Update of investment order needed

[deborah]

Hi,

I was just looking at the Australian investment order

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333550/#msg1333550

And it seems a bit out of date. At first glance, the limit for the government co contribution has risen to $54,837 and the salary below which it’s pointless to do so seems to have reduced to $18,201

Is this correct, and are there other changes that need to be made? People still refer to this, so it would be good to update it so it’s correct.

[oysters]

Your post was and is legendary Deborah!
Some thoughts of things to add, or modify it to suit?


What to do if you are young, and don't own a home? First Home Super Saver Scheme? This kind of prioritizes salary sacrificing, as early as possible, into super as early as possible after you start working (vs other savings or investments), in order for growth, to both maximise your age-retirement super and/or give you a slight chance of being able to afford a home in the Australian market...


I often wonder what I'd do, now, if my clock suddenly wound back 20 years to when I was 18. What would I do differently?

[marty998]

That was a great post. I thought it was made much earlier than 2016 though!

I'd be telling people to pay off HECS/HELP debts now, especially before the 7% indexation is going to be applied.

You might keep saying "but it's only CPI therefore not a real interest rate" but if you're not making any repayments and your wages aren't going up with CPI then the debt is only going to snowball and you'll be having repayments taken out of your wages forever.

[oysters]

Its a challenging question at the moment of how fast to pay of HECs, thats for sure. Last year I put down $500 extra into it just before the index deadline (important to mention that date). This year I've decided I'm going to calculate the amount of indexation and put that amount in, again just before the indexation date.


I figure that by matching the indexation and paying that each year, I avoid snowballing, while, hedging against paying it down too fast, for example in years when CPI and indexation is back to normal levels (and likely in line with wage growth, and below other possible debt interest rate levels, and below likely investment return levels).

[deborah]

Here is the existing version, with proposed modifications in green. Please advise of any other modifications we should make.

The original was a group effort by Australians on the forum. I just put it together. It’s definitely been useful, so I think it’s worth updating properly.

WHAT           
0. Pay the minimum required on all debts.
1. Establish an emergency fund to your satisfaction.  See https://www.bogleheads.org/wiki/Emergency_fund.  Use your mortgage offset account OR use springy debt http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/  .       
2. If your taxable income is less than $53,564 $54,837 (before salary sacrifice) consider contributing $1000 per year to superannuation to get the Government co-contribution.
3. If you have a HECS/HELP loan, and the indexation rate for the year is higher than your wage increase, consider paying the difference.
4. Pay off any debts with interest rates above your mortgage rate (if you have one).
5. Put money into your PPOR mortgage offset account (if you have one).           
6. Pay off any debts above the return you can reasonably expect to get on your investments.
7. If you taxable income is more than $37,000 $18,201 optimise Concessional Contributions into Superannuation - you need to work this out individually, because how much depends on at what age you plan to retire, how much is already inside/outside superannuation, and your marginal tax rate. You also need to consider whether you want to take advantage of the First Home Saver Scheme.
8. Invest any extra into low cost index funds (long term investments - 10 years) or high interest accounts (short term - 2 or 3 years).           
           
WHY           
0. Don't get yourself into trouble.           
1. Give yourself at least enough buffer to avoid worries about paying bills.
2. When the government is giving you money - take it.
3. This will stop the HECS/HELP debt from increasing faster than your wage. For example, the rate for 2022 was 3.9%. If your wages increased by 1%, consider paying 2.9% of the loan. This should be done before the cut off date (currently 1 June).
4. & 5. Because it's untaxed, the effective return on a mortgage offset account is likely to be the highest percent return you can get on your money           
6. It's better to pay off expensive debt than to invest. Look up returns on Australian investments over the previous 10 years - for instance https://moneysmart.gov.au/how-to-invest/choose-your-investments has investment types and returns.
7. Concessional contributions are taxed at 15% as they go into superannuation and people on low incomes have a lower tax rate. You will need other money to last you between when you retire (if you retire before you can access your superannuation) and when you are eligible for superannuation. However superannuation tax rates are low. You also need to be aware of the superannuation caps.
8. Because earnings, even if taxed, are beneficial. If you are saving for the short term (eg. a house deposit whether PPOR or IP), you want to be absolutely sure that you will get back what you saved, but longer term savings are better off in an index fund. If you are saving for a PPOR you may prefer to use the First Home Saver Scheme in superannuation. https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/FHSSessentials_n75457.pdf

Note: This assumes that you are employed. If you are a business, make sure that you put the superannuation guarantee (10.5% in 2022/23, 11% in 2023/24, 11.5% in 2024/25 and 12% thereafter) for yourself because if the business fails, you will at least have that money in old age.

[chasingthegoodlife]

Thanks for doing this deborah, looks great.

One thought - instead of calling point 7 ‘salary sacrifice into super’ is it clearer if you say ‘concessional contributions’? As they can also be made post tax and claimed as a tax deduction later, and ‘concessional contributions’ is the google string that will bring up yearly caps, tax treatment etc.

[deborah]

Updated above.

What about catchup contributions and after tax contributions?

[Gremlin]

Updated above.

What about catchup contributions and after tax contributions?

Yes, I was going to make some comment about this, but I don't really fully know the answer.

I actually think this depends on how committed you are to RE and how close you are to your preservation age.

Whilst we were pursuing FIRE we couldn't shovel everything into super, since it's no good having a super balance at age 40 that can fund the rest of your life when you can't access it until preservation age - it's a mustachian people problem.

You have to make sure you have enough investments outside of super to fund the period between when you RE and when you hit your preservation age.

Now that we're SWAMIs, we are back to funnelling more into super than we need because we already have the years between now and preservation age fully funded.

Where it fits in the order is a bit complex because it depends on both age and expected early retirement date.

[Murdoch]

For: "Pay off any debts above the return you can get on your investments" suggest change 'can get' to 'expect'. Could consider adding a long term return reference for common investments such as equities or property.

Could consider adding an 'invest in yourself to grow income' somewhere in the steps, noting that earning a higher wage is one of the biggest enablers to put the full plan into effect and FIRE ASAP.

[mspym]

@Gremlin i used the Aussie Firebug spreadsheet for calculating how much to throw into super vs taxable.
@deborah I’m not sure if he is still updating that but if he is that might be a good thing to link to. https://www.aussiefirebug.com/australian-financial-independence-calculator/

[Wadiman]

Thanks so much Deborah for all your hard work on this!

I have sent a link to this to some outside of the forum over the years and they have found it really useful.

I only have one minor suggestion: expand the 'ER' reference in 'What' 7 as folk outside the forum may not be familiar with the acronym.

 

[deborah]

Updated above again.

I haven’t included the Aussie firebug sheet or catchup/after tax contributions. I’m thinking about these.

At the time the Aussie firebug wrote his spreadsheet, you couldn’t do catchup contributions. That meant it was more difficult to add amounts to super if you ended up with too much in early retirement funds. Now it’s pretty easy to move them over to super as you progress.

It’s also important to stay slightly under the balance cap rather than to reach it. If you do, you can add more to super when the balance cap increases with indexation, whereas if you have hit the balance cap, that’s the maximum you can ever put in.

There’s also the downsizer contribution.

[deborah]

This is a group effort by Australians on the forum.

WHAT           
0. Pay the minimum required on all debts.
1. Establish an emergency fund to your satisfaction.  See https://www.bogleheads.org/wiki/Emergency_fund.  Use your mortgage offset account OR use springy debt http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/  .       
2. If your taxable income is less than $54,837 (before salary sacrifice) consider contributing $1000 per year to superannuation to get the Government co-contribution.
3. If you have a HECS/HELP loan, and the indexation rate for the year is higher than your wage increase, consider paying the difference.
4. Pay off any debts with interest rates above your mortgage rate (if you have one).
5. Put money into your PPOR mortgage offset account (if you have one).           
6. Pay off any debts above the return you can reasonably expect to get on your investments.
7. If you taxable income is more than $18,201 optimise Concessional Contributions into Superannuation - you need to work this out individually, because how much depends on at what age you plan to retire, how much is already inside/outside superannuation, and your marginal tax rate. You also need to consider whether you want to take advantage of the First Home Saver Scheme.
8. Invest any extra into low cost index funds (long term investments - 10 years) or high interest accounts (short term - 2 or 3 years).           
           
WHY           
0. Don't get yourself into trouble.           
1. Give yourself at least enough buffer to avoid worries about paying bills.
2. When the government is giving you money - take it.
3. This will stop the HECS/HELP debt from increasing faster than your wage. For example, the rate for 2022 was 3.9%. If your wages increased by 1%, consider paying 2.9% of the loan. This should be done before the cut off date (currently 1 June).
4. & 5. Because it's untaxed, the effective return on a mortgage offset account is likely to be the highest percent return you can get on your money           
6. It's better to pay off expensive debt than to invest. Look up returns on Australian investments over the previous 10 years - for instance https://moneysmart.gov.au/how-to-invest/choose-your-investments has investment types and returns.
7. Concessional contributions are taxed at 15% as they go into superannuation and people on low incomes have a lower tax rate. You will need other money to last you between when you retire (if you retire before you can access your superannuation) and when you are eligible for superannuation. However superannuation tax rates are low. You also need to be aware of the superannuation caps.
8. Because earnings, even if taxed, are beneficial. If you are saving for the short term (eg. a house deposit whether PPOR or IP), you want to be absolutely sure that you will get back what you saved, but longer term savings are better off in an index fund. If you are saving for a PPOR you may prefer to use the First Home Saver Scheme in superannuation. https://www.ato.gov.au/uploadedFiles/Content/SPR/downloads/FHSSessentials_n75457.pdf

Note: This assumes that you are employed. If you are a business, make sure that you put the superannuation guarantee (10.5% in 2022/23, 11% in 2023/24, 11.5% in 2024/25 and 12% thereafter) for yourself because if the business fails, you will at least have that money in old age.