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.

M&M – The Female Money Doctor Shares her Most Painful Money Mistake

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

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

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

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

Introducing the Female Money Doctor

I’m Dr Nikki, a GP in the UK and a money coach for women. I’m 36, and 6 years ago I came to the biggest epiphany… I was broke.

And for a doctor, this was worrying. What had I been doing with my hard-earned money over the past 6 years?!

This realisation came when I was sitting in a hammock in Fiji (yes I know how privileged this sounds). Whilst taking a break from a stressful career in Obstetrics and Gynaecology, I had flown around the world. I was deciding whether to go back to work in this field or do something else. 

While I was away, I had time to think. And time to watch my money dwindle away to nothing. 

I was in a huge amount of credit card debt, and travelling was just making things worse.

It was at this point in my life that I had had enough of being broke and in debt. I vowed to turn it around when I got home.

I then discovered the FIRE movement, and I was hooked.

After this discovery, I wanted to shout it from the rooftops! So many of my colleagues and patients had money issues. I noticed what a profound effect it was having on their health. It was definitely contributing to burnout, because so many people were working to pay the bills, not to buy back their freedom.

I started The Female Money Doctor blog to help others turn their financial struggles around once and for all, and because I didn’t want them to make the same stupid mistakes I did.

What is your Worst Money Mistake?

I got into a lot of debt in my 20s (this doesn’t include my student loan from medical school). 

This was through careless spending, not budgeting and generally saying yes to everything! It was a fun time, but definitely not something I would recommend.

To make matters worse, I tried to dig myself out of the debt-hole by investing in a property investing course. It promised I would pay off the course, and the debt with just one property deal over the 12 months I was on the course program.

I used more debt to pay for the course to the tune of £25,000, and guess what… it didn’t work. I was in a total of £60,000 after this. The course was way too advanced for the stage of the journey I was at. To be honest, I do feel like I was conned out of this money. They played on my emotions, and it was a mistake made from a desperate position, and it has taken me YEARS to make up for it.

With the benefit of hindsight, were there any warning signs your decision was a Money Mistake?

Yes, I was warned by one of my mentors at the time not to jump into anything too hastily, especially as I needed to borrow to purchase the course. But I didn’t listen. I had my blinkers on and I was determined to go for it. 

With hindsight, the course was not right for me, or for the other 12 people also conned out of the money they paid. 

It was the most I had ever spent on a program (and still true to this date), and I will never make that mistake again.

Is there any way you could have avoided this Money Mistake?

By listening to my mentors and stopping to think things through. I didn’t know anyone who had done the course, so I should have sought out other opinions first from people in the know. Now I realise that I made this decision clouded by emotion. I felt pressured into making a choice quickly, and like this was the only choice I had. If I had just taken a moment to breathe and think, I would have avoided the mistake. But then I made some fab lifelong friends, I wouldn’t have been inspired to start The Female Money Doctor, so it’s not all doom and gloom!

When did you realise that you had made a Money Mistake?

About 6 months into the course when I asked other people how they got into property investing – not a single one of them had heard about who I purchased my course from. They were gobsmacked when I told them.

That’s when the penny dropped.

I also realised that no one else in the course had made a property deal either – except one person, who already had investment properties under her belt and had the network in place, the money in the bank, and the industry insider knowledge to follow through on what was being taught.

How did you bounce back after making the error?

I doubled down on paying off my debt. Using Dave Ramsey’s debt snowball method, I consolidated the rest. I became totally consumer debt free in 2020, and now I’m focusing on building assets to support my FIRE aspirations.

Writing the blog also really helps me, because I feel like if I can just help one person avoid making a desperate decision like I did, it’s all worth it.

Thanks so much for sharing your money mistake, Dr Nikki. It’s so easy to fall for that magic bullet (fake) solution to problems!

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 – Financial Confessions – Captain FI

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

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

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

In the M&M series, I have asked financial content producers to bravely confess their worst financial mistakes.

Read these warnings carefully and learn as much as you can from them to avoid making money mistakes of your ow

Captain FI is a retired Air Transport Pilot who lives in Adelaide, South Australia.

He is passionate about Financial Independence and writes about Personal Finance and his journey to reach FI at 29, allowing him to leave his Sydney based international flying job at 30 and move to Adelaide to start a family About  Captain FI or Contact Me

Website: www.CaptainFI.com 

Podcast: Captain FI financial independence podcast 

What is your worst financial error?

1.  Blindly trusting financial institutions (FEES)

2. Had my super set as ‘defensive’ for years! 

3. Invested in poor-performing mutual funds for years before actually checking fees and performance and cutting my loss

4. Accepted much less pay than I should have for years, which eventually took an admin and legal case to rectify the contract. 

5. Blindly bought $20K+ of ‘AFIC’ (ASX: AFI) thinking it was a concrete manufacturing company and not doing any research because it was recommended in the barefoot investor blueprint 

6. Blindly buying more barefoot and motley fool stock recommendations and underperforming the index (whilst paying them subscription fees for the privilege to do so…)

7. Entering into a ‘quick’ duplex build with doing no due diligence myself and having no appreciation for the risk of things like project schedule slip and budget blowouts (which happened!). The 12-month project turned into a 36-month project. 

8. Put off investing for years and instead of learning about it, just spent extra money on unnecessary pilot training and upgrades ($350k total). I somewhat don’t regret this as it helped me ‘scratch the itch’ of flying but I should have at least started investing at least a portion of this early.

9. Started an air BnB subletting business right before COVID-19 hit

10. Wasting hundreds of hours on a shitty side hustle (like t-shirt printing) after falling for ‘passive income’ YouTube content scams 

With the benefit of hindsight, were there any warning signs your decision was a mistake?

 In each case, more education and due diligence were required. Take a deep breath, do some research a googling and reading in order to make the best decision. If it’s too good to be true, it usually is. 

When did you realise that you had made a mistake?

When it was too late and I was already entered into the contract / purchased stock / started a business / invested/spent ages doing it 

How did you bounce back after making the error?

Thankfully I have an amazing savings rate and as a professional with an increasing income as seniority increased, I had disposable income I could divert towards better investments, and mostly focus on investing in basic things I understand: index funds, investment property, online business and superannuation.

This meant whilst it delayed me reaching FI, it didn’t stop me as I learned from these lessons and grew stronger 

Cheers, Captain FI

Thanks, Captain FI!

Thanks so much to the generous Captain for sharing his financial mistakes in time to warn us!

The Captain shares his own investing strategies, journey to financial independence and many books and financial service reviews on his blog, so make sure you check it out!

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

M&M – Over Leverage by The Joyful Frugalista

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

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

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

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

Over Leverage

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

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

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

My Worst Money Mistake: Over Leverage

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

So far, so good.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How I Could Have Avoided this Error:

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

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

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

When I realised Over Leverage was a Mistake?

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

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

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

How I recovered financially from Over Leverage:

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

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

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

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

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

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

Thanks, Serina!

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

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

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

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

A Step by Step Guide to Writing Australian Wills

*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.  

Chances are that at some point in your life you will need to write a will.

But the process can be confusing and intimidating so I’ve put together this step-by-step guide to writing wills in Australia. Since the property purchases, I need to get mine updated.

What are Wills?

A will is also known as a last will and testament. This legal document lays out how your estate (all your assets) should be distributed in the event of your death.

This document can also contain instructions for guardianship of children and pets. A will can also contain requests for your burial/cremation and funeral.

It does not include the distribution of your superannuation, which may for many be their largest asset. For this, you need to complete a binding nomination form, easily downloaded from your super website. This usually needs to be completed every 3 years to remain current.

Life insurance payouts are also excluded from the will and go directly to the beneficiary listed with your insurance company.

Who needs a Will?

Solicitors will tell you that everybody needs a will.

I guess when considering whether you require a will and testament, assessing what happens if you die without a will (intestate) is useful. If you die intestate, a court will distribute assets according to a strict set of rules.

These rules, of course, are different from each state and territory of Australia, and don’t take into account any personal information!

The rules aim to provide a simple, fair settlement for most families, the New South Wales intestacy rules are:

  • If you were married or in a de facto relationship, your spouse / defacto recieves your entire estate
  • You were married in a de facto relationship with children to that same spouse, your spouse / defacto still recieves everything.
  • If you were married but have children to someone else, your spouse recieves your personal effects, a statutory legacy (arbitrary set amount of your estate, $480,700 in VIC) and half of the remaining assets. If there are any remaining assets left, they are split between your children.
  • You have children but no spouse, the children recieve equal parts of your estate.
  • If you do not have a spouse of children, other relatives including parents, grandparents and siblings will share your estate
  • You have no relatives or dependents, all of your assets will become the property of the New South Wales government (!)

Dying intestate involves more complexity, administrative and financial burden for those left behind. Unfortunately, it also sometimes leads to family quarrels over who gets what.

As soon as you have any assets, a mortgage or children, a will really is essential.

Nominating an Executor

The executor of the will is the person who carries out your wishes after your death, including organising the funeral, paying off debts and distributing the assets. This is a pretty huge responsibility, so you need to check with the potential executor that they are willing to take this on.

There is nothing like an inheritance to split up a family. Previously harmonious and reasonable people can turn into green-eyed monsters and do unthinkable things when a large amount of money is at stake.

An independent professional executor seems an ideal situation, particularly if you think your loved ones will be overwhelmed by the process. Unfortunately, fees can be expensive. It’s worth checking with your public trustee and solicitor what the fees would be for your estate if an independent executor would be appropriate.

Whoever you choose as executor, they need to know where to find an original will document to apply for a grant of probate. This is the first step as executor and gives them the legal right to handle your estate.

You may want to provide your executor with an original will or leave one at the solicitor’s office as well as in a safe place at home. Make sure you inform your executor where your will is and who your solicitor is.

Unpleasant surprises (such as being given less in the will than expected) cause family disputes and legal challenges. It is best to let your family know your wishes so no one is surprised on discovering your will.

Your executor should claim a fee if they are not a beneficiary in the will to compensate for the time and effort involved in the role of being the executor of the will. If they are a named beneficiary they cannot claim a fee. If you want to set a specific amount of compensation for the executor, you can do this by naming them as a beneficiary of what you think is reasonable.

How to Write a Will

There are three main ways that wills in Australia can be written. “Do it yourself” wills, hiring a solicitor and using the services of the Public Trustee. Each has its own advantages and disadvantages.

DIY Wills

The benefit of DIY wills is that you can do them yourself and it will cost a lot less money if you have little assets to leave behind. You need to ensure the will is valid, so it’s worth getting the public trustee or a solicitor to check you have correctly completed the document.

Public Trustee Wills

Public trustees will complete your will for free if you are aged over 60 years or nominate the public trustee to be the executor of the will. Unfortunately, there seem to be fees upon fees for this service. It is definitely worth checking the fees involved in the management of the estate and carefully considering options.

Solicitor Wills

If you want help with drafting or executing your will then hiring an experienced wills solicitor is ideal. The advantage here is that they know what should and shouldn’t go into your will, making sure everything goes smoothly and nothing gets forgotten about.

It may like a more expensive option at first, but it could save a lot of money and heartache if you have an estate to distribute.

Before we owned investment properties, we paid ~ $800.


What to Include in Your Will

  • Assets such as savings, investments, properties
  • Guardianship of children
  • Belongings of substantial emotional or sentimental value (ours includes the distribution of hubby’s fishing gear!)

What is Not Included in Your Will

For many readers, your largest assets on death may not be included in your will. Your superannuation and life insurance payouts go to your nominated beneficiary.

Writing a will with a solicitor’s help is a sobering process. It involves thinking through every morbid situation you can imagine and working out how to write your wills to cover all situations.

Remember to consider:

  • If you die and leave your family / dependents
  • What if you die and then your partner remarries?
  • If you and your partner die together
  • You, your partner and children die together

If you die, and your partner dies a year later, are you happy with your partner’s will beneficiaries? Many couples have “mirror wills” that are exactly the same.

Naming beneficiaries

Here you name your beneficiaries and what they should receive. It makes sense to make this as future proof as possible, as your assets now will change and hopefully grow over time.

Using percentages of your assets gives the flexibility to keep the will relevant as your net worth grows. If there is a possibility of more children being added to the family, ask your solicitor about dividing assets “between the children”. Stepchildren, however, will not be included under this and will need to be named specifically.

You can name anyone you want as a beneficiary including non-relatives and charities.

If there is anyone you specifically want to exclude from the will, talk to your solicitor about this. Excluding someone who would normally be expected to be a beneficiary can result in legal challenges, expenses and long court battles. Your solicitor may advise you to provide documentation of your reasons for excluding a person or bequeath them a small gift to demonstrate that their omission was not accidental.

Guardianship of Children

I reckon this is where most people get stuck and put off writing a will forever. It’s an awful thought experiment to consider options if your children were orphaned. It’s very unlikely to happen, but unfortunately, it does occur.

The alternative if you do not make a decision is that your children’s future will be decided in family court by strangers. Consider it a preventative measure using Murphy’s law, if you make a plan it surely won’t ever be needed!

For some, this decision will be easy. If there is a geographically close family member who is actively involved in your children’s lives, has a great relationship with the kids and would be willing to take on their care, that’s perfect. Keeping the kids close to home means less upheaval after such a traumatic event it would be kind to keep them at the same school and close to their friends.

For many of us far from family, there is no ideal solution. The guardian can be a close family friend rather than a relative if that is more appropriate. But if your sister with a non-existent relationship with the kids on the other side of the country might be shocked you chose a friend over her, you need to inform her just in case. Explaining your reasoning can help prevent surprises and legal battles. Often it’s a case of choosing the least bad situation.

The most important factor for us is that our children would feel loved and supported, as well as have a stable home with guardians young and healthy enough to care for them until adulthood.

Obviously, asking someone to become a parent to your children is a massive ask! This should definitely be discussed prior, with the opportunity for the potential guardian to decline without feeling obliged. No one wants their kids to grow up in a family that resents them.

Your Children’s Money

A testamentary trust can be set up on your death to hold assets, including property and investments, for your children. This trust will be managed by someone you designate to manage this until the children turn 18 (or whatever age you choose). This is obviously open to abuse.

The person in charge of your children’s trust should be someone to trust to do the right thing. You can also give the financial trustee role to someone other than the child’s guardian. Whether this will help protect the money, or cause family arguments is very dependent on the individuals.

Make Sure its Valid

There is no point in writing a will if it is not valid. It needs to be signed by two witnesses and yourself. It needs to revoke previous wills. Any adjustments to a pre-existing will need formal adjustment (a Codicil) and again needs to be signed and witnessed by two witnesses. I would urge professional help if you have assets outside superannuation and life insurance.

A will is invalidated by marriage, so you need to organise a new will after the wedding. Divorce also changes the validity.

While Your At It

While you’re doing grown-up jobs, consider the need for an advance health directive or Power of attorney.

If you are unable to make your own decisions (in a coma for example), an advanced health directive can appoint someone to make medical decisions for you, or state what you want in advance.

If you are unable to make your own decisions because you’re in a coma, someone still needs to pay the bills. An enduring power of attorney gives your designated person the right to make financial decisions on your behalf in the event you are incapacitated.

Adulting sometimes sucks and involves some jobs that just suck. This is one of those. But it is so important, particularly once you have children to make sure you have a reasonable estate plan in place. Get it sorted and then do something a little more fun!

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

How to avoid risk when investing

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“I wouldn’t invest in the stock market, it’s too risky”

My colleague, 2021

Investing is often portrayed by the media as some sort of giant casino. The image in many of our minds is of chalkies running back and forth amongst an absolute din of noise, whilst wealthy investors make large “Bets” on the next big thing.

If this is the way you approach “investing” in the stock market, it truly is risky. This sort of short-term speculation is gambling. Exciting for some, but completely different from the boring investing that is likely to provide good long-term returns.

Really long-term investing in broad-based index funds is the exact opposite of gambling at a casino.

The casino is rigged to make a consistent and reliable profit. Over the long term, despite exciting moments and wins along the way, gamblers are guaranteed to lose. In contrast, with passive broad investing, you are guaranteed to win if you stay invested long enough.

The certainty of investing gains probably only comes after 20+ years of investing, however. But you are highly likely to do well over 5-10 year periods as well.

Investing for under 5 years? No one can tell you how your investments will perform. More than 50% of the time you will gain, the rest of the time you will lose. This is why most investment information sources suggest a minimum time frame of 5-7 years to invest in the stock market.

Wanting to Avoid Investing Risk Altogether

“Successful investing is about managing risk, not avoiding it.”

Benjamin Graham

No one can completely avoid risk in investing or life. Crossing the road, eating a meal and even walking involves some risk of death according to this cheery site.

As with most things, it is not about avoiding risk altogether (it’s impossible) but minimising risk, weighing risks against likely benefits and minimising controllable risks.

When selecting an investment, the first thing we should look at is risk. This is important to consider before getting seduced by the promised returns. Exceptional promised returns often involve large amounts of risk (or downright scams).

There are many different types of investing risk, but some of these you have some control over.

Investing Risk: Inflation Risk

Inflation risk is almost inevitable. Over time, the price of goods and services goes up. It’s not really noticeable (usually) in the short term, but is obvious looking back at historical prices.

Your parents have probably thrilled you with long stories about their first job paying only $20 per week. Wages increase (hopefully) to compensate for the increase in the cost of living or the other way around. Everything gets more expensive.

The Reserve Bank of Australia aims to keep inflation at around 2-3% per year, over the long term. A little inflation is healthy for a growing economy. Too much, or too little is generally bad news for the economy.

If you hoard all your extra income in a savings account earning around 1%, your emergency fund is actually decreasing in real value (aka purchasing power).

If $30,000 was enough to fund 6 months of living expenses in case of an emergency in 2021, in 2031 you will need over $40,000. And that is assuming you have completely resisted lifestyle inflation!

Including interest earned, you would have only $33,138.

This leaves us with two options to maintain an appropriate emergency fund

  1. Ensure your emergency fund is earning more than the rate of inflation (hopefully remaining 2-3%).
  2. Keep adding a little extra to your emergency fund each year to compensate for inflation

It also makes it obvious that saving large amounts of money in a bank account is not getting to get you very far. If you want to outearn inflation over the long term, investing that extra is more likely to achieve your goals.

Australia has been living through a period of unusually low inflation recently. Due to the quantitative easing instituted in response to the COVID-19, there has been lots of talk about hyperinflation.

Risk in Investing: Longevity Risk

This is the risk, in the case of retirement savings, that you live longer than your savings last.

It’s a common and understandable fear among retirees. It is also a compelling reason to make sure your money is earning optimal returns for the risk taken.

It’s probably better to be alive and having to scramble to find some extra cash vs dead.

There is also the risk of the opposite – not living nearly as long as expected, and missing out spending all that dough!

Back up plans in case your investments don’t perform as well as you hoped can be formed. If you have planned to live off the income off your investments (eg investment property), the assets themselves may need to be eventually sold.

Continuing to earn money through a small part-time gig you enjoy can significantly reduce your portfolio drawdown. Earning $10,000 per year means you need $250,000 less in retirement savings according to the 4% rule. Renting a room in your home could provide some income, and company for those wanting to stay in their family home for longer.

Reverse mortgages of your principal place of residence have generally been a poor deal but could be used if all other reserves are gone. The aged pension is tiny, but many people live on this entirely. We are fortunate in Australia to have this government safety net for those that can’t provide for themselves.

Minimising basic living expenses and owning your own home outright can help the aged pension stretch to cover a reasonable standard of living. FIRE bloggers often live on not much more than the aged pension, whilst renting!

Sequence of Return Risk

Whilst no withdrawals are being made, the order of positive and negative returns make no difference to the end result. In the graph below a sequence of returns “A” were positive for the first 7 years and negative for the last 3 years. Sequence “B” includes the same returns in a different order – the negative returns occurred in the 1st 3 years. The portfolios are worth the same at the end of 9 years, regardless of the sequence.

Once withdrawals are being made from a portfolio, however, the sequence of returns is very important. The same sequences A and B are tested in the graph below. For the first year, 4% of the total portfolio value was withdrawn. For each year following, this original withdrawal was increased by 3% (accounting for inflation.

The lines representing the two scenarios meet on the top graph, but there is a gap in the bottom graph. Portfolio B underperformed portfolio A despite the two portfolio’s cumulative returns being the same.

This ties into longevity risk. If you are unlucky enough to retire immediately before a period of negative returns, you’re more likely to run out of dough.

You can mitigate this risk by

  • Having adequate cash savings to live off until the market recovers
  • Keeping your options open for the first few years after retirement to perform some paid work
  • Withdraw less than 4%
  • Reduce your spending in years of market underperformance

Investing Risk: Volatility Risk

Volatility is a retrospective view of variation in an investment’s performance.

The terms “risk” and “volatility” often seem to be used interchangeably. But most people would consider investing risk as the chance of losing a significant amount of money.

Some investments are more volatile than others. If you were to invest then fall into a coma for 30 years, this volatility wouldn’t matter. The cumulative returns would be all you would care about.

The biggest risks with high volatility investments are:

  • Your time frame. You need to be investing for long enough to ride out the volatility and get the good returns promised over the long term. 7-10 years minimum is commonly recommended for the stock market.
  • Your risk tolerance. If you panic and sell during a crash, you are locking in those losses. If you are able to ignore your investments until many years later (much harder to do than it seems) the volatility is likely irrelevant. There is more discussion on risk tolerance here.
  • Horizon risk – the chance your time frame will dramatically shorten due to a change in circumstances. Unemployment, for example, could mean you needed to withdraw your investments far earlier than expected.

Liquidity Risk

In the case of that sudden change of circumstance (unemployment), would you be able to access your investments to withdraw them?

This is known as liquidity risk. It is very individual whether this is a big concern to you.

If you have other more liquid assets (eg emergency fund), you may be happy to have a relatively illiquid asset (eg investment property).

If you think you may need to withdraw within a few years, you probably need a less volatile asset to reduce the risk of losing money when you withdraw.

Concentration Risk

This is the risk of having the majority of your assets in a single (or related) investments.

For example, a pharmacist lives off his income from the pharmacy he works at and invests in pharmaceutical companies (because these are within his zone of competence). If there is a major change to the profitability of pharmacies from legislative change, both his job and investments are at risk.

Another example may be to convert your super to an SMSF and use most of the balance to purchase a single investment property in your hometown. If something happens to the market in the area your investments are concentrated in, all your investments will suffer.

Market Risk

This is a risk of changes in the market affecting your investment, whether it be property, shares or bonds. Much of this risk can be reduced by diversifying investments. Putting your eggs in many baskets reduces your personal loss if one basket is dropped. Market risk can result from:

Event Risk

COVID-19 was an example. A highly unpredictable, dramatic event that affected all our investments (at least in the short term. It’s impossible to anticipate all potential events so some of this is out of your control. Event risk can be internal (change in management of the company you have invested in), or external (Global pandemics etc).

With property investing, there may be a new highway built close to your property causing noise pollution. Council plans should be checked prior to purchase, but new plans may arise years after purchase that can have a dramatic effect on your investment value.

Secular risk

Secular risk is a change in the competitiveness of your investment.

There may be new competition, such as Uber if you had invested in a taxi company, or a brand new block of flash apartments making your new 10-years ago unit seem old and daggy.

There may be technological advance that makes your investment obsolete (Blockbuster video).

Customer habits may change, damaging industries. COVID-19 was pretty bad for the cinema business.

Interest rate Risk

Those with borrowings (property investors and homeowners as well as high-risk investors borrowing to invest in shares) are affected by interest rates. Bond investors also care about interest rates, as bond values tend to go down when interest rates go up.

Currency risk

When investing or spending overseas, the exchange rate matters. Investing in the world stock markets is generally considered a good idea, as Australia is a tiny part of the world economically.

Exchange rate changes will alter the spending power of your portfolio in Australia, for better or worse. You can reduce this risk by “hedging” to your home currency for an extra cost.

If you want to retire overseas, hedging to your current currency makes no sense. The exchange rate to your planned country of retirement will make a huge impact on the quality of life possible with a given portfolio.

Credit Risk

Credit risk is relevant to those who invest by lending money.

Peer to peer lending is unsecured lending, offering good rates to investors and borrowers, but with risk to the investor if borrowers default.

Bonds are essentially like loans to companies, or governments. Lower rated bonds have a higher risk of default (and loss of capital).

Presumably, the global financial crisis is still a little fresh in our minds to be trusting mortgage-backed securities anytime soon. These sounded like a pretty safe investment, but banks were lending more and more aggressively until the entire system collapsed.

Legislative Risk

Governments can introduce new laws that can advantage, or disadvantage your investments.

An example would be the hotly debated issue of Franking credits. Franking credits were introduced in Australia to prevent double taxation. If you own a share in Woolworths, which pays a dividend out of the profit made this quarter, tax has already been paid on that profit at the corporate rate of 30%.

If you as an investor then receive the dividend and are taxed, the dividend has been taxed twice.

Instead, the Australian tax office provides a tax credit, known as a franking credit for the 30% tax already paid. If you are in the 45% tax bracket, you will only have to pay the 15% owed.

If you are paying no tax (because you are a retiree), you will receive a tax refund of 30% of the dividend. This is extremely popular with retirees and has encouraged a whole generation of “dividend investors”, who select investments because of their history of dividend payments.

If these Franking credits were disallowed, all those investors who had designed their investment strategy around the tax outcome will be disadvantaged. It would be a similar situation with negative gearing property investors.

Risk of Being Scammed

Most of us think we are too smart to get scammed. We are wrong. You cannot be too careful, and should always be watching for scams that get more sophisticated every year. Check out the new Netflix series “Money, Explained“. The episode on “Get Rich Quick” explains the psychology on why we are so gullible, and even the experts admit to getting scammed. It’s a great series, enjoy.

How to Manage Risk in Investing

I recently read a comment by Warren Buffet about pretending you only had 20 investing decisions to make in your life. Many of us change investment strategies too frequently. Spend your time considering carefully before committing to an investment, and plan to make it a lifelong investment. Consider risk first, and minimise as much as possible. Diversification reduces much of the market risk and is considered the only “Free lunch in investing”.

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

Ten Financial Mistakes to Avoid

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

Who Makes Financial Mistakes?

I doubt anyone can honestly say they have not made financial mistakes. 

I made plenty of errors by the time I turned 40! come in all shapes and sizes, from petty to life changing. 

The outcome of some financial decisions is not known often for many years.  Without certainty, investing is a game of playing the odds and minimizing risk.  You cannot invest without taking some risk. 

No one is going to make it through life without making some errors of judgement.  The aim of the game is to reduce the risk of large or repeated financial mistakes. 

Financial Mistakes to Avoid in Your Twenties…

– Taking on Education Debt without Considering Expected Return of Investment

Debt can be good, bad or tolerable.  Education debt is generally considered “Good debt”. 

The government have recently introduced the “Job ready package,” which has adjusted subsidization of tuition fees, according to anticipated job availability. 

Universities are not happy, raising the ideal of education for education’s sake.  But few students can honestly afford to dig themselves into debt without the security of likely employment, and a salary that will eventually compensate their debts. 

I see the change in subsidization as a helpful hint for young school leavers to examine the reality of their intended studies. 

I can’t say I put a lot of financial analysis into my study choices, apart from that I could loans to cover my expenses! 

Many school friends were disappointed to need to work unrelated minimum wage jobs for a year or two after graduation. 

For those that go ahead and pay the extra to study their passion, there will at least be less competition.  Many others will find other ways to learn the skills they need.  No one buys a painting because their impressed by the artists professional qualifications!  

– Looking Rich

Your 20s’ are a vulnerable time.

Self esteem is often under developed.  There can be an urge to prove yourself, and appear successful to parents and peers. 

Spending more than you earn to have the clothes, electronic goods, car and home that projects an image of success is a common error. 

As you get older, people tend to be relieved to care less about what others think.  Humans are pretty self-absorbed, over time most realize nobody is looking anyway! 

Now I am financially successful, I feel absolutely no inclination to flaunt it, instead liking to blend in.  Trying to impress others is a complete waste of time, if you can accept this in your 20s you are well ahead of the pack.    

Not Saving for the Long term

It’s easy to have a short-term outlook.  The very few who think and invest for the long-term during their twenties reap massively out sized rewards. 

From age 25, just $255 extra per fortnight into your superannuation earning 7% will grow to $1million by the time you are 60. 

Financial Mistakes to Avoid in Your 30’s

Your 30’s are often full of huge financial moves, moving up the ranks of your career, perhaps having kids and buying a home. 

Money is often tight with so many competing priorities.  Financial progress may feel slow, just make sure you’re moving in the right direction

– Paying Interest on Depreciating Assets

To build wealth efficiently using leverage, you want to buy assets that appreciate more than interest paid.  The gradually widening gap between asset value and debt owed is where wealth is built. 

If money is borrowed for depreciating assets, such as vehicles, the gap is still widening – but this time to destroy your wealth.  And the gap gets much larger much faster. 

Even if you have no capacity to buy appreciating assets, avoiding depreciating assets like the plague will put you in a far better situation when your income does increase and give you breathing room. 

– Drift

Drift is unintentional spending.  You will be busy with work, exams, kids and life. 

It’s easy to ignore your finances and forget to set and work towards goals.  If you are lucky enough to be able to pay the bills and lifestyle expenses without worrying, it’s easy to feel you are doing pretty well. 

Remember to make a plan, put some savings aside for emergencies, investment, retirement and other goals.

– Buying the Wrong Home

Buying a home is a huge financial decision and your entire financial future can be heavily influenced by your choice.  No pressure! 

The median house price Australia wide is $550,000.  The capital city Australian median is over $800,000. 

Make no mistakes, this is a huge amount of money.  Lifestyle choices should influence, but not entirely drive the decision of what, where and when to buy. 

An example: Three Registrars

All three of our registrars are looking to buy their first home to live in.  They all have a good borrowing capacity and plan to spend $800,000. 

Assuming a long term 6% interest on 90% lending of $720,000, each registrar will pay a total of $834,000 in interest over 30 years on top of the principal amount. 

Each registrar has saved up and pays upfront for a 10% deposit ($80,000) and buying costs ($48,000). 

Alan buys a home on the outskirts of a regional town, capital growth only keeping pace with inflation (2%) so he doesn’t make any real growth, but at least he’s not paying rent.  

Jo buys a house near where she works, outside the big cities but with a busy local economy.  Her home grows in value at 4% (real growth therefore 2%, adjusted for inflation), compensating for the interest paid over the years. 

Laura lives and works in Sydney and has brought a scruffy unit in a desirable neighbourhood.  She is lucky enough to see 7% (5% real) growth over 30 years, which multiplies the value of her home.

Beyond just saving rent, or compensating for interest paid, this equity growth allows Laura to borrow to buy further income producing assets. 

Laura’s financial success is incomparable with Alan and Jo’s.

 

– Buying a House “Just to Get on the Ladder”

In medicine, postgraduate doctors move regularly to fulfill training requirements. 

Young professionals often feel the pressure to buy a home just to get “on the ladder”.  Those planning to keep moving often buy and then rent out when they move on. 

This can be great idea, but you want to buy a place like Laura’s if possible.  To buy for purely personal reasons, you need to be staying in one place for 10 years. 

If staying put for less than this, the decision is an investment. 

Investing for a better return elsewhere whilst renting may be a better financial decision.   Index funds/ETF or a carefully chosen investment property are both good options. 

– Neglecting Retirement Savings

It is easy, and very common, to neglect retirement savings due to all the competing financial demands during your 30s. 

But this is the decade you have most influence over your retirement age and lifestyle (assuming you weren’t too interested in your 20s!). 

Make sure you are taking advantages of all the tax savings associated with superannuation. 

Consider investing extra inside or outside superannuation.  At 30, an extra $375 per fortnight invested earning 7% will grow to an extra $1 million for retirement at 60 years old. 

It gets far more expensive as you get older due to the dwindling influence of compound interest

Financial Mistakes to Avoid in Your 40’s…

– Paying off Your Mortgage

Controversial I know! 

I know the thought of being mortgage free is a psychologically tempting prize. 

Inflation is what makes the price of goods, services and income increase every year.  The Reserve bank aim to keep inflation at 2-3 % long term. 

Due to inflation, your mortgage debt and repayments relative to income reduce over the years.   In thirty years time, your mortgage repayment will feel far less significant than it is today. 

At current record low interest rates, paying off your mortgage early is a huge opportunity cost. 

Consider investing savings sooner rather than later to maximize growth before paying off your mortgage.  Or split savings between the mortgage and investments. 

Just don’t leave thinking about investing until after you’re completely debt free – you will have missed out on most of the growth potential. 

Once you are on track to reach financial independence by your desired retirement age, paying off your mortgage may provide a nice lifestyle boost.

– Focusing on Income over offspring

These are peak earning years, but for many of us critical years to be present and growing strong relationships with growing children.  

The need to get ahead financially and be present for our kids can often conflict. 

Ideally you want to do the heavy financial lifting before kids, but that is often not possible. 

Try and balance the two priorities so you don’t suffer later regrets.    

– Divorce

Of course, this may relate to a mistake made a decade or two again – marrying the wrong person. 

Divorce is the commonest, most devastating financial event to occur. 

Chose your partner carefully, talk about your goals, finances, and core beliefs early and regularly. 

Financial mistakes to Avoid in your 50’s and Beyond

There are few working and compounding years left to recover from errors.  Risks taken should be reducing.  A big issue is suddenly realizing you are not on target for a reasonable age retirement, taking excessive risk to try and compensate. 

I met a lovely chap, who after achieving a reasonable retirement nest egg, withdrew the lot to buy a franchise in the local shopping centre. 

The business could not make a profit and eventually he lost all his retirement savings as a result. 

Passion projects and new careers at this age need to carefully minimize downside risk.

– Speculation

Also encouraged by a feeling of needing to catch up, those wanting returns above 7-8% can be tempted to speculate. 

Day trading, FOREX, investment property brought without research and independent advice and cryptocurrency are all areas that can look shiny and attractive but hold significant danger. 

Have someone you trust that you can run ideas past, and make sure you consider their opinion. 

How to Recover from a Financial Mistake

People don’t like to share their errors, so you rarely hear about them.  If you have made a large financial error, you may be in a dark place.  It can feel very lonely.  You are definitely not alone.

I have had the unfortunate experience of watching my own folks make a $400,000 error.

They were absolutely determined to invest in their builder’s commercial build, despite a complete lack of knowledge and experience.  The adult kids’ relationships with our parents was at times strained due to us repeatedly raising concerns that this was a terrible idea.  

It is still very difficult to talk to my parents about why they went through with this risky investment.  They were promised 15% returns, and I suspect just liked the idea.  

When it became obvious the money had gone, they went through denial, panic, anger, regret, sleepless nights and nausea. 

It felt like they were enacting their revenge on us for our teenage years, as we went through most of the same emotions along with them!  I was very concerned about their health as a result of this incredible stress.  I am very grateful they pulled through.   

Of course, it is best to avoid financial mistakes.  But if you have made a regrettable error, hopefully it’s not as severe as this example. 

You will eventually put the error in perspective and move on.

Learn what you can from your mistakes.  What factors contributed to the error that you can avoid in the future? 

Find a silver lining!  My parents kept their home, and their health.  They will have to live with a tighter budget as a result of their budget, but will be fine. 

It is important to stop these errors (or hatred for the person who ripped you off) turning you into a bitter person

How to Avoid Financial Mistakes

 

#1 Don’t rush into any large financial decisions.  Read as much as you can.  Gather information from multiple qualified sources. 

#2 Always look first at risk, identify all risks associated with a decision.  Can you minimize all risks?    

#3 Lose your ego (and build self-esteem instead).  Buying cars and homes to impress others will send you broke

#4 Avoid debt for depreciating assets like the plague

#5 Remember your 1st home purchase can impact your financial journey massively.  Consider renting, rent vesting and buying.  A home purchase is always an investment as well as a lifestyle asset.

#6 Avoid drift with a financial plan that you review yearly. 

#7 Embrace the super power of compound interest – put extra into superannuation early.  Invest rather than pay off your mortgage unless interest rates increase > 5%

#8 Look after your relationships

#9 If it looks too good to be true it probably is – Always check an exciting opportunity with someone you trust who may be able to talk you out of speculating or putting your money in a scam

#10 Spend less than you earn (even a little). Increase the gap gradually over the years until you are on target to your goals.

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

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Doctors income no longer secure: How to protect yourself

Did you assume your income as a doctor would always be secure?  People always need health care don’t they? We are all aware of the devastating health and economic effects of COVID-19.  We have read so many horrifying accounts of deaths and healthcare system overwhelm from overseas, and are in a fortunate position to be in Australia (fingers crossed).

Doctors are busy preparing for COVID-19 have also realised their income is not so secure after all.   With this less rose-tinted perspective, junior doctors  should be better prepared in case of future income threats.

Financial Consequences of COVID-19 for Non-Employee Docs

Many people are facing tough times with COVID-19 closing their businesses, and cutting hours of paid work.  Doctors should be in a fortunate position due to high incomes, but some are currently facing dramatic reductions i income too. 

GPs and private specialists don’t receive a wage.  These doctors rely on Medicare billings and patient “Gap” payments.  These guys have to run a business as well as practice medicine.  No patients mean no income.  Pretty different to the assumption many have, that doctors’ incomes are recession proof. 

Because these doctors  are not employees, they receive no sick leave (paid recreation, professional development or parental leave).  They may have practice rent to pay, and employees (Nurses, receptionists, cleaners…).  These ongoing expenses continue despite income dropping precipitously since COVID-19. 

Government job keeper allowances should reduce the burden by subsidising employees’ wages.  Doctors may be also eligible for government financial support, a huge help in paying for the basics.  I suspect the job keeper allowance of $1500 /fortnight is inadequate to cover most doctors’ expenses, but it will prolong their emergency savings. 

How recession proof doctors financially affected by COVID-19 are depends on their basic living expenses, how much risk (leverage) they have taken with investments and the size of their emergency savings.

Lifestyle Inflation and COVID-19

Lifestyle inflation is when people increase their cost of living as their salary increases.  It is a common trap for most people, with doctors’ seeming particularly susceptible.  We almost all succumb to lifestyle inflation to some degree. 

After all the work of medical school, and delaying earned income until our mid-twenties, we deserve to treat ourselves a little.  But what starts as a treat to yourself with that first wage often continues for decades, growing to become more extravagant every year, egged on by your medic mates doing the same. 

We tend to upgrade in almost every area of our finances as we can afford to.  Doctors decades into their careers on wages of $200,000+ can end up not understanding where all the money goes, and with very little savings and investments. 

It happens by stealth: one deserved and affordable upgrade at a time.  The biggest issue with lifestyle inflation when it comes to personal financial shocks is when regular financial commitments become inflated  A big mortgage for that “doctors’ house”, the BMW loan and private school fees are some common culprits. 

If an individual has committed to large repayments that cannot be easily cancelled, susceptibility to financial insecurity increases.  Fancy wine, and other expensive habits in contrast can be ceased during an economic shock (painful as this may be), mortgage and car lease repayments are less flexible.

Property Investments During COVID-19

Property has always been a favoured investment by Australians. High earners receive disproportionate benefit from negative gearing, so is a commonly used strategy for doctors.   Some  may be heavily negative geared into multiple property investments. 

Negative gearing means  you pay more in interest, property management and maintenance than you receive in rent.  The idea is that the capital growth will more than compensate for money lost in the early years of investment. 

Having your investment largely paid for by a tenant and the tax man is a very attractive proposition! It can be tempting to over leverage, particularly when considering the alternatives as a high income earner – paying 45% tax on any earning outside superannuation.

Tenants all over the country are suffering with lost or lower income.   The government’s support packages thankfully will ease some of this burden, but not all. 

Tenants are requesting reductions in rent to help them through the crisis, and some have been unable to pay rent at all. 

The government, and each state has been instituting new laws that allow rent deferral for tenants in financial strife, and disallowing eviction of tenants due to non-payment of rents to ensure everyone has a safe place to stay for the duration of the crisis. 

Unfortunately, this crisis will mean lower rents, and more prolonged rental vacancies, putting financial strain on landlords who are still accruing interest on large mortgages. 

Those heavily negatively geared with a loss of income are in a stressful space right now.  This “Black swan” event is likely an emergency situation they would never had considered in emergency planning.

What Can you learn from COVID-19: How to Prepare for Economic Shocks?

  1. Keep your Essential Spending Reasonable
  • Keep essential expenses low (mortgages, car payments, utilities and school fees) to maximise flexibility in the event of future financial shocks
  • Luxury lifestyle upgrades and status symbols (if your ego is delicate enough to need the validation) should be paid for with cash.
  1. Pay off consumer debt and avoid getting into more
  • Consumer debt will keep you broke through compounding interest (the wrong sort!)
  1. Save an emergency fund

There has been debate about whether doctors really need an emergency fund.  The theory was – if there’s a real emergency, I can cover it with my credit card and pick up some extra work to pay it off fast.  Not looking real smart right now.  Everyone needs an emergency fund, above and beyond likely anticipated emergencies. 

If you are leaving hospital medicine to start in the land of general practice or private practice, make sure you have a larger emergency fund as you leave the (sometimes suffocating) security of government employment.

  1. Sort out your Insurance

Life insurance, total permanent disability and income protection insurance are all pretty boring ways to spend money. 

You will be ineligible for insurance if you develop certain health conditions.  Insurance companies are keen to exclude any conditions you are at all likely to suffer from (if you ever saw a doctor for back pain….) 

It is generally cheaper and easier to get insured the younger you are.  Time is ticking!

  1. Invest – but always limit the downside risk
  • Consider investments carefully, get professional, independent advise and don’t take on debt without carefully thinking through worst case scenarios to make sure you will be able to hold on (especially with property as buy/sell costs are huge)
  • Remember increase returns promised by leverage also come with increased risk (assess carefully and don’t over leverage)
  • Remember to get good quality landlord insurance, although this will not cover prolonged vacancy it should compensate for non-payment of rent
  • Look at the risks FIRST before being seduced by promised returns!

Coronavirus has taught us that medicine isn’t necessarily a secure job after all.  Learn from this by making your finances as secure as possible.  Rethink your emergency preparedness strategy and make sure you are financially secure and prepared before leaving the safety of a government job

Money Confessions of a 40 Year Old Doctor

I started work as a terrified intern saddled with, what seemed at the time, a huge amount of debt.

I remember wishing there was some sort of financial guide to help me dig myself out of debt, and use my wage in an efficient manner to create financial stability.  In comparison with our US colleagues Aussie graduates have it really easy, but debt never feels good.

Through the years, finance rarely came up in conversation with older doctors.  It’s something we just don’t talk about.  I have been frustrated, after making financial mistakes, to discover many senior colleagues had made similar errors.

The idea of this blog was tumbling around my head for a couple of years before.   During hotel downtime between locum shifts, I took the plunge and started this site.  In writing this blog, please do not mistake me for a finance professional or expert in investing.  I simply want to share financial shortcuts and mistakes discovered over my career, and encourage others to do the same.

On to my mistakes, in the hope my money confessions can help you avoid regretful decisions, or at least make you feel better about the choices you have already made.  Please don’t judge me for the stupidity of youth…

Money Confessions No 1: Debt Management

I was brought up to understand debt is bad, and mortgages a necessary evil that should be paid off asap.  In some ways, I heeded this wisdom.  I have still never borrowed for a car purchase (a major destroyer of wealth).  In other areas. I completely flunked this test of patience and self-control

University loan payments – that magical money that arrived in my account to be spent on beer, clothes, rent and books. Loan money didn’t seem “Real”.

I wasn’t earning it and I told myself that it would feel like a small tax out of my generous postgraduate wage.  I wasn’t particularly extravagant as a student, but certainly could have done with treating my loans like “Real money”.  I have now experienced paying the whole painful amount back dollar by dollar.  For any student readers, don’t deprive yourself, but do make sure your spending consciously and cautiously!  You will have many better things to spend your money on 5-10 years after graduation than paying back debt.

In the last six months of medical school, I got a bit spendy.  The looming promise of a regular pay cheque convinced me to relax a bit more.  I swiped my way to several thousand dollars in high interest debt (at 29.9% interest, at the time this did not even fill me with horror.)  Unthinkably dumb! So many people live like this – trapped in a cycle of paying off minimum amounts of credit card debt by huge interest charges.  My first few intern months were spent on paying this silly debt off.

Not completely cured of stupidity, after buying my first home, I succumbed to the temptation of decorating it with “Decent” furniture asap.  A trip to a local furniture store later, I had acquired several pieces of new furniture on an interest only deal!  I thought I was being super smart (and keeping the money in my new offset account)…. They charged administration charges to the “Interest free account” so I may as well have been paying interest, and ended up paying for this furniture for long after it was new and filling me with pleasure to use.  And of course, I spent the offset money on something else.

Money Confessions No 2: Home purchase and renovations

My home purchase I do not count as a mistake – it has given us shelter, a sense of security and finally, after a decade – I’m paying less in mortgage payments than I would have been in rent.  Whenever you hear a widely accepted truth, such as “Rent money is dead money” stop and question it.

In this article, I discuss and calculate, whether a home is better financially to buy or rent.  Money isn’t everything, and the sense of satisfaction and stability are priceless.  But financially, I would have been far better buying an investment property in a capital growth area (or putting savings into index funds) and continuing to pay rent in the regional town I lived.

The “Big Reno” has a created a house that fits our family’s lifestyle so much better, with loads of room for the kids to run around, and a pool they have learned to swim in.  We love it!

But we over invested, and it will take quite a few years in measly growth to make the money back in value.

Before you take on a big renovation, consider the financial aspects, top value house in the area (you want to spend no more than your renovated house will be worth) and whether you would be better buying, taking in to account 6% buying and 2% selling costs.

Money Confessions No 3: New Car purchase

Most people have no idea how much of an impact their behaviour with cars affects their long-term financial outlook.  Buying new cars, trading in regularly and car loan interests can steal your financial freedom.

Mr Money Moustache has analysed all aspects of financial efficiency in life and gives some great advice about cutting the costs of car ownership.

My “crime” was to buy a new car.  I was scared of buying an unreliable second hand car.  And maybe a little bit felt I deserved better than the hunks of junk I had brought so far in cash.

That was a decade ago (but feels like 5 minutes), the car was not particularly well looked after (I’m lazy) and is scratched, dented and looks suspiciously like I may be allowing homeless people to live in it.

But it still gets me from A to B, and will last me (hopefully) for at least another 5 years.

Disappointingly, the New car feeling lasted for a few weeks.

The most cost-effective way to own a car is…don’t.

After that a great 2nd hand car from a very reliable make, is far more efficient given the huge losses in value from depreciation over the first 5 years of a car’s existence.  Holding on to that car until you need to replace it (rather than when you get bored, or it begins to look scruffy) also improves efficiency.

Money Confessions No 4: Not Paying for a Financial Advisor, and taking advise

I thought I was doing the responsible thing, after a big jump in pay, to see a “Financial adviser” to organise my finances. It turns out he was an insurance and managed fund salesman.  He did get my partner and I to review our insurance needs, and secure better life and disability as well as income protection insurance at a relatively young age (the premiums increase steeply during 30s).

However, he also convinced me to move my superannuation to a “Superwrap” product that was charging 4%!  I was reluctant, but he was pretty convincing that the better performance would outweigh the fees, and after all – you get what you pay for.  They didn’t of course, and after 3 inefficient years, I moved my superannuation to the original fund and will likely stick with them until retirement.

Remember, the fees are the only thing that is ever guaranteed!  Ruthlessly minimise fees to get ahead.

Money confessions No 5 Salary Sacrifice

For years, this just seemed too confusing, and I was too lazy to take advantage.  Ridiculous!  Too lazy to make a phone call and fill in some forms to get free money (the tax I paid!  Every time I changed job, this was a big hassle I often didn’t get round to sorting out for months or years.  It is a great deal, don’t be lazy,  Read this article, and salary sacrifice your accommodation costs and superannuation

Money Confessions No 6: Drift

“Drift” is a term I first heard on the US based Choose FI podcast and it summarizes a common pattern I fell in to.

I have always been interested in personal finance, but often get to a point (especially in my early training years) where progress towards financial goals was extremely slow -and I would lose interest and focus for years at a time.

During this period, automated actions such as paying into my mortgage continued, but extra income that was gained through pay rises was absorbed into the households spending unconsciously.  Actively using those pay rises could have got me to financial goals faster, but nothing changed until I snapped back in to goal setting mode.

Drift is almost inevitable, for a medical professional probably even more so.  The demands of work, postgraduate training and exams are extreme.  You will not have time to keep your finger on the financial pulse of your household too.

Set your goals.  Automate as much as possible (savings & investments), make an appointment with yourself to review your goals and progress.  Set a reminder on your phone, calender or email once or twice a year to meet with yourself (and partner if you have one) to limit the destructive effect of drift and keep on track to your financial goals.

Money Confessions No 7: Money organisation

With our mortgage, 10 years ago, came multiple offset accounts.  This should have been great, but meant to a disorganised mess with overdrawn fees as a result of money being in the wrong account.

Each household needs a money organising system.  Finances get more complex as you grow older, and often spend on many more items.

I have trialed a few systems, the most important feature seems to be separating discretionary spending (Wants) from obligatory spending (Needs).  There are some grey areas, but decide for yourself what are Wants and needs, and pay for wants our of a separate account – with a set amount to spend each week/fortnight/month.

Barefoot investor is the system I have adopted.  Empower wealth have a book and online platform free for use by anyone.

Hopefully I’ve given you some red flag signs to watch for before making any big money mistakes.
Anyone want to make feel me a bit better by sharing their own financial errors?

IF YOU FIND READING ABOUT OTHER PEOPLE’S FINANCIAL MISTAKES USEFUL IN AVOIDING YOUR OWN, CHECK OUT THE AUSSIE DOC MONEY & MISTAKES SERIES.  1ST ARTICLE BY SERINA BIRD ON OVER LEVERAGE.


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Should You Protect Your Income? The Ultimate How to Guide

Should You Protect Your Income? The Ultimate How to Guide

There are massive changes coming to income protection. 

Despite being the most expensive personal insurance, and premiums increasing recently, insurers are losing money annually. 

The Australian Prudential Regulation Authority (APRA) has stepped in to address concerns about insurance provider sustainability.  An open letter from APRA to insurers outlines its intentions for the near future.

Changes are planned to commence March 31st 2020, when it will likely become impossible to secure “Agreed value” policies covering more than income in the 12 months preceding the claim.

From July 2021, further changes are expected, with abolition of agreed value policies altogether and insurance policies requiring renewal every 5 years – under new terms and conditions.    

My take on this is that income protection is going to become even more expensive, and less generous.  If you are considering starting a policy, talk to an adviser as soon as possible to try and get in before the changes.

What is Income Protection? How Does it Work?

Income protection is the personal insurance you are most likely to claim.  It provides a regular income in case of inability to work due to illness or injury. 

Those over the age of 25 will usually have some automatic income protection through their superannuation, but those under 25 have to request insurance. 

We see patients becoming unexpectedly injured or severely unwell at work all the time, but often don’t consider the financial consequences of lost income – which can be severe enough to cause home repossession. 

Most people, including doctors, feel somehow immune to these random events, but of course they can happen to anyone.

Do You Need Income Protection?

This really depends on your situation.  What would happen if you contracted an illness or catastrophic accident requiring months to years off work? 

Unless you are financially independent through investments, or have someone who loves you earning more than enough to support you both, it is likely you should have some income protection. 

Even if you don’t need insurance now, it is worth considering whether your needs are likely to change.  Do you plan to have children?  If you will need income protection within the next 5 years, consider securing the policy now.  Premiums escalate surprisingly rapidly as you age (significantly in 2-3 years during my 30s as I discovered!)  Delay also risks developing a medical condition in the meantime that could make you un-insurable, far more expensive to insure or have significant exclusions in your policy.

How much Income protection do You need?

This is tricky!  It will take a detailed look at your budget, and what your obligatory expenses are (you won’t be holidaying overseas if your ill enough to claim income protection). 

Then you need to look into the future and anticipate changes to those expenses.  For the reasons outlined above, it’s best to make your policy as future proof as possible. 

Consider other sources of income. How much of your obligatory expenses could be covered by your partners income?  Do you have any investment income coming in that would continue despite illness or injury? Also take in to account any significant long-term savings that could help financially support you.

Remember to calculate gross income required – your benefits will be taxed as personal income.  You may (in the next few months) still be able to secure an “Agreed value” insurance policy.  This means you will be paid a prior agreed benefit in the event of a claim (Up to $30,000 per month). 

It is likely agreed value insurance policies will not be possible after July 2021 (perhaps sooner).

The other type of policy (the new norm) is “Indemnity Value” – the benefit paid is based on your income immediately prior to the claim. 

Indemnity value policies may be better for those going up the payscale over the next few years, but could be disastrous for individuals becoming ill or injured after 12 months of parental leave, other extended time off work, or the 1st year of a private practice before profits kick in.  It also could be detrimental for those whose health has been deteriorating for a period of time, and who have reduced hours worked as a result. 

If taking out an indemnity value policy, try to find one that will calculate the benefit on your income over the past 3 years to minimise the risk of being short changed.

Can You get Income protection?

Your ability to secure a policy depends on age, medical history and “Risky” activities and occupations.  Chronic illnesses, extended periods of time off sick or a history that is perceived as high risk to insurers (especially back pain in men, anxiety in women) will make securing a policy more difficult and more expensive. 

Sometimes insurers will offer a policy with specific exclusions that won’t be covered if they recur (such as back pain if you once complained of pain in the back!).  It is definitely not worth lying about your history, as the insurance providers will not pay out if they find you have been dishonest (even if it’s completely irrelevant to the eventual claim).  

Exclusions can be reviewed and sometimes removed at a later date, provided you have had no further issues, you have a good insurance broker to negotiate on your behalf, and the provider decides to play ball. 

When does Income protection kick in?

You can choose different waiting periods before your income protection starts paying benefits, usually 30, 60 or 90 days.  This should be based on your amount of sick leave accrued (assuming you are staying with your current employer) and how long your emergency fund would last if the worst happened. 

Premiums drop significantly as you increase the waiting period.  Do remember, though, that if you have two episodes of illness with a brief return to work between, the waiting period may have to be served for the second illness again.

How long does Income protection last?

Superannuation income protection policies often pay out for only 2 years – not much use if your surgical career is ended by a traumatic limb amputation.  Other policies continue to age 60 or 65 years, which will provide long lasting income replacement – at significant cost. 

When considering how long you need income protection for, consider your savings, debt, partner income, dependents, your age, superannuation balance, and your Total permanent disability insurance payable if you were never able to return to work.

Own Occupation vs Any Occupation

Many cheaper insurance policies (including those that come with your superannuation) will only pay out if the insured cannot work in any capacity. 

Unless you can cover your expenses with a minimum wage job (I’m impressed if you can!) get own occupation insurance.  Again, you will pay extra for this.

Should You Buy Income Protection Inside or Outside Superannuation

Premiums are tax deductible whether they are in or out side of super.  If you need to claim on the insurance, income is taxed at your marginal rate, regardless of whether premiums were paid inside or outside superannuation.

Paying from within superannuation can help affordability at the time if cash flow is tight.   If you are not salary sacrificing the maximum into superannuation, increasing your salary sacrifice to cover the premiums is a tax efficient way to pay. 

If no extra is contributed to superannuation to cover into the premium, they will eat into your superannuation balance and cost a lot more in the long-term due to lost investment earnings on the premium amount.

Insurance inside superannuation is often cheaper, and the most hassle-free way to secure insurance. Unfortunately, superannuation income protection is often an inferior product, often paying benefits for only 1-2 years. 

Benefits may cease if the insured becomes permanently incapacitated (qualifying for Total permanent disability if they have it).

For protection inside super, the unwell person needs to meet the legal condition of release of superannuation law as well as the insurance policy definition of incapacity.  

Insurance inside superannuation cannot be moved to another superannuation provider.  If the insured is moving employers, they must either keep the same superannuation or start a new policy. 

As well as excess management fees associated with multiple superannuation accounts, automatic insurance could mean individuals with more than one super account are paying multiple insurance premiums.   

If the insurance is left with an old superannuation account, and the premiums consume the entire balance, the insurance will obviously be cancelled.

Income protection inside superannuation may be appropriate for you if you have few expenses, or have significant savings and no plans for adding dependents to your household.  You also need to have reviewed your superannuation and made sure you’re happy using the fund for the long-term.

If you have insurance through your superannuation, it is worth checking your occupation rating. 

Doctors (apart from retrieval) are considered low risk and therefore attract a cheaper premium, as long as the correct occupation rating is applied.  If you are automatically enrolled as a blue-collar worker, you are paying more than you should. 

Income protection insurance outside super has a larger choice of features and usually more extensive cover available, at a greater cost.  It is a hassle to get set up – requiring medical underwriting, lots of paperwork and lots of questions from the insurance company.  But once it’s set up, as long as you pay the premiums, could last as long as you need income protection (before July 2021).

Stepped or Level Premiums

You have a choice of two fee structures.  Stepped premiums start out much cheaper and are based on age, but escalate significantly as you get older. 

Level premiums start out significantly more expensive but do not increase with age, and are generally considered more cost effective if income protection is required for 10 years or more. 

Over the past 5 years, even level premiums have increased significantly due to an increase in claims. I had been horrified by my “level” premium increases, but now read that the insurance industry has been making massive losses for the past 5 years – and frankly it benefits no-one if these companies go bust.

Income protection and other payments

It is worth checking whether your income protection policy will continue paying benefits even if you qualify for TPD.  This will make a huge difference on how long you should have income protection benefits for (2 years or up to age 65) and how much TPD you require.

Income protection is taxed as normal income (assuming you’ve claimed tax deductions on the premiums), so remember this when planning how much you require.  Base your benefit amount on gross income required. The ATO have a simple tax calculator to help you work this out. https://www.ato.gov.au/calculators-and-tools/simple-tax-calculator/

Look at the small print on whether premiums are reduced should you receive compensation payment or social security benefits

Income Protection and Tax

Income protection is a tax-deductible expense.  Insurance benefits paid in the event of a claim are therefore taxed as normal income

Does Your Policy Cover Partial Disability?

Check whether partial disability is covered.   When Dr Cristina Yang was stabbed in the abdomen with an icicle , she probably wouldn’t have been able to return to work for a while.  Her employer may have put her on a “Return to work” program of half shifts two or three times a week.  Would her Income protection policy have covered the rest of her income?

If a self-employed anaesthetist has a fracture requiring a dominant hand plaster cast, he will be able to perform some administrative tasks but will not be able to anaesthetise patients – likely leading to a significant reduction in income.  Will income protection make up the difference?

Do you get paid super?

I’m reading a lot about inadequate retirement savings lately.  Periods of time not contributing to your superannuation (eg parental leave, extended time off work) make a significant dent in retirement savings.  It is possible to get a policy that pays superannuation, just as an employer would.  You guessed it – at a cost.  Decide whether you need it, and check this small print when comparing policies.

Index linking

Is the income protection benefit index linked?  This means the benefit paid increases with time to compensate for inflation.  If Dr John Dorian suffered a major head injury from his scooter, aged 25, will his income protection benefit still cover his expenses in 40 years time?  Not a major issue if you only need income protection for a few years, but worth getting if needed for a decade or more.

General exclusions

Policies also have general exclusions that they will not pay for – Usually they will not pay if the insured is in a combat zone, injured due to acts of war or terrorism or no longer an Australian resident, illness as a result of pandemic or pre-existing condition, self-harm and attempted suicide.  Similar to your house or car insurance, it’s important to read and compare the policies in detail to understand what is covered and what is not.

How much does income protection cost?

This is extremely variable depending on age, waiting period, length of benefit payments, pre-existing conditions etc.  Expect to pay anywhere between 2 and 5% of the benefit amount as a premium (Mine comes to 3% currently). 

If you are buying several polices, ask for a discount!

Where to buy the best income protection?

You have three options – through your superannuation, through an insurance broker, or direct. 

Income protection is extremely complex, and is absolutely no use if you buy a policy that in the event of a reasonable claim, does not pay out. 

A broker will have a great understanding of all the pros and cons of different policies and help you weigh up what is most important.  They should also manage the claim process in event of illness of injury.  As you may know, insurance companies in general like to avoid paying out, so it would be beneficial, in my view, to have someone experienced and knowledgeable negotiating on your behalf.

Insurance brokers are paid a significant amount of commission for signing you up, so they are clearly not independent.  It probably makes sense to work with more than one insurance broker, and get quotes from direct insurers and carefully compare the terms of the policies.  It’s advisable to get all this right the first time so you only have to do it once!

When to stop income protection?

Insurance companies would like you to stay fit and well (Awww!) and working while paying premiums for the rest of your working career.  Premiums will increase as time passes, and stepped premiums will escalate dramatically as you age. 

In order to be cost effective as possible, you need income protection for the minimum time you really need it – often with debt, dependents and little in the form of assets.  As debt is paid down, dependents become independent and asset base grows, there will come the point you can self-insure.  Make sure you assess this carefully, and only cancel your policy when you’re sure you don’t need it. I imagine it will be a great feeling to get rid of those hefty premiums once and for all!

Income protection is a fairly complex topic, thanks for sticking with me through this mammoth guide!

At the end of the day most people will find they have to balance their needs with keeping insurance premiums reasonable.  I hope this guide gives you an idea where you can make compromises.

Did you get the TV Medical drama references or am I just showing my age?!  Go on…indulge me.  Who is your favourite TV Doc?

Now go ahead and work out your insurance needs, and get that policy sorted ASAP. 

 


FREE INCOME PROTECTION CHEAT SHEET


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