Shares vs Property

The great Australian dream is to own property. That is all any baby boomer goes on about. While it has been a great vehicle for wealth in the last thirty years, the soaring prices have only made it more and more difficult for first home buyers. Buying in capital cities is borderline impossible for young people, meaning we have to resort to buying in less than ideal places, or regional towns. Another option would be to invest elsewhere, perhaps through shares. However, investing in shares can sound complicated, and is seen as a complex, often risky investment choice. I’ll explore more below to see what option may suit your out of the two.

Pro’s

Property
  1. You can see it and feel it.
    The best part about property in my opinion is that you can see it and feel it. Before you buy a house, you can drive past it, walk through it and see how it feels. Property also has multiple uses, you can live in it, rent it out, or a combination of both. I own my home and I do love knowing I can change what I like, it doesn’t matter if my dog digs a hole, and just knowing it is mine brings a certain feeling with it.
How can I stay mad at this face? It also helps that I don’t have to tell the landlord my dog dug a massive hole in the lawn as I am the landlord.

2. You can use leverage to increase your gains.
Leverage basically means using a loan to signficantly increase your gains. For example, if you invested $5k into an investment and it gained 10%, your total gain would be $500. If you invested $5k and got a loan of $15k to make your total investment $20k, and that gained 10%, your total return would be $2000. Thats a 40% return on your initial $5k deposit.



Lets say you buy a $500,000 home with a 20% deposit. Your deposit would be 100,000 so you would have a $400,000 loan. If your house went up by 5% each year for the 5 years you owned it, your house would now be worth $642,000 (the wonder of compound interest- if it just went up by 25% it would be worth $625,000). Thats a return of 142% on your initial investment of $100,000 (honestly wtf).

Just a comparison of the example above (buying a $500k house with a $400k loan) vs an example of buying a $100k house outright.



It is important to keep in mind that leveraging can also work against you as well. While it can magnify your gains, it can also magnify your losses. For this reason, leveraging does increase your overall risk and it is important to only borrow what you can afford.

As you can see in the graph, the losses are much larger in the leveraged column.

3. If you live in it you dont have to pay capital gains tax (CGT).
If you choose to make your property your primary place of residence (PPOR), if you do decide to sell, you will not need to pay any CGT on any profits you make. Lets say you decide to sell the property I used as an example above. The $142,000 you made in 5 years would be tax free. Absolutely insane!!

4. Low volatility
The other great thing about property is that it’s value isn’t shown to you every day like shares. The only way to actually know if your property has gone up in value is if you get it revalued. This can give you much more peace of mind compared to shares, and is also more likely to decrease the risk of you making an emotional decision to sell based on the value of the house.

Shares

1. Low barriers to entry
The low barriers to entry are arguably the best pro of shares. These days, it has never been easier or cheaper to get started investing. While property often requires a large amount of capital to get invested, you can invest in shares for as little as $5. Micro-investing platforms like Raiz and Spaceship allow you to invest small dollar amounts into a portfolio of your choice. Raiz also has the option to allow you to round up purchases and invest the spare amounts. Other platforms allow you to invest with a minimum of $500 at a time, still much cheaper than property. New online platforms like Pearler make it simple and super easy to get started, meaning its never been easier to become an investor.

2. High liquidity & cheap purchasing costs
Another benefit of shares is that they are highly liquid. This means you can buy and sell them quite quickly. Generally there is a 2 day settlement period when buying and selling shares. This means that you can sell quickly if you need to and receive your money in two business days. Compare this to property which is highly illiquid, as it can often takes months to sell and settlement is at a minimum often 30 days.

Transaction costs are also much cheaper than property. Brokerage (buying and selling once off cost) generally ranges anywhere from $5 to $19.95 per trade. I use pearler, which is $9.50 per trade, with no other fees and is one on the most cost effective platforms.

3. Ability to diversify
My favourite part about shares is the ability to diversify in one single transaction. Buying one Exchange Traded Fund (ETF) can expose me to the best companies in the world. For example, buying an S&P 500 (top 500 US companies) ETF like the iShares S&P ETF (code IVV) lets me buy companies like Amazon, Apple, Microsoft, Google, Tesla and 495 other great companies in one transaction. I invest in only three different ETF’s which allows me to invest in the best companies accross the globe.

4. No ongoing fees
Another great benefit of shares is that there are no ongoing fees to pay- no mortgage, no rates, no maintenance costs. You may have to pay some management fees but these are often very low (less than 0.5%) and will be taken out of any gains you make. In other words, once you buy those shares, there will be no costs to maintain them until you pay the brokerage fee at the end to sell them.

Con’s

Property

1. Highly Illiquid
As I mentioned earlier, property is highly illiquid. This means that is takes time to buy and sell. If you need the money quickly, you can’t just sell off some of the property to make some money, and you can’t even sell the whole house quickly to find the money. Buying and selling property is something that takes time and also involves high transaction costs, so it isn’t something that can be done spur of the moment. If you are someone that isn’t great at saving or you are an emotional spender, this may actually be a benefit for you.

2. Expensive
The other massive con that makes it so hard for people to buy is just how expensive property is. In South Australia we are luckier than those on the East Coast and generally have lower prices, however property still isn’t cheap. A deposit alone can be in the six figures and therefore very hard to save for. Add on top the ongoing expenses of paying a mortgage and no wonder people can’t get into the market!

3. Ongoing expenses
Another disadvantage to property is the ongoing expenses. Unlike shares, property will continue to cost you money on a month to month basis. This can include expenses like mortgage repayments, council rates, land tax (if an investment property), insurance, bills & general maintenance. Then if something were to break down you could be looking at even larger bills! Shares you buy and forget about, property requires constant attention and often money even after you buy.

Shares

1. Daily Price Movements/Volatility
One thing that really gets people when it comes to shares is that you can see how much they are worth every second. When the market is open, the price is fluctuating constantly and that can often cause a strong emotional reaction in people. Shares are volatile which means their prices move up and down frequently. You need to have a strong gut to handle these movements and not sell at the first sign of panic. Being sure of why your investing and your investment strategy is key to avoid making emotional decisions.

2. Difficult to leverage
Another negative for shares is that it can be difficult and quite risky to leverage into them. There are a few products out there that can allow you to borrow to invest in shares, but they often come with “margin calls” which will force sell your shares if they drop below a certain point. Due to the volatility of shares, they may well drop to that certain point, but may easily rise again soon after. Therefore, the worst possible thing to happen would be to sell at a low and this would only magnify your losses. NAB have a product called the Equity Builder, which works similar to a home loan where you pay a principle and interest loan each month. There are no margin calls, as long as you make your repayments they won’t sell off any of your shares. This seems like the best product by far, however they are not accepting new applications at the moment and are only accepting expressions of interest.

3. Jargon ++++
The last con to shares is how difficult they seem! It really isn’t difficult to invest in shares however the finance bro’s have made it sound so hard and scary that people don’t want to give it a go. There are plenty of resources out there to get started and plenty of platforms that make it so easy to understand. I promise it isn’t as confusing as it seems, start having a look, get started and learn as you go!

Conclusion

For full disclosure, I own both property and shares, however I would have to say I prefer shares over property. The reason why I love shares is that I can automate my investing, I put away a set amount a week and pearler invests it for me. I don’t have to pay any bills, there is no maintenance or any ongoing work required of me. I just let them sit there and make me money in the background. Property is also great though as it does provide a roof over my head and it is a great feeling to know I own the property and can do what I like with it. Hopefully this post has helped you work out what may suit your better. In all honesty, I think a combination of both is always best. Keeping your eggs in different baskets is always a good idea in my opinion!

Spending In Line With Your Values

When it comes to saving money, I don’t think saving as much as possible at the detriment of everything else is the right answer. What I believe is more important, is saving money on areas you don’t value in order to spend your money on things you do value.

So…. What do you Value?

Have a think about what you value, maybe even write down a list. What do you believe is most important in your life? Here is my list:

  • Experiences
  • Travel
  • Spending time with friends and family
  • Spending time outdoors
  • Being generous
Skydiving in NZ anyone?

I never feel guilty about spending money on any of these things. Better yet, a lot of these can often be free or have little cost. Write out your own list of what is important to you. Next, look at your last couple of months of expenses. Where has your money been going? Write down another list, in order of what you have spent. Here is mine:

  • Living Expenses (Mortgage, bills etc)
  • Travel to NT (Fuel, Accommodation, activities)
  • Groceries
  • Fuel
  • Donations

Living Expenses:
For most people, our living expenses will be the most costly expense on our list. This is expected and often unavoidable. However, that doesn’t mean that we can’t try to minimise it. Most of my furniture is comprised of items I got off of Marketplace, or hand me downs from others. I rent rooms out to others so we can all live for cheap. We try to keep bills low by putting on a jumper or blanket instead of using the heater, and use rain water instead of mains where we can.

Travel:
My latest trip to the NT was a holiday that was well overdue. For our 10 day trip to Alice Springs and Uluru, it came in at just under $1000 each for the two of us. We saved money by camping, buying all our own groceries rather than eating out every day, and spent a lot of time doing free activities like hiking and sight seeing. We splurged on experiences like the Field of Lights at Uluru and other things important to us like national park passes and indigenous art.


Groceries:
My biggest tip for saving on groceries is to have a plan for everything you buy. Food waste can cost you, so planning meals, buying only what you need, and then using all of it will save you plenty in the long run. This is what I focus on mostly, so I can put my money to use by buying good quality ingredients.

Fuel:
I am originally from Adelaide but now live in Mount Gambier- a five hour drive away. I visit my friends and family back home as often as I can as it is important to me, and as a result fuel is high on my expenses list.

Donations:
As you may have seen recently, I was matching every persons donation to the Afghanistan cause with $10 of my own. As a result, we donated over $1000 to the cause, and I personally contributed about $350 to that. This is more than I would normally donate in a month, but for a good cause I am happy to do so. I have other monthly contributions set up to charities I care about, so donations do still make up a big portion of my monthly expenses. Donating not only helps others but also makes me feel better about myself, a win-win.

By looking at my two lists, I can see that they align pretty well. Your spending habits are a great way to see what you truly value, and if its not lining up, it may be time to change things up. I used to spend way more money on new outfits than I do now, and that was always just to impress others. It would more often than not leave me feeling more guilty for spending that money than feeling good for having a new outfit. I have realised now it just isn’t important to me and I was just doing it to fit in. This is just one example of what I was spending money on that wasn’t in line with my values. Shifting towards spending where I want to spend has made me much happier overall.

I would encourage you to compile your two lists and see if they add up. If they don’t, it might be worth making a change to see if you are happier for it.

Top 5 Finance Podcasts

Read on for my opinion on the top 5 finance podcasts!

My Millennial Money

My Millennial Money is one of my favourite podcasts. They cover all things money, including saving, budgeting, investing, property and everything in between. They also have many other podcasts under the same banner including My Millennial Property, MM Business, MMM Express, MM Career & MM Health.

Equity Mates

Equity Mates is another one of my favourites, and was actually the podcast that got me starting to invest. In their early days, they provided some really good insights into how to get started, how to understand the jargon you might see, and some other insights great for newbies! These days, they are chatting to some really great investors and intelligent people on the podcast and I find I learn something new each time I listen. They follow a similar philosophy to mine when it comes to investing, however they do often discuss individual stocks on the podcast. While I don’t invest in many individual stocks myself, it is a very interesting listen to hear how they are valuing companies and making decisions to buy or not!

Get Started Investing

Get Started Investing is a relatively new podcast made by the same guys at Equity Mates. It is targeted for beginners, and I wish it had been around when I started. I have had a listen to a few of the episodes and they break down share investing so well and believe this would be a great way for new people interested to learn more!

She’s on the Money

She’s on the Money is another great finance podcast that is aimed specifically for women. It is kept pretty simple so if you have no idea where to start, this could be just the place. It is a fun podcast to listen to while also being empowering and inspirational. They have a few episodes a week so there is plenty of content there for you each week.

Financial Autonomy

Financial Autonomy is another great podcast, and is run by Paul Benson who is a financial advisor. He believes the best way to build wealth or become financially independent is to invest in shares, property or own a business. He breaks this down further in his podcasts, as well as interviewing people who have started this journey to financial independence.

Other Notable Mentions

The Australian Finance Podcast

Great for beginners, breaks down investing in a really simple way!

The Property Couch

A great podcast focussed solely on property investing. I found it very insightful when looking for a property myself.

Aussie Firebug

All about the hosts journey to FIRE (financial independence retire early). If you wan’t to retire before 65 and need some inspiration, this is the place.

Motley Fool Money

Focused purely on the share market and how the current climate is affecting it. Another point of view that makes for an interesting listen.

Ways to Help the Environment and Your Wallet!

We can all do our part in helping the environment, and why not also save a bit of money along the way? Below are some of my tips as well as some tips from the community about how to do both!

Eat Less Meat!

Quite an obvious one. A diet incorporating meat will often be much more expensive than that of a plant based diet. There is also research out there to indicate a plant based diet is also much better for your health. If you eat meat in every meal, it might be worth looking at ways to cut back. No one is expecting you to completely eliminate meat from your diet instantly, but trying to have a meat free day or more a week could go a long way in helping the environment and saving you money.

Reuse! Reuse! Reuse!

Did I say it enough? One way to save money and also help the environment is to reuse! For an upfront cost, you could buy a few reusable items that could save you a lot more money in the long run. Even becoming creative and re purposing items could be a great way to save money and save the planet. Reusing jars as containers, old t-shirts as cleaning cloths, turning food scraps into compost for the garden, the opportunities are endless.

Some reusable items you could buy to save you in the long run:

  • Keep cup
  • Drink Bottle
  • Tupperware/glass jars
  • Silicone lids
  • Un-baking paper
  • Reusable bags
  • Reusable straws and cutlery
Can you turn your household into a zero waste zone?
Reduce Wastage

This kind of goes without saying. Buying less and throwing away less is obviously great for our wallet and the planet. The best way to help this is to plan your shop before you actually go. Pre-planning meals and buying only what you need will mean you will be less likely to throw things out. A way I try to reduce waste is to only go shopping again once I have used up everything from my previous shop. I tend to get a few interesting meals doing it this way but it is always fun to try, and I always feel better knowing I’ve not wasted any food or money.

Other ways to save money & be environmentally friendly
  • Limit water usage/use rain water where possible
  • Buy in bulk to decrease amount of packaging
  • Shop in season/shop at local markets
  • Recycle bottles & cans at local depots for 10 cents each
  • Start composting
  • Start a veggie patch
Summary

Helping the environment isn’t about being perfect, its about doing lots of little things. If we all make a couple of small changes each in our lifestyles, it will have a large impact on the environment.

Any other ideas or useful strategies? Let me know in the comments!

Buying A Home 101

A few basics to buying a home I believe everyone needs to know!

How Much Money Do I Need For A Deposit?

Unfortunately, the answer is, it depends. In an ideal world, you would have saved up enough money for a 20% deposit, as well as for fees like stamp duty, conveyancing, building and pest inspection etc. These days, house prices are sky rocketing, so a 20% deposit could be entering six figures. This isn’t always achievable, and therefore you can buy a home with a deposit that is less than 20%. However, this comes at a price, and that price is Lenders Mortgage Insurance (LMI) and larger repayments.

LMI will be added if your deposit is less than 20%. This protects the bank (not you) if you fail to make your payments or end up owing more than what the house is worth. LMI increases the lower your deposit is, so if you only have a 5% deposit, you will be paying quite a bit more just in LMI.

Therefore, to avoid paying LMI, you have a few options. First, is to have a 20% deposit. If this isn’t possible, you could use a guarantor. This could be your parents, or grandparents, who are happy to put their home up for collateral for yours. This means, you can buy with only 5% and not pay LMI, however if you fail to pay your guarantors home can be taken by the bank as payment. You can also use the FHLDS which means the government acts as your guarantor, however there are limited spots available per year.

It is also important to remember that there are other fees associated buying a home. You may have savings worth 20% of the house, but fees like stamp duty and conveyancing could eat into your savings and leave you with a much smaller deposit.

20% of the buy price= $90k
Subtract stamp duty, transfer fees & government fees:
Available deposit left= 67,179 (14%)
LMI= $4,148
10% of the buy price= $45k
Subtract stamp duty, transfer fees & government fees:
Available deposit left: 22,179 (4%)
Not a large enough deposit to buy a house, therefore no LMI



Using the calculators on realestate.com.au, to buy a house for $450,000 with a 20% deposit, you would need $115,000, which is actually 25.6% of the purchase price.

Using this example, you would need to save more than 20% to avoid LMI, plus then also have some money to keep aside for an emergency fund.

The larger your deposit, the smaller your loan will be and therefore the cheaper your repayments will be. This is another thing to consider and is demonstrated in the screenshots above.

How Much Can I Afford to Borrow?

Arguably, serviceability is more important than your deposit amount. Serviceability basically means your ability to pay back the loan. The banks used to be very lax on this, however have tightened things up as the years have gone on. Your income, evidence of savings, and job security are all large factors in banks determining your serviceability. Those with inconsistent incomes, casual employment, or self employment may find it more difficult to get a loan as it is hard to prove you will have what it takes to pay back the loan over the next 30 years. While it is possible to still get a loan in these situations, it will just take a bit more work and would be definitely worth seeing a mortgage broker for help applying for a loan.

There are many online calculators that you can use to see how much you can borrow. While these aren’t completely accurate, they will give you a rough guide. At the end of the day, it will come down to what you are comfortable paying. Most financial gurus will say you want to keep your mortgage payments below 30% of your post tax income. For example, if you take home $1000 a week, you wouldn’t want your mortgage repayments to be any more than $300 a week. Anything over this is generally considered mortgage stress, as you also have to pay for bills, rates, and other general life expenses. Some people may be comfortable spending more than this as a good home is important to them, while some others may not want to spend more than 10%. Again, it is up to the individual and what is comfortable.

Keep in mind when looking at these calculators, that interest rates are at an all time low and will inevitably rise in the next few years. Therefore, when using these calculators it is important to factor in these rises to ensure you will still be able to afford your repayments in years to come.

Example:

$500,000 loan at 3% interest rate: $1,976 monthly repayments

$500,000 loan at 5% interest rate: $2,684 monthly repayments

There is a difference of $708 per month or $177 per week. Therefore, if you are already stretching yourself with the monthly repayments of $1,976, an increase in interest rates could push you over the edge.

Fixed vs Variable Loans

There are three different types of loans you can get: Fixed, variable or split.

Fixed loans allow you to set a fixed interest rate for a set period of time. This means for a certain period of years you will have the exact same repayments. You may choose this option if you want certainty and don’t want any fluctuation in your repayments. The downside of fixed loans is that you are locked into that rate for that set period of time. If you were to refinance you would have to pay break fees, or if the interest rates drop, you will still be paying your higher interest rates. Fixed loans also generally wont let you pay any extra repayments, or may have a limit of an extra $10,000 a year for example.

Variable loans will have a varying interest rate, which rises and falls with the market, but is entirely controlled by the bank you are with. Variable loans offer great flexibility, and have shown to actually cost people less in the long run. The downside of variable loans is that they can rise and you can end up paying more, which if you haven’t budgeted for could put you under more financial stress. Another positive of variable loans is that you can often have a redraw or offset account attached to your loan. This means you can pay off your loan quicker if you want or have money offsetting the interest you are paying. I will explain these types of accounts more in the next section.

The last type of loan is a split loan. A split loan is where you can split your mortgage into a fixed and a variable part, so you get the best of both worlds. The fixed portion gives you security and certainty, while the variable portion of the loan allows you more flexibility and to allow you to make extra repayments off the loan.

Account Types

Redraw Account
A redraw account allows you to make extra repayments onto your home loan, thus decreasing the interest. Then, if you ever need that money for renovations or anything else, you can “redraw” it. It is important to note with redraw accounts, that once you have paid the money into the loan, it is technically the banks money. Some banks refused to give cash back from peoples redraw accounts in the height of COVID-19, something many people didn’t realise banks could do. This is obviously an extreme situation, and more often than not this money can be withdrawn whenever, however it is something to consider.

Offset Account
An offset account is an account that you can have tied to your loan, and any money in there will offset the interest you pay. For example, if you had a $500,000 loan and had $100,000 in an offset account against that loan, you would only be paying interest on $400,000 of the loan. Offset accounts generally come with additional fees, so it is important to see if the interest you’ll save is higher than these fees. How to do this is below:

$500k loan with 3% interest = 15k in interest p.a.
$20k in account, offsetting 3% interest = $600 saved p.a.

Therefore, as long as you have at least 20k in your offset account, and the fees are less than $600, you would be better off having an offset account.

For another example, lets say fees are $300 p.a. and you would only ever have $5,000 in your offset account each year, 3% of $5k is only $150, so you would actually be losing $150 a year to have an offset account and it may be better to go with a cheaper redraw option instead.

Other Tips & Tricks

  1. Pay fortnightly instead of monthly. There are 26 fortnights in a year, and 12 months in a year. By paying fortnightly, you will be making one extra repayment a year without even realising it, and saving you money in the long run.
  2. Just because the bank will lend you a certain amount, doesn’t mean you should automatically get a loan that size.
  3. When you are working out what you can afford, make sure to take into account your current lifestyle expenses, as well as rates, maintenance and other costs associated with owning a home.
  4. See a mortgage broker. They are free to go and see, they have great expertise and will be able to help you through the process. Couldn’t recommend this enough.