May 2, 2020
Welcome to the latest round of Strong Money Q&A – where I answer a bunch of juicy questions sent in by readers.
These posts are to simply provide more thoughts on certain topics or situations that don’t really require a whole blog post.
And by sharing my answers with all of you, instead of one-by-one, it’s better value for everyone!
In today’s post we discuss:
— Cashing out $20k from your Super fund.
— Mortgage funds for high monthly income.
— How index funds re-balance.
— Short-term investments.
— Investing for children.
— Downsizing for FI.
— How to track spending.
Friendly Disclaimer: Remember, nothing on this blog is personal advice. I’m not an expert on tax, investments, or anything really. Please do your own research before making any financial decisions.
With the recent announcement by the federal government allowing Aussies to take out up to $20k of their super tax-free over the next 2 financial years, it got me thinking…
Would it be wise to take the $20K out of super and add it to my FIRE portfolio, so it can start contributing to my passive income pre-retirement?
I’m 37, so retirement is still a ways off. Also, my super is invested 100% in shares (40% Aussie/60% international). The only issue I see is the potential tax increase on any earnings given that super is capped at 15%. Is there a benefit to doing this or should I just leave it in there?
It’s an interesting question. I’ve even wondered this myself!
As you say, the downside is your money will be taxed at a higher rate, but the upside is the access and total control much sooner. It’s really a personal choice at the end of the day.
An extra $20k isn’t going to make a huge difference either way. But if you wanted to access every dollar possible sooner, and aren’t really factoring super into your early retirement plans, then I can see the reasoning there too.
Sorry for the non-answer, but I think both points are valid. And just to be clear, most people shouldn’t even consider this unless they’re about to declare bankruptcy! Those of us in the ‘retire early’ space are a different breed – where it’s strictly about moving cash from one investment account to another.
I’m a follower of your blog (you recently featured another question of mine). I understand you have some funds invested with Ratesetter.
I wanted to gather your thoughts on the Trilogy Monthly income fund and how it compares to Ratesetter as a capital stable investment. It has similar returns and its unit value has remained stable at $1 whilst paying high monthly income.
To be honest, I haven’t really looked at Trilogy or other mortgage funds much at all. It does seem like a somewhat similar choice to peer-to-peer lending (higher risk, higher yield credit).
It’s been around a long time, so it gets a tick for longevity. Part of me wonders why the yield is so high if it’s lending to property investors (unless it’s a riskier subset of investors than the banks will lend to?).
In this area, at least I can at least understand how Ratesetter can yield more – people are often borrowing cheaper than from a bank, because it’s in the area of personal loans/car loans/etc where banks often charge 10% or more!
I also can’t seem to find the default/arrears rate. The fund says it “hasn’t missed a distribution”, but that’s not quite the same as “investors have received 100% of principal and interest due since inception” as with Ratesetter.
It could be fine, and the yield figure may be after arrears, but they don’t spell that out. I’m guessing there’s no provision fund to cover future losses, so if defaults ticked up it could perform worse than Ratesetter in terms of missed interest or even capital losses.
Not saying it’s a terrible option – just some comments based on a quick look and without knowing much about it. And as you mentioned, I have some funds on the Ratesetter platform, so I’m probably biased.
For those that are curious on how it works, I’ve written about peer-to-peer lending with Ratesetter here.
I have a question in regards to how an index fund like VAS (Vanguard Aussie shares) returns investors capital back to them when it has to sell, to keep in line with the index?
I’ve googled the crap out of it and am getting nowhere. I understand that being a trust structure they must pass on capital gains when assets are sold, but I’m struggling to see how it would affect my holdings.
By their nature, broad market index funds like VAS, don’t regularly have to buy and sell holdings to keep in line with the index. This is a common misconception.
As companies grow and shrink in the index, they grow and shrink in the fund as well – no need for VAS to do anything. That’s because each company started at the same weight as the index.
Let’s say CBA falls in value and BHP rises in value. The index fund does absolutely nothing, and the value of those holdings change inside the fund, making them bigger/smaller automatically.
The only reason holdings change is due to companies being merged/bought-out, or falling out of the ASX 200/300 index, at which point they’re replaced with another company which enters the index.
On the odd occasion there will be some capital gains from these events that gets passed on to shareholders. But for the most part, the index isn’t doing much, and therefore has very low turnover and is quite tax efficient.
We’re going to buy our first home when my partner goes back to work in 2-3 years. We have decent savings, but I don’t want to put it in the bank for 2-3 years. So, what’s the best option for a 2-3 year investment?
Whoa, steady up there! Well done on your saving. But 2-3 years is MUCH too short of a timeframe to invest in shares, even a balanced fund in my view. You really need 10 years or so.
The answer is, no AFIC wouldn’t be safer even though it has a very stable dividend history. Because if the market falls 30-40% as it did recently, AFIC falls too, equally ruining your home-buying plans.
You want to make sure your cash is there when you need it to buy the house, so I would keep this money in a high interest savings account. Unless of course you’re very flexible on timeframe and will simply wait it out if you get a bad run of returns in the market – then shares are okay to consider.
I’ll invest gradually each quarter for 18 years in the name of my wife (she has lower income) and we’ll reinvest dividends. I even think about education funds because it seems they are tax effective, but fees are higher and the money can only be used for education.
From those options, I would probably go for one of the Vanguard ETFs, and invest in the lower income earner’s name. This will be tax effective, very low cost, and maybe even result in franking credit refunds.
I’m 99% sure both of these Vanguard funds offer dividend reinvestment plans (DRPs), but if not, you can simply receive the dividends and add it to your quarterly purchase. This also gives you complete control with no middle-man, unlike an ‘education fund’.
Some people in the FI community include their home and super value in their outcome of when they’ve reached FI.
In my personal situation, I own my $1m house, have $350k in Super and $100k in shares. In my mind, I’ll only reach FI when I generate income from shares, and don’t include the assets which I need to live (my home).
However, I am thinking of down sizing to a $600k home and investing the leftover into shares, to achieve more dividend income. What are your thoughts?
Great question! Honestly, if you can downsize that would using your wealth much more efficiently.
That extra money from downsizing would make a huge difference in the amount of passive income you’re generating. Therefore, it has a huge difference in the level of freedom you have!
I would definitely do this, as you can still have a nice place to live for $600k! So the only real difference is you’ll have much more dividend income too. Win, win!
Hi Dave, thank you so much for your amazing content! So inspirational.
I just have one quick question and I wasn’t sure where to post it. What are you using now that the TrackMySpend app has stopped?
Thanks for the kind words! Lots of people ask this, which I find surprising. The truth is, I’ve never used a spending tracker app of any kind. Here’s what I do…
Once per week, I check our account and manually enter the transactions into different categories on a very basic spreadsheet I have. That’s it. Literally numbers in a column. Just like you see in our household spending reports.
Doing this once a week makes sure there’s not many transactions to go through and is easy to remember. The funny part is, I’ve only started doing this since starting the blog just to know exactly how much we spend, so I can share it.
On the way to FI we just kept a running estimate (which turned out to be pretty accurate). No budget of any sort – we simply buy what we need. Obviously, we do buy unnecessary stuff too, but not a lot.
The most effective budgeting tool is developing the habit of questioning most spending outside groceries.
I find this to be simpler and more powerful than having a dedicated budget or setting up half a dozen unnecessary buckets, for example. But don’t tell anyone, the Barefooters will come after me 😉
I hope you enjoyed this Q&A session! Another great blend of reader questions this time round.
Do you have any thoughts on these topics? Let me know how you’d answer these questions in the comments below!
And if you have a question you’d like me to answer, you can get in touch through my Contact page and I’ll do my best to get back to you. Thanks for reading!