We’ve Paid off the Mortgage – What Now?

Paid off Mortgage – Now What?

Congratulations!! A paid off mortgage is an incredible achievement! 

Most have been so focused on achieving this goal, they are not sure what to do next.

With mortgage repayments gone, you will have a significant chunk of cash flow freed up.  

Most will keep their mortgage open whilst fully offset, for more flexibility to withdraw money in an emergency. 

If you just want the mortgage closed once and for all, Money magazine has an article on practical considerations of how to actually close your mortgage and obtain the deed certificate.

Whether you close the mortgage, or keep it open/fully offset, there are three main options for your new freed up cash-flow:

  1. Invest it to achieve financial goals
  2. Spend it on lifestyle upgrades
  3. Reduce working to free up time for other passions

The main issue is to make this decision consciously – don’t let it slip away from you through unconscious lifestyle inflation. 

Put this hard-earned cash to work for whatever you need and value the most. 

Let’s examine each option in more detail.

  1. Invest it to Achieve Financial Goals

Have you developed a financial plan?  

You need to know if you are on track for retirement.  To know this, you need to have set your goals. 

When would you like to retire?  What will your annual spending be? How much is your superannuation projected to pay out if you continue working as is until your desired retirement age?  If you desire to work less, how does this adjust this picture? 

What other important financial goals do you have over the next 20 years – a new car?  A wedding?  Kids’ education costs?  A trip to Antarctica (yes please!)?

Examine your financial goals and current trajectory to decide whether you need to put some or all of the freed-up cash towards reaching your goals.

What is your risk tolerance?  It’s important not to invest in a volatile asset if you’re likely to pull your cash out when the stock market crashes. 

We tend to overestimate our risk tolerance.  Were you invested in 2008?  How did you behave? What did you learn? 

If you have never been through a market correction, it’s probably best to play on the periphery while you get accustomed to volatility.  Perhaps try a micro-investment app whilst investing most of your cash in a lower volatility asset.

The worst thing you can do is pull your money out when the market is down, in my experience it takes experiencing a couple of market downturns to feel confident enough to ride it out.

What is your tax position?  Do you have a long-term no- or low-earning partner at home who could receive investment income without paying tax? 

Or are you a high income household for which tax minimization strategies are important?

You won’t want your money sitting in a bank account for more than a year (apart from your emergency fund) or it will shrink in real value due to inflation. 

Inflation is what makes the cost of living increase every year (usually 2.5-3%). 

$100 is worth less in terms of what it can by as the years go by.  Your investments need to beat inflation, or you are going backwards. 

Generally, higher rates of return are associated with higher risk. 

You can work out what % annual return you require to meet your goal using a savings calculator.  

You need to know how large a retirement sum you need (25 x annual spending is a reasonable starting point), and how much you will spend per year in retirement. 

You can then fiddle with the interest to work out what post tax, inflation adjusted return you require.

It makes little sense to take on more risk with your investments than you need to achieve your goals.

What is your time frame?  Whether you are 35 or 55 makes a huge difference to the amount of risk you want to take on. 

Real estate generally needs at least 10 years to be worthwhile, 7 years is often quoted as the minimum time-frame for the stock market. 

Your health and life expectancy are big factors in how long you need your retirement nest egg to support you (and therefore your withdrawal rate).

If you decide you need or want to invest, you have two main options:

a). Dollar cost average into an investment

The easiest and lowest risk option is to simply divert your freed up cash-flow into an investment. 

Make this automatic with a direct debit and be patient, you will soon be surprised how quickly it adds up. 

Now is the time to do some research – if you don’t yet know where you want to put your money, direct debit it into a savings account and get started with some research and professional advice

There are many options in investments to choose from:

Cash in the bank is government guaranteed, up to $250,000, even if the bank goes bust. 

But you will receive less than 2% interest, which is unlikely to keep up with the pace of inflation (2.5-3% per year). 

Term deposits are currently providing equally feeble returns.  Unless you already have more money than you need for your goals, this is not a realistic option for more than an emergency fund and retirement cash reserve.

Bonds – Government bonds are the lowest risk investment. 

By paying into a bond, you are lending money to the government, who are considered extremely unlikely to default. 

As interest rates drop, bond “Coupon rates” (interest you earn for money loaned) increase, making them more attractive to investors. 

Normally, the longer term bonds attract a higher yield, but over recent months this has reversed so that short term bonds are paying out more (this is apparently supposed to predict a stock market crash, but it’s been happening for a while…) 

You need a really large investment amount to buy bonds directly, but Bond ETFs can be easily brought via a broker on the ASX, similar to shares. 

Corporate bonds – Have more risk than government bonds, but are still considered low risk.  This time you are lending your money to corporations who pay you interest (the yield).

Insurance bonds – These are nothing to do with the bonds above.  They are investment products offered by insurance companies and can contain any type of investments.

If investments are held for 10 years, there is a tax benefit to top tax threshold households, as tax is only paid at 30% on these investments. 

Examine the fee structure carefully to ensure the fees don’t consume all the tax benefit. 

Peer to Peer lending – This is another, fairly recent way to lend your money, directly to other consumers. 

Peer to peer lending connects investors with borrowers, cutting out the middleman so giving both a better deal. 

They offer decent rates, especially over 5 years, but the risk of borrowers defaulting is the main issue. 

Rate Setter have a provision fund that pays in cases of borrower default, but if there was a huge number of defaults, this would be overwhelmed and investors would lose their money. 

Money shouldn’t be invested that can’t be lost, but P2P lending may have a peripheral role in a portfolio (I’ve not invested yet).

Shares – The easiest way to gain exposure to Australian and International equities is through ETFs or index funds. 

Buy the whole market initially (broad Australian and International index fund or ETF), and once you have a reasonable portfolio, decide whether you want to be bothered researching individual shares. 

Share markets crash, and rebound, and bounce around all the time. 

History tells us dollar cost averaging into a broad index fund is the best way to go most of the time.  It’s hard to beat, but you have to stomach the volatility.

The ASX has a basic education online course for beginners . 

To buy shares, ETFs, or bonds, you will need a broker.  Google “Broker” and you will find lots of choice.  Look at price (particularly for the size of trades you are likely to make), and education/information provided.

Most people use a discount online broker, although full service brokers still exist.  These offer advice on investments.

Property – The only way to dollar cost average into property is via a Real Estate Investment Vehicle (A-REIT) or BrickX

There are variable amounts of leverage with these funds, and they do have the advantage of diversifying your investment over multiple properties and mean no landlord hassles. 

A-REITs also have the advantage of more liquidity than a direct property investment which you have to wait to be sold.

There are residential and commercial real estate trusts, allowing individuals to dip their toes in the commercial property market, which is often considered higher risk to buy a single asset in and may be financially out of reach for many investors.

b). Borrowing to Invest

If you have an appropriate time frame and are willing to take extra risk, leverage can increase returns. 

The equity in your home can be used to borrow funds for an investment property, or for those with knowledge and experience, shares.

Leverage is a double-edged sword in my humble opinion.  It can magnify returns but makes it possible to lose more than the money you have put in, and in extreme circumstances can threaten the home you have worked so hard to pay off. 

Leverage needs to be considered carefully, first minimizing risks. 

2. Upgrade your lifestyle

If you have already hit all your financial goals, are on track for retirement, have an accessible healthy emergency fund and are happy in your work, perhaps it’s time to upgrade your lifestyle. 

Or perhaps you’re putting some money towards investments but feel you can afford to treat yourself a little. 

Consider carefully before committing to ongoing regular costs and ensure they are really worth your time earning them. 

Take some time to consider what will really produce the best benefit to your lifestyle. 

In the words of Paula Pant, “You can Afford anything, but not everything”.  I don’t think most doctors believe this applies to them.  It applies to everyone!

Spend some time thinking about what will really improve your quality of life, instead of impulsive purchases. 

Experiences seem to produce more ongoing pleasure than products, especially if planned in advance and anticipation and delayed gratification are involved.

My personal priorities would be 1). Increase holiday budget and plan an AMAZING trip every year 2). Take time off at half pay so that I can take more time off during school holidays to spend with my little ones 3).  Getting a cleaner so I don’t have to spend my precious time off doing boring housework.  Everyone’s different though!

 

3. Reduce working to free up time for other passions

Perhaps the best improvement in lifestyle would be to work less.  Part-time work is an amazing opportunity, in my opinion, to live a more balanced life. 

With more time to enjoy with my family, and indulging hobbies, when I return to work I am more refreshed and able to enjoy work more.  I appreciate the benefits of more time to look after my health with regular exercise and healthy meal planning and preparation. 

Consider if part-time work would improve your lifestyle.  Once in the top tax bracket, cutting hours has a disproportionally minor effect on pay due to high taxation as you get paid more. See more about optimizing your income for tax.

If you are unable to cut your hours permanently, perhaps you could take some more time off unpaid (for the self employed) or on half pay to allow longer holidays. 

No matter what you choose to do with your freed up cash flow, this is an exciting time of life, with a plethora of opportunities to choose from. 

Enjoy your debt free (or non-deductible debt free!) life and the freedom that comes with that financial security of completely owning your own home.


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Do I Regret Investing in Property

Read the Prequels: Property vs Shares: Why I chose to invest in property and then Getting the Experts in Empower Wealth Review – a detailed description of my experience using empower wealth and purchasing my first investment property.  Do I regret investing in property?  Well it’s early in my property investing journey, but so far I am optimistic and encouraged by an uneventful rental history and some early capital growth.  In fact, I’ve just finished buying property number 2 (for investment).

Do I RegretInvesting in Property: the First Six Months

Just over 6 months ago, I finally took the scary leap buying property for investment purposes.  I say finally because I have had a vague plan to invest in property for over 15 years.  But I never felt financially ready or knowledgeable enough. 

I spent a long time weighing up the pros and cons of property vs shares.  Then spent hundreds of hours reading property investment books and listening to The Property Couch podcast.  More time was spent analysing data from Your Investment Property Magazine and walking the streets before finally deciding to use a professional buyers agent.

The looming election in 2019 helped me bite the bullet – labour intended to end negative gearing (apart from on new properties).

I wanted to get into the property market before any changes occurred.

Labour lost that election, and negative gearing is probably safe for another few years.  But I thank Labour for creating the urgency needed to end my analysis paralysis.

I had, based on another medic’s recommendation, started listening to the Property Couch podcast.

Over many episodes, I had developed a sense of trust in Bryce and Ben, the friendly duo imparting free wisdom every week.

I reached out to their company, Empower Wealth for help in selecting a great quality property investment.  My detailed review of Empower Wealth is here.

The closure of the property went very smoothly, Empower Wealth walked me through each step with clear instructions and great organisation.

They helped me select a property manager  who started viewings for rent before exchange and I had multiple tenants applying to rent the property – outbidding each other to secure the home.

This level of competition was not expected, but encouraging.  I had been pretty nervous so was reassured the potential tenants obviously thought it was a great property.

Do I Regret Investing in Property: Teething Problems

My new property agent helped me pick through applications and weigh up the pros and cons of each potential tenant.

I ended up signing a contract with the most reliable and trustworthy sounding tenants.  This was all made easy by the property manager.

There were a number of phone calls in the first two weeks, and I found myself concerned this property investment deal was going to be a big hassle.

There were minor unforeseen issues, like the oven not working and needing to be replaced, tenants having difficulty finding plumbing for a washing machine.

None of this was especially cumbersome, but if it was a weekly occurrence going forward, I would have resented the hassle.   I was looking for a passive (ish) investment, not a weekly commitment.

Things settled down though.  The initial issues were fixed, the rent arrived regularly on time, and the property manager organised payment of all bills, taken from the rent.

Do I Regret Investing in Property?  Ongoing Property Management

It should be pretty easy at tax time to have all the property income and expenses (apart from interest) recorded on the property manager’s online platform.

The property manager communicates regularly by email, which suits me well.  They also have an online portal I can log on to view expenses and rental income.  The net rent is transferred to my offset account every fortnight, to put towards mortgage payments.

So far my calculations on affordability have proven conservative, and  I am having no issue with covering the mortgage payments.

I accompanied the property manager for the first inspection, which went well.  The tenants have extended their lease, which I’m thrilled about.

For now, things are pretty easy.  The repairs required have been very reasonably priced.

I’m grateful to the property manager for having a network of proven reliable and fair priced tradespeople.  I haven’t got a similar list for my own home where I have lived for over a decade.

So far, I’m really happy with my 1st experience buying property for investment. I am realistic that there will be times (particularly around the change of tenants) that it will be a bit of a hassle – making decisions, choosing tenants and following up on damage after tenants have vacated.  Having a property manager has shielded me from most of the work.

What’s Next?

We’re saving hard again, with the rent coming in being more than we had planned for, and further drops in interest rates we are already saving for our next property deposit.

It’s too early to know whether the property is performing as predicted, or I will regret investing in property.  But I’m currently optimistic, I’ll update when I have a new valuation.

If you are trying to buy into a hot property market, check out my article on avoiding getting carried away with FOMO.

Reduce Tax Australia: Drs can Make Income Efficient

Tax was my highest expense in 2019/2020 – four times the cost of my next largest expense (housing). Prepare for the 2020-2021 financial year end.

If you’re paying tax, you’re earning income.  If you’re paying lots of tax, you’re earning plenty of dough, so have no reason to complain!

But not all income is equal to the tax office.

Tax avoidance is illegal, and will land you in serious hot water!  Definitely not worth taking any risks.  But the Australian Tax office (ATO) allows tax optimisation.  A small reduction in your tax bill can make a significant difference to your take home pay. Efforts to reduce tax are definitely worthwhile

We will discuss some of the ways to make sure you are paying only the tax you are obliged to in this article, starting with the big power moves, and moving on to the easier, small but important optimisations.

Reduce Tax Australia: Favour More Tax Efficient Income

As your income increases in Australia, the tax efficiency declines substantially due to the “Progressive tax” system (the more you are paid, the higher % of your income you pay in tax).

Taxable income Tax on this income “Marginal Rate” Net income for maximum in bracket
0 – $18,200 Nil 18200
$18,201 – $37,000 19c for each $1 33000
$37,001 – $90,000 32.5c for each $1 69000
$90,001 – $180,000 37c for each $1 137000
$180,001 and over 45c for each $1 No max

29.03.2021 These have now changed, check out the new 2021 tax brackets to see how much less tax you will pay!

Investment income is also taxed at your “Marginal rate”, but Capital gains are discounted by 50% if the asset (e.g. property or shares) is sold after at least a single year of ownership.  If you made all your income in a year from capital gains, you would halve your tax rate!

In contrast. Business income is taxed at a flat rate of 30% with small businesses (up to $50 million annual turnover) currently taxed at 27.5%, reducing to 25% for 2021/2022.

If your business income is produced more than 50% from your personal work /skills (Most GP or private specialist practices) it is classed as “Personal Services Income” and taxed at your marginal rate (completely losing out on the advantageous taxing of businesses).

Business income has to be a genuine business, at least 20% needs to come from business income rather than passive investments (some would open a “Company” to keep assets under and pay tax on rent/dividends on business rates rather than marginal rate).

Once you earn above $37000 annually (32.5% marginal tax), income is more efficiently earned through business (25-27%) or capital gains (Up to 22.5%).

You are actually penalised by earning income through personal effort!

It’s definitely worth investing outside your career in medicine and start creating income taxed more advantageously.

Salary Sacrifice to Reduce Tax to 15%

Salary sacrificing your accommodation costs is as close to a no brainer, easy tactic to reduce tax paid for those whose employer offers this great perk.  Cut through the confusion with my article on salary sacrifice for doctors here.

Utilise Your Partner’s Marginal Rate

Single income families are disadvantaged by the tax system.  A couple each earning $150,000 would pay 32.7% of total gross pay in tax.  A single earner bringing in the same household income of $300,000 will pay 41.2% in tax.

Having a stay at home partner/parent is far from a purely financial decision, and the Aussie Doc household have chosen to make this choice, despite the tax disadvantages.

The one advantage of having a non-earning partner is their marginal tax rate – 0%.  That’s the best you can get!  Your stay at home partner can earn up to $18,200 per year in investment income without paying tax.  That’s better than superannuation!

Remember, to think in to the future – if your partner returns to work will it still be advantageous to have the investments in their name?  Selling the investments will result in paying capital gains tax (hopefully with 50% discount if held for more than a year).

Keeping Lifestyle Expenses within a Lower Tax Bracket

There is an argument for purposely keeping annual spending under the next tax bracket (minus tax), and using the excess income to fund tax advantaged investments, or to allow part-time work.

Pay / grade Income Tax Total tax as % of gross income
Intern $70k 14297 + 1400 medicare levy 24%
RMO ~ $90k 20797 + 1800 medicare levy 26.5%
Registrar ~ $150k 42997+3000 medicare levy+875 MLS 32.7%
Specialist ~ $300k 108097+6000 Medicare levy+ 1759 MLS 41.2%

From the table above, if the $300,000 specialist cut down to 0.5FTE their tax % would reduce from 41.2% to 32.7%.  Instead of receiving $82.80/hr after tax on average, he/she would receive $97.10 net per hour worked.

Not everyone would want to work part-time of course, but the choice to do so is limited by costs of annual living expenses.

The specialist would have to keep their annual spending under $100,991.  How much a doctor allows lifestyle inflation to absorb his / her pay is the main barrier to having this choice.

Reduce Tax Australia: Negative Gearing

I almost didn’t include this for fear of encouraging you to invest to save tax.

Investments should be made for their anticipated (well researched) returns.

Many, many doctors before you have fallen foul of making investments to save tax -and lost a lot of money in the process.  If the underlying asset does not perform, you are literally throwing money away!

But if there is an excellent asset (property or shares) that you would like to invest in, negative gearing may be an added bonus.

Negative gearing is more advantageous as you reach the higher marginal rates.

If you brought a well-researched property, but the costs of holding that property (Interest, property manager, repairs and rates) are greater than income produced from rent, you will be losing money each year.

Australia is unusual in it’s willingness to let you deduct this “loss” against other income sources, therefore reducing tax paid on your primary income, and reducing your loss in holding the property.

The idea is that the increase in house value over time more than compensates for this loss.  The big risk comes with choosing the asset … again, a poorly performing asset completely destroys this strategy.

Reduce Tax Australia: Doctor Tax Returns

You are able to deduct work related expenses at your tax return.

The average intern receives a small refund (A great starter fund for your emergency fund, house deposit or first investment).

More senior doctors deducting significant amounts annually should consider a PAYG withholding variation to adjust the amount your employer withholds for tax out of each pay.

This allow you pay less tax fortnightly – a great strategy if you are self-controlled and can direct the tax saved into a mortgage offset account.

If you are receiving a $10,000 refund, you are effectively lending the ATO that money tax free.  You can bet they won’t return the favour!

If you are a home owner with a mortgage of $100,000 at 3%, you could save yourself ~ $300 in interest over a year by having the tax in your account instead of taken out of your pay.

Potentially deductible items include: 

AHPRA Fees

Medical equipment (eg stethoscope)

Self-education (courses or text books, journal subscriptions)

Branded work uniform clothing (Not regular smart clothes)

Professional indemnity fees

Phone and internet fees for the portion used for work

Laundry expenses for washing work clothes

Home office expenses (eg electricity)

Overtime meal expenses (check specifics with accountant or ATO).

Donations to tax deductible charities

Accountant fees

Travel expenses only if you travel between from your place of work to another (Not just a commute to work) – accommodation, flights, food

You will need to record all these expenses and check whether you can claim them.

Have a system for recording your expenses easily.  The ATO have an app, but the first year I used it they deleted all my data.  I now keep a notes document on my phone with pictures of receipts embedded in document.

Locum Doctor Australian Tax Efficiency Hacks

Travel and accommodation are often covered by the hospital or agency, but if not could be deductable.  For irregular locum travel, you may be able to claim cost of food so keep receipts and remember to ask your accountant.

If you earn more than $75,000 as a sole trader, you will need to register for GST, and pay tax quarterly.

If you earn less than that (as I do with irregular locums when dates/hospitals suit), you are able to keep the entire income until your tax is due after June 30.

For fellow mortgage slaves, this money could potentially sit in an offset for over a year!   Just remember to put aside how much you may need to pay in tax (I just put 50% of income in a “tax to be paid” offset for simplicity).

Accidentally spending tax owed seems to be a common issue, especially for the 1st year or two of self-employed business, so watch out for this!

Timing Income and Tax Deductible expenses Optimally

This is especially relevant to those with a mortgage offset account, as significant amounts of interest can be saved.

For those under the threshold for GST registration (<$75,000 in ABN income) it is advantageous to earn this early in the tax year – if you could earn $40,000 in gross side hustle income in July and sit this in an offset saving 3.3% you will not have to pay up the tax until September/October of the following year – saving up $1500 in interest!

Similarly, although unlikely as powerful is trying to time tax deductible expenses for the end of the tax year.   If you need to buy a new laptop or pay for an expensive course, the want to minimise time between you paying and receiving a tax refund, so your money is in your offset as long as possible.

First Home Savers Scheme

If you’re not yet contributing up to the $25,000 concessional cap (which is taxed at just 15%) to superannuation, and saving for a house, consider using the First home savers scheme to boost your deposit with tax savings.

See the ATO to check eligibility as well as small print conditions.

Mortgage Offsets

Mortgage offsets have been mentioned a few times in this article and for good reason!

For those that have a mortgage, putting your savings in an offset will save you more interest (currently 3-4%) than any high interest savings account (currently 1-2%).

Interest earned from a savings account would be taxed at your marginal rate – interest saved is not taxed.

Australian Tax Optimisation Using Discretionary Trusts

Income splitting is illegal in Australia.  You are unable to split your personal services income between yourself and your spouse.  Sorry!  Again, we are back to the disadvantages of having high and low earning partners as opposed to two moderate earners (significantly more tax for the unequal spouses).

Investment income, however, can be far more flexible.  Property or shares can be put into a “Discretionary trust” where earning can be distributed to whichever beneficiaries are most advantaged that year.

It is worth thinking ahead, small children now will be university students in 10 years and may attract a marginal tax rate of 0%.

Optimising Tax Efficiency of Australian Income – But NO Tax Avoidance!

It is worth making sure you are optimising tax within the ATO guidelines.  Watch out for “tax avoidance” investments or schemes.

Many a doctor has been caught out, motivated to avoid the punitive tax levels associated with personal services income, and lost all their money as a result.

Choose your investment first, then optimise for tax not the other way round.


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Money Confessions of a 40 Year Old Doctor

I started work as a terrified intern saddled with, what seemed at the time, a huge amount of debt.

I remember wishing there was some sort of financial guide to help me dig myself out of debt, and use my wage in an efficient manner to create financial stability.  In comparison with our US colleagues Aussie graduates have it really easy, but debt never feels good.

Through the years, finance rarely came up in conversation with older doctors.  It’s something we just don’t talk about.  I have been frustrated, after making financial mistakes, to discover many senior colleagues had made similar errors.

The idea of this blog was tumbling around my head for a couple of years before.   During hotel downtime between locum shifts, I took the plunge and started this site.  In writing this blog, please do not mistake me for a finance professional or expert in investing.  I simply want to share financial shortcuts and mistakes discovered over my career, and encourage others to do the same.

On to my mistakes, in the hope my money confessions can help you avoid regretful decisions, or at least make you feel better about the choices you have already made.  Please don’t judge me for the stupidity of youth…

Money Confessions No 1: Debt Management

I was brought up to understand debt is bad, and mortgages a necessary evil that should be paid off asap.  In some ways, I heeded this wisdom.  I have still never borrowed for a car purchase (a major destroyer of wealth).  In other areas. I completely flunked this test of patience and self-control

University loan payments – that magical money that arrived in my account to be spent on beer, clothes, rent and books. Loan money didn’t seem “Real”.

I wasn’t earning it and I told myself that it would feel like a small tax out of my generous postgraduate wage.  I wasn’t particularly extravagant as a student, but certainly could have done with treating my loans like “Real money”.  I have now experienced paying the whole painful amount back dollar by dollar.  For any student readers, don’t deprive yourself, but do make sure your spending consciously and cautiously!  You will have many better things to spend your money on 5-10 years after graduation than paying back debt.

In the last six months of medical school, I got a bit spendy.  The looming promise of a regular pay cheque convinced me to relax a bit more.  I swiped my way to several thousand dollars in high interest debt (at 29.9% interest, at the time this did not even fill me with horror.)  Unthinkably dumb! So many people live like this – trapped in a cycle of paying off minimum amounts of credit card debt by huge interest charges.  My first few intern months were spent on paying this silly debt off.

Not completely cured of stupidity, after buying my first home, I succumbed to the temptation of decorating it with “Decent” furniture asap.  A trip to a local furniture store later, I had acquired several pieces of new furniture on an interest only deal!  I thought I was being super smart (and keeping the money in my new offset account)…. They charged administration charges to the “Interest free account” so I may as well have been paying interest, and ended up paying for this furniture for long after it was new and filling me with pleasure to use.  And of course, I spent the offset money on something else.

Money Confessions No 2: Home purchase and renovations

My home purchase I do not count as a mistake – it has given us shelter, a sense of security and finally, after a decade – I’m paying less in mortgage payments than I would have been in rent.  Whenever you hear a widely accepted truth, such as “Rent money is dead money” stop and question it.

In this article, I discuss and calculate, whether a home is better financially to buy or rent.  Money isn’t everything, and the sense of satisfaction and stability are priceless.  But financially, I would have been far better buying an investment property in a capital growth area (or putting savings into index funds) and continuing to pay rent in the regional town I lived.

The “Big Reno” has a created a house that fits our family’s lifestyle so much better, with loads of room for the kids to run around, and a pool they have learned to swim in.  We love it!

But we over invested, and it will take quite a few years in measly growth to make the money back in value.

Before you take on a big renovation, consider the financial aspects, top value house in the area (you want to spend no more than your renovated house will be worth) and whether you would be better buying, taking in to account 6% buying and 2% selling costs.

Money Confessions No 3: New Car purchase

Most people have no idea how much of an impact their behaviour with cars affects their long-term financial outlook.  Buying new cars, trading in regularly and car loan interests can steal your financial freedom.

Mr Money Moustache has analysed all aspects of financial efficiency in life and gives some great advice about cutting the costs of car ownership.

My “crime” was to buy a new car.  I was scared of buying an unreliable second hand car.  And maybe a little bit felt I deserved better than the hunks of junk I had brought so far in cash.

That was a decade ago (but feels like 5 minutes), the car was not particularly well looked after (I’m lazy) and is scratched, dented and looks suspiciously like I may be allowing homeless people to live in it.

But it still gets me from A to B, and will last me (hopefully) for at least another 5 years.

Disappointingly, the New car feeling lasted for a few weeks.

The most cost-effective way to own a car is…don’t.

After that a great 2nd hand car from a very reliable make, is far more efficient given the huge losses in value from depreciation over the first 5 years of a car’s existence.  Holding on to that car until you need to replace it (rather than when you get bored, or it begins to look scruffy) also improves efficiency.

Money Confessions No 4: Not Paying for a Financial Advisor, and taking advise

I thought I was doing the responsible thing, after a big jump in pay, to see a “Financial adviser” to organise my finances. It turns out he was an insurance and managed fund salesman.  He did get my partner and I to review our insurance needs, and secure better life and disability as well as income protection insurance at a relatively young age (the premiums increase steeply during 30s).

However, he also convinced me to move my superannuation to a “Superwrap” product that was charging 4%!  I was reluctant, but he was pretty convincing that the better performance would outweigh the fees, and after all – you get what you pay for.  They didn’t of course, and after 3 inefficient years, I moved my superannuation to the original fund and will likely stick with them until retirement.

Remember, the fees are the only thing that is ever guaranteed!  Ruthlessly minimise fees to get ahead.

Money confessions No 5 Salary Sacrifice

For years, this just seemed too confusing, and I was too lazy to take advantage.  Ridiculous!  Too lazy to make a phone call and fill in some forms to get free money (the tax I paid!  Every time I changed job, this was a big hassle I often didn’t get round to sorting out for months or years.  It is a great deal, don’t be lazy,  Read this article, and salary sacrifice your accommodation costs and superannuation

Money Confessions No 6: Drift

“Drift” is a term I first heard on the US based Choose FI podcast and it summarizes a common pattern I fell in to.

I have always been interested in personal finance, but often get to a point (especially in my early training years) where progress towards financial goals was extremely slow -and I would lose interest and focus for years at a time.

During this period, automated actions such as paying into my mortgage continued, but extra income that was gained through pay rises was absorbed into the households spending unconsciously.  Actively using those pay rises could have got me to financial goals faster, but nothing changed until I snapped back in to goal setting mode.

Drift is almost inevitable, for a medical professional probably even more so.  The demands of work, postgraduate training and exams are extreme.  You will not have time to keep your finger on the financial pulse of your household too.

Set your goals.  Automate as much as possible (savings & investments), make an appointment with yourself to review your goals and progress.  Set a reminder on your phone, calender or email once or twice a year to meet with yourself (and partner if you have one) to limit the destructive effect of drift and keep on track to your financial goals.

Money Confessions No 7: Money organisation

With our mortgage, 10 years ago, came multiple offset accounts.  This should have been great, but meant to a disorganised mess with overdrawn fees as a result of money being in the wrong account.

Each household needs a money organising system.  Finances get more complex as you grow older, and often spend on many more items.

I have trialed a few systems, the most important feature seems to be separating discretionary spending (Wants) from obligatory spending (Needs).  There are some grey areas, but decide for yourself what are Wants and needs, and pay for wants our of a separate account – with a set amount to spend each week/fortnight/month.

Barefoot investor is the system I have adopted.  Empower wealth have a book and online platform free for use by anyone.

Hopefully I’ve given you some red flag signs to watch for before making any big money mistakes.
Anyone want to make feel me a bit better by sharing their own financial errors?

IF YOU FIND READING ABOUT OTHER PEOPLE’S FINANCIAL MISTAKES USEFUL IN AVOIDING YOUR OWN, CHECK OUT THE AUSSIE DOC MONEY & MISTAKES SERIES.  1ST ARTICLE BY SERINA BIRD ON OVER LEVERAGE.


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