Sitting Down with Strong Money – Your Questions Answered #14

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…

• Could you have retired without property?
• Should I use debt recycling with my investment property?
• A beginner investor with 5 questions!
• How does the 4% rule work in practice?
• Best money tips to live happily on less.

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

Question #1

Hi Dave,

One thing that sparked my interest was how you retired in only 10 years whist only earning $75k a year.   It sounds like you were able to achieve this through property investment.

Do you think you would have been able to FIRE in 10 years if you had invested in ETFs and LICs only?

It got me thinking about my own situation as I’ve been earning a six-figure salary for the last 12 years.  Kind of makes me wish I did things a bit different as I’ve done everything in reverse.

I’m 36 married with 3 kids, have paid off my $600k house, built up a
superannuation portfolio of $350k and started investing in ETFs two and-a-half years ago.

In that time I’ve built up a portfolio worth $180k.  Feel I could have reached FI earlier if I did things different – I’ve really had enough of working.

Dave’s Answer:

Could I have achieved FI without property?  Yes.

Keep in mind, I’m in Perth, where we purchased half our properties and they’ve done quite poorly.  The few over east did well, but on average, we just did okay.

Starting again, I wouldn’t bother with property and would invest 100% in shares.  It’s simpler, there’s no costs or headaches, and no huge debt required.  I wrote a bit more about our experience in property here.

You’re in a fantastic position so you should be proud!  With no mortgage, your living expenses would have come down a lot.  If you can keep investing for the next few years outside super you should be able to semi-retire at the very least.

Or maybe you can slowly wind things down now 1 day a week, and continue to build your portfolio steadily in the meantime?  Either way, semi retiring by 40 is still an incredible achievement – congratulations!

Question #2

Hi Dave.  Firstly, thanks for all the great work and information you keep
putting up, always great reading and learning.

Wanted to ask your opinion on debt recycling on an investment property, to buy shares.   As I understand it, debt recycling is beneficial to reduce a mortgage on your own home.

What I’m curious about is reducing a mortgage rapidly on an investment property may not be as beneficial as long as it’s negatively geared.  Or do you think debt recycling with dividends paid into an investment mortgage is worth the risk?  Thanks very much.

Dave’s Answer:

Thanks for the feedback, glad you like the content 🙂

In this case, it doesn’t really make sense.  The debt on your investment property is already tax deductible.  So there’s no benefit to paying it down, borrowing the money back out again to reinvest in shares.

If you have less debt for property and some debt for shares, the total debt will be the same.  The benefit of borrowing more would be you have a bigger pool of assets, but that’s a different goal.

So it’s really a question of whether you want to increase your total debt level to invest in shares.  That will depend on your expected return, the interest rate, and whether you can tolerate the risk of large drops in value and possibly dividends as well.

Hope that makes sense!

Question #3:

Dave, I just listened to the Aussie Firebug podcast and absolutely loved your story.

I have started investing in shares a couple months ago after reading the Barefoot Investor.   My portfolio is LICs and a few international ETFs.  I have started with  $2,000 on each one.

First question:  Is this a good amount to start with to have good amount of passive income in the future?

Second question:  How often do you recommend to top up?

Third question:  Can you recommend any other funds to add to my portfolio?

I have already automatically set them up on DRP plan.  Also I have got some savings in the bank – roughly $75k.

Fourth question:  How can my portfolio can even benefit more from this money?

Fifth question:  If I top up every month, how long would it take me to retire early?

Dave, mate I’m sorry for the long email but I needed to talk to someone.  I’m very determined to do whatever it takes to have solid portfolio.

Dave’s Answer:

Great job getting started!  A lot of people never get that far.  Okay, your questions…

Q1:  Is this a good amount to start with?  Yes.  Remember, most of us start from zero!  Don’t worry about how small the numbers seem right now.  Just focus on continuing to save and invest and the numbers will get bigger.

Every time you buy more, your future income gets bigger.  And every time you reinvest your dividends, your future income gets bigger.  Just keep repeating and soon it will start growing faster.

Q2:  How often should you invest?  Buying shares every month is perfect.  This keeps you focused and makes it a regular habit.

Q3:  You don’t need any more holdings, you have more than enough already and have good diversification.  Just keep adding to these and you’ll have a good mix of Aussie and international shares.

Q4:  How can your portfolio benefit more?  I would probably invest more cash since that is a huge amount to leave laying around not doing much.  Unless you plan to buy a house with this money, then investing more probably makes sense.

Q5:  How long to retire?  Play around with this calculator – plug in your numbers and it will tell you.  Check the difference it makes when you lower your expenses.  Spending less is a great way to speed up progress if you can do it.

Just keep saving, investing, reading and learning and it will all start becoming more clear.  You’re on the right track already, so keep up the good work!

By the way, if you’re a newbie reading this, check out the recently created ‘Financial Independence for Beginners’ page.  The two sections there should cover 99% of your general FI and investing questions! 

Question #4

Hi Dave.  Let’s say you had your $1 million dollar share portfolio to retire
early, were trying to follow the 4% rule,  and starting to switch to living off the portfolio.

How does one achieve this and follow the 4% rule (in practice not theory)?   Is it simply turning off the dividend reinvestment plan or is there something more to it in order to balance it all?

Dave’s Answer:

Great question.  There’s a couple ways you could do it.  And it kind of depends on your portfolio.

One way is to turn off DRP and just let the dividends flow to your bank account.  Depending on your portfolio, this may or may not be around 4%.

If it’s less, then you can top this up by selling a few shares each year.  As markets rise over time, this is highly likely to be sustainable.

That’s especially true for markets which are higher growth, lower yield, like international shares where you might only get 2-3% dividends.  Selling 1-2% per year to create 4% income is perfectly fine.

Another method is to leave all your dividend reinvestment plans on, and then each year just sell whatever you need to create 4% (if you reinvest your dividends then sell the same $ amount of shares, you’re in the same position afterwards).

This is ideal if you are following a specific asset allocation so you can keep everything the same weightings over time.

And regardless of which option you take, make sure you have some cash (or bonds) you can use during bad times to leave your shares untouched.  Lots of different ways to do it, so depends which method you prefer.

We discuss this a bit more in the following podcast –  How Much Do You Need to Retire Early?

Question #5

Hey Dave, love the podcast.  You (and Pat) both seem to live with your partners
on quite a low amount, happily!

Could you please share some of your best money hacks?  Where are places that you save money that the average punter may not realise?  Thanks!

Dave’s Answer:

Thanks!  Well, much of our blogs are dedicated to sharing how to create a high savings rate while having a good quality of life – so start browsing!

Honestly, there’s not a whole lot of secret hacks – we’re just a bit better at spending across all areas, which adds up to a huge difference overall.

But since this question was asked we actually made a podcast around this topic:  Big Wins to Boost Your Savings Rate.

It starts with realising how good we already have it, in one of the wealthiest countries in the world with incredible living standards.  Once we fully absorb this fact, we realise that even a simple life in Australia is pretty amazing.

Other than that, the ‘saving’ tab of the content library will lead you to plenty of other thoughts on the topic.

More savings ideas…

If that’s not enough, I’m taking part in a new podcast series called Frugal by The Pineapple Project.

The host, comedian Nazeem Hussain, is asking for advice on all the ways people can spend more wisely while living a happy life.

It’s laid back, entertaining and well-produced, so make sure you check it out!  I enjoyed the first few episodes and am looking forward to the rest of the season  🙂

The Pineapple Project is #podcast back ????
And new host @nazeem_hussain
is gonna make you rich! ????(Well a little bit richer)…
on things like:

Cars ????
Phones ????
Travel ????
& pets ????https://t.co/9YkuszScmI pic.twitter.com/9DTYEQDUtb

— Tom Wright (@TomEdwardWright) May 16, 2021

Notes…

I hope you got some value out of this Q&A session.  There’s a ridiculous amount of these sitting in my drafts folder, which I’ll publish periodically, in between my other content.

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!