The journey to financial independence comes with many things to learn along the way.
To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series.
I hope these posts help further your thinking as you progress towards your goals :)
Just so you know, in many cases there’s often not a “right” answer, so be sure to think carefully how to adapt any information to your own circumstances.
If you have a question you’d like answered, post it on the Pearler Exchange or drop it in the comments below.
In this Q&A we discuss:
- I’m 18, where should I start?
- Are lifestyle assets anti-FIRE?
- Should I sell my LICs?
- How to get both dividends AND growth
- Switching investments when you retire
Let’s get started!
I’m 18 years old, where do I start?
I am an 18 year old aiming to achieve FIRE at age 35. I’ll be studying finance and economics next year, with the aim of getting a high paying job and saving aggressively over a 13 year period before leaving my finance job and enjoying financial independence (looking at a savings rate of at least 50% if possible).
Some of it will go into generic savings accounts, and some will go into investments. I’m just wondering what the investing/saving split should be? My current forecasts are 60/40 in favour of investing, but I'm not sure. For investments I'm looking at splitting between local Australian index funds and US index funds.
Thank you for your website and all the guidance that it has provided me. I really do appreciate all the invaluable information I have picked up from Strong Money Australia.
Dave: I absolutely live for examples like this! And I’m honoured that you’ve found the content helpful.
In terms of your question, I know many people like to do multiple things at once. I see this as the financial equivalent of multi-tasking - and I’m not the biggest fan.
Instead of allocating to several places at the same time, I prefer to focus on one thing at a time based on the priority that makes sense. So in this situation, I would personally do the following:
- Build an emergency fund (say $20k)
- Save a deposit if I wanted to own a home/property, then buy
- Build investments
If you aren't fussed with home ownership anytime soon, then skip step 2. This way you can devote 100% focus to each thing, and see faster progress and momentum while doing so (which is extremely motivating).
In terms of allocation between markets, that sounds pretty sensible. Most readers will be aware I’m personally just aiming for a simple 50/50 Aussie/global split (I use global instead of just US for more diversification).
Is buying a lifestyle asset Anti-FIRE?
I am a huge fan of your work. Your principles have been a massive guide for me. I have a quick question about a situation that pits pure FIRE strategy against a lifestyle/emotional asset.
I'm considering buying a small plot of land in the Philippines (my partner's home country) for $10k. It has a sea view and is where we might want to retire. I know this goes against the grain of investing in income-producing assets, and I'm weighing the opportunity cost versus locking in a piece of our future retirement dream.
My question is: How do you personally factor in these significant, non-financial "life goals" when they conflict with the most mathematically optimal FIRE path?
Dave: Wow this is an interesting one!
How do you factor in decisions like this? You just accept that not everything needs to be based on pure financial logic. And that something like this gives you a certain optionality that is valuable and hard to quantify. So it's not fair to think that it's reckless or not a valid option for parking money in.
But that’s the philosophy, let’s talk numbers.
If the likelihood is pretty decent - say 50% - that you might end up living there in the future, then I do think this makes a lot of sense. Especially given the sum of money involved isn't huge. An extra $10k-$50k really isn't going to matter much in the grand scheme of your progress.
Plus if you do end up moving there later, that will lead to ultra low housing costs - potentially, a huge potential win. So it's not exactly going against your FIRE goals given it could be an important part of the overall strategy.
But I’ll add a caveat: deep down, if you know you probably won't move and you're just kinda trying to justify buying/building yourself a holiday home... then it's more of a grey area 😉
As a side note, the Philippines is somewhere I'd like to visit in the next couple of years - it looks like there are some incredibly beautiful places to see!
Should I sell my LICs?
When I first started investing I didn't know about ETFs, so I bought some LICs and even some individual shares.
Now my strategy has essentially changed. Plus I see AFI and ARG haven’t gone up as much as the VAS I bought. I know past performance is not indicative of the future, but I want to swap over to VAS.
However, while I'm still earning good money, if I sell, I'm going to be taxed more on the capital gains vs if I sell when I hit FIRE and have no other income.
If you were in this situation, would you be doing the maths? Comparing tax vs returns? Have you ever done this calculation?
Dave: I wrote an article about when to sell shares here which may help people in a similar situation. A few thoughts…
Yes, large LICs have underperformed, and they've also become cheaper - as in they now trade at large discounts to the value of their assets. Some people will see that as a buying opportunity. But if your strategy/preferences have changed, then that's different.
In terms of returns, you would have received higher income and franking credits from those LICs than VAS, so make sure you’re looking at the entire picture vs price only.
Over the long run, the difference between the older LICs and VAS is unlikely to be huge, in my opinion. So I would personally lean towards delaying the CGT until I was on a lower tax rate.
If you just really want to simplify, or have lost faith and don’t want to own them, then that's another matter. If you don't think you'll be on a low tax rate for 10 years or more, then it could be more profitable to sell now (assuming the index performs better). But if it’s just another 3-5 years or something, then it’s less likely to be profitable to switch. Unfortunately, like a lot of things with investing, you'll only know the right answer looking backwards!
I want dividends AND growth - where should I invest?
My goal is to have a diversified portfolio where I have dividend ETFs with some growth. I would possibly like to have a growth ETF that's Aussie based and also US. I currently invest in VHY, VAS, IVV. I'm only new to investing and want to get some passive income.
Dave:
The funds you’ve mentioned when combined will produce both income and growth.
VHY is a high yield Aussie fund that will have lower growth. VAS is an Aussie total market index fund that will have both income and growth, and IVV a US index fund which will have mostly growth with a little income.
You could add more and more ETFs to get different exposure. But you’d have to look at something that focuses elsewhere like emerging markets or Europe, for example.
If the goal is simply to have an Aussie/US mix, and a balance of dividends/growth, then this combo already meets that criteria. It’s just a matter of deciding how much of each you want and adding to it as much as you can.
“Should I switch investments when I retire?”
I’m in my late 40's and looking into debt recycling to invest in a diversified high growth ETF. Just wondering if it makes more sense to go with DHHF (lower yield) or VDHG (higher yield)? And would this need to change as I get closer to retirement?
Dave: We covered this in one of our Aussie FIRE Podcasts on debt recycling and using debt to invest - I believe it was either Episode 36 or our 2-part episodes on debt recycling which was episode 19 + 20.
Given the two funds are so similar in terms of their portfolios, and because debt recycling is largely about tax benefits, there is a greater tax benefit with the lower yield one.
Keep in mind, when it comes to retirement, you probably want to get rid of the debt by then and live off your investments. And in that case, the higher yield option will be simpler - most people generally would rather avoid having to physically sell shares.
Of course, the same thing can be done with a lower yield option by harvesting some of the growth by selling a few shares.
People may wonder, “if they’re so similar, why is one higher yield?”
Basically, because VDHG is a group of managed funds and DHHF is a group of ETFs. Managed funds often have to pay out capital gains when they have people selling out of the fund, whereas ETFs don’t - just based on the mechanics of how they work (see point 5 in this post ).
In terms of switching later, I’d say that’s best avoided due to taxes, especially if switching between such similar options. Try and build your portfolio the way you want it later - saves yourself a bunch of hassle, stress, and probably tax too.
Should we pay off our mortgage or add to super?
Hello Dave. Your Strong Money Australia book has probably changed my life and my mindset more than any other book. My wife and I have a mortgage of $161,000 once our offset account is subtracted.
We have a savings rate of 24%, which gets pumped into our offset. My Super is with REST and I've chosen a high growth option which claims to earn about 8.7% per year. My wife and I (46) are fairly set on smashing out our mortgage before any investing, but I'm wondering if there can be any benefit to leaving our offset account as is and pumping our savings into Super instead.
Our mortgage rate is 5.34% p.a. We're hesitant to change course with what we are doing, but if there’s a clear advantage to doing two things at once I'd like to know.
Dave: I'm incredibly glad you’ve found the book so impactful - thank you for the kind words!
OK, so your main question is whether there's a benefit to focusing on super instead of getting rid of the home loan (or both). I’d say yes, a couple of benefits:
- Tax deductions for contributions.
- Higher long term returns than the mortgage rate (likely)
The downside is, that money is locked up until you hit 60 - another 14 years.
So if you were hoping to semi-retire before then, getting rid of the mortgage ASAP is often a huge lever in achieving that. But if you are more interested in maximising long term wealth, or you plan to retire closer to the super access age with just a bit of wealth outside super, then maximising super can make a lot of sense.
Depending on your actual numbers, you may be able to contribute to super up to the allowable cap each year (for both of you), and then use additional cash to smash the mortgage.
Final thoughts
I hope you enjoyed this Q&A session, and these answers gave you food for thought.
Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community - like myself, someone more knowledgeable, or one of the Pearler team.
You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.
Until next time, happy long term investing!
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