Is it bad to move to a new place?

Recently I moved to another apartment, and I just want to note down what I went through and whether it is a reasonable choice for me.

Tl; dr;

It was a great choice. Both in financial and mental aspects.

  • Financially: saving on rent per week, and it is actually a lot.
  • Mentally: soft reset on life, and re-evaluate the items in my possessions.

Financial numbers

Since I am more attracted to numbers, this is normally the first point of view that I consider.

With the rent price going down across Melbourne CBD, I did some research and decided that I currently pay a bit more than what the market has to offer. Therefore I decided that it is time to do something.

What did I do first? Well, I asked the current landlord to drop the rent down. They didn’t go down to the level I expected, and they were going to sell the apartment anyway, so I realized that I need to find what I want elswhere. I sent my 1-month notice to the property manager and started to find another apartment. It is necessary for me to do so since now I have a deadline to adhere to.

It is easy to find something good in the CBD with the budget of $300/week. You wouldn’t imagine the view and the convenience some of these apartments offer in this price range. However, that is not my budget. My budget is a modest $250/week.

I have a hypothesis that some landlord would be motivated to drop their pricing a bit more in this weather, especially in the lockdown period. Yes, I gave notice just before Melbourne went into the 5th lockdown. And I have 30 days to play with that idea. I cannot inspect the apartment physically, only through images and videos. And I need to put in a lot of offers to confirm the hypothesis.

The steps I took are as follows:

  • I spent a few hours in the first weekend, shortlisting the apartments that are in my range and around $50 above. So anything less than $300/week is considered.
  • Prioritize the ones that I would like to live in, with good view, good natural lights and preferably unfurnished.
  • Contact all the property managers asking for the videos if it was not available, and normal conversational questions to keep them engaged. Also tell them that I need to move by that date.
  • Wait a week and then apply to all those apartments, with the rent offers scale back 10-20%, e.g. $300 -> $250, $250 -> $210, etc.
  • Keep monitoring the market and add new listings into the shortlist if they satisfy the criteria.

From all apartments I applied (probably around 40-50 of them), I have 2 offers accepted by the landlords. Both apartments dropped their rent from $300 -> $250 per week. Now I have the ability to choose. And I ended up choosing the one that I think suits me better. The hypothesis was proven right.

Now is the fun part, how much do I save, considering all the cost I needed to spend?

Above is the moving cost as well as my previous rent.

  • I hired a removalist company to move all my stuff, and only need to pack them up.
  • I hired a cleaner company to thoroughly clean the old apartment.
  • There is a small setup fee for the internet at the new apartment.
  • I pay for 6-months mail redirection from Australia Post to ensure that my mails are not missing. I do have a few bills that are still going through the mails.

The meaning of the above table is, I need to live in the new apartment for 10.63 weeks (around 2.5 months) to recoup all the moving costs, and anything after that is basically what I can save from the moving exercise. Not to mention that I will free up some money that was stuck in the bond for the previous apartment.

Mental aspect

Lots of people are afraid of the thought of moving houses. And it is for good reasons. People like to settle down, whether it is their parents and friends told them to, or they believe in having a stable base and then they can take off in their career. Asking someone and you will get a reason why they don’t want to move, or trying to find a place to stay for a very long time.

I believe that I am always home. I don’t need a physical place to remind me of that. That can change once I have my own family, but by that time, I will be in a much better place comparing to where I’m at now. However, we are living in the present, and I feel quite good about the decision to move. It is like hitting a reset button in life, moving to a new place, but not so strange that I feel lost, and I spend time to look through all the luggages I brought with me until now.

It’s a good exercise to audit all items that are in my possession every once in a while. I found that I could throw away a few unused items, restock medicine cabinet, and re-evaluate wardrobes.

I also did a small experiments on my friends, I selectively told certain people that I was going to move and see how they react throughout the period. So far, only my family keep up with what I have been doing regarding the move, the rest don’t care enough to ask. Which is quite interesting. I shall note this down for future references.

Summary

Overall, the move went smoothly. I could have bargained for removalist and cleaner services. But given the tight timeline I ended up going with what I have, knowing that after a year I will be in a better place anyway. And who knows what will happen after a year, I may move again.

“Change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.” – Barack Obama

By Tuan Nguyen

New normal – are we fked? – Part 1

Just my thoughts on the “new normal” that has been talked about in both social media as well as government official announcements. What I observed other people’s behaviour after a year and a half under COVID-19 influence, and how did I respond to the same circumstance.

Tl; dr;

I think we are heading towards a cliff as a whole. Big explosions are expected to go off at anytime. However, it depends on what can I do if and when they happen.

I choose to hold close to my investment assets, and not selling anything as of now. Holding as much cash as I can in the offset accounts, while looking for more investment opportunities. I will only expand my portfolio if I find something that fits my calculations and risk tolerance.

The economy

Did you ever look back 2 years ago, when a 2-litre bottle of milk is $2.00? Now, it is $2.40. Same brand, same bottle. What happened? Did inflation go up so much that we did not even notice? Other food products have gone up too, maybe not 20% in the case of milk, but surely, 10% is the norm. While people are looking, researching on stocks, real estates, cryptocurrencies, other aspects of our lives are also going up at a high pace. And nobody bats an eye.

So why did it happen? According to investopedia, there are 3 forces that may affect the inflation rate of a certain product. Cost-pushing, Demand-pull, and Expansionary Fiscal Policy.

  • Cost-pushing: with the restrictions in travelling as well as worsened relationships with foreign countries, we are not importing as many materials in the last 2 years. As a result, a lot of subsequent products are going up due to the lack of materials. We can see it in the increment of new property builds.
  • Demand-pull: this probably can be observed the most when there are disconcerting news, like the first lockdown in Melbourne last year. People flocks to purchase food, and not surprisingly, toilet papers. We did have some people hoarding them and resell with a higher price. And sadly some people bought the items.
  • Expansionary Fiscal Policy: I strongly believe this is the cause of all food prices going up. With various supports coming from the government, suddenly there is more money in people’s pocket, and they can afford more. Corporations are probably the best people to take advantage of this fact, and they raise the price, just a little. I don’t blame them, if I were in their shoes, I would probably do exactly the same.

However, our economy has not been thriving at all. Lots of money going into people’s hand end up in properties. Let’s consider 2 streams, one is purchasing established properties, the other is purchasing new builds.

  • Established properties: this purchase, in my opinions, does not contribute to the productivity of the whole economy. It’s just moving money, or mostly credits in this instance, from one bank to another. And because the price of properties has been rising, there is more and more credits being created every time properties change hands. Which may lead to the breaking point where people realize that there are just too much debt to pay, and we have a time bomb waiting to explode.
  • New builds: contribute a temporary boost of productivity and jobs, due to the fact that someone has to build the property. However it is not sustainable. Some people will argue that we can keep building houses, but we only have like 30 millions population. Who are you building these properties for? Unless the government has a better migration policies, and hoping that people will flock into Australia, we might not end up where we think.
Source: ABS

Since when are we borrowing to buy properties more than we invest into our business, and therefore the economy???

Employment

I have seen companies who wants to employ an experienced level person for 6 months, but unable to do so. They put their compensation to more than $160,000 per annum but there was no hope. At the end, they needed to source the resource from oversea.

We are facing an issue where most of our senior level employees are from migrations, and not a lot locally. This may be the reason why employment is still high, and even if it’s low, the people who got employed may not worth it. The longer our border restriction is, the companies become more desperate and they will need to either go for offshore resources, or agree to a sub-optimal local one.

I know about this because I’m running a service to help businesses finding their offshore resources. The business is called VA For Everyone. And I talked to a lot of business owners with resounding answers that are similar to what I described above.

Summary

I guess that’s long enough for a rant. The economy and the employment aspects are pretty weird and I manage to take advantage of it by providing people what they need. However if this drags out for another year, I am not sure what is going to happen.

Next part I will share my thoughts on people’s psychology from observing people in my circle.

“You see, but you do not observe” – Sherlock Holmes

By Tuan Nguyen

financial review

Financial review – How do I do it?

Every month, I conduct a financial review for myself. I go through what I spent in the last month, making sure that I recognize all transactions and categorize them into different sections. From there I plan my spending for the next month, and have a better forecast for my finance over the next year or so.

Tl; dr;

The steps that I go through (should take less than an hour to do)

  • List out all bank transactions
  • List out all credit card transactions
  • Put the transactions into several categories.
  • Put the final numbers into a spreadsheet.
  • Split the income into the same categories, and move them to corresponding bank accounts.
  • (Quarterly) Review investment portfolio.

You can’t control what you can’t measure

If you aim to achieve financial freedom one day, you need to control your finances. And the only way to control it is to measure what you have done over a period of time. I get paid monthly, so that’s why I do this once a month. I encourage you to do it in conjunction with your pay day.

It is even more important to me because I one day will work full time for my own company, and at the beginning, my income will drop significantly to keep the funding inside the company for growth. That’s why I do need to know how much my expenses are; and from there determine how much I need to take out of my company for living.

I begin the financial review with listing out all bank transactions within the last month in a text document. You don’t need to have the bank statement, just transactions history is fine. Don’t forget your credit card transactions as well. I myself have quite a few bank accounts, so pulling all of them together requires me to log into each and everyone of them at least once a month. I just copy and paste them into a text document. Below is an example.

bank transactions
Bank transactions
transaction text
Transaction list

If you do this step, you’re probably ahead of many many people in terms of financial control. At least you have a rough look at what you spent over a period of time. Therefore it triggers something in your mind, and every change begins with the mind.

Categorize transactions

So, when you have a list of transactions, it’s time to put them into several categories. For me, I follow the Barefoot Investor categorization. You can read more about it in his book.

The categories are as follows:

  • Income: all your income sources (you can split it into salary, reimbursements, side income, etc. if needed)
  • Daily expense: all your necessary living expenses, e.g. food, electricity, gas, water, home loan mortgage payments, etc.
  • Splurge: all your optional expenses, e.g. eat out, TV/internet subscriptions, coffee, etc. Anything that you can live without, but choose not to.
  • Investment: all your investment expenses, e.g. putting money into stock market, purchase of something for work, charity donations, etc. Basically anything that potentially making you money, or at least can claim back on tax.

Note: I don’t count my investment income in this calculations, since I would like to reinvest all of them back into the market. So I keep them in an investment bank account, and only look at that once every 3 months.

The Excel spreadsheet for financial review will look similar to this. I also attach a sample file at the end of this section for you to try out. For people who can use accounting software, I’d recommend Akaunting because it’s free and should be enough for this.

Excel spreadsheet showing financial calculations
Sample Excel financial sheet

Here is the link to the sample document. Each month you just need to add another column to the right, and continue the calculations. Overtime, you can see what’s the average spending is; and from there, calculate your own financial plan. Every year I change to another sheet for clarity purposes.

Plan your expenses

Now you know how much you earn in the last period, it’s time to plan your expense for the next month.

Following The Richest Man In Babylon, I immediately pull 10% of total income into my investment account.

For the first time, I have no average number to plan my expenses, so I can only estimates how much do I spend for each categories. Your last expenses total is a good place to start. The average numbers should be around 6-12 months accumulations to be accurate, which means you need to adjust your plan every month until it becomes stable.

So let’s say your income is $3000.

  • 10% to investment ($300) – put this in a separate account, and review/plan it every quarter.
  • 30% to rent/mortgage ($900) – I split this because I need to measure whether I can move to another rental place, or move back into my own place. You can just put it together with the daily expense.
  • 30% to daily expense ($900) – You will have $900 to buy food and pay various necessary bills.
  • 30% to splurge ($900) – You have $900 to buy all the things you want to buy, no question asked.

The percentage will change based on your own spending habits. However, the aim is that no matter what you spend, at least 10% will need to go into investments for the future. Once the planning is done, move the money into each of their own bank accounts.

Congratulations, you have finished reviewing your financials for the month. In future posts, I’ll share my way of determining the expense a bit more accurately, so that you don’t trip on unexpected bills.

Summary

Financial review, in my mind, is what you must do, not what you want to do. It has to be done regularly so that you have a chance of having a better future. The hard part is doing this repeatedly over a long time. I have done this for almost 2 years now, and my numbers are getting better and better everyday.

By Tuan Nguyen

Discussion – How FIRE benefits corporations?

FIRE movement is tremendously popular these days, especially among specialist workers. The idea of retiring early with an abundance of money is attractive to everyone. The concept is excellent and is real. People have reported retiring early and have enough income for them to live their lifestyles. However, is it all good and beautiful?

Tl; dr;

  • The mainstream way of FIRE is work – buy assets – reach a certain networth – retire happily.
  • FIRE gives back money to corporations and allow them to continue growing.

What is FIRE?

FIRE stands for Financial Independence, Retire Early. It is the concept that first came out from the book Your Money or Your Life. This concept then blossomed and became the most popular way of achieving an independent retirement known to millenials. The FIRE movement is very simple, considering that your annual salary, you should allocate most of that earnings to buy assets like Stock and/or real estate that makes you money; living below your means until your networth is enough for you to retire and live your dream lifestyle.

Most people advise to buy ETFs as the easiest way to buy assets. At the end of the day, most fund managers cannot beat the market index. So, why try to beat the market yourself, send the money to fund managers; while you can just buy into a broad market ETF and benefits from the rise and fall of the market?

How does it benefit corporations?

Assuming you work for a big company X.

You earn $500,000 per annum post tax because you are great at doing your job and ready to work long hours for the company.

You follow FIRE movement and decide to spend 80% of your take home money to buy ETF that track the ASX200, or S&P500 depending on where you live.

Now, let us take a more general look, and assume X is the ASX200. We can see that you put back $400,000 per annum back into X and allow it to grow artificially. The growth does not come from better productivity, but from people buying blindly into the company. In a way, it is a great “scam”, where corporations take your best productive years, paying you top dollar, all that for you to give back most of the money back to them to continue the cycle. It is truly fascinating.

The best thing is that, you benefits from it too. However, I imagine that you get 1, your employer will get at least 100. But everyone is happy right?

How to FIRE the right way?

I strongly believe that beside being good at your job, you need to be fluent in at least one form of investments. It maybe learning how to pick stocks, how to invest in real estate, how to get your way around commodities, gold and silver, etc.; or even starting a company. The possibility is endless.

The question is why people do not do this? And from my experience, it seems to be because they are scared. Why learn how to invest when I am already making $200,000 per year? Why leave my job to start a business? What if I lose everything?

What most people do not experience is that the other side of fear is calmness. Before you jump out of the airplane for skydiving, fear engulfs you. But once you jump, there is a sudden calmness in your mind, and then the joy of experiencing flight.

Summary

FIRE is a great way to achieve financial independence. I am also an advocate of the movement. However, my approach to it may not be the same with other people. I will achieve Financial Independence my own way, and I will share with you the journey over time.

“Only those who go where few have gone can see what few have seen.” ― Buddha Gautama

By Tuan Nguyen

Discussion – Pareto distribution

Recently I came across a lecture from Professor Jordan Peterson. In this lecture, he talks about Pareto distribution and comparing it with the Normal distribution. There are massive distinctions between these two and I think it is interesting to note down some of them.

Tl; dr;

  • Pareto distribution deals with creative domains, or human creativity. Where the majority of work is produced by a small number of people.
  • In a domain, the square root amount of people produces half of the product.
  • Given a randomized trading environment, the trading activity always end with one player holds all the money.

Pareto distribution

In contrast to the normal distribution, where most activities occurs in the norm, Pareto distribution argues that the most activities occurs around a very small set of units.

Galton board
Normal distribution visualized
pareto distribution
Credit: mode.com
Visualize the 80-20 rule with Pareto distribution

One thing that we may have heard before, 80% of the work is produced in 20% of the time. This is the most common example of the Pareto distribution. One thing to note is that this distribution works best in creativity domain, where things are not certain.

There is a formula, called Price’s law, is used to determine the amount of creative work. This formula is derived from Pareto distribution theory. The formula states that given X people working on a creativity project, square root of X people produce half of the progress, while others produce the remaining half.

For example, if 10 people are assigned to do a project, then 3 people will deliver half of the project, and 7 people deliver the other half. This does not make sense when I first read about the theory, but experimental results clarify the point. An amazing thing about this law is that if 10,000 people work on a project, we only need 100 people to deliver half of the project. It becomes ridiculous at a large scale.

Applying Pareto distribution to the Game of Money

With the same understanding of the distribution, and project it to how wealth are concentrated only in a few individuals. We can clearly see the Pareto Distribution at work.

Professor Peterson talks about an example, like Monopoly, we start with 4 players, and at the end, 1 player ends up with all the money and wins. And even if we start again and again, only 1 person is the winner. With Pareto distribution theory, in a randomized environment, and we apply randomized trading rules, the game always end with 1 player having all the money.

I did not believe it.

So, I decided to write a small web app to test the theory, what’s programming is for right?

To my surprise, it always end with one player holding all the money. Which player is not important, the important thing is that we know the end result will take a shape like that.

You can access the game here https://lightbringer1991.github.io/trading-game/

Summary

Knowing about Pareto distribution, I finally have an answer to the question: “Why can’t we distribute wealth evenly to everyone, would the society be better off that way?”. The simple answer to that, is, even if we do the distribution, over time all the wealth will concentrate to a small number of people anyway.

“The more you know, the more you realize you don’t know.” – Aristotle

By Tuan Nguyen

property investment

Discussion – Do you NEED a home?

As someone who is familiar with migrations, I moved from Hanoi to Ho Chi Minh city when I was little. Moving from Vietnam to Australia when I was 18, and moving from Ballarat to Melbourne 5 years later. I feel like I experienced a different way of living, in contrast to how our predecessors have been living.

Tl; dr;

  • We WANT a home and we NEED a place to live.
  • Sense of ownership and jealousy often clouds our judgement when it comes to purchasing our dream house.
  • There is nothing wrong renting for the whole life. It just needs more planning.

Housing is a basic need

According to Maslow’s Hierarchy of Needs, a place to live satisfies the safety needs, and some of the physiological needs.

Having a place to feel safe, to keep ourselves warm, to be able to rest is a must for any human.

Back in the days, we normally stay in the same community throughout our lives. We were born and raised in the same house, even live in the same house when we became adults and gets married. At the end, we probably died on the same bed that we slept as a kid.

With that context, it is no surprise that most people who experienced that lifestyle, including my parents, think that one needs to own his/her own house because it is an absolute necessity.

An alternative aspect

Let us take a look at some statistical facts.

Back in 2012, a social indicated that 43% of Australians moved house in the last 5 years. The number is a staggering indication of how much we move around these days. We do not stay in the same geography for a long time due to various reasons, such as changing life styles, kids, work opportunities, etc.

In the new working environment, the idea of job hopping is becoming the norm. People are encouraged to change employers every 3 to 4 years to increase competitiveness and enhance their skill set. Sometimes changing job means that you need to move to another area, and I do see people renting out their own home, move to a rental property to be close to their new workplace.

The question is, is owning our own house a necessity?

To think about an answer, we must take a step back and look at the reasons why we purchased our home.

  • Is it because our parents told us, “You need to have your own home!!”
  • Or it is because your friends all have their own home?
  • Is it because you feel like owning a piece of real estate satisfy something within you?

There may be other reasons, however the above 3 is what I feel when looking back at my previous home purchase. Those reasons are not about what I need, they are all from external factors. And the one thing that inspire me to purchase is just because I wanted the feeling of ownership.

Therefore, it is never about my needs to buy my own home to live in. It is more about what the society expects from you, what I want to achieve in life.

With that being said, there is nothing wrong in purchasing a house of your dream. However, you need to think about the WHY are you buying as the very first step. If there is no good reason to buy, it is ok to keep renting.

The renting hassles

I used to rent for over 3 years when I arrived in Australia, and have resumed renting for nearly a year now. What did I encounter?

  • I lost all bond because of a dodgy tenant who sublet the room to me.
  • Living in a house infested with mice and I had to arm the traps every day.
  • I lived in a cold room with no heater for an extended period of time. In Ballarat winter, you wouldn’t like it 🙂
  • I lived in a house that had a break-in.

It is fair to say that I have quite a bit of experience as a tenant. Most people fear the stories of renting, and fear the hassles of moving houses, of being kicked out by landlords.

Fortunately, in Australia, if landlords want tenants out, they need to have formal notice and give the tenant a reasonable amount of time to find another place. Rental is a heavily regulated topic, and most of the regulations actually favour tenants.

And the moving, it is much easier nowadays with removalist services. When I last moved, it took me like a week to pack, a weekend to move, and another week to unpack. Yes there were some work to do, but then again, don’t we do the same thing when we move home?

Summary

Owning our own home is not really a necessity, but it is more about what we want, and how do we fit into the society.

Always questioning the reason why you purchase a property, and you will be more aware of your goal.

“We live in this bubble of ignorance. Most people know nothing about history, or the historical context of the traditions they still follow today. People do things without knowing why they’re doing them.” – Oliver Markus Malloy, Inside The Mind of an Introvert

By Tuan Nguyen

Discussion – Superannuation contribution

Recently I have been in discussions about superannuation contributions. And I think some information needs to be spread out to help you in building a stable retirement.

Tl; dr;

  • Employer must contribute super for their employees, minimum of 9.5% of the gross salary per annum.
  • The amount of contribution is taxed inside super account at 15%.
  • You can voluntarily contribute more money into super and take advantage of the low tax break, however it will only be at maximum of $25,000 per annum, including the amount contributed from employer.
  • You can contribute to previous financial years, starting from FY 2019.
  • There are ways to access super to buy assets before reaching 65, mainly via SMSF.

What is super?

superannuation jar
Source: sbs.com.au

Superannuation, or Super in short, is the money put aside by the employer for you to take care of you during your retirement.

The required amount that the employer is required to contribute equals to 9.5% of your ordinary timed earnings per annum, at the minimum.

You cannot access the money inside super account until you are 65 and above, or under certain circumstances.

Why should I contribute more into super?

Since I cannot access it until I am 65, why should I contribute my hard earned money now instead of taking it to buy some investments now?

First off, you are spending money to fund your future retirement, ensuring that you have a better future.

Secondly, most super accounts have investment settings built in, and it is highly encouraged that a young individual as I am, should put all super money into high growth investments. Since I cannot pull the money out in another 30-40 years, it is reasonable that I will see some substantial return thank to compounding effect.

Thirdly, you save tax money when putting more into super.

super contribution comparison

Suppose that the tax is flat out 32.5% for simple calculation. In the case of progressive tax rate, the difference may be lower. But generally, you still save some tax money and increase your net worth better. The tax charged inside super is a flat 15%, and it is substantially lower than our tax bracket. Of course if your tax rate is smaller, this will not make sense.

How do I use my super money before retirement?

The most common way to “access” your super money before retirement is to transfer all of them into a Self-managed Super Fund (SMSF). You will be in charge of this super fund, and therefore has the right to control the money. However there are quite a lot of restrictions that come with the structure. It is best to consult with a financial advisor or an accountant to know more.

Another uncommon way is that some Superannuation company, e.g. AustralianSuper, has an investment product called Member Direct. You can subscribe to this product, and basically it allows you to buy certain shares of your choice within the scope of super. There are also some limitation of doing it this way, and you can only purchase shares.

What I am doing?

It may be best if I try to top up the maximum amount of contribution each year, and later on I may pull them out into an SMSF to purchase a property.

Let’s say I top up maximum of $25,000 per year, after 10 years I theoretically have $250,000 inside super. During that time, if the share market goes the way it has been going in the last 100 years, my investments will compound about 7% per year, leading to the final figure of around $410,829. With this figure, I should be able to purchase a property to sit inside my own SMSF and net me some healthy return.

Summary

There are a lot of interesting things when it comes to Superannuation. I just listed the most common ways to deal with it here. It is crucial to consult professionals who can advise you on the matter. However, it is good to know that there are other solutions out there, all you need to do is ask.

By Tuan Nguyen

Discussion – Cost of home ownership

As someone who used to live in my own house, I gathered a bit of information about the associated cost of home ownership. For this post, I would like to share my experience of the matter.

Tl; dr;

Cost of home ownerships can come in many ways.

  • Closing cost (when purchasing the house)
  • Moving cost
  • Mortgage repayment
  • Insurance
  • Rates (council and water)
  • (Situational) Repair/renovate cost
  • (Situational) Body corporate fee

Assumptions

All figures will be based on the following data (close to what I used to pay, but rounded to make it easier to remember)

  • Purchase price: $400,000
  • Interest rate: 4% pa
  • Rental (in the same area): $350 per week
  • Council rates: $2000 pa
  • Water rates: $800 pa

Starting the journey

To live in one’s home, one needs to buy it first. Here are a quick look at what are the costs to purchase a home.

Total closing cost of buying a house

This, of course, does not include the numerous hours I researched, went to inspections/auctions. But as a rough figure, it is easy to see how much does it take to conventionally take ownership of a house in Melbourne, Victoria (The figure is back in 2016).

Nowadays, there are schemes that help easing the pain when purchasing the first home. For example, you can waive the stamp duty as part of the First Home Buyer scheme; or even be able to borrow up to 95% without triggering Lender’s mortgage insurance. However this is another topic for another time.

For Victoria, there is a way to calculate your expected stamp duty via the government calculator page.

Living in my own house

It is a great feeling of owning a house to live in. Once I moved in, the first cost that I needed to spill out of my pocket is the moving cost. It can vary between $100 to, say a few thousands if you are moving interstate. Luckily, I have a few friends who helped me moving from Ballarat to Melbourne with minimal cost associated. Let’s say it was $600 for hiring movers to do that.

Then, the mortgage repayment kicks in. At $320,000 total mortgage, the P&I repayment each month came down to $1,528. Which means I needed to fork out $18,336 each year from after tax income to satisfy the mortgage repayment. Once in a while you can call the bank to ask for a reduction in rates, which can happen when RBA reduces interest rate, or the bank is running a promotion.

After signing the contract, I was advised to purchase home and content insurance, which came down to about $140 per month. This is because once I sign the contract, all damages (if occur during settlement time) are my responsibility. Since my loan was with ANZ, I had a choice to bundle car insurance with home and content insurance to have a better premium. You can take a look at this to reduce the overall insurance costs.

After a while, local council and water company will start sending you bills regarding the rates. In my case it was $500 per quarter for council rates and $200 per quarter for water rates. These fees you need to pay as part of home owner costs. There is no negotiation on this part.

Situational costs

My house was an old one, so repair and maintenance is kind of compulsory. I normally fork out about 10% of the expected rental in the area, which was $350 per week at the time. Each month the rental income would be $1,516.66, which means I needed to keep about $151 per month, ready for repair. This, should be a part of home ownership 101.

This came in handy when the hot water system failed ($5,000 replacement), and the cooking stove “exploded” ($1,000 replacement). Of course if you live in a brand new house, there is less chance to repair anything. You can ignore this part.

Another cost that can be considered is body corporate fee. This happens when you live in an apartment complex, or a block of units. There is a fixed fee that the body corporate charges each unit, and the owner of those units have to pay for it. The money is used to maintain common areas, such as drive ways, common gardens, etc.

Once thing to note is that you need to read the body corporate paper carefully. Sometimes the body corporate already purchases home insurance. In this case you just need to purchase content insurance. However check with your insurance provider before deciding.

Summary

Ongoing cost of home ownership

The above is a summary of running/maintaining a house for a year. This is not meant to scare you, but to prepare you for what is to come when you decide to settle down and claim home ownership. Figuring out all the numbers before committing is the key of financial stability.

That is all my experience regarding the financial side of owning my own house. These figures of course not accounting for any capital appreciation aspects of owning real estate. However we can go back to it at another time.

By Tuan Nguyen

Discussion – Why am I renting?

Owning a home is the ultimate dream of many people. Some even say it is the biggest investment of one’s life. After almost a year of renting, I now have a better view at renting versus living in my own house.

Tl; dr;

  • Rent when: you are not ready to settle down; you have debts that have high interest rate; you want to speed up your financial state
  • Live in your own home when: you tired of moving around; you can financially support the mortgage; you are aware of costs of owning a house.

Why renting?

I used to live in my own house. It is the Vietnamese way to live in your own house and not paying other people’s mortgage.

However, after a number of years, I came across a concept called rentvesting, which I considered intriguing to understand more. Rentvesting discusses that by renting, you end up saving more money than the cost of owning a home. And by redirecting the difference into purchasing investments, you can get ahead financially comparing to people who are still paying off their home loan.

There are 2 points that needs to be done for this strategy to work:

  • Your rent is cheaper than your would be costs of owning.
  • You redirect all the difference into investments.
home vs rent in the same area

Above is the comparison for my own situation when I tried to figure out whether I should move out of the house or not. The number checked out, netting me $306.89 per month, or $3682.72 per year back in my pocket if I chose to rent somewhere in the same area and rent out the house. Then I can redirect it to the offset account, or saving up for another investment deposit.

home vs rent in the city

But why stop there? I decided that if I rent in the city, it is more suitable for me. Assuming that for each hour commuting I can put into work to just make $10/h, and I waste 3 hours each day commuting at that time.

At my age, settling down is not really a thing to consider. I am happy to move around, exploring different suburbs and enjoy the lifestyle that the city gives.

Benefits when you rent

  • Landlords handle all repairs.
  • Cost of living is fixed, therefore cashflow projections are more reliable.
  • Enjoy lifestyle.
  • Easy to move around.

Why buy a home and settle?

Someone once said: “A man needs a home when his wife says they need a home.” With that in mind, the suitable time for someone to live in their own house is when they want to settle down and ready to live in a particular location for the next 5 years or so.

Why 5 years? Statistics say that Australians tend to move house every 5 years on average. Maybe the kids are grown up and parents have to move to another location closer to schools. Or one person finds a job that are far away and therefore decides to uproot the family.

However, you need to be aware of the costs of holding a house before jumping into the water, which I will discuss in my next blog post.

Summary

Renting versus living in own’s home has been a great discussion over generations. However when we put emotions aside, and focus on what is quantifiable. There are a lot of benefits that can come out of renting, provided that we follow a set of strict rules.

Disclaimer: the information on this website is for general information only.

By Tuan Nguyen

property investment

Investing – my thoughts on comparison rates

So I recently completed a refinance. It took me over 3 months from contacting the broker to the day the account is created. I just want to share some thoughts on the difference between interest rate and comparison rate. And when one is more beneficial than the other.

Tl; dr;

  • Interest rate is the pure rate charged on outstanding loan balance.
  • Comparison rate is interest rate plus certain fees, defined by the banks.
  • If your goal is to smash the loan as fast as possible, high comparison rate is not really an issue.
  • If your goal is to keep the loan for as long as possible, give some thoughts to the comparison rate.

Interest rate vs comparison rate

This is an example of loan package that outline the interest rate and comparison rate, along with the fees associated.

westpac home loan
Westpac investment loan

One thing to note is that when calculating comparison rate, banks like to use these figures: $150,000 loan size, 25 years loan, Principle & Interest payment.

As we can see, the interest rate is 3.84% per annum, which means for a loan of $150,000, you need to pay $779 per month in mortgage.

However, looking at the comparison rate, it is 4.24% per annum, essentially means you need to pay roughly $812 per month in mortgage.

The difference for a year is roughly $395, which equals to the annual fee that they note down in the image above. The fee could be higher if the banks also calculate the account opening fee into the comparison rate.

tables showing the difference between interest rate and comparison rate

When do we need the lowest comparison rate?

This is a bit weird for people like me who just got into property investment. But for investment properties, I want to drag the loan out as long as I can, so I can utilize the borrowed money to keep purchasing. I am willing to pay interest only for as long as I can, because it makes the cash flow better and more predictable.

With that in mind, obviously the higher rate is, the worse the cashflow will be for an investment property. So when I try to find a loan, it is in my interest to find something that has a low comparison rate, only if I intend to hold the loan for a long time.

So when do we want a high comparison rate?

Home loans often have the best interest rate, but sometimes go with a terrible comparison rate because of all the fees associated with it.

However, if my intention is to pay it out in the next, say 10 to 12 years (surprisingly, it is not that impossible to do). I can take the package with low interest rate, but a bit high comparison rate. The reason is that comparison rate is calculated based on a gradual payments for a long time. So by paying extra and/or change the payment period, we can reduce the real rate down to a ridiculous amount.

Example: given the same rates above, let’s say that we want to pay $300 per week into the repayment. With the assistance of moneysmart website, we can calculate the total repayments and how long does it take, as well as guessing the actual comparison rate.

calculations showing early repayments

As we can see, by paying extra into the home loan with the intention to finish it off, the actual rate is even less than the interest rate, since we finish the loan much earlier than expected of 25 years.

Summary

Loans are complicated, and there are a lot more that I cannot cover. It is best to go to a broker and discuss with them your goal. Trust in their expertise to find a perfect loan for you. And if things don’t work out the way you want, a refinance is always an option.

By Tuan Nguyen