M&M – Over Leverage by The Joyful Frugalista

money mistakes
over leverage

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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.

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