February 9, 2019
I’ve got a special treat for you this week – an interview with a reader.
But not just any reader. Someone who many of you can relate to.
A family man. A passionate investor. And someone who also questioned the non-stop 50 year career path and decided that freedom was more important than climbing the corporate ladder for the sake of it.
Our reader’s name is Michael. Like me, he’s also from Perth. And as the title says, he reached Financial Independence last year at the age of 32!
Just to show I’m not a freak outlier and this early retirement stuff is for real, I thought this interview was a great idea. Especially since Michael’s circumstances are different from my own.
Michael first contacted me through this blog to chat about the prospect of leaving his job.
But he wasn’t too worried about the numbers. He didn’t go into details but knew there was enough wealth and investment income to cover his family’s expenses.
Instead, he was more unsure of the lifestyle shift, and the cultural expectation to keep working.
We got to chatting and decided to meet up. During the meeting it was clear we had a lot in common – I think most FIRE focused people do. We shared similar experiences, priorities and mindsets.
Shortly afterwards, Michael left his job. Maybe I convinced him that this FI lifestyle ain’t so bad?
Nowadays, we’re good friends and catch up semi-regularly to talk about life, investing and a bunch of other stuff.
Despite the FIRE movement growing, there aren’t many examples of young people actually reaching financial independence. And that brings us here.
Michael is a private guy, but I managed to convince him to do this semi-anonymous* interview if we keep the numbers obscure. I understand and respect that, since the numbers I’ve provided about our own journey and net worth are also pretty imprecise.
So let’s get started – I hope you enjoy our chat!
Michael: My parents migrated from China to Australia when I was a kid and spoke no English when we arrived here.
I’ve lived in Perth all my life. Now I’m in my early 30s, financially independent, with a wife and 3 kids.
Michael: I have been interested in FI since a very young age. I want my money to work for me, instead of me working for money.
When I was working in the office, I often looked out the window at the blue sky outside, and wondered why I’m sitting here all day doing a job I don’t like.
Then I’d think, do I want to do this for the next 40 years?
You pretty much spend the best years of your life looking at a screen and dealing with people you don’t like.
Michael: Absolutely. She loves the fact that we don’t need to worry about bills or money and can focus on more important things in life. She wants to work (but doesn’t currently), and if you are FI, you can choose jobs that have more meaning to you and also work very flexible hours.
If you’re not happy with your boss, you can always fire him first. It surely does take a lot of stress out of life.
With investing, she is still a property person and I’m trying to change that. All I can say is, I‘m still trying lol!
Sometimes results speak louder than words. And I’m confident 10 years from now, we will look back and be glad at our decision to invest more in shares, rather than keep buying properties (more on that later).
Michael: It took about 15 years. I started working from high school and saved aggressively. My parents also helped with my first house deposit, but I always worked hard and saved quite a lot of money.
I could truly see financial independence when I started investing in LICs – I love the predictability of income from LICs. Because I knew if I keep on doing this (buying shares), my income can only grow year after year. It’s like buying an annuity.
Whereas before, if I kept buying properties, my asset base is growing but my income is very uncertain, as I know there are countless problems and unforeseeable expenses associated with properties. To put it simply, I cannot rely on that income.
I also hold Soul Patts – Washington H. Soul Pattinson, an old investment conglomerate – which has been around for over 100 years, survived 2 World Wars, the Great depression, and numerous crises. Yet it never failed to pay a dividend and has increased its dividend every year for 18 consecutive years. We are confident that it can at least maintain its dividend for the foreseeable future.
To most people (including many members of my family) that love property and hate shares, I encourage them to find a property that requires no maintenance, no dealing with tenants or property managers, no expenses, 100% occupancy and paid its rent on time for over 100 years plus a very enviable capital growth record.
Michael: I would say our savings rate was probably around 70%. We don’t like eating out very much and since our kids are so small, its very troublesome to travel, so our holiday cost is almost nil.
Our expenses are mostly household rates, utilities and groceries, plus private health insurance. We are able to keep saving now and we’re looking to invest more into the sharemarket over the foreseeable future.
With shares, I can more or less accurately predict my income and the compounding effect for the foreseeable future. This is not possible with properties as there are so many unforeseeable expenses and uncertainties. Property might be okay for ultra long term wealth building but if you want to be financially independent at a young age, I wouldn’t recommend it.
Michael: We have a mortgage that has been paid off, but the debt we refinanced for other properties – the rental income more than pays the interest, so no financial stress at the moment.
I would estimate our annual spending at around $45k.
Michael: I always like to read books on investing and subscribe to various newsletters. I also read books on Warren Buffet etc. I used to think to be successful in investing, you need to have a high IQ and need to know when to buy or sell shares.
Over the following years, I realised EQ (emotional intelligence) is much more important than IQ when it comes to building wealth. However, the book that changed my view completely was Peter Thornhill’s ‘Motivated Money’.
This book changed my views on the stockmarket. I realised you don’t need to be an investment specialist and the sharemarket is not a casino like many people claim.
Of course there are many successful property investors out there too. But the sharemarket is how I want to invest for the following reasons:
1. Liquid investment.
2. Stable or ever increasing dividends.
4. No or very little transaction cost.
5. Predictable and high cashflow.
6. No need to deal with tradies, property managers or tenant specific risks.
With shares, I can go and live overseas for a few years and have cashflow coming in. With property, I still need to communicate with property managers and if you get a bad tenant/manager or catastrophic event occurs, you still need to put in effort in doing a lot of things.
If you are really into property, you can always buy REITs (Real Estate Investment Trusts).
For example, BWP (Bunnings Warehouse Property Trust), owns tons of Bunnings Warehouses. Or VVR (Viva Energy) owns hundreds of petrol stations. Both have long leases, no maintenance costs, blue chip tenants and rent linked to CPI.
Michael: My investment strategy 10 years ago is completely different to my investment strategy now.
Back then, it was all about properties for me. My goal strategy was to buy as many properties as possible and borrow as much as you can.
Michael: A common theory is properties double every 7-10 years. So eventually you can just sell off half of your portfolio and pay off your loans.
Unfortunately, I didn’t buy in Melbourne or Sydney, otherwise I might have stayed with that strategy. But in hindsight, I think it’s a good thing that I experienced the Perth downturn for the past 10 years. Otherwise I’d still be in the property game and probably leveraged to my head.
And I believe what happened in Perth, will happen to Melbourne or Sydney sometime in the future. People always say “you can’t go wrong with property over the long term as they will always go up in value.”
This is true, provided you can hold onto property for the ultra long term. This is not always possible, because there are so many variables and expenses associated with property. Even if its 100% occupied, the yield is still extremely low and you still often need to put money in to keep it.
What I’ve learned is, large initial capital outlay, large transaction costs and low income return does not sound like a good investment to me, and is the reason why good businesses don’t usually own a lot of
Michael: My investment strategy changed around 5 years ago and I’ve allocated all my earnings to shares since then. Mainly into LICs. And this is my strategy going forward, for the foreseeable future.
The change was triggered partly because of the Perth property downturn and I could no longer see how property could help me achieve Financial Independence. Also partly because of reading Peter Thornhill’s book and then getting introduced to LICs.
Some people will argue the tax benefits of property, as you can negative gear and get depreciation benefits. You can negative gear because you are losing money (losing $1 to get 30 cents back doesn’t sound very clever to me) and depreciation is a very real expense, as you will need to refurbish the building over time.
With shares, if my dividend increases, I pay more tax – that’s fair. With property, your rent can actually decrease but your expenses and tax can still go up, i.e. land tax, rates, insurance. A decrease in income and an increase in tax and expenses? That sounds pretty crap to me.
With shares, you are relying on the cashflow. With properties, you are relying on capital growth. So if my share portfolio doesn’t have any capital growth for 10 years, but dividends increase during this time, I can accept that and make decent money without needing to sell.
However, if my properties don’t have any capital growth for 10 years and due to the various expenses, I need to keep on putting money in, then I might be forced to sell. So you are reliant on capital growth over a relative short period of time to make money (10 years is short in terms of investment horizon).
You can argue that it is OK since you are on high income and can always negative gear. But that is assuming you want to keep on working and don’t want to be FI while you’re young. I know what I’d rather be.
Michael: Correct. People focus too much on tax and prefer to do interest only payments.
I prefer to pay off my debt ASAP, or get it down to a negligible level – say 10% of total assets. It’s true that inflation eats away at the purchasing power of money over time. But having no debt means you have the freedom to pursue whatever you want.
In the olden days, people would buy things without a credit card and pay off their house ASAP. Why is it becoming a norm these days to buy everything on credit and have a 30 year mortgage?
I don’t see people living a happier life.
Michael: My portfolio mainly consists of LICs and some other companies that I like.
Moving forward, I will most likely invest more in the traditional low fee LICs. I don’t like WAM’s fees and it has key personnel risks.
As for individual shares, I have holdings in Soul Patts and UOS (United Overseas Australia – a real estate development company based in Malaysia).
Both Soul Patts and UOS are excellent companies with enviable records, and they are probably some of the best allocators of capital on the ASX. That’s not to say they’re bulletproof. But they’re probably better than 90% of the companies on the ASX.
Investing is always a probability game. The only thing you can control is putting risks in your favour. This includes examining various factors to tilt the probability of success to your favour. Again, nothing is 100%, but the chance of a reasonable return is high over a long period of time.
Michael: Not really. I’ve always used the average Australian wage as a number I work towards. So if my family can achieve that number, I’m pretty happy.
Michael: Yes, they do. It will improve as we sell off low cash-generating assets such as properties. Our biggest worry is we have to pay more tax in the future. But I guess that’s a good worry to have.
Michael: Absolutely. Even though I hated my work, quitting wasn’t easy. If you are out of the mining industry for too long, you won’t be able to get back in. But the stress and the working environment are really soul-killing.
I used to hate weekends because I know one more day then I have to go back to work. That’s not a healthy way of living. It may be company specific (as I really hated that company). But now I have the option to not work… so why not?
The corporation that I worked for was also a catalyst for me to quit. On the outside, they promote work/life balance and you are supposed to work 38 hours a week. But the most common message from your manager is to “sacrifice for the team and be a team player.”
Or another way to put it, work 50+ hours and get paid 38!
All the time that I was there, I never saw anyone work 38 hours. There are people replying to emails at midnight. Remember, we’re on a fixed salary, so effectively working 10+ hours for free each week. Plus, (with Perth traffic) 2 hours travel time each day is quite stressful.
I really couldn’t see myself doing that for 30 years. Even if you could make millions doing it – what’s the point of making tons of money if you are working in a job you hate, with people you don’t like and extremely long hours?
When you are 70, would you regret not doing more overtime at work? Or would you regret not spending more time with family?
Michael: I officially quit my job about a year ago, and it’s been great!
I don’t like to interact with people too much – so hanging out with the kids, doing some reading and learning how to cook and bake cakes is becoming a hobby of mine.
The kids keep me occupied for now which is great. And it’s also a wonderful feeling seeing them grow up. Over the next few years, we’ll do a lot of travelling with the kids as we would like to show them the world.
I think after the kids are older and go to school, (plus my finances become simpler to manage, as I’ll slowly get rid of properties and move into shares) then I might become bored and will most likely do something.
Maybe work 1 or 2 days a week? Start a business and build that up slowly?
No idea. But it’s great when you are not forced into making a decision. When you’re FI, you can do whatever, whenever you like.
1. Don’t need to wake up in the winter cold.
2. Get to spend time with kids and family. This is invaluable – you can always make more money later, but you can never see your kids grow up again.
3. I used to think on Saturday that “damn, one more day and I need to go back to work.” Well, this doesn’t happen now.
4. Pretty much I don’t need to work in a soul-draining/killing job. I have the freedom to pursue what I think is important, and at this stage of my life, kids are more important.
1. All my friends are working, so it’s all just time with family which is great. But sometimes you can feel a bit down, hearing them moving up the corporate ladder and seemingly achieving goals in life.
Conformity is a big obstacle to overcome and I think I’m still trying to overcome it.
2. Sometimes I think, how will my kids see me when they grow up?
If they have a parent that works 12 hours a day, 7 days a week – that might teach them to work hard. But if they see their parents retired early, they might think money falls from the trees and be lazy.
Michael: As I said, I spend a lot of time with my young kids – taking them shopping and out to various places etc.
I also spend a lot time trying to refine my retirement strategy and simplifying it.
For example, Labor’s recent plan of taxing Trusts at 30% and removing cash refunds for franking credits, got me thinking about home country risk and that having investments in a single structure can be quite risky as policies will change over time.
Michael: My background is Chinese. The country has been poor for so long, and because they’re lacking in social security in the country, the only security you can have is to make as much money as possible.
Hence the culture is to work extremely hard and think of any way possible to make money. So there is never enough. The more you have, the more you are expected to make.
Michael: My family culture and expectation is to work hard, save hard… then work even harder.
Most people see Asians being rich without knowing how much sacrifice they’ve made. Most people I know hardly take holidays, work 12 hours a day, 7 days a week for many many years to become wealthy.
So if you tell people you are financially independent or retired in your 30s and may not go back to work for the rest of your life, then they’ll probably form a view that you’ve lost motivation and hence have no goals in life.
You are expected to conform. Being independent or different is harder than most people think. It can lead to isolation or other forms of stress.
If you work until 65 in a job you don’t like, and have no time for your kids, you are said to be hardworking and you sacrificed for the family.
But if you are said to be retired in your 30s, they’ll think you should work harder and provide an even better future for your family.
Why live in a million-dollar house, if you can work harder and afford a $2 million house?
Why send your kids to public school, when you can work harder and send them to a prestigious private school?
But in my view, a better future cannot simply be measured in terms of money or material things. They are important, but there are other things that are also important.
Michael: It’s hard to be an independent thinker and not conform to society. I’m still adjusting to that.
But the extremely long hours staring at a screen, typing reports and doing that for 30 years is soul-killing. You are constantly tired and have no time for anything else.
Sometimes you just have to “not give a shit” about what other people think. You live for yourself, not someone else.
Also, I like the feeling and freedom that FI brings. I can do things I like, whenever I like.
I believe in my investing strategy and have done my research. There will always be people out there to doubt you or try and convince you to follow their ways. You just need to tread your own path and believe in what you’re doing.
1– Worry is like a rocking chair; it gives you something to do but gets you nowhere.
2– Truth always rests with the minority, and the minority is always stronger than the majority, because the minority is generally formed by those who really have an opinion, while the strength of a majority is illusory, formed by the masses who have no opinion.
Michael: No desire to return to work anytime soon. I want to spend as much time as possible with the kids.
When they go to school and don’t need me as much, I will probably do some part-time or casual work, but the risk is if you’re out of the mining industry for so long, you might not be able to find a job. Thankfully, that’s not a concern for me.
One of my friends (a couple) are both doctors and they make tons of money. They will retire in their 40s to spend more time with their kids. This friend once said to me, “what’s the point of making all this money if you have no time with your kids and they grow up hating you.”
This had a big influence on me.
I’ll most likely spend all my time with family until the kids attend primary school, which is still a few years away. After that, I will see if there are any opportunities to start a business. Otherwise we’ll just wait and see. No plans so far.
Michael: A lot of factors combined, including working hard and making as much income as you can, whilst spending little and living a frugal lifestyle – especially during the early stages to build up your portfolio.
But ultimately, I believe the most crucial factor in reaching FI is changing your mindset and the way you view risk. Most people believe property is safe and shares are risky.
Nothing could be further from the truth. What I find hard to believe is, most people just assume that and aren’t even willing to listen to another opinion.
1. Living beyond your means and taking on too much debt.
2. No goals or desire for FI. Most people don’t believe you can retire early, hence don’t even want to spend time looking into this topic. If you don’t believe in something, how can you plan for it?
3. Lack of understanding of risk/return. I have friends that lost money on properties, yet, when I try to share with them the idea of investing in shares and how good the everlasting income can be, they don’t even want to listen.
Their first reaction is always “Shares are risky, you can lose it all.” Ignorance is a key barrier to FI.
4. Listening to too many so-called experts and people on TV etc. For example, I heard on the radio the other day, now you can move into your own home without any savings and no guarantors!
If you can’t even bloody save for a deposit, what makes you think you have the discipline to pay off the house?
5. Thinking that eating out twice a week, 2 holidays a year and a 5 bedroom house is the basic necessities of life. As well as 2 brand new cars and a 4WD for the weekend.
6. Will spend 10 hours researching where to buy the latest gadget but will not spend 10 minutes thinking about their finances or plan for their future.
Michael: Being financially independent is such a good feeling. And especially so at a relatively young age. I think I have the following advice:
1. Save more than you spend. And don’t just save 10%, aim for 70%.
2. Knowledge about investing and ability to accept other opinions is key. My own investment strategy will also change, but the argument needs to be valid and acceptable to me.
3. Don’t over-leverage. The only thing that can make smart people or good companies go broke is too much debt.
4. Keep investing and stick to your strategy, but open to changes. To be successful in investing means you need to ignore the noises and focus on the fundamentals.
The market will keep on throwing things at you. Today it might be another crisis looming, and tomorrow it might be a change in policy. But the human race and the capital markets will thrive and adapt over time. This is the key factor of investing in the share market.
You will need to find a strategy that suits you. But for me, I like the share market for its predictability, cashflow and good fundamentals. That to me is sufficient.
5. People always talk about what things money can buy. But I truly believe that nothing beats the feeling of Financial Freedom. The ultimate gift that money can buy is “time and freedom.”
So don’t envy your neighbour for their new BMW or boat, you should envy people with freedom and options.
I hope you all enjoyed this interview and it gave you some food for thought.
Like me, Michael questioned whether spending most of his life at work was really such a good idea and instinctively knew there had to be another option.
And as you can see, Michael was glad to break free from his highly demanding career. This has allowed him to live more in line with his values – with family being the primary focus right now.
Saving and investing might seem like a slow and boring process at times. But every time you sock away some money into income producing assets, it boosts your financial strength, decreases your reliance on a job and increases your future options in life.
And you do it one chunk at a time. Until one day, you’re able to step back and re-focus your time and energy on what’s most important to you, just like Michael.
If you have any questions for Michael, or about this interview, just leave them in the comments section and we’ll both answer as best we can (while respecting Michael’s desire for privacy around the numbers).
As always, thanks for reading!
*I say semi-anonymous, because his name isn’t really Michael and the numbers are kept private 🙂
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