Author Topic: My Aussie plan. Help me improve please?  (Read 4657 times)

merry3irwin

  • 5 O'Clock Shadow
  • *
  • Posts: 15
My Aussie plan. Help me improve please?
« on: June 14, 2013, 06:46:40 AM »
I'm actually 21, almost 22. I would just like to thank everyone in this forum for their wonderful advice. I can't remember how exactly I got to be so financially aware this early, but I've always known I didn't want to be a wage slave until I was 65. I think reddit opened up this awareness with r/personalfinance, which led me in turn to 'Your money or your life', ERE, and MMM.

Is there anything you could advise me on investment wise? Here's my situation:

I live in Sydney, Australia and as such student loans are not an issue (they only rise with inflation). I currently have $28000 in loans and 1-2 years left on a bachelor of Mechanical engineering degree.
I live at home, and I plan to until I find a wife to live with (hopefully around 28). So my living costs are effectively zero until I do. My parents are well off that they need no contribution from me.
My starting salary in 2 years will be around 60k if I find a job in my field straight away. I plan to save as much as I can for the down payment on a home loan. I'll keep the money in term deposits (current 4.7% PA) till I use it. I would like a 3 bedroom around 400k. Interest rates are fairly high(approx 6.5%) compared to the U.S right now so I want to hammer away the loan in about 4 years if I can
I then plan to save at the same rate till I have enough that I can live off a 3% SWR.
I have 12k currently split evenly between savings account at 3.5%PA and a first home saver account (gov contribution of 17%PA, of a capped 6k per year. Money can only be withdrawn to buy a first home, or rolled into a superannuation fund).

That's about it I think. I'm so conflicted with advice on the markets right now. The contrarian saying buy and hold is the wrong strategy now? All I know right now is that index funds would be the safest option, but how will that provide regular income, come retirement time?

You guys are such an inspiration to me. Hopefully I can emulate some of your success looking back at my life in twenty years time.

Regards,

A newborn mustachian.

pom

  • Bristles
  • ***
  • Posts: 288
  • Location: Paris, France
Re: My Aussie plan. Help me improve please?
« Reply #1 on: June 14, 2013, 08:35:29 AM »
I hope that you realize that you are overplanning. I do that a lot myself and have been doing it since I was about your age so I totally relate. Life unfortunately has a tendency to deviate quite a bit from what was planned but that is part of the fun. Just as an exemple, I intended to live and work in Canada after college but I ended up in the US due to a great job offer, another great job offer later I am now living in Paris and just got married.

Anyway, I still plan because it is fun and it keeps me focussed on my goal of FI !

I'll comment on the buy and hold part. In my opinion, buy and hold an index is right strategy. Sure it will go up or down but since you will likely live another 60-80 years, in the end it will be mostly up.

How will it provide regular income? Well it will start with small amounts pretty much immediately and it will grow from there. Check this table:

http://markets.ft.com/RESEARCH/markets/DataArchiveFetchReport?Category=EQ&Type=RAT&Date=06/13/2013

The current yield in Australia is 4.5%, after funds fees you will end up with about 4.3% . For exemple the vanguard fund VAS which currently sells for 61AUD paid 2.66 AUD in the last 12 months; so lets say you had 1 million worth, you would have cashed in more than 43 000 in the last 12 months (more than that because it was selling $54 a year ago). The dividends in Australia did not increase much in the last few years but I can't imagine that it would not at least follow inflation in the long run (with ups and downs so be prepared for a bumpy ride to the top).

Good luck!

merry3irwin

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Re: My Aussie plan. Help me improve please?
« Reply #2 on: June 14, 2013, 09:01:20 PM »
Hahaha, yeah over planning is something I do quite often, but I love it. It gives me a sense of control, even if it doesn't always pan out that way. But like Jacob Fisker said, I hope to have a strategy soon to cope with whatever changes come my way.

Thank you so much for your advice :)

Purple

  • 5 O'Clock Shadow
  • *
  • Posts: 37
Re: My Aussie plan. Help me improve please?
« Reply #3 on: June 14, 2013, 09:28:21 PM »
Merry Irwin (cool name).

Whilst you are being graced with the support of your parents your task is to build skills, income, savings and habits for your lifetime. Learn every practical skill you can at home from parents, friends, MMM on how to live well and cheaply - make sure you are having fun and loving life as much as possible.

Give service to others while slowly continuing to build your solid foundation of social and physical capital. From your description you are already doing well on this. Get to know yourself, build your wisdom. Take it day by day and be patient.

Actually, Max Ehrmann said more than this much better in Desiderata .... http://allpoetry.com/poem/8574007-Desiderata_-_Words_for_Life-by-Max_Ehrmann



Nudelkopf

  • Pencil Stache
  • ****
  • Posts: 899
  • Age: 28
  • Location: Australia
Re: My Aussie plan. Help me improve please?
« Reply #4 on: June 14, 2013, 10:46:49 PM »
a first home saver account (gov contribution of 17%PA, of a capped 6k per year. Money can only be withdrawn to buy a first home, or rolled into a superannuation fund).
With the FHSA, although you get 17% on your contributions for the year - how much does the rest of it get?

Also, do as much vac work as you can over your summers.. It's like free money, all you have to do is turn up to work.

happy

  • Walrus Stache
  • *******
  • Posts: 5095
  • Location: NSW Australia
Re: My Aussie plan. Help me improve please?
« Reply #5 on: June 15, 2013, 08:33:42 AM »
FWIW, I don't think you are over-planning.  One needs to have a sense of direction/goals...sure some other better opportunity may come up, but if it doesn't then you need a plan.

Mostly I agree with the other posters:

Living with your parents free of charge is a great gift, so make the most of it savings wise...it will never be so easy again.

Educate yourself in the way of the mustache and hone your frugality muscles...to be content and happy whilst spending little will be one of lifes most valuable skills

As far as investing: learn about shares and real estate. Read about and start tracking markets.  Start now: you can read about history but start living through the markets now so you get some personal history going now. There are lots of good recommendations on MMM, JLCollins and on the forum.

Give some thought as to whether you really want to buy a house first up....I know its the Aussie way, but houses cost a lot to trade and need to be bought and held, so you need to be settled in a place for the long haul. Or, buy something that could be readily rented.


merry3irwin

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Re: My Aussie plan. Help me improve please?
« Reply #6 on: June 15, 2013, 12:43:48 PM »
Purple: I could not agree more with what you said. My overwhelming life philosophy now is to grow as much as I can, mentally, emotionally, and physically. ERE by Jacob Fisker (a book I'm sure this entire community has read) has opened my mind to what life should be like. Fortunately I have a father than can fix and build pretty much anything so I have a strong learning base there. My mum is an excellent cook, from whom I'm always learning. Thank you for your encouraging words.

Nudelkopf: The FHSA contributes up to 6K a year only. The rest receives no contribution, however, it is also a savings account (First home saver account), and the whole balance receives a variable interest rate. I currently have mine open with MEbank. Do your research because I'm unaware of whether or not you can transfer the balance to another FHSA. You may be stuck with the bank you open it with till you use the money. IMHO MEbank is fantastic. YMMV

Mortgage Mutilator: Thank you for the lengthy reply. I actually was browsing your site a couple of days before you posted here. I did say that the interest rate was high compared to the US right now. I'm aware that historically they have been much higher. God damn you U.S for 3.5% 30 year fixed mortgages!! I can beat that in a savings account!
I completely agree with your take on paying off the house ASAP but my plan is one step before where yours starts. I plan to build as big as a deposit as possible so I can pay those bloodsuckers as little interest as possible. Aiming at least for 150k for a 400k place.

I agree with you and fortunately I have a strong enough will not to be swayed by anyone, including my parents. There's no such thing as good debt, unless you're using it to leverage another investment.

I am also a huge fan of Mr. Sethi. His was the first finance book I ever read. Funny, smart, and entertaining, it was a pleasure to read.

Again, thank you for commenting :)

Happy: Living with the parents is an incredible gift, and I'm planning to make the absolute most I can out of it. The housing issue is one of the biggest things I'm going to have to deal with. So many things can change between now and when and if I buy. Housing bubble could burst, interest rates could shoot up, etc etc. I plan to be as flexible as possible but plan to have a huge deposit  if I need it.

marty998

  • Walrus Stache
  • *******
  • Posts: 6371
  • Location: Sydney, Oz
Re: My Aussie plan. Help me improve please?
« Reply #7 on: June 15, 2013, 06:26:23 PM »
Ok so regarding the FHSA accounts I just set one up for my brother.

* You can contribute as much as you want to it, however the Government will only co-contribute on the first 6k you put in each financial year. The max co contribution is $1k (17%), for 4 years, so the most you will get for free is 4k from the government.

* But here's the great thing, it's 4 financial years, not 4 calendar years. So you can contribute $6k each in June 2013, June 2014, June 2015 and July 2015 (2 years + 2 days) and still get the maximum benefit. Be quick though, June's almost over and it takes a week or so in turn around times to get the account and details set up.

* The bank you hold the account with pays their own specific interest rate on the account, you should shop around for a good rate because I have seen variations up to 1%. (We went with ME bank for my bro too).

* Tax on interest earnings is a flat 15%, and is deducted from your account (you don't need to include it in your tax return).

* If you don't use the funds to purchase a first home in 4 years the balance rolls to super, locked away for a very long time.

So merry3, I can tell you from experience that you will not be able to pay a $250k mortgage off in 4 years on $60k a year (assuming you do get a job that pays that much to a grad), without having some sort of significant investment gains or inheritance. You may be able to do it in 7 or 8 but if you really want 4 then your best bet is to be very good to your parents and hope for some help form them.

6.5% is not a competitive rate in this market. I am on 5.14% (bank staff rate) but you should be able to get at least a .7% discount off the SVR which comes to around 5.3%-5.4%. 2yr fixed rates are 4.89/4.99 at most major banks.

Ok so now I'm going to whack you over the head with reality.

You are not going to get a 3 bedder for 400k in 7 years time east of Katoomba. So you are looking at long  and costly ($2k per year) commutes. So $60k less tax less HECS less $10k min a year on food and bills (my experience) means you will have $33-$37k a year left over and $15k will go on interest and bank fees and legals in the 1st year, plus you need to buy appliances (don't get cheap shit, buy a fridge/freezer and a washing machine that will last for 20 years). So if you manage to take $15k off the loan outstanding in the first year then you have done well, all assuming you spend nothing else on life in general, again this all assuming at $400k and not $600k which is where prices will probably be knowing what Sydney is like.

But don't be disheartened. You will get pay rises, loans balances go down, things get much easier after the first year. 2.7 years in I have reduced a $270k loan down to $160k (paying over $50k/year at it) and it is on track to be gone by Dec 2016, if not earlier.

Blah I've just typed a long rambling post that might not make any sense, maybe I need a few drinks for some clarity as per my off topic thread.

merry3irwin

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Re: My Aussie plan. Help me improve please?
« Reply #8 on: June 15, 2013, 06:57:27 PM »
Marty,

There's a lot I have added/clarified here I now see.
I plan to pay this mortgage with a working wife who hopefully would me making around 50k at least. And after five years I'll hopefully be on something like 70k. So that'll be 120k combined.
I ran the numbers and if I moved out/get married by 28 I'll be able to reach roughly 200k or more by that point (as I would have zero expenses living with parents)(45k per year compounded at 4.7%[not sure how much HECS will take]) 

And HOPEFULLY the housing bubble pops just before I buy hehe. And honestly 4 years paid off is the absolute best scenario. I'll still be very happy with 7 or 8. I know I'll be much much better off than everyone else out there.

Nudelkopf

  • Pencil Stache
  • ****
  • Posts: 899
  • Age: 28
  • Location: Australia
Re: My Aussie plan. Help me improve please?
« Reply #9 on: June 15, 2013, 07:42:16 PM »
So $60k less tax less HECS less $10k min a year on food and bills (my experience) means you will have $33-$37k a year left over
He's studying mechanical engineering, so I assumed the 60k was after tax. (My entire waterpolo team are now mech engineers, earning ~95k pre-tax as graduates with BMA in central Qld). Which changes things. (Maybe it pays to work out woop woop).

kit

  • 5 O'Clock Shadow
  • *
  • Posts: 23
  • Location: Sydney
Re: My Aussie plan. Help me improve please?
« Reply #10 on: June 25, 2013, 07:57:16 AM »
Overall a good plan, if everything goes to plan. Even if you decide to fall off the wagon and go all spendypants, you'll be able to throw a massive party.

Doing some rough math on a $250k loan, the repayments would be a minimum of $1500/month. This is about in line with what you'd lay out monthly on rent on a similar property (for reference I checked 3 bedders in Blacktown). The benefit to buying is that it will be that until it's paid off, the downside is that amount doesn't include any of the house expenses or the stamp duty or the opportunity cost of taking the $150k deposit out of investments.

The question I have is whether it's worth it to put all your resources into buying property near Sydney. It is- to put it lightly- overheated. It's not like it was for your parents. I lived in the US in the run-up to the two crashes of the 2000's and can't help but see the similarities. There's a big rush to 'get in now before it gets worse' and wages cannot and are not keeping up with the pace of housing inflation. I would suggest a strategy of making a big stash while waiting to see what happens with the market rather than buying on a schedule, because you'll be able to score if you are patient.

StinkWorth

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: My Aussie plan. Help me improve please?
« Reply #11 on: September 14, 2013, 03:05:35 AM »
My starting salary in 2 years will be around 60k if I find a job in my field straight away. I plan to save as much as I can for the down payment on a home loan. I'll keep the money in term deposits (current 4.7% PA) till I use it. I would like a 3 bedroom around 400k.

Congrats on getting started so young.

Your biggest risk is finding a job in your field straight away.  If you fuck it up, you will lose a lot of dollars, and many months.  You should focus your time/effort on lining up a job straight after uni.  Try to find internships or part time work in your employer(s) of choice.

Also, housing is very expensive in Sydney.  A 3-br $400k house in Sydney would be a long long way from the CBD.  See the article: "The true cost of commuting".   Is there any way you can avoid buying a house in Sydney?

Depending on how long you expect to invest for before buying a house, 4.7% pre-tax is quite bad.  Blue chip banks reliably pay more than that, also with franking.