4 Ways to Dollar Cost Average

*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.  

What Does it Mean to Dollar Cost Average?

Investment in a security at regular intervals of a uniform sum regardless of the price level in order to obtain an overall reduction in cost per unit

Merriam Webster dictionary

Dollar-cost averaging is a powerful but simple strategy of investing the same amount of money at a set frequency, regardless of market movements.

For example, you invest $1000 per month in your chosen portfolio for the next 10+ years.

The secret of building wealth through the stock market will be disappointingly boring to some, yet refreshingly simple for others. It is to invest consistently over a long period of time.

Sounds easy right? Yet most investors will either fail to invest as they planned (due to fearful media coverage or competing financial priorities) or withdraw money during market volatility.

Investing regularly and consistently means finding some other way to fund car repairs, replace a broken fridge and the other little emergencies that come up in life.

I thought this graphic from Fidelity demonstrates pretty powerfully why investors need to stay in the market and stick to the plan. You really don’t want to miss out on any of the best 5 days to invest in the next 40 years.

Fidelity – A US brokerage and research house

Why it is Useful to Dollar Cost Average

Most investors do not consistently invest for decades. Many jump in and out of the market, or stop and start. Many switch strategies frequently and take excessive risks.

Individual investors routinely and significantly underperform the market return, year after year. Factors contributing to this performance include over trading, incorrectly timing the market and overconfidence being the most significant.

MorningStar

But anyone who has read a few articles on finance and investing will know you should buy low, sell high, hold long term and aggressively minimise fees.

So why are these investors failing to keep up with market performance?

Let’s assume you are far more intelligent and knowledgeable than the “Average investor”.

Surely you can at least match market returns?

Yet even professionals routinely underperform a simple index.

What’s going on? Why can the vast majority of investors act irrationally?

Turns out we are hard-wired to be underperform.

1. Dopamine and Short-Termism

Dopamine is a chemical messenger (a neurotransmitter in the brain). It is released in response to delicious food, exercising and sex. It reinforces pleasure, reward and motivation.

Rats who had no dopamine release will not move a few centimetres to get food, and instead, starve to death!

Parkinsons disease is caused by a reduction in dopamine and is treated with an oral replacement (sort of) dopamine. As the disease progresses, Parkinson’s sufferers can hardly move within hours of missing their medication.

Occasionally, Parkinson’s sufferers become addicted to their medication, overuse it and show addictive behaviours (such as suddenly starting gambling).

There is a theory that inherent dopamine deficiency contributes to addiction, along with genetic and environmental factors. Our brains process short and long term rewards differently. We are biased towards short over term rewards.

Online stock brokers stuff their website full of data in red and green, updated every few minutes.

We know that investing for the long term whilst minimizing trading and fees creates better performance. So why do these stockbroker platforms think investors need minute by minute updates? Even for well researched individual share investors, surely the minute by minute price is irrelevant?

Your Classic Trading Platform is Design to Keep you Addicted to Trading

These platforms are designed to be addictive, just like social media. The longer an interface can keep you hooked, clicking, trading, and paying fees the higher the profits from the stock broker.

If the price goes up a dollar, we are rewarded with a hit of dopamine. When the price goes down a dollar, our mood can be dented, panic can set in and investments sold (resulting in another fee).

They encourage short-termism and take advantage of our natural tendency to value short term wins over longer-term bigger gains. As a result, the trading platform makes bigger profits, and investors trade away a lot of their returns.

2. Herd Behaviour

It’s incredible how our instincts subconsciously manipulate behaviour. Herd behaviour is the tendency for people to behave consistent with a group, even when the individual wouldn’t choose to behave that way outside of the group.

Have you ever chosen between restaurants for dinner and went with the busiest, assuming it must be better? This is an example of the Bandwagon effect. Individuals assume if a large group make a certain choice, they must have more information than the individual and are unlikely to be wrong.

A savvy restauranteur may invite a few passersby to a free drink in the restaurant to attract the crowd that follows the apparent popularity

We are also social animals. The instinct to be accepted by the group remains strong. It influences how people dress, what they drive and how they behave. It is instinctual to try and “fit in”.

Herd behaviour has a very dark side, believed to contribute to the mob mentality and violence of rioters.

Herd behaviour is a useful instinct in avoiding danger. In investing, herd behaviour exacerbates extreme stock bubbles and the consequent crashes.

The Good News – Using Herd Behaviour to Your Advantage

The good news is that you can overcome these biases. The first step is to be aware of them. It is useful to have a “herd” moving in the same direction you want to go!

If all your friends and colleagues are spending their cash on status symbols and think the stock market is gambling, it’s going to be even harder to delay consumer gratification and hold steady during market dips.

“You are the average of the five people you spend the most time with”

Jim Rohn – Entrepenuer, author and motivational speaker

If you want to live a different life, less full of consumer purchases but more full of financial freedom, abundance, time and choice, it’s important to find a new “herd”.

Subscribe to Aussie Doc emails, listen to podcasts that you find motivating and join groups online that are full of people heading towards financial freedom, instead of away.

Look out for clues in “real life” for like-minded people and start a conversation about your favourite book/podcast/group.

Find habits to keep you on the straight and narrow. I find writing this blog helps me keep focussed.

The Good News – Dollar-Cost Average and Automate to Overcome Short-termism

Go out for a delicious meal, have great sex and enjoy some exercise. You don’t need a dopamine hit from investing.

Commit to dollar-cost averaging – investing a little bit every fortnight, month, or quarter. Increase your accountability by writing the goal down and sharing it with someone you trust – a partner, parent, sibling friend or mentor. Make a plan for what to do in an emergency, when you are short of cash and tempted to delay investing. Make a plan for when (not if) the market crashes and you feel tempted to withdraw.

Automation really takes it to the next step. If you have to log on to your computer (or phone) and press buy every fortnight, month or quarter there will be many opportunities to fail to invest.

If you really know that you need to stop your regular investment because of a true crisis, you will easily be able to stop the direct debit. Investors are far more likely to invest consistently if the investment is automated.

Dollar-Cost Average vs Lump Sum Investing

If you have a lump sum to invest because you have saved a lot, received a cash windfall or inheritance you need to decide whether to invest the lot at once or dollar cost average over a period of time.

The mathematically correct answer is to lumpsum invest. 66% of the time (according to Vanguard) investing a lump sum will achieve a better return than dollar cost averaging over a year. Because the market, over the long term, always goes up, the longer you delay investing the full lump sum the more returns you miss out on.

But many investors will be anxious about investing a large lump sum. If the day after they invest the market crashes by 50% investors need to know they can hold and tolerate the volatility. If lump sum investors panic and withdraw their lump sum after a crash, they will only have succeeded in losing a large chunk of your money.

So those with a lump sum, spend a week or two (max) working out what to invest in and either lump sum it or dollar cost average over a year or less.

How to Dollar-Cost Average

There are a few ways to dollar cost average your investments. Here we are purely talking about investing in the stock market.

If wanting to invest in property, you could to invest in a Real estate investment trust (REIT) listed on the stock market or through Brick X. By definition when you purchase an investment property directly, you are investing all the cash (including that borrowed by the bank) at the time of purchase, even though you pay it off over time.

Options to dollar cost average into the market

1. Invest Brokerage Free as Often as you Like but Pay a Management Fee

Investing using microinvestment apps like RAIZ generally have an ability to direct debit straight into investments. This is a very easy way to start dollar cost averaging, with a bit of money from each paycheque.

If you pay no brokerage you will generally pay a management fee – a set percentage of the total invested on an annual basis. These are currently $3.50 per month up to $15,000 invested, which seems pretty reasonable.

After this the fee becomes 0.275% this gets excessively expensive as your investments grow. Remember you pay the fee every year on an increasing balance, compounding the effects of the fees. Brokerage you sell once on purchase, and again when you sell.

The microinvestment apps are (including RAIZ) generally not CHESS sponsored. This means you don’t legally own the underlying investments but they are held in trust for you. This could be an issue if the provider closed. I personally didn’t mind this for a small balance, but don’t like this risk and would prefer CHESS sponsorship now my investments are more significant.

2. Invest less often, Pay Brokerage but no Management Fee

If you are paid fortnightly you are unlikely to want to pay brokerage every fortnight. You can open a separate account to save your “investment” to make investments regularly.

Working out how often to purchase investments to make the brokerage worthwhile involves estimating planned return and alternative return (from your money sitting in a savings account or offset.) Here is a link to a handy investing frequency calculator that can help you work it out.

If automation is important to you (and I feel it should be, see the problems with human brains above), I have found Pearler* an easy user-friendly way to automate investments.

Commsec Pocket also allows automated direct debit investments. This is a sort of a hybrid between the microinvestment apps and a brokerage. Commsec pocket charge no management fee, which is great. Their brokerage is $2 for $1000 investment. This is a similar cost ratio to Commsec but allows for much smaller investment amounts (perfect for paycheque investing). Unfortunately, the brokerage is still around double the cost of Self Wealth (that doesn’t have an auto-invest feature yet) or Pearler*.

3. Invest in Vanguard products Brokerage Free with Vanguard Personal Investor

I was about to start investing with Vanguard when the Vanguard personal investor commenced. I was pretty unimpressed with the new 0.2% management fee on retail investors as Personal investor was commenced. As a result I started my first investment with RAIZ, dabbled with Stockspot before opening a Commsec account and then switching to Pearler.

The good news is that Vanguard have significantly improved Vanguard personal investor. You can now invest in Vanguard products only brokerage free and without a management fee. Other ASX shares attract a $9 brokerage (excellent) and an annoying 0.1% annual management fee.

Many of my readers may only invest in Vanguard products so this may suit them perfectly. The one big issue remaining is the lack of automation. You have to press buy every week, month or quarter. Automation, for me, is a huge helper on keeping on track to goals.

Great news! Vanguard emailed me today (Nov 2021) a new auto-invest feature is now available on their managed funds. They remain brokerage and account keeping fund and you can invest from as little as $200 / quarter! This probably replaces the micro-investment app for many new investors and may last many investors through their investing career. Check out the offerings. (they have teased they may get auto-invest working with ETFs, but not yet).

4. Invest Brokerage Free via Superannuation

It is quite easy to direct debit each money into your superannuation with each pay. If you are not maxxing out your non-concessional limit of $27,500 per year (using salary sacrifice) the significant tax benefits should definitely be taken into consideration.

If saving1% in fees per year makes a massive difference to your investment returns over the long term, imagine what saving 15% in tax could do!

You do not pay brokerage fees for contributing to super, but there are obviously ongoing management fees.

I am pro-super. I’m over 40. It’s hard for those under 30 to fully appreciate the benefits, and tolerate the legislative risks that come with super. I would suggest everyone at least put some extra into super, maximising any “employer match” available.

Over 30, strongly consider investing up to your $27,500 concessional contribution cap.

The exception to this is if you are about to have a large increase in income. If you will breach your concessional cap within the next 5 years (~$275,000 gross “base” salary) you will be able to use catch up contributions for the first 5 years of the super high income to make up for not hitting the concessional cap in the years before.

For Example:

In 2021 you earn $150,000 base pay and end up with $25,000 in total employer, salary sacrificed and voluntary contributions.

In 2022 you are promoted to the “Boss job” earning $250,000 base pay and end up with $30,000 in total employer and salary sacrificed concessional contributions.

Normally you would have to pay extra tax for the concessional superannuation contributions over $27,500. Instead of paying 15% tax on the excess super contributions of $2,500 you pay your marginal rate of 45%.

But because of catch up contributions, as long as your super balance is under $500,000 you will be allowed the excess as a “catch up contribution and only pay the usual 15% tax.

Non-concessional cap come in handy over 50 when your closing in on your preservation age and really need to maximise super to benefit from the tax free income stream after 60.

Find out about opportunity cost.

Human brains are designed to fail at investing! Use any mental trickery and handy tools you find useful to keep you moving closer to your goals.

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.

Progress to Financial Independence Australia: Coast

*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 came to a sudden and exciting realization this week that our household is “Coast financial independent”.

It won’t change my current plans, but does offer options should a change in circumstance come about.

What is Financial Independence?

Financial independence is defined as being able to fully support your cost of living with income from investments. We all need to reach financial independence by the time we reach our desired retirement age. Whether you want to retire at 30, 50, or 70, financial independence should be your goal as a high income professional.

The 4% rule of thumb is considered to be a safe withdrawal rate in the vast majority of scenarios. Therefore, to reach full financial independence a household needs ~ 25 times their annual living expenses invested.

FI Number $2.5 Million = $100,000 in passive income annually

What is Coast Financial Independence?

It’s a long road to financial independence. Some become obsessed with saving and investing for financial independence, at the expense of everything else.

Many more are looking for ways to find more balance. Yes, they want to get ahead financially, have emergency cash and options to take time off work. But they also want to travel and see the world, go out for dinner and not scrimp and save all the time. Others simply want a few mileposts along the way to encourage them to keep at it, and reassure them they are progressing towards becoming a self-sufficient millionaire.

There are many variations of financial independence that have been cooked up in the imaginations of those that want their financial cake and eat it too.

Coast financial independence takes advantage of the power of compounding interest over long periods of time by front-loading retirement savings.

No matter what age you are currently, money invested now is going to get you far better returns than those in 10 or more years time. With coast financial independence, the aim is to get as much money invested as early as possible.

Instead of continuing perpetually until the saver is financially independent 10-15 years later, they watch out for the time where their current investments are sufficient to to achieve full financial independence by the time the saver reaches traditional retirement age.

At 41, I would like the option to retire (or not) at 55. But our household have just reached the point where, if I invested no further funds in super, shares or property, we would be financially independent by the time I reach a “traditional” retirement age of 60.

How do you Calculate Coast Financial Independence?

The easiest way is to calculate coast FI is with this brilliant calculator at WalletBurst.

Of course, the trickiest part of this is the assumptions. With any financial planning, we have to make an assumption about returns and inflation. If the assumption ends up being way off, our planning is fairly meaningless. To combat this risk, extremely conservative assumptions are often made. This can result in over saving, but will often result in reaching goals sooner than you had anticipated!

In my example, I have assumed an inflation-adjusted return of 10% which is optimistic. However, it is also very unlikely I will never contribute another dollar to investments!

I don’t plan to quit medicine, no matter my financial situation. Unless you are self-employed, you will at least invest compulsory employer superannuation contributions of 10% of base salary annually.

If you are self-employed or plan to become so after reaching Coast FI, it is probably sensible to make more conservative assumptions, such as 4-5% inflation-adjusted returns. If you will receive compulsory super contributions despite being Coast FI I reckon you can be optimistic.

What are the Options Available after Reaching Coast Financial Independence?

This is the big positive above coast FI. Options. The freedom to choose even if you don’t actually change anything. It’s a huge psychological boost. But could also mean you finally have the confidence to make the big move you’ve been dying to move. Options include:

1. Reducing Hours Worked.

After reaching Coast FI, you no longer have to save for retirement.

If your assumptions are correct, your current investments will grow to provide a fully stocked retirement fund by the “traditional retirement age”. If you are making compulsory super contributions or your assumptions turn out to be too conservative, you may be able to retire earlier.

You now need to earn enough to support your current living expenses. This is so strange, as this is what many of your friends, family and colleagues do anyway. You can live pay cheque to pay cheque!

Except you have investments growing in the background. And hopefully an emergency fund. If you would love to reduce your hours worked to spend more time with kids or are obsessed with your new hobby, this is now an option. Those that have been saving aggressively will have plenty of time / income to spare once reaching coast Financial independence.

2. Make that Career Change.

Perhaps you have been keen on a career change, but discouraged by the associated pay drop.

When you go to being an expert in an area to a learner, there is inevitably a resulting decrease in compensation. Which makes a mid-career transition for those that feel they have achieved everything they wanted to in their area of expertise challenging.

Once you are Coast FI, you no longer need to save for retirement. If you have been saving 30-50% of your income towards retirement, this is a big buffer to absorb a drop in income . It is a great time to make the leap to your new dream job.

3. Keep Coast FI a “Get out of jail free card”.

Those without an urgent need to reduce hours or change jobs still get to benefit a lot from realising they have hit Coast financial independence.

Does anyone else likes to keep a couple of weeks of paid leave always available? The availability of the leave means if I really need a break, it’s an option. I find it more beneficial to have the leave available than to actually take the extra couple of weeks off!

With Coast FI, there is a lot more freedom on offer.

It’s generally your work environment and colleagues that make or break a job. These can change pretty quick. If your work environment becomes toxic, being coast FI means you can change jobs or reduce hours without worrying about a drop in income.

Earning more than you “need” (or get used to spending) provides so much freedom. If you continue investing the extra until you need it, you are less and less reliant on employment income. Financial freedom comes long before full financial independence

What Age Can you Reach Coast Financial Independence?

Coast FI can be reached surprisingly quickly. The longer you have before traditional retirement age (I’m counting this as 60 in Australia) the less you need saved. Because of the magic of compound interest.

At 7% post inflation return, a 20 year old needs $100,000 invested to be coast FI. Now obviously this is pretty hard for most 20-year-olds. At what age do you think you could hit coast FI?

What Are the Issues with Coast FI?

Nothing is guaranteed, inflation and investment return least of all. So you obviously can’t take your Coast FI date as set in stone. Most will continue to make a small contribution to investments (eg compulsory super) or accept their retirement age may change depending on actual investment returns.

As you continue to advance in your career, cost of living does tend to creep up. Our expected standard of living increases for most. For doctors and other high-income professionals, lifestyle inflation can be pretty extreme. Most seniors in these professions wouldn’t think it was possible to live on $60,000 per year.

It’s easy to see luxuries as essentials.

Even if you do a good job resisting lifestyle inflation, most will want to upgrade their lifestyles a bit. So if you hit Coast FI at 30, but then significantly increase your cost of living through house and car upgrades, having children and paying for private school you will not be Coast FI anymore.

Once coast FI, if you increase your cost of living, work out how much you need to contribute to investments to maintain this lifestyle after retirement.

Are You Nearing Coast FI?

Coast FI is a powerful step along the long to financial independence. Being aware of when you cross over into Coast financial independence can provide psychological and practical lifestyle benefits. Are you nearly there yet?

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.

education Investment Bond Review

*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.  

In 2014, shortly after reading the Barefoot investor*, I opened an education bond for my eldest child. Australia’s most popular finance book recommended an education bond for high earners. Read on to find out my experiences on the education bond, pros and cons. I have no affiliation with Australian Unity or other education bond providers, so this is an unbiased review as a consumer.

Education Bond Review: Set-Up Process

You require a financial advisor to set up an education bond. If you are among the minority who have found one they like and trust this is no issue. For those that don’t need a financial advisor, or have not been able to find one yet that they feel is trustworthy, this is a major stumbling block. Results include:

  • Procrastinating for months to years
  • Getting talked into something inappropriate by a financial advisor/sales person
  • Finding an honest and reliable financial professional who will guide your investing over the next decades

My financial advisor talked me into signing my super over to his management in 2016. He charged a 4% annual fee! He was very convincing that his superior management would more than compensate for the fee.

This may not come as a surprise to the savvier amongst you. It didn’t.

What can I say, I was naive and way too gullible.

Education Bond Review – Tax Benefits

Education bond earnings are taxed at the corporate rate of 30%. This avoids the punitive unearned child tax rates (up to 68%) or even the adult’s marginal rate of up to 45%.

Earnings withdrawn from the bond to pay for education expenses after 10 years benefit from that 30% Tax being refunded. So as long as you follow all the rules, these investments can be tax-free.

The investment has to be started in an adults name if a child is under 10 years old, but this can be transferred to a child without incurring a taxable event at aged 16.

Education Bond Review- Rules, Rules and More Rules

Apart from the brief 3 years the financial supervisor spent playing with my super, the education bond has been my most complex investment so far.

There are rules upon rules in this thing. All else being equal, it’s obviously easier to have simpler investments!

The appeal of the education bond is all in the tax benefits. Not following all the rules means missing out on tax benefits. Rules include

  • Minimum initial contribution of $1000
  • Maximum contribution of $590,000
  • Minimum regular savings contribution $100 monthly

To be eligible for the full tax benefits

  • Earnings must not be withdrawn before 10 year investment period. There is a partial tax discount from 8 years.
  • No more than 125% of the previous years contributions can be contributed each year. You can, however open multiple accounts if you have another lump sum to invest.
  • Earnings withdrawn to pay education expenses get the 30% corporate tax rate refunded. These can include tuition fees, books, uniforms and a “living away from home allowance” of currently $8,200 per year.

Change of Circumstances

The Aussie Doc household set up an education fund back in 2014, while both adults were working. The intention was to save for our toddler’s tertiary education costs.

At the time Mr Aussie Doc was on the 37% marginal rate, myself on the top tax bracket. The education bond, therefore, appealed due to the tax-free earnings.

In 2016, Mr Aussie Doc became a stay at home dad, a change in circumstance we hadn’t planned in advance. Now with the kids in school, he works a few hours but is still not hitting his tax-free threshold. There is no plan currently for Mr Aussie doc to return to work for significantly more hours or pay, but if the right job came up it could happen. Who knows what we’ll be up to in another 7 years!

With Mr Aussie Doc now on the 0% marginal tax rate, the education bond has no tax advantages for us.

Luckily, the education bond does allow withdrawal of contributions, tax-free and without penalty. In 2019 we withdrew our $25,000 contributions, leaving ~ $5000 in the fund. We can withdraw the remainder for education costs (school fees) from 2024.

Performance

Australian Unity offers 15 different investment options within the bond. The word “Bond” is confusing. This investment is nothing to do with bonds you can invest in. The education bond is just another vehicle, like your superannuation, in which all sorts of investments can be contained.

We ended up with “Perpetual balanced growth. It is actively managed by Australian Unity. The current asset allocation is:

  • 35.2% International equities
  • 31.78% Australian equities
  • 27.4% Money market
  • 4.91% Australian fixed interes
  • Other 0.78%
  • Global fixed interest -0.07% (not sure how)

7 years ago when I set this up, I knew pretty much nothing about investing. I trusted my financial advisor to select an appropriate investment.

In retrospect, I probably should have spent a bit of time learning for myself and choosing an appropriate investment appropriately. I did eventually!

Over the past 5 years, this portfolio has produced 5.3% growth per annum. Over the same period, the ASX 200 has produced ~ 10.27% total net annualized returns. The Vanguard diversified high growth fund. The Vanguard balanced index fund returned 7.47% over the past 5 years.

My education bond has underperformed comparable investment products, such as the Vanguard balanced index fund more than enough to wipe out any tax benefits.

Fees

And yet again, it all comes down to fees I suspect. Australian Unity, like many financial product providers, like to break down the fees. They charge an admin fee of:

  • 0.7% of invested amount
  • An investment management fee of 0.25%-1.1% of balance on top of the admin fee, depending on exact investment choice.
  • Some of the investment choices also charge a “performance fee” of 0.02-0.03% to reward investment managers for beating benchmark performance.

So in summary you will pay between 0.95-1.83% of your balance in fees per year.

The Vanguard balanced index fund we compared earlier charges 0.29% of the balance in management fees. I’m not recommending this fund, just providing some context to these fees. Superannuation fees tend to be a bit higher (perhaps to change when Vanguard start super), but Scott Pape suggests keeping fees under 0.85%.

Even the Australian unity product disclosure statement warns a 1% increase in fees can lead to 20% underperformance over 30 years!

On a more positive note, there are no contribution or withdrawal fees with Australian Unity. Over the long term, it is cheaper to pay brokerage and avoid account keeping fees.

You will have to pay $9.95 brokerage to purchase (and sell) an ETF Pearler*. Although you can get one free transaction with this link*.

Vanguard personal investor are now offering completely fee-free transactions (no brokerage or account fees) on Vanguard managed funds! The only fees I can see apply is the 0.29% per annum management fee and 0.5% on any money earned in a cash account.

Alternative Options

Alternative for saving for your childrens’ education include

  • Buying a broad based index fund and paying tax according to marginal tax rate (It will probably outperform despite higher tax)
  • Buying Australian foundation investment company in child’s name and selecting the DSSP option to defer any taxation until your child reaches adulthood
  • Open a microinvestment account in an adults name (advantage being you don’t have to select investments yourself)
  • Save in an offset (but with sub 3% returns you could do a lot better)
  • Purchase an investment property. Depending on your time frame you could sell it, or plan for it to be positively geared and fund child’s education.

Education Investment Bond Review Summary

Education bonds appeal to high taxpayers and those who want to avoid working out which investments to buy. It requires involving a financial advisor to open the account. My education bond drastically underperformed the ASX and similar managed funds over the past 7 years.

The good news is that if you have already signed up for an education bond and now regret it, you are able to withdraw all your contributions without penalty. There is likely to have been little growth so you will be able to withdraw the majority of your balance.

If you are still considering an education bond from Australian unity (formerly Lifeplan), read the Product disclosure carefully.

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.

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.

Choose a Mortgage: What is the Comparison Rate?

*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.  

Purchasing a property, and taking on a mortgage, is one of the biggest financial decisions most Australians will make in their lifetime.

Your choice of property will be a large factor in wealth accumulation over your lifetime.

The total price of a property can be doubled (or more) by interest paid over the life of the loan. Luckily we are currently in record-low interest rates, although it is unclear how long this will last.

The interest rate you pay makes a massive difference over 30 years to how much you pay for a property. Should you rely on the comparison rate to make your decision?

No.

Even paying 0.5% extra in interest over 30 years for the above $500,000 property results in an extra $44,000-$65,000 in interest charges over the life of the loan.

But it’s not just the interest rate that’s important. Annual fees act in a similar way to interest and blow out the cost of a loan over the long term. Then there are establishment fees, exit fees, redraw fees, introductory rates and special features such as offset accounts and lenders mortgage waivers.

The result is enormous confusion for first-time buyers and refinancers! A mortgage broker can help you compare like with like, and make recommendations based on your personal circumstances. It is wise to invest some time educating yourself on options given mortgage brokers have a conflict of interest in recommending loans (being paid by the lenders).

Work Out What Kind of Loan You Need First

I find it’s easy to narrow down the options first. Do you need a residential or investment loan?

Need to Borrow More than 80% Loan to Value Ratio?

Do you need to borrow more than 80% of the property’s value (LVR)?

Loan $400,000

Property Value $500,000 = LVR 80%

Deposit Required $100,000 + Borrowing costs ~ 6% property value 30,000 = $130,000

If you work in an occupation considered at super low risk of default, you may be able to get lenders mortgage insurance (LMI) waived.

Different lenders have different eligibility criteria. Accountants, lawyers, judges, doctors, dentists, vets, optometrists, chiropractors and physiotherapists. Nurses may be able to get LMI waived up to 85% loan to value ratio, or discount LMI.

Borrowing over 80% LVR is a higher risk strategy but can suit those trying to get into a rapidly rising property market and investors.

Do you Need a Redraw or Offset?

In these articles, I go through the benefits and downsides of offset accounts and redraw facilities. They are both ways to potentially reduce interest paid. You will have to pay extra in fees (particularly for offset accounts). If you will keep more than ~ $20,000 in savings it is likely worthwhile paying for an offset. The higher interest rates go, the less you need to have in savings to make offsets worthwhile. They are ideal for emergency funds, and as discussed in the articles above.

How Much Will You Borrow?

Please work this out based on the repayments you are happy to make on a monthly basis.

Then check you can borrow that amount with an online calculator.

If you calculate your maximum borrowing capacity first, you will be psychologically anchored to that (usually) higher price.

Mortgage repayments can be significant dampeners of your ideal lifestyle if you over commit yourself. If you want to buy as much house as you can possibly afford as part of a financial plan, make absolutely sure you are buying the right house. And make sure you are happy to make the sacrifices involved in that strategy.

Remember to price in extra insurance needed such as income protection, TPD and life insurance premiums. Unfortunately, these have become far more expensive over the last couple of years, even for those of us with no longer available “level” premiums.

Do You Want Fixed or Variable Rates?

This may come down to the actual rates on offer at the time, so I don’t think this needs to be set in stone before looking at options.

Fixed rates are offered over 1-3 years (and longer, but often at great expense). The bank sets these rates based on all the information available to them. They set these rates to attract customers, whilst obviously maintaining their own profits. Fixed rates are usually a little more expensive than variable rates, although this trend has been reversed recently.

The Reserve Bank of Australia (RBA) review the official cash rate monthly and increase or lower it to manipulate the economy as close to a happy steady state as possible. The banks choose to pass these changes on or not, even increasing rates independently, to maintain profit levels.

Despite this over the long term, variable rates have usually been cheaper than fixed rates. More than half of borrowers who sign up for a fixed rate end up paying more than they would have with variable rates.

People choose fixed rates because they:

  • Believe they can predict interest rate moves (and think they will increase)
  • Have borrowed a lot of money and would struggle to meet repayments if interest rates increased

We were nervous buyers in 2008, on unimpressive salaries at the time. I’m grateful our mortgage broker at the time talked us out of fixing rates then! I think our rate was ~ 8% at the start!

A fixed-rate usually locks you into the loan for a period of 1-3 years, with an exit fee to break the agreement. This provides inflexibility in the case circumstances change, you wish to move or refinance to access equity.

Fixed-rate mortgages also don’t traditionally allow offset accounts. There have recently been mortgages offered with fixed rates and offsets, but to go with these options you will be limited to a handful of loan choices.

It is possible to hedge your bets by fixing part of the loan and keeping another part variable. This can offer the best of both worlds for some. They have more security around repayment amounts but are able to offset emergency savings and future surplus income against the variable portion of the loan.


Our mortgage broker did not talk us out of fixing rates after our most recent investments property purchase. With rates so low, it’s hard to imagine them going much lower. Fixed rates have been offered by lenders at rates lower than variable rates. We ended up going with a mixture of variable and fixed rates for our mortgages.

Comparing Fees

One-off fees are less significant than recurring annual fees. Add the annual fees to the interest payable on the amount borrowed to compare mortgages like with like.

Similarly “cash back” or airline point offers may be lenders trying to distract you from fees and interest payable during the life of the loan. It is the recurring expenses that are most significant.

Compare mortgages over 3-5 years. You should review your lender options 3-5 yearly, and will likely refinance to better options at the time. If you are fixing for a period, compare rates for the fixed period only. You will need to review the loan and compare it with competitors at the end of the fixed rate.

Comparing Interest Rates & the Comparison Rate

I tend to ignore honeymoon low-interest rates, which tend to balloon after 1-2 years. I don’t want to refinance my borrowings after a year. It’s a lot of hassle. I would rather secure a good value loan for 3-5 years (or the fixed-rate term) and not have to worry about it for a while.

What is Mortgage Comparison Rate?

Due to the complexity of loan offerings available, legislation has been introduced to attempt to make it easier. Each loan has to display a “comparison rate” in its advertisement. The idea is that the comparison rate lumps all fees and the interest payable for a loan together so that you can compare like with like.

Unfortunately, I don’t think a comparison rate is that useful for most of us. In fact, they may provide you will very inaccurate information based on your situation.

The comparison rate is based on a standard borrowing scenario – the rates and fees incurrable by a $150,000 loan, repaid over 25 years.

I don’t know anyone who has brought home for $150,000. And most home loans are over 30 years. Most financially savvy households will refinance their loans 3-5 yearly anyway.

A $395 annual package fee is usually the same whether a home loan is for $150,000 or $1,000,000! The interest on the larger loan will be a far more significant part of the equation.

If you are (conveniently) borrowing just $150,000 the comparison rate will be an excellent comparison tool. For the rest of us, we need to do the maths ourselves or ask our mortgage broker for a detailed comparison based on our actual intended borrowings.

Is Flexibility Important?

Life is unpredictable and personal circumstances can change quickly, and dramatically.

It is worth taking some time to consider how important flexibility is in your situation. If you are planning to stay put in a home for 10+ years, with no plans to invest and a low likelihood of needing to move flexibility can be a low priority.

For those with more options on the horizon, avoiding loan discharge fees and prolonged fixed rates are a good idea.

Utilising an offset account instead of a redraw facility will mean extra repayments can be moved to a new home if you end up converting the old one to an investment property. If you pay off the loan (using a redraw) you cannot withdraw to gain access to tax deductibility.

Take your time making the right choice of property and loan. Remember these are some of the biggest financial decisions of your life. Get it right!

Have you recently taken on a new mortgage or refinanced. Comment below to tell us what kind of mortgage you went with and why.

Your wealth accumulation journey starts as soon as you make the first step.

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 Investing Possible on a Nurse Salary?

*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.  

We don’t tend to talk about finance at work. It would be considered taboo. But throughout my career I have noticed nurses who seem to have their finances totally under control.

I’ve never dared to ask how they do it, with a registered nurse salary. But these colleagues breeze in for work, with stories of extensive travel and adventure. They hang around for a few weeks or months before they disappear again for another extended trip.

The average Australian registered nurse salary is $73,000, far less than a doctors average salary. I am unsure whether I have any nurse readers but have only been able to find one Australian nurse finance blog.

I worry reading about the financial moves of a senior doc could be a little demoralising to one of my nursing colleagues. So I have been itching to interview one of my clever nursing colleagues to find out how they do it!

Many of us on higher wages could do with a reminder that much of our spending is not essential. It’s common to start considering luxury expenses as basic living costs once we’re used to them!

So I hope you enjoy reading about Lisa, an RN generous enough to share her financial ass kicking story of the past 4 years.

Nurses, one of the few blessings of being ill

Sara Moss-Wolfe

Our Registered Nurse Case study: Lisa

I am a 54 year old Registered Nurse who works for NSW Health as a Community Nurse and some Palliative Care, permanent part-time 5 days a fortnight, often doing extra shifts that suit my needs.

What are your financial goals and time frame?  

I became single 4 ½ years ago after a 29-year relationship/marriage with two adult children who are off on their own journey’s.

My goal now is to be financially independent, not work full time ever again, build my investments that provide an income and retire earlier than I thought I might be able to.

Progress over the Past 4 1/2 Years on a Nurse Salary

When my marriage ended 4 ½ years ago I had 27K in super, as is the way with a lot of women who give up their career and become the primary carer of children, and 10K in a running away from a home account. 

Total 37K

After financial separation, I ended up owning my home that was valued at 550K, and 100K of his super was split to me, and another 25K in cash.  I didn’t have a permanent job so that was my primary concern and it’s taken me a few years to leave a private healthcare setting and get back into public health because it pays the highest hourly rate which helps me to not have to work full-time.

Total 712K

Currently my home beside the seaside is worth 920K thanks to a crazy housing market.

Car and household goods 100K

Super now 218K

Passive ETF investments 275K (Aussie Doc: In 4 1/2 years on an RN salary!)

Savings 35K

Total 1.548M

What Strategies Did you Deploy to Reach this Point on a Nurse Salary?

I knew I wanted to be financially independent and never rely on a man for financial security again. 

Immediately after my separation, I reduced all my living expenses to the lowest level I could by decreasing insurances, getting better plans for services. I got rid of my credit card because I had the cash I knew I’d never need one again. 

I began living as my parents had always taught me, if you can’t afford to pay cash for something then you can’t have it. 

Then one day I found The Barefoot Investor book by Scott Pape in Kmart, I’d never heard of it but for $19 I thought it may be worth a read.  It changed my life, his simple bucket concept made sense to me, it made me feel like I could be in control of my money, rather than money controlling me.

How long did it take before you started seeing progress? 

Everything started falling into place so quickly, every bit of money I earned was split 60/20/10/10.

I built up my emergency fund, all bills were paid on arrival.

Allocated Splurge money to allow me guilt-free treats. 

My mojo savings built up so quickly. I had to work out how to earn more on my mojo savings given recent low interest rates offered on savings.

Everything financial was so quickly becoming easy for me, it was astounding!

I increased added more pre-tax to my super, chucking in lump sums when I could.

Currently I receive 10% from my employer, 20% I salary sacrifice pre-tax and a few big lump sums post-tax when I can.

Were there other strategies before?  If so, what made you pivot?

I knew I didn’t want to invest in real estate.  So I began listening to financial podcasts and reading everything I could about passive investing, it really appealed to my sense of adventure. 

I took my time with my research into this brand new area, I didn’t have any family members or friends to guide me, so I wanted to make sure it really was the right choice for me.

In 2019 I tried investing with Spaceship Universe to see if my personality could cope with the ups and downs of the stock market, as it turns out I loved the adventure and seeing how world events cause the volatility.  I only began with $20 a week, then $50 a week, my tax return, and now $100 a week, not a big investment but the returns are over 30% currently, not bad!

What next???  I found Jack Bogle and read much of his writings, so began my investing in Vanguard ETF’s VAS 90% and VGS 10% because they both have low management fees and pay reasonable dividends quarterly.

Wow! It Must have Been All Work and no Play. Did you Have the Time and Money to do Anything Fun?

I went backpacking in Europe for 3 months in 2018, only booked the first 2 nights, followed great weather, advice from locals and relaxed into an exploring adventure through Wales, France, Spain and Portugal.

I was hooked!

This was something I wanted to do more of, so knew I needed to work out how to fund this sort of trip for the next few decades.

What makes your strategy suit your personal situation? 

Having spare money every fortnight so it seemed to be a good fit for me. 

I live simply, I want for nothing, live very comfortably in my modest home, drive a 5-year-old car that I paid cash for, and can buy whatever I need without a worry.  I have no debts at all, and I never worry about money at all.

What are your Nursing Colleagues like with Money?  Do you Discuss Finances at Work?

Most are appallingly bad. None have any idea about super. None are actively investing for income. A couple are married to tradies so they invest in real estate.  I have mentioned finances with colleagues but most seem embarrassed they know nothing about how to manage money.

What is your impression of the doctors you work with and their money attitudes, knowledge and behaviour?

I have worked with many specialists when I was managing a private day surgery. Most of them were pretty savvy about their finances and future.

But most of the GP’s I’ve worked with in private practice aren’t very on top of their finances.

Most are contractors, they have big mortgages, leased cars, not much in super, struggle to put away money for tax, kids in private schools, extravagant holidays…. kind of living beyond their means. 

A couple of female GP’s are very close friends of mine and I know that I’m in a much better financial position than both of them despite them earning way more than I do.

Do you have any side Hustles?

Not currently, other than dividends which have been quite good and always reinvested.

I was a textile designer when my kids were young, had been published internationally and I’m looking at getting back into that now that I’m not having to work full time in nursing.  I think an extra income stream leading into retirement could be very beneficial in a few ways when winding down from a nursing career.

What is the Most Powerful Wealth Building Tool Available to You?

Compound interest of course, once you hit 100K, it really begins to grow exponentially. In the next month I will hit the 500K in shares, something I never thought would be possible just 4 years ago.

I’ve begun actively tracking my Net Worth this year and it is going up by $12K a month, way more than I earn in wages.

Where do you Stand on the Great Property vs Shares Debate? Why?

Shares win every time, it’s been proven by people way smarter than me who’ve tracked it over decades.  My parents had rental properties and they were always a headache to manage even with real estate agents managing them, and the returns weren’t great after all the expenses.

Where do you Stand on Investing for Capital Growth vs Income?  Why?

I’m currently reading Motivated Money by Peter Thornhill and I can really see dividend income is the way to go for an easy retirement.  I’m considering adding a LIC to my portfolio soon.

What is your biggest financial mistake?  What did you learn?

Marrying my ex!  Lol  He really set my financial independence back by decades.  I don’t think I’ll ever share finances with anyone again, I want to be in control of my life. 

How do you navigate through a divorce and thrive financially?

It was a very sad time for me, it was my decision to leave him, although he really didn’t leave me much choice.  It wasn’t what I saw for my future. 

The best advice I can give anyone going through separation or divorce, act early and decisively. 

You really need to think only of yourself and your future, work out what you want from the division of assets so that you can get on with your life as soon as possible.  Do it with grace and humility. 

My financial separation was completed with my lawyer and consent orders, all within 7 weeks of ending my marriage.  Make sure you rewrite your Will and nominate binding beneficiaries for your super. 

I was shaken to my core but I decided that I wouldn’t be bitter or angry, and I didn’t want it to affect my health.  I decided immediately I would forge a great big beautiful life for myself, and I have. 

What Finance Tips Would you Provide an Eager Nursing or Medical Colleague?

Always salary sacrifice pre-tax into your super, so your total (including employer) contributions add up to 15% from the day you begin working.  If you can contribute more like I do, it makes a huge difference. 

Spend less than you earn, always.  Don’t have a credit card. Pay for everything with cash. 

Save 20% of your income always, invest in something that provides an income, such as dividend-paying ETFs or LIC’s.  Don’t buy gold, art, wine, classic cars, etc, they depend on someone else wanting to buy them for more than you paid for them. 

Drive the most modest car you can, it’s a depreciating asset that gets you from A to B.  I love that no one can actually guess my financial situation by the car I drive, it’s like flying under the radar, but of course, I can rent fabulous cars when I’m on holiday or when I’m retired because I have the income to indulge myself.  

Choose your path wisely, the earlier you get started on the right track the easier and more enjoyable your life will be. 

Thanks Lisa, for your inspiring finance journey. It truly is astounding what can be achieved in less than 5 years! Becoming wealthy is truly more about your actions with your money than your income. Have you managed to make incredible financial progress despite not being a super high earner? Would you like to hear more about nurse finance? If you’re keen to get started building an investment portfolio but don’t know where to start, check out the quick start guide.

Comment below!

Your wealth accumulation journey starts as soon as you make the first step.

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.

Challenges Stopping Financial Progress?

*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.  

Photo by Jukan Tateisi on Unsplash

All high earners should be working towards financial independence. Some want to retire in the medium term and retire early. Others aim to be FI by age 65, or older. We all likely have more financial goals than money to allocate, particularly in our early careers.

You may have become enthusiastic about personal finance after discovering a blog or podcast that resonated. You may have read Barefoot* or Rich Dad Poor Dad*.

Any truly worthwhile goal feels insurmountable at the start

Aussie Doc Freedom

Initial responses to personal finance information are either:

  1. What a load of BS, I can’t afford anything or have any control over my destiny
  2. OMG! I can earn money even without working? Why didn’t anyone tell me about this? I have to read everything on Earth related to this.

Anyone in between? I am certainly a number 2. I have friends and relatives I’ve provided copies of books to help after they confess severe financial stress but often turn out to be number 1 responders, with no control over their situation. I’m not sure if there are in-betweeners.

I am going to assume that you, the reader, are a lot more like number 2 than 1.

This early enthusiasm often leads to a look of spending on books (guilty) and excel spreadsheet obsessing.

Sooner or later almost everyone will reach a point of disappointment or despair when they realise

  1. They are not on track to financial independence
  2. They are not sure it is possible to reach all their financial goals

Even for those that seem to have a viable financial plan at the start (I suspect it’s unusual), sooner or later, unexpected financial challenges arise.

Sometimes, each month brings unexpected bills and it feels like we are making no progress. It’s easy to lose heart. Many will give up.

But those that keep plodding along, tightening the belt (even more!) or taking on extra work to get through the tough months, are likely to reach our goals. Even if it feels almost impossible at the time.

Why Hardly Anyone is on Track to Hit Goals Initially

When you sit down to set your goals and make a financial plan, it may seem you have too many goals. Too many options for your savings, and never enough income to meet all your goals.

Some common goals include:

  • A new car
  • A house deposit
  • A special holiday (YOLO!)
  • Parental leave
  • Children’s education (secondary private, university?)
  • Retirement

What if you need to save for all of the above?!

And you have a few hundred dollars a month spare (which is a good start!).

It can feel hopeless and very demotivating.

Income and Expenditure over a Lifetime

Income and expenditure are not evenly distributed over your lifetime. Of course, everyone has an individual life journey. But here I examine a “typical” financial lifecycle to examine why your 20’s and 30’s are so tough!

In your 20’s, most have below-average incomes. Many will rent for a few years, trying to save that first home deposit and possibly purchase a car. You may need to move (several times) to further your career, producing more expense.

If you purchase your first home in your 20s or 30s, you are now responsible for repayments, property maintenance and rates. Those hoping to expand their family may want to renovate or upgrade to a home better suited to a young family.

The average Australian woman has her first child at 31 years of age. High-income earners tend to have children later than the average. If your household decides to start a family in their 30’s, household income decreases whilst expenses increase.

DINKs (double income no kids) naturally have a lot more disposable income.

Below is the 2017 ABS data on household income. It peaks (on average) between ages 35-54 years. The orange line represents “average” Australian household expenditure, which I couldn’t find broken down by age group. Obviously, households will try to reduce expenditure when income is lower (in their 20s and early 30s) and increase expenditure as income increases.

But with so many expenses to pay for in your 20s and 30s it’s no surprise it feels really tough to make much financial progress.

ABS data from 2016

Once income reaches close to peak (for doctors post-fellowship), it becomes much easier to catch up and get on track to all your goals.

Unexpected Life Events

Once you start working towards your financial plan, unexpected money challenges will inevitably occur. Your car breaks down and a wisdom tooth requires expensive surgery. The next month the council rates are due. And then your dog ruptures his ACL and needs vetinary surgery.

It can feel like the universe is trying to stop you from following your plan!

No one is immune to these unexpected life events. Having cash on hand as an emergency fund make these expenses an irritation rather than a full blown crisis.

Advice from the Other Side

After an unknown amount of time spending less than you earn, making unpopular car decisions, saving and investing you reach the “other side”.

So many times over these years, it feels like no progress is occurring. Bills seem to invent themselves each month just to turn your one step forwards into two steps backwards.

But eventually, you realise you are on the other side. You have accumulated significant wealth, and the bills don’t seem such a big deal anymore. Earnings from investments become more significant, eventually, earning more than you save. This comes long before financial independence, but means you are really on your way now.

Repeated small actions produce exponential if you stick with it. Unexpected opportunities come along and may result in significantly faster progress than expected. For us, it was lowered interest rates. For others it could be a property boom, an inheritance or something else.

Most will also build their financial plan based on conservative predictions of returns. It is only sensible to do so, as you want to make sure there is a good likelihood you will reach your goal by following the plan. Actual returns may exceed your conservative predictions, speeding your journey to your goals.

This wealth snowball starts to build when you start regularly contributing to investments. You just won’t notice it starting to roll.

Success Post Income Peak Depends on Self Control in the Early Hard Years

If you can afford to invest before those peak income years, go ahead. But if there are just too many demands for your savings in your 20s and 30s, it’s ok to wait.

But don’t assume that because you’re expecting a big income peak in your late 30s or early 40s you can spend recklessly and sort it out later.

If you enter your income peak with a load of consumer debts on credit cards and car loans, you will yet further delay your wealth accumulation. Time is the most powerful factor in wealth accumulation. If you have already waited to start accumulating, you have no more time to waste paying off expensive loans.

There are a few huge factors you can use to make sure you reach your income peak in reasonable shape

  1. Avoid bad debt – avoid car loans if at all possible and pay off your credit card every month without fail.
  2. Buy a reasonably priced car and keep it for 10-15 years
  3. Buy a house you can actually afford (ideally in an area with good capital growth potential)
  4. If you choose to rent, invest the extra you would have paid in mortgage payments, maintenance and rates
  5. Salary sacrifice into your superannuation and your rent or mortgage payments if eligible
  6. Start a microinvestment account. Invest tiny amounts to get used to market volatility and grow confidence and knowledge before investing with “real money”.

Once you Reach Peak Income

You want a plan before you receive your first peak income pay. You want to start catching up and building wealth immediately. Most of us high earners are behind our peers because of years spent in tertiary education and student loans.

Ideally, this is based on your goals and financial plan. A reasonable backup, if this is too overwhelming, is to save and invest 20%.

It is important you decide whether you will invest in property or shares (or both) and start putting that money aside before upgrading your lifestyle.

Easier options include putting extra into superannuation or direct debit into ETFs at Pearler.

Only buy that dream home once you have worked out what you can afford. Huge mortgage repayments can prevent any other financial goals from being achieved.

Still, you will find financial challenges come up and prevent you from progressing as you planned. Once you are on track to plans, your mind has a tendency of thinking up new goals. Remember to enjoy yourself along the way. Budget fun money and a holiday budget.

How to Overcome Money Challenges

When those irksome money challenges occur, take a deep breath and work out how bad it is. Can you fund it with your emergency fund? Do you need to pick up some extra work to refill the emergency fund?

Have a little faith, even if you are not currently on track to meet your financial goals, that an opportunity will come along. Keep plodding in the right direction as best you can, and keep your eyes open for those special opportunities. If you just keep making good financial decisions, it is likely you will hit those financial goals sooner than you thought possible.

Have you had frustrating money challenges? Comment below and share how you avoided getting too demoralised and stuck to your financial plan.

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 Installing solar Power Worth it?

*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.

Are you wondering whether installing solar power is worth it?

A little internet research provides hundreds of pages of solar power companies reassuring you that it is totally worthwhile. But there is a bit of a conflict of interest there isn’t there?

I thought those considering splashing out may appreciate my consumer’s point of view.

The Aussie Doc household is now on our second set of solar panels. Having just been through the process of replacing our panels, it’s a great time to share our experience.

The Cost of Electricity is Rising

You would have to be living under a rock to fail to notice the headlines complaining about rising power prices. The graph below is data from the ABS on the increase in average household electricity costs since 2009.

In 2011, when we installed our 1st set of solar panels on our 1980 house, the calculations told us it would take around 7 years to break even. We purchased a “cheaper” system at the time, although it certainly didn’t feel cheap! It was a big outlay and we were concerned the calculations provided by the solar power company may prove to be exaggerated.

The significant increase in price since 2011 actually would have shortened the time it took to break even. We were lucky enough to time this well enough to secure a 44c feed-in tariff until 2028 (unfortunately no longer available). We didn’t realise what a huge bonus this was at the time, but feed-in tariffs now are usually 7-16c per KWh.

Initially, we were completely bill-free (or even paid a little from the electricity company!). Over 3-4 years our bills started to creep up, reflecting the increase in prices. The bills were still far lower than our friends until this year when there was a sudden spike in our bill from $300/quarter to $500.

After my brave partner got on the roof to check it out, turns out one of the panels was broken. Discussion with solar companies in the days after revealed that solar panels are far more efficient now than those produced in 2011. Our solar panels were pretty much at the end of their lives after 10 years. But we could replace the system and still take advantage of our old feed-in tariff agreement.

Cost of a Solar Power System

Prices of solar power systems have come down significantly. In 2011, our 4KW system cost around $9000, and this was from a cheaper company. Ten years later, we have had to replace it with a new 4KW system for $5563.

This is a pretty small system to install. We have an advantageous feed-in tariff that we can continue to take advantage of until 2028 as long as we don’t put a bigger system in.

It is also more expensive than many of the prices listed because we chose panels with micro-inverters. Each panel has its own micro-inverter rather than all panels connecting in series to an inverter. The advantage of this is each panel acts independently. If one is broken, the other panels are unaffected. It also means we can monitor the electricity production of each panel, helping to identify and pinpoint malfunction.

Price range online in 2021-

A 6.6KW system will cost $5200-$9000

A 10KW system will cost $8000-12000

Pricing should include panels and installation.

Small-scale technology certificates are rebates offered per panel installed. Your solar panel company will generally organise these and provide a discount on the quoted price. You can work out your STC rebate eligibility here.

The STCs are scheduled to reduce the rebate every year until the rebate completely ceases in 2030. They vary in generosity depending on where you live. These discounts are already included in all the prices above.

Electricity Feed in Tariffs

Feed-in tariffs vary according to your location and energy company. You can review them here. Unfortunately, feed-in tariffs of 40c+ are no longer available.

If you signed up for a fabulous feed-in tariff before 2012, you may be able to continue using this if you have to replace your panels.

For new solar systems, you can find out feed-in tariffs in your area. The price you receive for electricity is now usually less than you pay the same company for electricity. For new installers, it is better to use as much of your own electricity as possible due to this imbalance.

Installation of Solar Power

This should be organised by your solar power professionals. If you need roof repairs, get these sorted before solar power installation day.

We discovered the roof under our old panels had deteriorated. The solar power company we used identified it and gave us time to get it fixed before they completed the installation.

How Many Solar Panels Do You Need?

Look at your electricity bills. What is your daily usage? How large is your roof? What is your budget? Your solar panel company will be able to help you work out the optimally sized system for your situation.

Remember to allow extra if you may purchase an electric car in the future, are getting a pool or spa or have kids that will one day become teenagers!

The Aussie Doc household stuck with a 4KW system to maintain the 44c feed-in tariff. After this runs out in 2028, it is likely we will upgrade our system and add a battery.

Choosing a Solar Power Company

There are a lot of companies selling solar panels. They beat each other down on price, which is great for buying a system at a reasonable price. But it also means many of these companies seem to go broke quite often.

It’s not uncommon for households to realise there is a problem with their solar panels, only to find despite the system still being under warranty the company no longer exists.

For this reason, and the desire to have good quality panels that last as long as possible, look for longstanding solar power companies with a good reputation and customer service reviews.

Find out which solar panels they provide. Are they made by a good manufacturer? How long does the warranty last?

Our solar panels were out of warranty. We brought cheaper panels due to financial constraints at the time but paid in cash. The solar panels provided good value.

We asked for quotes from a couple of local companies. Those that no-shows for the quote can be ruled out immediately.

You can gain an understanding from the solar power company representatives about your options, and cost-benefit. They should be able to provide all this for you. Compare the options available and make your choice.

Is It Worth Borrowing to put in a Solar Power System

With it taking 3-5+ years to make your money back, it is generally not worth going into debt and incurring interest for in my opinion. If you do decide to borrow, Canstar recommends green loans over the other deals the solar power companies offer.

Are Solar Power Batteries Worth It?

There is now a range of solar batteries on the Australian market, including the Tesla solar.

Many households use electricity primarily in the evening when solar panels are not productive. Particularly for those with pathetic feed-in tariffs, the ability to store excess electricity produced during the day to use at night can be powerful in reducing bills.

Others like the idea of being completely off-grid, for environmental reasons.

Many want a battery system as backup during power outages, so they don’t need to annoy their neighbours with a noisy generator.

Solar batteries are still very expensive, and will likely at least double the cost of your solar power system. It is still worth getting quotes with and without a battery, but many will find the expense too great.

Even if you’re not ready to commit to the expense of a battery right now, ask your solar power provider if the solar power system they can install will be “battery ready”. If a drop in battery price occurs similar to the way panel prices have come down, it could soon be very worthwhile installing a solar battery.

Efficient Solar Power Usage

To get the most out of your system (and minimize your bills)

  1. Increase power production – Maintain your solar panels with annual inspection and cleaning to get rid of soot and grime which may reduce efficiency. Position panels to take advantage of maximal sunlight (at the time of day you use more electricity ideally).
  2. Reduce power use – Always to reduce bills. Turn off the LEDs. Fill the dishwasher and washing machine before turning on. Switch everything off standby
  3. Time power use – You will want to use electricity when it is cheaper. For most with solar panels installed in the last few years, that will be using electricity during the day. So time dishwasher and washing machine cycles for daylight hours. For those still enjoying a high feed-in tariff, it’s more efficient to use electricity after dark.
  4. Monitor electricity production. With our 1st solar system, we only realised there was a problem with the panels when we received the quarterly bill. With our new solar system we can monitor electricity production (hourly!) via an app. We have already used this to identify shade that needed to be removed from one of the panels.

I Solar Power Worth It?

With electricity prices continuing to rise, and return on investment often 3-5 years, solar panels are worthwhile for the majority.

Solar batteries are still quite expensive and the cost-benefit will vary. If installing a battery is too expensive at the moment, get a battery ready system.

Solar power is an expensive initial outlay. I don’t think it’s worth going into debt for solar panels. If you do, you are better off with a green loan or borrowing from your mortgage (and paying it back fast).

As well as the financial benefits, it’s pretty awesome environmentally to use solar. Being as self-sufficient as possible means you are less vulnerable to financial shocks and unpredicted price hikes.

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.

Super australia: how to choose a fund

*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.  

Are you trying to sort your super Australia?

Have you been meaning to get around to working super out? Trying to ignore that nagging feeling you are not invested in the right fund, and not maximising your super potential?

Let’s get it sorted. Commit to spending a few hours choosing a reasonable super fund you will be happy to stick to for the long-term. Make sure you are maximising all the available benefits that suit your personal situation.

Then forget about it (for a while), and let super do it’s thing while you get back to more exciting activities.

What Is Super Australia?

Super in Australia is the governments way of forcing us to save for retirement, long before most of us would even consider it.

Australia introduced compulsory superannuation in 1992, to gradually reduce the population’s dependence on the aged pension.

All employees over aged 18 earning over $450 per month receive compulsory superannuation contributions from their employer. Compulsory contributions have just increased to 10% of base salary, and are scheduled to increase to 12% by 2025. Self employed individuals do not have to contribute to superannuation, but are eligible to.

Investments inside super grow and compound over decades until the member is eligible to withdraw (after age 60 and retired for those born after 1964).

There are over 500 different super funds for employees to choose from, which each offer a variety of investment options, fee structures and insurance products.

elf employed individuals do not have to contribute to superannuation, but are eligible to.

Advantages of Super Australia

The undeniable benefit of contributing to superannuation is a reduction in the tax you pay. Tax benefits are available for anyone earning over $18,200 per year. Tax of 15% is charged on “Concessional” (pre-tax) contributions on entry to the fund.

If you earn more than $250,000 you do have to pay “Division 293” which increases total concession contributions tax to 30%.

Furthermore, investment earnings inside your super account are taxed at just 15%.

These are huge advantages to the high income earner, who will be paying a top rate of 37-45% tax. To limit the excessive advantage to higher income earners, the government caps the contributions you can make pre-tax (concessional) to $27,500 per year.

Disadvantages of Superannuation

Young people often ignore super because they are unable to access it until their preservation age. This lack of liquidity can be seen as an advantage or disadvantage. The reason compulsory superannuation was introduced because most would not start saving for retirement until much later (if at all). Super forces you to stick to investing. But it cannot be withdrawn (generally) in an emergency.

The other issue with super Australia is that the government change the rules. Almost. Every. Year. There is over $2 trillion in super accounts in Australia. The rules will continue to change, and I think probably become less beneficial to high income earners (who benefit the most from super).

There is no standardisation of investment products or fees, making options difficult to compare.

Super Australia – Contribution Confusion

Concessional just means pre-tax contributions. Your employer pays concession contributions to the super fund. Salary sacrificed contributions are also concessional. Eligible employees can save 4-30% on tax. This is an easy and profitable way to build wealth.

Salary sacrificing to superannuation is advantageous to anyone earning over $45,000. The largest barrier to getting started is the application form. It’s also easier to never see the money before it goes into your super than make a voluntary contributions. Salary sacrificing can increase student loan repayment requirements.

Voluntary after tax contributions are Non-concessional. There is a $110,000 annual limit but you are able to bring forward 3 years allowances to contribution $330,000 in one lump sum. It is advantageous to have most assets inside superannuation prior to retirement, so most people take advantage of non-concessional contributions in the years leading up to their preservation age.

It’s More Tax Efficient to Contribute Evenly Over Time

Maximising your non-concessional contributions throughout your career will make saving for retirement painless and relatively easy.

A saver contributing $27,500 per year for their entire career would pay far less tax than almost everyone, whose income starts low and increases over time. Many reading this blog are nurturing a career that later in life will produce a high income, resulting in concessional cap breaches and division 293 tax.

The concessional contribution carry forward rules were introduced in 2019-2020. This means you can make up your underutilised concessional cap within 5 years. This is very generous and can be used to boost super contributions, minimise tax and make up for years of lower income. This is particularly useful for those with a big increase in salary, and those taking extended time off work, or parental leave. This article explains the details.

Couples Strategies

If you are in a stable, long-term relationship, it is also more efficient to have your combined superannuation evenly share. It is generally not in your favour to look wealthy to the government.

A professional earning $300,000 with a stay at home spouse will pay $25,000 more in annual tax than a household with two working adults earning $150,000 each. It’s a similar situation with superannuation.

Having a super balance in an individual’s name over the “Super Cap” (currently $1.7 million) attracts penalties aimed at limiting the advantages of the wealthy:

  • Unable to make non-concessional contributions to boost super before retirement
  • Can not rollover more than the cap into an income stream, meaning you continue paying tax at 15% on investment income in an accumulation account. Super income stream under the cap is tax free once you are over age 60
  • No longer eligible for co-contribution or spouse contributions tax offset

I think the biggest risk of letting your super cap breach is the likelihood of future legislative changes. Those breaching the super cap will be a tiny minority of the population, meaning its an easy political cash grab.

Mind the Age Gap

An age gap between spouses should also be considered when working out your superannuation strategy.

You will read a lot about putting more super in the older spouse’s super account to allow the younger spouse to be eligible for the aged pension from aged 67.

An individual is not eligible for any aged pension if a spouse is still working and earning $3163.20 or more per fortnight. They also reduce pension eligibility based on assets you own, whether they are producing income or not. This currently excludes the principle place of residence, meaning you could own a 20 bed mansion and still get the aged pension as long as you don’t have much income or other assets. It is very likely this will change to have some limits on the PPOR value. High income earners should assume they will not be eligible for the aged pension.

There is also an argument for keeping super in a younger spouse’s superannuation to increase eligibility for financial assistance for aged care placement for the older spouse. Similar to the aged pension strategy, this will only make a difference in the years between the two spouse’s preservation ages. Any benefits will be wiped out if the younger spouse is still earning an above average income at the time.

For a high income household, there may actually be an advantage to having more in a significantly older spouse’s superannuation. Changes to superannuation generally come with a warning, and those soon to retire are often protected. If your spouse is a few years older than you, they may be less likely to be vulnerable to super Australia legislative changes.

Which Superannuation is Best for You?

On to choosing which of 500 super funds is best for you. Australians can now choose their super fund, or go with the employers recommended fund. As from this year, your initial super fund will stay with you despite job changes until you choose to change.

Super options are not easy to choose. There is little standardization among the options different funds offer. So comparing an “aggressive” option between two super funds is actually comparing two completely different portfolios, with different risk profiles.

It is very easy to become overwhelmed by the responsibility of choosing the right super fund. Just like most things in life, perfect is the enemy of done! Take some time to choose a reasonable fund and stick with it unless there is a very good reason to change.

Chasing super returns by changing your fund every few years to the fund with the best performance. Each super fund has a different investing philosophy. Perhaps the top performing fund last year had a heavy exposure to international equities. International equities did great last year! Hence that fund had above average performance.

But periods of overperformance tend to be followed by periods of underperformance. The time periods are variable, but the trend, known as mean reversion means joining last years winning fund is often a bad move.

So what factors should you consider when choosing a super fund?

1. Fees

It has been well advertised that fees make a huge impact on long term returns. Minimising super fees is critical. Fees are also guaranteed, unlike returns. Funds have variable fee structures. Make sure you compare total fees. There are often administrative and investment fees.

The Money Smarts website has a tool that you can list super funds according to the fees charged, based on a $50,000 balance. Canstar allows comparison based on your age and super balance, but has sponsored links to super funds (a conflict of interest). It’s a good idea to have a look at both and shortlist a selection of 3-5 funds to choose from.

Insurance

It’s worth trying to get insurance right straight away. If you need to change insurance to a better quality product or increase cover a few years down the track, health problems in the meantime can make you ineligible for insurance. Even seemingly minor health issues can result in insurance companies putting exclusions on your policy. They will minimize any risk they actually ever have to pay out a claim in any way they can.

You have to work out whether it’s worth paying for insurance you don’t need yet to eliminate the risk of becoming ineligible by the time you need more insurance (often when you have kids).

If your insurance is taken out with your super fund, you are tied to them if you don’t want (or can’t) to change insurance policies. This may mean having to keep the super fund open just to fund insurance premiums if you wish to change your super fund later on. This will mean paying two sets of super fees.

Insurance in super is cheap, but often not as inclusive as dedicated insurance policies.

Income Protection

Income protection is the most commonly claimed personal insurance policy. It is also tax deductible if brought outside superannuation. Super fund income protection commonly only pay income for 2 years. If you plan to have a family, particularly on 1 income, consider upgrading to a top quality income protection policy.

If you want to keep income protection inside super, the Canstar comparison website does allow you to filter funds to only those that allow income protection.

Life Insurance and TPD

Life insurance is pretty simple and difficult for insurances to avoid a claim if you die. Total permanent disability cover has a lot of shades of grey. Are you happy to have TPD for any occupation, so as long as you can work any minimum wage job you won’t get to claim on your insurance? The premiums will be far cheaper, and this is often available through your super. If you want a more general TPD policy cover that will pay out if you are no longer able to work in your chosen career, you need an “Own Occupation” policy. A plastic surgeon who amputates multiple fingers reaching under a lawn mower would want to have an own occupation TPD and income protection policy!

Investment choice

Next you can start comparing your shortlisted funds. This is easier if you have some idea of your risk tolerance and ideal asset allocations. Spend some time reading these articles to get a rough idea of what your ideal fund should look like.

Do you want to choose an ethical investment option? How these investments are screened for ethical behaviour vary widely. Reading all the small print associated with the ethical options for each fund. Do any of the options fit your values? Check what the fees are again for this particular option, as some of the ethical funds do come at a premium to reflect the extra work involved.

Investment Returns

When looking at investment returns, I think it is best to ignore 1, 3 and even 5 year returns. You do not definitely want the top performer, due to the trend of mean reversion. Make sure your super fund has had good returns over the long term, and the fees, insurance and investment options are appropriate. Chant West have released this graph showing the top super funds performing over 10 years.

Don’t ignore your super Australia! It is one of most Australian’s largest asset, along with the family home. Spend a little to make sure your in the right fund, investment option and salary sacrificing if you’re eligible. Check every year to check on progress, but otherwise let compounding growth do it’s thing.

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.

When Should You Upgrade an Old Car?

*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.  

“I’m not getting old, I’m becoming a classic”

Over the past couple of years, I keep get variations of the question,

“Why is your car so shit?”

Apart from the fact that my friends, family and colleagues have poor manners, I’m not really sure why anyone is that interested in my choice of vehicle. Should I follow their advice or hold on to my old car for a bit longer?

The car is 11 years old, brought as an ex-demo with cash.

It is rarely clean, full of all sorts of things I may need (spare shoes, clothes, kids activities). It has some minor scratches and dents.

In the 10 years I have owned it, I have changed the tyres twice and the battery once. I have serviced it more or less on schedule and never (touch wood) had a mechanical issue.

It’s actually just out of the generous 10 year warranty that encouraged me to buy it in the first place.

The level of interest in the car I drive by in-laws, friends, neighbours and colleagues surprises me.

My Car History

One valuable financial lesson my parents taught me was that cars are just a mode of transportation. They taught that treating a car as a status symbol was silly, and would “keep you poor”.

I was extremely fortunate to have my first vehicle loaned to me by parents for my first year of work, during which I saved up for my first bomb.

It was a 20 year old car, not very reliable and came with plenty of repair bills. I upgraded when it passed onto a better place, to a 15 year old beater. This lasted me a good few years, and when it died I caught the bus for 12 months and saved up cash for my first brand new car.

The personal finance community generally don’t recommend buying a new vehicle.

Vehicles depreciate most in the first few years, making it more efficient to buy a vehicle 3-5 years old.

At the time however, I was wary of buying a “lemon“, and the price difference between the ex-demo and a second hand didn’t seem worth taking a risk.

As a family growing up we always owned old cars. They broke down, and that’s never convenient. But dad had some mechanical knowledge and usually fixed them up himself.

I don’t know a thing about motors. I tolerated two unreliable old cars whilst less financially stable. Now in a strong financial position, I don’t want to deal with an unreliable vehicle.

I bartered hard and refused to add on extras they were trying to flog, despite significant pressure from the salesman. I purchased my new ex-demo car for $20,000 cash as a registrar earning ~$150,000 gross. Which is a touch over Captain FI’s suggestion for a car budget of 2 months net salary. So far so good.

The personal finance community also preaches holding on to vehicles as long as possible. Not every agrees though. Suncorp think exactly the opposite to the finance community, that you should buy a new car every 3-5 years and sell it before it gets “Old”.

Despite the fact my vehicle, according to the comments, looks a bit rough, I’m somewhere in the middle. Once the car becomes unreliable, it’s time to upgrade. I’m hoping to get another 5 years. It’s a Mitsubishi, if it were a Toyota or Honda I would hope for more.

When is a Car Old?

As soon as you drive the car off the dealer’s property, it is no longer new.

When it becomes “Old” is relative. Over $100,000 km is often quoted as a psychological point at which cars are considered old and lose more value. Many people sell their vehicles before this point. Only 31% of car purchasers have owned their previous vehicle for 10 years.

When a car becomes unreliable really depends on the make, regular servicing and vehicle use. A car starts to look old depending on how much you care for the car, wash it and protect it from damage.

Pros of Upgrading Your Old Car

Around a third of people admit to buying a new car because it makes them feel successful. There’s a lot of insecure people around.

People want to display wealth, to imply significance and influence. The wealth doesn’t actually need to be real. Many think they can afford a vehicle if they can afford the monthly payments!

Many of your colleagues, friends, neighbours and family will be impressed with your new purchase, and congratulate you the first time they see it.

Perhaps a better approach is to work on self esteem. Stealth wealth has many advantages.

There are more practical advantages of a new car though.

A brand new car should be reliable, and will be under warranty for a few years.

Even a newer second hand car may be more reliable than an old bomb. It’s easy to buy a lemon though, so get a pre-purchase inspection unless you have great mechanical know how.

A newer car should have better safety features, although the gains in vehicle safety made with new advancements are diminishing. The biggest impact on crash safety came with the introduction of seatbelts.

Some of the newer brands are pure electric, or have hybrid technology. These should lead to lower running costs over the long term, particularly if you drive a lot of kilometres.

Cons of Upgrading Your Old Car

A new car is only new for a day. Even if you love the attention and external validation it brings, these benefits are likely to dissolve in a week or two. As soon as someone you know buys a newer or cooler vehicle, yours won’t look so shiney anymore.

It’s hard to know whether you will enjoy your new vehicle as much as you think you will until you have been driving it for a while. It’s a good idea to rent your potential vehicle to try it out for a bit longer than a test drive. Buyers remorse would be pretty painful after forking out tens of thousands of dollars.

Opportunity cost. By spending $20,000 on a vehicle, you cannot spend it on other things. Invested, that $20,000 can multiply over decades wisely invested. It could slow you down in your acquisition of your first investment property, or in buying a new home. That money could be used to allow you to reduce work hours, and free up your time.

There are extra costs associated with upgrading your car. Insurance tends to be more expensive the newer your car is. There is an extra premium if it is a make commonly involved accidents. If you are looking to keep car insurance costs down, check out my Budget direct Car insurance review.

Your choice of car strategy can make a huge difference to your wealth accumulation over a life time

If you don’t have the money saved to purchase a new vehicle, a loan is necessary. Paying interest on a depreciating asset is making it far more expensive, and increasing the damage it does to your financial situation. Sometimes you are stuck having to take a loan to purchase a vehicle, if you need it to get to work, and there are honestly not viable public transport options available. In this case, a cheap car should be purchased with a minimal loan that is paid off asap. Start saving as soon as the loan is paid off so that you are better prepared when this car needs replacing.

When to Sell your Old Car

Of course this is very individual, based on your own priorities and values.

Someone obsessed with cars is likely to accept the financial sacrifice and trade up more often. Those of us who see a vehicle simply as a mode of transportation will hold on to them far longer.

Personally, I am definitely in the latter camp.

The thought of choosing a new vehicle does not fill me with excitement. In fact, the incredible number of options available is overwhelming. I have simple requirements (air con, reversing camera, wheels…). The choice of vehicle will probably come down to safety features, fuel efficiency and price. If choosing a new vehicle feels like a chore, you are likely to hold on to the old one for longer!

When to Upgrade

This depends on your stage of life and financial security.

If you are on target to hit your goals, and you can save the cash for a nice car that you will enjoy, go for it! But buying your dream car (or even a decent one!) before you have taken steps to secure your financial future will hold you back.

Borrowing to buy a car should be avoided if possible, and minimized if it can’t.

If you are at a stage where money is still really tight, or mechanically knowledgeable you may be willing to put up with a break down here and there. Once the money situation is on track, most won’t want to deal with an unreliable vehicle.

2021 does not seem a good time to upgrade you car. There is a shortage in microchips, and months long waiting lists for new car delivery. Second hand car prices have increased as a result. If you can, avoid purchasing any car within the next 6 months (or more).

Why Do People Care So Much About What I Drive?

Back to the question of why does everyone seem to care so much about my choice to hang on to an ageing vehicle? At work it’s parked in a large car park anonymously. I could probably get away with not owning a car at all, so upgrading seems a bit excessive.

Even Warren Buffett drives a modest car that he brought at a discount!

When people are trying to pressure you into a decision that is completely irrelevant to them, they subconsciously want you to validate their choices in life. I think many feel uncomfortable when others make different choices. It’s more comfortable when everyone follows the same path.

So don’t pester your boss about their ageing car. We all make decisions based on priorities and values, and some of us value almost anything over the car they drive.

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.