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Sitting Down with Strong Money – Your Questions Answered #15

October 12, 2021


Welcome to a fresh round of Strong Money Q&A!

It’s been a while since I published one of these posts.  If you’re new here, think of this like us sitting down having a cuppa and I share my thoughts on a bunch of different questions.

This time around we’ve got the following questions…

  • Does putting too much into a house ruin my chances of retiring early?
  • How do you actually benefit from buying LICs at a discount?
  • Would I invest in bonds to diversify?
  • I’ve smashed my mortgage.  Should I start spending more?
  • Are online lenders a good idea?

Friendly disclaimer:  Remember, this blog isn’t personal advice.  I’m not an expert on investing, tax, or anything really.  Do your own research before making financial decisions.

 

Question #1

I am 25 years old and always been savvy and frugal with money.  I have  $176,000 in savings and currently have $23,000 in a high growth account with Six Park.

I am currently building a house and struggling to come to terms with a good strategy for my early retirement plan.

The house is costing around $420,000.  With the grants, plus my savings in the offset account, the mortgage will be around $200 per week between us.  Then the plan was to invest any extra cash into my Six Park account until I have enough to retire to part time work.

Would you recommend a different method?  I am worried I may have put too much into the house and ruined my chance of retiring early.

I love the podcast and dream to follow in your footsteps. ( I also work in warehousing as you did Dave).

 

Dave’s Answer:

Glad you like the podcast!  And fantastic work so far, you’re miles ahead of 99.9% of people your age!

In terms of your plan, I guess it depends.  Would you rather have a smaller mortgage and smaller investment account, or larger mortgage and larger investment account?  Sounds like you’re leaning towards the first one at the moment.

Option 1:  If you’re a good saver and don’t spend much, you can probably focus on paying off the house completely (which may only take a few years) and then semi-retire.  At that point, you can go to cruise mode and as long as you add a little to your investments the portfolio will keep growing while you stay semi-retired.

Option 2:  You could pay as little as possible on the mortgage and focus on getting your investments up so they cover maybe half your expenses.  You could add most of your savings to your Six Park account (after a small house deposit), and add all your monthly savings here.  This also only take a few years given you’re frugal and the mortgage won’t be very high.

In general, the investments will have a higher long term return than paying off the house.  But getting rid of the mortgage makes life simpler and lowers your expenses forever which is extremely cool.  So it really depends which option is most appealing to you.

I wrote an article on the different strategies and ways to approach the whole mortgage vs investing tradeoff which may give some more ideas.

I’ve also got a post about robo-advisors like Six Park and others in my drafts which I’ll hopefully get to soon!  I’ll look at how using one of these options compares to investing in a similar portfolio and a low cost broker.

 

Question #2

How or what exactly am I saving when I buy LICs trading at a discount.  Does this have any connection or impact on the dividend I receive?

 

Dave’s Answer:

Good question.  It does in a roundabout way.

Say the LIC has $1 of assets, its share price is $1, and pays 4 cents in dividends (4% yield).

Now say assets are still $1, the dividend is 4 cents, but the LIC now trades at 90 cents per share.  Buying at a discount in this case means the yield is now 4.44% (4 cents divided by 90 cents).

So it’s actually possible to receive higher performance than the underlying portfolio of investments inside the LIC.

This is different from an index fund, which basically always trades at the exact value of its assets.

Beware though, often LICs trade at very large discounts for a reason – they might have a poor track record, very high fees, or a questionable strategy.   So it’s best not to get too clever with this stuff and stick to funds that have been around a long time, are lower fee, have a simple strategy etc.

 

Question #3

Have you ever invested or look at bonds as a way to diversify?

 

Dave’s Answer:

I’ve looked at bonds, but as an asset class bonds don’t interest me at all.

Many newbies look at bond returns over the last few decades and think they must be a great investment.  But it doesn’t work that way.  Bonds had great returns mostly because interest rates were high.

Given how low interest rates are now, bonds will have low returns going forward.  That’s because the best indicator of a bond’s return is simply its yield.  Which makes sense, since bonds don’t have the ability to grow earnings like companies do.

I prefer to diversify by owning a mixture of assets which should all have decent returns – Aussie shares, international shares, real estate etc.  Bonds are like a bank account today in my mind – very low risk, very low reward.

Sometimes people buy bonds to reduce the volatility of their portfolio, which they should continue to do that job.  But then it’s sacrificing return for stability, which may or may not be what you want to do.

 

Question #4

I’ve worked hard to smash my mortgage and I’m nearly there.  But I wonder, as I don’t have children to leave my assets to, am I working so hard for nothing?

Would I be better off having an affordable mortgage and buying things I want, instead of going without them and reverse mortgage my home when I am older?  I am in my early 40’s.

 

Dave’s Answer:

Congratulations on being so close to paying off your mortgage!

Think about it this way.  Pretty soon, your mortgage will be gone.  That expense will disappear from your life.  Imagine how much spare money you’ll have each month when that happens.

At that point, you can certainly treat yourself to a few things for becoming a debt-free homeowner.  It’s probably also good to keep saving at least some of that money and either starting to invest or putting it into super for later on.

You can balance both of those things nicely.  It doesn’t have to be all or nothing.

Later on, you’ll get the pension, have no mortgage, plus you’ll have some super and maybe some investments too.  So overall, even without much effort you’ll be in a great position, while being able to enjoy yourself along the way.

Being financially secure is hard to put a price on.  Even if you could spend heaps more now, is it worth it?

Being in a strong financial position brings more happiness than buying stuff does.  The best part about having wealth and assets is not so you can leave it to someone else, it’s so you can live your own life with greater freedom and independence.

 

Question #5

Hi Dave.  Thank for all your amazing articles, I just recently started to follow you.

I have a quick question if you don’t mind.  Would you recommend a company like Reduce Home Loans to get my house mortgage?

Thanks in advance 🙂

 

Dave’s Answer:

Thanks for following along, glad you’re enjoying it.

Good question.  I haven’t had experience with that particular lender, but I would definitely consider using low cost online lenders like Reduce or other similar ones for a home loan.

My podcast partner Pat got his loan through Tic Toc for example.  They all look like pretty good options and I don’t have any concerns with online lenders.

It’s important to remember, if you borrow from Reduce, you have their money, not the other way round!  So if the lender disappears, your loan will simply transfer to another finance company who will take over their loan book 🙂

Whether you choose a big four bank, an online lender, or use a mortgage broker, getting a good loan and interest rate is critical and usually has a big payoff for very little work.

 

Notes…

I hope you got something out of this Q&A session.  I still have a big backlog of these which I completely forgot about!  And I know some of you really enjoy these so I’ll be sure to publish some reader questions articles more frequently.

If you have a question you’d like me to answer, send it through via my contact page and I’ll do my best to get back to you.  I can’t reply to everyone unfortunately, but I do try.

How would you answer these questions?  Do you have any thoughts to add?  Let me know in the comments below.  Thanks for reading!

10 Comments

10 Replies to “Sitting Down with Strong Money – Your Questions Answered #15”

  1. Regarding the mortgage, so true that it doesn’t have to be all or nothing. It depends on the level of security you need as well. If you are nearly there and you are comfortable then you could try halving the extra you pay. This will free up some money but still accelerate the end of that debt. Pick one of the things you want to save for and see how you go.

  2. Just for fun why not merge 2 questions together 🙂

    “Is the equity in my house similar to a bond?”

    House equity is returning higher than bond rates by saving you mortgage interest which isnt taxed as it isnt income. Doesnt help with cash flow though (until loan fully repaid)

    What do you think Dave? instead of buying bonds, just pay off more on the home loan as a secure/low risk investment option?

    1. Yeah that makes sense to me Jason. Bond rates aren’t really doing anything for cashflow either at current rates 😉

      Offset account is also good to maintain access to the cash if need be. It also depends how someone is looking at it and why they were interested in bonds in the first place. It could be they were interested in reducing the volatility of their share portfolio, as opposed to their total wealth. People don’t always see things as a whole, but look at things in segments.

  3. Re: Question 4
    You never know what the future holds. I don’t regret for one moment that I paid off my mortgage in my mid 40s. I also don’t have children. I love knowing that I am secure and have a roof over my head – and as long as I can afford council rates, utilities & basic home maintenance, I’m ok.

    What I do regret is not investing in the stock market or salary sacrificing into super while paying off the mortgage. I’m playing catch up now with super & investing outside of super.

    There is definitely a balance though with being able to live a life you love now instead of waiting until all debts are paid or when we can finally retire.

    1. Thanks for sharing your thoughts, some very solid non-advice there I think 😉

      As you point to, there’s so much happy middle ground which sometimes people forget.

      Given your position as a late-starter, how are you deciding the mix between how much you invest inside vs outside super?

  4. Re questions 1 and 4.

    I’ve chosen to pay the minimum on my mortgage – UNTIL my investment returns roughly cover my base monthly costs (living expenses, not including mortgage payments). Gladly, that will happen in the next few months.

    Then while I’m still working full time, my priority will be to smash my mortgage, and just let my investment returns compound.

    It’s likely that I’ll still have a small mortgage when I’m at the FIRE stage, but I’ll see what my situation is!

    To the questioners – good luck! There’s a lot to think about, and many paths to consider.

    1. Hey JC. That’s a pretty interesting and nifty way to do it, and fantastic that you’ve basically hit that baseline goal now! Coming up with mini-goals along the way like that is a really great way to keep the motivation levels up I think (might have to write an article about that).

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