Turning home into a rental

Let's start with the obvious - turning your home into a rental is hard.

First, there's the moving out - we all know moving is hard, but add into that wanting to leave the place in perfect condition because any tiny smudges are still your problem.



Then there's sprucing the place up - this can start before you move out but some of it just needs to wait until you're out. Before we left we were able to patch up dodgy light switches, cracked walls and damaged door frames that we were used to but the tenants would definitely not tolerate.

Once we moved out we shelled out for a professional clean, painting, new lawn, fresh bark for the front yard and a new smoke alarm. To make things more exciting the cleaners did such a poor job that the rental agency got them back (at no cost thankfully) to have another go...

For the two months between moving out and having tenants move in I was at the property three or four times a week - watering the lawn, weeding the front yard to keep the curb appeal up, letting tradies in and out, flicking lights on and off to make it look like people lived there...

On the 24th of May the tenants finally moved in, putting an end to two months of stressful back-of-my-mind worry. Finally I had rent coming in.

Three days later I received multiple maintenance requests with an estimated cost of three months worth of rent.

Get yourself a good agent

This is my second rental and I cannot stress enough how good a good agent is. I rarely hear from my first rental property - the rent comes in twice a month, and every six months I receive an inspection report stating the property is in good shape. Each year we renew the lease, I offer a quality of life upgrade and then sink back into obscurity.

So far the agent for my new rental has been excellent. They've sent me multiple updates as the tenants settled in, negotiated a higher rent when the tenants requested pets, and organised quotes for the maintenance requests that came in well under the expected amount. Thanks to their actions I'm comfortable with the tenants (so far) and will be receiving a rent payment before the end of the financial year - after paying off all the repairs and upgrades.

Lock away your keys

Once the property handed over, lock away your keys. The agents were kind enough to send me photos of how the tenants have furnished the property, but now that I am comfortable it's in safe hands I want nothing to do with the property. It's not a passive investment if you are actively involved.

I still have a set of keys to the property if anything untoward happens, but unless there is an emergency, I don't want to think about it.

Paperwork and Necessaries

Disconnecting from a property is a pain in the... here's some tips:

• Switch every correspondence you possibly can to email - it will make it easier next time
• Pay for a mail redirection. It's worth it, especially to avoid paying late fees on bills that went astray
• Switch your insurance, and then get more - you need landlords insurance and home insurance. It cost me a couple of weeks worth of rent, and it's definitely better to be safe than sorry.
•  Call the utility company - turns out gas and electricity companies are useless at disconnecting a service. The idea that you might want to be connected for two properties at once is especially baffling to them. Get them on the phone, because their online services wont cut it.
• Make the agent do it - everything you can possibly lump on the agent, do it. You're paying them for it, so make sure you get your moneys worth.

Automate everything, and enjoy

In hindsight, turning our home into a rental wasn't as much of a chore as expected. The hardest part was moving houses - especially since our new house wasn't quite ready on the only weekend we had free.

Once we had moved, the biggest chore was watering the newly installed lawn. If not for that task, I could have visited the house less often while waiting for a tenant to arrive.

Now that we've moved out, and the tenants have moved in, all payments are being funneled through the agent. They manage repairs, they pay my bills, and they collect my rent. Two a month they pay the rent into my offset account, and my mortgage payments are automatically drawn from there.

At the end of the year, the agents will send me a tax report. I already have a depreciation schedule arranged. All of the heavy lifting is now being done for me, and I just get to sit back and watch the money roll in.

For the 2019/2020 tax year, I'm expecting to bring in enough to cover the mortgage, and most of the bills. By the time of my retirement goal (February 2026) this house alone should be paying for itself, and covering 10-15% of my desired retirement income.

Not bad for moving into a nicer house and a couple of months work.

The Year of Investing: June 2018 - It's over!

The Year of Investing is over! I kicked all the goals, and I'm stoked to see how much impact this year has had.

The Year of Investing - May 2018

So uh.. I may have bought lots of things. And a fair bit of stuff. And I did some manufactured spending to hit credit card minimum spends. And then I bought some more bits and pieces.

I may have disengaged the frugal auto-pilot for a month. Woops.

The Year of Investing - April 2018

Well that was a weird month. If March was a financial trainwreck, then April tried to one-up it was unpleasant life events. Thankfully by the end of the month it all settled down and I still kicked plenty of goals, but what a roller coaster!

The Year of Investing - March 2018

Oof, was it just me or was March one of those months? I spent a lot, the markets went backwards and life just seemed more stressful and busy than it had any right to be. Still, I stayed on track with my goals, and squeezed in a couple of days of doing absolutely nothing - just like retirement could be!

Emotional survival for stock market crashes

After seeing the share market take a wonderful and scary dive at the start of February, I started thinking about how it felt to me - seeing the value of my investments drop by a couple of thousand - and how it would feel to others with bigger accounts.

While I'm early in my journey and quite happy to see market values drop so I can acquire more for less, I'm trying to imagine how it will feel when I have a bigger investment, and a market correction hits.

Here's a few ideas to manage the panic moments.

Don't panic

Firstly, take a breath, have a beer and don't panic. Panicking isn't going to push the markets back up, but it is going to affect your physical and mental health, and it's going to drag down your ability to think through the next steps.

If you're having trouble keeping your emotions under control, this isn't time to make a big decision. Instead, take yourself outside the house, or invite some friends around who don't talk money. Take the time to do something else and relax for a bit before taking any actions.

Review what you own - not what it's currently worth

If you bought ten avocados at $5 a piece, and then see them on sale for $2each, you still have ten avocados. It might be a bit of a kick in the teeth that you're $50 out of pocket for something you could now get for $20, but you've probably got the good quality stuff, and the price will change again tomorrow anyway.

At the start of February the value of my portfolio dropped dramatically, but the amount of stocks that I owned didn't. A few days later, the price came back up, and because I bought (instead of selling) the value of my portfolio is higher than it was.

The February drop in my International Vanguard Shares.
I bought more while the price was down ;)

Remember this is all part of the plan

If you're planning for the long term, then that plan includes market correction, crashes and blips. While it might hurt at the time, you know that in the long term you'll barely notice this blip on the charts. 

The oft-quoted number for share market returns is 7% an average per annum after inflation. Note the word average. This means that some years will be great, some will be a bit meh, and occasionally it will have horrible moments. If you have years of greater than average returns, you're going to eventually need a doozy of a drop to bring things back in line. 

Double down?

The part that hurts about a market crash is knowing that what you paid for something isn't what you can sell it for. If I bought my house for $300,000 and someone offered me $150,000 for it, I'd be pretty offended.

But, if my house cost me $300,000, and the identical house next door was selling for $150,000 then I'd snap that thing up! I know that right now no one will pay me $300,000 for it, but I also know that my house is pretty great, and buying a second one for half price wouldn't be half bad. I could rent it out and bring in some cash to cover both mortgages.

Now I own two assets that are valued at $300,000 and I'm $450,000 out of pocket (1.5x more spent than owned). Not a pretty picture, but a much nicer one than being $300k our of pocket for a $150k asset (2x more spent than owned). I'll balance my costs by renting out the spare house, and when the values climb back up I'll have two assets growing.

The same applies to shares, but in smaller amounts. If I own 10,000 shares that I bought for $5 each, then my average purchase price is $5. If the price drops, and I buy another 10,000 I can bring my average purchase price down, so when the prices bounce back, I take full advantage of it. I covered this idea in detail in my post on Dollar Cost Averaging and Dollar Value Averaging.

FIREy wrap up

Investing is a long term game and you need a long term plan. If you have one, then drops in the market shouldn't stress you out. You can even work through a bear market with a good plan. While it might suck for it to hit just before (or just after!) your retirement date, the world won't end. Worst case you can head back to work for a bit longer. Best case you've got cash lying around to invest. Either way, check your plan, take a breath before acting and remember that in a few years time this will just be a little bump in the road.

The Year of Investing - February 2018

I'm back! Sort of! I got one blog post out in February, and plan to post once a month for the rest of the year. After that my stint as a Treasurer will be over, as well as one of the extra committees I've signed myself up for. So 2019 should be a boring quiet year where I can focus on writing a lot more.

But between now and then, I hope to get one post out a month to keep my typing fingers in shape, as well as these monthly updates.

Read on intrepid followers, for the dazzling numbers that made up February...

The Year of Investing - January 2018

Where in the world is LadyFIRE this time? Largely lamenting the fact that I didn't get my payrise, and spending over an hour every night in a volunteer treasurer role. Who needs free time right?

The Year of Investing - December 2017

Where in the world is LadyFIRE? I've been pretty silent around here but I've almost locked down that promotion I've been chasing. I have a verbal confirmation, but I'm not popping the champagne till I get the paperwork, and the payrise.

The Year of Investing - November 2017

November is the real start of summer! And it has been the start of businesses ramping up for Christmas, and my investments have all performed admirably. I've been completely disengaged from this blog dealing with professional turmoils at work, but I'm cautiously optimistic this shake up will lead to some career leaps, more money and more responsibility if I can play my cards right - and not lose my temper at the guy who seems determined to snatch the same opportunity.

The Year of Investing - October 2017

What a month! It was crazy expensive, I saved a tonne of money and I went out, with people! I'm not a huge social butterfly but I'm always up for a good costume party. There was a hint for summer for a day or two, and then winter laughed and laughed and took over again. At least the finances went well.

The Year of Investing - September 2017

September went so well I set myself an investing stretch goal! It may have been a quiet month on the blogging from, but the weather has turned wonderful, my accounts are trending steadily upwards and life feels good.

Acorns - 12 month wrap up

Acorns are offering double sign up bonuses for September, which has drawn eyes there way and lead to them being crucified in the media with sensationalist headlines. But after a almost a year I feel like I've got the right to say, they ain't that bad. In fact, the returns are decent, the apps easy to use and the mindless investing structure is a great starting point that everyone should get behind.

If you need convincing, here's an almost 12 month wrap up.

I opened my Acorns account in October last year while sitting at my desk. I found I had developed this habit of going out for overpriced lattes simply to get away from my desk and chat with my coworkers. Once I had my account up and running I started depositing $5 each time I was invited out for coffee. The same amount of money way leaving my pocket, but I was much happier with the outcome. I'd rather buy time away from my desk permanently than a few manufactured minutes.

(BTW, this review will make a bit more sense if you've read about Acorns before, you can head over to my earlier review for a bit of background.)

However, a couple of weeks later I realised that I had an account balance of $25, and I'd just paid my first monthly fee of $1.25. For some super quick maths, that's an annual fee of $15, or a ridiculous 60% of my account balance.

Here is where everyone gets mad at Acorns. If you are only putting round ups in your account, then the fee structure is going to kill you. With round ups alone after a year my account would barely be hitting $200, because I'm not a big spender.

Round Ups are Acorns prime draw card. They track your spending and 'round up' each transaction. Spend $1.10, Acorns will take 90c. Except they don't, they wait for you to hit $5 worth of Round Ups, then take $5 each time. It's not exactly what they advertise, but it's still sneaky background investing that (most) people won't notice.

Except as I said, the fees on a small account are appalling and this is what most people are complaining about.

However to bring your fees down to a reasonable amount, you only need $400-$500 in the Acorns bank. While I was sitting in the passenger seat of a camper van in Tasmania I plumped my account up with a few easy button presses and dropped my annual fees down to 3.75%. The Acorns app is so easy to work with I did this even while my internet connection was dropping in and out.

Now let's be honest, that's still not a great annual fee. My Vanguard account pays a measly 0.75% per annum. However to open a Vanguard account, I would need to find $5,000 and a lot of people just starting out don't have that kind of money lying around.

When I started looking at investing I had $1,000. I definitely didn't have the confidence to drop $5,000 on Vanguard. That is the market niche that Acorns fills. Yes, the fees are higher than Vanguard, but the return (even after the fees) is going to be better than a bank account.

Remember that historically the share market returns 7% per annum after inflation. Ignoring inflation, the returns are closer to 10%. Even after paying 3.75% in fees, Acorns will return more than a bank account, but importantly it is hugely educational.

In my last monthly update I noted that I was losing more money each day than the cost of a cup of coffee, because the market was falling. A couple of years ago this would have been terrifying and a sign of a losing investment. I know now that it's simply the ebb and flow of valuations. One day I'll be down $10, the next day I'll be up $15.

And for people who haven't read this and are still paying the huge fees - well their big lesson will be how excessive fees destroy your investments.

For people starting out with investing, Acorns provides a solid return and a great education at a rather low risk.

Acorns performance

In the past I've reported returns of over 10% on my Acorns account, even after fees. However the times, they have a-changed and the last couple of months have not been kind. However this isn't just a straight sales pitch, this is a realistic outline. In the first six months I was up 10%. Now I'm only up 2.32%. If I wrote this review a month ago it would have been better. I'm reasonably confident in a month or two the numbers will move back upwards.

   
You can see on these charts when I dropped in $400 to plump up my account, and when I switched from adding $5 a week, to $75 a week in July.

In fact, the markets are changing so much that since I took these screen shots two days ago my returns since opening have bounced back up to 3.14%/ The longer that my account is around, the less bouncy these returns will be.

So if you're new to investing, I absolutely think you should sign up for Acorns. With this referral link you'll get a $5 bonus, which covers your first four months of fees. Build your account up to $500 as quickly as you can, then set a regular weekly investment that you can handle. If you start out with $5 you'll invest $260 in a year without even noticing. If you can push that up to $20 a week, you'll have $1,000 at the end of a year, without even noticing.

While you're learning to invest you can open the app each day and watch the charts bounce up and down. It's a great lesson for investing for the long haul and not worrying about day to day swings.

Stop buying shit

Shit, slang something inferior or worthless.

This is where the frugality movement and the minimalism movement come together and truly shine. Because you can be a minimalist with only a few things, but they can be crappy things you have to replace every two weeks. Or you can be frugal and buy something on super special, but maybe you didn't really need it.

Stop buying shit that you only use once

Think of all the things you buy just to throw them away again. Garbage bags are one of the five things you'll never find in a finance bloggers budget because you are literally paying money for garbage.

However there are less extreme examples like paper plates, straws, bamboo skewers, paper towels, tampons and disposable coffee cups that can be replaced by reusable items like real plates (or wipe down plastic ones) metal straws, metal skewers, kitchen rags, menstrual cups and keep cups.

Not only will you be literally saving the world with less waste, you'll be saving your hip pocket as well.

Stop buying shit that falls apart

In the first six months after moving out together Mr. FIRE and I bought and broke three different cheese graters. Two of them broke while we were using them, the third somehow got rusty while it was in the cupboard. We then bought a cheap knock off multi-purpose kitchen dicer that came with a grater, julienne slicer, mandolin slicer, etc. etc. That broke the first time I used it as well.

So finally we caved in and spent $30 on a decent grater like this one. We bought it from a proper kitchen supply store, instead of trying to find one at a two-dollar store and it's been going strong for three years.

If I'd bought the expensive version first, I would have spent $30. Instead I wasted $50 on cheap crap before finally dropping another $30 on a decent one. 

Don't trick yourself into thinking you are saving money buying cheap shit that falls apart. Buy quality once and enjoy it for years to come.

Stop buying shit you don't need

How many coffee cups do you have in the cupboard? I can tell you Mr. FIRE and I have 6 small espresso glasses, 6 latte glasses, 4 tea cups and 4 large cappuccino cups (yeah, we like coffee). While this sounds like a lot, it works out to doing dishes two or three times a week if we want another coffee.

However, when I lived at home with my parents with had a shelf over a metre wide, and three mugs deep that was full. At a guess I'd say we had at least 40 mugs, all the same size and shape for 3 people. We used the same three mugs every day. Yet for some ridiculous reason we would buy mugs as souvenirs, as Christmas presents, as birthday gifts... I'd say we had over $500 worth of mugs we never used. We didn't need any more mugs, yet we kept buying them.

We also had a garden shed full of tools with multiples of the same type. We owned a bamboo sushi rolling mat even though we never made Nori Rolls. We had a label maker but nothing labelled. If I wanted anything, I always dug through the cupboard We had a fondue kit, a slow cooker, two different blenders... we had everything.

The thing is, we didn't need all these things. Most of them we rarely used. So many things were bought and used once or twice then never again. We bought them because it's easier to make Nori Rolls with a bamboo mat than by hand. It's easier to have a big blender instead of working in batches. It's easier to buy another trowel instead of finding one you already have.

Laziness cost us a lot of money. 

Stop buying shit you don't want

Here's a big one that costs people. How many times have you been early to a job interview, been waiting for a plane, or just had a few moments free and suddenly smelt something delicious in the distance. There are cafes on every street corner, and the biggest lure is boredom and habit.

In these moments somehow coffee and a snack mysteriously materialises in our hands, and money disappears from our wallets. Once I walked out with a coffee I didn't want and a really disappointing croissant because... I don't know? I was bored. I needed to kill some time.

I can't believe anyone wants
or needs this many cushions...

I had literally bought something I didn't want!

And it's not just quick and easy snacks either. I have found myself in clothes stores with the rest of the team while on derby trips hunting for something to buy before I realised that I didn't want anything new, and I couldn't fit it in my suitcase anyway.

Every time I go through Bunnings I end up looking for things to buy. I start with the things I came for, and if I can't find them I somehow still end up looking for something to buy.

I'm not a shopper and I somehow get lured in to buying things. If my friends are shopping, I feel compelled to shop. If I'm near a cafe, I feel compelled to snack. If I enter a shop I feel awkward leaving without buying anything. Until I got over this I used to spend money on stupid shit that I didn't even want!

Start buying your life back

So if you aren't buying shit, what are you buying? If you stop buying shit you'll find your pockets lined with all this spare money. Spend some of it on buying quality things that will last for years (we own $180 frying pan - thankfully it was 60% off) and then spend the rest of this spare money on buying free time. 

Every dollar you aren't spending on shit, you can spend on more dollars with this fancy trick called 'investing'. If you've just got a few dollars, start with Acorns. A couple of hundred, consider peer-to-peer lending with RateSetter. Over $5,000 you can break into the share market with Vanguard.

Buying shit for $20 will give you a few moments happiness, or maybe just buyers remorse. Every $20 you invest will give you back $1 a year for the rest of your life.

Do you want more shit? Or do you want to start buying your way free of the 9-5? Your choice.

The Year of Investing - August 2017

Smashed my savings goals and smashed my investing goals. A month of low bills and upward trending markets worked out wonderfully!

The sky isn't falling, and you should be investing

I generally avoid mainstream media. I realised very young that most news shows are interested in showing you all the horrible things happening in the world. They devote 90% of an hour news block to tell you about all the bad things that will never affect you (Do we really care that a flock of chickens escaped and are running amok in a caravan park?) and the other 10% to sports.

Unfortunately this obsession with the worst news has burrowed into the minds of most people, and turned us all into hopeless pessimists. Investors are convinced the next market crash is right around the corner, and sitting on their piles of gold, waiting for the best time to invest.

That time is now.

This post isn't going to be a pearl of economic wisdom proving that the economy is going to continue on it's amazing upwards trajectory without a blip. In my lifetime there have been two great market crashes (the dot com bubble and the GFC) and pessimists are convinced that Australian housing is overpriced and the bubble will burst any day and drag the share market down with it. I've been hearing that for ten years, so I don't trust those experts.

Market returns over the years

That's not to say it won't happen, but I'm not stressing out about it. Markets will yo-yo up and down, but in the long term they'll keep travelling upwards.

Take for example, this chart from Vanguard.

This chart show what would happen if my parents invested $10,000 in Australian Shares from the day I was born until now. Despite two major crashes it returns over 10% per annum, and is now worth $123,000. Over such a big timeline, the dot com bubble is barely visible.

If my parents had been a little more conservative and waited until just before my 15th birthday, they would have invested right before the Global Financial Crisis. Let's say they invested in April 2007. Ten years later, the chart looks more like this.

This chart is much flatter, but it is still worth 4% per annum. While not as amazing as the last one, this chart shows what would happen if my parents had bought in at the worst possible time in my life. A year after buying in, they would have been down 16%, or over $3,000. However, as long as they didn't panic and sell, just a few years later they would have made that money back, and be $4,000 ahead.

Of course, they could have been really super smart, and bought in at the bottom of the market. That's the dream, because then their returns would look more like this:

From February 2009 to now, the share market has returned 10.9% per annum. A $10,000 investment becomes $24,000 in just a few short years without you adding a cent to it. Investors often quote 7% as a historical average, so anyone who could get 10% would be absolutely thrilled.

Invest at the bottom of the market... right?

So, Hands up everyone who wants a 10% return on their investments? Yepp, me too. Keep your hand up if you're willing to sacrifice $85,000 to get the right market timing. Not me.

Once again, hypothetically, let's say my parents had $20,000 to invest in me when I was born (if only!). To hedge their bets, they put $10,000 in a Vanguard Australian Shares Fund, and they hold $10,000 in cash, waiting for the best time. But watching the market crash in 2009 they were too scared to deploy that $10,000 in cash.

The $10,000 in cash is now $30,000 because it's been sitting a high interest bank account. The shares had grown to $95,000, but when the market crashed they dropped to $50,000 in a few short months. So my parents decided it was too risky to put the money into the markets, and they left it in cash.

Today, at the ripe old age of 26, my returns would look something like this:

That rapidly growing blue line is now $123,000 of Vanguard shares, paying dividends every year. That purple line, crawling upwards at a snails pace, is the cash that was held aside for when it was the 'right time'. It's only worth $39,000.

So when is the best time to invest?

The best time to invest is yesterday. Or last year. Or even last decade if you could. However I assume that none of you have a time machine handy, so the best time to invest is today, and everyday moving forward regardless of the doom and gloom you keep hearing.

Over almost any ten year period* you will make more money from investing than from stuffing your mattress and waiting for the apocalypse to come. The market might crash tomorrow, it might crash next week, it might crash the day before you retire early with your million dollar nest egg.

Most highly paid hedge fund managers can't consistently beat the market. Even if they could, they can't stop a crash from happening. If (like me) you're many years out from retirement, the best place for your money is in the markets, earning a return.

And if the market does crash tomorrow, I'll be the first one at the sale buying up even more shares to fund my future.


* While I was playing with the Vanguard Index Charts I managed to find a couple of scenarios where cash was a better bet over ten years. Over 15 years, cash never won, even when you set the 'end date' at the very bottom of the GFC.

The Year of Investing - July 2017

One month down on the year of investing! I'm pleased to say I'm ever so slightly ahead of my investing goal, but it was an uphill slog with the markets fighting against me!
I haven't quite hit my savings goal, but I think we're off to a good start for the year.

The Year of Investing

The time has come to set new goals for the new financial year! After spending the last seven months building up a hefty $15,000 emergency fund, it's time to move on.

It's time to start the Year of Investing!

What's up with this 'Vanguard' thing

Have you heard of this 'Vanguard' thing? And you've maybe heard of index funds? If you've been around the early retirement sphere for a while you've probably stumbled across them. Unfortunately most bloggers seem to assume you know what that means.

I'm not going to pretend to be a tax expert, or a genius investor, but I'm going to give you a whirlwind tour of why I invest in index funds, and why I use Vanguard.

I heard about Vanguard way way back in 2013. I think. As a rough guess. I was reading Mr. Money Mustache blogs from start to finish (with the exception of the ones about the US tax code). After reading every post I was convinced I was going to retire by the time I was 30, that people in cars were clown, and that Vanguard was good.

I've since had to revise 30 up to 35, I'm willing to admit that cars are okay (although you really only need one in the house) but I still think Vanguard is pretty darn good. I started investing in it back in July 2015 before I really understood what I was getting into.

Pros: Low fees and a slice of every pie

That's one of the best parts about Vanguard - it's investing for dummies. You want to invest in the top companies in Australia (or the US, or the world?!) then Vanguard has you covered. Worried about stocks and you'd rather go for bonds - less volatility but a more secure return - you can do that with Vanguard. You want to invest in real estate but don't have the down payment for a property? With Vanguard you can buy into a massive real estate portfolio that includes residential and commercial properties for a measly $5,000. More than investing with Brickx, but you get actual diversification, a brilliant track record and really low fees.

Yay for Pie!

Investing for dummies? Pie?!

Yepp, investing through Australian Securities Exchange (ASX) is like getting a really big slice of the pie, without the tedious process of buying every single company listed on the ASX. You could also get a slice of the S&P 500 (America), a collection of Australian Government Bonds or a slice of the international market. For the sake of simplicity I'm just going to talk about buying a slice of the ASX.

When you buy a single unit of the Vanguard Australian Shares fund you buy a small piece of their portfolio. Each piece goes up and down in value based on the companies within it, and you receive a portion of the dividends from that company. It's just like buying a share in a company, but rather than buying a single company (say, Qantas) and having your investment fluctuate based on their successes (how many flights were made this month? how many planes fell out the sky?) you are buying a very large handful of companies. 

This means that if one company tanks terribly your investment doesn't take a big hit. If one company suddenly triples in value, you only see a fraction of that - because while you own part of that company, you also own a couple of hundred others.

While it sounds dull, it means you can't really screw it up. Investing in individual companies takes hours of research, and you never know what deals are being made on the golf course. You might think you have all the information to know that your speculative mining company is about to hit it big, but their competitor might move in and sabotage their equipment.

If this happened and you owned the little guy, your investment would tank. If you owned an index fund, you might own a little part of the little guy, but you'd own a big part of the big guy. You're investment moves in lockstep with the overall market, but isn't affected by booms and bust like the above scenario. It might be boring, but it's safe. A historic average 7% p/a after inflation kind of safe.

Low fees

Here's the biggest thing. When I was 18 and tried to buy property a broker told me I didn't have enough money. He then tried to sign me up for a managed fund. Like investment funds, managed funds own lots of companies, and you buy a piece of that portfolio. Unlike index funds, managed funds are trying to win!

An index fund simply buys the biggest companies on the market and holds them in proportions that match the market. That means that the Vanguard Australian Shares fund holds large amounts of Westpac, BHP, Wesfarmers and all those other big guys. Rather than trying to guess the winners, they just stick to what the market is telling them.

Managed funds try to beat the market by buying low, selling high and picking out those stocks that are going to boom. That means they spend hours trading stocks, researching, planning and monitoring. Sounds great, but historically most funds don't outperform the market. They might have a good year or two, but they don't run away with the trophy.

What makes all the difference is the fees. This fund was going to charge me 3.5% fees (from memory, it was a while ago.) If stock market has a historic average return of 7% then they would need to return 11.5% to break even after fees. I can tell you right now they weren't going to be able to pull this off. They were boasting 8 and 9% returns.

On the other hand, Vanguard fees for owning a slice of the ASX are a teeny weeny 0.75% per annum. If you're holding more than $100,000 then the fees drop down to 0.35%. They also don't charge fixed brokerage fees per transaction, they instead work on a buy-sell spread percentage. This sounds complicated but it simply means when you buy into the fund you pay 0.1% more than the current value, and when you sell you receive 0.1% less. It looks something like this:

Purchase 100 Units:

Unit Value: $2.0654

Purchase Fees: $0.20654

Cost: $206.74654

After one year

Unit Value: $2.209978

Holding Fees: $0.01657

Investment Value: $220.98123

Sell 100 Units:

Unit Value: $2.209978

Sale Fees: $0.2209978

Money in your pocket: $220.7768 (6.7% return after one year)

The teeny tiny fees are so small it's barely worth noting. There are fees, and you are paying a little bit, but honestly you'll be paying fees wherever you go. Having small fees making a massive difference in you investment over time.

Tiny disclaimer - when you invest you don't have to do this maths, you can throw $100 at a time at Vanguard and they sort out how much disappears to fees, and how much is invested. You'll never have to transfer them 74 cents to round out a purchase. It was just easier to demonstrate the maths the way I have :)

Cons: Big fat buy in, focus on financials, a terrible website, franking and quarterly distributions

Let's be honest, Vanguard isn't perfect. I work as a Web Developer / User Experience Expert and I just need to get this off my chest.

Vanguard has the ugliest, clumsiest website I have ever struggled with! I do like the product though (You can tweet that, maybe they'll upgrade it)

Mr FIRE is a networks engineer and would like to add that their APIs are terrible to work with, don't follow protocols and make at home data collection tricky (if you're not a nerd, you can ignore that part).

What that means for your Average Joe is that figuring out how to actually sign up is a pain in the behind, and digging around to find out what you're buying into is annoying. It's best to read other sites reviews the get an understanding, rather than trying (and failing) to figure it out from the Vanguard site.

Oh, and once you've opened a Vanguard account, you need to sign up for online banking separately. What a nightmare.

For your convenience:

• Sign up to Vanguard here.
• If you have an account, sign up for the online portal here.

You're welcome. I've done this before and it was still annoying to find those links.

Big fat buy ins

The thing that put me off Vanguard for a long long time was how much you need to get started. You need to be able to drop $5,000 in one go to open an account. When you're new to investing that is a lot of money, because you should never invest more than you're willing to lose. For investments in ETFs you should be willing to leave it there for years, not months, and $5k is a lot to put away in one hit. But remember for that you are getting a slice of many, many companies - so you know if one of them tanks, your entire investment won't go down the toilet. The only way to lose everything would be if Vanguard went under, and consider the size and history of the company, the odds on that are pretty low.

Once you've paid that first $5,000 you can add to your investment for as little as $100, which is much nicer. And with the ability to make deposits via BPay, you can easily set up a recurring investment - set and forget dollar cost averaging is a massive win in my book.

Focus on financials

One of the risks in investing in an ETF focused on the Australian share market is how much of the banking sector you end up owning. The top ten companies in the Vanguard Australian Shares fund are CommBank, Westpac, ANZ, NAB (the big four banks) then BHP, CSL Limited, Telsta, Wesfarmers (Coles), Woolworth, and Macquarie Bank.

Five of the top ten companies are banks, and they make up 28% of the overall fund. That means that if the banks take a hit, then your portfolio takes a massive hit. Given that the Australian government has just introduced an extra tax on banks, this is a very real concern for me at this time.

My personal solution to this is to also 'shop' outside of Australia - I hold three different Australian based ETFs (this one, another focus on high dividend yields, and another focusing on bonds) I also hold 35% of my Vanguard portfolio as the International Shares Fund. To buy another fund means another $5,000 buy in, but it allows you to diversify even further. 

Franking and quarterly payments

This is one more thing that bugs me about Vanguard. Quarterly payments of dividends mean I'm only seeing payments once every three months, even though I know the underlying shares are paying at random times throughout the year. I understand how this business model works, and it makes sense, but it's... boring. I'd like to see those dividend payments hitting my account more often, just for a little fun.

The more serious concern though is franking credit. Companies pay 30% tax on earnings, and if their dividends are fully franked, it basically means they're pre-taxed. When you declare them on your tax return, what you're saying is "This company paid me $70, and they paid you $30 in tax, so basically I paid $30 in tax". If a dividend isn't franked, you would get $100, but have to pay tax on it. For a more detailed (and really easy to follow) breakdown, check out this post by Pat the Shuffler.

For the sake of this argument though, Franking is good. Very very good.

And with Vanguard, you can't control what kind of Franking you get. If you bought the shares directly you could look at the history of the company, what kind of dividends they pay and what sort of franking credits they offer then make an informed decision based on that. Vanguard might be investing for dummies, but it also takes your decision making power away. You do end up with some franking credits, but it's not as much as you could get if you picked the shares yourself.

Conclusion: Do we buy it?

Heck yes we buy it! Okay, the website is ugly and hard to use, but once you're signed up you can set and forget your investments. Yes we don't have much control over the companies we buy into, but that's also the beauty - most managed funds rarely beat the market, so why waste time trying? Set, forget and move on, come back in a few years to find you're super rich.

The $5,000 start up is a tough pill to swallow, and if you are scared of diving it, you can dip a toe in share market investing with Acorns but the fees structure with Vanguard is far better, and they have decades of history, rather than Acorns few months. 

As an aside - you can also buy the same Vanguard shares without buying them direct from Vanguard. You can buy them in the same way you buy shares through the Australia Securities Exchange. Aussie Firebug put together a great article about how and why he buys that way, including a video where he steps through a purchase. Check out his guide to buying Vanguard, and happy investing!

For the love of mortgages

“Word nerds will notice an eerie root word in ‘mortgage’ — ‘mort,’ or ‘death ... The term comes from Old French, and Latin before that, to literally mean ‘death pledge.'” ^ref and yet, despite this roughly 70% of Australians are living with a mortgage.^ref

In the personal finance sphere destroying debt is a common goal. Bloggers celebrate living debt free, and lament every dollar lost to paying back loans. Every dollar in interest repayments is a dollar out of your pocket.

There's more to it than that though, which is why I'm not actively paying down my mortgage.

The house buying story

In 2014 my father passed away. My brother had moved out of the family home a couple of years earlier, leaving just me and my mother in the family home. A couple of months later in June I scored my first proper adult job, 9 till 5 office work. After a few weeks I learned three things about myself - No way in hell was I working in an office till my 60's, winter makes me cranky and while I love my mother I cannot live with her. At least, not without any other people as a buffer.

While I was reading Early Retirement blogs, I hadn't yet stumbled across the concepts of House Hacking and Rent-vesting. I knew I had the money to buy a house rather than rent so I could bring my pets along, and I knew not to buy outside my means.

Fast-forward three years and I own a comfy, dated 2 bedroom home that desperately needs a renovation eventually. I bought this property entirely in my own name, for $60k less than the banks said I could borrow, and my partner pays 'rent' (which all goes straight to the mortgage), While the decor is horrendously outdated it's nothing that desperately needs fixing. We could DIY some renovations and make the value of the property soar by taking it out of the 80s and into the current decade.

The cost of a house

As it stands, we should be poster children for paying down our mortgage quickly. I bought for less than I could afford without accounting for Mr. FIREs contributions, but here's the tricky part I don't want to waste money paying my mortgage early. (tweet this).

I currently invest $500 - $600 a month while I'm trying to hit my $20,000 cash savings goal. If I threw that money at my mortgages instead I could save $107,000 and knock almost 10 years off the life of the loan. As I've posted before, shortening the life of your loan is a really good thing.

There is something even better though. Something worth continuing my death pledge with the big scary bank. Instead of looking at your debts in horror, look at your net worth. Your net worth is simply the value of your assets (cash, stocks, house, etc.) minus your debts (mortgage, credit cards, those kind of things).

You can grow your net worth in two ways - by having more assets, or less debts.

The cool thing about assets though - once you've set them up they grow themselves! If you have $1,000 invested, next year it's going to be $1,070 (assuming a 7% return). Through compounding it grows even faster each year. Paying down your mortgages is great because you pay less in interest every year, but it doesn't compound in the same way that your investments do (although if you aren't paying your loans compounding will very quickly run against you!)

Maths and graphs

Let's say, hypothetically, that I owe $300,000 on a 4% loan (I actually owe a bit more than this across two properties, but lets keep things simple, the rate is right). Over a 30 year loan it costs $515,610 once you factor in the interest, and assuming that you invest and save nothing else and your property value doesn't change, you end up with a net worth of zero.

How utterly thrilling. After 30 years you are worthless, break out the champagne! Well, you have the equity in your house, but you can't use that to buy champagne, or put food on the table so I've left it out of this argument. In every case your equity would be the same, so to simplify maths lets just ignore it.

Trying another tact, let's throw a bit more money at this mortgage. A 30 year, $300,000 loan needs $1,432.25 a month in repayments, but for a nice round number let's make it $2,000. Your mortgage will be paid off in just under 18 years, and you decide now is a good time to invest. Rather than taking that $2,000 a month and living the high life, you just shift it into a nice safe index fund investment with 7% annual returns. Then your graph looks more like this orange line:

Amazing! After 30 years this time you're worth almost half a million! For an extra $570 a month from day one, you've managed to squirrel away a very tidy sum, in fact your investment portfolio is worth 50% more than you bought your house for!

In scenario one you spent $515,610 over 30 years to be worthless. In scenario two you've output $720,000 on paying your mortgage and investing and now you are worth $488,500. That will definitely buy you a bottle of champagne, and a waterfall to drink it from.

But you can still do better without spending a cent more. Your mortgage is costing you 4% per annum and shares are returning 7%. Each year you aren't investing you are missing out on that 3% difference. So instead, you choose to invest from day one. You make the minimum repayments on your mortgage ($1,432.25) and invest the rest ($567.75). Then your graph looks like this grey line:

See that line surging towards the heavens? That's you with no debt and an investment portfolio worth almost $700,000. In fact your investments are so huge that you can safely drawn down $2,300 every month. You are earning more from your investments than you've been putting towards them. Break out the champagne! After 30 years you own your home completely, no more mortgage, no rent and your investments are huge. Many people have retired on less, pat yourself on the back! If you do your maths properly and don't buy into the retirement income myth, you might just be free from the rat race.

Surely you can't be serious?

So why is this possible? Interest rates. Purely and simply, interest rates on mortgages at the moment are crazy low. I'm paying a mere 4% on my mortgages, whereas the share market has been returning an average 7% a year since we started tracking it. While a 3% difference might not sound like much, after 30 years it makes a massive difference.

Many people hate the idea of paying a mortgage and would never ever go back into debt. Others carry a mortgage while holding massive investments because they know that the returns on their investments will well outstrip the costs of the mortgage.

Me? I love my mortgage. I've been given 30 years to pay back this debt, and my lender isn't hovering over my shoulder demanding the money now, now, now! They know that if I pay it back early they lose out on making money from me. Well I lose out too, on all those years of compound interest.

I could be paying back the banks, or I could be setting aside money for my future self. Which would you prefer?