How to Use Behavioural Finance to Become a Better Investor

*This post “How to use Behavioural Finance to Become a Better Investor” 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.  

Definition

“Behavioral finance attempts to explain and increase understanding of the reasoning patterns of investors,including the emotional processes involved and thedegree to which they influence the decision-making process.”

Ricciardi, Victor & Simon, Helen. (2000). What Is Behavioral Finance?. Business, Education & Technology Journal. 2. 1-9.

I am fascinated in research around human behaviour with money and investing. Over and over we hear the same cardinal rules about finance and investing:

  • Spend less than you earn
  • Regularly and consistently invest over several decades
  • Investing in low cost passive index funds is the easiest, cheapest way to grow wealth
  • Minimize fees including brokerage, management fees etc
  • Buy assets that grow in value or provide income rather than those that produce costs (particularly at the start of your journey)
  • Ignore the noise and just stick to your written investment plan

It’s not rocket science! Over the last decades the introduction of superannuation, cheap online brokers, and micro-investment apps have made investing attainable for everyone. It has never been easier to take the simple steps to secure a strong financial future.

So why do most investors struggle to stick to the script?

During the 1990-2000s, Behavioral Finance attempted to answer these questions.

Behavioural Finance: Why do We Struggle to Spend Less than We Earn?

Clever marketing surrounds us almost constantly. Most of us like to believe we are immune to advertising. But extensive human psychology research, aimed at manipulating the audience subconsciously, informs the design of these advertisements.

  • Colour – the background of an advert or show room is purposely chosen for a particularly subconscious association. This is proven to impact consumer behaviour
  • Subliminal messaging – hidden messages within adverts and other media
  • Emotional branding – manipulating consumer emotions to create a loyal customer
  • Autonomous sensory meridioal response technology – Do you experience a shiver or tingle with certain sounds? Brands intentionally create these pleasurable auditory sensations to engage you with online platforms or make consumers more likely to like the product advertised
  • Creating artificial scarcity – Consumers desire brand name product of which there are few available, which is why brands create demand through artificial scarcity.

We are probably far more affected than we ever realize.

Humans also have a natural tendency to prioritize the short term over the long term, so have a natural resistance to delayed gratification. And we are constantly surrounded by messaging encouraging the answer to our problems is a new product.

It’s no surprise so many fail to get past the first step – Spending less than you earn.

The Efficient Market Hypothesis.

The efficient market hypothesis of the 1970s assumed that all market participants are rational and self-interested, and aiming to maximize returns.

The theory suggests all available information is priced into the market already, making it impossible to “beat the market” unless you have inside information (which is illegal) or take additional risk (eg leverage).

It is clear that the stock market as a whole is not entirely rational. There have been many speculative bubbles. Price appreciation has resulted in irrational over-enthusiasm, and further price appreciation until eventually rationality kicked in, and the bubble burst.

Lots of speculators made a fortune during the tulip mania of the 1600s, and the dot com boom of the 2000s. Late adopters (or those that didn’t get out in time) were often wiped out when prices eventually crashed.

Warren Buffet is the most famous investor in the world. He is one of a handful of investors in history to have consistently taken advantage of stock market irrationality to make above-average returns.

Thousands of professional fund managers try to replicate this market arbitrage with a dismal success rate. It turns out, although the market can be very irrational, investors (even professionals) are the cause of that irrationality.

Unless you as an investor are less irrational than the rest of the market, the efficient market hypothesis may as well be true.

Below is an infographic from SPIVA demonstrating the underperformance of funds vs the ASX 200 over 15 years. Active funds actually outperformed the Australian index in 57.76% of cases over the past year, the most positive timeframe.

SPIVA | S&P Dow Jones Indices (spglobal.com)

What chance as the average hobbyist investor got?

“People systemically depart from optimal judgment and decision making”

Barber and Odean

WHY DON’T WE CONSISTENTLY INVEST OVER THE LONG TERM ACCORDING TO THE PLAN?

The need to invest regularly, no matter what the market is doing is widely advertised. Missing a few days of market returns by sitting on the sidelines awaiting a market correction can result in dramatic damage to overall returns.

Yet market timing is a huge temptation to most investors. It seems so easy to improve returns by just timing those investments a little better. The data tells us it is unsuccessful most of the time. But many investors can’t help but think they can beat the odds. Why is that?

Prospect theory/loss aversion/Regret Theory– Are all based on the fact we hate to lose money and will adjust decisions based on the anticipation of regret.

In fact, we hate losing $100 far more than we love to win $100. This skews our risk assessment. For many, this results in failure to invest at all, due to the fear of the market going down.

Excellent explanation of loss aversion by Quikeconomics

It also explains why investors are so tempted to remove their money from the market when a crash seems imminent. Unfortunately, massive market losses are predicted almost constantly, and the market is rarely predictable.

As a result, investors who divest for fear of a market crash are at a real risk of missing out on the best days in the market.

Delaying investing because of bad market predictions for fear of loss and regret is another example of how you are likely to lose profits by trying to avoid risk.

Anchoring Bias

Holding on to a poorly performing asset (eg poorly picked property investment or individual shares) despite all indications this is a long-term underperformer is also common. Investors cannot stand the pain of selling for a loss. They often demonstrate anchoring bias, waiting for the price to return to what they paid (No matter how long that takes). It’s the tendency for the first price to become anchored in our brains.

Investors struggle to overlook the anchoring to see the opportunity cost of having money tied up in a dud investment – that cash could actually be making money elsewhere.

Fascinating experiments on Anchoring bias – Quik Economics

Hindsight bias

Ever heard someone exclaim they knew something was going to happen, when in fact you know they did not make a strong prediction?

They’re not just lying, you probably do it too. Our brains play a trick on us when new information becomes available, in updating memories, often to include the new information.

When investing results appear predictable due to hindsight bias, it is easy to become overconfident in your ability to predict the future.

WHY CAN’T WE JUST STICK TO DIVERSIFIED PASSIVE INVESTING?

For most of us plain old vanilla investing has the best chance of getting us to our goals. But there is an ever-lasting temptation to try and beat the average with a more complicated plan.

The property next door goes up for sale. You know the neighbourhood inside out. It’s a comfortable investment. You may skimp on the research due to familiarity bias, a tendency to favour assets we feel familiar with. Although you might like your neighbourhood, this house is not necessarily the best choice for your portfolio. The decision should be just as rigorously researched as any other investment decision.

When researching an investment decision (and most other decisions), we are prone to confirmation bias, the tendency to screen out any evidence contradicting our desired action and only taking notice of information that supports our case.

Why Don’t We Ruthlessly Minimise fees?

Investors have a terrible habit of flip-flopping inside their portfolio, wasting returns away in brokerage costs as they are chasing the latest must-have stock. It is well documented that lower trading results in higher performance. Much like switching lanes in heavy traffic, it’s unlikely to get you anywhere fast.

Overconfidence is a huge risk to your investing returns. Most of us tend to think we are better than average, obviously, that is impossible! So when we look at the dismal results of the average investor compared with the index and assume we will do better, most of us are deluding ourselves. Those with high skills in other areas tend to assume they will also be better than average in finance, but the skills often do not transfer.

And then to compound this problem is the issue of self-attribution bias. When an investment choice goes well, we tend to take the credit and assume the success was due to our intellectual decision-making. When there is a poor result, some other sucker tends to get the blame!

WHY DON’T WE JUST STICK TO THE PLAN?

Humans exhibit herd behaviour. It’s uncomfortable to go against the crowd.

If there are two restaurants next to each other, and restaurant A has a line up outside and restaurant B is empty we tend to assume all the people wanting to go to restaurant A know something we don’t and assume it must be better. Savvy restauranteurs offer free drinks on quiet nights to get the crowd started.

The fear of missing out is a powerful emotion. Reading about investors becoming millionaires investing Bitcoin certainly made me stop and wonder if I was doing it all wrong. It sounds so easy! And fast! I even downloaded a podcast to learn more about this. Alas, I am not convinced I can understand the case for bitcoin beyond the fact the technology has great potential, although we’re not exactly what for yet. Teaching is a great exposer of understanding. If you can’t explain something simple enough for anyone to understand I’m not convinced you understand the concepts well enough yourself.

“Don’t invest in something you don’t understand.”

Warren Buffett

Behavioural Finance Behaviour Modifications

Being aware of these biases we are all prone to is the first step in limiting their damage. The second is to build a system of behaviours that help counteract bias. Some suggestions include:

  • Direct debit your savings out automatically each pay so you have no choice but to spend less than you earn
  • Have a written investment plan that you refer back to when considering changes.
  • Have a time delay (2 weeks? A month?) before making the changes to your investment plan. Document why you changed and your new investment plan
  • Have a plan for when you are feeling nervous about market corrections (not to log into your account until you hear media reports of recovery, JLCollins stock market meditation)
J.L. Collins Stock Market Meditation!
  • Research investments thoroughly but set a time limit by which you need to take action. Accept there will always be some risk, you can only minimize it.
  • Have an investing advisor or knowledgable buddy who you can discuss your decisions with. They will be able to identify hindsight bias, familiarity and confront your confirmation bias
  • Read/listen to many sources of information, including some that don’t follow your investing philosophy. Challenge your assumptions and learn to understand the the point of view
  • Assume you are an average investor. Be realistic about your capabilities. Just because you’re an incredible neurosurgeon* (*insert own impressive profession) doesn’t mean you are also Warren Buffett.
  • Keep an investing journal. Look back to see if you really “saw it coming”.

Behavioural Investing Conclusion

“It is possible that an investors’ biggest problems and their most dangerous enemy is himself.”

Benjamin Graham.

Although traditional economists believe in the idea of rationality in individuals, financial models are oversimplified.

Emotional and cognitive biases heavily influence investor behaviour. The resulting irrational behaviours can cause huge losses.

Only by recognizing behavioral biases in our lives can an individual investor make logical decisions. Behavior-based financial research provides fascinating insights into real financial behavior.

Further Resources for Behavioural Finance Geeks:

From Efficient Markets Theory to Behavioral Finance (aeaweb.org)

Quik Economics youtube channel

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.

Investing How to: Limit Order vs Market Order

*This post “Investing How to: Limit order vs Market Order” 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.  

Limit Order vs Market Order Definition

A market order is designed to fill as quickly as possible. You agree to purchase a set number of shares (or dollar value) at the market value at the time. The order will be executed as long as there are enough shares to fill the order before the share price changes.

A limit order is when you set the price you would like to purchase shares at. The order is only executed if the share price reaches the limit order you have set.

How to Investing – Which Type of Order?

Have you recently started the plunge and started investing? Or still trying to work out the finance jargon before you take that leap? Market and limit orders are terminology you will come across when placing a trade (buying any share or ETF) on your broker’s platform.

The thing to remember is your overall investing style. Many readers will have a plan to continue dollar-cost averaging into the stock market on a regular basis, no matter what the market is doing. Remaining disciplined and following your strategy over the long term with dollar-cost averaging is a no-hassle way to get rich slow.

The biggest risk to your investment returns is your human nature. When the market drops, as it did just weeks ago, it becomes increasingly difficult to ignore the media doom spreaders and keep buying. Our brains prioritize short-term thinking.

Limit Order vs Market Order vs Dollar Cost Averaging

For those wanting to dollar cost average over the long-term, I am a strong advocate of automation.

Set up a direct debit into your investment of choice and avoid 90% of temptations to not carry through your plan. If you automatically invest no matter what the market is doing, you don’t need to know about market or limit orders.

Your automated investment will go through as scheduled as a market order no matter the market price at the time.

When the market is down, you will purchase more shares for your regular investment cash. There is no need to try and predict market movements (which seems impossible).

Options to automatically invest on a regular basis include using a micro-investment app (ideal if investing parcels <$1000), investing in a Vanguard diversified managed fund through Vanguard personal investor (quick start minimal research needed), or selecting your ETFs yourself and auto-investing with an online broker.

Micro-investment apps and VPI really suit beginner investors who just want to get started and are not interested/not ready to choose their own investments.

I have accounts with Pearler and Commsec so am in a position to step by step through market or limit orders with either.

Market Orders

As mentioned above, a market order is filled almost instantly (as long as there are enough shares available for sale at the market price at the time).

This is the traditional way to invest in the stock market before auto-investing was a thing. Many investors will still use market orders to invest at preset intervals, according to their investment plan.

It also may be how you would invest if you had come into an unexpected lump sum of cash. Statistically, you will be better off putting the entire lump sum into the market at once, rather than dollar-cost averaging. You do have to be able to stomach the volatility though, and admittedly this is much harder shortly after investing a large sum.

Market Orders with Pearler

Pearler specializes in auto-investing, but you can easily perform a one-off market order as well. Below is a screenshot of my Pearler platform.

You can type the ticker code into the search button at the top, or navigate to the “Invest” tab to choose from a selection of popular investments.

After selecting your chosen investment, the next screen displays the current market price and a graph of historical performance. The “buy” button is pretty obvious.

After selecting “buy” you are taken to the order screen.

Here you are again prompted with the market price and can enter how much you would like to buy.

Auto-deposit automatically debits the money from your linked bank account if there is not enough left in your money market account, but Pay ID allows immediate (particularly if not the 1st transaction) movement of money.

Brokerage is $6.50 with Pearler (unlimited amount) although this is planned to reduce shortly. Pearler brokerage can also be discounted down to $5.50 by paying for credits in advance. Feel free to check out my full Pearler review.

Market Orders with Commsec

Commsec remains the most commonly used online broker in Australia. It is more expensive than Pearler and other modern online brokerage platforms. But many investors stick with what they know and trust, and the longstanding reputation of Commsec keeps some investors loyal.

Again, the platform is pretty easy to navigate. There is a search button at the top of the site where you can enter your ticker code for the relevant investment.

Next, you are taken to a page displaying investment data and an obvious “buy” or “sell” option.

After pressing “buy” you are taken to an order page where you can enter how much you would like to invest today. If you want to purchase at the current price (market order) tick the “At market” box.

Once you have submitted this form, you get to confirm all the details on the next page before finalizing the order. On my first orders, I was worried about making a mistake but it’s all pretty simple as long as you check and double-check each detail.

Commsec brokerage is $10 for up to $1000, $19.95 for $1-10,000 and $29.95 for $10,000-$25,000 as long as you settle using their CDIA account.

Commsec offers T+2 trades, meaning you can purchase shares at the moment, and just have to have the funds cleared in your CDIA account (set up when you open a trading account with Commsec) 48 hours later.

Limit Orders vs Market Orders – Limit Orders

Limit orders mean you do not buy the investment immediately. Instead, you set the price at which you would like to buy and if the share price drops to that limit while your limit order is active, the order is confirmed and investments purchased.

There is a good chance that your limit order will never be fulfilled. If the share price goes up, or dips but not quite as low as your limit order the order will not go through. When there are inadequate shares for sale when the price dips to your limit, it will be partially fulfilled.

If you were relying on limit orders as your normal mode of buying, it is likely that you won’t end up investing as much. The stock market, after all, tends to go up over the long term. If you wait for market dips to invest, you are likely to end up worse off overall than dollar-cost averaging as you will have less time invested in the market.

Limit orders can be useful if you are interested in buying at a discount when the market dips, on top of your regular dollar cost investments. The argument still stands though that if you were going to invest this money, you should have done so as soon as possible to attain the highest profit.

However, I still “buy the dip” when the opportunity arises.

  • I dollar cost average every fortnight into Pearler, and superannuation
  • More savings are aimed at paying off my PPOR mortgage. At 2.6% this is likely to be inferior to stock market returns but provides more freedom (and I am so close I want the debt gone!)
  • When the market corrects 10+% I know eventually it will rebound, it is likely I will make outsized returns when this occurs.
  • The opportunity cost of paying down our mortgage instead of investing in the stock market becomes far greater.
  • I also feel more in control of the situation when the market is dropping by “doing something” that feels useful, I am less likely to panic and sell.

As a result, I have a very simple strategy of investing a set amount at set percentage drops from the high. I don’t monitor the market closely but find I can’t avoid hearing that the market is “crashing” so then set up limit orders to be fulfilled at my predetermined drops in value.

Limit Orders with Pearler

Pearler does offer limit orders. On the purchase page, you simply press “more options to find the limit order option. Pearler limit orders remain active until they are executed, or you cancel them (unlike Commsec below).

I tried this during a recent downturn. I simply used auto-deposit, but of course, by the time the money had cleared into my Pearler trust account, the price had rebounded.

Then the cash was stuck in my trust account earning next to no interest, instead of my offset earning a still unimpressive 2.6%.

Given I would prefer to work on fully offsetting my mortgage unless the market does a significant enough dip, this didn’t really suit me.

I made my 1st withdrawal from Pearler as a result. For those interested in Pearler, I had to provide a little further identification before making the 1st withdrawal and this took a couple of days to process. The money landed bank in my offset as expected after that.

Limit Order with Commsec

This is why I still have my account with Commsec. I can set up a limit order and the money only moves if the trade goes through, allowing my cash to keep saving me the interest in the meantime.

To make a limit order with Commsec, you go through exactly the same process but type the price you would like to purchase at in the “Price limit” box instead of ticking “at market”.

You are then taken to the confirmation page where you can check all the details and submit the order. With Pearler the limit order is active for 1 month, so you will need to keep resetting it if you want to.

When the trade is activated, you will receive an email with this information. You then have 48 hours to get money transferred to your settlement account or risk a fine.

Obviously, you will need to monitor your emails if you have limit orders set up and be ready to transfer the cash quickly. You must be confident your cash will clear in time before the settlement date.

Limit order vs Market order

Market orders are the traditional way to buy stocks. You simply log in and buy at the current price when it suits. But wealth is not often built through one-off or Adhoc investments. Most of us need consistent, regular investing over the long term to build significant wealth. Auto-investing makes this easier to stick to.

Limit orders won’t appeal to many new investors. If you have money that you want to put in the market, most of the time you will profit more by putting in as a lump sum immediately. But if, like me, you have a competing use for your investment, setting up a limit order may suit you.

A limit order means if you want to buy at a specific price you don’t have to spend your days obsessing over market prices (trying to catch the dip).

If you’re happy to watch the market and purchase opportunistically, a market order through a low-cost broker will be more cost-efficient.

Let me know which strategy you prefer – Autoinvest, market, or limit orders. Comment below to learn from each others perspectives.

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.

Do You Want to FIRE? Financial Independence Retire Early Australia

*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.  

History of FIRE

Before the FIRE acronym was created, anyone wanting to become financially independent had to work it all out themselves. A few did, and mysteriously retired, or lived a life without financial worries. Since some of those smart cookies started sharing the knowledge accumulated, the FIRE community has begun to form.

Vicki Robin’s “Your money or Your Life” book is often accredited with being the very start of the FIRE movement. Mr Money Mustache added fuel to the fire with the most famous FIRE blog.

In the US the FIRE community grew, with many blogs popping up, spruiking the benefits of developing a FIRE mindset.

Articles and forums share valuable information that helps people take smart financial shortcuts, and most importantly, save and invest consistently. Not having to work out all the potential hacks yourself makes it far easier to spend less, save more, and invest wisely. Savers gain confidence in ignoring societal norms and forging their own path when part of an online community of people doing similar (but varied) things. But the really specific US information wasn’t relevant to those in Australia.

FIRE is Spreading: Financial Independence Retire Early Australia

The FIRE movement has been gaining popularity in Australia since the Global financial crisis, with Aussie Firebug started ~2014. Australian blogs have been proliferating over the past 5 years.

Now individuals wanting to improve their financial situation have a wide selection of bloggers and podcasters doing the research and providing the information (mostly) for free.

As a result, the FIRE community in Australia is growing rapidly. Not just for hardcore savers, but for many who just want to improve their financial situation and make a life that bit easier.

Everyone can take advantage of the FIRE knowledge to improve their financial picture, not just those wanting to retire early.

What is FIRE?

The idea of FIRE is to utilize the incredible power of compound interest by aggressively investing (50%+ of income) as early as possible, in order to retire early and live off of their investments.

The 4% rule is a rough rule of thumb guiding FIREYs to accumulate enough to live off around 4% of it annually.

Many FIRE followers are depicted as individuals taking extreme steps to save early retirement.

But as more information is shared, and individuals take on the best way to adjust the FIRE idea to suit them, the financial movement is becoming more based around financial flexibility and optimizing resources.

How To Retire Early With FIRE?

The simplest scenario is for a person (of any age) who wishes to retire in 2-50 years. Based on the 4% rule, the saver needs to accumulate 25 x their required retirement income before declaring themselves as financially independent and retiring.

The maths means the percentage of your income you save and invest is far more important than your actual income. If you earn $50,000 or $200,000 and save 50% of your income, you will be financially independent in around 16 years (assuming 5% real returns).

Financial Independence Retire Early Australia: Withdrawal Rate Controversies

There are ongoing controversies around the 4% rule, and different people may advocate a withdrawal rate anywhere between 3.5-5% depending on the circumstances. Towards the end of the accumulation phase, you will have a better idea of where you sit on withdrawal strategies. Your ideal withdrawal rate depends on:

  • Age at planned retirement
  • Life expectancy (you may have more data than average life span, based on your own health)
  • Flexibility in spending (if you can cut back during market crashes, or take on a part-time job you could manage a higher withdrawal rate the rest of the time.)
  • Do you have a cash reserve to use (and reduce portfolio withdrawals) during market crashes
  • Do you have back up options in case of running out of income (Aged pension, reverse mortgage, selling investment property you had planned to leave in your will)
  • P/E ratio of your investments at retirement (check out Mad fientist’s incredible article and safe withdrawal rate calculator).

Time to Financial Independence

How do you save 25x retirement income? Thanks to Early retirement now, this graph shows how much of your income you need to save to reach financial independence.

Early Retirement Now

If you are planning to retire before your superannuation preservation age, it still makes sense to calculate your FI number, and savings rate using amounts saved inside and outside super.

Once you have worked out how much you need in total, work out how much you will need outside superannuation to bridge the gap until you reach preservation age. Income from superannuation is generally tax-free, so will generally be more efficient

Financial Independence Retire Early Australia: Progress to FIRE


The aim is to become financially independent by the time you want to retire (any age that gives you a good chance of remaining healthy and happy enough to work).

Along the way there are many checkpoints.

It can seem like a long journey along the way, but the fantastic news is that each step you take provides more financial security, freedom, and options, should your circumstances or aspirations change.

I am a big fan of coast FI. For me, it has the best of both worlds. It involves frontloading investing to take maximum advantage of compound interest. Once you have done some short-term hustle to reach “coast” it’s possible to take your foot off the accelerator.

You will have reduced your cost of living to far less than take-home pay and are on track to retirement without any further savings. This allows flexibility in switching to part-time work or switching careers and taking a pay cut without stress.

How to Create a Gap Between Income and Outgoings

To achieve any of the above, there has to be some money to pay off debt, save an emergency fund, or start investing. You must spend less than you earn. Ideally, you want to make this gap significant.

There is a balance to be found between increasing freedom from a bigger savings rate and spending for enjoyment along the way.

Most middle-class Australians can find a lot of wasted spending if they start tracking outgoings. Eliminating spending that brings you no value, and optimizing taxation is a good start with no hardship involved!

The financial independence community often tells us cutting the three big expenses is the most powerful way to increase your savings rate. These are often housing, transport, and food. Avoiding buying as much house as you can afford as a high-income earner is certainly a powerful lever in increasing your savings rate.

Setting a budget for discretionary spending, and separating this into a separate account helps you prioritize fun spending on things that bring you the most value, and reduce waste.

Cutting spending is often more efficient for high-income earners as you will pay so much tax on extra earnings. If you are not already on your top potential income, focussing on your career is likely to provide far higher returns than side hustling. In my opinion side hustles are helpful for high-income earners when they are a true passion of the hustler (it is an enjoyable hobby that happens to bring in some cash) or it is a short-term boost to help you reach the next stage of your financial plan (eg saving for a house deposit).

Financial Independence Retire Early Australia: How to Invest

I strongly recommend making a financial plan before starting to invest. This can be with a professional or DIY.

My other advice is to keep it simple. We have a tendency to overcomplicate things (usually in the hope of outsized and quicker returns). It often results in lots of unnecessary stress and underperformance.

Over history, any investment that is very popular and hyped up eventually crashes. Plenty of people make huge gains in the run-up, but no one knows when the bubble will eventually burst. Fear of missing out is a massive danger to your investment outcome, particularly when everyone around you is bragging about gains (they always go quiet about the losses though).

I am a cautious investor but recognize I don’t need to take large risks. I just need to stick to the plan to reach my goals. Because my assumptions are pretty conservative, I will probably reach my goal ahead of schedule, but that is in the hands of the market Gods!

Avoiding getting scammed is also very important. Please don’t skip this bit thinking you are too smart for this. Intelligent people are regularly fooled by increasingly sophisticated scammers. Always be suspicious when money is involved, particularly if you are a high earner.

The main investment choices (and certainly where most of us should start) are passive stock market investing and residential property.

Passive investing in the stock market can occur inside or outside superannuation. It is the simplest and most reliable to get right. If you hold broadly diversified passive ETF, managed fund, or super with low fees for long enough it will go up. You just have to put enough money in to reach your goal in the desired time frame. Don’t overlook the almost guaranteed good return of passive funds because it is boring but effective!

The big issue with the stock market is, of course, volatility. You can lower volatility by investing in bonds (you will find some inside super) or alternative asset classes with low correlation with stocks (they tend to go up in value when stocks go down).

I have chosen residential property with the aim of rental income smoothing out the volatility of stock market returns. Buying individual properties diversifies nicely from the stock market (and is negatively correlated quite strongly with international stocks). But it is far easier to screw up than passive index investing.

Despite the huge bull market in Australian property leading up to 2016, everyone I personally knew regretted property during this period and ended up selling.

When people are generous enough to share their financial mistakes and regrets, take notes! These are some of the most useful lessons in investing you can receive – what to avoid. Lessons of regret are far more useful I find than stories of success (that may or may not be repeatable). If you can avoid the big errors, you will probably do ok.

I think a 20-year timeframe before retirement is ideal for buying Australian property (growth strategy) as this takes a while to pay off. To find out why I chose to invest in property despite all the horror stories read my 1st ever article.

Involving property in your investment strategy does make things a bit more complicated. You have concentration risk from putting a lot of money in one physical asset in one location. There are risks of unexpected major maintenance. You need to manage a property manager if you don’t want to be managing the property yourself.

Find out about wealth creation strategies here.

Don’t do F.I.R.E. Just to Escape a Job you Hate

Don’t spend 10 years trying to reach FIRE just to escape an unsatisfactory employment situation. But you can use the concepts, ideas, and community motivation to get a space between income and expenditures and build some savings before you take the leap to a better job (even if it pays less).

Lean FIRE/FAT FIRE

Lean FIRE is for those planning to live on less than $40,000 US per year. Those aiming for lean FIRE can reach it more quickly as it requires less of a lump sum accumulated.

But they have less flexibility if they have very little discretionary spending. If the stock market has a bad year, they are unlikely to be able to tighten belts much further to reduce their withdrawal rates (although they could still work part-time).

Lean FIRE can be treated as another stepping stone if you are aiming for traditional FIRE. Knowing that you can retire anytime (albeit on a tight budget) provides huge psychological freedom and confidence. Those aware that they are already lean FIRE are not likely to be scared to lose a little income by changing to a more enjoyable job.

Fat FIRE usually refers to those retiring and living off $100,000 or more per year. Which is traditional FIRE for many higher-income earners. Another way people sometimes refer to it is that they have more than 25x living expenses, as an extra buffer before retiring.

Financial Independence Retire Early Australia: Conclusion

There has been a proliferation of financial information online thanks to the popularity of the FIRE concept in Australia and overseas. This information needs to be checked for accuracy but is a great source of new ideas, concepts, and potentially useful financial shortcuts.

Anyone aiming for financial independence by retirement can make use of this information to educate themselves and improve their financial situation.

Whenever you plan to retire, the financial independence community has a lot of value to offer.

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.

Impact Investing, Socially Responsible & ESG Investing. Where to Begin!

*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.  

Ethical investing seems like a great idea. Who wouldn’t want to help the planet, or the people on it as well as make great long-term financial returns?

I have been skeptical about the ability of these funds to match general market financial performance. After some time developing a financial plan, and choosing investments, ethical investing was put in the “too hard basket”.

In this article, I finally take a deep dive into ethical investing.

Types of Ethical Investing Strategies

What is Impact Investing?

Impact investors invest in companies with the intention of making the planet a better place. Investments are selected for their positive social and environmental impact, alongside a financial return.

Impact investing sits as a hybrid, somewhere between charitable giving and investing for profit.

What Sort of Investments are Included in Impact Investing?

The decision on which companies make a positive impact on the world is prone to subjectivity. These decisions come down to the opinion of a panel of fund managers.

Funds invest in companies they feel are making a positive impact on social and environmental issues. They can also provide low-interest loans to non-profit organizations.

Renewable energy, affordable housing, equitable healthcare and education, sustainable agriculture, conservation, and microfinance are some of the areas impact investing may invest.

What is ESG Investing?

ESG investing aims to invest in companies with positive environmental, social, and governance practices by using positive and negative screens.

ESG investors feel businesses with positive behaviours in these areas are more likely to profit over the long term. The primary aim is financial profit, with social benefit a side benefit.

It seems logical that companies that have abandoned fossil fuels in favour of greener alternatives are likely to have a brighter future.

What is Socially Responsible Investing?

Socially responsible investing selects investments based on a set of ethical standards. Those investments that don’t pass the filter are eliminated from the fund. Some examples of unethical behaviours that can be excluded are companies that are affiliated with terrorism, alcohol & tobacco and gambling.

How does Impact Investing, SR or ESG Investing Differ from Philanthropy?

Companies raise money to expand by listing on the stock market with an “Initial public offering”.

After that, their shares are traded between investors (and institutions) on a secondary market. The company does not directly benefit from those secondary market trades, just as Toyota doesn’t when one of its cars is sold secondhand.

So by investing in some sort of ethical, socially responsible or positively impactful company, you are not actually supporting that business. But you are (at least trying) avoiding profiting from unethical, socially irresponsible or negatively impactful businesses.

ESG, SRI or impact investing may fit better with your moral compass. But it is not usually the same as charitable giving. Impact investing is the closest to philanthropy, as this can include micro-loans to socially disadvantaged persons who can use those loans to better their lives.

RIAA Visual Explanation of Spectrum from Traditional Investing through ethical and impact investing to Philanthropy

Some funds cross boundaries and use a mixture of approaches. The Responsible Investing Association of Australia only certifies investment products as “responsible investments” if they:

“Have implemented an investment style and process that systematically takes into account environmental, social, governance or ethical considerations, and this investment process reliability has been verified by an external party. The product or service meets the strict operational and disclosure practices of Certification Program requirements.”

Responsible Investments Association of Australasia

Investing Fees

As you might expect, investing ethically usually involves a small fee premium. The selection of investments is, by definition, more active than a simple index ETF. But the fee premium is far smaller than I had expected.

Vanguard Australian Shares Index ETF charges just 0.10% management fee. Vanguards ethically conscious Australian shares ETF charges 0.16%.

Vanguard ethically conscious International shares ETF charges 0.18% but Vanguard Australian Shares Index ETF also charges 0.18%.

Is Impact Investing, Socially Responsible & ESG Investing Profitable?

Research into the results of ethical investing is often limited in its applicability by:

  • Timeframe researched (we really want 30-year results, but not many researchers are that patient is getting a paper published!)
  • Variable definitions of “ethical investing”. What counts? What doesn’t? The definition has likely changed over the years
  • Conflict of interest – obviously studies by funds pushing ethical investors (or vice versa) have potential to be biased
  • Selective publishing (would a research group release their data if they found a poor result?) and access to data (research showing a fund’s positive result is generally available free on their website).

Results

Many studies over the years have largely found ethical investing to produce comparable, sometimes better returns than traditional investing. The longest duration of study I could find was over 20 years. Ippolito compared socially responsible and traditional mutual funds between 1965 and 1984 and found net risk-adjusted returns to be comparable.

A further study of 103 mutual funds between 1990 and 2001 also found no difference in risk-adjusted returns for ethical and traditional mutual funds.

Tippet, in contrast, found Australian ethical funds on average underperformed the market by 1.5% between 1991 and 1998. A further 89 ethical Australian funds were compared with the market return between 1986 and 2005, demonstrating a 0.88% underperformance for ethical funds over this period.

2000-2010 slight (statistically insignificant) advantage in British ethical funds over the market return. Socially responsible mutual funds were also found to outperform the S&P 500 between 2001 and 2012.

More recently, the Responsible Investment Association of Australasia reported responsible investments outperforming consistently over the past 10 years (ending 2021),

from RIAA Responsible Investment Benchmark Report 2021

It certainly seems promising that responsible investments can outperform the market some of the time, and match it a lot of the time.

Returns, similar to other active investments, seem to vary significantly over different time frames, swinging above and below the market returns over time.

Studies that broke down the “mean return” tended to state significant variation between the best and worst-performing fund at the time, likely due to a huge variation in investment selection strategies.

from RIAA Responsible Investment Super Report 2021

” Responsible Investment AUM increased by $298 billion to $1,281 billion in 2020, while the AUM managed by the remainder of the market decreased by $234 billion to $1,918 billion.”

Responsible-Investment-Benchmark-Report-Australia-2021.pdf (responsibleinvestment.org)

Younger investors are demanding ethical investing options, and superannuation funds are providing these options increasingly.

There is over $3 trillion in Australia’s superannuation accounts. Given mandatory superannuation contributions, young people are far more represented in superannuation than investing outside super.


Super funds want members, and their members are increasingly wanting ethical options. The significant inflow of funds through superannuation into ethical investments may well be pushing up these prices, contributing to the good recent returns of ethical funds.
Super funds are also in a powerful position of being able to encourage positive ethical and environmental outcomes in companies that want institutional investors.

The Case for Ethical Investing

If you are frustrated by your inability to make the world a better place (on a large scale), ethical investing may appeal to you.

The idea of investing for profit whilst making a positive impact is attractive. With the increasing flow of super funds into responsible investment choices, you may believe the underlying responsible investments are likely to continue increasing in value over the next few years.

When considering the viability of the companies you invest in long-term, those already with sustainable and ethical practices may perform better financially as a result.

Challenges of Impact investing

Involves Active Management and Reduced Diversification

Ethical funds can be heavily skewed towards tech stocks due to their low environmental burden. Entire sectors (eg resources) can be excluded by some ethical funds, whilst others include every sector and select the best ethical option available. A lack of diversification can lead to more volatility and active management is known to underperform index investing over the long term.

False Dichotomy

Like people, very few businesses are all good or all bad. Hitler and Mother Teresa were extreme outliers. But most of us have a complex (and fluctuating) amount of good and bad personality traits.

Companies are the same. Tesla is one of the most front-of-mind ethical stocks for most people. Electric vehicles can make a huge difference to our carbon footprint. But lithium mining (required for Tesla battery manufacture) has been associated with child labour, severe air, and water pollution. 

This means each company requires a careful weighing up of positive and negative factors, the weighting of which is highly subjective. Would you want to be on a panel deciding which investments to include in an ethical fund?

What makes it even harder, is that some factors are easier to measure than others. Social and governance factors seem a lot harder to define, prove and measure.

How do you weigh the impact of avoiding child labour vs avoiding environmental devastation?

Green Washing & Spin

Greenwashing is when a business spends more effort portraying itself as “green” than trying to make a positive environmental impact. It is commonly used as a marketing gimmick to encourage you to buy something you don’t need because it’s “environmentally friendly.”

Businesses may be motivated to push up their own share price if key people own still own significant equity. Encouraging ethical super funds to invest may also be where greenwashing comes in. If the company is able to find specific criteria on which they will be judged, they may manipulate this.

Ethical Investing is less Powerful than Ethical Consumerism

Businesses are highly motivated by our purchasing power. Minimizing purchases, researching companies, and only purchasing from those you consider fit your personal values is likely more impactful than investing with an ESG filter.

Going car and meat-free are some of the most impactful environmental choices an individual can make.

There is also likely plenty of whitewashing going on. You may have noticed that your employers’ behaviour doesn’t always reflect its documented values and mission statement. Choosing to invest in a company because they make a written commitment to increasing the number of women in leadership positions is optimistic.

Mixed purposes

Quite often trying to “kill 2 birds with 1 stone” results in missing both. And you shouldn’t be trying to stone birds to death anyway, that’s hardly ethical ;).

Perhaps investing and doing good together may result in a suboptimal result in both. Is there a better way you can make a positive impact on the world? Perhaps through the donation of time and/or money or using your position of power to correct some wrongs you witnessed during your ascent to the top.

Investor pressure in “bad companies” can Create Positive Outcomes

Particularly when large and powerful, as are super funds, investor pressure can have a lot of influence.

Choosing Values and Aligning a Fund with Them

If you have strong opinions, and firmly held values you now need to find a fund that matches them.

Many others will be unsure of certain issues. Many ethical funds, for example, exclude Alcohol-related businesses. Alcoholism is a terrible disease that causes enormous social harm.

But I would still visit a vineyard and enjoy an afternoon of wine tasting. It feels pretty hypocritical to ban alcohol from my investments whilst directly supporting the businesses with my consumer dollar.

I am not a gambler. Casinos, pokey machines, and horse races all have their addicts too. But I don’t feel so strongly that all casinos, sports betting or pokey machines should be outlawed.

Just like alcohol, there are plenty of people who enjoy an occasional gamble relatively harmlessly. I just think there should be more protections for those that have the potential to become addicted.

How to Invest Ethically

If you have read all the above, and want to invest ethically, the first step is to choose whether you want to invest primarily for social good (impact investing) or profit (ethical, socially responsible, or ESG investing).

Wannabe Impact investors, check out the GIIN.

Start at the RIAA if you are interested in ethical, socially responsible, or ESG investing. They have a really useful tool, that first prompts you to choose your priority values and then provides a selection of funds that match the best. From there you can check how each fund checks its investments, its long-term performance (as long as possible), fees, and liquidity. Read this article for more information on choosing ETFs.

If you wish to switch your superannuation to an ethical option, RIAA is the best place to start

Conclusion

Many will choose to keep investing and doing good separate to keep things simple.

Ethical investing has many shades of grey, nuances, and traps naive investors. But it also has a reasonable body of evidence that it can at least match market returns, and sometimes exceed them. The Responsible Investors Association of Australia has a great tool to narrow down ethical investments that more closely match your values.

Are you an ethical investor? Please share any tips you have learned or helpful tools for budding impact or socially responsible investors below.

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.

10 False Economy Mistakes you Will Regret

*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.  

False Economy:

“An attempt to save money which actually leads to greater expense.”

Collins English Dictionary.

Have you ever purchased a cheaper option, only to have to replace it and realise you should have paid more upfront for a better quality product?

These types of examples are probably what most of just think when “false economy” is mentioned. But there are many more ways in which false economies can trip you up in your financial life.

When living paycheck to paycheck, consumers inefficiently waste money as they can’t afford to pay upfront for long term value.

But even those on good incomes easily fall into the trap and pay more over the long term by trying to save money. Most of us think too short term to capture the maximum utility from our lifetime income.

This article aims to help you start thinking more long-term, spending your money in the most efficient way over your life so you can use it to squeeze out more fun overall.

1. False Economy in Purchase of Goods

We have probably all made these kinds of mistakes. When cash is tight, it’s tempting to buy the cheaper option in the hope of holding on to your cash. Of course, cost doesn’t always equate to value.

A simple example is the purchase of a new t-shirt, as a basic wardrobe staple. You could pay $1,050 for a Christian Dior shirt, $60 for a shirt from the Gap or $12 at Target.

The $12 target t-shirt is likely thinner, has poorer quality material and stitching than the Gap or Christian Dior shirt.

Many may find the Gap (or similar) option provides better value for money, as they can wear the shirt for years without it wearing out.

If you are buying a shirt for a child, or are likely to stain your t-shirt with sunscreen or just being clumsy, the cheap Target option may be the ideal option (environmental, ethical and personal style would also weigh into the debate of course).

It seems unlikely the Christian Dior shirt offers 20 x the longevity of the middle range shirt. Perhaps if you were trying to attract a superficial but wealthy life partner? Although that doesn’t sound like a story with a happy ending!

I know I have been tempted into false economies when reluctant to spend my hard-earned cash on something as boring as a household appliance. Buying the cheapest washing machine may lessen the pain at the time. But if it needs to be replaced in 3 years, uses up excessive power and water, or cannot be easily repaired you may regret it.

When buying goods, spend some time considering:

  • How you will use them (how often, how well looked after)
  • How long do you plan to use them
  • Reviews from family, friends, and online of your purchase options
  • Cost differential vs value

2. Paying for Services vs DIY

It is tempting to try and DIY everything to try and save money. A lot of the time, this can be effective. You may learn new skills and even have fun.

But sometimes you end up saving less money than you would have earned working that number of hours. Worse, if you end up with a disastrous result it could cost you a lot more to fix it up.

Consider carefully which services you need a professional to get the job done properly. Weigh up how much time it would take you to perform the job yourself vs working some extra hours to pay a professional.

Be honest with yourself though! I suspect it’s not uncommon for high-income earners to work an extra 2 hours will cover a weekly cleaner plus change. But they don’t do the extra paid work, or anything else productive so the cost just eats into their potential savings.

When considering whether to DIY or pay a professional:

  • What will the result with DIY vs profession
  • Cost of professional service vs Cost of your time
  • Will you use the extra time to earn the extra?
  • Can you afford the extra money to be spent out of your income

3. False Economy in Paying/Saving Interest

Paying the minimum payment on a credit card balance makes the repayment seem “affordable”. Credit card companies (much like investors) love to receive compounding interest every month.

Many credit cards have a 2% minimum payment, and a 15%+ interest rate. Paying the minimum repayment will create great wealth for the credit card company, but spiral the consumer into increasingly oppressive debt it’s hard to escape from.

Avoiding all debt to avoid paying interest can also be a false economy though.

Debt can be good, bad or tolerable.

Credit cards and other high-interest debt are almost never productive. Investment debt is considered good, or productive debt.

Investing borrowed money to earn returns greater than the interest paid is a common (but optional) way to accelerate wealth building.

Homeowner debt is considered tolerable, but when maintained instead of paid down to allow investment of funds instead, is as productive as investment debt (though you may want to consider debt recycling to improve tax efficiency).

Paying down your home mortgage can be considered a false economy due to the potential investment returns lost.

But this has to be weighed up against the significant emotional gains of having a debt-free home. With recent 70%+ increases in income protection insurance, paying off your home loan may provide better value by allowing you to reduce insurance requirements.

4. Deferring Critical Spending

When considering a potential expense, consider whether it is essential. Often the inevitable spending are the boring costs none of us wish to pay for.

Home maintenance is a classic example. Regular maintenance is likely to prevent larger and more costly repairs in the future.

Looking after your health is another. Preventative health checks can avoid a whole world of pain, emotionally and financially. Not being able to work in a few years time is likely far more costly than just dealing with a health issue when it is reasonably small and manageable.

5. False Economy with Your Time

Anyone who has been following the personal finance crowd for a while will understand that personal finance is not really about money at all.

“Finance enthusiasts” get their money sorted in order to gain control over their life, particularly their time.

Terrible things happen to great people all the time. And it’s far too easy to assume we have all the time in the world.

Avoiding productive and meaningful activities because you don’t “have time” and waste too much of it scrolling or watching Netflix is a false economy. Make the time first for the most important things to you. Try and fit the rest around this. What are your big rocks to get in the jar first?

6. Skipping the Emergency Fund

Some sites (particularly for doctors) advocate skipping the emergency fund.

I think each individual has different emergency requirements. But most of us could imagine a one to two thousand dollar expense that could come up. Those with families, homes, and investment properties could have unexpected expenses running into the tens of thousands easily.

You may need a backup fund in case of unemployment. Do you have a permanent contract and are an essential worker? Are you a single or double-income household?

If you save equivalent to the largest emergency expense you can imagine each month, perhaps you can use a credit card (kept only for emergencies) to cover the expense until payday? I am pretty risk-averse, but we are all different. I can see for those without a mortgage, earning ~1% interest for emergency fund savings is unappealing.

Make sure you think about all scenarios in detail before deciding to give up on the emergency fund. I wouldn’t be without it.

If you have a mortgage offset account, you can keep an emergency fund in there and save interest (tax-free). There is still an opportunity cost of keeping your cash in an offset over investing, but it is not as severe.

Those with a mortgage offset will at least be able to save interest equivalent to long-term inflation.

7. Saving Money on Critical Insurance

I know, another horribly boring way to spend money! People are tempted by the two extremes – either paying for every insurance going due to loss aversion or tempted to skip critical insurance.

When considering insurance, I am a big follower of Scott Pape’s advice to only insure for catastrophic events. If you can afford to self insure, do so.

If you drop your phone, it is really annoying having to pay to replace it. But it won’t cause a major problem in your financial future. If your house burns down, or you crash into someone’s Mercedes, these unexpected expenses could make a big impact on your financial life.

Getting insurance right unfortunately requires us to think about potential events no one wants to acknowledge as a possibility.

What if you or your partner are killed, permanently disabled and unable to work? Or a child gets a significant, potentially life-threatening condition?

Hopefully, this time will be wasted as these events will never happen. But if they do, the fact you prepared “just in case” will provide some relief and a lot less stress on top of what is already an extremely stressful and unpleasant experience.

8. Not Investing in your Relationships

Perhaps you have drunk the personal finance cool-aid, and are completely on board with delaying gratification for the greater financial good.

There still needs to be some balance along the journey.

If you sacrifice everything, work every hour available, hit a super high savings rate but have no time to spend with the ones you love, you are very likely to regret it.

Relationships are what make life enjoyable, far more so than incredible luxuries and experiences. Have you ever been sightseeing on your own? It just isn’t the same without someone to share it with.

Neglecting your family and friends can lead to more distant relationships that can be hard to heal. Not treating your spouse as you should can lead to the potentially most expensive life event of all, divorce. Neglecting your kids will lead to a lifetime of regret that no amount of money will compensate for.

Cherish those important to you. Make it a priority, and build habits that strengthen the bonds that are important to you. For those that tend to forget, and time slips by, create regular reminders (I use todoist*) for yourself to check in with the important people in your life.

9. Neglecting Saving for Retirement

Retirement is not a very appealing prospect in your 20s and 30s, particularly if you are embarking on an exciting career.

But saving for the long term will provide so many benefits and options available only to those who are financially secure with savings.

You are also probably broke and think you can’t afford it. But it really only takes a tiny amount when you are young to make a big difference over the long term. In your 20s pick the low-hanging fruit. Take advantage of low-income and spouse contribution tax offsets when you can. Consider starting a micro-investment account and start investing tiny amounts whilst learning about the stock market. Salary sacrifice to gain any employer bonus super contributions. If you know where you’re going in life, make a plan. If this is overwhelming, start saving and build up to a savings rate of 20%.

When you can afford a little more, try to increase your salary sacrifice or deductible super contributions to reduce your tax burden. Build up to maximizing your concessional contributions as your income improves. When that pay increase comes, think about making or adjusting your plan, and investing outside superannuation if appropriate.

Waiting until your 50s to start ramping up super contributions is inefficient, particularly if you then need to make non-concessional contributions (having paid your full tax). Spreading super contributions throughout your life is the most efficient use of your money due to tax concessions and compound interest. That leaves you with more money over your lifetime for the fun stuff!

10. Blowing your Pay on Tax

Tax is our biggest (by far) expense, costing around 30% of gross income. Over a 20 year career as a staff specialist, I expect to pay at least $2.6 million in tax.

You will pay a lot of tax over your lifetime, depending on your career and working longevity, more or less than the figure above.

Doctors often make foolish decisions, led by the desire to pay less tax. Making investments for tax savings is a terrible idea. Spending money for the tax deduction also doesn’t make any sense. At least 55% of the cost is coming out of your own pocket rather than the ATOs.

So decisions should generally not be made based on potential tax savings, but once a decision to invest or spend on a tax-deductible expense, an effort should be made to ensure tax is minimized. This means, making sure you have a system for collecting details of tax-deductible expenses so you don’t forget any at tax time. With investments, consider the tax implications before committing, as a change in the structure in which you invest may make a significant difference (trust, super, company, individual, education investment bonds).

The one investment I think you should consider tax first is superannuation. If you are paying 32% tax, you will receive a 17% immediate return by salary sacrificing extra into superannuation.

By taking advantage of spousal super contributions while they have a low income you will receive up to 18% immediate return.

The government’s co-contribution scheme will provide a 100% immediate return on $1000 voluntarily contributed to superannuation earning less than $41,112. That is a risk-free return. Unbeatable!

All these benefits have income thresholds, and super balance limits set, which means you will become ineligible as your income and super balance increase. Take advantage of huge risk-free returns while you can!

False Economy Conclusion

Avoiding false economy spending is all about thinking long-term. Few of us can see our entire life’s trajectory, so often we are forced to work on likelihood.

Spend some time weighing up how to deploy your funds effectively over your lifetime, and get the most bang for your buck.


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.

10 Wasteful Expenses that are Robbing You Blind

*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 trying to find ways to cut back on spending without missing out on life?

The financial independence community tell us that cutting spending in the three biggest categories (usually housing, vehicles and groceries) will make the most dramatic difference to your ability to save.

This is really useful advice to consider for those starting out, as buying less home and car than you can afford can provide a lot of freedom in life. But these may be non-negotiable or already optimised for your household.

There is usually still plenty of wiggle room to reduce spending in other categories, particularly if you are a high-income earner.

What are Your Top Three Expenses

Some high-income earners may find their three top spending categories are not as expected. Our highest spend before COVID-19 was on holidays (and no regrets!)

According to 2016 ABS data, high net worth households spend on average:

Of course, it is even more useful to track your own spending and work out which categories your own splurges lie.

But I think these statistics are also very useful.

Low, middle and high income earning households on average spent the most on:

  1. Housing
  2. Food and non-alcoholic beverages (Transport for high income earners)
  3. Transport (food and non-alcoholic beverages for high income earners)
  4. Recreation
  5. Miscellaneous goods and services (Medical care & health expenses for low income households).

Recreation, transport and miscellaneous goods and services seem to cost more of our income, the higher income and wealth a household has.

Now, much of that is (hopefully) conscious. Once a household has accumulated a reasonable net worth (within the top quintile according to the ABS), they may well decide to loosen the purse strings and upgrade the car, as well as spend more on recreation and non-essential goods and services.

Remember being wealthy (having a high net worth) is very different from having a high income though. A high income will not necessarily result in wealth unless the high-income earner invests a proportional amount of that income.

If you’re only just starting your investing journey and would not yet consider yourself high net worth (or on track to your goals), recreational and miscellaneous goods and services are expenses worth examining closely.

Let’s look in detail at the wasteful expenses that could be blowing your chances of developing wealth over the next few years.

1. Paying More Tax than you Need

By far our biggest expense is tax, a category often forgotten when looking at spending. Of course, you cannot avoid tax. But you want to make sure you are optimising it and making your income as tax efficient as possible.

This category is often forgotten, as unless you are self-employed, you rarely have to make a physical payment to the ATO. You don’t miss the tax as you never see it. But you could be losing thousands of dollars you could better spend elsewhere.

Saving on tax involves a little bit of education and organisation, but zero lifestyle sacrifice. Read all your options to save tax and get them sorted asap.

2. Not thinking about Grocery Expenses

It’s way too easy to consider grocery costs as non-negotiable. Realistically, many of us spend far more than is necessary. Cutting down on these expenses can create immediate savings, but involves a change in thinking and habits. Options include:

  • Shopping once a week/fortnight only (+ fresh produce top ups)
  • Attempting to purchase as much unpackaged foods as possible (good for you, the environment and your budget)
  • Meal planningg
  • Buying and cooking in bulk and freezing meals for easy dinners
  • Buying packaged food with lowest price per unit ($/kg etc) – reduces cost and packaging
  • Challenging yourself to eliminate food waste by using up all leftovers
  • Using a cheaper supermarket if available in your area
  • Collecting points and using them productively if using Coles/Woolies
  • Setting a budget for your weekly shop and keeping under it (limits non-essential spending)

3. Stop Paying Double / Triple for Convenience

It’s easy to fall into the trap of paying a lot for convenience food.

Paying $3.50 for a bottle of water doesn’t seem like a big deal. Until you consider if you were a bit more organised you would have brought your own for free, without the negative environmental impact of a disposable plastic bottle (and water, if the advertising is to be believed, transported from a faraway mountain stream!)

$3.50 is not going to move the needle on any of your goals. But decisions like this made over and over again do add up to a significant impact.

Instead of considering the actual cost, consider the multiple you are paying over what you would pay if you were organised. According to the University of Queensland, the cost of tap water is approximately 0.3c per litre. So you are paying 100 times the cost if you forget to take your refillable water bottle.

Eating out costs a lot more than preparing your own food, and is almost always a lot less healthy. Save eating out for special occasions, a carefully chosen restaurant with a great atmosphere and amazing food. Otherwise, build a repertoire of mostly healthy snacks you can prepare easily and take with you.

4. Prioritise Discretionary Expenses

The easiest way to prioritise “recreational” spending is to separate money available for discretionary spending and limit it.

With a regular, but limited supply of “fun money” over time, anyone learns to optimise it. You far more quickly learn what spending didn’t provide great value, and stop repeating the process.

This is a great strategy for couples, particularly with one spender and one saver. You will both need to come to an agreement on the amount of discretionary spending that should be allowed. I suggest individual limits, so the saver is encouraged to treat themselves a little, and the spender feels they can indulge themselves without invoking judgement from the saver.

5. A Luxury Vehicle before You’ve Earned It

Young men, particularly, seem to feel a lot of pressure to prove themselves via the vehicle they drive. Purchasing too much car too early in your financial life can really damage your chances of ever actually being wealthy enough to afford a flash car, financial security etc.

“Buy the cheapest car your ego can afford”.

For those of us without a lot of ego or interest in vehicles, you probably want one that won’t break down on you!

If a flash car is something you aspire to, make it a long term goal and reward. Get your dream car, after you have got your finances on track. Then you will be able to enjoy it without financial stress or regrets.

6. Stop Impulse Purchases

Does that “Miscellaneous products and services” ring any bells?

Is anyone else struggling with the fact you don’t even need to go find the credit card to make an online purchase anymore?

Advertising is getting smarter all the time. Adverts are woven into social platforms and individualised based on google searches, comments, clicks or even spoken about within earshot of our mobile phones. I’m sometimes convinced google can actually read my mind.

I am now the proud owner of a “lotus mat,” promising to take away all my aches and pains and have me practising yoga until I a centurian. I know. I’m a doctor. I know better. But it sounded so good! A magic fix for irritating musculoskeletal problems that is costing me hundreds of dollars in physio and daily exercises forever.

Spoiler alert: It doesn’t seem to be a magic fix. My purchase will probably end up stuffed into a cupboard only to be rediscovered in a few years.

Yes, I don’t really need to save a lot more money. I’m already on track to our goals. But I also don’t need a load of rubbish in my house overflowing out of my already overstocked storage.

Nowadays I keep a wish list in a notes app on my phone. When I am tempted to buy something (often as a result of a Facebook ad) I add it to the list. Given a month to think about it, I realise I don’t want most of these items, and I am more aware of the costs of my potential purchases with a month worth listed on my phone. The things I really want that will fit into my fun spending budget I can then purchase.

7. Mobile Phones & Internet

I hope you are not still buying mobile phones “on contract”. You know the phone companies are ripping you off. Buy phones outright and choose the contract separately.

Consider buying not the latest model of phone to save a few hundred dollars, but the recurrent costs of the contract are probably more significant.
To save even more you could go for an annual plan such as that offered by Kogan.

Similarly, shop around for internet providers, There is a lot of competition now and they often use the same network as the big providers.

8. Stop Wasting Power

Power costs have been escalating for years. Taking the steps to save power daily can seem like a hassle, but like most other things, can easily build into habits that become second nature.

Use appliances (like your washing machine, dishwasher, pool pump) at the cheapest time of day, using timers if necessary. Get your home insulated to reduce heating and cooling costs. Set air conditioners to 25C and heaters to 20C and isolate rooms to use them in, with closed doors and windows. Turn appliances off standby as part of your routine (you can get remote controls to make this easier).

Buy energy-efficient appliances, and shop around for the best deal on power. Having purchased a home you plan to stay in for many years, consider solar panels.

9. Alcohol

Alcohol is a huge and often destructive part of Australian culture. It is easy to spend a lot of money on booze.

Alcohol helps many of us relax, but at what cost?

It often results in poor sleep, reduced productivity, mood depression and poor long term health.

If you drink, alcohol should be part of your “fun money” budget. Consider cutting down if you think it is providing more downside than up, and find new relaxation rituals.

10. Outsourcing

Outsourcing can go either way. At some point in your life, it will make sense to roll up your sleeves watch a youtube video and get on with it yourselves. As your income increases and you become more aware of your own strengths and weaknesses, it may be worth outsourcing certain jobs.
When considering whether to DIY or outsource weight up

  • Cost of outsourcing vs post tax income of you working extra hours (if available) instead of doing the job yourself
  • Quality of result likely outsourcing vs DIY
  • Whether you will enjoy the challenge of DIY
  • Whether you will actually work the hours to pay for outsourcing

Even if you can Afford it, Can’t you think of Better Ways to Spend it?

It’s easy to start slacking off with all the above when you have enough to pay the bills without worrying.

It’s how many high-income earners get into bad habits and forget to save for bigger goals.

Even once you are on target for all your big financial goals, I still think it is worth considering all these wasteful expenses.

Even if you can afford to waste money, is there really no better way you can think of to spend it instead?

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 Should you Spend on Holidays?

*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 starting to dream of travelling again?

Leaving home over the past 2 years has been a risky endeavour, with local and border lockdowns occurring frequently and at short notice.

After booking and rescheduling at extra cost again and again I have avoided booking flights anywhere recently. But with state border lockdowns coming to an end soon, and international borders open, my feet are getting itchy.

After 2 years of minimal travel, (I haven’t even been interstate, despite several attempts to) I want to go EVERYWHERE this year. It’s hard to narrow down, but visiting overseas (and Australian) family will be a priority.

Prioritising Now vs Later

This is the debate I am (and I think we should all be) constantly having.

I’m guessing anyone reading this blog is interested in optimising their finances. If you are a high-income earner, even a short period of time focusing on sorting out your finances results in outsized benefits.

There are a few perfect freaks who started investing in their teens and religiously saved a percentage of their income since birth. If you are not one of those, getting to a great financial situation is still going to take some work and effort initially.

Most of us are guilty of unconscious spending, and high earners are likely the worst offenders. It’s easier to pick up bad habits, and not bother thinking about spending.

The initial phase of finding ways to cut spending usually feels pretty painful, but it soon gets easier. Once you find the right balance, when you have cut out low-value spending, and automated your investments, it becomes as easy as your original unconscious spending lifestyle. At this stage, your financial freedom increases, allowing options that weren’t available to you. If circumstances change you are less and less “stuck” as your investments grow.

It took us 5 years of gradually increasing our savings rate to reach coast FI (for retirement age 60). At the end of this, we are ahead of schedule to meet all our goals with our current savings rate. Our savings and investments are automated and don’t really require a lot of thought anymore.

It is easy at this point to continue being finance obsessed, saving every dollar and “Unconsciously saving” as the habit of saving everything can become as entrenched as unconscious spending.

Reflecting on life, and what you want out of it is vital. Too many people let the years pass by without really thinking about any of this. No one has a guarantee of how long we have to enjoy life. There has to be a balance between now and later.

If travel and holidays are a priority, you may want to allocate more spending to this, or work out how to get more for less.

What is the Average Spend on Holidays for Australians

The average Australian spends $4,750 on an overseas trip, around 7.6% of the average yearly income.

Concerningly, around 1/3 spend more than they intended.

How Much Do Holidays Cost

Australia is the 12th most expensive country to fly internationally from.

I have certainly noticed a return flight from the UK to Australia tends to be cheaper than the same trip leaving Australia.

Some data collated by Budget Direct suggest it’s not necessarily cheaper to travel domestically.

The average cost per night of an Australian domestic holiday is $193 per person, for a trip overseas the average cost of a night ranged between $162.25 and $233.33. Average holiday cost statistics 2020 | Travel Research & Statistics — Budget Direct™

What are your Priorities?

The key to all of these articles is that you should spend your cash on what truly brings you great value and enjoyment. If you find travel stressful and would rather be at home, you would have to be crazy to pay these prices to travel voluntarily.

But I enjoy a change of scene regularly and love to see new places to explore.

If travel is something you prioritise, budget for it. Work out how you can get the trips you desire inside your budget.

For some people, travelling is about experiencing Michelin 5* restaurants and staying in the fanciest hotels. I feel like I don’t have the upbringing to feel comfortable in these places! I’d rather carry my own bag to the room than fret about what (and how) to tip a bellboy. I cringe at the thought of taking small children to these fancy establishments.

For me, travel is about experiencing as much as you can. My priorities are seeing the sights, the kids having loads of fun and being able to relax. I like to stay somewhere comfortable, but can still enjoy roughing it for shorter breaks when the dollars are better spent elsewhere.

Work out what your priorities are when you holiday.

Holiday Goals

Time to write a bucket list. If you’re anything like me, the list of trips will be large and varied! If you start with everything, you can start to work out the best order for your trips.

Timing (Read Die with Zero)

When you are young, fit and healthy it is time to enjoy the most energetic activities. Splash your cash on the activity (bungy jump?) you won’t want to do when you’re older and save splurging on the fancy hotel until you’re older (and fussier).

If you are planning to start a family in the next few years, which trips would be best before travel gets a bit more complicated?

Young families are very varied in their willingness to travel. Some avoid it as the stress of transporting kids away from their familiar environment means parents can’t enjoy the trip anyway. Others are intrepid explorers even with small kids, strapping them into backpacks for extended travel. You kids could have medical conditions that may alter your ability to travel, but otherwise, I suspect do just adapt to what the parents expose them to.

We are somewhere in the middle. I do tend to plan travel around the kids’ needs. If they are happy and entertained, I can actually relax.

You may want to time your trips around the kids’ ages. Their ability to partake in kids clubs and sports lessons may also alter the ideal timing for your trip.

Lastly, small kids are very easy to impress. Don’t use all your money with the “Wow” holidays until they are ready to appreciate them.

Under 5’s love nothing more than to camp, cook marshmallows on a campfire and collect twigs and rocks. My under 10’s still love camping but also really enjoy playing with other kids at cheap family resorts with pool slides. I imagine it’s going to take a bit more effort to get teens to declare a family holiday as the “best trip ever”.

Setting a Budget

We should all set an annual budget for holidays. However, it is perfectly reasonable to spend more in one year, as long as you cut back the year before to make up for it. A big overseas holiday to a bucketlist destination is almost always out of budget. But perhaps you could manage it if you stick to camping the year before whilst saving up?

The average spend quoted above really doesn’t mean much. The amount you should budget annually depends on your income, goals, priorities as well as how far along the financial journey you are.

If you are just starting out investing, and aren’t yet on track to your goals it’s wise to reign in the travel budget. Once you are on track (or ahead) towards your big goals, it may be time to prioritise travel more in your budget.

Sticking to Budget

Remember to budget for:

  • Flights if appropriate
  • Travel insurance
  • Car rental or public transport / taxis
  • Accommodation
  • Meals
  • Drinks
  • Special ticketed activities
  • Catching up with friends
  • Any new clothes / luggage / equipment you will need to purchase for the trip
  • 10% Overspend fund

It is very likely you will come across great experiences on your travels that you haven’t budgeted for. Do yourself a huge favour and allow 10% or so for these unpredicted expenses. You will want to make the most of your time on holiday, and do all the things.

It can be sad when holidays come to an end, you don’t want to come home to a credit card debt to be paid off as well.

Squeezing Everything Inside the Budget

I’ll bet your ideal trip won’t fit inside your budget! Time to make it fit. Work out what are your priority “Must do” expenses and cut back on the lower priority items.

Consider:

  • Using credit card/supermarket points to pay partially or fully for flights or accommodation
  • Staying in cheaper accommodation (camping, youth hostels, airBnB…)
  • Renting self catering accomodation so you can prepare most meals at home. Given eating out generally costs multiples of cooking for yourself, this is likely to be a great saving (and ideal for families with picky kids)
  • Using public transport instead of renting a car
  • Reducing car rental expenses by using credit card insurance instead of being ripped off at the airport
  • Bringing your own kids car seats to avoid the daily charge which seriously adds up!
  • BYO alcohol or abstaining
  • Reducing the number of ticketed events, and looking for natural and free attractions
  • Borrowing or buying second hand clothes/luggage/equipment

You may want to earn some find some extra money to cover the gaps

  • Working an overtime shift for holiday money doesn’t seem so bad!
  • Selling items from your home you no longer use

Planning Cost Effective Travel

An Epic Road Trip

Planning an epic road trip from home can result in a fun, fantastic, and reasonably cheap holiday. Australia is an incredible destination, and could take an entire lifetime to fully explore. We took 5 months to explore with our little family in 2016, and have barely scratched the surface.

Where have you still not been within an 8-12 hour drive of home? Perhaps this year is the time to get exploring! By avoiding flights (particularly once you have kids > 2 years old) you will save hundreds, or thousands of dollars.

The bonus of adventuring for the first time is the flexibility. You can adapt the journey depending on how it’s going. Worst case scenario, you can easily pack up and come home.

Travel to More Cost Effective Countries

Travel to certain countries is obviously a lot cheaper than others. Once you have paid for flights, a long holiday in Thailand or Bali can be very cost effective. Given the flights are usually the biggest expense with these trips, it is worth going to your destination once rather than have more than one holiday to the same area. You will need long enough to do everything you wish whilst you are there.

Tack on Holidays to Family Visits

For those of you like me, with family overseas, consider booking flights with an extended stopover for a second holiday en route to your family. It means you get a pure holiday on top of the family trip, and save significantly on flights in comparison with booking a completely different trip.

Similarly, with family in Australia far enough away you need to fly, try and extend the trip and taking a side trip whilst you are there. Visiting family is awesome, but it can easily use all your paid time off as a full time employee.

Being able to take long enough off work for extended trips to make the most of your holiday dollars usually relies on being financially healthy with a flexible employer. Some employers (including public health) allow time off at half pay which massively increases your holiday flexibility. Being self employed can provide the most, or least flexibility depending on the business you run. I don’t see many farmers taking holidays!

Working Holidays

Are you a highly skilled worked in demand? Doctors and nurses are in short supply in so many rural and regional towns, often in fantastic locations.

Locum agencies will usually pay to fly you to the location, and will often provide family friendly accommodation if requested.

You may be able to negotiate days off between shifts, or to delay employer paid flights home for a few days. That way you can tack on a mini holiday to the (largely employer paid) work trip.

This is a great solution to those in the early days of getting serious saving and investing, and with little cash to spare. You often get to see a part of the country you would never have known about prior, and do some sight seeing without spending much. Meanwhile, you boost your savings with the extra earnings and help out a much in need workplace.

Don’t Miss out on Holidays Because you are Saving

No matter what stage of getting your financial life sorted you are at, I don’t think it’s a great idea to miss out on holidays all together.

Work out your goals, priorities, financial stage and get imaginative. Work out the best way to get maximum holiday fun for your budget.

Comment below, do you have any other tips to squeeze more awesome experiences from a tight holiday budget?

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.

A New Concept: Die with Zero Review

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

Die with Zero by Bill Perkins

Bill Perkins is an American engineer, hedge fund creator and poker player. He published Die with Zero in 2020.

Who Should Read this Book?

Die with Zero, despite the controversial title, is about squeezing every drop of joy out of life. It turns around traditional financial advice and instead urges readers to loosen the purse strings and make hay while the sun shines.

If you are struggling to get out of consumer debt, or haven’t yet set up a money management system, savings routine and investment plan I would suggest writing this book suggestion down for a few years. The timing of reading this book is very important.

Timing

It was actually perfect timing when I pressed “Buy” on my kindle last month.

We have just finished reviewing our progress after 5 years of getting serious about saving, investing and paying down our mortgage. We’ve made significant progress, and more importantly, have a money management system with saving and investing automated. We are now Coast FI for traditional retirement at age 60, and ahead of schedule for me to be able to retire (if I want to) at 55.

We’re not close to full financial independence yet, but I don’t think we need to be.

I have always only had one foot in the financial independence philosophy. I only plan to retire a little early and may continue with voluntary or other work I love, regardless of pay.

The Financial Advice Gap

But the huge explosion in information, opinions and philosophies produced by the financial independence community in the US and now in Australia, is incredible.

Financial advice is unaffordable for those without many assets to start with. By the time investors have worked out to accumulate a good asset portfolio, most don’t need professional advice. Advice is often biased by hidden incentives and too narrow in its scope. Most financial advisors can only advise on “investment products” not property. Property advisors are largely unregulated.

It is extremely expensive to get good, independent unbiased holistic advice on the whole picture.

Finance bloggers have been helping to bridge the financial advice gap. Blogs also provide a forum for people interested in finance and investing to chat and share ideas. People tend to feel more comfortable without the judgment that can result from showing interest in a taboo topic like money in our “real lives”.

Financial Independence & Die with Zero

Financial independence means something different to everyone. For me, it is as much about getting value for money, squeezing every drop you can from your finite resources. And that’s where Die with Zero and Financial independence meet.

I feel like we have now done most of the heavy lifting with 5 years of focus on finances. We will continue paying down mortgages, investing in ETFs outside super, and into superannuation each year.

But the hustle of saving up for investment property deposits is done. We are on track (or ahead) and everything is automated. I feel like we can lift our eyes to the horizons and focus on other priorities whilst our investments continue to compound in the background.

This is why it was a perfect time to read “Die with Zero”.

Why Read Die with Zero?

It is common, particularly amongst the financial independence community to get rather single-minded, one might even say obsessive about saving and investing. It can start to take over, even damage relationships.

It is important to stop regularly and reflect on whether we can squeeze a little more joy from life, along the way. I’m looking at you (and me) type A personality!

Death Bed Regrets

The book spends some time exploring common deathbed regrets. After all, if we could look into our own futures and work out what we would regret in the end, it would surely change our behaviour in the present.

Bill Perkins quotes the work of a palliative care nurse Bronnie Ware who has published her own book about the 5 most common death bed regrets:

  1. I wish I’d had the courage to live a life true to myself, not the life others expected of me.
  2. I wish I hadn’t worked so hard.
  3. I wish I’d had the courage to express my feelings.
  4. I wish I had stayed in touch with my friends.
  5. I wish I had let myself be happier.

The author also points out that we too often feel there is all the time in the world to get round to those “one-day” aspirations. By considering one’s own mortality, and acknowledging our time is finite, we tend to pursue those dreams more aggressively and even enjoy everyday experiences more.

What would you do differently if this was your last week, year, or decade of health?

You can Have Time, Health, and Money, But Not All at the Same Time

Bill points out that most of us start out with plenty of time, hopefully, healthy but very little money. As the decades pass, responsibilities increase, our time disappears and our health falters.

He urges us to maximize these assets at the time. In my 20s I slept in the front seat of a small car backpacking. We had 3 weeks to get up the East coast of Australia, and very little money.

My travel companion and I still giggle about our ridiculous adventure. We had an awesome time, and the absence of luxury didn’t seem to bother us.

I can’t imagine enjoying this same mode of travel/accommodation in my 40s! Unfortunately, I have collected some musculoskeletal injuries that would make the trip very uncomfortable. The good news is, I could afford to stay in hotels and enjoy that little extra luxury nowadays. But I am so glad we took that crazy trip!

The author of Die with Zero prompts us to prioritize the active experiences whilst we are well enough to do it.

Memory Dividends

Bill Perkins points out that spending money on some of these experiences is, in a funny way, a kind of investment. These experiences pay “Memory dividends” for years to come. The earlier we have those experiences in life, the longer we have to enjoy the memory dividends. And things don’t need to be expensive to produce amazing memory dividends.

Contrast my crazy trip driving up the East coast and sleeping rough for 3 weeks in my 20s with the equivalent, in comfortable hotels in my 40s. Which do you think would pay better memory dividends? I have no doubt my travel companion and I would have a great time doing it again in a bit more luxury. But it would never feel as adventurous as the original trip. We wouldn’t have the same experiences as we did in our 20s, or I suspect meet as many people.

Risk-Taking

The author rejects the traditional advice to play it safe when leaving school. He points out, that if there is a time to take risks, it is when you are young, have few responsibilities, and have time to rebuild.

He gives the example of someone with a dream of becoming a professional actor. The young person’s parents may well advise them that the chances of success are slim, and encourage them to follow a more predictable and stable guarantee. But will that young person always live with the regret, and “what ifs” of not pursuing the dream? The author points out that a few years of trying to achieve their acting dream is a small sacrifice to have given it a try, even if they fail.

Prioritize Healthcare

Bill Perkins points out that without health, you have nothing. Money and time spent on health are very wise investments that you will never regret making.

I am 100% on board with this one. Look after yourself, get your teeth checked, eat healthily (most of the time), and exercise regularly. Be proactive with injuries or health symptoms.

As a doctor, I have had the privilege of working in areas with wealthy and poor communities. Money makes a huge, visible difference to health and ability to perform and enjoy activities in your 70s and beyond. The profound differences between the two populations are a result of better diet, leisure time, and exercise as well as proactive healthcare.

Bill Perkins points out that money is best spent on preventative health. He points out that spending large amounts of money on healthcare at the end of life (when he implies you are drooling in a nursing home) provides far less bang for your buck.


Planning Your Life

Die with Zero encourages us to take a long-term outlook when planning our lives. Instead of just planning the next 1-5 years, the author suggests we should plan our whole lives. His point is that it is easy to miss out on the optimal time for some of those “one-day” experiences you never quite get round to.

He suggests thinking about your life in 5 years “buckets”. Make a list of everything you want to do (and of course, this can change over time). Then work out when the best 5-year time bucket is to do each activity.

I particularly like this idea when planning experiences with kids, partially because I desperately don’t want to miss out on anything with my little ones. We had to time our trip to Lapland (I know, self-indulgent!) before they were too old to believe in Santa.

Small kids love camping. It’s amazing how entertained they can be finding sticks for the fire and exploring beaches for the perfect shells. Apart from our expensive trip to Lapland, most of our holidays while the kids are under 10 have been camping or visiting family.

As they get older, I imagine it will get harder to get them excited about a family holiday! Over the next few years, the perfect time to take our 1st family skiing holiday and to experience theme parks.

Spending during Retirement

The book describes data demonstrating that retirees spend most in the early years of retirement, even despite the challenging cost of healthcare in the US. The author asserts that dying with a full investment account represents wasted opportunities to enjoy oneself.

Bill Perkins encourages us to spend our money optimally, with the aim of running down our retirement accounts before death.

What about the Kids?

Instead of leaving an inheritance after death for the kids (usually in their 60s), he suggests giving that cash to them in their 20s and 30s when it can have maximal impact. If your kids have learned to manage money and invest well, they will not need that inheritance in their 60s. Almost everyone would appreciate a hand up in their 20s or 30s as there are so many competing expenses.

Charitable Giving

The author also sees a terrible waste in waiting to donate large amounts of cash to charities with your will. He suggests the charities could have put the money to good use far earlier.

Running out of Money

Bill Perkins suggests a solution to the obvious issue with the book – the risk of running out of money before death. This solution is to purchase an annuity so that you have guaranteed income to cover essential expenses as long as you live. With this increased certainty, retirees are more likely to live it up and spend their retirement savings without fear.

The Take-Home Message

There are so many uncertainties in life and investing. How could you possibly die with zero? Even the author admits it is impossible to get it perfect. But he does suggest that by aiming for zero we will all come a lot close to optimal use of our resources within our lifetime.

The obvious issue is the amount of uncertainty. You could die next year (in which case maybe you would quit work now and travel the world in luxury, using up all your funds). Investment returns could be 5% or 15% over the next 20 years. That makes a big difference to how much you should be spending.

I don’t think the book is supposed to be taken literally though. He challenges our thinking to remind us that life is finite, and we have to make the most of our resources (time, health, and money).

Die with Zero is definitely worth a read once you are well on your investment journey, to remind you that life is not all about money. Die with Zero regrets.

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: 5 Common Investing Mistakes (and How To Avoid Them)

*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 you have a money mistake you think readers could learn from me please get in touch at Admin@Aussiedocfreedom.com.

This week I have a generous guest post from Kate Campbell, Editor & Host of How To Money. Kate works in the finance industry and as a financial educator at How to Money. In today’s article, she shares 5 common investing mistakes, and how to avoid them.

When it comes to investing, one of the reasons that commonly holds people back from getting started is the fear of making a mistake.

This is understandable given your money is on the line, but something I’d really encourage you to dive deeper on.

Because at the end of the day, I truly believe the biggest mistake you can make is not actually starting at all.

But given we often learn through other peoples mistakes and can gain confidence by understanding all the ways we can go wrong. I wanted to share five common investing mistakes with you today, and how you can avoid them (because we’ve all made at least one of them at some point along our journey).

Investing Mistakes #1: Investing without a plan and decision-making process

One of my biggest suggestions for new investors is to write down a plan of attack before diving in. This gives you direction and keeps you focused. It’s easy to get distracted by every new shiny thing you come across.

I’d also encourage you to write down the reasons you make a particular investment, which you can review over time as you learn more along your journey.

Action Tip: Create a Google Doc to record your investment decisions and outline your investment plan.

Investing Mistakes #2: Investing money that you can’t afford to lose

Are you planning to invest your emergency fund or house deposit? If so, you’re playing with fire (and not the kind we like here in the financial independence community).

Make sure you’re not using any money you might need in the next few years. Otherwise, you might be forced to sell your investments during a market crash because you need the money.

Investing Mistakes #3: Investing in companies and products you don’t understand

Investing already involves risk, so why amplify that by investing in companies and products that you don’t understand?

If you’re planning to buy an ETF, make sure you understand how ETFs are constructed and managed before investing in them. If you’re planning to invest in an individual company, there’s plenty of research you should be doing first. By doing this homework, you’ll be much more comfortable with your investment decisions.

Action Tip: Take the free share and ETF investing courses on Rask Education to make sure you understand the foundations before starting.

Investing Mistakes #4: Investing all your money in one single investment

This is a mistake that investors of any age make (just read some of Scott Pape’s weekly columns), and a mistake that can financially wipe you out.

You might have heard the term diversification already. But if not, it’s the process of spreading your money across different areas (e.g. not putting 100% of your money in a single company).

Kate’s Tip: Spend some time learning about different investment options and ways you can diversify your investment portfolio. Plus, don’t bet the house on any one investment.

Investing Mistakes #5: Investing without keeping records and doing the work

This is a mistake I made starting out that I’d love to help others avoid. Every time you buy and sell an investment or are paid a dividend, you need to keep a record. This will help you down the track when doing your tax return and calculating capital gains/losses on your investments.

Plus, you need to make sure you’re updating the share registries for your investments so you’re getting paid any dividends and receiving key documents. Doing all of this will save you a massive headache at the end of each financial year.

Action Tip: Set up a Google Sheet doc or Sharesight account to track all your investments.

I hope learning more about some of the common investing mistakes and how to overcome them, will give you the boost you need to overcome the biggest investing mistake of all: never starting.

Do check out How to Money and Kate’s Aussie doc article outlining her individual wealth-building strategy here.

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.

My 5 Year Plan Complete: Financial Progress since 2017

*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.  

At the end of 2016, our family returned from 6 months travel with our then-toddler and baby. We had extended parental leave to allow us to travel Australia in a camper trailer, on the (dirt) cheap!

Background Before the Five Year Plan was Set

I am a doctor living in a regional town, married with 2 young kids. My financial five year plan began as I achieved my career goal of completing specialist qualifications and getting my 1st consultant post.

Until 2016 we had been pretty responsible with money. We brought far less home than we could afford in 2008 (on a combined income of $110K).

My income was unaffected by the GFC and increased annually. Interest rates also dropped steadily since home purchase until today!

The extra income earned through pay rises went directly into increased mortgage repayments. We never reduced our payments when rates dropped.

Eventually, we were paying double minimum repayments. Increasing them further didn’t seem to provide as much advantage in time to pay off the loan, so we paused further increases.

Here we entered a bit of a drift state. We were doing well with the mortgage and had no idea how to work out if we needed to put extra into superannuation. I liked the idea of investing but didn’t know where to start and didn’t have a lump of cash to start with.

We could generally pay for our reasonably modest lives (for a doctor household) without having to worry. I didn’t always pay off the full credit card every month, but would often use it to smooth spending over the year. For example, paying for a holiday on a credit card, and then paying it off over 2-3 months. Not ideal I know!

We saved cash for both our cars when we needed to replace them. His was second-hand (and a complete lemon, costing the same again in repairs). Mine was an ex-demo but only $20,000 and paid out of savings.

As my income jumped with the step up to consultant, we also became parents and I reduced my hours to part-time.

Time to See a Financial Advisor?

With a very good income, and now very grown-up responsibilities, we decided it was time to see a financial advisor.

I made every mistake in the book. I didn’t do any checks and booked in to see one that offered advice without charge.

The advisor-sold us lots of insurance, which as a single high-income household with small kids we definitely needed. But he also convinced me to move my super over to a wrap account with (in retrospect) extortionate fees and pain in the ass paperwork that they needed me to sign every few months.

I was aware I should avoid fees but advisors are excellent salespeople. He was using a lot of finance lingo I sort of understood, and I think I fell foul of the Dunning-Kruger effect. A little knowledge can be very dangerous! He convinced me “you get what you pay for”.

Between work, having and looking after babies, and our trip around Australia, I didn’t have a lot of free time to review the situation.

YOLO

We had long planned to renovate the house, which was poorly laid out and a bit small for our liking.

After years of delaying gratification, I had a huge YOLO moment and suggested to my partner that we should travel around Australia and renovate the house at the same time.

The Return to Reality before the Five Year Plan was Set

We returned in December 2016 for our first Christmas in our shiny, renovated at MUCH expense home. As a result of the huge reno, we were now 90% leveraged. We had no savings. The credit card was maxed out.

At the time it didn’t feel as bad as it sounds, I knew it was temporary and there was still regular income, which was about to increase significantly. In retrospect, it was irresponsible pushing this close to the edge!

Financial Situation @start of 2017 (Beginning of 5 Year Plan)

Super ~ Just over a year’s gross salary accumulated between both our accounts

House – 90% leveraged, low-interest rate though

Savings – 0

Investments outside super– 0

Credit card debt ~$5000

Getting Back on Track

Even at the time though, I knew we had to get back on track fast.

With returning to work, my income would receive a massive boost. I wanted to swing back to my financially responsible self and maximize this to get back on track.

I picked up the Barefoot Investor, read it cover to cover, and made notes. That night I started reorganizing bank accounts, opened a micro-investment account and worked out a fortnightly direct debit we could afford.

I have had an interest in finance, but finance became a new hobby for me over the next few years. I read blogs, and books and listened to podcasts.

Long-term Goals – Smart Goals

  • Retirement age 55 financially independent with $2.5M in assets between us
  • Kids education savings – Decided to put enough aside to cover worst case (most expensive) of medical school fees for both kids. If they don’t take part in tertiary education, they can use the money for a house deposit or business start-up.
  • Never work full-time again
  • Increase options/freedom to travel
  • Replace the cars when they need replacing

Five Year Plan – Financial Goals

Long-term goals need to be broken down.

I started with a 5-year plan, before breaking them down and identifying annual goals.

5-year goals:

  • Save money in offset to fund an investment property deposit for ~$600,000 property
  • Purchase investment property before my 40th birthday in 2020
  • Invest $125 per month towards the children’s tertiary education
  • Get the kids to Lapland!

Plan to Achieve the 5 Year Plan Financial Goals

  1. Increase income whilst improving control over income
  2. Reduce Spending
  3. Save a deposit for an investment property
  4. Research how to invest in property successfully whilst saving
  5. Research Lapland and find out how to do it without going bankrupt!

Five Year Plan: Increasing Income

Although I was returning to a wage well above average household contact, we had a lot of catching up to do! To find out why I decided to invest in property 1st, review my property vs shares article. To meet my goal of purchasing an investment property before 2020, I had to hustle.

Options to Increase Income

-Extra Shifts

Extra shifts are available from time to time at my regular work, but this was unpredictable. I worked overtime shifts when they came up and we didn’t have plans.

-Locum Work

Locum work was the obvious way to increase income dramatically, quickly, and reliably. There are loads of rural hospitals all over Australia that are desperate for staff, I happen to really enjoy working in them. By working in different hospitals, I got to experience different patient populations and perform a lot more clinical work than I do in my day job. I find it renews my enjoyment of practicing medicine.

Locum doctors also get control over when and where they work. In the future, increasing control and flexibility appeals to me.

Being paid in pre-tax dollars for my locum work also meant I could park those dollars in our offset account for up to 21 months, significantly reducing the interest incurred by the mortgage each month. The interest saved could then be used to pay the offset down further.

-Start a Blog

I was considering starting to write a blog to document my transformation from 90% leveraged broke doctor, to a financially responsible wonder woman fully in control of life. Again, the location flexibility of blogging appealed. If I could produce an income blogging (and that was a big if) I could maintain a modest income whilst we traveled further as a family.

But at the time, my 1st priority was getting cash flow in fast. There was no guarantee of producing any income with a blog, and if I did get to produce income it would grow very slowly. The idea of blogging was put on the backbench until 2019.

Five Year Plan: Reduce Spending

We had a chaotic banking system before I read Barefoot, even incurring overdrawn and dishonour fees occasionally.

Barefoot to the rescue. I opened multiple offsets, reorganized my accounts, and stopped paying bank fees. Most importantly, my partner and I agreed to separate a set amount each pay to go to our own splurge or fun account.

Next, it was time to look at cutting costs.

The biggest costs for many are housing, transport, and groceries. Cuts in these areas can often be the most significant moves. I wasn’t wanting to cut spending on housing, our vehicles are 10 and 20 years old, so already pretty cheap. Grocery spending was reduced by buying things cost-effectively (in bulk and on sale).

I started listening to the Choose FI podcast. It is an American pod, so not all the content is completely relevant to Aussies. But their philosophy resonated with me, and Brad and Jonathon’s enthusiasm has a way of catching on.

One by one I worked through our expenditures, identifying wastage and eliminating as much as I could find. Every time costs were cut (No matter how small), savings were increased by a corresponding amount.

I did find repeating this process twice a year helpful, as I became more comfortable with cutting expenses as my mindset gradually shifted.

Five Year Plan: Save a Deposit for an Investment Property

It may seem a little strange that instead of saving for a house deposit I opened a micro-investment account and set up a direct debit to invest in the stock market.

We are generally advised not to invest in the stock market for less than 7-10 years, and not before saving an emergency fund.

I had a bad case of impatience, and couldn’t wait to get started!

I reasoned that the date for property investing wasn’t set in stone. If it had to be delayed because of a market crash it wasn’t the end of the world to me. But in the meantime, I could take advantage of market growth (hopefully) and save that property deposit faster.

It was a risky move, and it could (and probably should) have bitten me on the arse. But it didn’t, I got away with it. In fact, I’m such a jammy git I withdrew the whole lot (~40K) days before the COVID crash. Beginners luck! I am definitely becoming more risk-averse as time goes on!

At the same time, we aggressively paid down that pesky credit card debt in our mortgage offset account.

We have been credit card debt free since early 2017, and at the start of 2022 so damn close to fully offsetting our mortgage, I can almost taste that (PPOR) mortgage-free lifestyle (2023?)!

As regular readers are aware, I brought our first investment property in July 2019, 6 months before my self-imposed deadline. There was a lot of media doom and gloom at the time, and I was pretty scared I could be making a mistake. Knowing there were no further steps I could take to reduce the risk, I took the plunge.

The property has performed well so far, even before the COVID boom. It has been constantly tenanted (touch wood) and we ended up purchasing a second investment property in 2021.

Five Year Plan: Research how to invest in property successfully whilst saving

I always liked the idea of being a property investor. After learning about stock market volatility, I liked the idea of diversifying retirement income.

I had never taken the plunge before because

  1. Didn’t think we could afford it
  2. I didn’t know where to start and didn’t want to get ripped off.

I read every book on property and investing that I could find and was overwhelmed by all the different approaches.

Thankfully, I was pointed to the Property couch sometime in 2017. I devoured the episodes and felt confident I had found my guide to buying property for investment. Initially, we planned to do it all ourselves to save some money.

But the more I learned, the less I knew! Eventually, I had to admit to myself that I needed professional help.

5 Year Plan: Take the Kids to Lapland

This was my Carpe Diem goal. I’m a bit obsessed with my kids and a pretty cheesy mum.

Once it occurred to me I could take them to Lapland, a quick google search later I was hooked on planning. We have family in the UK and had planned to go back to visit, and decided our Lapland adventure could be a great side trip.

Personal goals should be planned around major life changes and events. Kids are small for a limited time frame, and it won’t be too long before they’re too old for certain experiences.

But these are very expensive trips. Holiday companies offer 1-day excursions to Lapland (Rovaniemi, Finland) to reduce the cost as accommodation can be pricey.

We booked bargain flights to Helsinki, where we caught the Santa Claus express overnight train (Oh, yes). I found a charming Airbnb log cottage that belonged in a fairy tale. I hired a car (with snow tires!)

We saw all the sites, met Santa, took an exhilarating sled dog ride, saw reindeer, and had so much fun just playing in the snow. We even caught a brief glimpse of the Aurora in the 5 nights we stayed.

It was still expensive, and some parts were absolutely a rip-off (like the ice restaurant). But this was an experience of a lifetime and I am absolutely thrilled we did it.

Looking back, the pandemic was beginning in China as we were playing in the snow. I could not have imagined how life could change, and the ability to travel has been lost for so long. I am so glad we did not delay this trip in order to save more money!

Financial Situation @start of 2022 (End of 5 Year Plan)

Super ~ Just under two year’s gross salary accumulated between both our accounts (nearly doubled)

House – 90% offset, even lower interest rate

Savings – equivalent to 18 months spending in offset

Investments outside super– $85,000 between Pearler & kids education funds

Credit card debt ~0 of course

Summary of 5 Year Plan Achievements

It really is impressive how far a strong salary when you stay focused can get you in 5 years. It’s gone pretty quick! We have 90% offset our mortgage from being 90% leveraged. We have invested inside and outside super and purchased two investment properties. Limited ability to spend our money as a result of COVID travel restrictions and intermittent lockdowns have accelerated the progress as well.

What achievements have you got planned over the next five years? Five years is a long enough period to make huge progress towards your financial goals. Have you written down a five-year plan? What is your Carpe Diem goal? What will be your situation in 5 years – and will you look back at how far you have come with wonder?

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.