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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
It's time to learn how to manage your money and understand investing
In Sort Your Money Out: and Get Invested, former financial adviser and host of the money money money podcast (formerly my millennial money) Glen James shares a life-changing approach to the major milestones of your personal finances. Learn how to deal with debt, embrace a realistic spending plan that works, buy your first home, invest in shares and create the plan you need for long-term financial success. You’ll get the accessible and friendly help you need to get smart with your money and equip yourself with the skills and tools to understand and secure your financial future and invest in a property, in shares and in yourself.
Written in a matter-of-fact style perfect for anyone who just wants to know what works for them, you’ll also learn about:
- Realistic ways to increase your income and help balance your budget
- The methods that lead to a safer, more stable financial future
- The smart way to invest in real estate and purchase a home or investment property
- How to understand the share market, ethical investing, and your superannuation
- Getting out of debt and getting the most out of your life
Ideal for anyone trying to get a handle on their personal finances and get started building a portfolio, Sort Your Money Out is a one-of-a-kind must-read book filled with practical and entertaining financial help to make sense of an intimidating, but crucial, part of everyone’s lives.
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Veröffentlichungsjahr: 2021
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Table of Contents
Cover
Title Page
Copyright
Dedication
hi, I'm Glen!
introduction
Life On Own Terms (LOOT: my version of FIRE)
let's get this party started!
1 debt and how to get out of it
Debt consolidation: a cautionary tale
Good debt, bad debt and ‘life debt’
Car loans
Your home mortgage
My 5 steps to get out of debt
HECS/HELP debt
The truth about credit scores in Australia
BNPL: Afterpay, Zip Pay, etc.
Loans from family and friends
Debt and mental health
2 get rich and make it rain: mindset and money
The answer is not a lotto ticket
So how do you get rich?
Money mindset, habits and making them work together
Business and leadership
Maximise human capital and transfer it
can we fix it? yes, we can!
3 a sound financial house
How did the sound financial house come about?
Building your sound financial house
Your emergency fund (cashed up)
Wills and estate planning
4 budgets suck: setting up your spending plan
Spender vs saver
Budget types
Lifestyle inflation
Couples and money
Singles and money
Low-income earners
My money hierarchy
The Glen James Spending Plan
Banks and bank accounts
getting invested
5 learn how to be the wolf of your own street
Mindset of an investor: how to be great at investing
Asset allocation and diversification
Growth asset classes
Defensive asset classes
Cryptocurrency
Risk it to get the biscuit
Risk profiles
6 move over Warren Buffett, I'll take it from here
Passive (index) vs active investment styles
Building your portfolio: why diversification matters
‘Buying shares is just like gambling’
Mechanics of share investing
Before you start investing
Understanding fees and costs
Start investing
Basic taxation and dividend reinvesting
Ethical investing
Investing overseas
Investment bonds (and investing for kids)
Financial advisers and professional help
Note
7 property and mortgages: how to pass go with a plan
Key stakeholders
Learning from other people's mistakes
8 steps for buying your first property
Mortgages and lending
Finding a mortgage broker
looking at important topics
8 superannuation: your first-ever investment account
A tax-effective environment
Investment options inside superannuation
When should I add more money to superannuation?
Superannuation investment options and fees
Compare your own fund
What investment option should you choose?
How to get money out of superannuation
Self-Managed Superannuation Funds (SMSF)
9 sex, drugs and insurance
Life insurance
Personal insurance
General insurance
where to from here?
Stay motivated
Slow down and help others along the way
Get personal help for your situation
money myths, hacks, luxury items and digital assets
Money myths
Money hacks
Cryptocurrency, NFTs and digital real estate
disclosures
index
End User License Agreement
List of Tables
Chapter 4
Table 4.1: the weekly spend account
Table 4.2: the cash hub account
Table 4.3: the GCHC account
Table 4.4: your income
Table 4.5: setting up automatic transfers from your cash hub
Chapter 5
Table 5.1: types of assets
Table 5.2: examples of risk profiles
Table 5.3: balanced fund comparisons
Chapter 6
Table 6.1: Vanguard product comparison
Table 6.2: international indexes
Table 6.3: top 10 shares in the ASX 200
Table 6.4: examples of index funds
Table 6.5: examples of active funds
Table 6.6: share price example
Table 6.7: fees and what they mean
Table 6.8: real fee example
Table 6.9: Perpetual scoring methodology
Table 6.10: Perpetual Ethical SRI fund vs BetaShares Australian Sustainabili...
Chapter 8
Table 8.1: salary sacrificing
Table 8.2: comparison of super funds
Table 8.3: Hostplus comparison
List of Illustrations
Chapter 4
Figure 4.1: Maslow's hierarchy of needs
Figure 4.2: my money hierarchy
Figure 4.3: my money hierarchy with examples
Figure 4.4: the Glen James Spending Plan bank structure
Chapter 5
Figure 5.1: example of asset allocation return
Figure 5.2: a modern portfolio in action
Figure 5.3: annual return and asset allocation. If some is good, more isn't ...
Chapter 6
Figure 5.1: Vanguard price chart
Figure 6.2: example chart of CBA, IOZ, VDGR and WBCSource: FE FundInfo. Retu...
Figure 6.3: the relationship between your share broker, the ASX, the shares ...
Figure 6.4: my management fee example matrix
Figure 6.5: screenshot of an online brokerage account
Figure 6.6: Perpetual Ethical SRI Fund vs benchmarkSource: FE FundInfo. Retu...
Figure 6.7: Betashares Australian Sustainability Leaders ETF (A) vs Perpetua...
Chapter 7
Figure 7.1: my property risk/return spectrum
Figure 7.2: 8 steps for buying your first property
Figure 7.3: a risk matrix for lending
Figure 7.4: how parental guarantee works
Figure 7.5: how a vanilla mortgage works
Figure 7.6: how a mortgage account with a redraw facility works
Figure 7.7: how a mortgage with an offset account works
Chapter 8
Figure 8.1: how superannuation works
Figure 8.2: making extra contributions to your superannuation
Figure 8.3: growth of Australian Super vs Aware SuperSource: FE FundInfo. Re...
Figure 8.4: the importance of superannuation in retirement
Chapter 9
Figure 9.1: three ways to obtain life insurance in Australia
Figure 9.2: example of stepped vs level premium costs
Figure 9.3: private health insurance decision tree
Appendix
Figure 1: Darwin weekly asking prices for houses (top line) and units (botto...
Figure 2: Perth weekly asking prices for houses (top line) and units (bottom...
Figure 3: Hobart weekly asking prices for houses (top line) and units (botto...
Guide
Cover Page
Title Page
Copyright
Dedication
Table of Contents
Introduction
Begin Reading
where to from here?
money myths, hacks, luxury items and digital assets
disclosures
Index
WILEY END USER LICENSE AGREEMENT
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First published in 2022 by John Wiley & Sons Australia, Ltd
42 McDougall St, Milton Qld 4064
Office also in Melbourne
Typeset in FreightText Pro 11pt/15pt
© UrbanGhetto Pty Ltd. 2022
The moral rights of the author have been asserted
ISBN: 978-0-730-39650-5
All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.
Cover design by Jason Knight, creative director of Brand Solved
Front cover photo: David James
Front cover and internal image (money in the air): © Cammeraydave/Dreamstime.com
p138: Coroner photo: © Elnur/Shutterstock
Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.
This book contains general advice only. It does not contain or replace your own personal financial, taxation, legal or financial product advice.
I wish to acknowledge the Darkinjung people, traditional custodians of the land on which I live and work, and pay respect to their elders past, present and emerging.
I wish to extend that respect to all Aboriginal and Torres Strait Islander peoples who may read this book.
hi, I'm Glen!
Congratulations on getting invested!
This book might be your first investment: an investment into yourself and your understanding about money, mindset, behaviours and investing.
Before we get into it, let me tell you a bit about me.
I run a podcast called my millennial money. I'm a millennial so the language I use on the podcast is ‘millennial’. However, I believe the basic laws of money and investing don't discriminate and we can all learn about them and apply them to our lives and goals.
This book is not for any specific age group, but I do use millennial talk a bit, so you'll come across terms such as TL;DR (too long; didn't read). The TL;DR section at the beginning of each chapter is for those of you who, like me, just want a list of points about what's in the chapter.
In addition to my podcast, I also have a website called ‘Sort Your Money Out’. The website is home to the Glen James Spending Plan online course, which I mention in this book. It's a place where Australian podcast listeners and blog readers can go to be connected to trusted professionals (financial advisers, mortgage brokers, accountants and lawyers) when they need help. I also run a Facebook group called ‘my millennial money’ that you'd be welcome to join; it's a great community of like-minded people.
Lastly, this book is not a textbook. Rather, it's a collection of my thoughts, and methods of doing things that I have seen over the years and have used myself. It's impossible to serve up individual financial advice about your own circumstances in a book or a podcast — that's why I am pro professional help for people at key moments in their life.
I'm just here to encourage you and if that’s all you take from this book, I believe I've done my job. Over to you.
Enjoy the read,
introduction
I am not a writer and I hate reading. I am not an economist and I hate maths. I am not a behavioural therapist and I hate getting told what to do. I am not a naturally frugal person and I hate budgets. I do, however, happen to be a retired financial adviser and I have been in an ideal position to observe what works and what doesn't work when it comes to people's personal finances. I have seen hundreds of individuals' secrets (good and bad!) when it comes to money and how they do things. My own struggles with wanting to spend every living cent that walks into my life meant that I needed to create a system that works on its own and allows me to not have to think or care about money day to day while still saving and building wealth in the background.
When it comes to money, personal development, goal setting and motivation, I love books that are of a self-help nature. (Yes, I hate reading — so I listen to audio books.)
There are some books that I love because they nail certain concepts, but I would struggle to recommend them to you as they are American and not specifically relevant to our way of doing things in Australia. Don't get me wrong: while there are many things to glean in every book, I wanted to put something together that was clear, concise and could be read over dinner. A pamphlet, even. (If you've watched Curb Your Enthusiasm, where Larry David and Jerry Seinfeld hassle Jason Alexander for his book Acting without Acting, you’ll know what I’m talking about.)
If this book encourages and changes only one person, I will be happy. I understand that my way of doing things may not be the silver bullet you're after (if you find one, please let me know), but it is a way that works and will work for most people. The trick is to live purposefully with your money and to have a system in place that works for you and your particular personality style.
I will show you how to set up your personal finances so you never feel broke again. (I am not talking about joining a powerball syndicate with friends at work — but hey, if the shoe fits, right?)
I will show you step by step how easy it is to invest for your future and teach you enough that you will feel empowered and be informed to make your own decisions.
I will show you how to set up your financial life from the ground up so you build it in the right order.
Yes, I may be provocative and sarcastic; however, I will be extremely practical and will give you the tools to win in all areas of your finances.
Make sure you look at the resources at the end of each chapter as there will be useful tools for reference along the way.
Life On Own Terms (LOOT: my version of FIRE)
Financial Independence Retire Early (FIRE) is a movement of people who follow a mantra of being able to live your life your own way and working towards having financial autonomy not linked to a source of income that you have to work for (e.g. salaried employment). It's the ultimate goal of amassing enough passive income so you don't have to work! Love it! At the risk of offending thousands of people who are dedicated FIRE followers, I believe this movement can be summed up as ‘just do what you want on your own terms’. (Sorry to offend you so early in the book.) This is why I prefer to use the acronym LOOT. That being said, throughout my life I have always had a recurring existential crisis in my mind. Like, does anything actually matter? What is the point? Why should we conform to societal norms? We are just floating on a speck of dust travelling 1600 kilometres per hour into infinity.
Now, that thought can become pretty heavy on the mind, so to counteract it, I often find myself thinking about life as a game. There are laws that our human societies have agreed on, but on balance we are fortunate enough to live in a world — and particularly fortunate to live in a developed country like Australia — where we can generally do as we wish. Please don't go quoting any Maslow's hierarchy of needs at me saying I am just pursuing self-actualisation and I am a privileged and entitled brat (guilty). That would be weird; however, as I was having these thoughts at a very young age, maybe I was a brat and have not grown up since age 12.
We should on occasion step back and have a detailed look at our own situation and life from a different angle, as perspective can make a world of difference. It could be the difference between a park full of people re-enacting the ‘Thriller’ music video or individual people holding up the Leaning Tower of Pisa (if you’ve seen the meme). Perspective matters.
If you are part of the millennial generation or Gen Z cohort, you may have been influenced by the perspective of a parent, grandparent or other significant influence in your life — and if not a specific person, you will have been influenced and moulded by society in general.
The trap in this situation is that Gen Xers and baby boomers lived in different economic conditions from those that exist today.
It used to be pretty linear: it went education, then work, then retirement. A job for life and then out to pasture. The average age for the big events in Australians' lives has basically shifted 10 years further into the future compared with the baby boomer generation. Fifty years ago, people reaching age 65 were considered ‘old’. Nowadays, age 65 is considered being within the ‘lifestyle years’.
Why do we build our lives on a structure that is modelled from another era so different from today's? Why do we go to work, go home, sleep, rinse and repeat? Why do we get told that we have to save for a magical line in the sands of our time — age 65 — so that we can then suddenly stop the conveyor belt of our working life to do nothing but enjoy life in retirement?
Well, I'm here to say that from this time on, things will be different. For example, at the time of writing I am mid-30s and I am working in my third occupation. I left school at age 16 and commenced a trade (telecommunications), then re-trained and studied financial planning (which I worked in for about 15 years), started a passion project on the side and now I am a full-time podcaster with a team of people that has morphed into some weird new media company. What the heck will the next 10 years look like? My point here is, I'm like many others — there is no longer one career for life.
If you are reading this and saying, ‘But Glen, I love my job and life!’, that is perfect. You are killing it. Keep it up.
If you're just leaving school, at university or under 30, the key to life at this stage is to keep away from consumer debt and keep your cash flow as lean and agile as possible (all of which I will help you with in this book). It is a good rule for any age, to be honest.
You may be reading this thinking you have found yourself on a treadmill of working to live, you have no real passion for what you are doing and you feel too old. Let this book be the sign you are after: you can change; it is not too late. Anything is possible with your life and your money. Perhaps you have been in the workforce for some time, have financial commitments that are beyond you (in other words, you're in a crap load of debt!) or you're just bored. You have been accustomed to a life of apathy and have accepted defeat. That is the last we will speak of it. You need to decide enough is enough and start to make a change. This book could be the catalyst you need.
I want you to think, is your life how it is now because of a specific person in your life who is influencing you with their perspective on how things ‘should be done’? Has your mindset been influenced by a societal structure that has changed over time? You might be thinking, ‘everything is fine, I want “the Great Australian Dream” ’. Do you even know what that is and who made it up? Well, I don't know the name of the person who envisioned the Great Australian Dream or coined the phrase, but it is a derivative of the American Dream in the 1940s and really took off in the 1950s and 1960s. The Dream was basically to buy a home as this was a symbol of success and the house provided security. Yes, I get it — the security of owning an owner-occupied (your own) home must surely be a good thing, right? But why are we applying 1940s (almost a century ago) logic to today's crazy house prices and way of life?
Your job while reading this book is to step back and look at your life and finances from the perspective of the you of tomorrow. What would the you of tomorrow want you to do? How would they want you to handle money? Would they want you to put some money away for them? Would they want you to set up your life now right, so they are in the best lifestyle position? If you're not happy with where you are at, let's change that now!
I'm setting the new Great Australian Dream … LOOT: life on own terms.
Your own terms might include buying a house and having one job for life. Great. I love it. But don't just jump into the car, flick on cruise control, get a blindfold and then at the end ask, ‘How did I get here and who set the course?’
I love that the new Great Australian Dream does not include any ‘have to’ pressures; it does not include particular physical things to attain; it does not include a strict formula such as EDUCATION > WORK > RETIRE … it is whatever you bloody want it to be!
Grab a highlighter or a pen. Scribble everywhere in this book, scrawl dreams across these pages. Be encouraged by these chapters and, of course, dog ear the paper corners. My hope is that by the time you have finished reading you will need to call the paramedics as you will have just given your primary school librarian a heart attack (remember, in primary school, the anal librarian drumming into us about damaging books?).
This book does not need to be read in any order (but it does help to read it in page order). If you see anything you want more clarification on, feel free to highlight or circle it so you can ask a professional (financial adviser, mortgage broker, accountant, etc.).
Now, let me help you sort your money out.
let's get this party started!
1debt and how to get out of it
tl;dr
Never, ever consolidate debt. I'll tell you soon why this is a very bad idea.
There's good debt, bad debt and ‘life debt’.
I'm not a fan of car loans. The car yards have signs that read ‘Cash for cars’ — this should be your life motto too!
Keep making only minimum repayments on your mortgage until you are out of consumer debt.
Consumer debt is money that's borrowed to pay for products which are then consumed (e.g. personal loans, credit cards, buy-now-pay-later programs, store cards, car loans and holiday loans).
Don't worry about HECS/HELP debt … for now.
The truth about credit scores: should you be concerned about them?
In my view, BNPL (buy now pay later) products are the payday lenders of this generation and can cause you to think you are good at managing money — but honestly, they are financial cancer.
I would only consider loans from family and friends if you have absolutely no other option — and make sure everything is in writing.
Debt and mental health: overspending can put you in a dark place, but it's okay to seek help.
If you want to skip the summary about types of debt and all that, page 16 has my 5 steps to get out of debt.
My view on debt? I don't like it. I don't buy into ‘good debt’ or ‘bad debt’. While many financial commentators talk about these two types of debt, for me it's all one category: the category of ‘I'd rather not have it or need it’.
According to the Financial Review, in May 2021
31 per cent of Australians reported being under financial stress, meaning they had difficulty paying for essential goods and services. This was higher than the 26 per cent who say they are just making ends meet.
In March 2021, the Financial Review also reported that ‘[b]orrowers with high levels of debt-to-income experience high levels of mortgage stress and are more likely to default’.
Being debt free is a major goal for so many people. It's important for two reasons. The first is a hard and fast reason: if you have consumer debt you're overspending and to make things worse, you're paying interest for overspending. It's like you're playing poker and are about to double down, but you're on the Titanic so things are about to get much worse. It's a lose-lose situation. It also makes no financial sense to be in consumer debt, borrowing for items that are going down in value. We all know this but many of us have been caught in the trap. This is because it's more about behaviour than ‘sense’, which leads me to the second reason that it's important to be free of consumer debt. You will become a different person; you will likely cease to be just a consumer and be more focused with your life. Your spending plan will be in order, you will have more money to put to things that matter (future you!) and you will honestly feel like you're making progress in your financial life.
Now you may be asking yourself, ‘What about investing? What about shares? What about buying a property?’ No. No. No. Everything else is on pause. Because nothing else matters if we can't get your debt and spending habits under control first.
Debt consolidation: a cautionary tale
David came to see me in my financial advice practice when he was 63 years old. David was married and his wife was not in the workforce and was not present at the meeting that day. David was clearly a hard worker and I would assume he had been his whole working life. He had come to see me for some pre-retirement advice. Depending on the circumstances, age 60 can be a magical time for financial planning due to superannuation rules. However, the most magical age to start planning your future is now, if not yesterday. Not at age 63.
Most of the time as a financial adviser, I did not really care in a ‘clinical sense’ about the backstory which had led to a client's financial situation. Sometimes if there was a big, juicy lump of money involved I might ask to satisfy my own curiosity, or it might naturally be raised as a talking point. If a client had a significant amount of debt, I might also enquire to learn what had been the cause of it so it could be addressed and hopefully avoided in future. I tend not to ask too many unnecessary questions because you learn early on in financial advising that if you ask too many questions and give people an inch, they take a mile and tell you their entire life story, which tended not to be relevant either to me as a person or to providing financial advice. My approach with clients was mostly, ‘we are both here now — let's deal with what needs help’.
I assumed that David's financial backstory would have been pretty boring, fairly common and typical, so I didn't ask.
The current financial situation for David and his wife was as follows:
Annual household income: $70 000
House value: $550 000
Mortgage remaining: $100 000
Superannuation: $130 000
Personal consumer debt: $32 000
Savings: less than $5000
Car value: $30 000
Car loan remaining: $16 000.
You don't need to be an economist or personal finance expert to look at David and his wife's personal financial situation and know they were not in great financial shape to retire comfortably. There were many potential reasons and common reasons why this was the case. For example, a 63-year-old may have been self-employed for most of their working life without making superannuation contributions and only recently changed to salaried employment, which would explain the low superannuation balance. They (or their now adult children) may have suffered a significant medical event earlier in their life that had derailed their savings. Maybe they had been sued and had to declare bankruptcy and start over at some stage. Who knows?
Usually, people will tell a financial adviser about a big event that had greatly affected their finances as a way of explanation. But David didn't offer any explanations, stories or even excuses. Unfortunately, the most common backstory of people in situations such as David's is that they have spent more than what they earn, lived payday to payday and been in a debt cycle since their 20s or 30s. At the risk of sounding like I have no empathy or emotion to get the point across, some people like David have just been a frog in a pot boiling over the past 30 years and it is only at age 63 that he has actually realised that he is boiling and it is probably too late to do anything significantly helpful.
The issue with David's situation is not the debt itself. We often assume that the debt was the problem and I imagine David may have thought this too throughout his life. But David was planning to retire in only a couple of years at age 65. He asked me, ‘Should I refinance the mortgage to clear the personal loan and car loan?’ In other words, should he consolidate the debt into his mortgage because the debt is the problem.
The problem was that from a very young age David and his wife had done three things:
they had never managed their money responsibly — which led to
living on more than what they earned — and
they continued to refinance their debt into their home mortgage and then restarted the cycle of accumulating further debt.
I reached over to the phone to call 000 because I was concerned that David was about to have a heart attack in my office when I told him there wasn't much I could do for him. You see, people think coming to see a financial adviser gives them a ticket to this magical world of rainbows, sunflowers, unicorns and a wand that removes their debt. This is far from the truth. I have no magical tickets or wands.
I am being a little dramatic here. I did tell David this:
At that time, earning $70 000 per year basically gave David and his wife an after-tax income of approximately $1056 per week. Due to their debt, they had been spending more than $1056 on a weekly basis.
I had to explain to David that he didn't have a lot of options. At the time that David was planning to stop working full time, his superannuation ($130 000) would need to be withdrawn to clear the mortgage debt ($100 000) and repay most of the personal consumer debt ($32 000) because he would have no other additional income source to repay those loans. This means David would be retiring at age 65 (his intention) with a paid-for house (great!) and the age pension, but no other assets to produce any extra income. Also, David would not be able to apply for more debt to fund any lifestyle luxuries, fun or other stuff because you need a job to get a loan (to show the lender that you have the capacity to repay it).
This is why it's important to get rid of credit cards if you have a problem with them well before you retire. In my opinion, any loan given to a person solely receiving the pension should be illegal!
In the usual circumstances, a couple retiring in Australia today would normally receive around $718 per fortnight each in government support, aka the Age Pension (this is the maximum and how much they receive depends on their assets other than their home). We would plan to top up the pension payment with a small additional amount each week from their own retirement savings so their standard of living in retirement remains largely unchanged. Since the retirement savings would be depleted due to clearing the mortgage and personal consumer debt, if David wanted to keep his current car (worth $30 000 with a loan of $16 000), his only remaining task before hanging up the tools in a couple of years would be to repay the car loan and then try to learn how to manage money while slowly adjusting to a much lower income.
To be honest, there was not much I could do for David and his wife other than offer some practical help with budgeting and cash flow and try to help them change their habits and behaviours during the last couple of years that David would be working. Further, I suggested to David that if he did like his job and felt he had the energy and health to keep working, he should consider only a transitional semi-retirement at age 65.
What does David's story mean to you reading this? If you are in debt and you are not imminently close to retirement, you have one thing that David and his wife did not have: time. Time to change your behaviour and stop overspending. Time to attack your debt and decide that you are breaking the cycle and you are not using consumer debt ever again. Time to learn how to manage your own money. Time to live on less than you earn. Time to systematically invest money, even smaller amounts, over the long term, to assist in retirement.
If you don't have debt, life will reward you. You not only get to leapfrog people in debt to start investing, you also get to live life on your terms, not tied down by repayments. You are also entitled to this shortcut in reading my book: skip the rest of this chapter and move on!
I want to also acknowledge that there are some members of our community who are older and who did not have retirement savings available to them during some of their working life. If that is you, it's okay. We're here now — let's get on with it.
You'll hear many people suggest that consolidating your debt helps solve your debt problem. I'm sorry (not sorry) to say: it doesn't. You've just moved the debt from here to there. By combining a car loan, credit cards, personal loans, financed cars or furniture and rolling them into your mortgage, for example, it feels like you have made things simpler. But you haven't — the debts are still there. The best thing to focus on is paying the debts off completely, one by one (using the Debt Snowball method explained later in this chapter). It is also important that you look at your spending plan and change your habits. You must stop the potential for any future debt creation by nailing your habits now. Don't let any further consumer debts accrue. The best kind of consumer debt is … none.
Good debt, bad debt and ‘life debt’
I hate debt. The thought of something or someone hanging over me that can cause me to change my situation or strategy without my control just irks me. I do have a mortgage on my home; and the mortgages on my investment properties are principal and interest loans (I talk about this in chapter 7) because I want the debt paid as soon as possible.
Now I am not a debt junkie. I don't believe in consumer debt or ‘bad’ debt. I don't even like using a credit card, like the ‘financially savvy’ people out there who use cards to get points and pay them off immediately so no interest accrues, blah blah … I just don't want crap hanging over my head.
When I read books about people who have purchased a million properties in 10 minutes and so on, I always think, ‘Why wouldn't they de-risk and de-stress and only have half the properties without any debt?’ Anyway, this isn't about my property debt philosophy — I am just using this opportunity to drive home the fact that I don't love debt however ‘good’ it is claimed to be.
When you hear other ‘money people’ talk about ‘good debt’ and ‘bad debt’, it can be summarised as follows.
Good debt:
Debt where the interest is tax deductible as the debt is secured against an appreciating asset. Likely to be used for wealth creation and has a low interest rate. Sounds good!
Examples: investment property mortgages, a loan to buy shares, business loans
Bad debt:
Debt that has interest (usually quite high) that is not tax deductible and the debt is not secured against an appreciating asset or any asset at all. Sounds bad!
Examples: car loans, personal loans, buy-now-pay-later products, credit cards, interest-free store cards
I believe there is a third category of debt, which I like to call ‘life debt’. This debt is sometimes just part of a functioning life in our society. This type of debt is not tax deductible, but it doesn't fit into the two traditional good/bad categories of debt.
The two main life debts I am talking about are your home mortgage and your HECS/HELP debt. Some might even categorise HECS/HELP debt as ‘good debt’ as this debt is secured against an appreciating asset (you, the income earner), but it is not tax deductible. Ideally, your home mortgage should be linked to an asset that is increasing in value over time, but this is also not tax deductible.
While I don't know everyone's situation, it is safe to say that your initial focus should be on clearing all consumer debt, or ‘bad debt’, and resolving not to enter into debt again in your life. I honestly believe that if you are consumer-debt free, you have your financial foundations in place (more on this in chapter 3) and you have leftover money in your spending plan, then you should get personal financial advice from a licensed adviser about whether paying down your home mortgage or investment debt is beneficial to your personal circumstances compared with investing elsewhere or making extra contributions to superannuation. I won't (and can't) give a one-size-fits-all answer to this type of ‘life debt’ because it will depend on each person's individual circumstances. As I mentioned, my own home mortgage and investment property mortgages are all principal and interest loans. I don't pay any more than the minimum, but I am investing elsewhere and I maximise my superannuation contributions each year. This works for me and my personal circumstances right now, but it might not work for you.
If you no longer have any consumer debt and you'd like to be connected with a licensed financial adviser, check out the resources at the end of this chapter. If you already have a financial adviser in your life, once you're free of all that bad debt it might be a good time to go back to them and talk about the goals for your financial life.
Car loans
I'm not a fan of taking on car loans. Here's why.
The problem with a car is that as soon as you drive it out of the dealer's car yard, click the seatbelt on and put it in ‘D for drag’, the car is likely to be worth less than the amount you borrowed for it — and that's not even taking into account the interest you'll pay over the loan term. In addition to that, the vehicle will decrease in value every single day. I can hear the big D (Trump), who wrote a book called The Art of the Deal (which I haven't read), saying, ‘It's a bad deal’.
Not only are you getting screwed from day one in terms of the amount you owe versus the car's depreciating value, but you've also given yourself no psychological pressure or resistance for borrowing to purchase it, which can amplify the negative financial effect.
For example, paying $18 000 upfront for a car might be a lot of money for you, but $92 per week sounds very doable. If we lived in a world that didn't have car loans, you probably couldn't stomach saving up that much money and transferring it in one transaction to an item that will immediately decrease in value, and possibly be dinged and treated like crap (I've seen how some of you look after your cars!).
You're likely to end up paying less for a car that you pay cash for due to the psychological hurt from the process of coughing up $18 000 of savings. You might decide that $10 000 is more reasonable and that you can invest the rest and make it grow.
I used to be pretty hardline with my view on car loans. When it comes to getting your habits and behaviours sorted, I would prefer that you try and change your other major money habits first rather than me insulting you and turning you off by saying you can't have a near-new or brand-new car that stinks of plastic and toxins curing (I mean, that ‘new car’ smell). I'd rather win the war with your total financial picture as opposed to losing a battle on cars.
While it might be beyond the scope of getting out of debt completely, if you ‘must’ have a ‘good, safe car’, I would use these rules of thumb.
A car that is approximately three years old with fewer than 60 000 kilometres on the clock is usually a good deal. This is because the car's value has already had a huge hit in terms of depreciation.
Ensure the car is worth no more than 50 per cent of your annual after-tax income. This is a good guide to stop you having ‘too much car’. If you have a spouse or partner, the total motor vehicle capital value combined (i.e. the total worth of the car/s owned by both of you) should be less than 50 per cent of your combined after-tax household income. To be frank, this should also include boats, motorbikes and any other toys with motors.
For example, if you earn $60 000 per year, you would pay approximately $10 000 in tax, leaving you with a $50 000 annual after-tax salary. You certainly wouldn't want your car to be worth more than $25 000. This is the maximum limit and will keep you from tying up too much money in assets that are decreasing in value. You may choose to be more conservative and set a limit of spending only 25 per cent of your gross annual income. On an annual income of $60 000, 25 per cent would be $15 000.
Choose whatever formula you like for your vehicle spending limit, but either way, have a rule for your life and stick to it. What if you averaged both of the above rules out? Now the car shouldn't be worth more than $20 000. I may have created a new formula for myself just now!
If you ‘must’ (!) have a car loan, I recommend not having one for more than four years (48 months) to ensure you're not paying off your car forever.
Most car yards and car finance providers generally quote the weekly or monthly repayments over a five- or seven-year term. They do this because a longer loan term lowers the weekly repayment amount, making the car sound more affordable and getting you emotionally invested into buying it.
If you're thinking ‘Screw you Glen, I still want a loan for my next car’, put down a 20 per cent deposit (i.e. only borrow 80 per cent). This will generally ensure your car isn't worth less than what you owe on it because your deposit should cover the depreciation. This approach will also slow you down a little bit and ensure you don't spend too much on your car.
A final word
on car loans
Unless you have salary packaged a car, you live in your car (long commuter or sales rep) and/or it has been calculated by your accountant to show that you're able to save tax by paying for car costs pre-tax, you need to decide whether you should try to pay cash for your future cars. This will generally slow the purchasing process down while you save the amount needed and tends to result in more careful decision making and not spending as much on a car as you would if you used debt to purchase one. Psychologically, it ‘hurts’ much more to spend your own saved money than to get a loan.
If you have a mortgage and equity in your property, it's sometimes tempting to refinance the mortgage to buy a car. I still believe using your own cash will stop you overspending on a car. If you do, however, think, ‘It's all good, Glen, I got this’ … please make sure the broker sets up a separate loan for the value of the car, and pay this down over four years. You don't want to be paying the car off for the next 20+ years.
Your home mortgage
If you have a mortgage and you are also in consumer debt, I would recommend that you don't make extra repayments on your mortgage at this time — just make minimum payments until you have no consumer debt. Speak with your mortgage broker to make sure your mortgage has a competitive interest rate so that you are not blatantly getting screwed by paying additional interest. If your mortgage has not been reviewed by a professional recently, it could be a good opportunity to do this — go to the resources at the end of this chapter for information on how to contact a mortgage broker.
Here's a tip: If you're refinancing your mortgage, make sure you ask your broker to refinance it to the current term left on the loan — don't refinance it to a fresh 30-year mortgage. Refinancing to a new 30-year mortgage will mean that you end up paying more interest over the longer term. Additionally, remember my comments about debt consolidation? Refinancing your mortgage to a fresh 30-year loan follows the same concepts as debt consolidation.
Try to limit your mortgage repayments to no more than 30 per cent of your take-home household income. Repayments that are 25 per cent are great; 20 per cent or less is amazing. This recommended limit also applies to your weekly rent, for those who don't yet own a home. The more your rent or mortgage repayment is over 25 per cent, the higher the chance of you ending up in consumer debt again because you won't have as much money available for living or unexpected expenses!
My 5 steps to get out of debt
If you're still with me, you will most likely by now have assessed your debt situation, even if only in your head. If it's not looking good, it ain't no thing because I'm going to help you. I'm a bit basic and love steps, so here are my five steps for getting out of that consumer debt hole. Some of the steps might seem counterintuitive but sometimes we have to try different things to make positive changes to our lives. Remember, if you don't like my philosophy on consumer debt, you can always stay in debt .
Let's look at the steps one by one.
Step 1: you must hit rock bottom
You must, must, musssttt decide and agree with yourself (and maybe your partner, if you have one) that from here on in there will be no more consumer debt in your life. You need to be resolute. Starting to get out of debt will be close to impossible if the debt is continuing to grow or if you go for a couple of weeks or months and then you're back at the checkout with your plastic or buy-now-pay-later app, ready to throw it around like in a terrible 1990s comedy movie.
The reason you must first decide that enough is enough is because it's honestly a waste of time and energy if you start trying to get out of debt and when the next flashy item appears you're straight back to using debt to make a purchase. That's because you're not disgusted enough with yourself yet (hehehe, I'm remembering myself before I was done with consumer debt!).
I like to think about mindset and philosophical things when it comes to consumerism. In Australia, we have it pretty good — it's not as crazy as the USA, which has a hyperconsumerism-motivated society (though I think this is slowly changing). I once saw an average house in mid-west suburbia (Columbus, Ohio) where a guy was riding his ride-on mower in the front yard — most likely purchased on finance. It's probably rare to see someone in Australia riding a lawnmower in suburbia — although my dad purchased one because he got it ‘cheap’. Okay, Dad. At least he paid cash (and went halves with a neighbour — ha)!
Many people in the world (approximately 9.6 per cent of the world’s population) live on under US$2 per day. I sourced this figure from a book by Peter Singer called The Life You Can Save. Now, compared to the poverty and limited means that the majority of the world's population relies on daily, looking at the consumerism machine that our privileged, Western society celebrates makes me think that enough is enough. I want out. I need out. I think about how the rest of the world lives and compare the fact that I have borrowed money, paid for the pleasure to borrow it (interest) and then consumed an item of luxury — and I feel ashamed of myself and our society.
You need to reach a point where you decide that debt is negative, self-limiting and that it should have no place in your life from now on. There is no point starting to get out of debt unless you are aware of the fact that debt is a terrible thing that has not really brought you any blessings this far.
It is perhaps more important now than ever before to be resolute in your philosophy around consumer debt because technology has advanced to the point where we can enter into debt more quickly and easily than ever — just one click on ‘install app’ and the cycle restarts. Conversely, it has never been so easy to invest for the future and manage your money with the use of technology.
If you are truly not at a point where you are serious about stopping your debt cycle, I suggest you stop reading now and get on with your day. Don't waste your time reading this book (hehehe).
Everything we do in personal finance and building wealth is based on the fundamental principles of spending less than we earn, having a good cashflow system and investing for the future.
The reason I harp on about the importance of making a personal resolution to no longer have debt is because I have seen too many people put so much energy into paying off their debt, then enjoying a couple of months without debt and loving life, and then running back into debt with ‘all the extra money they have’. It's just not worth the huge effort in trying to clean up your act if you are only going to relapse.
I hope that by the end of this chapter you'll be ready to cut up the credit cards, close the loan accounts and delete the buy-now-pay-later apps.
If and when you reach the point in your life where you are ready to say goodbye to debt, keep yourself accountable and share the resolution by filming yourself cutting up the cards (or do a screen record of yourself deleting those apps) and tag me on Instagram! @mymillennialmoney
Step 2: get your money system in place
For as long as I can remember (probably since I was 16 years old) I have read and listened to personal finance resources and motivational speakers from all around the world. Personal finance speakers often use the analogy of ‘You Incorporated’ as a way to get people to step back and see themselves as a company or corporate entity with ‘you’ being the boss. If this is a new concept to you, effectively you are the CEO of ‘You Inc.’. Would you expect a company that has a good, stable income and expenses to have zero systems in place to manage its cash flow? Of course not, so that's why you must have a cashflow system in place for yourself.
Since you have decided that you are done with debt and never looking back, your focus should now shift to setting up a good cashflow management system. Your cashflow system should be automated and remove you from the process as much as possible.
While you are doing this, I would suggest that you place all your consumer debts on minimum monthly repayments only and forget about them for the next few pay cycles as we need to get some good habits and behaviours flowing around spending and managing your money.
I want you to not worry about doing a million things at once. I want you to trust me and try my way — with respect, your way of handling money has not worked so far if you are currently stuck in consumer debt.
So you are paying only minimum payments on your consumer debt and focusing only on setting up your cashflow system (see ‘Setting up your spending plan’ in chapter 4). I want you to not only see the light at the end of the tunnel, but also to feel it! You see, if you conducted a financial autopsy on the average person's consumer debt, you would probably find that there is a car loan, a credit card that they can't shake or a buy-now-pay-later (BNPL) program that goes round and round and maybe even a personal loan from something another life ago. Generally, personal loans and credit card debt mean that there is no financial asset linked to them and the debt/money has been spent at the discretion of the purchaser. Lending money which is not secured against an asset is risky business because there is no guarantee that the lender can recoup the loan amount should the borrower fail to repay it (also known as ‘defaulting’). In turn, this is why credit cards generally have higher interest rates: the bank can't rock up and sell the nice holiday that you enjoyed or the shopping trips you went on to recoup their money and pay off the debt. Most consumer debt (such as credit cards, cars, personal loans and BNPL) is not usually from one big item purchase (with the exception of a car purchase, which decreases in value anyway) but rather lots of different things here and there without any real system in place to manage money.
In short, you may have suffered a death by a thousand cuts and you have been systematically overspending. Don't you just love consumerism?
If you are in this situation, I want you to pretend that the new CEO of You Inc. has a mess on their hands. The business needs to run as usual, which is why you can't simply stop paying rent, mortgage or grocery bills to throw 100 per cent of the available money onto the debt — if you do, the business will stop functioning. The first thing the new CEO must do is put a working system in place, even if this means that the balance sheet (the financial statement of a company — in this case, You Inc.) has some debt that needs to be cleared. It takes time to fix a mess. It's understandable that it will take at least a few pay cycles for the new strategy to be installed and to take effect.
Think about this: you're on a boat and there's a slow leak. What's more important? To start bailing water out because you're worried that your feet might get wet or to stop the leak? If you spend time stopping the leak and fixing what caused it, it's okay to have a bit of water on your feet. I understand that some of you might be up to your neck in water, but it's still more important to stop the leak and put a system in place to ensure the cause of the leak can never happen again.
My point is that there's no sense simply paying down debt until you first decide that you're not going into any more debt (as we saw in step 1) and now you are going to work on yourself and the systems in place. I'll show you how to get a money system in place in chapter 4, but I want you to know that dealing with habits and behaviours takes time and that's totally fine because this time you are now serious about getting out of debt.
Step 3: focus on building an emergency fund
You've come a long way. Yes, it's been small steps — purchasing this book, being keen to change and hopefully being challenged by steps 1 and 2 — but you've decided that enough is enough, and it's time to do things differently.
That's if you have totally agreed with changing your mindset around debt. Remember, there is no rush here and I will celebrate with you on any movement you make. It can take time. It's okay.
You don't want to fall back into debt once the debt repayment campaign has started. The reason why steps 1 and 2 have to be completed before step 3 is because we're about to get drastic.
