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The Fierce Girl's Guide to Finance

Get your shit together with money

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July 2016

Can I afford my own home? Part II

home

We discussed the pros, cons and Beyonce lyrics relevant to home ownership in Part I.

So, you want to go ahead and buy your own little patch of paradise? (If by paradise you mean a modestly priced abode in an affordable suburb).

Great, let’s do this!

How much do you need?

Shit’s gettin’ real now. You’re going to need a large amount of cash as a deposit. Ideally, 20% of the purchase price and the stamp duty (there are some stamp duty exemptions depending on the state you live in, but overall, it’s a tax you pay for buying a house. I know, WTF, as if it isn’t already crazy expensive).

So let’s assume, conservatively, you are buying a $500K property. You will need to save $100,000.

This would give you a 20% Loan-to-Value Ratio, or LVR. This a big deal to banks – and they get all antsy if it’s much lower than this.

However, maybe you find a deal where you only need a 10% deposit. That’s fine, but they will charge you Lender’s Mortgage Insurance, which is a total scam in my view, but it protects the bank if you default on the loan. I know, poor banks, needing ALL the protection cos they’re doing it tough.

The price of LMI depends on how short of the 20% deposit you end up. They tend to whack it on top of the mortgage amount, which is good because you don’t need to save the money for it, but bad because you end up paying interest on that amount too.  In our example, LMI would cost almost $9000.

How will you save this much?

By not spending it on other things. Sounds obvious, but there is a long way between saying ‘I plan to save a cool $100,000’, and actually getting there. And on this long road is a lot of  saying ‘no’ to things.

No to $20 cocktails. No to taxis home after said cocktails. No to overseas holidays. No to expensive phones you upgrade every two years. Look, the list goes on.

Saving money is kinda hard and boring. So is paying a mortgage actually. In this example where we borrow $400,000 (after saving 20%), the repayments will be over $2000 per month (on a 4% interest rate). Totally doable, but not exactly conducive to a lifestyle of luxurious ease.

And this is what the bank wants to see: that you have been practising the saving game for a while now. You need to demonstrate a savings history – which is why, even if you have awesome folks who gift you a deposit, you still need to show you aren’t blowing your paycheque on cocaine and hookers every week. Or even every second week.

Savings and wise investment

Homer hilariously disparages the concept of ‘savings and wise investment’ in this scene.

Sadly, there are no fortunes to be made with bacon grease these days. And even saving is pretty tough on its own. If you have a sensible time frame to save a deposit, you might consider investing it first.

The era of low interest rates is great for borrowers but shit for savers. Even the best high-interest accounts are only paying around 3% interest, and inflation is around 2%. So every year the value of your money actually only grows by 1%.

One option is to invest in a managed fund or ETF that delivers a higher return. Now this comes with its own set of risk and reward, so don’t just take my word for it (you could even see a financial adviser). But the idea here is that you have an interim investment strategy to boost your returns, if this is whole property idea is a long-term goal.

Playing the long game

My friend Gigi is in her early 30s and lives in New York (thanks E3 visa!). She wants to buy an apartment there one day. (That sounds pretty way out, but in fact it’s the same price as Sydney, maybe even less.) So here is what she does:

  1. She has been saving part of every pay since she was a graduate – i.e. it goes straight into an account that she doesn’t dip into for new clothes or nights out.
  2. She still has holidays and does fun things, but that is a separate budget. She pays herself (to her savings) first.
  3. She puts it into a share portfolio that bubbles away while she plays the long game. This means instead of getting 2-3% she has been getting 5-8% returns (depending on the shares and the time period).

So it’s probably a few years yet until Gigi bags that apartment. But guess what, she started early, so even if she waits five years, she will be well under 40 when that happens. Considering we live a bloody long time these days, Gigi will have a good 50 years of owning property ahead of her.

Gigi and me: living the dream in her (rented) NYC pad
Gigi and me: living the dream in her (rented) NYC pad

So how do you get started? Break it into small steps.

  • Open a dedicated online savings account, for that one purpose. Set up direct debits to it on payday. Don’t touch it.
  • Use the savings and mortgage calculators on MoneySmart to work out how much you need to save, and over what timeframe. It will give you a goal to aim for.
  • Do a budget. For realz. Give it a go at least. Look, here is an easy one! Just get a handle on what goes in and out, so you can see where to trim.
  • Start practising saying the magical phrase ‘Sorry, I can’t afford that’.

Can I afford my own home? Part I

fairydoor

We all have goals. Beach body by December (any year will do). A pair of red-soled Louboutins (paid for by someone else). Squat twice my own bodyweight. (Oh, is that just me?).

And many of us want to buy property, and wonder if it will ever be within reach.

So, can you buy your own home?

I don’t know. But I can ask you a bunch of questions in response. This is a pretty long post, but it’s really important, so please stay with me. There may be cocktails and topless waiters at the end*.

What it comes down to is this: why do you want to buy a property?

Is it because your parents told you that you should? What, like they told you to stick at the job you hate, to always have safe sex, and to stay away from that bad boy despite his amazing biceps? Some parental advice is definitely sound, but often unheeded.

And some advice is based on a time when there were four TV channels, seatbelts were optional, university was free, and houses cost 4 times the average salary, not 20 times. So unless they pony up with a deposit for you, your parents’ advice should be taken with a grain of salt. They mean well, but they built their wealth in a different era. What worked then may not work now.

Do you hate ‘throwing away dead money’ on rent? Sure, your hard-earned cash is heading into the pocket of some landlord (probably a babyboomer with a free uni degree).

But here’s the thing: you can afford to rent a nicer place than you can afford to buy. I live in a sweet inner-city apartment with my flatmate who is an interior designer. It looks like a Vogue magazine. My rent is exy but not ridiculous. And I estimate it’s a third of what I’d be paying to actually own the place.

If you’re happy to live somewhere less fancy (i.e. outside a capital city) then the maths of buying can stack up. Go nuts in Wagga Wagga. I won’t be joining you though.

Interest costs money. A lot of it.

Home ownership is seriously expensive. Not only are there maintenance costs (ever replaced a hot water system? See ya later $2000), or strata fees (at least $500 a quarter, up to a couple of thousand) or council rates (starting around $1500 a year). There is the eye-watering cost of a mortgage itself.

Say you borrow $500,000 over 25 years. You will actually pay nearly $300,000 in interest (at 4%, which is a record low rate in this country). For the first years of a mortgage you pretty much only pay the interest (on minimum repayments). The value of the home is (hopefully) increasing over that time, but when people say ‘I doubled the value of my house’, that usually doesn’t include the cost of the mortgage. The graphic below (from the MoneySmart calculator) shows the interest payable in light pink – it comes to $294,755.

Source: Moneysmart.gov.au
Source: Moneysmart.gov.au

If you are living in the home, then of course you saved on rent and had somewhere to crash. Just bear in mind that the numbers aren’t as simple as property-obsessed parents/real-estate agents/taxi drivers would tell you.

Is it because you have a burning desire to renovate?

Well here is my experience. Renovation sounds fun, and those bastards on the reno shows make it look so easy and cheap. BUT they have a team of tradies who do the real work and actually charge at least $50 an hour to people like you and me. And also, living without a functioning kitchen for ages is a grind.

Renos have their pluses, but being inspired to renovate by The Block is like being inspired to diet by The Biggest Loser. I.e. It’s fun to watch on TV but hellish IRL.

Is investing the answer?

Perhaps you aim to buy an investment property somewhere you can afford (but wouldn’t live). This is fine, but just make sure that you RUN THE NUMBERS first.

At the end of the day, buying a residential property is nothing more than an investment. And there are lots of ways you can invest your money. Owning a share in a property (where the bank owns the rest) is just one option in the exciting world of finance. However, it’s very popular. (So is dub-step, Pokemon and the Kardashians; the world is a confusing place).

But here are some reasons why it’s so beloved by Australians:

– People get it. You can drive past your property and think ‘yep, there is my wealth’. If you own shares, you can pull out some pieces of paper and look at them, but it’s not really the same. (Although you could listen to Beyonce on this one: “Always stay gracious, best revenge is your paper”).

– Negative gearing is a thing. If you spend more on repayments and other costs than the you receive from rental income, you can deduct that loss from your taxable income. Say your repayments cost $20,000 but you only get $15,000 rent. The amount the tax man can slug your salary now goes down by $5000. Also, the interest you paid on the loan can be tax deductible. (It’s pretty complicated, you can learn more here).

But the thing to remember on negative gearing is that whatever costs you can write off on tax, they are still costs. That is, you still had to put your hand in your pocket and find that money. The $5000 came from your pay. It’s a deduction and not a refund. It’s not all magical free money, just because you get some of it back.

– FOMO. Another driver of our property addiction is that Australians see how much ‘other people’ have made on property. Well, I am sad to say it, but if you’re buying in the next five years, the big gains in the market have probably all been had – prices are likely to grow much more slowly after the recent go-nuts boom. (Millennials and Gen-X get screwed by old people again!)

Yes, you will get rental income. However, right now (July 2016), RP Data says, “gross rental yields for houses are currently at 3.2% and unit yields are 4.1%, both of which are record lows”.

Yield is the rental income as a percentage of the property’s value. It’s low right now because the property is sooo expensive to buy in the first place. (This could be a whole separate discussion, so let’s park it for now and say property is doing ok, but not amazingly, as an investment).

The other thing about tax

There is one last point about buying property that nobody every really explains to novices: Capital Gains Tax (CGT), where the government takes a cut of any great investment you make. Say you make $100,000 profit on an investment. They will take a share of that (based on a complex calculation best explained by an accountant) once you sell the investment and reap the profit.

This applies to shares or property investments – but there is one big exception to this rule: you don’t pay CGT on the home you live in. So the $100K you make on an investment property gets taxed, but the hundred-G’s are all yours if you lived there. (This is why people downsize when they retire – they take the tax-free profit and bank it as their nest egg).

So what’s the answer?

I know what you’re saying. “Just tell me whether to buy a house already!”.

To be honest, if we take all of these facts together, the best option is to buy your own place in a cheap, unlovely area and live there for 20 years til it gentrifies. That is actually what many of our parents did. The suburb in southern Sydney, where I grew up in a red-brick 1960s bungalow, now has a median price of close to $1 million. I can’t sufficiently convey to you how far away and unexciting that place is, and yet if my folks had stayed there, they would now be millionaires, just by sitting on a house they bought for $100,000 in the 1980s.

But for fierce girls like us, it’s harder. We like our comfortable lifestyles. Many of us have credit card or university debts. It’s hard to save the $50K deposit we’d need for even a modest property.

So I am not saying a property is a bad investment. I am not saying you shouldn’t buy your own place. I am just saying it’s not the ONLY way to make money, and it’s not the magical route to untold riches that it was for our lucky, once-in-a-century baby boomer parents.

And if you don’t buy anything for the next decade, or ever, THAT’S OK. You aren’t a loser. You aren’t on the path to homelessness. That is, as long as you do this one thing… SAVE AND INVEST. (Ok, that is kinda two things).

Please make sure that just because you don’t have a mortgage, you don’t piss away every dollar you earn. Take the money that you’d be spending on a mortgage, and do something useful with it. Save it. Put it in super. Buy shares, buy REITs, buy bonds, buy a managed fund … there are plenty of other ways to make money.

Just make sure you have a plan to build your assets over time – which is essentially what home ownership is all about. That, and choosing homewares, obviously.

*Subject to availability.

Part II: Still want to buy a property? Here’s what you need to do.

The doctor is in: how to get better at (not) spending

ryangosling doctor

Don’t lie to me. I know you spend money on shit.

You had to get your nails done because you had a bad day, and why should your nails suffer too?

You needed a new white top, to go with that blue skirt, because otherwise the skirt wouldn’t get worn, and that would be more wasteful.

You buy a fancy $20 cocktail because, well, YOLO.

I know, because I do this too. We all do. We live in a consumer society, surrounded by things to buy and people convincing us to buy them. I don’t have any magic solution for that – except escaping to an ashram, and really, can you imagine the hair and wardrobe options in rural India? Exactly.

But we can all do a little better. We can all learn a little thrift. And why is this important? Because it takes a lot of damn effort to earn money. And there are things you really want to do with that money – things that give you joy, or meaning, or opportunity, or security.

Meaning every dollar you don’t waste on crap is something you can spend on the good things. I know, sounds obvious.

So we need to spend consciously. To consider if something is in line with our goals, priorities or even just our genuine pleasure.

Buying your friend a drink is a nice feeling and a great way to bond. Dropping a hundred bucks at the bar because you decided to do shots all night? No.

Buying a killer dress to wear to a friend’s wedding, because your ex will be there? A sensible choice IMO. Buying something from a cheapy Chinese shop in your lunch hour, because you’re PMSing like a bitch, and then realising it actually clings to your lovely lady lumps a bit too much? No.

Think about what matters to you. Goals are good: whether it’s a holiday or a good retirement, having a goal lets you do a calculation. “Would I rather drink wine in Rome or buy another pair of shoes that hurt my feet?”.

Think about what you love and allocate resources to that. I fucking LOVE eating breakfast out. I’d rather spend $25 on that, rather than a bottle of house wine on a Wednesday night (that will make me feel seedy as a tin of raspberry jam the next day). But maybe you really like wine Wednesday. That’s cool. Just make your own toast on a Sunday.

But girl, please, don’t do both, every time. A sense of entitlement to every indulgence that comes your way is a one-way ticket to poverty-ville.

Your spending manifesto

Now write some things down. Give yourself a manifesto. This not that. Poached eggs not prosecco.

Fact is, you can’t have everything you want. Soz!

So deal with that, and decide what you want the most. Be mindful. Be smart. And be a fucking tight-arse when it comes to allocating the money you bust your arse for at work.

Let’s never say these things again…

emoji766

If we want to be fierce and capable bossladies, let’s all agree on some disempowering (and frankly, pretty lame) things we are not going to say:
Money? Yeah, I will sort that out one day, when I’m older. Sure, you may be spending your twenties or early thirties having fun, travelling, experiencing life, or drinking $20 cocktails like a total baller, then eating tuna and rice for the last week before payday. We all love doing those things (my flattie and I even have a dish called Tuna Special). But the thing is, the sooner you start, the less painful it is.

Money? Yeah, I find all that stuff boring and hard. Well, I find most life admin boring and hard, but you know what, I do it anyway because I am an adult and I like the outcomes – such as, having a registered car or a valid insurance policy. So you have a couple of choices: 1) make it more fun or 2) suck it up and do it anyway. Actually, there is a third option: combine 1 and 2. Stop by here, and you’ll see that once you get started, it’s not as hard as you thought. 

Money? Yeah, I’ll never be rich so there’s not much point. Depends what you mean by rich. You’re unlikely to be confounded by the decision about whether to take out the Ferrari or the Lamborghini. But you may one day own an investment property. You may help your kids buy their own house. You may fly to Austria and do the Sound of Music Tour to fulfill your life dream (oh, maybe that’s just me). Rich means different things to everyone, but at its core, wealth gives you opportunities and choices.

Money? Yeah, I should get going on that, but I never know where to start. Then let Fraulein Maria tell you where to start! At the very beginning. And the beginning is: wherever you are. Whatever you’re doing know, whatever you have now, you can take a small step that improves your finances. Do something small and achievable, one step at a time.

Money? Oh yeah, I just spend it – I let my partner do all the other stuff. NO!!! I don’t want to freak you out or anything, but there’s very high chance that this partner will not be around forever. He (or she) might cheat on you and you kick him out. He might cheat on you and run off with someone. He might just get old and bitter and you don’t want to be married to him anymore. He might die. He might develop a gambling habit and drop your savings into the pokies. He might get cancer.

Think I am being a Negative Nancy? Think those things won’t happen to you? OK, now, every single thing I name above – think if you know someone it happened to. Maybe not your besties, but maybe someone in your family? Friends of friends? Your own parents? This stuff happens ALL THE TIME.

The good news is, you are here, and refusing to say any of the above things. Now, check out some resources to get you started on owning your amazing bosslady power.

Bindi & Mindy tell you what’s up

A quick chat about why the ladeez get turned off money. We also discuss flight socks and giggle a lot.

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