You Only Live Once

February 26th, 2012

With apologies to those who believe in reincarnation, it’s true that you only have one crack at life and implicit in this is that you should live for today. The problem with that is it can lead to a life with unnecessary hardship down the track. The ‘only live once’ approach should perhaps be replaced with a ‘no regrets’ approach. Although on the surface they are similar, the no regrets attitude looks towards the future.

I have heard many a young person justify the personal debt they are in with the line “Well, you only live once!” and I have heard just as many people a few years older express regret at the debt they burdened themselves with when they were younger. So to minimise the chance of regret, I reckon you should think to yourself “You only need to do it tough once.” You get to choose if you will do it tough for a short time by saving up for purchases, or a long time by buying on credit then paying your debts off.

The ‘do it tough once’ thing assumes that you don’t suffer some sort of personal tragedy, illness or disability that you can’t insure yourself against or avoid. Statistics tell us that there is a pretty high chance that you will bit hit with an affliction that’ll lay you off work for a couple of months at some stage in your life. So I guess the reality is that you may have to do it tough twice.

I’m not saying that all the good things you want should be delayed until you no longer have enough teeth to chew your own steak. There is a happy medium between living for today, at a big cost, and not spending a cent ‘til the day you retire. In fact, doing things tough when you’re young means there is little risk of having a retirement where you have to rely on government help.

Doing things tough once also lowers the chances of passing on the burden of debt to your family when you depart. Personally I can think of nothing where I would be more of a failure as a parent than to pass on a large debt with nothing to show for it to my children. Giving my kids the best crack at life has always been a very high priority for me, and being free of debt is a big part of that.

So next time you are tempted to whack that new lounge on credit or buy that car with a loan, think about how much easier life will be later on if you delay the purchase and use your savings instead.

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The House Price Oversight

February 18th, 2012

House prices in Australia are high. “No shit, Sherlock,” I hear you say, “Tell us something we didn’t know.” Ok, um, Kevin Rudd actually would like to be PM again. Already knew that one too, eh? Well I will tell you something you don’t know about Aussie housing, but first, some basic economics.

The price of everything from a loaf of bread to illegal drugs is dictated by supply and demand. Where you have an increase in demand for a product, like a Justin Bieber album (God knows why there is any demand for him), the price will go up so long as the supply of that product remains stable. Where there is more supply than people wanting to purchase, the price goes down (just you wait and see, Justin). For Aussie housing, exactly the same rule applies.

For many years there has been a large demand for houses, units, townhouses and land in Australia due to a couple of factors, mainly to increases in population from high levels of migration and our fertility rate. Our fertility rate isn’t huge (we’re rooting only slightly more than we’re dying), and migration accounts for between 200,000 – 300,000 more residents every year. As we don’t build enough new houses, to the tune of about 25,000 a year, we currently have an undersupply of about 200,000 homes. So say the economists. Seems simple enough, but I reckon that there are a few things being ignored.

The first is that, thanks to McMansions, the average size of a house today is twice the average size from 1950, and there are heaps more bedrooms. So there is enough room at the parents’ place for many gen Ys to be happy enough to stay, and sometimes to stay there with their partner. After all, the undersupply of housing in Australia has not led to an incredible increase in homeless people.

The other bit overlooked by economists is about the migration figures. Given that there is a large number of people coming from countries with higher population densities than in Australia, it’s quite plausible that migrants are happy living in more cramped conditions than the average Aussie. For example, a guy moving from Japan, where the average amount of housing is just 47 square metres per person, would gladly move into a “cramped” sharehouse in Australia where the average floor space is about 84 square metres per person.

So an increase in migration may not equate to a corresponding undersupply in housing, especially when the economies in other countries start to pick up and those countries call for skilled migrants. Many a skilled worker has left Australia for more money overseas.

I’m not predicting a migrant-exodus-led house price crash in Australia, but I am saying that I believe the simple figures that you hear about on the news need looking at more closely, especially if the undersupply problem is addressed by an initiative to build lots more houses, and whilst ever the people pushing the undersupply line have a vested interest in keeping house prices inflated.

In the end, house prices simply can’t continue to rise as they have over recent years as the average income earner, and above average income earner, will not be able to afford to buy one.

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Good Debt?

February 10th, 2012

There are a lot of people in finance who like to talk about good debt and bad debt, as though debt could either be well behaved or dig lots of holes in your garden. Perhaps debt should be referred to as naughty or nice. I guess in the simplest forms you could categorise them like that, but life’s not that simple so I prefer to refer to debt in a different, more complex way.

Debt is either tax deductible or its not, and debt is used to buy something that will either rise or fall in value.

While you are still awake I’ll tell you about tax deductible debt; it’s anything that can be included in your personal or business tax return (yes, you might need to grab yourself a coffee at this point). The majority of taxpayers would not be able to claim a tax deduction on their credit card or personal loan interest, because the purchase that’s accruing interest hasn’t been for something that earns income. If you use your car for work (that’s at work, not driving to and from the office) and your car has a loan, you will be able to claim a bit of the interest on that loan. Tax deductible debts are also the loans used to purchase investments like shares and property (but not vacant blocks of land). Because the tax deduction allows you to effectively lower the interest you pay, there is not the same urgency to pay off these loans. Thus the ‘good’ debt. [As a side, I’ve never heard from a victim of a rogue geared investment scheme referring to the debt that crippled them as being good in any way.]

When you have purchased something with debt that you can’t claim on your tax (pair of jeans, Blu-ray recorder, cat food, snowboard, etc.) then you want to pay this off as soon as you can. This debt is usually for stuff that falls in value (the coffee you have just finished won’t be worth too much now, and the cat food’s only worth something if it’s been half eaten by Paris Hilton’s dog, you can prove it, and successfully sell it to some idiot on eBay). Bad debt. Naughty debt. Go and sit in the corner.

Things in the non-tax deductible debt category that go up in value are usually only homes (mortgages) and qualifications (FEE HELP). They might not always rise in value but they should be worth more as the years go by. Sort of, kinda, alright good debt. Good because it’s not bad, but I’d never refer to a half million dollar mortgage as good. These debts should still be paid off quickly, but there’s no need to pay off FEE HELP or HECS debt quickly.

Like I said, it’s complicated.

To make it easy to remember, get rid of all the debt that you can’t claim on your tax, especially if the debt was used to buy things that aren’t worth as much anymore. After they’re gone then you can concentrate on paying off that geared share portfolio and investment property.

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Sam or Greg?

February 4th, 2012

In recent weeks The Wiggles announced that the yellow Wiggle was changing. Wiggles management said that the original yellow Wiggle, Greg would be rejoining (unlike the way that Pippa from Home and Away changed where we just had to accept a new person playing the role without a press conference – I’m still getting over one).

If media reports are true, Greg’s return has less to do with wanting to don the skivvy again and more to do with a bad investment. When Greg left the group 6 years ago he received a payout of around $20 million. This in turn was allegedly invested into a property development that went belly up. If this is the case it would seem that Greg broke one of the fundamental rules of investing – don’t put all your eggs in the one basket. This decision led, in part or full, to Sam leaving the group after having been recognised as bringing a new energy to an aging outfit.

There have been the inevitable suggestions from the public regarding whacking Sam in a green top and adding him as a fifth Wiggle, but they’ve been there before.  The original Wiggles album was recorded by five cast members, albeit without their famous colours (and if you have a copy on CD, signed by all five, I reckon it’d be worth a bit.) The fifth Wiggle, Phillip Wilcher, wrote most of the first album, which was re-released years later with all of Wilcher’s work removed.

For a group described as Australia’s richest entertainers, there would seem to be little generosity extended to Sam. He allegedly earned a salary of $200,000 a year for his time as lead singer and was offered just $60,000 when he left. It might seem like a lot of money to you and I, but it’s a tiny fraction of the $27 million they earned last year. In recent days, Wiggles management have released accounting figures to show that despite earning many millions, the outfit made a $2.5 million loss last year and that the five owners are propping the company up with a $7.2 million loan via another Wiggles company. Talk about complicated accounting.

It seems that money, and in this instance big money, changes things. I met The Wiggles 15 odd years ago and was thoroughly impressed with them – they were genuinely nice guys who adored their fans. I don’t know if and to what extent they may have changed since then.

Whether you are on team Sam or team Greg, one thing can’t be denied – Sam’s departure is a blow to the chances of The Wiggles implementing a succession plan to hand over the performance to four new Aussie faces. High Five managed to keep their brand alive after the original cast left but there is concern that The Wiggles won’t pull off the same stunt when the time comes. If they can’t then it’s the kids who will suffer (and their parents who will have to rely on aging DVDs and/or a US based group to see them through every morning).

All this may or may not be accurate. The truth, as they say, might lie somewhere in the middle. But I can’t help thinking that the fresh young face of Sam would still be there if it were not for that investment gone wrong.

Think about that next time someone says you should put all your money into a single asset.

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My Best Investment

January 29th, 2012

Every Wednesday there is a Money liftout in The Age and Sydney Morning Herald newspapers that has a profile of a prominent Australian. Their life stories are condensed into a couple of paragraphs before a section where they are asked a number of questions. Each person gets the same questions including one asking what has been their best investment.

There have been lots of answers involving houses bought in the mid ‘70s or shares in mining companies and even a couple of people who feel they have never really invested money. My favourite answer would have to be from a guy called Clive Hamilton who said his best investment was in the shares of a company that performed really badly. He sold them and used the money to take a woman out on a date. They have been married for many years.

I guess if I was asked this same question my answer would be the money spent on trips to Germany. I have been there four times, including the trip when my German wife, Claudia and I married there, and when we showed off our little chicken to the family just after she was born. They don’t speak much English and my German is scatty at best, but I have developed good relationships with my family despite the language barrier.

More importantly, my wife has been home regularly and our daughter has become a part of her German family’s life.

Yesterday we farewelled Claudia’s parents after a three week stay in Australia. Saying goodbye is always hard. Really, really hard. Especially when you don’t know when the next trip will be and how much our chicken will have grown up and changed in that time. It inevitably involves hugs, tears, an inability to speak from the massive lump in my throat and reciprocation from family members who rarely show such emotions.

The regular visits have meant that we feel quite close to our family, despite the distance.

We are really lucky to live in a time when contact with our European family is quick and easy (and free via email and Skype), and regular travel is do-able. It’s an investment in time, an investment in money and an investment in effort. And although they can’t be measured in percentages, the returns are great and will continue to be for many years to come.

What has been your best investment?

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No Regrets

January 22nd, 2012

I lost a mate this week, not someone I was really close to, but a 27 year old man I had a great deal of respect for. He spent his last days in a hospice and died with his Homer Simpson slippers on.

Coincidentally, I also saw something doing the rounds of Facebook written by a nurse who worked in palliative care about the top five regrets of the patients the nurse had cared for over the years.

The nurse wrote:

“When questioned about any regrets they had or anything they would do differently, common themes surfaced again and again. Here are the most common five:

1. I wish I’d had the courage to live a life true to myself, not the life others expected of me. This was the most common regret of all.
2. I wish I didn’t work so hard. This came from every male patient that I nursed.
3. I wish I’d had the courage to express my feelings.
4. I wish I had stayed in touch with my friends.
5. I wish that I had let myself be happier.”

It’s at times like when you lose a friend that you tend to reflect on your own life and mortality. You ask yourself if you would have the courage to stare death in the face. Would you try to go out with a bang? Would you regret anything?

My favourite quote, from a source I do not know, is – Nobody ever said on their deathbed “I wish I’d spent more time at the office.” It is a mantra I try to live by (and, yes, I am on leave from my full time job spending time with family as I write this). Of the five points above, it fits perfectly with number 2, and it also fits with how I define financial freedom for myself.

You may decide that financial freedom for you is different. Perhaps it involves owning rental properties, shares and expensive goods, maybe it’s about having enough to go on holiday every year, but it’s likely that most people would include an element of not having to work too hard within their personal definition.

There are many ways to achieve financial freedom, like marrying into money, receiving a large inheritance, or running a successful business. But these ways are not options for us all. What is an option for just about everyone is to have your finances sorted, and I’ve never met anyone who regretted doing that.

RIP Pete Veness

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New Year’s Resolutions

January 1st, 2012

They’re so easily made (particularly when it’s the champagne that’s doing the talking late on new year’s eve) so quickly broken (especially when you drank so much champagne you spent the first hour or two of 2012 hailing at the great porcelain alter). New year’s resolutions are probably best made sober and with a bit of thought if they are things you actually wish to achieve in the new year, rather than something that becomes a resolution again in 12 months time.

Quite often these self-promises relate to weight loss, fitness gain or telling that prick of a boss where he can shove his unpaid overtime. And a lot of new year’s resolutions are about money. Save up for a home deposit, pay off the car loan, get credit card spending under control, sort out that pile of paperwork that represents 10 years worth of superannuation – your new year’s resolutions may read something like these.

It’s all about goal setting, and like any goal you set for yourself, the more realistic it is, the greater the chance it will become reality. After all, a goal to lose 30kg before June is about as achievable as saving half your income in the same time frame. Aim for something closer to losing a kilo a month, or saving $500 every four weeks, and you will have a greater chance of getting there. The weight is more likely to stay off and the bank balance is more likely to be rising.

Then you have to work out how to actually do it. For the weight loss it can be a matter of replacing the chocolate eaten on the lounge in front of the laptop with eating a piece of fruit instead. Make a commitment to walk to the local shops for that loaf of bread or milk that’s run out once or twice a week rather than taking the car and you get the increase in exercise to help with the weight loss goal as well. For saving more, look to replace the chocolate with a piece of fruit and cut down on your fuel bill by walking a bit more. Hey, hang on, I’m messing with you, right? Funny thing is that lots of people who aim to shed a kilo or two have healthier bank balances as a side effect, and people who start saving money end up losing weight as well. Two birds, one stone.

The last thing to do before you lose your enthusiasm is to write down your goal to remind yourself of it and/or share it with someone who will encourage you to get there.

Everyone knows that so many diets or exercise regimes fail because they were too difficult to sustain over the long term. Many goals to save money can fail for the same reason. Make your new year’s resolutions realistic from the outset and you will get to where you want to be, albeit a little later than you might like.

Happy new year.

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I’m Not Tony Robbins

December 18th, 2011

I’m not a motivational, go get ‘em, punch the air, you-can-do-it-bloke. I’m an average guy, and unlike Tony Robbins, I’m not a knob. I don’t believe that everyone can achieve fortune by running their own business, inventing the next big thing or standing in a room surrounded by 200 other people all doing Zumba. But I do believe that the vast majority of people can attain financial freedom, and faster than you would think is possible.

I paid off my first mortgage by the age of 27, and recently there has been some interest shown in how I did it. I’m not going to give you a full blow-by-blow description here, just a plug for my website where I give you the tools you need to pay off your own mortgage or get yourself on the right financial track. But what I will tell you is a bit of detail that I don’t include in my site.

I bought my first place, a 3 bedroom townhouse in an outer Canberra suburb when I was 22. I was single and lived without a flatmate. I earned about $32,000 a year, give or take a bit of overtime, and over those years I saved my arse off. I’ve never smoked, never been a big drinker and drove my first car, a second hand Ford Laser for 9 years. It has meant some sacrifices over the years, all of which were worth it to live a life free from financial burden.

In the year I paid that first mortgage off I got married and spent 3 months unemployed. Like so many others, my first marriage didn’t work and the divorce was a big hit to both my confidence and finances.

Since then I have remarried, become a dad, travelled overseas a number of times for holidays and moved from the first townhouse to another, then more recently into a house. Our house is reasonably sparsely furnished and the telly is so old it won’t work without a set top box by mid next year. My wife balances study with being a stay at home mum.

I’ve changed jobs a number of times, but I don’t work in finance and still earn an average to slightly above average wage.

I’m an average bloke.

There will always be some people who will not have enough money as they rely on a government pension. And there will be others who struggle due to their own or a family member’s disablement, illness or problem like a litigation loss. But I reckon upwards of 80% of people could do what I’ve done, and by that I mean attaining financial freedom. You only need 2 things; the know-how and the discipline.

I can help with the know-how, you have to provide your own discipline. If it’s motivation you’re after go watch a bunch of Tony Robbins DVDs.

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Big House Big Mortgage

November 19th, 2011

Claudia and I own a big house. We own a massive house. It wasn’t that big when we moved into it a couple of months ago, and we haven’t done any extensions. We’re painting. Yes we (as in Claudia and I) are painting it, and with every room we paint the house seems to get bigger and bigger. I’m not the world’s best handyman, although I can bang a nail in the wall to hang photos with amazing competency, so this paint job has proved to be a big job and a big learning curve. Especially as I’m less competent at home maintenance than my wife.

Claudia and I looked for a house for quite a while. We knew that we couldn’t live comfortably in our old 2 bedroom townhouse for too long and proved ourselves correct when our little chicken was born in January. With all the baby crap that we needed the place very quickly became cramped.

In terms of square metres, our house is not that big. At 1502 metres it’s not small, but it’s certainly no mansion. When we were searching for a house we did a lot of looking around at places that ranged in size, starting from about 1202 metres for a house in an established suburb. But looking around the new places in display villages was a real eye opener.

The houses currently up for offer as house and land packages are, to put it lightly, friggin’ huge. Finding places smaller than 2002 metres is hard, blocks larger than 4002 metres are uncommon, and two and three bedroom houses are as rare as a smiling emo. The average house in a display village is a 4 or 5 bedroom energy sucking monster with space for 3 large plasma tellies. Some of the houses for sale even show you where you can put all these TVs. With bugger all yard, it worries me that the future generations of Aussies will contain no decent cricketers (Bangladesh is counting on this).

Walking around these display homes it quickly becomes apparent how many first home buyers there are looking at buying large houses. One place we were in had a couple asking the salesperson if the display furniture could be sold with the house as well. It got me thinking that the size of the mortgages of the average display home buyer would match the floor size of the building being purchased. A hell of a way to start your life as a couple or with a young family.

It seems to be the case that many first home buyers are looking to buy a house that has everything that the home they grew up in had – lots of bedrooms, large living areas, large car accommodation, etc. What many first home buyers overlook is that if their parents ended up in a place like that, chances are they started in a smaller, more modest house that was extended over the years to fit a growing family.

It may seem great to live the great Australian dream in a big house in the first place you buy, but somehow you have to pay off the great Australian mortgage.

And some time down the track, a big house has to painted again.

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The Greatest Saver

October 9th, 2011

Today I pay tribute to the greatest saver I’ve ever known, Joyce – a lady who never, ever wasted anything.

Joyce was born in Sydney in 1913, and the great depression and Second World War largely shaped her attitude towards money. She was lucky enough to be supported by her husband Herb and family over these years, and didn’t spend time in the jobless queues herself.

In the early 1930’s, and newly married, the couple were given a block of land in Sydney which they built on for a cost of $500. In 1939 she said goodbye to work and hello to twin girls, and within 18 months they had a third child.

Joyce and Herb stayed in the house they’d built until well after the 3 children had grown up and left. Then one day, in mid conversation with Joyce, Herb dropped to the floor and died instantly from a stroke. Despite being the state manager of an insurance company, Herb had no life insurance.

Suddenly alone and without a husband to support her, Joyce needed to draw on all her resources and strength to get by on a government pension. It didn’t help when the house was broken into twice in quick succession, so she made the decision to move to a unit on the 4th floor of a block of flats that had no elevator. Joyce figured that by the time any thieves were to make it up the stairs, they’d be too buggered to rob her.

Joyce did not waste one scrap of food or single cent over the 1970’s, 80’s or 90’s, allowing her to regularly visit family in country NSW and even go on holidays to destinations such as central Australia and Fiji.

In her later years she was able to save $100 a week from her pension by doing things like recycling the wrapping paper from presents she’d received and using it to wrap gifts she gave to others.

Now that she’s passed away, you won’t find her name on a list of heroes or Order of Australia recipients. She will simply be remembered by those who knew her as a kind, generous, loving lady.

I’ll remember her as my Grandma.

RIP Joyce Haggarty 1913 – 2011

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