Saving | Slack Investor

The Slack Way to Financial Freedom: Episode 1 – Saving

Generational wisdom … Homer style. – From Source (May be subject to copyright)

Now Slack Investor admits to being a lucky bloke. and recognizes that many are doing it tough and just haven’t got the income to engage on a savings program. This post is not for you, and I hope that your fortunes will turn around soon. This post is the first in a series – for people with choices on how they spend their income.

Save more than you spend … Duh! – Obvious you would think – Sorry Homer, It is worth doing!

According to a June 2018 Members Equity survey , of Australian households, less than half of them are putting something into the savings bucket each month.

Households who ‘typically spend less than they
earn each month’ (i.e. savers) eased further to 48%

Not only are the savers decreasing, but at the other end of the scale, the number of households that are in financial distress is increasing. The ME Bank report shows that more Australians are overspending – households who ‘typically spend all of their income and more’ increased 3 points to 11% during the six months to June 2018. Cripes!

Now the hard truth is out there … what can you do? Slack investor doesn’t pretend to have invented how to save. Any financial website will contain similar information. The advice is sound because it works. Just get started … this is the first step.

“Go and have a long hard look at yourself in the hall of mirrors” Roy and HG

Analyze your financial situation … Over a month or two, see what is coming in and what is going out. Many banking apps assign categories for your monthly spending in your statements. A pen and paper would do, but free software makes this task easy ( e.g. for PC, MS Money Sunset (Slack Investor way); or Phone: Pocketbook). Track your financial habits – you have to get an idea of what is going on in your financial world first … and then, take control.

2. Set yourself some savings goals. ...

Now the interesting part, and this is the “Art of the Possible”. Be realistic here and set goals that you can actually get done. Unless you can you work more hours or get an additional job, it is difficult to adjust the income side. The real power you have is over your spending. There are some things that you just have to spend – Rent, Bills, food etc. However, it is the discretionary things that need looking at. It doesn’t mean that you cant have fun anymore … just less expensive fun!

“The purpose of discipline is to live more fully, not less.” Master Po – From Kung Fu (see below)

The objective is to build up some savings – for a house or retirement. Naturally, if you have any personal debt (Credit Cards, Personal loans) you should get rid of this first. Keep your savings account separate from all others. The best savings method is what works with you – It can be a jar, or a monthly transfer from your transaction account to your savings account. Young Slack investor always found saving easier if he didn’t see the money. – A direct debit just after payday into your savings account will get this done.

What you should aim for when you get your first full-time job is to set up good habits. There is a good “Rule of Thumb” known as the 50:30:20 rule where you divide up your take home salary into parts – 50% for essentials, 30% for discretionary items (Fun!) and 20% for saving. There is a little bit of mathematics to back up this 20% savings rate. The Money Under Thirty table calculates that it will take 41 years of 20% saving (earning 5%) to get your savings to 25 times your inflation adjusted income – This is the amount that is generally agreed to be sustainable using investment earnings to replace your income, using the 4% rule.

Do not despair with these calculations, they are just a rough guide – and there are some things going in your favour as:

You don’t need to replace your whole income in retirement – just enough to cover your yearly expenses.
Over the long term, investment return earnings would hopefully better than 5% – this will get you to your goal quicker.
In Australia, if you earn over $450 per month, your employer is already contributing 9.5% of your wages to your retirement savings (Superannuation).
In Australia, we are in the very fortunate to have Medicare, a universal health system that subsidises health care for Australian citizens and permanent residents.
Although Slack Investor encourages readers to aim for complete financial independence in retirement. Under current rules, for Australians, there is a “sweet spot” for home owning couples of $400 000 in superannuation savings. Using a mix of the Age Pension and Super, couples can have a retirement income of $52,395 per annum. This bizarre sweet spot will be expanded upon in later posts.

3. Build an emergency fund.

In June 2018, a significant majority of households (62%) continued to report that they ‘could not easily raise $3,000 for an emergency’ – a percentage point lower than six months ago … ME Bank survey

Do not be part of this 62%, it is so important to have that “cushion of cash” – from which your financial independence can build. You must be ready for the many unexpected things that life can throw at you -$3000 in an online account is a good start and will help you sleep better at night.

Youtube excerpt from Kung Fu (3:35) where wisdom is imparted from Master Po to Grasshopper (May be subject to copyright)

The next part of the Slack Way to Financial freedom is Investing. But, to paraphrase Master Po from the old TV Series (1972) Kung Fu

“Grasshopper … you are not ready for this … until you have mastered saving”

PS … If the discipline of saving gets too much, I recommend a bit of Youtube Roy and HG magic (12:39) here for light relief.

Spaceship … Let Me Out Here!

Hey you Millennial dudes and hipsters… Suh!

Space … sounds good … its so snatched! … Spaceship … even better. Come on … lets get on board. Superannuation is so boring … but Spaceship .. Its so now – isn’t Elon Musk working on one?

What Slack Investor is referring to is the reach out to the younger crowd of cool new investor products that will look after your superannuation in a really cool way. Spaceship, is just one of the new breed of disruptors (e.g, Zuper, MobiSuper, Grow Super) that is encouraging you to put your super investments into a high tech sounding enterprise that focuses on new technology companies. It seems that their marketing push has been successful with at least $100 million in funds under management for Spaceship.

Now, Slack Investor has a soft spot for disruptors that make use of new technology to help the investor work more efficiently through lower costs and new platforms. However, Spaceship and their ilk are not, so far, disruptors. They are just a repackaging of the same old greedy financial industry that are trying to separate the investor from their hard earned loot.

We had a look at the critical importance of fees in investment in an earlier articles here and here. Despite the marketing fluff, Slack Investor is getting off the couch and drilling down. A highly recommended process before you part with your money to anyone. Spaceship fees are 1.6% plus administration, MobiSuper fees 1.5% plus admin fees, Grow Super fees are 1.85%! Fees are critical to investment returns.

The same drilling down process can be done in the USA with Individual Retirement Accounts (IRA) or employer sponsored 401(k) plans. Google is your friend – Long term performance and Fees Fees Fees is what you are looking for. A good articles for the USA on fee impact can be found here, And for the UK here.

The Australian Securities and investment commission (ASIC) says

A 1 % difference in fees can lead to a 20 per cent difference in the value of a superannuation benefit over 30 years.

From Hostplus – Money Magazine Best of Best 2017

The above table shows some existing funds that have established long-term returns and with a fee structure less than 0.5% for $50000 invested.

So get out of the spaceship … and relish life on planet Earth with some low cost super funds … they are so “On Fleek” as far as your money is concerned.

Banks … If you must!

Slack Investor has been banging on about the efficiency of online accounts as a place to park your savings (here and here) but my life is also cluttered with other banking relationships – but each of these accounts are first thoroughly researched.

This sounds a bit Un-Slack but banks don’t want you to really think about your accounts, they want you to accept this banking relationship in a benign way as they clip the ticket on every transaction. But, with a bit of thought, you can save some money … and it is much better in your pocket than theirs.

Firstly, Online accounts, everyone should have one as this is the most efficient and flexible way of saving with no risk. Try InfoChoice for a selection of accounts – although some institutions ask you to set up another transaction account with them. At the moment, it is difficult to go past RaboDirect who have a juicy base rate of 1.9% and they link to your current transaction account. Make sure you look at the base rates as the “honeymoon” rates often expire after a few months.

Transaction accounts, these are the busy accounts that you usually have your pay go into and they have good online access and come with a debit card or perhaps pay wave. These accounts usually pay little or no interest and sometimes have monthly fees (If so, … avoid these like the plague!). Make sure you always use the no fee ATM’s or eftpos for getting cash.

Credit Cards, this is where it gets interesting and where banks get a lot of justified bad press ie., Greedy Banks. The current average credit charge rate is 16.92 percent in an environment where the Reserve Bank has set the cash rate at 1.5 percent – I know that there must be a margin … but this is ridiculous! Then there are the credit card transaction charges at the retail level (The ACCC reports them at 1-1.5 percent for Visa and MasterCard, and between 2-3 percent for an American Express card). But there are ways to avoid the hook.

Golden Slack Investor rules:

Be nice to your mother.
Always … Just Always … pay off your credit card every month to avoid these inflated interest rates.
Ask at the point of purchase what the credit card transaction charges will be – explore alternatives to avoid these charges eg, eftpos

I don’t really blame banks… they are just companies that try to do the best for there shareholders. I received a great bit of advice from a seasoned investor 15 years ago …

Don’t complain about the big banks … just close your accounts and make sure you are a shareholder!

I took this advice and, where practical, moved my custom to the smaller banks and credit unions who were working a bit harder for their customers. Owning the big banks have been a profitable trade up until now, especially when you consider the fat dividends that pop up twice per year – Much better than bank account interest!

Due to their privileged position in the Australian economy, I am sure that big 4 banks will continue to be profitable, but they face a few headwinds now and growth will be difficult – They are out of the Slack Investor portfolio for now.

However, the first bit of advice remains true, engage with your banking – look at comparison sites like InfoChoice or Finder The smaller banks, mutual banks, and credit unions are still offering the best deals – make sure they have free ATM access, and some way of doing the occasional face-to-face transactions.

Just fill out a few forms, get some ID certified with a JP, scan … and join the banking revolution!

May 2017 – End of Month Update … and FHSST!

Slack Investor remains IN for US, UK, and Australian index shares.

Despite a bad month for the Australian index, the Slack Investment Cycle returns for the US, UK and Australian markets are 141.0%, 12.7% and 8.9%, respectively.

Extract from the ASX Index Fund (STW) May 2017 – Incredible Charts – More detail on the individual Index Chart Pages

May 2017 still finds the monthly price range bar is well above the 10-month moving average in all markets (This is the last bar on the far right of the charts on the index pages – and it is above the black wavy line that represents the 10-period moving average). This is Slack Investors comfort zone … so no action again this month.

For more information on parameters such as progressive gains, try the Slack investor ASX Index, US Index and UK Index pages for updated details – and a look at the charts. Next end of month update on the index charts will be early in July.

FHSST … First home super saver scheme

Slack Investor has probably gone a little early on this as, although announced in the 2017 budget, it is still a twinkle in the government’s eye as the legislation is still to be presented to the quite fickle senate and passed as law. But, it is a sensible proposal that should give first home savers in Australia a bit of a kick along if passed.

The scheme opens up the great tax-saving vehicle of salary sacrifice. Salary sacrifice is not normally on the radar for young first home buyers as it is normally associated with saving for your superannuation – and locking away your money for decades. FHSST lets you save up to $30000 for individuals ($60000 couples) – and lets you access your money when you buy your first house.

There is a nice calculator and graph here provided by SCOMO Someone on $60000 who puts $10000 per year into the scheme would have $25578 saved up after 3 years. This is a bonus of $6239 as measured against just putting the savings into a bank.

For those who are young and saving for their first home … hope for a quick legislative passage and get on it! … Its really dope!

Sometimes What You Don’t See is Really Important!

Especially when the thing you don’t see is your money!

I know things are difficult out there … rents are high, things break, bills keep coming in, and everything seems to be going up – except for your wages. But, if you can have the discipline to save even a little bit of your money, your wealth fund will be able to establish some roots … and this start is a huge and necessary step to financial independence.

Through experience, Slack Investor knows that it is easier to save money close to the source – if you can quarantine some of your income at the time of payment, – all the better! Start up an online, no fees, bank account and tell your boss that you want a portion of your pay put into this. If your employer can’t do this, then set up a direct transfer from your wages bank, the day after payday, to your online savings account. It is done … you are on your way.

In the parable from the financial classic The Richest Man In Babylon, the rich man Algamish passes on the secret of his wealth to the financially challenged scribe Arkad –

“I found the road to wealth,” he said, “When I decided that a part of all I earned was mine to keep. And so will you.”

Algamish suggested at least 10% of your wealth was to be put aside – and Arcad, with his mentor’s help, also became a rich man in Babylon. Arcad was not lazy with his money and understood the power of money and time through compounding interest …

“Then learn to make your treasure work for you. Make it your slave. Make its children and its children’s children work for you … Invest they treasure with greatest caution that it may not be lost.”

Back in the real world, and far, far from Babylon … So many Australians have built their wealth through real estate. Increasing land values have helped this (Especially in Melbourne and Sydney) … but a big reason why home ownership is a vital stepping stone to wealth is that the banks will lend you 80% of the asset value (If you satisfy their income tests!) … and you are “forced” to quarantine your monthly loan repayments from your spending. This is “forced” saving and most homeowner’s, up until now, have found a way to make these payments each month. Business Insider quote a Standard and Poor’s report of an Australia wide loan delinquency rate of only 1.29% for January 2017. This figure will most certainly rise as we go into an interest rate increasing regime – but that’s another story!

Salary sacrifice into superannuation is another way of putting a portion of your wages aside and “paying yourself” in a tax-advantaged way. This strategy has great benefits for older folk but, … this has little appeal if you are 40 years from retirement.

But wait … Hidden in SCOMO’s 2017 Australian budget there is a tantalizing offer to the young home saver who wants to quarantine a bit of money for their future wealth … The First Home Super Saver Scheme. The unfortunately named, deflating sounding scheme has the acronym – FHSST … and will be discussed next post.

Superannuation … Engage! – Part 2

You have been busy (and definitely not Slack) and gone through the paperwork that combines your super funds into one fund that you will keep for your working life. You have probably found an Industry Super Fund provider with established performance and low fees … Sorted!

Slack Investor is proud of you!

However, a little more work is required. The default investment option for most funds is called “balanced” – that sounds pretty cool – who wouldn’t want to be balanced! Generally Balanced options comprise 60-70% in growth assets and 40-30% in income assets.

The options that your fund may offer you are … in terms of increasing risk are

Cash – Invests 100% in bank deposits or other ‘capital guaranteed’ products.
Conservative – Around 30% in shares and property with the majority in fixed interest and cash.
Balanced – About 70% in shares or property, and the rest in fixed interest and cash.
Growth – At least 85% in shares or property.

If you are young … go for Growth, or High Growth … every time! Your super will be invested for 40-50 years and this is plenty of time to ride a few bumps that Growth assets such as shares and property can sometimes throw … Embrace risk and ride these bumps …. It is a good lesson to realise that the beautiful dance between risk and growth must be part of your investing life – Without risk, it is impossible for your investments to grow substantially.

Depending on your time frame, your tolerance to risk will vary. There are good reasons for someone approaching retirement to step back from a growth at all costs investment strategy. But, if you are just starting your working life, and want to grow your superannuation in a meaningful way … time is on your side … and risk is part of this process …

Australian Super have crunched the numbers and found that

YOUNG workers choosing “low risk” investments for their superannuation may be up to $170,000 worse off

The appealing sounding “low risk” options mostly deliver returns not much higher than inflation … And, we are not interested in just tracking inflation … we want growth!

If your superannuation amount is low and you want to give it a bit of a boost, and you earn less than $51,021 (2016/2017 year), the Australian government runs a co-contribution scheme that will reward you on a sliding scale – If you earn less than $36,021, the tax office will automatically kick in a maximum $500 for a $1000 after tax contribution to your super fund – This reward gradually tapers to zero as your income approaches $51,021. This is a pretty good return for your investment!

Grandparents and parents please note – if your wonderful offspring have a part-time job and a compulsory super fund – and you have a windfall that you would like to pass onto the next generations that cannot be frittered away on teenage pleasures – I am reminded of the fantastic George Best quote here.

I spent a lot of money on booze, birds and fast cars. The rest I just squandered.

Despite the wisdom of George Best, a gift of $1000 that would go directly to your loved one’s super fund would attract this govt co-contribution and be a great lesson in the benefits of compounding interest.

Financial Winners

There are many ways to measure a happy and successful life – and financial security is just a part of this. Benjamin Franklin best sums it up

“Content makes Poor Men Rich; Discontent makes Rich Men Poor.”

To be grateful and happy with our many blessings is a good place to start – But, to be financially secure is one of the three tenements of a happy life. My Dad did give me the great advice …

“The only time that you use borrowed money is for the purchase of appreciating assets.”

This meant I would avoid the crippling credit card interest by paying off my credit card balance every month (Admittedly, there were a few slip-ups!) and, most importantly, if I wanted a car or holiday, I would have to save up for it first – and pay cash before the glorious enjoyment of my purchase.

However, (hopefully) appreciating assets like property or shares were given the big tick by my Dad – and it was OK to borrow money for them. I suppose my Dad would have made an exception to the rule if you were investing in yourself. Spending borrowed money on things like education or, if you are just starting out, tools, a work ute, or office equipment – can be justified.

This makes Slack Investor a bit of an outlier in the community considering the amount that the average Australian owes on credit cards. ASIC has a Debt Clock and they point out that there is around $32 billion owing on Australian credit cards, that’s an average of around $4,300 per card holder!

There are some basic rules for getting ahead financially and Noel Whittaker points out the differences between winners and losers in the financial game.

“The winners borrow at low rates of interest, subsidised by the Tax Office, to buy growth assets such as property and shares that increase in value over time. The losers borrow at high rates of interest, non tax-deductible, for consumer items such as cars that depreciate in value.”

You can argue about the fairness of negative gearing and capital gains concessions (I think rightly!) and superannuation concessions (Which have been recently reigned in) – but these are the existing rules.

If you start at a young age with just my Dad’s advice … and only borrow to invest in, hopefully, appreciating assets – it will be a good start. My Dad was an understanding bloke and would appreciate that there were some cases where the rules need to be broken – i.e. suppose that you needed a car for your job – but he would insist that If I did borrow for a car that I would shop around an get the best loan deal … and hopefully, I would be able to pay it off early.

Slack Investor can’t guarantee financial security – but If you follow my Dad’s simple advice you will be on the right path to be a financial winner.

First Investment … Index Funds … Sounds Fun!

OK … the cushion is sorted and we are ready to start on the path to financial independence with our first investment.

However, we are just starting and our first plunge into the share market shouldn’t be with an individual company … this is too risky … exposure to the whole market through an index fund is a good first step.

The main reason for this strategy is that Slack Investor has found that – despite his great prowess as an investor (?) there are many unknowns when it comes to an individual share or stock.

Slack Investor does a great deal of research on a company before he parts with his dollars and, despite being convinced at purchase time that this company will be a great winner, this does not always turn out to be the case.

Slack Investor has been in this investing game for a considerable time and despite this 30-year experience and diligent research his documented win probability for an individual company (Selling the share for more than I bought it) is surprisingly (to an optimist like me!) low.

Slack Investor win probability ... is just over 50%.

This sounds like I don’t know what I am doing … However, bear with me …If you follow Slack Investor and use the enduring wisdom of many successful investors

“Cut your losses short and let your winners run.”

… You will be well on the road to financial freedom.

This is because individual stocks that you keep in your portfolio (Winners) may increase in price by 5-500% (or more!) but if you limit your losses on losing stocks to around 15% you will end up with a solid investment portfolio. For the record, the Slack Investor portfolio has between 20-30 individual shares/managed funds and, including dividends, has achieved a 5-year average annual Internal Rate of Return (IRR) of 14.6% (as at 30/06/16)

If you don’t want to get involved with a stock broker, and you have $5000, then the most excellent Vanguard Funds offer exposure to the whole Australian, US or World markets through their managed funds. For example the Vanguard Index Australian Shares Fund offers exposure to the whole Australian share market for a management fee of 0.75% p.a. with a published 5-year annual average return of 8.7% (after fees)

Or, you could take the plunge and sign up with an Online Broker. Slack Investor uses CommSec. After a bit of paperwork you should then be able to trade on the ASX online and get exposure to the world of Exchange Traded Funds (ETF’s). You will have to pay brokerage for each trade but otherwise, costs are low.

Two such Australian ETF’s are SPDR S&P/ASX 200 (STW) and Vanguard Australian Shares Index Fund (VAS) . They have management costs of 0.19% and 0.15%, respectively, with 5-year average net total returns of 9.98% and 9.32% respectively (31/08/16).

The stock market is a capricious beast and susceptible to whims and world events. Of course, past returns on the stock market are no guarantee of future returns – but, if you put your faith and money into the whole market through an index fund for 3-5 years you will usually be rewarded.

Shares? … What about a house!

Dipping your toe into the stock market can be a daunting experience. A lot of people feel more comfortable with investing any saved money into residential property. In Australia, this has been usually a great idea – As well as income provided by your renters, there are tax advantages in negatively gearing your property. However, residential property has run long and hard and property yields are looking a little bit skinny. Corelogic reports that, as of September 2016

Australian gross rental yields for houses are currently recorded at 3.1% and unit yields are 4.1%, both of which are record lows.

Prediction of future property yields and capital growth rate depend on a complex mix of supply, population growth and interest rates. The low yields and the large sums required to get into the housing market make housing a difficult first investment in capital cities – and Slack Investor thinks the days of big capital gains for residential property are behind us.

I am not against residential property and it is one of the Slack Investor foundation blocks that you must have a plan to own your own home – in a place that you like – before financial independence and retirement.

For many, the forced savings commitment that a home loan provides is a great way to wealth accumulation – the money disappears from your account prior to you having a chance to spend it! It is a pity that much of the home loan payment is portioned to loan interest – but this is not such a concern for a long term commitment, especially in times of capital appreciation.

Owning a home gives Slack Investor a great joy that cannot be measured in financial terms alone.

glennstevens — Glenn “Sexy” Stevens, RBA retiring governor and Slack Investor favourite.

So where should you start investing … Bank cash rates are low (1.5% from August 2016) and several punters think that they may be low for some time. Slack Investors favourite banker, the Reserve’s Glenn Stevens has just cut the cash rate to 1.5% and thinks that the low inflation environment and conditions for Australian economy growth are expected to remain the case for some time.

Cash is safe and reliable though, and is the best place for your cushion while your are saving up your first investment bundle. But putting your money in the bank will not make you financially independent … you have to take some risk.

Share investment, is not recommended for very short time frames as the stock market can be very volatile … but If you have some money set aside that you can afford to leave in the market for 2-3 years – It is an excellent place to start your investing journey. Most Australians already have exposure to shares through their superannuation funds … and if you look at share investment as a chance to become a company part-owner, why wouldn’t you give it a go!

One More Marshmallow Please …

Once the financial cushion is established the hard graft of saving must commence … Fortunately, Slack Investor has always been a good saver and a lot has to do with the mystical trait of delayed gratification. A famous experiment was conducted at Stanford by Professor Walter Mischel. It is worth expanding on this research as Slack Investor finds this trait to be fundamental to the pursuit of financial independence.

The Stanford study was published in 1972 under the dry academic title of Cognitive and attention mechanisms in delay of gratification. And started with a preschool child sitting in a chair, and placing a marshmallow on the table in front of them. The researcher then told the child that he was going to leave the room and that, if the child did not eat the marshmallow while he was away, then they would be rewarded with a second marshmallow. However, if the child decided to eat the first one before the researcher came back, then they would not get a second marshmallow.

The researcher left the room for 15 minutes and the child would either gobble the treat … or wait patiently for what must have been a very long 15 minutes. In the original experiment, one third of the preschoolers managed to get the second marshmallow.

The really interesting part of the Marshmallow Experiment happened years later where follow up studies tracked each child’s progress in a number of areas.

The children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher university entrance scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills and generally better scores in a range of other life measures.

The children were followed for more than 40 years and the researchers concluded

… that the ability to delay gratification was critical for success in many of life’s challenges.

You might think that this ability might be part of your natural make up, but Slack investor and a bunch of Behavioural Analysts think that this delayed gratification can be learned (i.e., Older children were better at the task)… And the best way get this delayed gratification going … is to start saving. Some tricks you can use are to get a portion of your pay paid automatically deducted into a separate account … or set aside a review day at the end of the month so that you can slide any money that you don’t need right away to a separate online savings account.

These accounts are easy to set up and are offered by many banks. Slack Investor has a few accounts with ME Bank, but there are many offerings in the Australian Market. In addition to your transaction account, start a “Cushion” online a/c and a separate “Savings” online account. With your regular contributions they will grow and the delayed gratification vibe can warm your heart! … and you will eventually have all the marshmallows that you could possibly eat!