Original article: 2017. Updated: 2026.
Building wealth is a pretty simple exercise. But actually retiring on that wealth is not quite as simple.
Here’s what I mean.
Consider a couple who has a paid off house worth $2 million. You could call these people wealthy. After all, they’re a multi-millionaire couple!
And while that sounds great, it doesn’t actually do a whole lot for them in terms of financial independence.
Now yes, they can probably switch to part time work and just cruise along. But having the $2m home equity is not what made the difference. It was the fact that they’d paid off their house – reducing their expenses – that made the difference.
So if their home was worth just $500k, the level of flexibility they have is the same. Unfortunately, this couple still has to work, because they have no other sources of income.
You probably know people in a situation like this. The truth is, a lot of Aussie households are equity rich and cashflow poor. It’s an extremely common scenario. And our national obsession with property almost guarantees it.
But let me flesh this out properly to show you what I mean.
Let’s compare two people.
We’ll call one of them High-Roller Harry. The other we’ll call Moderately-Wealthy Martin. Harry has a net worth of $3 million. Martin has a net worth of $1.7 million.
Who’s more financially independent? You’d probably say Harry. He’s almost twice as wealthy, after all.
I’d say it depends. Because all we know about them so far is their net worth. We need more information.
What if I told you they both have living expenses of around $60,000 a year?
Then clearly Harry wins, right? I’d say there’s still not enough info to draw a conclusion.
Because here’s the thing. Harry could have all his money tied up in a $2m home, a boat, and a couple of fancy cars. Which means he has no level of financial independence at all. He still needs to work to cover his living expenses.
Since he has no other income streams, he’s fully reliant on his job income.
Now compare him with Martin. Martin has his entire $1.7 million invested in shares. Since he rents, he has no money tied up in home ownership.
With this level of portfolio, he can produce an income of $60,000 per year after tax – enough to cover his living expenses.
So despite having a much lower net worth, Martin is actually in a stronger position when it comes to financial independence. Because he doesn’t bother with trophy assets and his entire net worth is invested, this means his expenses are fully covered. He could declare himself financially independent.
Interestingly enough, because Martin’s renting and doesn’t have any luxury cars in the driveway, people probably think he’s not doing very well compared to Harry. They might even assume he’s struggling financially. This goes back to the wealth illusion I’ve spoke about before.
But the truth is, Martin has freedom if he wants it. He can opt out of work anytime he pleases. Even if wants to start living a fancier lifestyle, he still won’t need to work full time. Despite being a lot wealthier on paper, Harry simply doesn’t have that ability.
So clearly, when it comes to freedom, it’s not really about how much equity you have. It’s about where that equity is parked and what it’s doing for you. A million dollars could mean freedom for one person – and basically nothing for another. It all depends on your lifestyle and more importantly, how it’s allocated.
The lesson here is: don’t tie up your capital in assets that aren’t helping you gain more freedom. All equity is not equal.
Now, maybe you think this is an unfair comparison, because Harry wasn’t actually an investor. Let’s fix that.
This time, let’s assume High Roller Harry IS an investor. And since he loves property – like a lot of Aussies – let’s give him a portfolio worth $5 million with $3 million of debt against it. So he has $2 million of equity in investment properties.
Of course, he still has his home worth $2 million on top of that. So all up, Harry has $7 million worth of property, $3 million of debt, and a net worth of $4 million (ignoring his toys for this example).
That’s pretty damn rich on paper. Most people would look at his position and feel pretty envious. This is basically the Aussie dream or success story you hear about online.
But is he financially independent? Well, let’s check.
His property portfolio has a gross rental yield of 4%. After expenses gobble up 40% of the rent – his net yield ends up around 2.4%.
So on a $5 million portfolio, his net rental income is roughly $120,000 a year. He’s pulling in ten grand a month in rent! Not bad.
Now, with interest rates of around 6% or so, his interest bill would be $180,000 a year. Remember, his net rental income of $120,000. This means the portfolio is generating a cashflow LOSS of $60,000 every year.
So, despite his impressive pile of assets, and millions of dollars in equity, his investment portfolio is haemorrhaging money. He’s effectively paying for the privilege of owning it. And if he’s paying P&I on those loans, it’s even worse.
His passive income isn’t just zero – it’s negative.
Which means not only is he still reliant on his job to cover his own living expenses, he’s also relying on his job to subsidise his investment portfolio. He can’t escape. The whole thing falls apart the moment he stops working.
He’s definitely wealthy. But he’s not free. Not even close.
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Now I can hear the property fanatics already saying. “Yeah but in 20 years Harry will have way more wealth than Martin because he’s leveraged.”
And of course, this is true. High leverage, maintained for a long time, will compound returns faster. But here’s the catch…
Harry can only keep that machine running if he keeps working. He can refinance to access equity, but again, he can only do that while he’s working.
So his options are basically: stay at work and keep maxing his net worth, or accept that real freedom requires a different approach.
And to be honest, he’s already won at this point. It would be silly to continue down this path, stubbornly trying to hold onto the properties. Sure, he could squeeze out more gains, but for what? He’s basically a slave to the portfolio. At some point your assets need to work for you, not the other way round.
And therein lies a massive opportunity, for people who are sitting on lots of equity, yet have very little freedom – even to a much lesser degree than Harry.
Meanwhile Martin’s already free. Will he get the highest possible return from having maximum leverage? No. But I honestly don’t think he cares. And that’s something we each have to draw the line on at some point.
Because the alternative – chasing maximum wealth forever – usually just means working forever. Most people don’t actually want that.
There’s a financial cost to anything other than working forever. But to continue optimising for money, the cost is your time, and ultimately, your life. That’s what you’re trading away for the purpose of more.
Back to Harry’s dilemma.
The obvious solution is to sell down some of his portfolio and start using his equity to create income. I wrote about this in detail in my second book if you want the full strategy. The tricky part is, most people would resist this idea, since it means paying a big CGT bill, and having a smaller portfolio of assets.
There’s a lot of ego around how many properties people own, and it honestly becomes part of your identity. To sell some, or all, and switch into other assets feels a bit like you’re betraying a strategy that might’ve served you really well.
Property tends to be viewed as a sacred asset that should never be sold. And because of that, sadly, thousands of Aussies miss out on the chance to use their equity to have real freedom at a younger age.
I’ll add one more thing here. There’s a strong psychological component to all of this. Property feels “safer” to a lot of people. You can see it. You can drive past it. It feels nice to get rent than pay it. There’s just something visceral about owning real estate that feels solid.
Shares feel a bit abstract by comparison. Numbers on a screen. A line on a chart. Easy to dismiss as somehow less real. But the businesses you’re buying in an ETF or index fund are no less real than a property. Thousands of employees are going to work for YOU, the shareholder, each day.
Now, I’m not saying you can’t live off property. You absolutely can. I’m saying that just having a bunch of equity strung across multiple assets does not automatically translate to freedom the way most people assume. If you want to stick with property, maybe reallocate to some higher yield assets, or commercial.
Freedom is created with assets that produce a tangible income stream you can use. And that’s far easier to do, without a pile of debt, a long list of expenses, and the ability to cash out small amounts of capital gains whenever you need to.
OK, so I want to zoom out for a moment because this is genuinely the part that’s changed my view the most.
I wrote the original article in 2017, just after I’d left full-time work and started the transition from property to shares. At that point I was arguing for this principle that I had just dawned on, but I hadn’t fully lived it out yet.
Since that time, almost a decade now, I’ve watched this play out in real life. With myself, with people I know, and with the community at large. I’ll be honest – I expected the trend to slowly move in the right direction. I assumed people would start to realise that piling up illiquid equity isn’t the same as building freedom.
But it’s really been a mixed bag. Plenty of people now invest heavily into ETFs and things like that. But at the same time, people are more obsessed with housing today than they were back then. People have doubled down on their homes, mortgage sizes have expanded, and the idea of renting is more unpopular than ever.
And for investors, their rentals have ballooned in value, leaving them with impressive pools of equity that produce zero cashflow. And at today’s interest rates that cashflow equation is even worse.
The problem I was writing about in 2018 has multiplied. There are more equity-rich, cashflow-poor people in Australia than ever before.
Which is sad, but also an amazing opportunity. Because if you’re one of those people sitting on a big chunk of equity – that means you have options.
But there’s more resistance to selling than ever before, as people worry about their kids being able to buy in the future. So they sit there, equity-rich and continuing to work for spreadsheet wealth.
But you don’t have to play that game. I’m not telling you what to do with your portfolio, but at least consider your options. Looking back at the 9 years since I started transitioning out of property and into shares, I have zero regrets.
The income is enjoyable, our admin is simpler, and it makes our freedom sustainable.
And as the numbers get bigger through investing, it’s become more obvious to me just how much this obsession with equity can become its own trap. It looks like wealth from the outside, but it doesn’t actually get you the thing you really want.
If you are in this equity rich situation and you want to transition your portfolio so you can retire sooner, you might want some help mapping out exactly how to go about that. Now, I’m not licensed to sit down and do this with you, but I can put you in touch with someone who is – link here if you’re interested.
It could save you a bunch of tax if you do it smartly, and can easily mean retiring earlier than planned. By the way, it’s not easy for me to give a stamp of approval either to people or products, so I don’t take any recommendations lightly. That means they’ve been seriously vetted and I’m confident you’ll be looked after.
So what’s the takeaway?
One or two million dollars can mean complete financial independence, or it can just mean a nice house, some cars, and a job you can’t escape.
If your goal is freedom – like actual freedom, not just having an impressive spreadsheet – then your equity needs to be parked in the right places, working hard, and structured in the right way. You need to produce cashflow to buy back your time.
Most Aussies are equity rich and cashflow poor. That’s why we rank among the top of the wealthiest people on the planet per capita. But we’re not the most free – because a lot of that wealth is tied up in expensive property.
So many of us have built juicy net worth’s but are still chained to jobs. If you’re in that situation, you have a huge opportunity to change that.
Start looking not just at your wealth level, but exactly what that wealth is doing for you. Because freedom doesn’t come from net worth. It comes from cashflow. And too many Aussies have forgotten the difference.
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What are your thoughts on leveraging for income? One fellow Australian blogger used their equity to earn income and pay off their mortgage quicker – borrowing against equity could be a way to fast track income levels if you can borrow at a low rate. Even if you’re earning 1% on $100,000 (when you take the difference between earnings and borrowings), it’s still better than a return on a conservative 5% on $10,000.
http://www.australiandividendinvestor.com/2016/11/17/debt-recycling-how-i-paid-down-a-mortgage-in-10-years/
Thanks for your comment DR.
I think debt recycling for shares can work great. In fact, I would use that exact approach if I was starting today!
I agree with your thoughts, at current interest rates borrowing is appealing, and it’s much more attractive to invest (for income), than it is to pay down debt. Everyone is different though, and it won’t suit many folks. It can also work out poorly if someone doesn’t know what they’re doing 🙂
Hey, thats me! I also went berserk paying down as much off as much as I could as well. I could definitely see a situation where people are uncomfortable with the debt.
For those in a hurry, its a pretty nice way to get ahead. You should definitely talk to someone about it before you do it though!
Thanks for stopping by ADI 🙂
I read your debt recycling story a while ago!
The leverage can definitely work (not always), but it’s not a sustainable end game. High leverage and a passive income stream are generally not compatible. There’s no real need to leverage if one can save, and some folks will always be shy of debt so there’s those things to consider also.
A great point to remember for anyone on the FI journey. This is why most of my investments are stocks rather than property – There are of course pros and cons for both, though the cash flow is what I want right now (well in the next 3-5 years especially).
Yeah exactly. My opinion has really changed over the last few years on this topic and I think it’s underappreciated.
Thanks for commenting Miss B
I think, as you suggest people get caught up in accumulating wealth for wealth’s sake without knowing really why they are doing it, just intuitively knowing it is probably a good idea. If you never turn your wealth into some sort of income stream whether through your path (LICs) or any other of multiple paths, then the wealth is useless in my eyes.
You played a winning strategy by leveraging to grow your wealth then switching to high income investments.
You’ve done what most can’t, detach yourself emotionally from the number that is your net worth. Congrats on making that choice, I’m sure at the time it was gut wrenching.
Thanks mate.
It was a little hard to start selling, but in truth, thinking about being free, made the choice a lot easier. It just became too hard to ignore. If we wanted to keep all the properties, we’d have to continue working. Not a great trade-off!
Exactly Pat. If the wealth is just sitting there, but providing no freedom, then what is the point. Especially true when it comes to property, as many people are emotionally attached to even their investment properties.
It’s true, it worked out fine. But it can be done with a good savings rate, without the debt, and in a simpler and hassle free way of investing. Sometimes there is an underlying assumption in Oz that leverage is the only way to grow wealth, and it can’t be done through saving. Sadly, that’s been my experience from talking to people. And that assumption really shits me 🙂
>With a strong savings rate, there is simply no need for leverage.
This is the key. You can only truly feel financially “independent” when you have no debt against your name. $4m property portfolio and $2m in loans? Better to sell it down and have the $2m cash to invest. No bank can touch you then.
Agree with your sentiments ETF bloke!
While the person with the higher assets might make more money… the guy with no debt is in a stronger, more flexible and more financially free position!
Great analysis!
Cheers 🙂
Enjoying reading your blog and really like this post. At the moment, we are certainly in the Harry situation with a home we own outright after aggressively paying down and eliminating our mortgage within 5 years but have only just started to invest in index funds since getting rid of the mortgage. I’m not going to discount the amazing sense of peace we have in owning our home but it does mean we still have a few years left of working while we save like crazy and invest to generate sufficient passive income to commence an early retirement.
As is so often the case with hindsight, we would have done things differently when starting out with our wealth building strategy from day dot but with no mortgage payments anymore, our savings rate is shooting up as we also continue to optimise our spending.
I’m interested to know if you plan on starting to allocate to international stocks/funds in the future and whether you see being invested almost completely in the Australian market as potentially limiting growth of your portfolio. That whole “Australian market represents only about 2% of the world’s markets” argument. Sounds like your current strategy is solid and is working well, just curious on your thoughts.
Thanks a lot SOL Guy!
Don’t worry, we’re still mostly in the Harry situation too. In fact, most of Australia is! But excellent work for getting yourself mortgage-free!
And kudos for optimising your spending even without a mortgage – that’s when most people get (even more) sloppy with their finances.
If you keep reading, you’ll find out 😉 (my latest post mentions this) Yes, we do plan on adding international shares. But only after we’ve fully built our Oz focused portfolio giving us the income we need. We see international as some extra diversification and more of a long-term goal to further reduce risk.
As for limiting growth – well that depends. Only if international shares have higher returns for the foreseeable future, but nobody knows that. Capital growth will likely be lower here, because we’re receiving a higher income. So returns may be 5% income 2% growth, instead of 2% income 5% growth. A different return, but not necessarily a lower return.
I prefer more of our return to come from income at this stage, due to our low tax rate and desire for cashflow. Hope that makes sense!
To add to this thread, I find that most people are obsessed with balance sheet valuations – what is my real estate worth today? What is the value of my share portfolio today? My wife and I attained FIRE status some years ago on the back of rejecting the net worth proposition. Our balance sheet is nothing more than a historical record of what we paid for the assets we purchased. This way, we remove all the emotion associated with valuation swings that result in most people doing the wrong thing at the wrong time. Instead, we chose to focus our financial attention on the monthly cashflow movements and comparing budgets to actual. Sounds boring but it is the more meaningful and empowering. The wealth effect is simply fools gold.
Thanks Stephen – very well said, and congratulations on your Financial Independence!
It’s a strange line of thinking, especially for home-owners who will never sell to invest the ‘profits’…
Sure your house/investment property is worth $x, how much freedom is it giving you? If none then what’s the point? There becomes a trade-off that those with large portfolios need to make – do I want to keep working to support my expenses/portfolio, or do I want to sell up and invest in assets that support me? Most people continue to choose the first one because they’re seduced by owning/keeping a larger asset base, and/or scared of the alternatives. Luckily I learned to change my mind as I saw the clear trade-off, rather than hold onto old beliefs.
Given the comments I have read in response to this article, it seems to me that the good old aussie dream of owning a home has a new rival, the new aussie dream of achieving FIRE status. Seems a worthy ambition! And it makes for a refreshing topic of conversation at dinner parties, etc.
Haha yes let’s hope so. It’s a great goal to have – to support ones-self indefinitely from sensible living, saving and investment. Then free to work on more enjoyable things, help others or simply enjoy the freedom of time, which is the most valuable asset of all.
Let’s hope it continues to gain traction 🙂
I really wish I had found FIRE 10 or 20 years ago!
I’ve only just come by it in the past few months and recently found your blog this month. I’ve always considered myself to be money wise. As I learned form a child after watching my mum struggle to raise me by herself on a single parents pension, I vowed to never allow myself to have to live off a pension. I’ve always been a good saver. But I had never heard of ETFs or LICs! So, consequently, I had ‘dabbled’ in shares lost thousands of $$ and stayed well away. I now have over $100k in precious metals bullion, $207k in home equity (with $58k of that in redraw), $60k in IP equity and then super $170k. The IP costs me $50 a week. I thought that was good! lol. Oh boy. I’d love an outsiders perspective/opinion as to what options I have from here.
Since finding FIRE, I’ve been putting a bit of money into Spaceship Universe Portfolio each week as my cashflow doesn’t seem to be enough to paying high brokerage fees at the moment for small parcels of ETFs. Eventually I want start investing in IOZ through Commsec Pocket and IWLD through Commsec. How could I make that happen sooner? I only just purchased the IP in March this year hence why the equity is so low, probably not worth selling that so soon and I admit I am attached the the bullion. I started buying that back in the peak of 2012. So I’m still down around 22% on silver while the gold has gone up only 17%.
BTW I just turned 40 (a week ago), I’m single/divorced with 2 kids with shared custody and only have part time work so my income fluctuates. So feel a bit limited there. I’d love to be FI in 8 years.
Thanks for sharing your story Beth. You’ve made some progress to date which is great. But on the other hand, the approach seems a little bit scattered if I’m being honest. Reaching FI means really taking a focused approach and making sure your finances and investments are all working towards the same goal.
I’ll send you some thoughts by email.
I wish I’d heard of FI 20 years ago too!
I have always been a saver, and very conservative with money having grown up with very little money. I bought a house to live in when I was 22 simply because the repayments were cheaper than renting. I’d rented for a year with friends and decided I didn’t want the hassle of flatmates anymore. I got a new job and moved to the city 3 years later and rented alone while renting out my house. Looking back, I should have bought in the city but I was always a little concerned about whether I could pay 2 mortgages if my first place was ever vacant (which it never was) but hindsight is always 20/20!
I have always been sensible with expenses, only ever bought 2nd hand cars with cash, didn’t bother with the latest fancy gadgets most others seemed to need (iPods, iPhones, iPads, etc). In 10 years paying rent living alone in the city, I managed to save 250k in online savings accounts (thanks to much higher interest rates than we can get today). I did splurge once and spent 3 months travelling around Europe which cost me $20k all up, but the experience was totally worth the money (and all from cash savings).
After I got married we bought a house (comfortably thanks to my salary, $250k cash savings and equity in my investment property). After 5 years, we sold our house and my IP and bought our forever house which is now essentially paid off. I feel like that money could have been put to a much better use earlier if I knew about FI, but it has given us a lot of options and security in terms of house purchases over the years, so it has been beneficial even if not optimal.
We are not FI by any stretch (we have just begun our investing journey with 2 small LIC purchases, and reviewed our expenses and saw just how much we wasted on groceries and takeaway last year!) but a fully paid off home and moderate living expenses gives us both the flexibility to work part time while our munchkins are little, still with an expected savings rate of around 50% (based on this year’s budget now we’ve eliminated our wastage). We realise we could both work full time now and ramp up our savings and be FI right around the time the kids leave high school, but we have chosen to spend the time with our kids while they are little and we think it’s worth it. No childcare fees for one!
We hope to both continue working part time, as it gives great work life balance, eventually having the flexibility to only have one of us in the workforce (hopefully still part the or even casual).
We don’t know how to calculate our FI number as we don’t know how much our expenses will be when the kids grow up. But we’re just looking forward to growing our passive income year after year and seeing where we end up. And so begins our FI journey, thanks to resources like your blog!
Hi there,
I have only recently come across your blog.
I wanted to reach out to you to let you know how useful this article was for me.
Not to mention it was the final straw that convinced him to transition from IP to ETF index funds.
I realise this article is 5 years old, but its still as relevant today as ever.
oh, I also love your latest post on early retirement being “immoral”
Anyway, I just wanted to say thanks and share some appreciation
Chriss
Another great article!!