NHS Pension Changes – What’s Going On?

NHS Pension changes

Dear Aussie Doc,

I’m a UK trained doctor now in Australia.  I received a letter talking about the NHS pension changes and a public consultation.  The pension scheme is so complicated!  What is going on and what should I do?

NHS Pension changes

Hi Doc, 

I had a fascinating read of the 70 page intended NHS pension changes document! 

The NHS pensions were changed to reduce costs associated with the generous % of final salary scheme.  The new scheme introduced used a % of average salary over years worked, with the claim that this would improve the pension for lower income earners. 

The NHS excluded those within 10 years of pension age at the time (to their relief I imagine!)  But here’s the thing – this has now been agreed to be age discrimination against younger workers.

The UK government have now committed to setting this right.  They intend to offer those working in the NHS between 2015 and 2022 an option of the old “legacy” pension or the new one for the years affected.

After 2022 all NHS pensions will be the new version.   

The legacy pension is likely to be advantageous for those whose salaries increased significantly between 2015 and 2022.  But there are other differences in benefits proposed  which will be worth comparing.  Tax liability also needs to be considered, especially for those earning more than 110,000 GBP.  

It is even proposed that members can make a choice within 12 months of the options being offered, or wait until retirement age.  So there is no need to panic.  When the detailed deal is released, it will be time to analyse the details.  Waiting for retirement to make that choice may help you ensure you are selecting the best option.  

The NHS pension is still a good deal, but it looks like a bit of old fashioned generosity on on it’s way back to some members. 

This UK site has some useful information on the NHS pension too,

Good Debt vs Bad Debt. What’s the Difference?

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This weeks article on Good Debt vs Bad Debt was written as a result of collaboration with Pearler and 19 other Australian finance bloggers.  Download the resulting Aussie FIRE book – a complete guide to financial independence

Good debt vs Bad debt, what is the difference?  Consumer debt is a common trap, and a stealthy destroyer of personal wealth.  

But debt can be necessary, and even used as a powerful tool for reaching financial independence.  

There is a scale from terrible (life-destroying) debt to “Good debt” used efficiently to build wealth. 

Good Debt vs Bad Debt – What is Bad Debt?

Many individuals are stuck in a bad debt cycle, through extremely difficult circumstances.

If income is less than your expenses, you are forced to borrow for essential needs eg groceries, the situation is dire.  Even a small deficit (say $100/month), will accrue debt, which becomes much harder to pay off over time.  Add interest and late fees and this soon becomes a nightmare downward spiral.  

Consumer Debt

Others, not through necessity, but a lack of understanding, choose to enter the bad debt cycle.  

Consumer debt is what is generally meant by “Bad debt”.  It is debt used to buy goods that are consumed, or assets that will not grow in value.  Classic examples include car loans, credit card “shopping therapy” and borrowing to buy a boat.  

Paying interest on debt that is not essential, to buy assets that lose value once purchased is a little insane.  But people do it all the time.  “I deserve it” and “I can afford the repayments” are common justifications. 

“It’s time to share a big chunk of my future wealth with a bank/credit card company!” Admitted no-one, ever.

It’s easy to miss the significance of accumulating consumer debt when the repayments are affordable and the purchase desirable.  

But just as in a poverty induced debt spiral, the debt becomes harder to repay over time.

All income levels are susceptible to this, including high income earners, who tend to borrow bigger and brasher.  The repayments may be manageable, but they are stealing your opportunity to build wealth.

You may have heard of the “Debt snowball” and “debt stacking” (see chapter 1.2), which encouragingly make debt pay off sound easy.  

But there is a long period before the snowball or avalanche begin, where you’re trying to make a dent in your debt.  

Most of your cash is going to interest until you can start making a significant impact on the principal.  I call this the “Debt Dung Ball”.   It always takes far too long to pay off debt!

Car loans

A car purchase commits you to many additional expenses including registration, insurance, fuel and maintenance.  If you need a car, it is wise to limit the damage as much as possible.

As soon as you purchase a vehicle, it is losing value over time (depreciating).  New cars depreciate quickest in the first five years, making second hand cars better value.  

Borrowing to buy a car adds interest to the cost of the car, boosting the negative effect on your long-term wealth.   

People often borrow from their mortgages to buy a new car, due to the low interest rates incurred.  At record low interest rates of 3%, a modest $30,000 car paid off over 5 years will cost an extra $13,125 in interest.  

If you pay the debt off over 15 years instead of 5, it will cost you another $30,711 in interest (even at 3%) – doubling the cost of your car!

 

Personal loans, credit cards and Buy it now – Pay later.

Personal loans currently charge around 6-8%.  They are often used for boats, cars, holidays and general living beyond means.  The value of all these purchases decrease over time, and the interest rate is significant.  

The widening gap between asset value (decreasing over time) and total cost paid (increasing over time) is the exact opposite of what you want to achieve in order to build wealth.

If you want to be dirt poor, one of the fastest ways to do it is by letting credit card companies scalp you 12-30% interest on depreciating goods.  Brutal!  

Buy it now Pay later schemes are similar to a credit card with an interest free period.  Potentially free if paid off without fail, but quickly punished with fees if a repayment is late.  They tend to be used for retail purchases, which will fall in value after purchase.

These are all methods to spend more than you earn, and slowly degrade your future wealth. 

Good Debt vs Bad Debt – What is Tolerable Debt?

Tolerable debt is often debt that you cannot avoid.  In the original example, the first $10 debt to buy groceries may be tolerable to allow time for extra income to be earned to make up the deficit.  

A car loan may be tolerable debt if there is no other way to get to work to earn an income (no available public transport).  In these cases, the bare minimum debt should be incurred, at the lower interest rate.  Pay the debt off as fast as humanly possible to get back on track.

Home loans, in some cases, are tolerable debts.  If the home is not an investment you would purchase for its growth potential, it is a tolerable rather than good debt.  

Many towns have average or worse capital growth expectations for property.  It makes sense a lot of sense to keep your home mortgage modest in these circumstances, and leave borrowing power for better quality investment asset(s). 

What is Good Debt?

“Good debts” are those used to buy assets that grow in value (appreciate) over time.  The intention of taking on these debts is to increase the net wealth of the borrower, despite interest paid.  

For a debt to be classed as “Good” the asset MUST have an expected after-tax return greater than the interest paid.  Good debts loans usually charge the lower end of interest rates available at the time.

Taking on good debt involves risk, and can sometimes go badly.  

To make an informed decision taking on a “Good debt” it’s important to understand all the potential risks, as well as your risk tolerance.

Borrowing to Buy Property

A carefully chosen home or investment property can be considered a good debt.  This can be a powerful way to build wealth.  

Expected and actual after-tax returns must be greater than interest owed to make a debt productive.  It is not enough to buy any asset (including property) and expect it to perform well.  

In 2010, Amy incurred $400,000 “Good debt” to buy an investment property.  Amy had friends who had made significant profit in Darwin properties.  She brought a 4 bedroom home on plenty of land. 

A decade later, the house is now worth $325,000.  The bank don’tdoesn’t   care she hasn’t made a profit, as Amy has to pay the interest regardless of the property’s performance.    

To make matters worth worse, in order to free herself of the underperforming property, Amy will need to find $75,000 to pay out the remainder of the loan after sale.  

Amy is not alone.  Many investors have investment properties worth far less than they owe, with their borrowing capacity tied up in an asset too expensive to sell.  

Borrowing to Buy Shares

Other investment loans, for example borrowing to buy shares, are also traditionally considered good debts.  

The long term returns for the ASX since 1900 is an incredible 11.8% per annum.  

Borrowing at 3% to buy and hold shares over the long term would be a productive debt, as long as returns were greater than the interest paid.  This, of course, is never guaranteed.  

Student Loans

Borrowing money to study is generally considered a good debt.  The qualification should be to work in a field you will enjoy long-term.  If you will be able to secure work after graduation, and the income over the long-term will compensate for the time and money spent studying, student loans can be a very effective use of debt. 

Taking on student debt and failing to complete your qualification is a regrettable waste of money and time.  Debt is not forgiven if you drop out or change courses multiple times.  

If there is little employment in the field your studies qualify you for, high levels of competition or poor pay, the financial burden taken on may not be worthwhile.

This is a huge decision to make at 18 or so!  If in doubt, consider a year of work experience to give you time and insight.

Home Renovations

Borrowing to improve your home can be a good debt, but rarely is. 

The resulting value of the renovated property should compensate for the amount paid for the renovation including interest.   It is very easy to overcapitalise on your home by improving it beyond the top price point of the suburb and street.  

This then becomes a lifestyle choice – best not funded with bad debt.  If you are keen to improve your home, assess what the realistic best post renovation valuation is and use this to guide your budget.  If you are investing for lifestyle, consider saving and paying with cash to minimise the negative financial impact.    

Small business

Small business debt can be a very powerful use of debt – business is a rapid wealth builder if successful.  

But it is very high risk; according to the Australian Bureau of Statistics, more than 60% of small businesses fail within 3 years.  Debt taken on to fund a small business that fails is obviously a bad debt.  

A small business idea should be thoroughly thought out, researched and planned with realistic risk management before any debt is taken on.    

Debt for Cashflow

“Cashflow is king” is a common catchphrase among investors.  Everyone needs adequate cashflow to get them through rough times.

When taking on your biggest debt, a mortgage, consider borrowing a little extra to stock an emergency fund.  Owners are usually most vulnerable in the first year or two of a mortgage (home or investment).    

Stashing any extra borrowed along with ongoing savings in a 100% offset account is ideal.  You will not pay interest on the money whilst it’s in your offset account.  As long as you don’t raid it for non-emergency spending, you will pay no more interest for the added flexibility.  

Debt for Tax Optimisation

Paying off the home mortgage is a psychologically tempting prize.  Flexibility here should be considered, in case of job loss or other unanticipated disasters.  

Placing extra funds into an offset account, rather than a redrawthan redraw facility, means you can withdraw your money without the bank’s consent.  If circumstances change, banks can stop you redrawing money, but cannot stop you accessing offset savings.  

Circumstances often change more than anticipated, and the home you planned to live in forever may eventually become the perfect rental property if you move.  

If you have paid off the mortgage, you cannot then redraw and make interest tax deductible.  If you have only offset the mortgage, you can move your cash and deduct interest paid against rental income.  

When Good Debt Turns Bad

Bad Timing

Whatever asset class you invest in, no-one is able to tell you what the returns will be in ten years.  

Borrowing to invest at a bad time can result in several years of negative growth.  

This tends to happen when an asset class has done particularly well over the preceding years.  It is constantly in the news, everyone is talking about it, and those not already invested feel they are missing out!  

An unpredictable amount of time later, the peak of the market declares itself when the asset price collapses, devastating to those leveraged into the investment.

If you borrow to invest, you must be able to manage this risk.  Resist the temptation to follow the crowd, and be suspicious anytime there is excitement over a particular investment class. 

Only invest for the long-term.  If a reasonable investment is held long enough, it is likely to recover and benefit from another period of growth.  If sold, you crystallise the loss and pay interest for the pleasure.   

Default risk

Good debt can turn bad very quickly in the event of being unable to service the debt.  

Underestimating holding costs of property, failing to anticipate future increases in expenses or drops in income can cause loan defaults, or selling at the wrong time.  Before taking on good debt, carefully identify and minimise all risks. 

Opportunity Cost

Even when you have a “Good debt,” there may be better opportunities for that debt.  

Buying your own home would generally be considered a good or tolerable debt.  Perhaps the expected capital growth for that home is a little over the interest paid at 4%.  Depending on your risk profile, future plans and preferences, there may be a more efficient use of that borrowing power.  

Every time you decide to take on debt, it is worth considering whether there is a better use for that debt.  Everyone has limited borrowing power, use it effectively! 

Advanced Debt Utilisation

Credit Score and rewards

Credit scores are how lending institutions assess your reliability to pay back debt.  

Having a good credit score makes it easier to get a loan, may increase the amount you can borrow, and lower the interest rate.  

It is not impossible to get a loan without a credit history, but it may be harder.  

If you have utility bills, a mobile phone plan or any other history of borrowing you will have a credit score.  

You can obtain a free copy of your credit score from Equifax annually, and monitor it month to month at Creditsavvy.com.au.  This is important to monitor if you plan to borrow for mistakes on your file, and effects of credit card applications (especially for travel hackers). 

Credit cards can be a tool to build a better credit rating over 12 months or more, for those wanting to secure a mortgage at a great rate.  

It is a lot easier to spend excessively with plastic than cash.  Do not get a credit card if you’re not sure you can control your spending and pay the full balance every month without fail. 

If you feel you can handle credit cards, consider finding one with no annual fee.  You need to outplay the credit card company.  They want you to spend on your card, fail to pay it off completely and start paying them ever increasing interest.  Organise the full balance to be paid off each month automatically through the credit company.  Make sure you will never pay them a dollar in interest or late fees through missed repayments.    

Debt to income ratio

How much debt should you take on?  

Any debt is unproductive if you are unable to consistently make repayments without putting stress on your household.  

A common rule of thumb is that home mortgage repayments should be less than 30% of your take home pay.  If you maximise this, you are using most of your borrowing power, limiting opportunities for leveraging into investments.

There is no acceptable limit for bad debts – they are devastating your finances so should be eliminated ASAP.   

Total debt repayments including “Good debt” should only be pushed higher than 30% if you have assessed expenses, risks, future changes to income and expenses and have a generous emergency fund saved. 

Want to check out the other AUSTRALIAN finance bloggers? Download the free e-book to read all there is to know!

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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Budget No More: The Best Expense Tracker App

This article may contain affiliate links. If there are any in this article they are marked *. An affiliate link means if you click on the link and purchase a product, at no extra cost to yourself, I will receive a small commission.

Have you tried, and failed, at budgeting?

And found that, despite carefully budgeting, unexpected expenses appear every single month?

I could never stick to the budget either.  Because there was always a car repair, special event or SOMETHING.

Most people have multiple bank accounts +/- credit cards.  So, budgeting has become a lot more complex.

If you have accounts with only one bank,  your bank’s own expense tracking is probably sufficient.

For those that have accumulated multiple accounts and credit cards, the best expense tracker app for you can really help.

What Are Expense Trackers?

Expense trackers are apps designed to assimilate data from all your bank accounts and credit cards into one online location.

Data is added manually or electronically and automatically sorted into spending categories.

Then, it is clear where your money is going, taking into account all those lumpy or unexpected expenses.

Instead of an ideal budget that is impossible to stick to, you get a true picture of where your money goes each month.

When Would the Best Expense Tracker App be Useful?

Looking at your spending realistically makes identifying overspending and undervalued expenses easier.

Then, you can focus on cut spending in those areas.  Are there subscriptions you are paying but don’t use?

I realised I was paying a huge amount on insurance premiums (house, cars, boat, health, income protection and professional!).  I am pretty risk averse – going without insurance is not an option!

But there are ways to reduce costs.  I increased my income protection waiting period to 90 days, and house insurance excess to $5000.

As a result, these “cuts” saved significant dollars, with no impact on my lifestyle.

Scott Pape had a pragmatic approach to insurance.  I have adopted it since reading the Barefoot Investor.

He pointed out the obvious – you insure in case of disaster, not inconvenient cost.

If you have emergency savings that would cover 90 days of illness, or the first $5000 of home damage, do you really need the extra insurance?

Pay only for cover you couldn’t do without if disaster struck.

This advise has helped me turn down mobile phone insurance and rip off “extended warranties” on white goods.

Are Expense Trackers Secure?

Expense tracker apps use similar technology to banks.  Nothing is ever guaranteed though.

The apps have “Read-only” access meaning you can view balances, but not transact using the app.

The banks’ attitudes towards tracker apps is, however, a real issue.

Several banks have released statements regarding expense tracker apps.  They threaten sharing login details is breaking the banks terms and conditions.  If there is any fraudulent activity on your account, and the bank may not reimburse you.

Hopefully, the banks will be more collaborative with the progression of open banking and customer pressure.  But for now, you should probably check the situation with your own bank.

Many banks have tracking ability through your online banking.  But this only tracks expenses with a single bank.  If your banking is simple, this may be perfect.  Check out the Up bank review, they include expense tracking for free.

If your banking situation has become more complex, this is really where an expense tracker becomes really convenient.

Because you only need to share log in details if synch the app with your accounts and automatically pull the data, manually inputting data will not break T&Cs.

Some of the apps allow manual input of data.  But this would be incredibly time-consuming. There is a more reasonable option.  You can download data from your online bank and import it into the app.

This does not require the sharing of login details. It would be more time consuming than synched data but could be performed every 1-3 months.

Also, make sure you are aware of basic personal banking and identity security.  How to reduce risks of using online banking apps. 

Which is The Best Expense Tracker App for You?

– Best Expense Tracker For Easy Spending Analysis -Pocketbook

This is a free app that is very popular in Australia.

Pocketbook can synch with >80% of Australian banking data.

It’s intuitive to use.  And most transactions are automatically categorized.  You can change categories and add your own categories.

There is a budgeting section where you can set spending limits and ask the app to alert you if you near them.

I have used Pocketbook for the past twelve months and love the intuitive interface.  I have found it useful in identifying areas to save more money.

Do you want to review all your transactions in one place, are happy to synch accounts or manually import data?  If you want to monitor your spending without a lot of fiddling with spreadsheets, you will probably like pocketbook.

– Best Expense Tracker For Financial Forecasting – Pocketsmith

Pocketsmith has a basic plan, which requires manual import of data.  Unlike pocketbook, it projects your anticipated progress up to 6 months in advance.

However, the free version only allows data from 2 accounts.

Paid versions start at $10.95/month.  For this, the app allows bank synching and automatic pulling of data.

It automatically categorizes expenses, allows 10 accounts and will project your finances up to 10 years.

The paid versions produce automatic reports.  These reports include asset/liability and networth calculations, income and expense reports.

You can use the projections to work out whether you are saving enough to meet goals.

– Best Expense Tracker For Net Worth Calculations – Money Brilliant

Money Brilliant’s basic free membership allows you to connect bank accounts, credit cards, superannuation and investments.

It, like pocketbook allows you to introduce custom sub categories for spending and calculates net worth.

The paid version will send an alert if you can save money by switching gas or electricity suppliers.

It also tracks net worth over time, and suggests potentially tax-deductible expenses.

A paid membership will cost $9.99 / month.

Money Brilliant does not allow manual data entry or data import without synching bank accounts.

Money Brilliant claim that consumers are probably protected if there is fraudulent activity on their account. Not really reassuring!

– For Tracking Bank Accounts, Credit Card, Super and Loyalty Points in One App – Money Tree

Money tree app provides a similar free service to Pocketbook.

It can aggregate data from bank accounts, credit cards, and even superannuation and frequent flyer points!

There is a reasonably priced paid version of $4.49/month.  This adds personal budgeting and reporting features, making it easier to track your budget surplus/deficit over time.

Apart from the ability to track airline/ loyalty points and get warnings when they are close to expiry, this is all available for free with pocketbook.

The “Moneytree Work” version costs $5.84/month and includes automatic work expense detection (I’m not sure how reliable this is).  It also has a  designated feature for storing tax deductible receipts.

This is also available for free on the ATO app, or I just use the notes section on my android phone.

Unfortunately, there is no help offered with working out and with-holding taxes for the self employed.

The paid versions are only available to Iphone users!

– For Learning to Manage Your Money – You Need a Budget

You Need a Budget is a paid service with a 34 day free trial and money back guarantee.

The current cost is $11.99/month or $84 per year.

Instead of looking at your recent purchases, the emphasis here is on on setting goals for your money and spending limits.

You can do this with Pocketbook, but YNAB is a lot more involved.

The website has a lot of video lessons on money management and how to use YNAB.

The app produces lots of visuals to help you analyse your spending.

There are reviews on the site from savers who have paid off lots of debt with help from the app.

If you are just starting out with your first pay cheques and don’t know where to start with budgeting, this may be a useful app if you love all things tech and lots of graphs.

Alternatively, The Barefoot Investor is a quick read and will step you through sorting out your own budget and managing your finances efficiently.

I can see this app also being useful for those who have made money mistakes (haven’t we all) and will benefit from the motivational aspects of graphs and visual representation of goals.  If you have a lot of debt to pay off, you may need some help with motivation.

– For Self Employed BAS Payers – Quickbooks

A common issue for doctors transitioning to self employment is not managing their tax effectively. Many forget to pay themselves super as well, resulting in even higher taxes paid.

Opening your own practice is stressful, with so much to learn alongside your medical training.

The self employed have to set aside their own tax, to be paid quarterly or annually.

If this is not calculated and planned well, it can result in a HUGE unanticipated tax bill.

Quickbooks Self-employed is a basic app designed just for this.  It can be used for sending invoices, tracking personal/business expenses, tracking GST and recording tax deductible expenses.

This costs $10.50/month. There are also several other plans that allow management of staff and detailed tracking of spending.

The best expense tracker apps can be a really convenient tool to help optimise your money habits.  First ask your bank if they support use of the app (they can allow separate log ins, if they choose).  If not, consider electronically transferring data regularly.  As your banking becomes more complex, money trackers become more beneficial.

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

See full terms and conditions in footer

How Realistic Are Your Financial Expectations?

This article may contain affiliate links. If there are any in this article they are marked *. An affiliate link means if you click on the link and purchase a product, at no extra cost to yourself, I will receive a small commission.

This week I removed myself from a Facebook group.

This particular group has lots of posts showing off the posters’ recent splurge purchases.  Designer watches, bags, clothes, plastic surgery, and extreme luxury holidays.  I’m not quite sure why I signed up!

You are heavily influenced by the people you surround yourself with.  When exposed to these sorts of daily exposures, expectations gradually change. 

Expectations of what you can comfortably afford become inflated, sometimes to ridiculous levels. 

Do you aspire to become a semi- bionic – collagen plumped mannequin body with a handbag you’d risk your life for in a robbery?  That’s a personal choice, although I suspect it’s fueled by horrendous self-esteem and inferiority issues.  And your Instagram account. 

Financial Expectations: You Can Afford Anything but Not Everything

To a far lesser extreme I see this among colleagues and friends.  Common defences include “You can afford it,” “You deserve it” “You only live once” and the ultimate lie “It’s really an investment!” 

In the clever words of Paula Pant, “You Can afford anything…But not everything.” 

Are designer consumer goods really what bring you joy?  If you have retirement plans and other financial goals on track, go for it! 

Very few people can literally afford everything. There has to be a choice.  If you’re not making these decisions consciously, you are still making them with the purchases you make. 

Make Sure Your Financial Great Expectations are Realistic

Many reading this blog have, or will eventually have a high income, due to their professional career: Medicine, Dentistry or otherwise.  Your generous income may make you feel wealthy and prompt an urge to show off. 

But wealth does not come from income.  Wealth is built from the gap between your income and expenditure.  Some of your colleagues come from wealthy families.  Some may have graduated from medical school debt free and have received large financial sums as gifts or inheritances.

Expecting to live the same lifestyle as these colleagues is not realistic for most.   Don’t be fooled into emulating the Instagram lifestyle (it’s not real!). 

Think about your situation, your long-term goals, and avoid short-changing yourself for frivolous spending to keep up with the Jones’s. 

Comparison is the Thief of Joy – Theodore Roosevelt

Don’t be fooled into comparing yourself with seemingly wealthy friends. 

Maybe they come from wealthy backgrounds.  Maybe they can’t sleep due to financial stress with credit card companies calling day and night (Shudder….). 

Comparing your own life with the “Highlight Reel” of others on social media is a particularly easy trap to fall into. 

No-one posts photos of mundane, every day.  Those idyllic households with Instagram-worthy good looks, interior designed homes and angelic children?  Is it me or do these couples frequently announce their divorce within weeks of these images being published?  Maybe they’re trying to fool themselves their lives are perfect.   

Most importantly, don’t fall into the trap of feeling sorry for yourself. 

Your exact career choice may not be as lucrative as some of your friends. Perhaps you weren’t given a giant head start by wealthy and excessively generous parents.  

You Already Won Lotto

Readers who are lucky enough to live in Australia have literally won the lottery of life. 

This great country goes from strength to strength, and has a promising long-term future. 

Incomes are comparatively high and living costs reasonable (mostly).   Healthcare is available for all.  The social welfare system means if everything goes wrong, you won’t starve. 

If you are earning over ~$90,000  your income is above average in Australia.  (Intern docs, your wage will increase above this within two or three years.)

You have been provided amazing opportunities to secure a secure, luxurious and happy future.  But you have to do some work to achieve everything you want!

In most places I’ve worked with there are nurses who use casual work to fund months off work traveling the world each year.  I suspect nurses have a lot to educate doctors with in money management (and many other topics)!

If you are a doctor wondering how you can manage with your income my suggestion to take someone you know who does this out for lunch and ask to pick their brains! 

Adjusting Financial Expectations: Practice Gratitude

It is now well established that gratitude is beneficial to your mental wealth.  It’s just too easy to fall into the trap of wanting more and more and more, but never being satisfied. 

Being content and understanding when you have enough is a rare skill.  It has to be developed over time through practice. Starting a gratitude journal or regularly finding someone to be grateful for at work  will have a positive effect on your mood and sense of “enough”.   

Why Adjust Financial Expectations? Future Changes of Heart

What if the opportunity of a lifetime popped up?

Once you have all the trappings of middle-class life, impulsive life changes become harder.  Heading to Antarctica for a year as the expedition doctor, or taking your family for a world tour while home-schooling can seem impossible. 

It’s never really impossible, of course, but there are a lot more real and psychological barriers to following your dreams. 

If you own a big fancy house with the most expensive furniture and latest gadgets, are you really going to want to rent it out to strangers?  How much damage will be done?  It feels very personal when it’s your own home. 

What would you do with your cars and boat?  If you still owe money on a recently new car, you may not even be able to sell your now second-hand car for enough to pay out the loan! 

I value maintaining flexibility.  And as I get older, the idea of reducing my possessions appeals.  I aspire to owning less clutter and having more freedom. 

If you have trapped yourself into a huge mortgage and car payments, you have locked yourself into “Golden Handcuffs”. 

The opportunity to change careers or undertake a fellowship is severely impacted by financial implications.  Taking extended time off work if a family member is seriously unwell is not a viable option. 

You are essentially betting on your high income continuing without interruption, and that none of your life circumstances or aspirations will change. 

Life changes pretty fast sometimes, I’d rather be ready for whatever opportunities and difficulties are thrown my way.    

Model Reasonable Financial Expectations for Your Kids

I have a friend with kids of similar age to mine.  We have exactly opposing views of teaching kids about money. 

Her concern is that the kids will worship money if taught it is important.  She ignores money when it comes to her kids, and tries to pretend it doesn’t exist.

People all around us appear to worship money as the ultimate goal, going to jobs they don’t particularly enjoy to buy rubbish they don’t need to show off how much money they have.  Oddly, these same people who usually claim money isn’t important spend their lives chasing it. 

Money is important – it provides for all our needs such as food, shelter and safety.  Financial security provides opportunities for designing your life around your values and what you enjoy. 

Give Direct” is a charity I support that provides financial support directly to some of the poorest households in the world. $1000 can double a household’s income, allowing the family receiving support to use the extra fund to break out of the extreme poverty cycle.  What an incredibly powerful use of $540-700  after tax!

Only great privilege would allow you to forget that money stops people starving to death. 

Parenting is teaching children all the skills they need to become responsible and happy adults. 

They need realistic expectations and to handle a budget.  I hope financial literacy will help them avoid all the usual financial mistakes of youth

If parents are planning to provide them with financial assistance for a head start, this is even more important! 

So…

It will take time to reset your financial expectations.  Friends, family and society are constantly reinforcing “You can afford it”.  Broaden your social circle from high income earners who have picked up bad habits!  Look carefully for those around you who are money work from them, pay for lunch and ask them if they’d share some secrets.  Most importantly, make sure you fund what is really important to you as a priority.  Don’t buy stupid crap until you have the big rocks in the jar.

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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Should I Pay off My Mortgage? I Wanna be Debt Free?

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Do you dream about paying off your home loan? 

There are several factors to consider when deciding whether to pay off your mortgage:

  • Are you already saving enough to hit your long-term financial goals 
  • Are you maxing out your superannuation concessional limit of 25K?
  • Could you invest elsewhere for better tax-free returns?
  • Do you need to create equity for property investments
  • Do you have other higher interest debts?
  • Are you under mortgage stress?
  • Are you within 10 years of retirement?
  • Could you use a 100% offset account instead?

Your home loan is often the largest debt you will take on.  In the early years, your mortgage can feel like a huge burden and a common desire is to be mortgage-free.  Many busy professionals who have spare cash are time poor and lack the time, knowledge, or interest to consider investing. 

Spare cash is funneled into the mortgage with a strong desire to pay it off or just because it’s the easiest option.

Even if you wait until the mortgage is paid off to invest, you still need to invest time in selecting a financial advisor and /or educating yourself. You may have potentially wasted years of compounding higher returns. 

It is better to spend a little time as soon as you have the spare cash to consider very carefully “Should I pay off my mortgage?” 

Should I Pay Off My Mortgage: Against – Mortgage Rates are at Record Lows.

Currently(July 2020), most owner occupier loans are charging 2.5-3% interest. For up to date interest rates see here.

With rates being currently so low, it seems a great time to invest instead. 

Below is demonstrated change in net worth over 15 years from paying down a mortgage at 3% or earning 7% from an index fund with $1000 / month.  

The difference becomes more marked the larger the contrast between interest rates and stock market returns (unfortunately unknown at time of investment).  The longer time frame you have, the more potentially advantageous the stock market technique.

No investment returns are guaranteed however, so those with lower risk tolerance will prefer a guaranteed 3% saving over an unknown growth rate.

Should I Pay Off my Mortgage? Are you on Track for Retirement?

Check if you are already on track for retirement.  You will need at least a basic financial plan to work this out.  If you’re not yet on target, you will need to take more risk or invest/save more.   

If you don’t want to make a plan yet, consider the most tax effective solution.  Are you already salary sacrificing the concessional cap ($25,000) into superannuation? 

Salary sacrificing the extra to make your contributions up to the cap could save you 15-30% in income tax.  If you have maxed out your salary sacrifice arrangement, you will need to decide if you would be better off investing inside/outside super or paying more into the mortgage. 

Against Paying Off the Mortgage: Inflation

It is inflation that makes the cost of living increase over time.  Inflation is expected to be 2-3% long-term.  This means your real mortgage value is decreasing over time. 

The stock market is expected to grow over the long term (at least 10 years) above inflation.  

Over the years, if your income increases with inflation, your mortgage becomes a smaller and smaller portion of your income.  Finally paying off that mortgage after 30 years is far less impactful on your cash flow than imagined.

A home Loan is one of the Cheapest Debts to Own.

Debt can accelerate households into significant financial hardship through the high interest rates associated with consumer debt. 

If you have debts incurring higher interest rates than your mortgage, these should be the priority to pay off.

Most people should aim to have their mortgage on the home they will retire to paid off by the time they retire.  Taking non-deductible debt into retirement seems like something we’d all want to avoid!  

But in the decades prior, debt can be used to accelerate wealth directly (through leverage) or indirectly (By not paying off your mortgage and investing instead).

Should I Pay off My Mortgage? When You Might Want to…

  1. You are on course for retirement investments already

This is not a competition to collect the most money.  If you have calculated you are already on track for the retirement you desire, paying off the mortgage can fee up monthly cash flow and allow a reduction in working hours of more discretionary spending

2. You are close to retirement

Most experts agree, carrying non-deductible debt into retirement is a bad idea.  You will be far more sensitive to changes in interest rates, and may struggle to refinance loans.  Aim to pay off non-deductible debt in full before retirement

3. You are under mortgage stress from over committing

Mortgage stress is often defined as more than 30% of net income as mortgage repayments.  It probably is far more subjective than that.  If you are struggling to make repayment, tightening belts and putting extra repayments in to give you a buffer is an astute move.

4. You wish to invest in rental properties but don’t have enough equity 

There are several ways to increase equity, but the most reliable is paying the debt down.  The debt can then be converted to deductible debt for your investment property loan.

Pay Your Mortgage Off Before Paying Off These Productive Debts

Deductible debts

  • Loans taken to leverage into real estate can be effective tools for building wealth. The interest and expenses over and above rental income received can be deducted against your primary income.  This reduces your tax burden and can mean these loans are almost half the usual interest rate for those on the top marginal tax bracket.

Student loan debt that is indexed to inflation

  • Student loans (HELP, HECS, UK student loan company) don’t charge interest but increase the loan in line with inflation (2-3%). This is usually below mortgage rates and so should probably paid off last.  You are forced to make minimum repayments, but don’t make additional repayments without considering alternatives (opportunity cost).

If You Choose to Pay Off your Mortgage – Use a 100% Mortgage Offset

Rather than paying the money into your main mortgage account, paying into an offset account preserves full tax deductibility and maximal flexibility. 

Redraw accounts look similar initially, but the bank can refuse redraws if they are concerned about your ability to repay the loan.  They do not have this power over an offset. 

The future is unpredictable.  Everyone should have a cash reserve.  All those whose incomes have dramatically dropped during the COVID-19 crisis (including doctors) were unlikely to forsee this. 

It’s always best to keep a decent emergency fund.

Consider the possibility you may later decide to convert your house to a rental (a popular strategy with professionals who move around a lot for work).  If you have paid down the mortgage loan, you will pay more tax on rental income.  Even if you redraw the extra repayments, the loan paid down is non-deductible unless re-borrowed for deductible purposes. 

If, however, you kept the funds in a mortgage offset, you can withdraw them when you move out and treat the entire amount still owed as tax deductible.

Even for those who don’t plan to move, I think this is worthwhile as circumstances change quickly.

The one issue with a home loan offset is the accessibility.  Having (eventually) $100,000 or more in a bank account has a tendency to make you feel wealthy. 

And feeling wealthy makes me feel spendy!  You can un-link the offset account from your online banking so it’s not tempting you every time you log into your online banking.

Don’t let making the decision of whether to pay off your mortgage or invest be an emotional or lazy one. Your long-term wealth and future options depend on your choices decades prior.  

Assess your situation with respect to all the factors discussed in this article and make an informed decision.  If you want to pay it off here are a few tips on how to get the job done fast

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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