Why Is Money Conversation a Taboo?

*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.  

Why is money conversation taboo?

Money conversation is still considered taboo in Australia.

Money should be a pretty objective topic. It’s all maths! But money gets weighed down with a lot of psychological baggage. Money means different things to different people, including social status, self-worth and security.

– Social Status

Being wealthy has always improved a households social standing. Thorstein Veblen first coined the term “Conspicuous consumption.” The term describes the very visible display of non-essential, extravagant purchases to improve one’s social standing.

And there are social benefits associated with appearing rich. A series of fascinating social experiments, found people more compliant and generous to those wearing luxury brand clothing. Researchers even calculated that the Dutch Heart foundation could fund an extra 133 heart transplants per year by getting charitable donation collectors to wear a designer label shirt!  

Conspicuous consumption has become commonplace, with the wide availability of credit. And it seems to be most popular amongst those with lower incomes. Conspicuous consumption drops 13% drop when household income increases by $10,000. Disadvantaged households sacrifice spending on health, education and savings to prioritise visible purchases when compared with higher-income households.

The relationship between actual wealth and portrayed wealth is skewed in order to avoid the stigma of poverty.

With so much effort put into maintaining illusionary appearances, honest money conversation that might expose a vulnerable financial position is unwelcome.

– Self Worth

Closely linked to the above is the link between money and self-worth. People are insecure and tend to compare themselves with others. Society has taught us to think of money as a scoreboard in life. Those that have it are winners, those that don’t are lower in the pecking order.


This is likely why conspicuous consumption occurs to raise our perceived rank in society amongst peers.

But many people also internalise the relationship between money and self-worth. No matter how much they try and compensate for a poor financial situation by social signalling with consumer goods, they know the truth. And if you judge yourself to be worse off than your peers (whether that’s true or not) your self-esteem can suffer.

A study of consumption and mindset found women with a fixed mindset felt more beautiful after using a Victoria’s Secret brand name shopping bag. Fixed mindset students considered themselves more intelligent and better leaders after using a pen branded the “Massachusetts Institute of Technology”.

Of course,everybody has their own set of strengths, skills and virtues that should be the basis of self-esteem, far more than money. Particularly as we all get a different financial headstart (or not).

But this link between finances and self-esteem makes money conversation a touchy, sensitive subject. People can be defensive, angry, resentful, ashamed or boastful about their financial situation. Not an ideal mix of emotions for a calm and helpful conversation.

-Security

Money represents security to a lot of people. Having a paid-off home has huge emotional benefits for many, who feel no matter what happens, they will keep a roof over their heads.

If you’re struggling to scrape enough to pay bills each month, money becomes a major source of insecurity and stress. Broaching a financial conversation whilst this kind of stress is in the background can lead to heated arguments fast.

Inconspicuous Consumption & Discreet Wealth

Some people who value money as a major source of self-esteem and appreciate the social benefits of appearing wealthy will brag about financial success. Very few people want to listen to this bragging!

But most in a good financial situation will avoid talking about money, to avoid the appearance of bragging or being insensitive. Showing off wealth, through conversation or conspicuous consumption can be seen as crass and classless.

A study into inconspicuous consumption found 94% of Tokyo women in their twenties owned at least one Louis Vuitton item. When these luxury consumer items are so commonplace, they are no longer a signal of superior wealth. Experiences, services and other inconspicuous spending in line with values and beliefs are becoming more desirable ways to consume for the financially elite.

The Problem with the Money Taboo

The financially successful often have the knowledge and experience to give those wanting to improve their finances a hand. But because of the money taboo, those with money keep it discreet and those wanting to learn feel uncomfortable asking a would be role model finance questions.

Cue the spruikers. Thousands of youtube videos exist, usually by young men claiming they made their wealth quickly and effortlessly. They may be sat in a sports car to signal their extreme wealth. It may well be rented for the purpose of creating perceived authority.

If these guys are truly wealthy, is it through their “secret method”? Or from the courses and products they are spruiking? I suspect they are growing wealth by fooling those they claim to be helping.

Why are Money Conversations Helpful?

We stand a lot to gain by sharing money conversations more often. Almost everyone has limited resources, so should be using them efficiently and getting as much bang for their buck as possible. From a good deal on mobile phones to remuneration at work, particularly in areas where there is potential for discrimination in pay leading to pay gaps for women and minority groups.

Our other precious, limited resource is time. No one has the time to research every single decision they make in detail. Pooling research efforts on sites such as this one means the effort put into researching a decision, like whether solar panels are financially worthwhile, is shared with many.

The other advantage with sites like this is that it seems to overcome the social taboo around talking about money. I speak to you as if you are the best mate, someone I have known for years and trust with all my secrets. Many finance blogs are anonymous to allow this kind of sharing without fear of judgement or negative consequences in offline lives.

Important Money Conversation Milestones

Marriage or Cohabiting Relationship

Your biggest financial risk in life is your chosen partner. For better or worse, you’re both stuck with the consequences of each others financial behaviour through the marriage. Divorce leaves no-one better off financially.

Marriage can destroy you financially if your partner is a gambler or compulsive conspicuous consumer. But if you are both on the same page, you can achieve incredible things as a team.

Most relationships are somewhere in between the two extremes, including my own. There is a relative “spender” and a “saver”. By focusing on shared goals and dreams, we have compromised a solution. We save a fair bit, but still splash out on good food, kids activities and holidays.

Get on the Same Page on Goals, and Work Out How to Use Money to Get you There

Discussions and plans about goals and dreams is important before taking the big decision to cohabit. This reasonably painlessly leads onto how the couple will achieve their goals, creating a helpful money conversation. Discussion around how the household will manage money, and if either partner plans to stay home with children can follow.

I am a big fan of the “fun money” accounts. This strategy limits spending but also allows both partners to spend guilt (and criticism) free.

I have assumed you will combine finances, but am aware that some keep separate finances and pay a share of joint expenses. If that suits you both that is fine, but you should be combining efforts saving and investing towards joint goals. Without joint goals, and a combined effort to get there, where is this relationship going?

In the event of a breakup, and financial separation, all couple resources generally go into the pot to be divided. So if you have diligently saved and invested during the relationship whilst your partner has blown their cash every month, you are at risk of losing a significant portion of savings in the separation. And if they have racked up thousands of dollars in credit card debt, there is a risk you could end up liable for that too.

Kids

A child’s financial habits are supposed to be mostly formed by the age of 7! This means they are absorbing information from a young age by observing your behaviour around money. Do you demonstrate a healthy, balanced attitude towards money?

The good news is, your kids don’t know money conversation is taboo. Financial literacy is one of the many skills children should learn as much as possible before leaving home.

Many of us will be in a similar situation, attempting to walk the fine line between making kids lives that bit easier financially, and avoiding spoilt, entitled kids who are relying on handouts from mum and dad well into adulthood.

Financial Education is a Better Gift than Cash Handouts

I am pretty shocked by how many adults receive regular handouts from their ageing parents. The fascinating Millionaire Next Door series makes it quite clear that this “economic outpatient care” actually hinders, rather than helps, the recipients financial success.

Of course, preparing your kids for managing their money as young adults doesn’t come as one big “Money conversation” before they leave home. It’s learned through thousands of micro-discussions, games and role modelling over the years.

  • Explaining the ATM machine or credit card payment at the checkout involves taking money you have earned from your bank account. It’s not unlimited!
  • Verbalising your money decisions. Weighing up pros and cons, delaying gratification, getting good value.
  • Providing children with some money so they can learn by doing
  • Role modelling intentional spending
  • Conversations when school friends display consumerist behaviour
  • Linking real world examples – explaining you are doing some extra shifts to pay for an exciting holiday
  • Learning delayed gratification -Encouraging them to save for something they really want
  • Giving to a charity that they can understand (we like Childfund for the personal connection with our sponsored child)
  • Playing games – plenty of games that teach skills eg monopoly, game of life, cash flow for kids
  • Explaining the difference between an asset and liability and the benefit of buying the assets first
  • Helping them set up a good superannuation account with their first job, and helping them understand super

Parents

If your parents are good with money, they may have been a source of education and discussion over the years around saving, investments and getting a good deal. If your parents are pretty open with money, they are likely happy to discuss things like what they want as they get older.

How do they want their healthcare provided once they need more help? Have they organised a will and the right time to allocate an Enduring Power of Attorney for if they can no longer make their own decisions?

Many of our parents will find discussion about money unacceptable. They may even be concerned you don’t have the right motivations. Which makes the above conversations difficult to impossible to have.

Peers

Your peers are most likely to be in a similar money position to yourselves and so are most likely to be able to share information relevant to your needs, and vice versa.

But again, self-esteem, social status and security issues pop up so it’s best not to barge into conversations asking about your friends’ salary or savings rate.

The best way to approach money conversations with a peer is to offer information you have found. Perhaps you found a great deal on a mobile phone. Share this with your friend to open the door to them sharing similar information with you.

How to Have a Conversation about Money

Money conversation is still taboo. Yet we could all benefit from a little more sharing of financial information to get a good deal and avoid paying too much. Sharing our saving and investing habits can encourage those around to up their savings game.

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

How much House Can I Afford?

*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 considering purchasing a home and wondering how much house you can afford?

For many of us, homeownership is a lifestyle aspiration as well as a huge financial decision.

It feels great to be free of the landlord. To know your home is your own, and you can stay put as long as your like. The larger payments that normally come with a mortgage and inflexibility are the downsides.

I’ve written before about reasons not to buy a home, and how to save your deposit if and when you buy. I think it’s becoming more common knowledge that buying a home is not always the best financial move.

So How Much House?

One of the first questions first home buyers tend to ask when they have decided they want to buy a home is how much house to buy.

The easy temptation is to start by working out how much you could qualify to borrow. But this is not the best way to go about this life-changing decision.

Your overarching financial strategy should be front of mind when deciding how much house to buy. Instead of buying a house consistent with the amount lenders will lend you at the time, there are two valuable strategies in approaching home purchasing:

  • Buy less than you can afford to keep cashflow free for investing, travel, freedom
  • Buy as much as you can possibly stretch to maximise capital tax free growth

Of course, there is plenty of room in between for intermediate strategies, but I think deciding which extreme your own property strategy falls closest to is a good start.

Strategy 1. Buy as Much home as You Can Possibly Stretch to.

This is the traditional strategy. The idea is to max out your borrowing capacity to buy the best house (or the worst house on the best street). The strategy often involves upgrading your property every few years, to take advantage of your growing salary and to leverage any equity you have gained in market movements. Over the years, you able to purchase houses in better and better streets.

Many of our parents followed this strategy, and it worked out well for many. The idea goes that property is a great investment, and will grow in value over the years. At the end of your career, you can sell your (hopefully) massively appreciated house without any taxes and downsize to free up cash for retirement.

Any gains are currently tax-free as long as you live in the home as soon as practicable after your purchase. There is even a 6-year rule. This means you can leave the property and live elsewhere and continue to treat it as your principal place of residence. Despite being absent from the home for up to 6 years, you can protect your capital gains tax exemption on sale. As long as you check with your accountant and make sure everything is done and documented properly.

-Strategy 1: If you Pick a Property Poorly, the Strategy Fails

This strategy works incredibly well if you purchase a property(s) that ends up delivering fantastic capital growth. The dangerous “rule of thumb” that property doubles every 7-10 years imply this growth occurs to all properties. Some properties grow in excess of this, some don’t grow at all.


Sydney and Melbourne property prices have historically performed far stronger than the rest of Australia, which is why these cities are so unaffordable. The rest of Australia has not done so well. Up until this latest property boom, our property value in a regional town has just about matched inflation since we purchased.

If you pick the right property, in the right suburb and in the right city. But if this home is your single retirement plan (as it was for my parents), there is a whole lot riding on your choice! This is an example of concentration risk – all your eggs in 1 expensive basket.

Even if you choose a location that has historically provided great capital growth, there is no guarantee this will continue. If you maximise your leverage into a home in Sydney, what if Sydney lies dormant for the next 20 years whilst Melbourne booms?

– Strategy 1: You Get to Live in that Dream House

If you aspire to live in a prestigious area, and you get the investment part right, you are fulfilling an investment and lifestyle goal in one. You get to live (eventually) in your ideal home, and then it pays for your retirement. Sounds like a dream!


Inevitably though, few people can afford their actual ideal and still have to make some compromises. But you should definitely get an absolutely lovely home with this strategy

Strategy 1: Tax

The fact that this strategy means all your gains remain capital gains tax-free is attractive. You need to move into the property as soon as that is possible or you lose your capital gains tax exemption altogether. So no renting it out for the first few months, or delaying moving in after settlement.

Unfortunately, interest paid on own home is non-deductible. This means you are footing the entire interest bill for the duration you own your home. We currently have record low-interest rates, which makes this considerably less painful. But assuming interests rates eventually rise, your capital growth needs to increase faster than your annual interest rate.

Strategy 1: Reducing Options & Financial Stress

Having a mortgage repayment eating up half of your take-home salary drastically reduces your options in life. You cannot take a pay cut by changing jobs or reducing hours. You will probably not be able to invest money elsewhere for several years.

The reason I personally don’t like the idea of this strategy is from watching my own parents struggle for years. My father worked 7 days a week for decades! I wanted a different sort of lifestyle for our growing family.

If buyers can get through the first few years (the first 2 are the highest risk), financial stress tends to reduce. Those expecting a large pay rise in the near future may be tempted to push the borrowing in the short-term reassured that income will soon increase.

Those that don’t have 100% secure income or plan a reduction in income in the next few years (parental leave) need to take this into account when working out how much house they can afford.

Strategy 1: How Much House – Remember Interest Rates Do Go Up!

Mortgage repayments don’t look so bad with today’s low-interest rates. But they won’t stay low forever. Borrowers have the option of fixing rates, which can reduce risk significantly for tight budgets over the first 2-3 years. But once your fixed rate expires, you are at a mercy of interest rates at the time.

Our household purchased our family home in 2008, paying an interest rate of around 8%. Since then, interest rates have gradually dropped making our (less than we could afford anyway) mortgage less expensive over time. I buying a home and then experiencing interest rates inch all the way back to 8% over the next 10 years would be stressful.

-Strategy 1: The Downsizing Plan

Many who have followed this strategy have then struggled to downsize when the time came.

After many years living on the best street, it can be hard to downsize or move to a less prestigious suburb.

My parents brought the biggest and best house they could possibly afford. They were under financial stress for many years trying to pay the debt down. By the time they were ready for retirement, they were used to (and very proud of) owning a big, lovely home on a good street. The thought of downsizing to anything less prestigious was unappealing!

Strategy 2. Buying Far Less Home than You can Afford

This strategy works far better for those buying in a town not likely to see above-average returns. It also works well for those that want to have money left over for holidays, time off for kids and retirement. In lower house values areas, you also get a lot more house for your money so it doesn’t necessarily mean living in a suboptimal home.

There has been recent news about tightening lending conditions again. A borrowing maximum of six-time gross income has been suggested.

On a $150,000 gross salary, 6 x borrowing would be $900,000.

Repayments on $900,000 over 30 years at 2.99% would be $3790, or ~40% of net income assuming the income was earned by a single worker. That seems like enough of a mortgage to me!

Yet according to this financial review article, recent average loans in Sydney are written based on 8x salary! Even a tiny movement in interest rates makes these loans impossible to pay (hopefully they’ve fixed rates).

With Sydney and Melbourne prices, borrowers have been pushing these limits just to get into the market. If they have selected a great property, fingers crossed it will pay off.

In a regional city you may be able to get away with only borrowing half your potential borrowings.

– Strategy 2: Missing out on Capital Gains

The big opportunity cost here is if you plan to live and work in an area that will benefit from a significant capital gain over the next few years. It is important that if you choose the smaller mortgage, you use the extra cash flow consciously on something that will give you long-term value.

– Strategy 2: Missing out on Living in the Dream Suburb

If the prestige of living in THE suburb to be in is something that appeals to you, this is something to weigh up. Perhaps you won’t live as close to cafes and restaurants, or have your colleagues on your street. The benefit of living in a more average suburb includes less pressure to “keep up with the Joneses”. If you purchase on the street of your dreams, you may find you NEED to upgrade your car, and dress in more upmarket identifiable labels.

– Strategy 2: Spare Cash Flow Potential

Your extra cashflow freed up by buying less house than you can afford can be put towards investing or lifestyle goals (or both). Options include:

– Paying the mortgage down

A worthy and low-risk goal. Increasing your equity will allow you to borrow off this if you want to invest in property in a few years time (which feels like hitting two birds, one stone).

If you invested this money in the stock market, you would need to pay tax at your marginal rate on any dividends or withdrawals. So your returns need to be good enough to beat your mortgage interest saved after tax. That shouldn’t be too hard over the long-term at current rates, but as interest rates increase, paying down your mortgage becomes even more attractive.

When “paying off” your mortgage you may like to fill an offset account rather than actually pay down the loan. It has the same effect on the interest paid (less and less as you fill your offset) but the money still legally belongs to you, not the bank. This means you can withdraw it if in financial distress when the bank could prevent you from redrawing. It also provides flexibility if circumstances change (a new job offer in a new city?) and you decide to convert your home into a rental property. The offset cash can be withdrawn and used as a deposit on a new PPOR (or for whatever reason) and interest on the remaining loan balance remains tax-deductible.

– Purchasing an Investment Property

You are probably not going to be able to immediately purchase an investment property after buying a home, but with an aggressive pay down strategy and a booming market like currently, you could be ready to go pretty soon.

Interest on investment properties, as opposed to your principal place of residence, is tax-deductible.

Between renters and tax incentives, this makes owning a 500K home and 500K investment property potentially more profitable than owning a 1M home. The renters are helping significantly (particularly at current interest rates) and any shortfall is further softened with a tax deduction.

Owners of a 1M home pay every bit of the mortgage themselves, with no help from the Australian Tax office.

Interest rates are often slightly higher on investment properties (mine are 0.6% higher) than homes. And you lose out on the capital gains tax exemption you would get on the 1M home (although you would still receive it on your more humble 500K home). You would receive a capital gains tax discount of 50% on your investment property if you kept it for a year or more. And you pay no capital gains tax on an asset you never sell.

Automated investing into your superannuation or index fund ETFs outside super

This is easy and ideal for busy professionals who don’t have the time or interest to do significant research. Your super will allow you to direct debit extra payments directly into the fund, brokerage fee. Keep in mind that you will not be able to withdraw until your preservation age, so don’t invest so aggressively in super you are left short.

Those wanting to retire earlier than their preservation age (keeping in mind that may change) or those with a long term non-working (on the 0% tax bracket) adult at home may want to invest outside super. This will take a little research but is pretty easy to organise and automate through Pearler*.

– Holidays and travel

You may be purposely avoiding over-commitment to a huge mortgage to include more fun in your life. This may be more eating out, buying nice things or going on awesome holidays. Spend on what you value and brings you joy. Just put a little aside to do the grown-up thing and save a bit too.

How Much House Can I Afford?

How much house you can afford depends on your:

Current gap between income and spending plus rent paid –

Find out your net income, and work out what you actually spend, not a budget based on a hypothetical idea. Use expense tracking to work out what your actual expenses are. Your bank is going to examine (with a fine-tooth comb) your real-life spending using bank statements so you might as well get to grips with reality.

How Much House: Income security and anticipated income changes

Do you have a permanent contract? Doctors are often on temporary contracts for many years, but banks do seem to accept this as a norm. You could negotiate a longer contract with your employer to provide yourself and the bank extra reassurance.

If you are hoping to start a family or reduce income in some other way in the next few years, make sure you take this into account. Make sure you aren’t committing yourself to financial stress during anticipated times of reduced income.

Do you have income protection insurance, or will you qualify for a policy large enough to cover your intended mortgage? Unfortunately those with significant “pre-existing conditions” will often struggle to get cover. If you or your partner suffer an illness or injury that prevents them from earning an income for a significant period of time, there needs to be a backup plan.

It is a good idea to have some cash sitting in the bank in case of emergencies on settlement day. The last thing you need after spending every dollar on that dream house is for the car to need a major repair, or the hot water system to blow up and need replacement.

Priorities for the future

This involves a bit of daydreaming. Set audacious goals and design your ideal life. What is most important to you? Incredible house or incredible holidays? Intended retirement age (do you need to invest extra)? Is getting mortgage-free important to you?

Almost no one can have everything. You have to prioritise what you really want to make sure you get it!

Area you want to live in

How confident are you of its capital growth potential? Are you happy to bet the (literal) house on it? Is it in a major capital city within the commuter belt? Is it an established house (new homes and high rise units seem to perform poorly)?

How Much House Can I Qualify For?

Only after answering the above questions should you work out whether the bank will lend this money to you. Your ability to borrow depends on;

– Income

What is your gross income, easy to find on the ATO website. Banks will want at least 6 months of payslips or two years if self-employed.

– Security of income

Permanent employee > temporary employee > self-employed.

I was questioned about my income protection, total permanent disability and life insurance by the bank during the latest property purchase. If anything terrible happens to you, the bank wants to know you will still be able to repay your loan.

-Gap between Income and Spending

If my recent experiences applying for a mortgage are anything to go by, they are not going to take your word for it. They will ask for every bank statement you have ever received. One at a time. A couple of times each.

OK, maybe I’m exaggerating a bit. But your pie in the sky budget (that never foresees the emergency car repair, dental treatment…) is not going to cut it.

If there is a reason to keep your banking simple, this is it. Being asked for statements on 9 accounts repeatedly is really annoying. Sorry Barefooters!

– Other borrowings

These make a big impact on your borrowing capacity. Credit card limits are treated as if you have maxed out your card and need to make minimum repayments. Even if you pay them off every month religiously. If you’re anywhere near your borrowing capacity reducing card limits or closing unused cards and accounts may be worthwhile. Check with a mortgage broker.

– Credit score

You can apply for your credit report from Experian and monitor it monthly on Creditsavvy. I did have one random application appear on my file, which was erroneous. I managed to get it removed but had to be pretty persistent with the company involved.

– Profession

Certain professions are considered ultra low-risk borrowers because as a group they rarely default on loans. These include doctors, accountants, lawyers, dentists. Many banks will allow high borrowing (up to 90%LVR) without charging lenders mortgage insurance which is a big bonus.

– Deposit

How much deposit have you saved? You will generally need at least 5-10% of the purchase price plus ~6% buying costs.

– Age

Banks have become much less keen to lend to those they don’t see having enough working life to pay off the mortgage. A colleague was questioned (and offended!) by the bank about her plans to pay off the debt despite her advanced age (45!).

How Much House to Buy?

This is a very personal question, which depends on your capability of paying back over the next 30 years as well as your priorities. Do yourself a favour and spend some time reflecting on these questions (with your partner if you’re buying as a couple). Make the right decision for yourselves.

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.

The Secret to Finding your money luck

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

The infamous Money Tree your parents claimed not to have

Do you have friends or family who just seem blessed with “Money luck”?

They earn an awesome income, or have a great house and go on incredible holidays. In a few years time, they may retire at an age you couldn’t even consider giving up paid work.

It’s as if these people have a money tree in their backyard. Do you want to know their money luck secret?

Meanwhile, are you struggling to catch a break? Want to get ahead but unexpected expenses keep coming up and destroying your best intentions. Perhaps instead of money luck, you feel you have a money curse that destines you to perpetual financial stress.

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.

Winston Churchill

Money Luck: The World is Not Fair.

A discussion about money luck would be inadequate without an acknowledgement that money is distributed unevenly. Some get handed more than others, and there’s not much you can do about it.

But those born, or who have managed to come to Australia are amongst the luckiest in the world. There is still much inequity within this country, but having access to safe water, access to the internet and electricity is a good start.

Those of us reading this blog each have their own dose of privilege, some larger than others. But I reckon we’re all starting at a reasonable place.

When considering how we are doing financially, it is human nature to only compare with those in a similar situation to us. We all need a reminder sometimes that we are amongst the wealthiest individuals in the world.

Your mindset is incredibly important. Appreciating the headstart you’ve been given in life will help you make the best of it.

The Green-Eyed Monster

Envying those with more than you are a complete waste of energy. There are extremely wealthy individuals that made their way despite starting out with less than you.

There will always be someone wealthier than you. I hear even Warren Buffet’s incredible wealth has recently been surpassed by Elon Musk’s net worth. Mr Buffet isn’t losing any sleep, in fact, he is giving the majority of his wealth to charity.

Unless you are actually comparing bank and investment accounts, it’s impossible to tell how someone is doing financially anyway. Those parking sports cars in their waterfront home driveways may be leveraged to the eyeballs, stressed out each month about how to cover all those bills after an unexpected dental emergency.
The millionaires may be driving shit cars, to average neighbourhoods, dressed a la Targét.

We should all spend in line with our values, and some are far more visible than others.

So avoid wasting your mental energy envying those with more resources, and start working out how to find your own money luck.

How to Find Your Money Luck

It’s easy to assume that you have no opportunities to build wealth. But the ability to see opportunities may be the major limiting factor in taking advantage of them.

A Great Idea

J.K. Rowling has described her poor financial situation as an unemployed single mother when she started writing the Harry Potter series. The plot idea was formed in 1990 (during a long train delay), 1st manuscript was completed in 1995 and published in 1996.

How many people have had incredible ideas but never followed through to make them a reality?

J.K Rowling somehow identified this idea as an opportunity and with a lot of hard work (and a little luck) became one of the highest-earning authors in the world.

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

 Warren Buffett 

Many opportunities won’t be as romantic as a fantastic novel idea, catapulting the author to unimaginable wealth. It is a technique with a low success rate. Less than 2% of books published sell 5000 copies.

It is easy to miss an opportunity and let it goes to waste.

Notice Small Opportunities

Perhaps it wouldn’t have been a “Harry Potter” kind of opportunity. But small realised opportunities can lead to bigger and better opportunities arising as a result. These opportunities don’t come up and slap you in the face. You need to be on the lookout to see the potential and then assess the risk, time, effort and likelihood of success.

Take an opportunity you get to take on some extra work. You could see this and just weigh it up based on whether you need any more cash for your next holiday.

But if you reframe the opportunity to earn that extra money to build a deposit for a home a few years earlier than expected, its potential becomes far greater. Your home purchase could result in leveraged capital growth which could provide larger opportunities in purchasing another home or investments that would otherwise have been out of your reach. Short-term hustling early on in your career can accelerate financial progress.

Business

Many millionaires are made by starting a business solving everyday problems. Are there problems that annoy you daily that you could find a solution for? Spending some time working out a solution for an annoying problem could pay off. The inventor of the WIFI Ring doorbell kept missing package deliveries and worked out this product as a solution, before launching it as a commercial product.

Get your Deposit or Starter Fund Before You Know What it’s for

Even seizing the opportunity to save, then invest 20% of your net income is making your own money luck. Similarly to purchasing your home, having some savings and investments behind you provides wealth building opportunities that would otherwise not exist.

Be a Good Steward of Money Gifts & Windfalls

If you were lucky enough to have a surprise windfall come along, would you know what to do with it? Unfortunately, many windfalls come from an inheritance when you lose a loved one. The average Australian beneficiary receives $79,000, a little more than the median annual salary in Australia. This is a significant amount of money, with emotional obligations to be a good Stewart. With careful investing, this inheritance could grow to provide not only, but also your kids, more financial security.

But the months after a death of a loved one are not a good time to be making huge financial decisions. It is very possible to spend through this amount unintentionally, with nothing to show for it after a year or two. Beneficiaries are also easy targets for scammers looking to make their own money luck through unscrupulous methods.

If the worst happens, and a loved one dies, you will want to be a good steward of their hard-earned money. Having invested a little in financial education and making a financial plan will mean if an unexpected windfall arrives you won’t need to worry about what to do with it. You don’t want to be the sucker advertising on some Facebook group that you have come into money and don’t know what to do with it. Poor advice to throw your money into the latest fad is the best outcome, clever scammers stealing your inheritance is the worst.

Prepare Yourself to Receive Money Luck

“I believe luck is preparation meeting opportunity. If you hadn’t been prepared when the opportunity came along, you wouldn’t have been lucky.”

Oprah Winfrey

Have a Positive Mental Attitude.

If you think your financial situation is hopeless, it will be. Get your mind working for you. Build your confidence that you can follow your financial plan and get to a great outcome. Watch out for https://aussiedocfreedom.com/money-self-sabotage-how-to-get-out-of-your-own-way/self sabotage.

Build financial literacy

You need to recognise a financial opportunity and know-how to take advantage of good money luck when it comes. Build financial literacy through books, blog, magazine or podcast subscription

Make a Financial Plan

Set goals and make a financial plan. If no money luck surprises come along, you are moving towards your goals anyway. Any bonus money luck means you can just accelerate your plan. Small, repeated positive money habits are powerful over the long-term. Treat your personal finances as a form of self care.

Pay Attention

Pay attention to life. Try and spot those opportunities coming along. Instead of filling all your free time with filler activities such as tv, actively preserve “thinking time”. For me, this is hiking. Despite working on a financial plan, new perspectives or ideas will come to me out of the blue when I’m hiking. Carry a notebook or note application on your phone for great ideas that appear, and can disappear from memory just as fast.

Make your own luck by planning ahead, being observant and assessing opportunities carefully. When you find a great one, grab it by both hands!

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.

Too Busy to Research an Investment? A Quick Start Guide

*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.  

Basic Step by Step of Getting Your Investments Started

  • Work out some goals or choose to invest 20% of your net income
  • Save an emergency fund whilst researching options
  • Consider opening a microinvestment account if you have less than $200 to invest at a time, perform risk tolerance assessment and set up a direct debit into the investment account. Lookinto Commsec pocket instead if you already bank with CBA
  • Do your research on a Vanguard Personal investor account if you are keen to invest in (particularly diversified) managed funds. Pretty much like a micro-investment account on a bigger scale. Now offering auto-invest, brokerage and account fee free! From $200 investments
  • Look into a Pearler account if you have more than $2000 to invest at a time. Vanguard diversified funds offer an easy option to get started and can be brought with any broker. Set up a direct debit to invest your chosen sum regularly.
  • Stay invested. Keep direct debiting. Review in 2 years and consider optimizing further. Avoid frequent fiddling! It does take time, and a watched investment account doesn’t grow very fast (yes I’m still working on this!)

The Detail of Building your Investment

You’re a busy professional. There is so much to do, and so little time. You think you’re “bad with money”. You may have had one or two hurried attempts to invest that didn’t go well. It’s easier to stick with your area of expertise. There you know exactly what’s going on. And you earn plenty of money, surely everything will work out, right?

Maybe. Maybe not. One thing I do know is that you deserve better.

Looking after your personal finances is a form of self-care.

How many thousands of hours have you put into becoming the best you can be at work? How many unpaid work hours do you put in? You take on a lot of risks and stress. You probably made significant sacrifices in your 20s and 30s to get where you are today, perhaps these are ongoing.

Why shouldn’t reward yourself with the peace of financial security?

We may even be fooled into thinking we have it by a big paycheque each month. It’s nice to be paid well, but unless you are building income-producing assets of your own, you remain vulnerable to external events (COVID-19) and with limited choices should circumstances change.

Your Why of Investment

Hopefully, you love your job, but what happens if you get sick or injured? Do you have the insurance you need set up? Will the insurance company even pay up when you make a claim?

Do you want the option of more “Income flexibility” in a few years? The ability to cut work hours or take a break to meet family obligations or want to take on a new adventure?

Would you feel upset if when you are finally ready to retire, your financial situation means you need to keep working for a few more years?

These are the strong reasons for not ignoring your finances. But I know, it’s hard. You’re busy, and even knowing where to start investing can be overwhelming.

The good news is, you’re smart.

Investing can be as simple or as complex as you like it. Some (like me) enjoy learning about finance as a side hobby, greedily consuming every investing book I can get my hands on. Many others think the topic is brain numbingly boring and would rather do anything else than sort out their finances.

Both types can do well investing.

In fact, those not that interested may be less tempted to fiddle with investments. Leaving them alone is usually for the best anyway.

Do you Need a Financial Advisor?

You may benefit from a financial advisor if your situation is complex. But I see many of my colleagues trying to outsource their financial life completely to an advisor. The complexity of the fee structures involved has meant that many people don’t realise how much they were paying for often lacklustre advice or financial management.

If you want to use a financial advisor, you still need to educate and protect yourself.

Ideally, a financial advisor is used when you have a specific strategic question you need help with- eg Should I invest in property vs shares? Paying for a financial advisor before working out goals you want to work towards is an inefficient use of time and money.

If you do choose to employ a financial advisor, make sure they are qualified (do I need to mention Melissa Caddick?), and are paid by you, not by commission. Most “financial advisors” are really just salespeople trained to sell insurance and investment products.

Find an independent, fee-only advisor and use this checklist to screen them.

Investments: Where Do I Start?

Ideally, you want some goals. Set some time aside, with your partner if you have one to dream about your ideal life. From there, narrow them down to specific goals with time frames. Common goals include:

Next, you need to find out where you are financially already. Make a record of your current salary, house debt and equity, savings, superannuation and any investments you have. You can use a super calculator to work out if you are heading in the right direction for your desired retirement age. You can use a savings calculator to work out whether you are on track for other goals.

Then you can play with the calculators to work out how much you need to save and what you need to earn on your savings to meet your goals.

That Sounds too Hard, I just want to Start my Investment

Setting a retirement age and life goals seems pretty overwhelming in your 20s and early 30s. There are so many variables, it is impossible to project long term results with any accuracy anyway.

An alternative method is to save and invest 20% of your income. This method is suggested by Dev Raga our own medical finance podcaster, as well as the Whitecoat investor.

Taking 20% of your take-home pay (excluding super) and investing this sensibly for the long-term will get you closer to any goals that form over the years, and provide you with lots of options in life.

Save that Emergency Fund before Investing

Any consumer debt needs to go. This means anything apart from your mortgage, student loans and investment debt should be paid off. Particularly if the interest rate is over 4%. There is no point in paying guaranteed interest with no guarantee that investment returns will match them.

Traditionally a 3-6 month emergency fund is recommended. This is very individual. If you own your own home, your mortgage offset is the sensible place to leave this unless you will be tempted to dip into it for “fake emergencies”.

As your responsibilities increase, your emergency fund probably needs to. Unfortunately, those still on lower incomes have a greater need for the emergency fund.

It really doesn’t make sense to start an investment until you have funds to cover at least basic, common emergencies such as a car repair. You do not want to be withdrawing from your investments for a long time.

Check out your Current Investments

You should have a list of any investments you have collected from the earlier steps. It’s time to look at your current asset allocation.

For many of you, your only investment will be super. The good news is your superannuation is an excellent investment.

I wouldn’t start fiddling with your super asset allocation at this early stage. Most people overestimate their risk tolerance (particularly during good times). Being invested more aggressively than you can tolerate during the bad times risks you selling out and changing your investments during a market crash, locking in losses.

But you do need to make sure you are being ripped off with fees. These make a massive difference to long term performance, and are the only factor guaranteed to affect your returns.

Choose a fund with a low expense ratio (<0.6%) that suits your risk tolerance.

There is no ideal fund. Opening an account with one that’s just won an award for best performance is a bad idea. Many supers get their turn in the limelight of being the best performing super for a year. You don’t want to to pick a fund that has just had it’s best year. Another fund will win next year.

No-one can tell you which fund will outperform the others over the next decade. But you can control the fees. Minimise them.


Choose an Investment – Property or Shares.

Yes, there are other options, gold, collectibles, bonds. You will have exposure to some of these in your super. But the bulk of your investments will likely be in the stock market and/or shares for long-term growth.

I wrote an article on my approach to the property vs shares debate. Hang out in any investing forum online for a short period and you will notice a fight breaking out over which is superior. Whenever something is so hotly contested as this, there are certainly merits to both sides.

I am a big property fan for the use of leverage and diversification of income away from the volatility of the stock market. But the property market’s complexity is frequently underestimated by investors.

I have known so many people that regretted investing in dud (often off the plan) properties and swear of property investing for life. The issue with property is massive concentration risk and the risk (as well as the potential reward) of leverage.

If you are putting hundreds of thousands of dollars into one asset, you had better be sure it’s a good’un. And many aren’t. If you don’t have significant time to invest in education and research and don’t want to pay for professional advice, I wouldn’t invest in property.

But Sharemarket Investments are Volatile

The share market is often portrayed as some sort of risky casino. Yet we are all invested in the share market already, through our superannuation accounts. Everyone needs a basic understanding so they can ensure their super is invested appropriately.

Making an investment in the share market can also be surprisingly easy. It can be as simple or as complex as you like. Conveniently, research suggests simple “boring” investing* outperforms the sexier, time consuming and complicated version the vast majority of the time.

Risk is Not the Same as Volatility

The terms risk and volatility are often used interchangeably in personal finance books. I see them very differently. The stock market is extremely volatile. If you make your first investment in a broad-based index fund ETF, your money will grow exponentially over time but could also halve in value overnight.

This sounds terrifying! But over a long enough time period, the value of the stock market as a whole always goes up.

An investment in a single stock could take off like a rocket, or collapse to zero, taking your savings with it. But an investment in the entire stock market is not going to zero.

Your success in the stock market depends on your ability to withstand volatility.

It’s tougher than you expect to see your investments plummet, as they did last year by 30%. The protracted GFC in 2008 was even more challenging. But in all cases, those that held were rewarded with a mighty rebound and record-breaking growth eventually. The same cannot be said for individual stock pickers, who depending on their skill and luck may have lost everything or made a tidy profit.

For these reasons, it’s probably best to dip your toe into the stock market before diving right in. Starting investing before you can afford to is ideal.

You Can Get Started Very Quickly

It has never been easier to start investing in the stock market. Investments can start from just $5! It is also cheaper than it has ever been, which is great. The minimising of fees is a major factor in maximising returns.

For those wanting to dip their toes in the market, a micro-investment app is an ideal way to start. Start a regular investment of $50 per pay. The fees will be relatively expensive, but it’s a pretty cheap education in investing. I used one starting out and remain a fan. RAIZ even offer a rewards website, through which you can shop to offset your fee (and more).

Open a Micro-Investment Account if You Don’t have Much Money to Invest

There are several other options including Stockspot, Sharesies or Commsec pocket (ideal for those already banking with CBA) and spaceship.

RAIZ (and several of the others) offer Robo-advice. This is not individualized, and cannot take into account complex situations or questions. It assumes you want to invest in the stock market, and suggests a portfolio based on your risk tolerance (which it will help you assess). Most people overestimate their risk tolerance. You then set up a direct debit, and the money is transferred into your investments. Most of these platforms charge a fee per month but no brokerage, but Commsec pocket charges brokerage and no monthly fee (if you have a CBA account).

I am always raving about micro-investing accounts. I found it a great way to get started, as a cautious first-time investor. It allowed me to risk very little, but to start to experience volatility, get nervous and think about withdrawing my cash to then see it rebound.

Over time, confidence grows. Upgrade to a Brokerage Account

Most of the platforms offer some financial literacy education, which is variably useful. Once you have outgrown your micro-investment account (the fees get too expensive eventually), you could replicate the same portfolio or choose your own with your choice of broker, or choose a similarly diversified portfolio with Vanguard personal investor.

Unfortunately, Vanguard personal investors don’t yet offer the ability to automatically direct debit your investment from your bank regularly. You have to organise the transfer manually each time. Although this doesn’t sound like a big deal, it dramatically reduces the likelihood you actually follow through with your plan to make the investment each time.

Vanguard has just announced its new auto-invest feature. It is available with managed funds only but is brokerage and account keeping fee-free. If you are happy to invest in Vanguard managed funds, Vanguard personal investor is designed for you. With their range of diversified managed funds, it comes down to a choice of 4.

I have written an article about asset allocation if you wish to know more. I feel you could learn everything you need to start your own portfolio from scratch in a weekend from reading through each article at Passive investing Australia. But it is probably far easier to start with an easy diversified option such as a micro-investment account or a diversified Vanguard product. You have the choice of buying the latter brokerage free through Vanguard personal investor, or with brokerage charges but the ability to automate with Pearler. This article explains limit orders vs market orders vs auto -investing.

How to Get Started Investing Summary

  • Work out some goals or choose to invest 20% of your net income
  • Save an emergency fund whilst researching options
  • Open a microinvestment account if you have less than $1000 to invest at a time, perform risk tolerance assessment and set up a direct debit into the investment account. Consider Commsec pocket instead if you already bank with CBA<
  • Open a brokerage account if you have more than $2000 to invest at a time. Choose a vanguard diversified fund that matches your risk tolerance. Set up a direct debit to invest your chosen sum regularly.
  • Stay invested. Keep direct debiting. Review in 2 years and consider optimizing further. Avoid frequent fiddling! It does take time, and a watched investment account doesn’t grow very fast (yes I’m still working on this!)

Time is of the essence with investing, so you really need to make a decision and get started. Depending on your interest levels, you can dive into investing books, or spend a weekend reading the fabulous site Passive investing Australia to learn more. If you want to grow knowledge gradually over time, subscrib to this blog, money magazine or a podcast that you will listen to or read once a week to grow your financial literacy over time.

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

How To Choose Your Investment: Opportunity Cost

*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 is Opportunity cost?

Opportunity cost is the analysis of the trade-off between one choice and another. Every choice you make in life involves an opportunity cost.

Opportunity cost usually refers to economic consequences, but there are also non-financial factors to consider when making investment decisions.

If you choose to invest in Apple shares, rather than CSL, the opportunity cost is the CSL returns you miss out on.

What Opportunity Cost is Not: Sunk Cost

A common error in assessing options is falling for the Sunk Cost fallacy. This is the tendency for people to irrationally consider the non-refundable time, money or resources already sunk into one choice when deciding whether to continue with that choice or change to another option.

Going forward, if being logical, time, money or effort already spent on one choice is irrelevant to which choice will provide a better financial outcome.

Cost Changes Over Time

Opportunity costs change over time as different options arise, and the cost of each option changes. For example, a change in interest rates would alter your opportunity cost of investing in property vs shares.

What’s more, costs and returns are, by necessity, based on assumptions. These may turn out to be inaccurate. If you assume that every property in Australia doubles every 10 years, and your investment property actually goes down in value, your opportunity cost calculation will be wrong.

Can Opportunity Cost be Avoided?

There are always alternative uses for your money. Some may be extremely high risk but provide well above average returns, or not, depending on what happens.

Sometimes you will choose to sacrifice the opportunity cost of more aggressive investing (eg highly leveraged shares) for a lower risk situation. You may prefer a very likely chance of a good return over a more uncertain chance of a high return (and some risk of capital loss).

How Opportunity Cost is Calculated

The expected returns from the two investments are compared. The opportunity cost is the difference between the higher and lower return.

My very first post in 2019 outlined my attempts to work out the opportunity cost of invest in property vs shares. Dare I look back and see how I did in retrospect?

My opportunity cost calculation at the time lifted from the original article.

I had $2,200 per month spare to invest.

ReturnsINVEST IN PROPERTY
Long term returns ~7% but are extremely variable
Buy and sell costs
5-6% purchase cost & 2% selling cost
INVEST IN THE STOCK MARKET
Long term returns ~9% but extremely variable
Can be $10 / $10,000 (0.1%)
Power of leverageCan leverage up to 90% turning 7% returns to potentially 90% (minus interest)Can leverage up to ~70% turning 9% returns to potentially 63% (minus interest)
The full table including other costs is the original article.

So I assumed a 7% return for a $600k property leveraged at 100%. My $2200 monthly surplus cover costs exceeding rental income.

I didn’t take into account rental income increasing over the years and the property becoming less negatively geared. I also considered the tax benefits of negative gearing separately. The maths gets a bit complex, and it’s probably best to be conservative with all assumptions.

I assumed 9% total returns for shares, a bit less than the S&P 500 accumulation index historic return of 10%.

Leveraged Property vs Leveraged Shares Opportunity Cost

Of course, the property won hands down. It’s not really a fair comparison.

The shares in this example are completely unleveraged because the thought of leveraging into the share market was too risky for me.

If we compare the effect of property leveraged at 100% (with equity from own home) and typical maximum share market leverage of 70%.

Here we can see the aggressively leveraged shares overtake the property after around 8 years. Because of the volatility of shares, leveraging is far more aggressive. A drop in values can lead to a margin call, where the bank is not happy with the level of risk when an investor drops below their acceptable loan to value ratio.

The bank can demand with a margin call that you invest the extra cash within days.

Leverage into property is not without risk, but the bank doesn’t demand you pay up immediately. Investors of dud properties can choose to bite the bullet and sell in order or hold until (hopefully) the value improves.

If you want to know how the property did in reality check out my 2-year update.

How Opportunity Cost Affects Decision Making

The above calculations are made on many assumptions. Opportunity cost can only be accurately calculated after the investment period has proven the actual returns offered.

As we need to choose investments before we invest, it’s important to attempt to make an opportunity cost calculation as accurate as possible. Try and avoid introducing too much bias into the equation.

At some point, you have to accept that you’ve made the best decision based on the information available at the time and take the leap.

Look back in a few years to assess the accuracy of your opportunity cost calculation if you dare!

Rent or Buy Example

Should you purchase a home in your current city or just rent?

There are many variables to consider, check out my article on rentvesting and my my opportunity cost from purchasing a home in a regional area.

To assess the opportunity cost of choosing to purchase your home, you need to know

  • Rent you will be paying
  • Anticipated returns from investments you could make if you continue renting
  • Mortgage repayments
  • Anticipated returns from investments you could make if you buy (if any)
  • Anticipated capital growth returns from your purchased home
  • Time frame

If you are staying put for 10 years, rents will increase. Interest rates are currently extremely low, but will eventually increase. The expected capital growth of your intended purchase and the number of years living in the property make or break the deal for renting or buying.

Dud Investment Example

Let’s catch up with Bob, our rural specialist doctor who purchased a house and land package in a regional town on 2014 for $240,000.

We first met Bob (who really lives in my head) in 2019. After 5 years of paying the mortgage, he was in the disappointing position to be $45,00 in negative equity. The property valuation came in at only $195,000 after a bad economic turn for the town. The rent was covering the mortgage repayments so there was no emergent need to sell. He certainly wasn’t going to sell at a loss!

But Bob is making a common error in his thinking. This is the sunk cost fallacy. The fact that he has lost money on this investment does not affect the opportunity cost of the decision to stay with this property, or cut his losses and invest elsewhere.

If we were logical investors, the decision of whether to sell and reinvest or hold and hope would be based on:

Anticipated property returns for the original property going forward

VS

Anticipated returns if Bob sold up and invested elsewhere (another property of shares)

Transaction costs involved in selling the property and reinvesting

Property is particularly expensive to get in and out of, with purchasing costs of around 6% of the property value and selling fees around 2%. Over the long term, or if there is a large difference in potential returns between the investment choices, it becomes more logical to sell.

Dud Investment in Shares.

Earlier, you chose to buy Apple shares and accept the opportunity cost of the potential profits from buying CSL instead.

Now imagine the general public get fed up with Apple and it’s annoying charging port that has to be different. No-one is buying apple anymore, and it doesn’t seem likely the company is going to make a come back.

You decide to sell and buy CSL shares.

The sunk cost is the transaction fees (brokerage) you spend buying Apple shares, plus any losses. It is common for investors to hang on to shares in the hope they recover to the buy price. This makes no sense. Even if Apple manage to stage a comeback over the next 3 years, if CSL are expected to significantly outperform, it may be the more sensible investment going forwards.

When assessing the opportunity cost you would assess

Anticipated return of Apple shares going forward

VS

Anticipated return of CSL shares going forward

PLUS transaction fees to sell apple, buy CSL and capital gains tax to be paid.

It’s tempting for investors who have purchased a “dud” to stick their heads in the sand. Or illogically wait for the price to return to their purchase price.

It’s hard to face up to the loss, but there is an opportunity cost to doing this.

A capital loss is when you sell an asset for less than what you brought for it plus costs of ownership. The silver lining is that if you make a capital loss, this can be used to offset capital gains.

So if you lost $10,000 on Apple shares, but made a $10,000 gain on another investment, you could offset the gain and pay no tax.

Why Opportunity Cost is Important

Investors are prone to all sorts of biases in investing. Trying to make decisions logically based on the best available information at the time is a good start. Spend the time to calculate as best you can the opportunity cost of your next significant financial decision. Don’t be fooled into the Sunk cost fallacy.

I use limit orders to invest in my chosen ETFs when the market drop instead of paying extra into the mortgage offset, because as the market drops, the opportunity cost of paying off the mortgage grows large enough to overcome my desire to get rid of the debt.

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.

Saving Money: Avoiding All or Nothing Approach

*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

If wanting to improve your balance, start a little closer to the ground

Have you noticed many of us tend to behave in extremes?

With finances, there is the YOLO crowd that won’t put any money aside and go into debt for expensive and often showy consumer purchasers. They are living life for today, but often don’t think about what they actually value. They risk trapping themselves working lots of hours, with little flexibility for choice when they really want to make a different choice.

On discovering FIRE (Financial independence retire early), many go to extreme lengths saving 70% of their income. These super savers are often highly motivated by an unhappy work environment. In attempting to escape the situation, they take on lots of overtime, as well as a side hustle whilst practicing extreme frugality. The risk is compounding misery and missing out on all the good stuff in between.

Grant Sabatier is probably the most famous of extreme savers who later regretted going to such extremes. His health suffered and his relationships were neglected.

When we finally reach a huge goal we’ve been working towards for a while there is a risk of “Arrival fallacy”. Our brains tend to fantasise that all of life’s problems will melt away just soon as we…. Lose 10 pounds, Get a promotion, reach financial independence….

Only after reaching these goals do we tend to stop, reflect and realise that life is the journey experienced between goals. It’s good to be striving for something, just don’t sacrifice everything else to get there.

I decided at 16 years of age to try to become a doctor (and a good one too). From that moment I worked towards each goal in my way. At 24 I graduated medical school, but that was just the beginning. After nine years of postgraduate training, I passed the final exams to my specialist qualification. I had reached the end of my plan.

I had fantasised about how good this would feel for months, even years. But especially during the hard grind of study over the prior year. It took just 20 minutes waiting alone post exam for a friend for it to hit me. That pesky feeling of anti-climax.

Now what?

Luckily there was plenty of fun to be had in the days post-exam, and then my first “boss job” to settle into. But I admit I missed having an incredible goal to work towards. Once in my comfort zone at work, I wasn’t striving for anything, and without that, I felt a little lost.

I have found more, smaller goals since then. Parenting, sports, investing, taking up a musical instrument and starting this blog have kept my mind busy. I’m far more aware now that I need to be working towards something to feel happy, appropriately challenged and happy.

Is Saving Money Worth It?

Does anyone really want to be financially forced to work unless they love it until 67 years?

Does anyone think a health forced retirement before you have enough wealth accumulated to enjoy an acceptable lifestyle sound appealing?

What about not being able to take time off because you can’t afford it if someone you love really needs you?

Of course not! These situations all sound like they suck!
The reasons people don’t sort out their finances (and save) include:

  • They don’t think about the what if’s, and would rather bury their head in the sand and deny the possibility of the above happening
  • We have all been brainwashed by consumerist marketing. The worst affected think life isnt worth living if you cant buy every latest consumer product
  • They feel despondent, it feels impossible to save money for retirement or other goals. 🙁

Saving money offers increasing degrees of freedom of choice in our lives. The impact is significant as soon as we move beyond spending every bit of our pay each month. Small incremental improvements make a massive difference to your choices and sense of freedom over time.

  • The ability to pay for a small unexpected expense without stress (car break down)
  • No longer needing to waste money on high interest rates credit cards (designed to drown you in debt)
  • The ability to save more money by buying in bulk, paying in advance for discounts etc
  • Can buy better quality gear that ends up less expensive over the long run
  • Can take extra (unpaid or half pay) time off work in an employee
  • Have some flexibility with requirement for income for self-employed (so can reward themselves with a real break!)
  • Can choose to cut hours at work if it suits
  • Changing jobs to a more enjoyable post can occur without financial stress over small changes in pay
  • Can consider a mid-life career change
  • Can retire early if work becomes a drag

What are Money Saving Tips?

If you are new to the site, and the financial independence movement, it’s easy to wonder where to start. If you work through this list and take action where you can, you’ll likely be amazed at how much financial progress you make over the next 5 years. .

  1. Buying less house and car than you can afford are probably the most impactful financial decisions you can make. Avoiding brand new houses, units or cars seems to generally a great financial move.
  2. Focusing on becoming excellent in your career can pay far more than any of these other items. Save 50% of the pay increases.
  3. Minimise “structural expenses”. These are commitments to regular expenses, such as a cleaner or car payment. They are a far bigger deal than the one-off purchases you make. You can absolutely take these on if they truly add a lot of value to your life. Just think very carefully before you add more structural expenses to your budget.
  4. Start automating saving money into an emergency fund before doing the same with investments. Commit to a small amount each pay and increase it with each pay rise. This is the most painless way to save and does add up quickly, even with small pay rises. I just increased my Pearler* automated investment by $30 a fortnight after reducing an expense. It may seem so tiny, but if you do it every time it soon becomes significant.
  5. If you need to grow an emergency fund quickly (or want to start investing faster), consider selling some of your unused stuff. You will get a lot less than you paid for it but most of us probably have a few hundred dollars worth of “stuff” lying around.
  6. Allocate time to go through your spending at least twice per year. Analyse each line item. Is there anything you are not getting value? An accidental amazon prime subscription? A magazine subscription you don’t read often?
  7. Review your mortgage interest rates or rent every 2-3 years. Make sure you’re getting a decent deal.

Can Saving Money be Addictive?

It’s easy to get into a habit of checking your bank or investment account multiple times a day. Money can start to take over. People can be seduced by the “All or nothing” mentality.

The worst are probably converted consumers, rather like ex-smokers! Saving money can become like a religion.

Dangers in going overboard with saving money is:

  • Missing out on highly valuable experiences in your quest for a high savings rate
  • Sacrificing important relationships as you have no other interests, and refuse to socialise (and spend money)
  • The arrival fallacy. It would be so sad to arrive at financial independence and realise it’s not all that you thought it would be. Without hobbies or relationships you have a lot of time to fill!
  • There is always the risk of illness or death far younger than expected. Unfortunately I see it all the time at work. It is a painful reminder that nothing is guaranteed and your time should never be taken for granted
  • Huge “Fuck it” moments. After a months, or years of delayed gratification it’s easy to start feeling disgruntled if you don’t see a lot of progress. When everyone around you seems to be living a higher quality of life, and your sensible investing is moving too slow, it’s more likely you will blow your investments on a purchase you will regret.

How to Stop Obsessing Over Saving Money

You don’t want to be thinking about money all the time. There is a lot more to life you don’t want to be missing out on. If it’s started to become a habit:

  1. Automate your savings and investments. You have heard of paying yourself first. Take the amount you are putting towards savings and investments out of your account as soon as you’re paid. Automating this will help you gradually stop paying so much attention to it. As your investments grow, the increase each time will seem less significant, it gets a little boring. Over time you should gradually stop checking your account so often.
  2. Practice Mindfulness. We are always trying to multi-task everything. Try and be completely present during non-money activities that you value. If you are watching a movie cuddled on the couch with your partner, remove phones and enjoy the time fully.
  3. Get a hobby! You do need to spend a bit of time learning the basics of how to invest, but index fund ETF investing is really simple and evidence based to outperform far more complex methods. Unless this really interests you, it’s then time to find a new hobby. Get obsessed about becoming mastering a new skill or fitness activity.
  4. Have a fun money account. This is money you get to spend on anything you like. It will help you spend a little regularly on things that you value without guilt. If you find yourself hoarding this money, actively seek a way to put it to use in a way that will provide maximum joy.
  5. It is actually quite useful to cut expenses until it hurts. Most people assume they can’t cut expenses (eg gym membership). It’s worth cutting ruthlessly to work out what you really miss. When you notice you have gone a little too far, restart the spending that provides good value.
  6. If trying to increase income, ensure it never causes you harm. Moonlighting may be frowned upon by your employer, and may damage future career prospects. Taking on overtime when you need to be studying is obviously not wise, and working overtime in a job you don’t enjoy isn’t worth it unless very short-term, saving for a specific goal. Consider very carefully the consequences of side hustles and extra work, make sure you confirm with your employer taking on extra work is ok. Ideally extra work should provide more benefits than just money. You should enjoy the extra work, and perhaps learn skills that you are keen to pick up.

Spend Smarter

Try and find new ways to inject extra value into life whilst minimizing costs. Use frequent flyer points to fund budget friendly holidays. Shop around. Use Cash back.

Saving Money & Maintaining Balance

Many of us spend some years with our heads in the sand about our finances. Working out financial and life goals, and developing a financial plan are challenging. We need to simultaneously invest as if we will live to 90+ whilst also living every year to the full to avoid regrets. It’s easy to become a little obsessed with saving money. This can provide motivation to get over inertia and start making progress. But the road to financial independence is long and windy. Automate everything you can and make sure you focus on the ups, downs, twists and turns along the way. The journey is the best bit.

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

How to Use a Super Calculator properly

*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.  

Everyone needs a financial (including retirement) plan.

It’s very easy to put retirement planning into the too-hard basket, particularly if you are under 40. But these years are when you can make the maximum benefit to your outcome with minimal effort. Due to the amount of time available for compounding of returns, total returns are higher the longer you invest.

It means investing a small amount regularly from a young age can make a surprising difference to the outcome over the long term.

The compounding really starts to take off after around 30 years, but most people don’t even think about retirement planning at that stage.

Most of us, however, don’t want to defer gratification forever.

There needs to be a balance between saving and investing and enjoying the experiences your cash can pay for now. A danger in becoming too extreme in frugality is missing out on the important stuff, and delaying life! It is a fine balance, and very individual.

Would you like to know exactly how much you need to invest to meet your financial goals? If you know how much you need to invest, you know how much you can really afford to spend. This allows savers to enjoy more experiences along the way.

20’s

In your twenties, there are a million fun things to spend cash on. Hundreds of dollars can disappear on a great night out. The physical and financial hangover is never as much fun! These are also great years to explore the world with lots of travel.

I implore you not to miss out on these experiences. But right now, we’re pretty limited in our ability to explore. Make sure you are saving or investing the extra cash. Perhaps you could save some for the ultimate trip once travel is a realistic option again, and invest some? You don’t need to have a lot of cash, you can start micro-investing with $5!

Priorities tend to change for many when they start a family. There are only a finite number of years when the kids are little for you to enjoy.

It’s important to fit in all your “bucket list with kids” items in that period before the opportunity is gone.

Those that have the forethought to get their finances into good shape as much as possible before having kids will be glad of a little less pressure. Sleepless nights, tantrums and balancing home and work life are plenty to keep your mind busy without the very common issue of financial pressure.

30’s

Your 30s also tend to be the most financially stretched years. Most will have to practice patience and self-forgiveness as their financial picture can get very tight. Saving for retirement can seem an unrealistic thought! Particularly for big-city folk, large mortgages can keep them very cash strapped for many years. Think very carefully before you commit yourself to becoming house poor for the next decade! Over committing to a huge mortgage limits your ability to save for other financial goals, take overseas trips and take time off work when it is needed.

Again, even saving and investing a token amount regularly provides lots of value. Prioritise an emergency fund, then work out your financial plan. Don’t be discouraged if getting on track for your goals is not yet possible, just do what you can to move in the right direction. Things get easier and opportunities will arise to increase your investments.

Salary sacrificing and optimising concessional super contributions offers you, if not a free lunch, a heavily discounted one. Your investments via these vehicles are boosted by tax savings, making out of pocket costs far less onerous.

40’s

Hopefully, your 40s will start to get a bit easier. Having recently crossed this dubious achievement, I feel I feel “over the hill” financially speaking.

Money seemed an uphill struggle for many years. The first few years of a mortgage are the toughest, parental leave meant a massive drop in income and childcare and kindergarten was expensive. During these years, our household focussed on maximising any superannuation tax benefits and paying down the mortgage as fast as we could. The principle owed inched down painfully for the first 10 years.

Things got a lot easier after that. Part of that was a step up in income. The kids starting school and reducing mortgage interest have helped to accelerate progress.

The past 4 years since returning to work have involved paying down the mortgage aggressively, purchasing two investment properties and starting regular investing into index fund ETFs. Our super balances are also starting to compound, growing more in a year than we contribute.

When the financial stresses start to ease make sure you notice and use the opportunity to increase your investments to get on track with your goals.

How Much Super is Enough?

AFSA’s Definition of a Comfortable Retirement

AFSA assure us a “comfortable retirement” will cost around $44,818 for a single person, or $63,352 for a couple as long as they own their own home. There is some description of the lifestyle these retirees could afford, including a visit to the local RSL, a domestic flight per year and flying internationally every 7 years.

Many high-income professionals would have become accustomed to a far higher cost of living, with upgraded spending in all categories.

The issue with this is that we tend to lose the skills of managing on a low budget. Once luxury purchases ($20 bottle of wine) are now considered essential. The thought of swapping back to the cask wine of your 20’s is usually incomprehensible. The wine alone may not be a big deal, but upgrading every area of a spending really makes a big difference to cost of living.

If you are in your 20s, so far from retirement it’s impossible to anticipate your required spending, I think AFSA’s “Comfortable retirement” figures are a reasonable starting point. Just remember to reassess every 5 -10 years.

For those in their 30s, 40s and beyond I think starting with your current spending is the best. Then you can make an educated guess, based on expenses that will no longer apply after retirement (mortgage repayments, kids school fees, professional expenses). Remember to add back in additional expenses in retirement (more travel, health care).

Again, don’t worry about it being accurate. More exact numbers will only be realistic in the last few years before retirement. A rough number will get you most of the way there.

Comparing Your Super Balance with Others your Age

Unless you are on an average income, I think comparing your super balance with the average balance at your age is nothing more than a feel-good exercise. The average balance is $417,900 for the top age bracket, male 65-74 years.

If you have earned an above-average income, you should be well above average by your 40s. If you are in your 20s with a delayed start to the workforce, the average may be useful in motivating you to get caught up asap.

Most people currently rely at least partially on the aged pension. High-income earners should consider the aged pension only as insurance if all else goes wrong.

Aiming for the Super Balance Transfer Cap

Another strategy is aiming for the “super balance transfer cap”. This is somewhat arbitrary and unrealistic for those without a high income. But removes a lot of complications and is also a good starting point.

The super cap is the maximum you are allowed in superannuation that can be transferred to a pension account and received as a tax-free income. This year’s cap is $1.7 million per person. If you have over $1.7 million in your super account, this means you will continue to pay 15% tax on the excess that has to be kept in accumulation phase.

We are all different, but for us $1.7M for one or $3.4M would be excessive for our spending. It is worth being aware that if you might hit the super cap, you should consider sharing your super with your partner (assuming they have a lower balance). Individuals with large amounts of super will be an easy target for future governments looking for new sources of tax revenue. I think it makes a lot of sense to have your super balance (and assets in general) as evenly spread between spouses as possible.

The super cap changes with indexation and is not immune to being fiddled with by future governments.

What is a Super Calculator

If you have ever opened the correspondence from your superannuation fund you will have come across a super calculator. Most of the super funds have calculators on their sites and will often send an individualised projection according to your super balance.

I entered a theoretical situation into several super calculators online to find out how similar they were in their projections. The situation is a 30-year-old male, earning $150,000 receiving 10% employer super contributions only with a balance of $50,000.

There is a $227, 000 difference between the highest and lowest projection. Retirement income projections varied from $29,176 to $52,119. There is so much variation it makes the projections almost meaningless.

Issues with Super Calculators

The issue with super calculators, and investment projections, is there are multiple variables you need to make assumptions on. The super calculators generally make these assumptions, although the better ones allow you to change these. Variables include:

Rate of Return

This is probably the biggest factor of all. Whether the stock market will return 5% or 10% over the next 10 years makes a huge difference to your retirement balance. No one can predict what future returns will be. There were widespread expert predictions that returns would be lower than previously when I started investing in 2017. I’m glad I ignored them.

There is also a huge variation in the asset allocation of super products. Whether you are 25% stocks or 25% cash is going to make a big difference to your long term returns.

Most super calculators assume a generic rate of return. Each one I looked at made different assumptions.

Long-term historic returns are the best we have to go on. Have a look at your super product. Make sure it is appropriate for your situation. Use the targeted return for your fund in super calculators.

Super Fees

Super fees will also make a difference over the long term. Fees are sometimes ignored by calculators, at other times a generic fee estimate is made.

Fees are the only guarantee with investing. Minimising them makes a guaranteed improvement in returns. Check your super website and see what fees you are paying. Check they are within the lower half of super products available, and certainly under 1%.

Insurance Premiums

Perhaps you are maxing out your concessional contributions. Kudos! But if you have your life, TPD and income protection insurance premiums coming out of your superannuation, not all your contributions are staying invested. Watch out for overestimating your super by ignoring insurance premiums.

Again you can easily find out the total premiums paid from your super from the website.

Tax

Super withdrawals are generally tax-free if you are retired and over your preservation (mostly 60 now). But if you are over the super cap, or younger than 60, you may have to pay some tax.

Unless you have a particularly unusual situation, I think it is reasonable to assume income will be tax free.

Retirement Age

Some super calculators assume a retirement age of 65 or 67. Most will allow you to change your retirement age to 60, but no younger. This makes super calculators of limited utility for early retirees.

Time is the other huge factor in investment returns. If you assume you will work to 67 but actually end up wanting (or needing) to retire at 60 your projections will be meaningless. Best to assume you will be a younger retiree and ensure you are prepared in case of unexpected health or life changes.

Inflation

Again, assumptions need to be made about inflation. The long term target of ~2.5% is often used. I don’t think this can be predicted with accuracy, but as long as you review your expected retirement spending every few years, along with assets accumulated, you can adjust for unexpectedly high or low inflation over time.

Change in Salary over Time

Super calculators assume you will earn your current income for the rest of your career. This is wildly inaccurate for young professionals just starting out, who may be expecting large jumps in income.

Use this to comfort yourself if (when?) you find it is impossible to currently get on track to your goals. Unless you’re close to your expected top salary, there is no need to panic. Just keep swimming in the right direction.

None of the super calculators I have tried out allow for multiple changes in salary over the years. Professional projection software I suspect could do this. But there are so many assumptions, I’m not sure its worth the expense. If your assumptions are out, the detailed and “accurate” projections will be wrong anyway. And it seems unlikely you will make all the assumptions needed accurately.

If you’re anything like me, you will find this annoying! Uncertainty is unfortunately unavoidable.

Career breaks

Some of the super calculators allow you to include career breaks for parental leave or extended travel, fellowships etc.

Withdrawal Rate

Super calculators will make an assumption about how much of your balance you will withdraw each year, and give you an estimate of when you will run out of superannuation.

There is huge controversy around the acceptable withdrawal rate, and this will likely change closer to the time depending on your health, balance and risk tolerances.

A rough rule of thumb is that a 4% withdrawal rate is very likely to last 30 years in retirement.

Information Required to Use a Super Calculator

Ideally you want to use as much information as you can to get your super projection as close as possible. This free calculator has a lot of detail, and lets you play around with the variables without starting the entire process from the start.

Super calculators can give you an idea of how much extra you should invest to reach your retirement goals. They are limited by the huge number of assumptions that need to be made. The projections get more accurate the closer you are to retirement age. I still think they have a benefit in the younger years, to get you moving roughly in the right direction. It’s important not to panic when you realise you cannot currently get on track, just keep swimming in the right direction.

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.

Landlord Insurance

*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.  

As a landlord, your rental property is one of the most valuable assets you own. It’s important to protect it adequately.

Landlord insurance can help protect this asset and provides personal injury and property liability protection. Many firms have, however, reduced coverage for rental default as a result of COVID-19.

Read more about landlord insurance in this guide for new landlords!

What is Landlord Insurance?

Landlord insurance consists of two components. The first protects your rental property just as your own home buildings insurance does. This policy compensates for theft, fire or flooding and landlord liability coverage if someone is injured at the rental unit.

The other component of landlord insurance is in relation to tenants. This covers, depending on the policy, malicious damage caused by the tenant or their pet. Certain policies will also cover loss of income in case the tenant defaults on the rent, absconds or needs to be evicted. Landlord insurance policies may cover legal fees, costs of changing the locks and even tax audit fees.

Like all other insurance policies, there is a huge variation in the cover. It is wise to decide on what cover you require before comparing and read the PDS carefully.

Why Is Landlord Insurance Important?

All insurance companies aim to make a profit by paying out less in claims than it collects in premiums. This makes insurance policies a losing bet for consumers. And (hopefully) a boring waste of money!

But consumers who cannot yet afford to self insure need to protect themselves from financial catastrophes.

If your investment property burned to the ground, or a visitor suffered a serious injury on your property, the event may cause financial ruin. Changing the locks after a tenant was evicted? Annoying but hopefully not financially catastrophic if you are a property investor.

You should have financial buffers and an emergency fund.

The only reason you should take on the losing bet of an insurance policy is to insure against disaster. So when looking at policy inclusions, focus on ensuring you have disaster covered. It’s easy to get distracted by bonus inclusions that you are unlikely to recieve. Don’t pay extra for insurance you don’t really need.

How Does Landlord Insurance Work?

Landlord insurance works by providing coverage for the non-owner occupied residential rental property (i.e., landlord). It also provides liability coverage for bodily injury or property damage to others that arise out of your rental activities.

The landlord pays an annual or monthly premium. Most of the time, they won’t need to claim. If a claim is required, it’s time to call the insurance company. Only then do you find out how much of a battle it’s going to be to actually get the cash!

What Is An Excess (deductible)?

An excess is a dollar amount you pay on an insurance claim before the insurer pays anything toward the loss. For example: If you have a $500 excess, you would pay the first $500 for repairs yourself.

Increasing the excess will often reduce the cost of a policy. Again, the majority of the time you (hopefully) won’t need to claim, whereas you will always need to pay the insurance premium. It is generally more cost-effective to accept a higher excess for a lower premium

How Much Coverage Is Enough?

In general, landlord insurance covers replacement cost value or actual cash value (depreciated) for your building plus any additional living expenses due to damage from an insured event such as fire or storm.

It is important to consider all risks involved with owning rental property when purchasing landlord insurance because each landlord may have different coverage needs based on their situation and the type of property they own.

Terry Scheer was recommended to me. I have never had to claim (touch wood!) They cover $2 million in liability.

Underinsurance of homes is a massive issue, revealed every time Australia has a natural disaster.

The most accurate way to estimate the rebuild cost of a home is to order a quantity surveyor’s report. If you are planning to order a depreciation report for your investment property, enquire about a replacement property valuation for insurance purposes.

Alternately, insurance companies have calculators to help you work out the insurable value of a home on their websites. Use multiple sources and take care to get the estimate as accurate as possible.

Landlord Insurance Policy Features To Consider:

  • Excess options
  • Does the insurance company cover replacement Cost or Actual Cash Value of Building and Contents?
  • What Is Covered? (i.e., what is NOT covered?)  
  • Limits Of Liability Coverage For Bodily Injury Or Damage Claims/Lawsuits
  • Malicious damage by tenant
  • Damage caused by pets (do the insurance need to know about pets prior?)
  • How Long Does Landlord Insurance Last Before It Expires / Becomes Invalid
  • Are There Any Exclusions (“acts of God exclusion” is pretty subjective!)
  • Online reviews on claim process
  • Rental cover in case of tenant default, absconsion or (hate to imagine) death*
  • Eviction costs

*Following COVID-19, many firms have cut loss of income cover. Landlord insurers stopped offering new policies for a while as their costs blew out with unexpected claims. Multiple insurers do offer rental default cover again if this is important to you.

How To Get The Lowest Price On Your Landlord Insurance?

It is important to focus on the quality of the cover before trying to find the cheapest option. Cheap insurance that doesn’t cover financially catastrophic events is a waste of money.

The cost of a policy will depend on the size, value and makeup of the building, its location, policy inclusions and excess. It is usually more expensive than your principal place of residence insurance policy.

Shop around and compare landlord insurance quotes of appropriate policies. There are many online sites that offer landlord insurance comparison shopping. Make a list of available policies from different companies with all their pricing information, policy features and exclusions.

Another option is to ask your property manager if they have a recommendation.

Can You Make A Claim On Your Landlord Insurance?

Landlords can make landlord insurance claims for covered losses resulting from an insured event.

If you have to make a landlord claim it is important to follow all instructions given to you by your agent and landlord insurer regarding filing landlord insurance claims properly.  Speak to your insurer before commencing repairs if possible.

It’s also good practice to maintain detailed records of any conversations with agents about coverage information related to making claims, sending proof of loss statements etc. Keep copies of all documents filed during the process including receipts for repairs/replacement items purchased.

Landlord insurance is an important defensive tool to limit your risk in property investing. Make sure your policy covers causes of financial catastrophe, and then minimize cost.

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.

M&M – Over Leverage by The Joyful Frugalista

*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.  

Everyone makes some money mistakes. But learning from others is a lot less painful than making your own! I have benefitted from listening to tales from family and friends investing disasters and have confessed my own financial errors for readers, in turn, to learn from.

It is rare people are brave enough to share their financial horror stories. The shame and embarrassment of a huge financial mistake often prevent people from reporting or warning others.  But learning from others mistakes is sometimes more valuable than stories of success.

In the M&M series, I have asked financial content producers to bravely confess their worst financial mistakes. Read these warnings carefully and learn as much as you can from them to avoid making money mistakes of your own.

Over Leverage

Hi.  My name is Serina Bird. I’m the author of The Joyful Frugalista*, and host of The Joyful Frugalista Podcast.

I turn 49 in a few weeks’ time (how did that happen!), and I am mum to two boys (9 and nearly 12).  I’m a former Commonwealth public servant, who left to pursue other goals. I didn’t have a particular FIRE goal or target, but I was close enough to being financially secure that I felt I could take the leap when I did.

Oddly enough, I’m back in my former role part-time, and I’m enjoying the intellectual rigour and connecting with others.

My Worst Money Mistake: Over Leverage

In my first marriage, we were over leveraged in our property investments.  I was the primary income earner and for several years the only income earner.  We both had a goal of having at least ten residential investment properties.

So far, so good.

But I felt like it was often up to me to be the sensible one who watched the income and expenses where things were going. As I was in a busy job working overseas on posting, this wasn’t always possible.

In the last year of our marriage, we had huge gaps in our tenancies.  One property was vacant for six months before I realised what was going on! My ex-husband didn’t want to ‘worry’ me, and he also didn’t want me to lower the price. 

At that time, he had the main role of liaising with the real estate agents and I guess I wanted him to have a clear role as he wasn’t in the workforce at that time.

After returning to Australia, and then leaving the marriage due to an escalating anger situation, I suddenly had the burden of ten investment properties, plus legal costs, plus childcare.

I guess my worst financial error here was over leverage to the extent that there was no emergency fund.

We had a maxed-out credit card and an overdraft that was also at its maximum. 

While on paper I was wealthy, it didn’t feel like it. I was essentially living payday to payday and it was stressful.

Back in 2014 when we separated, the property market in my city (Canberra) plummeted due to cutbacks in the Commonwealth public service.  It wasn’t a good time to sell, yet both of us needed cash.  We managed to reduce the carnage by coming to an agreement to sell one and to avoid a fire sale. Selling at the lowest point of a market is never a good strategy.

What this taught me was the importance of building up wealth gradually and also of having funds available for contingencies.  Marrying (again) to someone who shared similar, frugal money values has also shown me how powerful it is when two people work together to achieve shared goals.

Related to this, another big financial error was being overexposed to property.

I love property investing and always have ever since playing Monopoly as a child.  Nothing’s going to stop my love of property investing!

But I almost totally missed the big mining boom because of fear of investing in shares – despite working on China issues at the time and reading about the big need for iron ore.

I also didn’t take the time to understand how my superannuation plan worked.  My ex didn’t like shares or believe in superannuation, and I guess I also was a bit sceptical of super. It seemed such a long way away before I would ever need it!

Warning Signs (in hindsight) I wish I’d Noticed:

With the benefit of hindsight, there were many warnings that my ex-husband and I weren’t on the same page when it came to investing and finance.  He had larger visions, but I was the one who was taking the responsibility for making mortgage repayments.

On the property investing front, the family tried to tell me we were taking on too much and being too ambitious. I heard this as them being jealous or thinking we were being greedy.

To be honest, there was a lot being written about leveraging heavily to buy more investment properties.  The boom of the early 2000s had a profound impact on people seeing how residential property could explode.  But booms don’t happen every day.  The money trail of what was coming in and going out should have told me that we were financially stretched.

How I Could Have Avoided this Error:

I could have avoided this error by having a more diversified portfolio, and crucially, ensuring we had an emergency fund – or at least access to a redraw facility in one of our mortgages. 

I also should have looked more closely at what was going on with our finances.

At the time when there were tenancy gaps, it was an especially busy time with my work as I was balancing being a mum to a toddler and baby plus many work-related evening events.  That said, it’s important to always prioritise your finances.

When I realised Over Leverage was a Mistake?

I don’t’ think I realised there was a ‘mistake’ as such for many years.  We had been so proud of our property portfolio. I was adamant we had made a good decision.  Yet looking back, I was always so anxious and, I think part of it was the stress of worrying about how I would make payments. It also held me back by keeping me in the same job as I didn’t have the courage to quit to follow the entrepreneurial path I had dreamed of.

On paper, selling the properties when we did was a mistake. If I had held all of them until the big 2021 boom, I would be laughing.  But, it would have been extremely stressful to have done so and my kids and I would have had to have made extraordinary, beyond the normal frugalista sacrifices. I think the pressure of doing that would have had a defining and adverse impact on my kids. I mean, there’s frugal and then there’s just plain crazy penny-pinching.

Looking back, I think around six years or so ago, I began to start rethinking my finances and how they aligned with my values. While I still loved property, my focus was more about ensuring that I could provide for my children through any contingency. Accordingly, a heavily geared strategy (even though it could have paid off eventually in a mega-bonanza), was incredibly risky.

How I recovered financially from Over Leverage:

It has taken me several years to restructure my investments. I have now rebuilt my super (I lost a third in the property settlement) and rebalanced the investment properties.

Two of the investment properties I retained.  I retained – then sold – the former family home, and my ex retained one house.  The rest we sold. 

I now have zero mortgage debt on the apartment where I live, my husband and I drive one car (car loan free), we pay our credit card off in full each month, he makes the maximum contribution to his superannuation, we have a cash emergency fund of $10,000, and we are building up our ETF portfolio. 

We have three investment properties and plan to start selling them down in 18 months’ time (ahead of hubby’s retirement at age 55). 

Without having to devote large amounts of funds to mortgage payments or car loans, we find we have more surplus funds to direct to ETF and other investments.

And we’re both somewhat amazed at how quickly our investments are growing now that we have reduced debt and consolidated our finances.  And the most important thing is that going into COVID, we knew we were in a good financial situation and didn’t have any reason to panic.

Thanks, Serina!

Thanks so much to the generous Serina Bird for sharing her financial mistake of over leverage, and her time to warn us! This warning is so relevant in todays over heating property market.

This article also contains a powerful warning to always be fully aware of how the household finances are being managed. Never outsource this completely to your partner.

Serina has also shared her investment strategy with Aussie doc readers earlier this year. The Joyful Frugalista book* shares more details on Serina’s property over leverage experience and loads of ideas on how to save money. I can recommend picking up a copy, I’ve read it twice to pick up hints on becoming more frugal!

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.