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The Fierce Girl's Guide to Finance

Get your shit together with money

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Invest like a boss

Is doing nothing worse than doing the wrong thing with money?

I want to confess something. I’m probably wrong.

Some view I hold, some article of faith, some strongly held opinion. It’s completely wrong.

Because you know what? We’re all wrong, some of the time. I was wrong about Trump being unelectable (me, and a bazillion other political junkies).

I was wrong about Beyonce being the only viable winner of Album of the Year at the Grammy’s. (Adele. Huh. Who knew).

And I have been wrong about the romantic suitability of more men than I care to remember (although some of them are burnt into my heart: from Doug the 15-year-old drop-out to Mr Darcy, the 40-something divorcé).

Nobody has all the answers – regardless of how much conviction they show when giving you those answers. (In fact, the more conviction the higher the chance they’re wrong).

This is really important to know when it comes to money, for two reasons:

1. You should run all advice through your own bullshit filter (mine included)

2. You don’t want to let fear stop you from acting

Let’s look at the first one. As a woman, you’re going to come across a bunch of people offering free advice about money. Your folks want you to buy property. Some bloke at work wants to mansplain why you should invest in shares. Some blogger wants to tell you to stop getting eyelash extensions  (oh, that’s me).

Some of it will sound legit. Some of it will make perfect sense. And some of it won’t sit well with you at all.

One of the best ways to increase the sensitivity of your BS filter is to find your own information. Read widely and get a feel for different viewpoints. And then …

Pay attention to the numbers

I work with a wide range of fund managers and they all have a different approach. Every time I sit down with them I totally believe that they have found the holy grail of investment theory. Most of them are indeed pretty good, but it’s their numbers that tell the real story. And those numbers show that some are definitely better than others.

Key take-out? Numbers don’t lie – always look at performance figures. And not just the last year, but the last three and five years – and longer if possible.

Someone can tell you that buying an apartment off the plan and renting it out is THE best way to make a solid investment. But it’s pretty easy to test that theory. Take the purchase price, and divide it by the rent it brings in. This is the rental yield, and it tells you a lot about the return on investment.

An apartment that costs $800K and is rented out at $500 per week, gives a gross yield of 3.25% (before costs such as maintenance and strata). Yield also doesn’t take into the cost of interest on the loan, so it’s a pretty blunt instrument to work out our return on investment.

The great unknown is how much capital growth it will get – i.e. how much the value will go up. Same deal with shares – you can broadly predict the yield on those (as dividends tend to be similar every year), but less so what the share price will do.

So like every decision in life, you have some things you know and some things you just hope for the best on. Everything we do is a calculated risk.

I bought a pair of navy suede ankle boots this week, and there is a risk that I might not get as much wear as I hope out of them. But I took a risk, because they are really cute and they were on sale and I have wanted blue boots for months.

(Side note, I broke my own promise not to go to Wittner. I have a problem).

Key take-out: you can and should run the numbers on an investment, but you also have to accept there is no perfect answer and no guaranteed outcome. You need to identify and manage the risk, through things such as diversification or building in a buffer. (Read this piece about risk if you are interested).

And this brings me to another point. When you are trying to run all these numbers, you may want some help. So, should you use a financial planner?

Probably. Like colouring your hair or getting a spray tan, you can do an ok job yourself, but you will probably get a better result with a professional.

It’s the same reason I pay a stupid amount of money to a powerlifting coach. Sure I could read a book on training, but that book isn’t going to stand in front of me and shout ‘knees out, chest up!’ when my form goes to shit.

So yeah, do the basics on your own. Learn some stuff, read a book or two, get your budget and savings sorted. But if you want to move up from messing around in the weights room to actually building some serious muscle, you need a coach. In this case, a money coach.

How do you find one? Well, asking other people is a good start. But if you don’t have any recommendations to go on, take a look at the FPA website.

But let me explain the industry a bit, so you know what to look out for.

Most planners will be attached to a bank, a big financial institution or something called a ‘Dealer Group’. It’s a complicated thing where they need to be part of an organisation that holds a license. The Licensee takes all the heat of the admin and compliance (there is a shit-ton of it in this industry). The people who work under this license are called Authorised Representatives.

So the person you deal with has some sort of network behind them, whether it’s a bank or a dealer group, and that institution may or may not want to sell you some of their products. What products? Managed funds, margin loans, life insurance, mortgages. Financial products.

Now, these may be right for you. Or there could be something better out there. If you get your make-up done at the Mac counter, they’re hardly going to point you over to the Estee Lauder counter are they? Well, actually there was this one time when the Estee Lauder girl at Nordstrom recommended the Smashbox mascara she was wearing (and it was awesome). So it’s all about finding someone with your best interests at heart, and won’t just push their products on you.

Luckily, there is a law that says they have to do this – i.e. act in the client’s best interests. So regardless of whether they have their own products, an adviser will generally recommend things from an Approved Product List – a list that their Dealer Group has checked out and made sure they are legit. It’s like going to Mecca Cosmetica or Sephora, where they just give you the best of the best regardless of brand.

Key take-out: Make sure you ask lots of questions about why they are recommending one product over another. Think about how long you spend choosing a foundation – and then maybe double it.

The important thing is that you do something. Don’t fall into the trap of thinking it’s all too hard, there’s too much to know, so you’d better not do anything. That’s how you miss out on building wealth, and instead just let your life run ahead of you and your goals.

So if you are a bit scared about getting started on the finance thing, here are some tips:

  1. Do some basic research. Google is your friend. Read Warren Buffet – he makes a lot of sense and is also one of the richest guys in the world.
  2. Speak to a few grown-up people you trust (and who have money) and get their input
  3. Ask around and find a professional you like and trust. You generally get a first session free, so if you don’t click, don’t go ahead. It’s like Tinder, but less awks.
  4. Use the process to think about your goals, priorities and plans. Then map your finances against these.
  5. Ask questions,  don’t be afraid to be annoying and demanding. If you can’t understand it or it doesn’t feel right, don’t do it.

And of course, you can always cruise around the Fierce Girl blog and enjoy its truth-bombs.

3 money lessons I’d give my 21-year-old self

My first degree was Arts, with Honours in English literature. If you want to know about Latin declensions or 19th century novelists, I’m your girl.

I don’t tell you this to impress you (although, feel free to be impressed), but to give you the context of how financially literate I was when I started my career. I even dropped maths in Year 12!

Now, I’m about to finish the final exam in an Applied Finance course. It’s not a full degree or anything crazy like that, but it’s the pathway to becoming a financial analyst (which I don’t intend to do).

In the 16 years between my first graduation and my imminent second one, I’ve muddled along on my own. I’ve learnt from smart clients and bosses, and the great Tom Buchan hounded me into loving economics. But I am not a numbers person, I don’t love maths and I can’t split a bill to save to myself.

Yet here I am, talking about money and stuff.

If I can do it, anybody can. However, there are things I wish I’d known earlier. If I sat my 21-year-old self down, this is what I’d say.

Capital Growth + Income = Returns. Think about all your savings in this way. Capital growth is when your asset increases in value without you doing anything to it. Your house’s value goes up while you live in it, or your shares increase in price while you own them.

Income is what you receive along the way. Think rent on an investment property, interest on a savings account or dividends on shares.

Every investment or asset will have some or all of these ingredients, e.g:

  • The house you buy to live in receives no income, but it gets capital growth.
  • A bluechip share portfolio will usually have a bit of each but skews towards income (more about that here).
  • A savings account has no capital growth but will pay income from interest.

There is no perfect combination of growth and income; it’s like lipstick. One that’s super glossy and glides on beautifully won’t stay on past your morning coffee. You can get one that makes it well past lunch, but it dries your lips out like a desert. Every lipstick has some combination of shine and durability, but the perfect ratio doesn’t exist.

Generally, the younger you are, the more you look for ‘growth’ assets because you’re building your wealth. When you’re retired, you generally need more income because you don’t have a paypacket. There are a hundred different scenarios in between, so you need to decide what’s important to you.

Every dollar you spend is a dollar you can’t make money from. The thing about money is that it can make you more money. Buying a house, investing in shares, contributing to super, even just getting interest on a bank account: all of those things give you more money – FREE money! Because that’s what capital growth and income are: money you DIDN’T HAVE TO EARN by working.

So, while it feels good to drop 100 bucks on eyelash extensions (don’t get me started on the ridiculousness of that price point), that’s money you could have put towards a holiday, or a home, or a degree, or any number of things that will actually improve your life.

If you can look me in the eye and convince me that extensions have genuinely improved your life (better job? hotter man? happier heart?) then go ahead. For example, I genuinely, deeply believe being blonde is an expensive but essential part of my life. But that means I don’t do other things like spray tans or nail salons.

It’s part of my approach to mindful spending and while it’s not perfect, it means I have some money leftover to do other, more productive stuff.

Get to know your money personality – and manage it. Everyone has their own approach to finances . I’m the ‘going broke saving money’ type: I can’t go past a sale … but still buy stuff I don’t need. (And, of course, it’s not a bargain if you don’t need it).

The key is to identify your own quirks and work around them (e.g. I try to avoid shopping malls in January). It’s all about self-awareness.

In a partnership, it’s more complicated. I was often in a tug-of-war with my ex-husband because we had different ideas about our money. He spent far more on ‘stuff’ than I’d like; I spent more on travel than he wanted. Neither of us was right or wrong, but if I had my time again, I would keep more money separate, accept that we have different priorities, and work from that basis.

Nobody is perfect, and I’m certainly not . I still get mad at myself for breaking my own budgets. I am the worst at claiming back money from my health fund and the tax office. I never have all of my shit together, all at once.

But like most hard things, doing a little bit to improve, all the time, can have a big impact.

Do you know some Fierce Girls who could use this advice? Share this post! Or subscribe if you want more real talk and lipstick analogies.

An Insider’s Guide to Finance: the risk-reward relationship

I’ve taken plenty of risks in my life. Some were productive, like packing up and moving to London. Leaving my marriage was a big risk that was hard to take, but the right thing to do. Wearing neon patterned tights with a crushed velvet skirt to a mufti day in year 7 – that risk did NOT pay off in either social or fashion terms.

When it comes to money, you need to get comfortable with risk. You see, there is a thing called the risk-reward premium, which means the higher the risk, the higher the (potential) reward.

This also means you can put a price on risk – the riskier the deal, the higher the stakes.

It’s why a car loan has a much lower interest rate than a credit card. The car can be repossessed if you can’t pay back the loan, while the credit card is ‘unsecured’ – they can’t come after you for the delicious cocktails you just bought, and the bank manager won’t fit into that Kookai dress. So the risk is higher for bank and more expensive for you.

Risky Business?

Now I am not saying let’s go to Vegas and put it all on black.

But when you invest, you want to balance the risk within your portfolio and within the asset class so that you get a good return while not losing your money.

Ok wait, I just dropped some jargon there. Let’s break it down.

Your portfolio is your entire wardrobe.

Your asset classes are each section: shoes, dresses, underwear, activewear, etc.

We talk about being ‘underweight’ or ‘overweight’ certain types of investments. For example, when the banks aren’t performing well, you might sell off some of those stocks and become underweight in banks. Or if you think resources are about to get hot again, you buy more and go overweight.

This can apply within one asset class – so you can be overweight on running shoes and underweight on high heels, within the broad ‘footwear’ asset class.

Or it can apply to the broader asset classes, so you have heaps of activewear, but not much in the way of work clothes (yep, me). That would be like having a lot of property (your own home) but only a small parcel of shares.

So now we have the lingo, let’s talk about risk. Here’s what you need to know:

1. You need some risk in order to make money, and that’s ok.

2. You can manage that risk by spreading it around – aka diversification

Now let’s talk more about that.

Why risk is ok.

Risk is what makes you money. It’s the old adage of ‘nothing ventured, nothing gained’. So it’s safe to keep your money in a term deposit in bank, but that’s not going to make you money.

In fact you could even lose money in the bank.

Wait, what?

Thing is, there are heaps of different risks when it comes to money, and one of them is inflation risk. You know how a bag of lollies used to cost 20 cents when you were a kid, and it’s $2 now? That’s inflation.

The value of money changes over time (it’s a really complicated backstory as to why), but let’s just say, inflation usually runs around 2-3% per year. (It’s lower than that right now, but has often been 5-6% in the past 30 years).

If your money is in the bank getting 2% interest, and inflation is 2%, you aren’t making money, but you’re breaking even. But if inflation goes up to 2.5%, you’re actually losing money. The dollar you put in buys less than what it bought a year ago.

This makes intuitive sense right? Things cost more all the time.

So that’s called Inflation Risk, and it’s a risk you face even when you think you’re not facing a risk. Crazy huh.

Here are some other fun and friendly risks:

Interest Rate Risk – The risk that interest rates will change and affect your investment. For example, you buy a property at 5% interest from the bank and then interest rates go up. Suddenly, the $2000 a month mortgage that was covered by rent becomes $2200. Not only do you have to find more cash, it changes the yield – i.e. the return you’re getting for the money you spend.

Liquidity Risk – The risk that you might not be able to turn your investment into cash as quickly as you need to. In the example above, you decide to sell the house as you can’t cover the repayments. But a bunch of other people have been hit by rate rises and are selling too. And with home loans more expensive, the number of buyers falls. So you might have the house on the market for several months, even drop the price. The property investment has low ‘liquidity’ and it can cause all sorts of headaches.

Market Risk – You can be the best stock picker in the world – or pay the best stock picker – but if the whole market falls, it’s pretty likely your investments will fall too. Economies – and the markets they’re part of – are always cyclical. They go up and down – that’s as much a part of life as the fact that you’ll get your period on the exact day you don’t want it to come.  The trick is to be prepared for the cycle and have diversified your risks – that way you can manage the dips when they come.

This is just a short list to give you a flavour. There are plenty more, like

  • sequencing risk (the risk that your investments are in the toilet right at the time you need them);
  • credit risk (the risk that the company you lent money to – in the form of bonds – goes under and doesn’t pay you back);
  • operational risk (the risk that you invested in a company run by morons who bugger it up and lose your money); and
  • concentration risk (the risk that you put all your eggs in one investment basket and then drop the whole darn basket).

You can make friends with risk

I’m not trying to scare you though. You don’t avoid investing just because there are some risks. If I listened to my mum about all the risks of going on holidays to the US (being shot, getting raped, the plane crashing, the car crashing…) then I’d never go.

What you do is manage risk, by being clear about your time horizons and your goals. (A financial adviser can totally help you there).

The rule of thumb is that you only invest in shares if you have at least a five-year horizon, because that’s how long you need to smooth out their ups and down (technically called volatility).

An investment property generally needs even longer because of the costs and drama associated with buying and selling.

And with your superannuation, you have 30-40 years to smooth out the returns, so if you’re young (under 45 or so) then you can tolerate even more risk in the hope of getting higher returns.

Spreading the risk is crucial. The ideal (possibly over your lifetime) is to have a bit of everything. Not just a property, not just shares, not just a term deposit, not just bonds. A bit of everything.

But you can start small. For example, think about a managed fund or ETF if you already own your home. Think about buying listed property instruments (REITS) if you already have shares but can’t afford an investment property.

Basically, don’t just buy a bunch of super cute high heels but then never have any good flats you can walk in.

Risk in a nutshell

So here are the takeaways you should know about risk:

Risk is a part of life, and investing. But if you stay away from crazy, get-rich-quick, too-good-to-be-true investments, you can tolerate and manage risk effectively.

There is also risk in doing nothing. Letting your money sit there and track inflation is a risk, because you risk your future returns and wealth.

So don’t be scared of risk – because the other side of it is reward. Imagine if you never took the risk of drinking too much, wearing too little and partying too hard – what fun stories would you have to remember? Investing is just like that, but with less booze.

Photo credit: Aaron Perkins

 

I saved some money. How do I invest it? (And WTF is an ETF?)

Let’s assume you’ve been following the Fierce Girl principles, and now you have squirreled away a nice lump sum. Maybe it’s $1000, maybe $5000 (you go girl!).

Now you want to put it to work, as it’s part of a long-term goal. (If it’s for a holiday or something in the next year or two, you can stop reading now and leave it in the bank.)

But if it’s for your F*ck-off Fund, a home deposit or for general unspecified future uses, you might want to invest it. Or you might not. Totally up to you. You don’t go around telling me how to live my life (unless you’re my mum, who provides ‘guidance’ on key issues like not ‘burning the candle at both ends’ and wearing singlets).

So I won’t tell you what to do with your money. Partly because that’s kind of illegal, since I am not a financial adviser. Mostly, though, because it’s a personal decision.

However, you still want to know some of the options. But let me make a couple of important points about investing – at any level, from novice to bad-arse billionaire.

1) Only time will tell you whether you made the right decision and 2) Nobody has the secret answer (except Biff, the bad guy in Back to the Future II, who has the Sports Almanac and can bet on everything ahead of time).

If you’re not Biff, then, like the rest of us, you’re making your best guess based on the information you have at the time. Even the rich guys in suits running the finance world – are basically doing that.

Their advantage is the quality of their information – they know a shitload about the thing they invest in.

But they don’t know if China’s economy is set to stop growing, or what would happen if Trump won the election, or whether there’s a huge meteor about the hit the earth and snuff out humanity. (If it’s the latter, I hope it’s about the same time as the Trump victory.)

The upshot of all this is that I want to give you some options, but encourage you to make a decision that suits you, your goals, personality and lifestyle.

Risk and return

Advisers often talk about ‘risk tolerance’, and get you to do a quiz about it. It’s way less fun than a Buzzfeed quiz like “What Sexy Halloween Costume Should You Wear Based On Your Favorite Food?” (actual quiz, yo!).

But it’s useful to know how much risk can you handle and still sleep at night, and how much can you afford to lose if it all goes pear-shaped.

There is a general concept that more risk brings more reward in investing (aka the risk-reward premium). That’s a vast simplification, but it does explain why you earn bugger-all on bank interest and generally more on shares.

Below are a few options (by no means the ONLY options) that you might want to look into, ask smart people about and generally educate yourself on. Most of them are focused on shares, or things can be traded on the sharemarket, because:

  • that’s where you can boost returns in an easily accessible way.
  • they work well when you have a small amount,
  • you don’t need to borrow to buy them, and
  • you can sell them at any time (unlike a property, for example).

Option 1. Leave it in the bank. A very smart friend of mine, who works in finance, is convinced this is the best option at the moment. Everything is expensive. Central banks have run out of ways to pump up their economies. It’s tough to get a good return. In her words, “The risk premium doesn’t justify the return”, if you invest in shares and the like.

Pros: A bank account is a safe bet. Deposits are guaranteed by the government.

Cons: Your money grows by receiving interest (and not much), not capital growth. i.e. the underlying value of it doesn’t go up, as it could for something like a property or shares.

If you do take this option, be sure to find the absolute best interest rate by comparing accounts on a site like Mozo or Finder. Term deposits are useful if you don’t need the money anytime soon – you get a bit more interest by promising the bank they can have it for a certain time. You can still get it back if you need it, but you forfeit some or all of that interest.

Option 2. Buy an ETF – aka an Exchange Traded Fund, which can be bought and sold like shares, through a stockbroker or online trading account. These tend to track an index (which is made up by a number of listed companies), but unlike an actively managed fund (see below), nobody is picking each of the stocks for you, so it’s cheaper in terms of management fees. Indexes track a lot of different types of assets, such as Australian equities, or even something more exotic like global shares, gold bullion or cyber security stocks.

There are lots of ETF providers these days, such as Betashares (disclosure: they are a client of my agency) and Blackrock iShares. My smart friend, mentioned above, picks ETFs as her second choice. I have exposure to them through the Acorns app, which is kind of like a buffet approach, where you have a whole bunch of ETFs, and can start with a really small amount (I kicked off with fifty bucks).

Pros: A good ‘toe in the water’ if you want to become an investor. You don’t have to decide on one company, so your investment becomes more diversified with a range of assets – i.e. all your eggs are not in one basket. ETFs are easy to buy and sell. There are lots to choose from. And you don’t pay a lot for the privilege.

Cons: You are tied to the performance of whichever asset class you have bought. e.g. if you have Aussie equities and they go down, so does your investment (but they also go up too). They can also be a bit confusing as there is so much choice – see an adviser if you aren’t sure. Or consult the oracle of Google and read reviews. And as with any market exposure, the worst case scenario is losing what you invest. That’s unlikely, but it’s not like the ‘sweet dreams’ security of a bank deposit.

How to get going: These are ‘exchange traded’, so you generally need to buy them through a broker – one of the online brokers will do the trick. Acorns is easy – you download the app and link it to your bank account.

Managed Funds – This is the traditional model, where a bunch of smart people pick investments on your behalf, bundle them up and manage them on your behalf. It’s quite similar to ETFs, in that you buy units in a fund and the value goes up or down based on the performance of the underlying assets. The main difference is that most funds are run by people (known as ‘actively managed’). As a result, there is a pretty big spectrum of performance, both good and bad, at different times.

Pros: If you pick a good one, you can make decent money – annual returns of above 30% are possible. Depending on the fund, you can also get more control and visibility over their investments – for example, Australian Ethical’s managed funds are all screened against their ethics charter, so you aren’t accidentally investing in a company that runs detention centres or digs up coal. (Also one of my clients, and I invest with them too).

Cons: You tend to need a bigger chunk of money to get started. If you pick a dog, you can be paying relatively high fees for poor performance.  When deciding, you should look at long term (i.e. 3, 5 and 10 years) performance.

How to get going: You can apply straight to the fund (some are even old-school paper forms), or some can be bought on the ASX through a service called m-Fund. Again, you’ll need to use a broker for that.

Listed Investment Companies (LIC’s)

These are very similar to both managed funds and ETFs – you buy shares in a company that is listed on the ASX, and its sole purpose is to buy shares in a lot of other companies. You can learn more about them here.

Pros: These often have lower fees than managed funds, but still have an active stockpicking approach behind them. There are some very reliable and established ones with a solid track record, that can give comfort to the novice investor. I used to work for AFIC, the oldest LIC in Australia, and it has weathered all sorts of storms since 1927 (including the Great Depression) and is still popular.

Cons: As with managed funds, you are exposed to losses if they pick poor performing stocks. While you can trade them on the ASX, some LICs don’t have a lot of people buying and selling each day, so you might not get the price you want at the time you want to sell.

How to get going: Once you have found an LIC that meets your needs, you buy them on the ASX, via a broker.

Self-funding instalments – These are a handy little thing that don’t get a lot of press, but can be a good way to boost your earnings by borrowing. Another smart friend of mine said she started her portfolio with these, way back when, and it was a great way to make money over 5-6 years without too much risk.

They are available on offer for a few blue-chip stocks (which tend to be the safest type of direct share investment), such as Westpac. They work like this: say you put up your $1,000, the SFI will match your investment (ie. you get $2,000 worth of shares). Then when the shares pay dividends , instead of you getting the money in your pocket, it goes towards paying down the loan amount.

Pros: You returns that are higher than what you money would get in the bank. It’s an easy way to dip your toe in the water. You can trade the SFI like any other share.

Cons: It is a long-term investment. You are still reliant on the performance of the underlying share and its ability to pay dividends. Borrowing to invest can magnify your gains but also your losses.

How to get going: these are exchange-traded, so you would buy them through an online broker.

Direct Shares – This is basically saying ‘I’ll have five hundred bucks of Company X shares please’ and own them in your own name. The only cost is the broker you have to use to buy them.

My view is: if you know what goes into deciding what makes a company a good one to buy, at a good price, you’d realise why so many people pay others to do it. I have done the basics of company valuation and it’s hard and scary and full of maths. And then there is the research about the company’s business model and strategy, where it sits in the industry, its competitive position etc. It’s a tough gig, and I prefer to leave it to the experts.

Pros: no management fees, buy whatever you like and exclude what you don’t.

Cons: Unless you’re an analyst or read analyst reports, there’s a good chance you’ll pay too much for the shares, or buy shares that don’t meet your needs for capital growth or income. It’s also hard to diversify (i.e. spread your risk) with a small amount of money.

New, fancy, fintechs

There are some newer investment options such as peer-to-peer platforms. Brickx, for example, lets you buy a small share of a residential property. I neither condone nor advocate these – you need to make up your own mind and/or wait to see how they perform. I mention them here to make the point that there are new ideas and ways to invest emerging all the time.

Well if you made it this far, well done. I would say the key is to do your own research and do what makes sense to you. If you are a bit scared, just start small. But don’t feel like investing is too hard or complicated – there are lots of tools and products out there to make it totally do-able.

PS: I’m not an adviser, this is not advice, please do your own research and/or see an adviser before you hand over your cashola.

photo credit: Jeff Belmonte Contando Dinheiro via photopin (license)

Insider’s Guide to Finance Part II: Financial Advisers

Financial advisers have had a bad run in recent years. But writing off all financial advice because of a few bad ones is like swearing off dating just because you watched The Bachelor choose Alex over Nikki (I know right!). Certainly there are stupid, incompetent or greedy advisers out there. But there are stupid, incompetent and greedy people everywhere, and to be honest, I would say quite a few of them make it onto reality shows.

So would I recommend using an adviser? Yes and no.

As I said in another post, I generally support outsourcing to experts. I certainly don’t let any of my finance clients write media releases, and they don’t let me manage millions of dollars of other people’s money. It works out pretty well.

So here are some reasons you would consider working with a financial planner:

  • You have a pretty big goal to reach, such as starting a business or buying a house.
  • You’re undergoing a change such as marriage, divorce or having a baby.
  • You want to make sure you are on the right track with planning for your retirement.
  • You want a roadmap that keeps you focused on a goal, with a tangible plan to get there.

Advisers actually do quite a lot more than just tell you where to invest your money. They can look your life insurance (read more about that here), how to manage your tax affairs or help with ‘estate planning’ (i.e. they make you get a will).

HOWEVER.  There are a few things you should know about the way the industry works, so you go in with your BS detector ready.

Not all advisers are created equal

Remember in Clueless, when Cher explains her virginity? “You see how picky I am about my shoes, and they only go on my feet!”

clueless

So ladies, be like Cher. Be highly selective when choosing an adviser, because there is a wide spectrum. Some advisers only have a diploma, while others have a degree (although this is set to change in the next couple of years, under new government rules).

A degree is not, in itself, a guarantee of knowledge or integrity. And similarly, plenty of good advisers have gained lots of experience on the job, regardless of having done a uni course.

However, it does pay to look at their credentials. Ask about their qualifications and experiences. Ask for testimonials. Ask your friends and family. It’s your money, and you want to be like Cher with it.

Know enough to call BS on their advice

I got a big financial plan done many years ago, and part of the recommendation was to get a margin loan to buy shares (more about them here). It was late 2007 and the markets were great. In fact the whole economoy was great, and Australia was ballin’ like Beyonce in a pool of dollar bills.

beyoncemoney

Anyway, by the time I got around to implementing the advice, I knew enough to be worried. The sub-prime loan thing was happening in the US (a precursor to the GFC). It looked like the boom could be over soon, after a  period of ridiculous high growth. And anyone with a passing knowledge of economics knows EVERY boom has to have a bust. The trick is working out when.

So I sat out the storm. We kept our money in the bank, and soon enough, the sharemarkets dropped by more than 30% – which would have meant my margin loan got called in, and I’d have lost money or had to spend more.

This isn’t to say the advice was bad. But it came at the top of the markets, and I wasn’t comfortable with the assumptions underlying it.

The lesson here is, do enough reading and learning on your own, so that if something doesn’t sound right – for you – then you can say no. Or ask more questions. Or marry someone for 72 days.

The people who lost their homes in financial advice scandals such as Storm Financial were told that despite a really low income (sometimes just a pension), they could make hundreds of thousands of dollars. If they had had enough basic financial literacy, they would have known it was total BS. (If it sounds too good to be true…)

It’s like when you are in a shoe store and they only have size 38, but you are a size 39. That sales girl will tell you they are leather, they will stretch, yada yada yada. But you know in your heart those things will give you nothing but grief, blisters and pinched toes. So, you need to take advice (from anyone, including me) with a grain of salt, and listen to your own gut feel.

Someone, somewhere, wants to make money off you

You know when you go to the beautician for a facial, and you’re paying your 80 bucks for the service. But then she tells you your skincare regime sucks, and tries to offload 200 bucks worth of overpriced Dermalogica on you. And somehow, in the moment, a $60 moisturiser seems like a really good idea. (Newsflash: it’s not, and it never will be).

Well, the same thing happens in finance. If you go to a financial adviser at a bank, for example, they are bound by rules to recommend the best financial products for you. But it just so happens that the bank has a whole suite of financial products to offer too. “Look, here’s a managed fund I prepared earlier!”.

And just like the beautician is going to offer you the product that makes her money (I know, she swears by it, she really does) – the adviser is also possibly going to sell you a product that makes money for his or her venerable employer: the bank.

It’s called ‘vertical integration’, and while the finance industry didn’t invent it, they have built a huge business out of it.

Not every adviser is part of this vertically integrated structure. Many independent advisers are deadset against it, in fact. And I am not here to say who’s right or wrong. There are fantastic advisers – both independent and aligned – selling a wide range of products in a highly ethical way. It’s just good to be aware who is making money, and where, and how.

Know what you’re buying,  ask questions, and consider whether you couldn’t get a really bloody good moisturiser at Priceline for $12. (I have, and look at my youthful skin!).

So how do I get started?

Asking friends and family for recommendations is a good start. Check out the Financial Planning Association website. Follow some advisers on LinkedIn and see if you like what they say. I wish you well, and hope you never again buy a pair of shoes half a size too small.

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Photo credit: https://www.flickr.com/photos/dskley/

An insider’s guide to finance: Managed Funds

Ever wonder what goes on in those shiny city skyscrapers, where billions of dollars change hands each day? Nah, me either.

But that’s because I have seen it first-hand. Don’t believe what you saw in The Wolf of Wall St. Most of it is just guys sitting in front of computer screens, or in meeting rooms with poorly designed PowerPoints. (My friend Amara disagrees and says I just don’t work with the right people, but I call it as I see it).

Anyway, I’ve worked with clients across the finance industry: banks, super funds, insurers, fund managers, advisers, fintechs. You name it, I’ve spruiked them to the media, advised their executives and probably gone drinking with them.

However, I’m not one of them. So I have a particular perspective.

And when people ask me questions like ‘what should I invest in?’, it’s not easy to answer, for two reasons: it is breathtakingly complex and also full of bullsh*t.

So I’m going to do some posts to help you sort through the BS, and share with you what I have discovered about the way money is managed, invested, lent and looked after.

Lesson 1: There is no secret formula.

There are literally hundreds fund managers in Australia, whose job it is to invest in shares (aka equities) on behalf of you, me and our super funds.

And every fund manager has their own style of investing. I liken it to girls and diets. Some swear by Atkins, blood type, food-combining, paleo or low-fat. Trends also come and go,  like the cabbage soup diet (which didn’t ever achieve much other than epic farts).

Fundies are the same. There are broad categories of investing, and within those, each one has tailored their own version. So you’re not just on a paleo diet, you’re on a low-carb paleo diet with an autoimmune protocol. (That’s actually a thing, for realz).

Let’s take, as an example, ‘value’ investors. They are the equivalent of shoppers who comb the racks at outlet malls looking for one perfect pair of Jimmy Choos marked down by 80%. So they buy ‘undervalued’ companies and hang out until they become cool. So, actually, it’s more like buying last season’s shoes and waiting five years until peep toes come back in.

Another style is ‘quant’ (short for quantitative). These guys don’t even bother going into a mall. Their shopping equivalent is creating an algorithm that sweeps eBay and buys one bargain pair of heels from every seller. There is still human input, but it’s mainly data-driven.

There are so many more styles, and sub-styles. Saying you’re an Australian equities fund manager is like saying you like Electronic Dance Music. Sure, but do you like house, deep house, dub-step, jungle, trance, or just Calvin Harris (and your rave pass gets revoked if it’s only him).

All these styles do well at different times and in different market conditions. It’s like how I love the last couple of seasons, when midriffs came back in fashion, because I can totally rock a crop-top (regardless of whether it’s age-appropriate). But when boho chic was all the rage, I totally floundered, because I look like a bad hippie hangover in flounces and frills.

Value investors are having a hard time right now because assets are overpriced and there aren’t many bargains to find*. It’s like the beginning of the winter, when boots are like $300 each. I never, ever buy full price because you know they will be on sale in two months. Value investors are like that, but they sometimes have to wait years for valuations to come down.

Ethical investments, by contrast, are having a stellar period, because they don’t invest in some of the industries that have been having a tough time in the last couple of years, especially mining. And they have more investments in booming industries like healthcare and technology, so it’s happy days for these guys at the moment. (Click here if you want to know more about that).

All of this stuff is swings and roundabouts though. Just like I am set up perfectly for a world where big butts are in fashion, I am going to be sad when big boobs come back in vogue. And they will.

Why pay more? 

The other thing about these funds is that they have different fee levels. ‘Active management’ is much more time-intensive and therefore more exy on fees. ‘Passive management’ is where they basically just follow the market – these are generally called ‘Index Funds’ and they have lower fees.

It’s like the difference between going to the hairdresser to get foils and complicated layers every six weeks, versus having your natural colour and a trim at Just Cuts.

Active managers would argue, as would my hairdresser, that you get what you pay for.

I pay a premium to my hairdresser and my fund manager, because I think both are worth it. My hair is frizzy and mouse-brown and needs a lot of help. I pay for ethical investments, because I am a greenie, leftie tragic. That’s totally my choice.

You could easily get a low-cost, Index fund or an ETF that will do the job of helping you grow your wealth.  You can also get a thoughtfully selected range of managed funds that will help meet your goals and possibly perform better than competitors (known as ‘outperforming the benchmark’).

So what’s a girl to do?

Well, you have a range of options.

Warren Buffett (one of the world’s richest men) reckons everyone should just do the Index Fund thing. Who am I to argue? If you want to, check out MoneySmart’s info on choosing a managed fund, and it talks about them in more detail.

ETFs (Exchange Traded Funds) are very much in fashion, and are another low-cost way to access investments via the stock exchange. I have exposure to some through the Acorns app, (which I’ve talked about here, towards the end of the post), but it’s not a large amount. That’s one of the good things about ETFs – you can start small. MoneySmart also has some good info on this.

Speak to a financial adviser. I know, you are all like ‘no, I can’t afford it’. I am generally a fan of investing in professional advice from people who know more than me (hello, divorce lawyer fees). However, I do think you need a good BS filter as well, because advisers do generally want to make money out of you. Start at the FPA if you want to find one, as their members have to be highly qualified.

If you don’t trust a financial adviser in a suit, consider getting some robo-advice. Which is not as fun as it sounds, because it’s not like Dexter on Perfect Match. (If you don’t know who that is, either you’re too young, or I’m too old).  It’s basically digital advice from companies such as Stockspot  (I am not advocating them, it’s just an example).

If only we could get advice from adorable 80s robots
If only we could get advice from adorable 80s robots

Now, if you aren’t sure why you’d want to buy shares at all, that’s a different conversation and you should probably read this post. Simply put, shares can be a good way to start building your wealth if you can’t afford a property and are pissed off at getting 2.5% interest from the bank.

Just don’t feel bamboozled by all the different managed fund options. Start small and simple, get comfortable, do a bit of Googling and reading, and I swear, you will be rich enough to buy an 80s robot in no time.

*Bonus learning – If you are interested in why assets are overpriced, it’s because of monetary policy (see this post for a primer). Interest rates are low, so everyone has more money to spend on buying investments. Also, because interest rates are low, it’s not much use sticking cash in the bank, so people buy shares and bonds and buildings to get a higher return. But when everyone does that, prices go up. It’s a tricky balance.

Photo credit: Kevin Jarrett

Buying shares is pretty much like choosing a husband

For realz. But I’ll get to that.

First up though, why are we talking about shares? Because they can be a solid way to build wealth. And they can be another option if you are priced out of the property market.

However, the stockmarket has been given a bit of a bad rap over the years. Partly because of the dudes who run it. People think they’re like this:

Well, I work with a lot of them and can assure you most of them are way more nerdy. They’re much more likely to ‘slave over a spreadsheet’ than ‘snort coke off a hooker’.

And maybe you think people who play the stockmarket are super-rich, like Goldie Hawn in Overboard (oh, what an 80’s classic!):

Well, go down to any company AGM (a shareholder meeting) and check out the crowd. It’s like this:

There are two types of shareholders. The first is mainly white guys in suits (‘institutional investors’). They invest on behalf of super funds and the like, and don’t go to AGMs because they have private meetings with CEOs in boardrooms with tiny bottles of San Pelegrino.

The other shareholders (‘retail investors’) are normal people like us. A fair few are older people who come to AGMs for the free sandwiches – and because they rely on shares for retirement income.

“But enough random photos, tell us more about shares!” I hear you say. Well, as R. Kelly once said, let me break it down for ya.

“Stocks, shares, equities: what are they?” 

These are all the same thing and they mean you have bought a piece of a company. You are a part-owner of it. You share the risk and the reward. If the value of the company increases, the share price goes up. If it makes a profit, it gives some of it to you. If it goes bust, so does your money.

Types of shares:

Bluechip – this is not an actual technical term. It’s just a way that people refer to big, reliable companies like banks or miners. (Note: being big isn’t a guarantee of reliability. It’s like, you can buy a pair of Jimmy Choo’s and be confident in their quality – but that stiletto heel can still get caught in a crack and snap off.)

These shares are the premium end of the market – you’ll pay more for them, because they are less risky. Buying bluechips is like marrying a guy in his 40s who already has a house and a career . He has done the hard yards and proven he is an adult. But you pay a price – emotional baggage and a bitchy ex-wife.

Bluechips also tend to pay more in dividends but have less capital growth – explained below.

Large cap, small cap – This is short for ‘large capitalisation’, and is the sharemarket value of the company. Each share is worth a certain amount, and there are a certain number of shares out there. When you multiply these, it gives you the ‘market cap’. (Company A has 1000 shares each valued at $1, so its market cap is $1000.) There are also ‘small cap’ and ‘micro cap’ stocks, which are often bought based on their growth potential rather than how they are doing now.

A company’s ‘market cap’  hopefully grows over time, as its profit, size and share price increase. It’s possible to buy a ‘small cap’ stock that becomes a ‘large cap’ years later.  This is like marrying a 28-year-old guy working on a start-up – a decade later you might be living in a waterfront mansion, or struggling to pay for childcare because you’ve become the breadwinner. It’s a bet on the future.

Bottom line: A good share portfolio will often have a mix of large and small companies because they each have their pros and cons.

“Ok, got it. But what will shares actually give me?” 

1) Dividends 

Because you are an owner of the company, management might decide to give you a share of the profits. These are dividends. Management decides how much they will pay each year, once they have run all the numbers.

This is what those retirees at the AGM are looking for, as dividends replace their pay cheques. However, the company might not make a profit. Or it needs to invest the profit into paying off debts. So they don’t pay you anything.

That’s because dividends are ‘discretionary’. A company never has to pay them.

You can choose companies that are really bloody likely to pay them, like a big bank. Overall though, income from shares tends to go up and down, so if you rely on them for your lifestyle, you generally need other assets like fixed-income bonds or term deposits as well.

2) Capital Growth

This is where the big gains can be made. If you had bought shares in Apple back in 1980 – when Steve Jobs was just another nerd in a turtleneck – you would have paid fifty cents each. They are now $110 each. Even allowing for inflation (i.e. things used to cost less – remember when a mixed bag of lollies was 20 cents?), that is still a damn good deal.

Of course, for every Apple there’s another five companies that either fell over, stumbled along or just ran a steady marathon. It’s all about picking the right stocks. Is that 28 year old boyfriend going to make good money, be a caring father, not get a beer gut and stay faithful?

Nobody knows. Even Beyonce. She won on the first three but failed on the last one. That’s exactly the same as picking stocks. The good thing is, you can have as many stocks as you like, whereas society says we can only pick one husband at a time. (Whatevs).

Total shareholder return (TSR) is what you get when you add these together. Often you can choose to keep reinvesting the dividends you get paid (if you don’t want the income), so that boosts your shareholding value. Couple that with capital growth, and that’s your return.

The TSR is based on many factors, including the company’s performance and share price. For example, ANZ Bank has delivered 7.5% TSR on average over the last eight years, while Westpac has delivered 11.5%. Luck, skill and research, basically.

“Shares sound great! Sign me up! Take my money!”

Whoa there sister. Let’s just bear in mind a couple of things about shares.

They are volatile (compared to cash, bonds or property). Their price can go up and down in one day (and usually does). A bit of ‘vol’ (as we like to call it, because we sound cool and smart) is okay over the long-run, but it does mean you need to be flexible. If you want to spend the $5000 in your share portfolio, you can easily sell them. But is the price good that day, week or month? This is why shares are better over at least a five-year time horizon.

All shares are not created equal. Some are dogs. For example, if you bought Myer shares in 2009 for about $3.60 they’d be worth about $1.30 now. I suspect these shares were bought by men who hate shopping, because if any of them had set foot in a Myer they would know the service is shit, the stores are tired and the prices are ‘meh’.

But if you had bought JB HiFi at the same time, for $9.50, you’d be smug AF now, because they are currently $27 each. I know right! Although, why people still buy all those CDs and DVDs baffles me completely. (By the way, if you like these figures, the ASX website has heaps of fun graphs and charts)

So, you can choose your own shares or you can let someone else do it. But even the pros get it wrong sometimes. What we hope is that they get it right more often. Which brings me to the third point.

Don’t put all your eggs in one basket. This is good old ‘diversification’. As we have discussed before, that’s just a fancy way of saying don’t stock your wardrobe full of just ballet flats, or just high-heels, or just runners. That’s crazy. Same with investments. If you buy shares, buy a range of them, because they will all perform differently over time, and in different conditions.

But how do I buy a whole bunch of different shares with just $1000?

Glad you asked! You can either buy a managed fund or an exchange-traded-fund (ETF). They pool a lot of people’s money and spread it out over a range of shares. (You can click the links to find out more about them).

I won’t give you advice on which ones to choose but I can tell you that I have the Acorns app. This takes small amounts of money out of my bank account every week and puts it into an ETF. It’s pretty cool because you don’t notice the money going out.

I don’t fancy myself as a stockpicker. Firstly, I just finished that subject in my post-grad course, and it was seriously the hardest fucking thing I ever studied. Secondly, I don’t have time to dig into the company accounts of potential investments.

So I put share investments into my mental list of “things better left to experts” (along with tax returns, powerlifting training programs and making laksa).

If you do want to go it alone, you can easily sign up to a broker and do it yourself. Check them out at Canstar (a comparison site).

“Sheesh, that’s so much information, I am just as confused as ever”. 

Ok I hear ya. There is a lot to know. You can always talk to a financial adviser. Or you can just start small. For example, download Acorns. Pop $500 into a managed fund or ETF. Or have a ‘fantasy portfolio’: pick some stocks and watch them over a period of time to see how you do.

What I would say is this: if you haven’t bought a property, (or even if you have), shares are one more option for you to build wealth and become a certified Fierce Girl.

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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.

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