Scared of Investing? How to Get Over the Fear

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

The fears we don’t face become our limits

Robin Sharma

Scared of Investing? But You Are Already Investing

If you have a superannuation account, you are already investing. Young people often don’t really think of super as their own money. But ignoring super will hurt your future self. Time passes quickly!

The graph below demonstrates compound growth of $50,000 at 6% vs 7% after fees over 40 years. The critical time to make sure you have your super working hard for you is in your 20s (when most of us ignore it!).

It’s time to invest a bit of time checking your super in the right place, invested in the right assets. By the time you have learned enough to sort this out, you have the knowledge to set up a simple portfolio outside super!

Scared of Investing? Don’t Forget Defence

A rule of thumb advice is not to invest money you will need in the next 5-7 years. You need cash available for emergencies. Being confident you do not need the invested cash in the short term will help early investors tolerate volatility.

What if an appliance or your car breaks down, or you need to take time off work for a health crisis? You don’t want to be withdrawing from investments, particularly during a bear market when prices are down. I wouldn’t be caught dead without an emergency fund, even though it’s frustrating to have to save this up once you’re itching to get started investing.

Scared of Investing? Educate Yourself

Learn enough to decide on a basic financial plan and asset allocation for your superannuation and stock market investments outside super. This is a reasonably small time commitment. Remember, reasonable and executed is almost always better than endless procrastination in the quest for perfection.

Knowledge tends to reduce fear a lot. Once you understand the benefit and ease of index investing using broad ETFs, you will have a better understanding of the actual risks and be able to assess this more effectively.

Think back to when you were early in your career. Was there a task that made you fearful that you are now confident and competent in?

What are the factors that help turn fear to competence and confidence? Can they applied to the fear of investing?

1. Practice in a low risk environment.

I’ve spoken before about micro-investing. Starting early, with tiny amounts of money lowers percieved risk and anxiety. Most microinvestment apps have a robo-advisor, making asset allocation simple (and as always, imperfect).

2. Mentorship

In an ideal world, we would all have a more experienced and knowledgeable mentor to share their experiences and coach us in real life.

An excellent professional financial advisor could fill this role, but they difficult to find. Selecting mentors (professional or otherwise) is probably the most challenging aspect though.

Even parents often give well meaning but bad advice based on no knowledge! A good rule of thumb is to use multiple sources of information and mentorship, so the inevitably biased information you recieve is hopefully balanced out by different views and approaches.

3. Familiarity

Repeated exposure to a situation inevitably reduces anxiety over time. The beginning of anything can be scary. If you can get started investing and get through your first few market corrections, fear should reduce (particulaly if you have performed all the steps above.)

If you don’t know where to start, Passive investing Australia is an excellent site, that can be worked through article by article over an (intense) weekend. Subscribe to this blog for ongoing education and (hopefully) inspiration. Subscribe to 1-3 podcasts or blogs with different investing approaches to get a more balanced education.

Scared of Investing? Assessment of Risk

People are terrible risk assessors. In investing you will come across most people at both extremes of risk tolerance. Many don’t have a good understanding of the risks involved.

At work, Colleague A may have a reputation as an investor, and brags about a crypto win. They are into a new fad each week and probably have little idea about any of it. They’re randomly throwing money at investments in the hope of catching a winner. There often seems to be very little strategy involved, and even when they do well, timing of their exit from the investment is often based on emotion. This is gambling, and is often the perception more risk averse people have of investing.

Colleague B when conversation turns to investing, states they are fearful of the stock market. These guys will probably make pretty good investors if they ever get round to learning enough. They’re not crazy risk-takers like colleague A. They don’t skip from one fad to another, racking up brokerage fees and tax bills all the time. They will likely research their options carefully and start by dipping a toe in. The biggest risk for colleague B is endless procrastination. Time is passing quickly!

Colleague C has been investing a while. They spent a weekend reading Passive Australia, and have signed up for a finance podcast and an investing blog to continue to grow their knowledge. They have made a basic financial plan, picked an asset allocation and found a low-cost online broker.

Their investment portfolio is growing year on year, and they don’t plan to enjoy the proceeds for a few decades. They don’t talk about investing much. There’s not a lot to talk about, and their style is nowhere near as entertaining as colleague A’s. They have chosen the easiest, lowest risk route in investing – dollar cost averaging into broad index funds forever.

Risk vs Volatility tolerance

Some of you may be wondering, if colleague C has chosen the lowest risk route, why are they not investing in property? Many people feel safer investing in property. It’s a physical asset they have far more experience with than shares. Property is less volatile, which often makes nervous investors more comfortable.

It’s a trap!

Volatility is often lumped in with risk but I see these two concepts as separate.

Volatility is short term risk and only relevant if you plan to withdraw your investments within the next 5-7 years, or you will panic if the price drops and sell when it happens.

Risk is the chance of actually losing your money. There is a common misconception that property always goes up. You can lose money with property as well as shares, but with property it’s more insidious. You may not even realise you are losing money for a few years.

I feel most people have a false sense of security around property. It feels more comfortable.

Most of my family and friends that have invested in property regretted it, despite statistics telling us property should have been a great investment over the same time period.

And yet I have chosen to become a property investor myself.

The big issues with property are

  1. Concentration risk – With hundreds of thousands of dollars invested in a single asset, choosing a dud property can be a disaster. You could invest this amount in a single share, but that wouldnt be very clever! A major advantage of the share market is the ability to diversify quickly and cheaply.
  2. Leverage – The vast majority of property investors will utilise leverage (ie a mortgage). This means a 10% gain or loss is increased by the amount of leverage taken on. Instead of investing $50,000 in shares and gaining or losing 10% ($5000), if that $50,000 is used as a 20% deposit on a property, a 10% change in property price would result in a $20,000 gain or loss. The magnified returns are attractive to property inevstors, but the magnified losses should be a warning to be absolutely sure the property selection is right.

Scared of Investing? Diversification

Not putting your eggs in one basket is an easy way to reduce risk.

No one can predict the future returns in any particular asset class. So the next 10 years could (and likely will) be completely different from the last decade. The shorter investment time horizon you have, the higher the risk a particular asset class will underperform.

When people are afraid of investing, it is often due to an idea they have to pick winning stocks, and may lose it all. But stock market investing has become far easier and more accessible over recent years.

Investors can now buy a simple index exchange traded fund (ETF) that exposes them to shares throughout Australia, or even the world. They can rely on a roboadvisor or make up their own asset allocation after some research.

The evidence is actually strong thaht this easy, lazy investing approach actually provides better performance than professionally managed funds most of the time. Some like the challenge of picking individual stocks, but most would start with a core portfolio of index ETFs.

Consider the Risk of Not Investing

Did you sit down and make that financial plan? You really need to give this a go, even if it’s not accurate and changes over time.

Are you on target to reach your goals? I would hazard a guess most people are not when they start out. I was always overwhelmed by the number of financial goals we needed to meet. We were never on target until this year, after a few years of investing to catch up.

What will you earn on your savings in your bank account? Check out how much your $70,000 balance will be worth in todays dollars over time. The graph below assumes inflation 2.5% interest on your $70,000 savings at 1%.

Inflation insidiously eats away at your savings. Taking small calculated risks to improve returns can help you meet your financial goals. Put the work in to make sure your super is working hard for you, and whether you need to invest extra.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  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.

3 Ways to Use The Wealth Effect To Grow Wealth

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

The wealth effect is a psychological bias resulting in a change in our spending behaviour, as a result of a perceived change in wealth. The wealth effect theory states that when house prices or equity markets go up, households feel more wealthy and spend more. Awareness of this bias can help individuals curb increasing discretionary spending faster than income rises.

Consumer Consumption and the Economy

Consumer consumption is a measure of household spending on goods and services.

Even a small decrease in consumer spending can lead to economic damage. Governments are therefore motivated to stimulate consumer consumption during economic downturns. During the COVID-19 economic downturn, this translated to rock bottom interest rates, Job Keeper, Jobseeker and a range of home buyer/builder grants.

The effect of consumer consumption on the national economy also means it has been studied, producing interesting data individuals can use to improve their own financial behaviour.

High rates of consumer consumption on top of record low-interest rates are a recipe for a booming economy. But it never lasts forever. When the economy turns again, and asset values fall, households can end up in excessive debt or even negative equity.

An increase in your home value is not realised unless you sell it. Similarly with gains in your superannuation or stock portfolio. Yet increases in these values, even if the money is not accessible, seems to affect household consumption.

Evidence for the Wealth Effect

Case, Quigley and Shiller studied the effect of changing property values on household spending. Between 1975 and 2012 they observed an increase in home values resulted in increased consumer consumption. A reduction in home values led to a decrease in spending.

Increases in the stock market value have also been linked to increased household spending in the US.

Most recently, an RBA analysis of Australian data suggested that a 1% increase in property value in Australia will cause a 0.16% increase in household consumption. Changes in house values result in larger and faster increases in consumption than financial wealth.

When housing values increase, we spend more and the savings ratio decreases. During economic downturns, with falling house values (and fear) such as during the GFC or COVID 19, national savings ratios increase.

Increased spending due to increased household paper wealth, despite stagnant income occur because:

  • Of a psychological bias. Households feel wealthier and so tend to spend more.
  • The ability to borrow based on increasing asset values. Households can borrow to upgrade their home or purchase a car.
  • Housing transactions tend to increase (related to increased borrowing power), which leads to further consumption through employment of property transaction professionals, home renovations and purchase of furnishings.

Change and Make up of Household Wealth

Thanks to Fidelity‘s recent paper on household wealth we can see that home values have disproportionately grown Australian’s wealth over the past 20 years.

Many Australian’s are “House rich, cash poor”. Unless retirees move to a significantly cheaper property, this equity often remains trapped inside their homes.

Consequences of the Wealth Effect

“When household wealth grows strongly, consumption typically grows faster than household income and the saving ratio tends to decline. “

RBA Bulletin 2019

It seems as soon as there is an increase in house values, we are pretty quick to start spending. The majority of spending occurs on household furnishings and vehicles.

The change in supply-demand inevitably leads to inflation in the products or services in demand. The effects are obvious to anyone in current times.

Friends are trying to purchase new cars but are on 6-month waiting lists. Production shortages of semiconductors compound the demand-supply balance. The effect trickles down. Used car prices have increased by over 30% in four months.

The massive demand to improve our homes after experiencing lockdown will inevitably be increasing costs to renovate or build in 2021.

If you weren’t convinced already, the ABS has given us yet another reason not to smoke!

Looking further down the list, the increases in the price of meat, household appliances, furniture and motor vehicles are all over 5% in just 12 months. Indulging in the wealth effect by spending on these items with the rest of the herd is super expensive!

House value increases are not steady each year. Some years (likely 2021) will provide incredible growth. There may be years where there is no growth or even a decrease in value. Spending $30,000 on a new car because your house increased $60,000 this year doesn’t really make a lot of sense.

How Individuals Can Use Understanding of the Wealth effect

As with most financial decisions, running with the herd is rarely the best choice. Making counter-cyclical decisions often works well in personal finance, as well as investing.

There are three main ways individuals use their understanding of the wealth effect to get ahead.

1. Stick to your Financial Plan

Recognise what is happening when you get over-excited about your home value increasing. Or all your friends are buying new cars, and you start to consider doing the same.

Refer back to your financial plan, and stick to it.

Avoiding emotional financial decisions is important in good times and bad.

Timing for that new car, house upgrade or renovation should be according to your financial plan.

Remember, your big increase in home value this year may be followed by years of no (or even negative) growth. Try not to waste your home equity on depreciating assets, it has far better potential uses.

2. Delay Consumer Consumption Until There is an Increase in Supply

Whenever there is too much demand for available supply, prices increase.

This provides motivation for existing suppliers to increase production and for new suppliers to pop up.

Often this will eventually lead to an oversupply, or demand will reduce (or both).

Once supply exceeds demand, prices will reduce and it becomes a “Buyers market”. Whatever you are buying, this is ideally the sort of conditions you want to be buying in.

If you have plans to purchase a car, upgrade your house, buy furnishings or household goods if possible delay until the demand drops and supply increases. This will also help the impulse to purchase contrary to your financial plan pass.

3. Avoid Over Leveraging

Interest rates can’t stay this low forever.

Our economy is doing far better than predicted. Border lockdowns will, fingers crossed, eventually become a thing of the past.

The RBA aims to keep inflation at 2-3% long-term, and uses interest rates as a tool to manipulate inflation.

If you are buying a new property, or borrowing to renovate, make sure you have done the maths. Don’t rely on the banks (they don’t have your best interests as their number one priority!)

Check you will cope with mortgage repayments when interest rates rise. Fixed rates offer short-term security but you need to be able to confident you will cope with the repayments when the fixed rate ends.

What rates you calculate up to depends on your risk profile. For me, a 6% rate seems reasonably conservative. Note the variation in home loan interest rates over time.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  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.

Mortgage Redraw: Tool or Trap?

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.

Whether interested in finance or not, we make decisions that impact our financial future on a regular basis. Being informed will empower you to make better decisions, and ultimately lead an easier life.

Buying a home is an exciting time, with many decisions to be made. Signing up for the associated home loan is a necessary evil.

“Even the once simple home mortgage now has so many flavours and styles and variations that it is difficult for people to make a decision”

Scotty D Cook

There are over 3000 mortgage products available in Australia. Features, fee structure and eligibility vary between providers. It’s easy to become overwhelmed by the complex options available.

With a series on mortgages, I aim to provide some guidance on the biggest decisions for one of the most significant financial moves you will ever make. Today we look at the mortgage redraw, commonly available with many mortgages.

How does Mortgage Redraw Work?

A mortgage redraw facility is available with many mortgage products. Borrowers may pay extra off their home loan, and “redraw” the extra repayments at a later date if required.

The appeal of a redraw is that borrowers can save money for short-term goals (such as that new car). Borrowers can save ~2.5% in mortgage interest of earning ~1% (pre-tax) interest in a bank account.

Many people use the redraw facility for an emergency fund. They make extra repayments with no intention to withdraw. The extra repayments could be withdrawn to get borrowers through a crisis.

There is definitely a psychological barrier to withdrawing money from your mortgage redraw, so borrowers are not going to accidentally spend this money on discretionary goods and services.

Others will use the redraw facility as insurance against rising interest rates. By making repayments as if the interest rate was 1-2% higher than it currently is, a buffer is built up in the redraw. If interest rates increase, the borrower is already used to the higher payments. If they increase even further, borrowers can use their redraw facility to make up the shortfall.

Fees Charged for a Mortgage Redraw

A basic variable mortgage is generally the cheapest mortgage available (ignoring discount variable loans that offer a seductive “Honeymoon” rate before hiking the rate after 12 months). These generally have no extra features.

A standard variable mortgage or mortgage package will offer more features, but with higher fees.

You will need to decide whether the extra fees are worthwhile in order to use a redraw facility.

Some lenders only charge a fee if the redraw is activated. This may suit those who don’t plan to withdraw, but want to use a redraw as an emergency fund.


Different lenders vary with the flexibility available with their redraw facilities. Some limit the number of redraws per year. Some limit the amount of cash that can be redrawn.

Lenders vary in the ease with which you can redraw cash. With some, it is simply the click of a button to instantly transfer cash from your redraw to your transaction account. Some may find this a little too easy, and want more of a barrier to accessing their emergency fund.

Other lenders require more time to access the redraw. If this is the case, a smaller emergency fund should be kept in your transaction account or credit card.

Can a Mortgage Redraw be Relied Upon?

This is the big issue with redraw accounts.

Once your repayment is submitted, it is up to the lender’s discretion whether they will let you redraw it.

A small proportion of customers have been shocked by the bank limiting the amount of their redraw account when they needed it the most.

It is no doubt bad for the lenders reputation to do this, but they could exercise their discretion should a major economic shock threaten the lenders profitability (or survival).

Commonwealth bank sent a letter to their customers in 2018 stating they had changed their redraw policy. CBA adjusted the amount in redraw accounts to prevent customers redrawing more than they could reasonably repay within the original loan term. This was a minor adjustment.

ME Bank got some bad press for drastically cutting around 4% of their customers redraw balance without notice during the COVID-19 crisis.

Tax Implications of Using a Mortgage Redraw

If you ever converted your home to a rental property, the historical lowest loan balance is the maximum you can apply a tax deduction for interest on.

For example, if your home loan started as $500,000. You are a good saver and pay extra in repayments while you live in the home. Your home loan balance stands at $300,000 when a work opportunity means you move interstate. You decide to keep your original home and rent it out, and purchase a new home near your new place of work. Even if you withdraw your redraw balance (say $100,000), you will only be able to claim a tax deduction on interest for $300,000 of the loan, not the remaining $400,000.

Offset vs Redraw Accounts

Offset accounts are treated the same as transaction account. As long as they are held by an authorised deposit taking institution, the balance up to $250,000 per person is guaranteed.

The money in an offset account also still legally belongs to you, not the lender. The lender has no ability to seize your savings in an offset account in times of financial crisis.

You can also withdraw money from your offset account without any tax implications. In the example above, if the extra $100,000 repayments were kept in an offset instead of a redraw, interest on the full $400,000 loan remaining would be tax deductible should the home ever be converted to an investment property.

The advantage and disadvantage of an offset is the accessibility of this cash. In an emergency, this money can be spent immediately via a debit card, BPay or any other method. Particularly for those with just a single offset, this can be a big disadvantage. Those without great cash flow management can accidentally spend those extra repayments. They can also fall prey to the “Wealth effect” after building up a significant balance in an offset account, there can be a tendency to spend more due to feeling wealthier.

Is a Redraw Worth it?

The savings made by using an offset or redraw depend on the balance you will have in it, and the extra fees paid to have these features. A typical standard variable loan with offset may charge ~$400 per year. If your interest rate is around 3% interest, you would need ~ $10,000 in your offset to make up the fee.

If a mortgage with redraw charges $120 in fees per year, ….maths**


Both a redraw account and offset reduce the amount of interest you pay on your home loan. A redraw can be a good option if you won’t have enough cash to make a standard variable or package mortgage fees worthwhile.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  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.

Should You USe a Mortgage Broker?

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

*I have no financial relationship with the mortgage brokers mentioned. I have not used them for my own mortgages, they are just examples.

So you’ve finally saved up that first home deposit! Exciting times, the next step is to decide whether you really want to buy a home, and how much you want to spend.

The vast array of options in choosing a mortgage can easily become overwhelming for home buyers.

“Even the once simple home mortgage now has so many flavours and styles and variations that it is difficult for people to make a decision”

Scott D. Cook

Many recommend using a mortgage broker to cut through the confusion.

Mortgage brokers have knowledge, experience and access to a wide range of different loans. They can help narrow down the huge selection advise which type of loan is best for you. And the service is (superficially at least) free to the consumer. Seems like a no-brainer!

Using a mortgage broker is a great idea for many, but as usual, it’s unwise to hand over complete responsibility and understanding to a professional with a clear conflict of interest.

With the extreme complexity of home loans and their fee structures, many will never know if your mortgage broker really had your best interests in mind.

Step 1. Decide How Much You Should Borrow

The first thing you usually come to on a mortgage broker’s website is a calculator to work out how much you can borrow. This is generally not how you should decide how much house you can afford. The higher the loan written, the higher the mortgage broker commission. It is obviously in the mortgage broker’s interest to organise as large a loan as possible.

The largest loan possible may be appropriate for some. Some borrowers are expecting an increase in income in the near future. Others are aware of risks but want to maximise exposure to a good capital growth area as part of their overall strategy.

For others, taking on a manageable mortgage repayment is more important. Make sure you have worked through your own budget and calculated how much in monthly mortgage repayments are acceptable. Take into consideration your top priorities. If the most important thing to you over the next 10 years is travel, make sure you have budgeted for your top priority!

Mortgage Broker Commission Provides a Conflict of Interest

Banks pay your mortgage broker upfront and trailing commissions for organising a loan.

The Royal Commission found loans provided through brokers rather than banks directly were:

  • More likely to interest only
  • Have a higher loan to income
  • Have higher loan to value ratios
  • Incur higher interest costs
  • More likely to default on their mortgages, due to the higher leverage taken

As a result, the Royal Commission recommended a change in the compensation model for brokers. It was suggested a more transparent fee paid directly by the consumer should replace the commission fee model.

The mortgage broker industry objected loudly to this. Consumers were generally unwilling to pay a fee for mortgage broking, and would instead go to the big banks directly. The end result would be a loss of competition. The result of this is usually increasing fees, meaning the consumer would be the biggest loser in all this.

Don’t Worry the Law Now Says that Brokers have to Act in a Clients best interes

Since January 2021 a mortgage broker must legally act in the client’s best interest! I’m unsure how much this actually does to protect consumers, but it is a law most would have assumed was already in place.

Step 2. Decide Whether Using a Mortgage Broker is Right for You

A Mortgage Broker May be Able to Get you More Money

These there are certain situations in which a broker’s qualifications and experience are an important asset to a borrower.

  • If you want to maximise leverage (and have carefully considered the risks)
  • Your credit score is not idea
  • You are self-employed
  • You want LMI waived for a loan over 80% (accessible for ultra low risk borrowers such as doctors, lawyers, accountants)

Brokers have experience dealing with the different lenders and will know which are likely to lend more based on personal circumstances. This will help you target your application for the most likely loan, avoiding pointless credit enquiries damaging your credit rating.

Can a Mortgage Broker Provide a Pre-Approval?

A mortgage broker can give you a rough idea of whether your loan is likely, but this is not a pre-approval. The broker will help you apply to the lender chosen for a pre-approval, and then liaise with the bank to finalise the actual loan once you have purchased.

You May be Able to get Cheaper Basic Loans Online Yourself

If you want a basic, no-frills loan, the cheapest way may be to find this through an online loan provider. These are usually not on mortgage broking lending panels.

You May Want to Stick with Your Bank

If you have a misguided sense of loyalty, stop. Your bank does not reciprocate. But if there are other features you love with your bank that you cannot get elsewhere, you could go directly to the bank. It’s unlikely to save you any money though, the bank just increases its profit margins.

Step 3. Choosing a Mortgage Broker

Check Qualifications and Credit License

It’s easy to assume a mortgage broker with a certificate on display has appropriate qualifications and work experience.

I am surprised to discover I could become a qualified mortgage broker with a 3 day workshop! After this brokers are registered with one of the professional bodies and provided with ongoing educational support on the group. Brokers need a credit license which can be checked here.

The minimum qualification to become a mortgage broker is a certificate IV in finance and mortgage broking. Many brokers have a diploma in finance and mortgage.

Do the checks. If those involved in Melissa Caddick’s scheme had just done some checking, they wouldn’t have lost all their money. In Melissa Caddick’s case, she was supposedly working under another advisor’s AFSL, which is not uncommon. Search online to check the advisor’s license. Make a phone call if you can’t find the information. ASIC only seem to catch up with fraudsters after a few years of stealing clients money.

Minimise and Be Aware of Conflicts of Interest

Is the broker independent or owned by a bank? They are supposed to divulge this information. My own experience (pre-Royal Commission) is this “divulged” in page 135 in size 6 font at the bottom of the page. It’s worth asking the question directly who the broker is affiliated with.

If they are owned by Westpac (such as RAMS) you want to be aware of this potential conflict of interest.

Minimising Commission Motivation

  • Same Commission Broker

Some brokers (eg Mortgage Choice) are paid the same commission no matter which lender they recommend. This reduces the risk of them recommending one lender over another for financial compensation.

  • Cash Back Broker

Others (eg isharebrokers) offer to share the commission with you when you write a loan with them. It is worth exploring in further detail the compensation model for the broker. Do they receive the same compensation for each lender or is there still a conflict of interest? Don’t confuse cashback mortgage brokers with mortgages that offer cash back to incentivize you to loan from them. Immediate cash back (or airline points) should not change your loan preference. It is a gimmick to sell the product. Your long-term mortgage costs are what you should look at when comparing costs.

Are they Experienced in Helping People in Your Situation?

If you have a special circumstance, you will want a mortgage broker is experienced with this situation. If you are looking for an LMI waiver, are self-employed, are a property investor planning to own multiple properties or have poor credit, look for a mortgage broker with expertise in this area.

How Many Options are Compared on Lending Panel?

In order to get one of the best products for your home loan, you will want a broker with lots of options to choose from.

How many loan providers can your mortgage broker compare? How many loan providers have the broker actually written loans for over the past year? This is probably a more accurate representation of the options that are being compared.

Personal recommendations

Online reviews and personal recommendations can help identify potential brokers to choose or avoid. Remember, the recommendations should come from someone with similar circumstances if yours are special.


How will your potential present the lender choices? You need to have the options presented so you can make an informed comparison of fees and interest, as well as other features.

Mortgage brokers can be a great ally in finding and securing the best loan for you. But you need to be a little informed about what you are looking for in a loan, in order to make an informed decision. You also need to select your broker carefully to make sure they have the right qualifications, experience and connections to do a great job.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  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.

is mortgage broker worth it

The Australian Finance Phrase Book

Do you read a lot of US finance blogs? The US-based finance content is excellent and comprehensive.

My favourites include Mr Money Moustache, the White Coat investor, physician on fire and the Choose FI podcasts. These are great for general concepts in finance and excellent for motivation to stick to the plan.

But which specific strategies can Australians apply to their own situation? All this talk about 401ks, IRAs and conversion ladders is a bit confusing!

The Australian personal finance space is growing, but still has quite a way to go to catch up with the US scene.

Traditional 401K

Australian Finance Translation- Sort of like concessional superannuation contributions, but employers don’t have to offer it and employees don’t have to contribute. Contributions and growth are completely tax-free (tax-deferred) until aged 59.5 years, in contrast to concessional super contributions and income which are taxed at 15%. On withdrawal from 401k, tax is paid, unlike most super contributions.

The Detail – Traditional 401K

The traditional 401k depends on employers to offer this retirement fund, so only ~60% of Americans can access it. Many employers offer a 401k “match” so that the employer will contribute extra to your 401k to encourage employees to contribute. Some employers tie conditions to their 401k contributions so that if you leave the company before a predetermined employment period, employees lose out on employer contributions.

Choices of Investments in a 401k vs Superannuation

The 401k, similar to your superannuation fund, is just a structure inside which investments are chosen. Choices within a 401k vary, similar to those inside super funds.

You can choose a managed fund, ETF and in some cases self-directed investments.

Depending on the amount of control a saver wants over their investments, the options available within a 401k or superannuation fund may help choose the fund.

In Australia, you can move your superannuation to a myriad of funds, based on fee structures, investment choices and historic fund performance.

In the US, employees are limited to the 401k options offered by their employer. Similar to superannuation, there are contribution limits that change with inflation annually.

Roth 401k

Australian Finance TranslationAnother employer-sponsored retirement vehicle, similar to non-concessional superannuation contributions. Post-tax income is contributed, so similar to non-concessional super contributions, there is no tax benefit on contribution. But withdrawals from a 401k after aged 59.5 years are tax-free, similar to all superannuation contributions after age 60.

The Detail

The 401k is another employer-sponsored plan allowing the contribution of after-tax dollars. There are contribution limits each year of $19,500 combined contribution to traditional and Roth 401ks. Over 50s are allowed to contribute a bit more to ‘Catch up’. Not all employers offer any kind of 401K. Employees do not have to contribute anything.

Australian superannuation withdrawals are generally tax-free after age 60. The non-concessional contribution caps are generous, up to $110,000 or $330,000 over 3 years.

Individual Retirement Account (IRA)

Australian Finance Translation IRA’s are like additional superannuation for low to moderate-income earners, or alternative for self-employed individuals and small businesses. Anyone can open this account, with their employer’s support. Tax advantages can be taken at the time of contribution, or on withdrawal depending on the account Americans choose.

IRA’s can be opened by anyone because they do not rely on an employer offering them. They offertax advantages, but these depend on the exact type of IRA that is opened. Eligibility for the tax benefits depends on your income, so higher-income earners miss out.

Americans can contribute to both a 401k (up to $19,500 pa total) and Roth IRA (up to $6000 pa total). IRA withdrawals before age 59.5 years incur a 10% penalty.

– Traditional IRA

Pre-tax contributions compound tax-free until withdrawal when they are taxed.

– Roth IRA

Post-tax contributions can be withdrawn after age 59.5 years tax-free.

– Simplified Employee Pension (SEP) IRA

Similar to a traditional IRA (pre-tax income, taxed on withdrawal) but for self employed individuals or small business owners.

–  Savings Incentive Match Plan for Employees (SIMPLE) IRA

Australian Finance Translation – Similar to concessional superannuation contributions but simpler and cheaper to set up for small businesses to offer their employees.

These are offered by small business employers and are similar to a traditional 401K. An employer match is often offered. Pre-tax contributions are made and remain tax-deferred until age 59.5 years. The contribution limit is $13,500 per year.

Retirement Systems Australia vs US

I think you will agree with me that the Australian system is a whole lot simpler. The collection of retirement accounts basically replace superannuation for different employment situations and income levels.

It is clear that the Australian system will serve the majority of the population better. The US system relies on individuals contributing to a retirement account voluntarily, and from a young age given the relatively low contribution caps. It does not require employers to contribute to employees retirement. The complexity requires each individual to perform a significant amount of research to understand the best options for them, and this likely changes with each job change. It also significantly disadvantages those with employers that don’t offer 401k. I imagine this further disadvantages low-income workers. Companies looking to attract talent will offer these kinds of perks.

With the complexity of the US system, there is a chance ultra-optimisers can get ahead financially by making sure they utilise every option available to their individual situation.

Many US bloggers suggest filling tax-deferred investment vehicles (such as the traditional 401k and traditional IRA) first as most people will be in a lower tax bracket after retirement. They are better off claiming a tax benefit now, and paying minimal tax after retirement.

This conversation is echoed in Australia in the inside vs outside superannuation conversation.

Both the US and Australian systems are exposed to legislative risk. The government could change the rules, and the further you are away from retirement the more likely changes will affect you. But the Australian superannuation system is so advantageous that it would be crazy to completely neglect it (controversial I know).

Franking credits

US doesn’t have franking credit imputation system like Australia. In Australia, company income is taxed at 30%. This is taken into account once you are paid a dividend. If your marginal rate is 45%, you will only be required to pay the remaining 15% tax. If your marginal rate is 15%, you will receive a 15% tax refund! This only occurs with “Franked” dividends that have already been taxed inside the company.

In the US, dividends are still taxed at favourable rates in comparison with earned income. But this rate does vary with your household income.

Standard Deduction

Australian Finance Translation – the standard deduction is similar to the tax-free threshold for each Australian. In Australia, we can claim itemized tax deductions on top of this, at our top marginal rate.

Americans have the choice of itemizing deductions or claiming a “standard deduction” of a set amount each year. The tax rate for income over the standard deduction starts at 10%.

Marriage and taxation

In the US, legally married couples have to choose whether to file their annual tax returns individually or joint. Depending on their specific circumstances, one may be advantageous over the other. Double high-income couples pay extra tax when they marry (but not, I believe co-habit oddly).

An American married high and low-income earner will pay less tax, as their incomes will average out in a lower tax bracket than filing individually.

In Australia, you don’t submit a joint tax return but do declare your spouse’s income on your own tax return, and vice versa. Your joint income impacts your medicare levy surcharge liability and family tax benefits. Families with a single high-income spouse pay more tax than families with the same household income earner equally by the two spouses.

The ATO treats co-habiting couples and same-sex couples identical to married couples.

On becoming a couple, you become entitled to only one principal place of residence (PPOR) capital gains tax exemption between you. As singles, you were entitled to one PPOR capital gains tax exemption each. This requires some careful planning around which to claim as your exempt property when combining finances, and moving in together after both owning a PPOR.

Donor Advised Funds

One of my favourite US bloggers, Physician on Fire, is a fan of donor-advised funds. These allow donation of income or appreciated investments to your own charitable fund, from which you can choose and change the charities to invest to each year. It is non-refundable, so donating money to a donor-advised fund means you have committed to eventually donating it to charity.

You might choose to do this instead of just contributing annually to the advantage of a change in tax brackets. It’s an ideal move in the year(s) before retirement, or reducing hours. If a $100,000 donation is made whilst you are in the top 45% tax bracket, after the tax return, you will have only contributed $55,000 of your own cash. This money can be invested, and donated each year in accordance with the funds rules.

The same sort of fund does exist in Australia. Australian communities foundation offer a donor-advised fund. It would be nice to see the fees under 1%, but this is definitely something I will look into in more detail when the time is right.

Taxation of kids

Australian Finance Translation – Australians can employ their children and reduce taxation of their family business. Australians don’t have a specific investment vehicle they can allow their children’s investments to grow tax-free. The Roth IRA is used in the US, but kids can’t access this money without a penalty before age 59.5 years.

US blogs often talk about employing their own children in the family business, to take advantage of their tax-free threshold. If the child earns enough to make the fees worthwhile, some start a Roth IRA with the earnings. The child’s untaxed “Post-tax” income can be contributed and will grow tax-free until age 59.5 years. That’s thinking ahead!

The ATO Taxation Treatment of Children

You may have heard of the punishing maximum 66% Australian tax rate for kids. The ATO charges extraordinary rates for kids annual income over $417 to discourage parents from putting their investments in their children’s names.

But earned income is treated very differently.

If your child has a part-time job, their income is taxed as if they were an adult. This means a child can earn up to $18,200 before paying a cent in tax. Each state has child employment laws that limit the number and timing of hours worked.

Your child can put in after-tax money (or pre-tax if they earn enough to actually incur tax). Fifteen per cent tax will apply to income from investments inside super until kids reach their preservation age. And of course, there will be fees charged by the super fund. Withdrawal after 50 years or so of investing will be tax-free if the rules remain unchanged.

Investing for Kids Outside Super

Investment bonds have become very popular since their recommendation by the Barefoot Investor*. They are more tax-efficient than simply investing outside superannuation, but fees and underperformance can waste these advantages. They may be useful for double high-income couples.

Investing in a low income earning spouse’s name is often the easiest way to invest. A brokerage account could be opened in your child’s name. A couple of investments offer a dividend substitution share plan (not a dividend reinvestment plan). With this, instead of receiving dividends, the fund awards you extra shares instead. With a DSSP specifically, no tax liability is incurred until assets are sold. The sale would be timed after your child turns 18 and are in a low tax bracket.

Check out more detail on options in saving for children.

Whole and Term insurance

There is a lot of talk in US blogs and podcasts about whole and life insurance. Whole life insurance is a policy designed to be kept, as the name suggests, for your whole life.

Part of the premiums you pay are invested, and the policy can be “cashed in” if you have a change of heart. Its primary function is life insurance, to be paid out in the event of your death at any time to your loved ones. Term insurance is often recommended over whole life insurance because of

  • Extra layers of fees within whole life insurance make it more expensive than term policies
  • Your insurance needs over your life change signfiicanly depending on your stage of life. If you take out a policy as a single income family with young kids, a huge policy is required. This will significantly reduce over time as your debt is paid down and children become independent.
  • The investment portion of the policy often produce suboptimal returns, likely at least partly due to the excessive fees and commissions paid.

In Australia, whole life insurance was phased out with the introduction of superannuation in 1992. Super is paid out to dependents on your death, so acts as a kind of insurance as you build up your balance. For years in which you need extra insurance, term life policies can be taken out within superannuation, and in fact, are often automatic. More comprehensive policies that are also more expensive can also be taken out through a financial advisor and deducted from your super. Read more about insurance here.

Australian Finance Translation

These are many of the US concepts I come across regularly in my reading and listening. I hope I’ve improved your understanding of what they are talking about!

What terms did I miss that you’d like to understand? Comment below and we’ll try and work out the answer.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  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.

Invest Now or Wait?

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

Should you invest now or wait? Rather like waiting for the COVID-19 crisis to finally be behind us, it’s probably best to get on with things!

Is it the right time to invest now? Are you afraid of timing the market poorly? Wondering whether to wait and see if conditions improve?

I suspect for first-time investors there are always plenty of predictions of impending disaster.

There are always lots of reasons to delay.

But odds are that you are more likely to regret not investing now. Even if you time your entry into investing really poorly, markets recover over time.

If you don’t start now, how will you know when the right time to invest is?

It’s critical you overcome fears and take the plunge if you are scared of investing.

Aussie Doc Investment Timing

Our household started investing at the start of 2017. I faced these same doubts and fears. There were predictions of a major stock market crash every week in the media. My “financial advisor” (aka insurance salesman) warned the market was at a peak and the firm were manoeuvring client investments to lower risk allocations.

I had read all the books. I had followed several financial blogs. Would I ever start investing If I waited? I took the plunge. Our first investment outside super was with RAIZ invest*. I set up my direct debit and watched the market far too closely.

Each 2% drop in the ASX was accompanied by media hysteria, and at first, it made me very nervous.

I considered withdrawing my hard-earned cash. My partner, who remains an investing sceptic, would read newspaper articles and report their exaggerated claims to me. Often the market had actually recovered by the time we had these conversations.

But each time this happened, I went back to those blogs, books and quotes. When the crash finally came, over three years later, I recognised the opportunity and invested cash as fast as we could.

Pushing Our Luck?

We purchased our 1st investment property in July 2019. In the months prior, there were dire predictions for the entire Australian property market. Labour expected to win, and abolish negative gearing. The media suggested the abolition of negative gearing would cause a dramatic crash in prices. My partner asked “Shouldn’t we wait?” Our friends and family thought I was crazy. ‘

“The time to make money in property was twenty years ago”.

A lot of people I know

I had wanted to get in before the election. But everything takes longer than expected, buying property is certainly no exception.

Despite a global pandemic and more dire warnings of an Australian property meltdown, the property has performed well so far.

In April 2021 we finalised our purchase of a second investment property. Hoping to buy in December 2020, the media were predicting the death of the housing market due to the impending “Job keeper cliff”. Mortgage red tape and Christmas delayed our purchase significantly. December would have been a stellar time to buy. By late February the paperwork was all sorted, but we had to compete in a cutthroat market.

My partner, the media, friends and family have repeatedly warned that now is not the time to invest. Each time I invest.

It’s been nerve-wracking to ignore media doom and gloom and invest anyway. It has been terrifying to reassure my partner and invest despite his concerns. It is not a comfortable feeling.

But I’m gaining confidence in swimming against the tide each time the decision proves correct.

Opportunities come infrequently. When it rains gold, put out the bucket not the thimble

Warren Buffett

Is Now a Good Time to Invest?

But all my investments (so far) are in the past? What about now? What if the market is about to crash again?

Is now really the time to put your hard-earned savings at risk?

Whenever you are reading this, I’m sure you can find an article predicting an imminent crash.

As a beginner investor, it is natural to take these finance professionals predictions seriously.

But the truth is surprising. Finance “guru” predictions for the US stock market between 2005 and 2012 were correct just 47% of the time. In contrast, seven-day weather forecasts have ~80% accuracy.

Flipping a coin to predict the direction of the market should be correct 50% of the time. In fact, these results suggest you may be better off doing exactly the opposite of the prevailing expert suggestion at the time!

Conditions will never be perfect, and apparently, no one can predict the future (at least not repeatedly).

“Waiting for perfect is never smarter than making progress”

Seth Godin

Is It the Right Time to Invest for Your Personal Circumstances?

The answer to this question is in your personal circumstances, not in (often incorrect) economic predictions.

Now is not the right time to start investing if you have bad debt, or high-interest debt (my cut off is ~5% for mortgages).

You also need an adequately funded emergency fund. If something comes up, you don’t want to be selling your investment in a hurry and potentially locking in a loss.

Investing money you need in the next 5-7 years is usually a bad idea. Both low liquidity and high volatility make money inaccessible at short notice. You cannot sell an investment property to get money fast in an emergency. Selling shares at a bad time in the market means crystallising losses that would have otherwise recovered.

Investing When You Can’t Afford it.

I do think there is great value to be found in investing even if you can’t afford to.

Even if you are saving for a home deposit, making tiny transactions into the stock market can be a great learning opportunity. Using a micro-investment app such as RAIZ* can build your tolerance to volatility before investing “real money”. One thing to watch out for is fees. With their monthly fee model, having less than around $5000 invested is fee inefficient. Utilise “RAIZ Rewards” to earn back the $3.50 monthly fee straight into your RAIZ account.

A commonly quoted minimum investment horizon in property is 10 years. The high transaction costs and taxes associated with buying and selling property mean you are more likely to make a loss if you sell more quickly.

Is Now a Good Time to Buy Shares?

Of course, it’s always easy to tell the best time to invest in the stock market. It’s always in the past! 1900 looks pretty good, but so does every year since. Even the GFC looks like a little blip at this scale.

To put it into context, between February 20th and March 12th 2020, the ASX dropped 26.5% from 7197 to 5290 points (losing $608.5 billion dollars).

During the GFC the ASX dropped 49.6% from 6385.7 on January 2nd 2008 to 3217.5 on November 21st 2008. At the time of writing the ASX is worth over 7700 points.

Even if you had invested in either the 2008 or 2019 peak, you would still have more money as a result of investing at the time of writing (July 2021).

Over long periods of time, the stock market goes up.

In retrospect, both crashes were incredible times to invest, but this wasn’t obvious at the time. Each crash has a different cause, so this time is always different. There were frightening expert predictions at the nadir of the 2008 crash, warning there could be a further 50% drop in value before the recovery began.

If you listened to the experts and sold out to cut your losses, you would have locked in those losses and missed out on the rebound that then occurred.

Looking into Your Crystal Ball

But what about now? If you missed the COVID-19 crash, you will be ready for the next one. But should you wait?

Look at the graph above. The crashes in price really become less significant over time. A crash in 5 years time may return the ASX to today’s prices. In which case, what was the point in waiting?

Even if you know and understand this intellectually, it is still extremely nerve-wracking to invest money in the stock market for the first time.

But if you don’t start now, how long will you wait? The “perfect time” is unlikely to ever come (and is always identified in retrospect!).

Should You Invest Now in Property?

Get your crystal ball out again! Last year we were going to get a 40% drop in property prices, now instead we’re mid boom with plenty of FOMO!

We brought our principal place of residence in September 2008, amidst GFC doom and gloom predictions. I remember being very nervous we were buying at the worst possible time and refusing to overpay. Prices dipped briefly before performing quite well in the capital cities, due to reducing interest rates and strong international immigration.

Source: What house prices did in the global financial crisis, and why it’s different now (

Our house in a regional area remained pretty stable for a long time, but interest rates dropping steadily from 7.25% to today’s ~3% was an unexpected gift, allowing us to pay down the mortgage aggressively.

Our property choice may not have been in the best area for growth, but the purchase was pretty well timed in retrospect.

There is currently a property boom occurring. Whether buying a property for investment now is a good idea comes down to your personal circumstances and getting professional help in obtaining the best quality property whilst not overpaying. The biggest risks in a hot market are being sucked in by fear of missing out, and overpaying significantly or buying a poor performing asset.

A good quality asset will grow over time. Even if you buy at the peak of a market, over time the significance of this will diminish. If you buy a poor quality asset at the peak of a hot market, its price may never recover to the value paid for it again.

With so much of your capital and/or borrowing power tied up in a property, the most important thing to get right is purchasing a good quality property.

What about if you are not yet ready to invest? Or you are reading this article in months to years time when the property market is in the doldrums again? Is now a good time to invest in property?

Again, it comes down to your personal circumstances. Don’t be afraid to invest when everyone around you thinks property is a dud investment. You may find out that swimming against the tide of opinion proves to be quite lucrative.

The Time to Invest is Now

You only know in retrospect whether an investing decision was the right one, at the right time. Rather than trying to time the market, consider your personal circumstances carefully and invest when you are ready personally. It never seems like the right time.

If you want to start investing in the stock market, check out this how to guide. If you are considering property, start here.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  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.

Comparison is the Thief of Joy

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

“Comparison is the thief of joy”

Theodore Roosevelt

And yet comparing ourselves is human nature.

According to the Social comparison theory, when there is a lack of objective, non-social means to evaluate ourselves, determine we compare ourselves to those around us.

So is comparison the thief of joy, or a useful way to evaluate and motivate us in making progress towards our goals?

There is upward and downward comparison.

Comparison is the Thief of Joy? Upward Comparison

Upward comparison refers to comparing ourselves with someone we think is superior.

This can actually be used as a powerful tool for self-improvement. Motivated people use upward comparison in a similar way to athletes trying to beat a personal best.

When motivated people find a social comparison they feel is “like them”, but further advanced, their peer’s success is a source of inspiration.

But upward comparison can be a destructive force.

Instead of benchmarking ourselves against the average peer, people have a habit of comparing themselves with the most elite peer they can find.

Some of these may not even be genuine comparisons, such as in the case of the teenage girl comparing her figure with the airbrushed, technologically tweaked image of an Instagram influencer.

Even with genuine comparisons, we tend to compare with the best rather than the averag.

Imagine you come in the top quartile of your class at an exam. You would be pretty pleased with yourself, I imagine? Well above average you can use your rating to benchmark your performance.

Now imagine exactly the same result, but this time your best mate won the prize for top performance at this same exam. Human nature dictates you will now compare yourself with your mate, and self-evaluate your performance negatively, even though you still came in the top quartile of your class.

In this example, comparison is the thief of joy. And jealous friends are no fun!

Comparison with the very best can be very damaging to self-esteem.

Very few people feel good about their bodies after looking at Instagram models


Comparison is the Thief of Joy? Downward comparison

Downward comparison can be helpful in helping us remember we are all pretty spoilt in Australia. Those of us with an internet connection are downright indulged and wealthy individuals living in one of the wealthiest countries in the world.

Check out how wealthy you are in comparison to the rest of the world. It helps us to remember to practice gratitude, an essential component of happiness.

But downward comparison has a dark side.

I see it in my 5-year-old when he wins a game and rubs it in loudly to his older brother. Adults are similarly prone to gloating, they have just learned to stop expressing it out loud!

Comparing yourself with someone you consider inferior is often performed by people with low subjective well-being, in order to boost self-esteem.

“Pride gets no pleasure out of having something, only out of having more of it than the next man…

It is the comparison that makes you proud: the pleasure of being above the rest. Once the element of competition is gone, pride is gone.”

C.S. Lewis

Introducing Dr Smith & Dr Jones

Dr Smith and Dr Jones graduated together best friends 10 years ago.

They became friends because they share a lot of common values, a hard work ethic and an awesome sense of humour. After medical school, their paths inevitably separated but they keep in touch and try to hang out a few times a year.

Dr Smith chose to train as a General practitioner. She enjoys the long-term relationships she gets to develop with her patients, and their families. She enjoys using her hands and performs minor procedures as part of her practice. Despite irritations with the medicare system, and the chronic undervaluing of GPs by the government and the general population, Dr Smith gets a lot of satisfaction out of her day to day work.

Dr Jones also enjoys working with her hands and chose to train as a plastic surgeon. She enjoys the challenge and satisfaction of helping breast cancer survivors with her incredible reconstructive surgery. She has also built a successful private practice, where she gets to be her own boss, away from the annoying inefficiencies of the public health system.

The Friendship is Not as Easy as it Once Was.

The two friends like to book a weekend away together to catch up, gossip and generally have lots of fun. Over the last few years, their friendship doesn’t feel as easy as it once was.

Dr Smith, having recently turned 35 years old, has started to think about funding her retirement. She earns around $150,000 gross per year. Up until recently, this has funded a good lifestyle given it’s well around double the average Australian household income.

But as usual, when Dr Smith sits down, sets goals and makes a financial plan, there isn’t enough income to fund all of her goals. Isn’t that always the way?

Dr Smith has been feeling a little demoralised, and it hasn’t helped to see Dr Jones’ significant lifestyle expansion over the last few years.

Curiosity got the best of Dr Smith last time she met with Dr Jones, who arrived in her brand new luxury vehicle.

She breeched the money taboo and asked her friend how much money she was making.

These ladies have shared so much, been buddies through hellish exams, relationship breakups and crises of confidence. Although a little startled by the taboo question, Dr Jones was willing to share with her friend that her income had peaked this last year at six hundred thousand dollars!

Of course Dr Smith congratulated Dr Jones on her fantastic success and ability to build her private work up in a relatively short time. Dr Jones treated them to a great meal and bottle of champagne to celebrate both of their career successes.

But things between them are no longer quite the same.

What’s Changed?

Dr Smith can’t help comparing herself with Dr Jones. Her income now seems pitiful in comparison. The ease with which she could meet all her goals if she had that kind of income!

Upward comparison, in this case, is denting Dr Smith’s confidence, creating jealousy and damaging a valued friendship.

Dr Jones has noticed her friend is cooler with her nowadays and makes superficially jovial but undermining comments or jokes at her expense.

It seems likely to Dr Jones that the source of this change is the income differential between the two friends.

She wishes she hadn’t shared her income, but it would have been awkward to avoid answering the question, and she now doesn’t know how to restore the friendship to what it once was.

The Reality.

Dr Smith comparing her very healthy income with Dr Joneses is not helpful.

It is not the sort of upward comparison that is inspiring, unless she can utilise some of Dr Joneses techniques to improve income at the General practice surgery. Dr Smith has no intention in taking the years required to train as a plastic surgeon!

All this comparison has done is devalued Dr Smith’s opinion of her own progress and income.

Hopefully it won’t discourage her enough to give up on those financial goals, because Dr Joneses situation is completely irrelevant to Dr Smith’s financial picture.

She is in no better or worse financial situation than she was prior to the income conversation.

Let’s take a privelidged peek behind the curtain to see what the two doctors entire financial pictures look like.

The Numbers

 Dr SmithDr Jones
Pre-tax Income$150,000$600,000
Post-Tax Income$106,433$347,333
Effective tax rate27%42%
Superannuation Balance$150,000$200,000
Equity in Investments outside Super$50,000$200,000
Annual Spending$70,000$229,000
Savings Rate (post tax, exec super)34%34%
Financial independence number$1,750,000$5,725,000
Years to Retirement16.38 years16.51 years
Calculated with Aussie Firebugs Calculator

Dr Jones receives around four times the compensation of Dr Smith but is taxed at an effective rate of 42% in comparison with Dr Smiths 27%. The ATO seems to be on Dr Smith’s side. This does significantly decrease the gap in the two friends take-home pay.

Dr Jones loses the immediate tax benefits of paying into super above the concessional cap of $25,000 (increasing to 27500) so has limited her contributions to this.

Both doctors have an impressive 34% post-tax savings rate excluding super. Dr Smith doesn’t understand how Dr Jones could spend so much whilst Dr Jones cannot comprehend how Dr Smith can manage on so little.

Check out the difference in the financial independence number. This is the investments needed to completely fund the doctors lifestyle at their current savings rate!

Both doctors are enjoying their work and don’t intend to retire particularly early.

But the time when they could retire and live off their respective investments is approximately the same, despite the significant differences in incomes.

Why Care About Financial Independence?

Being financially independent does not mean you have to retire. It does mean you can:

  • Cancel your income protection premium (finally!)
  • Reduce your hours
  • Perform volunteer work instead of paid work for some or all of your hours
  • Take extended time off in case of illness, family emergency or just because you want to
  • Introduce boundaries for your employer and colleagues
  • Be pickier about the work you do

The important factor in getting to the point where you can decide how much you do or don’t work is the savings rate. Because both doctors have similar savings rates, they are financially independent at around the same time.

Comparison is the Thief of Joy – What You Don’t Know

Don’t compare your situation to others. You don’t know what goes on behind the scenes.

There are so many factors beyond income that contribute to a person’s overall financial wellbeing. Debt levels, dependent children, parents and siblings and savings rate.

Comparing salaries is missing the point.

No one else has your exact goals, so no one else’s financial picture is relevant to your situation.

Income is only a portion of a household’s wealth story. What you feel behind on in some areas, you can make up for in others.

Stick to your own lane, your story is the only one that matters.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track with your goals.

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Aussie Doc Freedom is not a financial adviser and does not offer any advice.  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.

How to Leverage the Pareto Principle

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

The often-quoted Pareto principle was named after a 19th-century economist who observed inequality in land ownership in Italy. Just 20% of the population owned 80% of land, in Italy and overseas.

Dr Dura extended this observation in the 1940’s.

In modern-day it has become a rule of thumb to live by.

Just 20% of input usually results in around 80% of results. So for example, around 20% of employees create 80% of productivity. 20% of clients make 80% of complaints. 80% of road vehicle mortality result from 20% of causes.

It is natural to assume that each unit of effort in an endeavour should produce equal results. But this is rarely true. The most critical 20%ish of activities generally create the majority of results. Interventions targeted at areas outside the critical 20% produce ever diminishing returns.

Interventions can be targetted to improve outcomes disproportionate to the effort involved using the Pareto Principle.

The Pareto principle can optimise many areas of life. The 80/20 is not exact and the actual ratio likely varies between activities. But it is a great ballpark starting point.

Examples of the Pareto Principle Applied in Real Life

Pareto Principal Diet

The 80/20 rule diet is a sensible and balanced approach to maintaining a healthy diet, with less healthy foods in moderation. Not as sexy (or damaging) as losing 10kg in 12 weeks, but a simple rule of thumb to live by that can help many people maintain a healthier weight.

The 80/20 Rule Applied to Exercise

Similarly with exercise. If you want to be a bodybuilder, 3 hours a day in the gym with a carefully designed exercise programme and personal trainer are going to help you get that competitive edge.

For those that just want to stay reasonably fit and healthy, the 20% rule works pretty well. Riding a bike to work daily would meet the guidelines suggesting 30 minutes of moderately intense activity per day without a lot of fuss. Further exercise beyond this would make a difference, but not as much as that from going from a couch potato to a daily exerciser.

This ABS report found that less than 25% of Australian adults manage 10,000 steps in a day.

Pareto Principle & Time Management

At work, prioritization of tasks can utilise the 80/20 rule of thumb to improve your work day efficiency. In business, 80% of revenue is due to 20% of customers and 20% of tasks result in 80% of productivity.

“Doing less is not being lazy. Don’t give in to a culture that values personal sacrifice over personal productivity.”

― Tim Ferriss

How to use pareto principle in Finance and Investing

Embracing the Pareto principle can mean targeting your efforts efficiently to get the most bang for your buck. If you can find the sweet spot of most return for the minimum effort, your time and effort remain freed up.

Sweet Spot *

The 80/20 Rule in Money Management

Money management systems can be as simple or as complex as you like. The most important factor is that you avoid overdrawn fees and capture savings for investment.

Since the Publication of Scott Pape’s Barefoot Investor*, his barefoot buckets have become widely used. Empower wealth make the Wealth Portal available to anyone who wants to use it. You can document every spend every month.

Or, embracing the Pareto principle, you could simply separate discretionary from essential spending. Minimise effort and barriers to investing by utilising an automated direct debit to deliver your savings into a separate account, stock brokerage, mortgage offset or superannuation. Zero effort is required after the initial set-up, so you are so much likely to stick with it. Minimum effort, whilst reaping the vast majority of the returns associated with analysing all your spending.

The 80/20 Rule in Financial Literacy

There are countless excellent books on finance and investing. If you have time, and enjoy reading finance books here are my recommendations.

But assuming you are busy, or maybe just want to get your finances sorted without having to immerse yourself you can use the Pareto principle again.

You need 80% of the returns for 20% of the efforts. Subscribing to a blog that you resonate with will mean relevant up to date information will be delivered to your inbox in a weekly email. Subscribe to a podcast that suits you and commit to listening to it once or twice a week, and your financial literacy will increase significantly over time. With almost no effort! Or subscribe to Money magazine* to receive a physical copy monthly in the post to read with your coffee.

The Pareto Principle in Investing

One of the main deterrents to starting to investing is that it seems so complicated. Any financial news reports on several indices, multiple individual stocks, gold, oil and many more and attempt to explain the moves on the stock price that day with recent events.

Today I treated myself to Commsec’s morning report, reporting 0.4% increase in the ASX 200 on opening and warning about the potential effect of the delta variant virus on the S&P 500.

Long-term index investors know to ignore all this noise and jargon for what it is, largely entertainment for ultra money nerds. But is off-putting for beginners.

Instead of spending weeks learning a stock-picking strategy, and then trying to beat the full-time qualified professionals at their own game, you can accept market returns by investing in broad-based index funds. History tells us this will return more than 100% of the returns of active investments more than half of the time anyway.

The Pareto principle is helpful in developing a reasonable investing plan after a weekend of reading, even you are wondering where on earth to start. Sure, you could continue learning about investing for the rest of your life, but the initial 20% of effort will yield ~80% of results. You can tweak your plan and fill in the detail with extra knowledge later, or just stick with the 80%. Many do far worse.

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Aussie Doc Freedom is not a financial adviser and does need offer any advice.  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.