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.

How your second job is taxed differently (Hint: It's not)

As we come up to tax time, you should be getting excited for your tax return and getting your paperwork in order. With the proposed changes to the Australian Tax system it can all seem overwhelmingly difficult. I can't cover all the intricacies in one post but I can almost guarantee you that if you work two jobs, you're PAYG tax has been set up to disadvantage you.

I recently read an opinion piece complaining about the unfair taxing of second jobs. I'm not going to link it because it was overwhelmingly poorly written, contained incorrect maths, and a blatant misunderstanding of Australian tax laws. However the myth that your second (or third, or fourth) job is taxed differently to your first is so widely perpetuated that I need to address it.

This (incorrect) article claimed that any job after your first is taxed at a higher rate - 37cents in the dollar. They argued that it's impossible to get ahead working a second job if the $100 you earn in a night is immediately cut down to $63. Not only is this a ridiculous statement ($63 is still more than $0!) but it's completely false.

Okay, so how does Income Tax work?

Income Tax in Australia is sometimes seen as a big complicated issue and to be fair there are plenty of loopholes and boxes on the tax return form that can trip you up. However at the most basic level, when you are simply dealing with one income stream from an employer income tax is very simple.

To be fair it could be simpler, we could have a flat tax rate. But the above system means the if you aren't earning much, you aren't obligated to contribute as much. I like that system, because when you're not earning much the majority of your income gets poured back into our economy by way of day-to-day spending and all the little taxes on that spending (e.g. GST).

But I digress.

Our system requires you to plug in how much you earn, and spits back an amount of have to pay. You can use the able table and back of a napkin to work out your income tax, or use the ATO calculator here: https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=STC&anchor=STC#STC/questions 

The important part is, whether you earn that money working for an employer, through 3 employers, or through a PAYG job, and a side hustle it all rolls up into one figure that you apply to this table.

There are different tax rates for running your own business, money earned overseas, franking credits etc. but for the sake of this article, I'm ignoring them.

Claiming the Low Income Tax Threshold

Fact: You can only claim the Low Income Tax Threshold once

Myth: You can only claim the Low Income Tax Threshold with one employer at a time

The first $18,200 you earn is tax free, this is what I am referring to when I say Low Income Tax Threshold. It is a fact that this can only happen once per tax year. If you earn $18k from two employers, you can't ask for all of it to be tax free. As above, the two amounts are rolled together and you pay tax on $36k.

The myth that perpetuates from this is an assumption that you cannot ask for the Low Income Tax Threshold to be applied when arranging your PAYG deductions. When filling in the tax forms to hand your employer you are allowed to ask for the Low Income Threshold to be applied or not to all of your jobs, or none of them. 

What is withheld during the year is an estimate of the correct amount, made by the information that the people in the payroll have. If you have one employer and earn $30,000, they know to withhold based on that amount. If you have more than one employer, each calculates your withholding based on your salary there, not the overall amount you earn. After all, your employers aren't chatting to each other about your earnings.

Case Study: John, Cindy and Stephen

Let's go back to my case study friends John and Cindy, and one extra participant, Stephen.

John earns $30,000 a year. He has only a single income source and claims no deductions at tax time. John has $2,242 deducted from his salary payments throughout the year. 

Introducing Stephen:
 our third financial case study doggo

Cindy works two jobs, earning $15,000 at each. On advice from her (well meaning) friends and family, she only claims the Low Income Tax Threshold at one of her jobs. When earning less than $18,200 in Australia, no tax needs to be paid, so her first job doesn't deduct anything from her pay. However, she isn't claiming the Low Income Tax Threshold from her second job, so they immediately begin deducting 37c in every dollar she is paid as withholding tax. Her second job deducts $5,550 throughout the year! Cindy is $3,308 worse off than John!

Stephen also works two jobs, and also earns $15,000 at each. However he claims the tax free threshold at both of his jobs. Since neither employer speaks to the other they both only know that he is earning $15,000 with them, so neither of them deduct tax from his pay. Stephen pays no tax throughout the year, getting all $30,000 straight into his pocket.

Wait, what, how?

Simply by working two jobs instead of one, and ticking a different box on their payment forms we have three different people paying three different amounts of tax? Except, that's not actually true. This is why we do an (incorrectly named) Tax Return each year. 

The point of a tax return is not (like most people think) to get a refund on the tax you've paid throughout the year. The point is to confirm that you have paid the correct amount, and balance the books with the ATO. Generally we claim some deductions (and with tax time coming up, make sure you know about these easy to claim tax deductions), which means we get a refund, but that's not always the case.

Looking at our case study, John, Cindy and Stephen have all earned the same amount of money, but have had wildly different amounts deducted from their salary throughout the year. When they lodge a tax return, they find out their correct tax bill, $2,242 each. 

Since Cindy has paid $5,550 during the year, she receives a refund. As Stephen hasn't paid anything he gets a bill for $2,242. As Johns was deducted correctly throughout the year, he owes nothing, and gets no refund.

So, what's the best approach?

At the end of the day, who has more money? It's actually Stephen. While they all earned $27,758 after tax, if Stephen puts that extra money into a high interest savings account during the year he can make roughly $50 of interest. 

Of course, the opposite could happen and Stephen could actually be worse off. If he takes that spends that extra money throughout the year, not realising he will have a tax bill, then he will find himself in a sticky situation when he lodges his return.

This sticky situation is (in my opinion) why everyone is discouraged from claiming the Low Income Tax Threshold at multiple jobs. Not because it's illegal, or because it impacts your tax bill, but because A. many people cannot manage their money, and B. the ATO would rather pay you a refund, than chase you to pay a bill.

So if you're responsible and confident with your money handling skills, I strongly encourage you to claim the Low Income Tax Threshold at all of your PAYG jobs. If not, only claim it at one job and consider it 'forced savings'. Then enjoy a big tax refund at the end of the year. Either way, enjoy that second job or side hustle, whatever you earn, you earned it.

Disclaimer time: I'm not a tax professional. This is not gospel. This is my experience, the laws may have changed. I strongly encourage you to speak directly to someone at the ATO before claiming the Low Income Threshold on two jobs. Don't ask an experienced 'friend', don't ask an accountant. Go directly to the source. This is a good starting place: https://www.ato.gov.au/individuals/working/working-as-an-employee/claiming-the-tax-free-threshold/ 

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!

How money in the bank got me a Great performance review

source

A couple of weeks ago I got to sit through the joyous quarterly occasion that is a performance review. Of course, we don't call them that because a positive outlook is everything so we call them Inspiration Sessions!! Well, not quite, but it's a similarly pompous name.

I'm not one of the FIRE bloggers who loves their job and says they'd keep working even with money in the bank. I'm one of those FIRE bloggers who checks their numbers every Monday and sighs before opening the job pages and seeing if something else has come up before eventually getting down to work for the day.

But, despite all this, I still got a Great outcome in my performance review thanks to my FIREy pursuits.

John Goodman in the Gambler.
Go watch this scene, if you haven't already.

This scene from The Gambler might be the entire FIRE manifesto wrapped up in a short one minute speech. Get Money, Stash it away where it gives you a big fat warm safety blanket, then if your boss or anyone else asks you to do something you don't want you can calmly and confidently say F-U.

While I'm far from FIRE'd (seven and a half years at last check) I could go a few months without a job without having to tap into my investments. And if I did tap them, I could easily last a couple of years. It gives me a sense of comfort and confidence to know that I could weather (almost) any financial storm.

Okay yeah, but what's your point?

How does money in the bank lead to a good performance review? We have five metrics that we are graded on, and they're all behaviourl based. They call out ethics, teamwork, striving for excellence, courage and mindset. Take a guess which one I got a Great result on.

Courage

In my self assessment I gave myself full marks for Courage and my boss agreed. Having money in the bank means I don't give a damn if I get muscled out of this job I've grown to dislike. Six months ago we had a different team and while I didn't love my job, I came to work everyday, got some stuff done and felt alright about myself.

Now, with my new team structure I feel undervalued, ignored, and underworked. A month ago I recommended a method to dealing with an issue that was overruled by my manager. The issue persisted and we recently had an hour long team meeting about it. The outcome? 100% agreement from the team that my initial solution was the way to go.

This might sound like a bizarre combination of complaining and bragging, but the focus here is that Money in the Bank gives me the courage and power to stand up and say no. My boss can still overrule me because that's his role, but I have no hesitation in telling him that I believe his decision is incorrect, and the potential impact it can have.

There is no way I could conduct myself like this if I was living paycheck-to-paycheck. If that was my scenario I'd need to keep my head down and my mouth shut while working frantically on ever changing goals and tasks I disagreed with. The peril of being fired (the bad kind) would rule all my actions. 

For some people, FIRE is an unattainable goal. For others, they love their job and see no reason to squirrel away large amounts of money. As someone who used to like their job and is now in a pretty unpleasant situation I can whole heartedly endorse the value of F-U money - even if you never plan to quit. Things can change and that job you love can quickly become a daily struggle.

F-U Money isn't enough to retire on, but it's enough to give breathing room. And apparently it will get you a great rating in your quarterly reviews.

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...

Why do you think $40k isn't enough?

One of my Australian FIRE blogger friends Pat the Shuffler was recently featured on ABCnews.

Not only was it a good read, but the bottom half of the internet (i.e. the comments section) was highly entertaining.

But one ongoing comment that I want to address has been a bane of the FIRE community for years. "Hope he likes eating two minute noodles, because no one can live on $40k a year."

What is it with everyone outside the FIRE community trying to tell us we don't know what our own budgets are?

Negative whingers

First of all, let's tackle the obvious theory - maybe they are all just negative whingers? I've been reading FIRE blogs for years, and not only do I think that $40k a year per person is an affordable lifestyle, I think it's downright decadent. So many FIRE bloggers out there are living on $40k or less per year for a family. Pat the Shuffler and I are aiming for $40k a year in retirement funds for ourselves alone.

It's hard not to see people as negative whingers when surrounded by like-minded FIRE folks. But it's not just the FIRE folks living on very little - minimum wage in Australia is only $36k  per annum, NewStart payments are a measly $14k per year, the maximum disability pension for a simgle person is $23k. One person living on $40k has plenty of money. 

Money buys happiness

Let's tackle this theory. Most of the people complaining - if they bother to give a reason why $40k isn't enough - say that the reason $40k is insufficient is because you have to live a miserly, poverty fueled lifestyle.

Here's some things I can't do on $40k a year:

• Learn to fly a plane - a one hour lesson can cost over $200, and you need 25 flight hours for a Recreational Pilots license. 
• Join a golf club - at $660 joining fee, plus $405 annual clubs fees, PLUS playing rights / greens fees... no thanks.
• Have new car every year - the 2018 model of Mr FIREs car would cost us $36k... he's been driving his old one for almost 8 years, and it was old when he bought it. 
• Hire a Maid - for $70 a week for a two hour clean, I'd be out $3,640.. I'll scrub my own toilet, thanks.
• Pub dinners and shows every week - Going out for dinner is anywhere from $20 - $50. Going to a gig, theatre show, or event can cost $50 - $80. If this was the only time I socialised, I'd be $5,200 out of pocket.
• 4 bedroom mega mansion - buying a bigger house than I need could cost me $40k a year in interest payments alone. Mr. FIRE and I don't have kids, so why would we need a big house? We barely use all of our 2 bedroom place.

However, here's things I can and do enjoy on $40k a year:

• Sports! I train 8hours a week for Roller Derby.
• Interstate sports! I travel 2-3 times a year, for Roller Derby
• Holidays! Admittedly, I don't travel often outside of derby - more because I'm lazy than because of my finances - but I still do it and keep my expenses down.
• Picnics and Dinner Parties - why would I go to a pub and pay too much for average food, when I can have friends come to my place, play board games and cook them dinner? I can feed 3-4 visitors for less than I would spend on my own meal going out.
• Hiking, Biking, Fishing and Slacklining - need to head outdoors? That's free after the initial equipment outlay
• Rock-climbing - for a little more adrenline and a little more expense, I climb indoors at a gym. But I could buy a stack of gear and climb outdoors.
• Crafting - I craft a LOT for costume parties, joke prizes and things I actually want. I've made necklaces, beanies and slippers, as well as a chicken coop and planter box.
• Video games - let's be fair, I enjoy a lot of fancy nice things, but I also play video games. A lot.
• Coffee and great food - whenever I have food cravings, I just learn to make it. I can make yoghurt from scratch, I'm decent at sushi rolls, and I have a pretty amazing salad selection.

I need this little dude in my life

Anything I'm missing? Actually, I know exactly what I'm missing - a dog. Mr. FIRE and I have started plotting moving to a house with a bigger yard so we can have a dog :D And a workshop, and a bigger veggie garden, and maybe build a skateramp in the backyard. But mostly get a dog.

Medical bills and maintenance

This is where I think people might have a good point. $40,000 a year, as a young person is a pretty cushy lifestyle. My health insurance at the moment is only $85 a month for hospital and extras - I make a point to use as much of the extras as possible, and having hospital cover will be a big deal when I hit 30 and tax rules come into play. Right now I just keep it because I play a high speed contact sport with wheels on my feet. I've already had one knee reconstruction...

But, that's me being youthful. As I get old insurance companies will start charging me more as my body breaks down due to old age. I'll be doing my best to take care of it, but time defeats us all everntually, and I have a choice of paying an insurance company for the privelege, or paying for the health care when things happen.

Of course, this doesn't actually mean I suddenly need thousands more. It just means being aware of the upcoming costs and planning for it.

Someone who plans to spend $40k a year for the rest of their life probably isn't planning to spend exactly $40k every year. For starters, we plan for inflation. But personally, I'll be planning in some wiggle room - it's easier than you'd think! 

Ready, here we go...

Plan to spend an average of $40k a year? 

Option One: Don't retire when your portfolio is generating $40k a year

If you plan to spend $40k a year to have the equivalent life that you have now, but recognise that your expenses will change in the future, just work a little longer. If you have a million dollar portfolio, working one extra year will give you a $1.07million portfolio (assuming a 7% return) plus any contributions you made.

It has only costs you a year, and now your safe withdrawal has boosted up to $42,800. If you then retire and live on $40k, you will have an extra $2,800 per year to deal with unexpected crises and rising costs. Of course, you won't need to spend that every year, so it will just build up for when you do need it.

Option Two: Earning money in retirement

Gasp working in retirement? Then you aren't really retired! Well, to be fair, I said 'earn money' not 'work'. Many early retirees like to create things, you can earn money from blogging, from writing books, from selling arts and crafts. I have earned money in the past by pet-sitting - getting paid to hang out with cool dogs! Lately I've been watching video games streams, did you know some of the top ranked gamers on Twitch pull in six figures.

Option Three: Start small

If you plan on spending an average of $40k per year in retirement, you can start smaller and work your way up. In your first decade of retirement, maybe you could live on only $35k. This frees up a lot of money for later years, and lets your portfolio grow.

Option Four: Leave the country

If you're living in a High Cost of Living area (looking at you Sydney) then consider spending a year or two somewhere else! According to The Earth Awaits, I could spend $4,600 a month in Sydney for a modest lifestyle, or a mere $415 for the same lifestyle in Madurai, India. Don't want to travel so far? Staying in Australia, Hobart is only $2,550, or if you want to stay on the mainland Adelaide is a mere $3,000. Much cheaper than living in Sydney.

If things really don't work, move somewhere smaller!

While travelling can be expensive the biggest cost factor is the flights, and fancy hotels. If you are going for a long trip then the cost of the flights becomes a smaller portion of the overall cost, and you can rent long-stay accomodation, rather than paying night by night.

FIREy wrap-up 

While I like to think the best of people, and I'd love to believe the naysayers have our best interest at heart - when you think it through $40k per person is plenty of money for a good life. And that's without even going into extreme ideas like living in an RV, or going off the grid.

There are plenty of 'Plan B's that you can take up to make your retirement foolproof.

Now I just need to get there!

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.