Buy Banks, not Houses #Budget2017

Buy bank ETFs and rent a cheap unit instead.

Recently the Australian government has announced in its Budget 2017 that there will be a bank tax applied to the five biggest banks in Australia. This may affect me because I live off dividends, and much of these dividends come from Australian banks via ETFs. When I mentioned my concerns to others, I was surprised at how much hatred others have for banks in Australia, which is surprising to me.

I am not too concerned by the bank tax, and I will continue to invest in ETFs that invest in high-dividend paying stocks (e.g. HVST) as well as the finance and banking sector (e.g. OZF and MVB).  The reason why I am confident is because I feel that banks can simply pass on the tax expense to borrowers by raising interest rates and fees. Many people may be unhappy about this, but they have the freedom to take their business to other banks.

Banks should also benefit from the cutting of the corporate tax rate from 30% to 25%.

The housing affordability scam

The budget also includes a complex scheme whereby people saving up for a deposit to buy a home can salary sacrifice at most $30k per year into their superannuation fund thereby obtaining tax benefits and then taking that money out to use as a deposit on a home.

This, in my opinion, is such a scam because it is effectively the same as the various grants that the government gave to home buyers. Why put first home buyers through the whole process of putting money into super to get tax benefits and then taking it back out again? Why not just give the expected tax savings to these first home buyers directly?

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The scheme also does nothing to address housing affordability because every economist knows that the price of housing will go down if demand goes down and supply goes up. If there are tax benefits to using super, and if super is used to buy houses, this will only increase demand, which increases prices. Make no mistake, this scheme does not help buyers. It is designed to prop up the market.

Once again, first home buyers are being scammed. The major problem is that most first home buyers don’t understand economics and believe that the government giving them money will help them buy a house. Rather, it will simply drive house prices up even more thereby requiring them to get into even larger debt. The debt that they’d be getting themselves into will also be nondeductible debt, which means they pay more tax than if they had borrowed the money to buy a investment property or other investment e.g. ETFs.

What should you do?

Unfortunately I don’t see the housing affordability issue being addressed because too many people benefit from high house prices, so governments will do what they can to prop up the market. Homeowners benefit from higher prices; banks earn interest from mortgages; and real estate agents, property developers, builders, and lawyers also make money from the property boom. Those hoping to buy a house suffer, but the solution seems to be to help them become homeowners, and when these young homeowners finally buy a house with government support, they have a vested interest in high property prices, but what many of them don’t seem to understand is that they are buying into a very expensive market by loading themselves up with so much debt they effectively become slaves to the bank.

Those who borrow from banks to buy houses believe they are oppressing renters, but really in most cases it is the other way around. Rental yields are so low that the average Melbourne house only produces about 3% in rental yield. If you had $1 million and invested it in a house and rented it out, you make $30k in rent. Had you invested that money in NAB shares as of today you’d be earning 8% dividend yield, i.e. $80k per year if you invested $1 million, which means you could invest your $1 million in bank stocks, earn $80k, rent that house you wanted for $30k, and have $50k leftover. By buying the house, you lose $50k in opportunity cost.

The market will continue to be propped up because everyone benefits, and those who don’t benefit think they are benefitting. First home buyers think that by receiving government money they are closer to buying a home, but they don’t realize that homes will be more expensive. Those who recently bought a home think they are better off than if they rented, but they don’t understand how much they will pay in interest nor will they understand how much opportunity cost there is in owning property. The best slaves are those who believe that they are the oppressors.

The major problem with housing is that it is commonly associated with a debt-fuelled depraved and wasteful materialistic lifestyle. Once someone borrows large sums from the bank, it is not just a massive house that they buy. They increase their spending in other ways, e.g. furniture and renovations. The debt that they hold tricks them into believing that they have more than they actually have.

The solution then is to go back to basics. Own bank ETFs and live cheaply off the dividends. You can rent a cheap self-contained unit in the outer suburbs for less than $250 per week and then wake up early to commute to work via train. Insecure tenancy is not a problem in the age of Airbnb. Renting gives you the freedom to move to different areas to minimize costs and maximize opportunities. Renting also frees up cash flow to enable you to seek out the best investments.

 

Netflixing to Save Money

When I was younger, I rarely went out. I preferred to stay inside and indulge in cheap electronic entertainment. As I invested more and more and started to earn more dividends, I found myself in a position to go out every now and then, but I have realized that I actually hate going out. I would prefer to stay home and watch Netflix. It just so happens that netflixing is much cheaper than going out, and it is very enjoyable as well.

Netflix pours billions of dollars each year into content production, which means they are able to provide extremely good entertainment to its customers, and customers only need to pay $12 per month. It’s a good deal, in my opinion. It is far better than going out. When people at work show off to me that they went out to a restaurant to a vineyard, I am not afraid to just tell them that I am a hardcore netflixer.

I was talking to colleague earlier this week about how Netflix is an investment because you save up so much money on Netflix that you are able to pour massive sums of money into ETFs. What I hate about “going out” is that it has become such a status symbol. People brag about going out and socializing as if there is something so special about it when really all they are doing is moving themselves to a new location and spending significantly more for it.

When I started working full-time, I was saving about 80% of my salary whereas now I am saving 100% of my salary and living off dividends. I think what is most important is that you pick a savings rate and stick to it. Whether you eat out, pack your lunch, buy coffee, or whatever is irrelevant as long as you stick to your savings goal. Many people focus on small things such as skipping coffee and saving $4 per day, but I find that many of these people skipping coffee are blowing their money on holidays, cars, and so forth. Often skipping coffee is not a savings plan but a reaction to blowing your money elsewhere. Picking and choosing isolated examples of how you save money is meaningless. It’s the overall savings rate that matters.

You Save 100% of Your Salary? What if You Die Before You Retire?

I probably shouldn’t do this, but I told someone recently that I save 100% of my salary and live off dividends. One of the argument he used against this is that, if you save up a considerable amount of money, you deprive yourself while you save and there is a chance that before you retire, you may die, which means you never had the opportunity to enjoy spending the money that you saved.

This made me think about why I continue to live a minimalist lifestyle and live off dividends.

If you die with lots of money saved up, you could have enjoyed that money. However, for many people, freedom is so important that it’s not the spending of money that makes them happy but the holding of money. This applies to me as well. I love to hoard money not because of what I can buy with it but because of the freedom and autonomy it gives me.

If I had, say, $1 million then according to the 4% rule I can spend $40k per year forever. I never need to work ever again so long as I’m satisfied with a $40k per year lifestyle. There is no need to suck up to some boss, and I can do jobs on my own terms and live according to your own rules. I continue to work, but I do the work that I love. That is freedom, and I care about that more than some shiny Ferrari.

You enjoy your work when you’re not dependent on it

In my opinion, you enjoy working when you don’t care if you’re fired. If something at work bothers you, you simply ask your manager if you can be transferred elsewhere. If for some reason you are fired, just shrug and walk to a job agency or find a new job yourself. Because you live off your investments, it doesn’t matter if you’re unemployed. You don’t work to feed yourself because other people feed you.

However, if you’ve never saved up any money, if rather than living off dividends you have massive debt and spending obligations, you are then dependent on your job, and dependency is slavery.

Slavery has not been abolished. It has evolved.

Embracing Laziness

It is easter and I have not been out of the house. It is cold outside, so I just don’t feel like going out. I don’t have many friends, so I am rarely invited places, and even if I am invited, I often reject the offer because I consider it a hassle to go. It is paradoxical because I feel mild loneliness but at the same time I am repulsed by humanity.

When I talk to colleagues at work, they always talk to me about their latest weekend adventures, e.g. skiing or hiking in the mountains, going to music festivals, etc. Now that I am in my early thirties, many people my age are married and have children, so they do family activities, and there some DINKs as well who spend their free time holidaying or playing with their dogs.

Meanwhile, the way I live now in my early thirties earning six figures is no different to the way I lived when I was a university student, that is, with my parents mostly staying at home indulging in electronic entertainment. Now that I am older, I am less ashamed of my lifestyle, and there is a rebelliousness in me now. I want to defend this lifestyle.

Some things have changed. Rather than read books from the library, I read ebooks now. I still watch YouTube, but I prefer higher quality films and shows streamed via Netflix. I am still an avid reader of everything on the internet.

I still travel. About a year ago I travelled by myself to Bali, and I met some girls while travelling and have mostly kept in contact with them. When I travelled to Bali, I was strongly encouraged by my manager to travel because I had too much annual leave accrued. I have heard people telling me it’s illegal for an employer to force employees to take annual leave, but I sometimes don’t mind having my hand forced in certain situations.

Upon reflection, I am quite lost in my life because I don’t really know what to do. My main focus has always been on freedom and autonomy by living off dividends, and when you have the freedom to do what you want, oftentimes you don’t know what to do because nothing seems to provide any significant happiness, and I suspect nothing will. Nevertheless, having the freedom to be able to experiment with different activities is in itself satisfying.

I feel that my career has stagnated. I received a promotion about three or four years ago and since then I have applied for a handful of jobs with more responsibilities, but I haven’t been successful. I will continue to apply for promotions or better jobs, but I see it as just a chore. I feel like I am just going through the motions, and I show up at work because I have nothing else to do in my life. If I stay home, I would just sit in a room all by myself whereas work does give me companionship because I am around people, and I talk to them. I admit that the connections you make with colleagues at work are not as deep as, say, the connections you make with a spouse or family member, but I have learned to appreciate the benefits of superficial relationships now. Greater connectedness to others exposes your vulnerabilities, which invites conflict, and often when others reveal themselves too much, what they expose is quite vulgar. The interactions at work are sanitized by HR guidelines, anti-discrimination legislation, fear of authority, etc, and these forces seem to do a good job at making socializing at work more pleasant. Many people complain about “political correctness,” which to me is roughly defined as “restricting behaviour to minimize offending others.” I personally love political correctness. Why would anyone want to be exposed to an environment in which they are bombarded with people, ideas, conversations, etc that are offensive? You can grow a thick skin, but at the end of the day, everyone is offended by something. Blocking offensive communications is not about being afraid of truth. The truth is that there are many out there who only want to offend others without any regard for truth or logic. Trolls don’t just live on the internet.

I now have a desk with a window view facing the city, so I can see skyscrapers and busy streets below, and often I love staring out the window at people walking on the streets. There is a homeless woman who sits on the street at the bottom of the building opposite mine, and I see her all the time, and I often think about her life and how she ended up where she is. We all live together in this city but we all go through different paths in life.

Because work for me has become very comforting and pleasant, I spend a lot of time at work. Often I am not working hard enough during the day, so I need to stay back to catch up.

I will continue to live off dividends. I believe it is the best way to live. Everything I earn from work, I invest, and I live off my investments. This ensures that I am not dependent on work. Even if I am fired, it does not matter because I already live off my investments. I can work how I want to work. If I don’t like where I work, I simply move, and I am very happy to hire career consultants or other professionals to help with the move. If all efforts to move to a new job don’t work, it doesn’t even matter. I can travel to Thailand and start my own online business or I can freelance. I have layers upon layers of backup plans for everything.

I will always work because I love making money and growing my investments. My investment portfolio is like a child to me. I love watching it grow. I love protecting it by diversifying government bonds or gold mining ETFs into it. It is a beautiful child (in my opinion), and unlike a human child, my investment portfolio pays me money in the form of dividends. I love to work, but I don’t like to work hard. I hate pushy people and unrealistic deadlines. I want to enjoy my work. I want to work with people I get along with. I don’t think the job I do right now is the perfect job for me, but I am hopeful I will land in that perfect job one day.

Trump Inflation Will Hurt Families

Many people complain that government spending and debt was high under an Obama Administration, but government spending and debt will still rise under a Trump Administration.

Whereas the Democrats tax and spend, the Republicans will spend and spend.

Trump will increase government spending with a massive government infrastructure program. He will also lower corporate and income taxes.

Lower taxes and higher spending means more money going out and less coming in. You don’t need to be an accountant to know that if there is more money going out and less coming in, you need to either go into debt or print more money.

Either way, the amount of money in circulation will increase, which will cause inflation (see “Investors are betting that Trump will be the inflation president“).

This is very bad for families because although money can be printed from thin air, value cannot be. The more money there is, the more inflation there is, which means the cost of living is higher, and families tend to spend a lot.

Thankfully, I am am single and childfree. No wife and no children means I don’t need to spend much money. I only feed one mouth rather than three to five.

My recommendation to others is to live a minimalist lifestyle and invest your money in assets that go up with inflation (e.g. stocks, property, gold, and inflation-indexed government bonds). The breadwinners in families with massive costs of living will need to slave away in a desperate attempt to keep on top of the inflation that will ravage their household finances.

Investing Under a Trump Presidency [Podcast]

I am certainly not a Trump fan. I actually find the man quite disgusting, and I watched in horror as he was elected President of the USA. That being said, the stock market boom following his election has increased my net worth considerably, and I expect more gains in 2017. However, there are significant risks involved in investing in American equities at this time, so while you should be exposed to the market to capture all the gains from this bull market, you must be prepared to exit the market quickly once it is clear the boom is over.

Other topics discussed in this podcast include Wall Street’s complete takeover of the White House as well as reasons why residential real estate is a bad investment.