debt – I Live Off Dividends

How Debt Can be Good

If you simply stand where you are and do nothing, will everything collapse? If so, you need to fix this. If not, you are a free man.

For a long time I have been uncomfortable with debt (see Why You Don’t Need Debt and The Borrower is Slave to the Lender). However, over time, I have borrowed more and more, and I think it is because I have become comfortable with debt. I used a CommSec margin loan to borrow to buy equities, which I now do not recommend to readers because interest rates on a margin loan are approximately 6 percent. I have recently started to use NAB Equity Builder, which allows borrowing to invest in ETFs or LICs for 4.3 percent which is quite low.

One of the problems with debt is that the return on investment needs to outweigh the cost of borrowing. The interest rate on the margin loan is approximately 6 per cent, which means you need to find an investment that beats 6 percent otherwise you will make a loss. However, central banks around the world are lowering interest rates and new products are emerging that allow you to gear into shares with low interest rates (e.g. NAB Equity Builder). Another argument in favour of leverage is that the interest expense is tax deductible. Currently in Australia if you are on a six figure salary, each additional dollar you earn is taxed at 37 percent, so if you are borrowing at 4.3 percent from NAB Equity Builder then after tax you are effectively borrowing at 2.7 percent. In my opinion, 2.7 percent should be easy to beat. As of right now, an ASX200 ETF such as STW is providing 5.66 percent in dividend yield, which after tax is 3.5 percent. Once you add in franking credits and capital gains, you are well ahead.

What about freedom?

One of the arguments used against debt is that debt reduces freedom because you are obligated to pay it. If you have an obligation, this reduces your freedom. However, just as in personal finance we look at both expenses and income so too when considering personal freedom we should look at both obligations to us and obligations from us. While personal finance is about cashflow and net worth, personal freedom is about obligation and specifically whether all your obligations are offset by obligations others have to you. Being free means having as little net obligation as possible.

In a previous post I discussed how freedom ultimately depends not only on cash flow but on “obligation flow.” We all have obligations e.g. the obligation to eat to survive as well as the obligation to put a roof over our head to shelter ourselves. However, if we have enough passive income e.g. from dividend ETFs to cover these costs, we are free, and we are free because our obligations to us (from the companies paying dividends to us) is greater than the obligations from us (to eat and sleep). Basically if your passive income is greater than your living expenses, you are free. It is net obligations that matter.

The same concept applies to debt. Suppose you have an obligation to pay interest. That may not be a problem if you own enough dividend ETFs to cover the cost of the interest. In the example above, the STW ETF’s dividend yield (or a similar ETF e.g. A200, VAS, or IOZ) is enough to cover the interest cost, even after (or especially after) tax.

It is important to keep in mind that dividends are strictly speaking not obligations that companies have. Technically companies do not need to pay any dividends. However, in reality, companies that have historically paid high dividends continue to pay high dividends because of shareholder expectation, and if shareholder expectation does not meet reality, share prices will go down, and the executives deciding how much of company profits to distribute as divdends are usually remunerated with shares, so it is in their interest to ensure the company is both profitable and continues to pay high dividends. Something else to consider is that dividends are not the only form of obligation. A company may use debt to raise capital from bond investors. In this case, there is a real obligation that the borrower has to pay bond investors. Furthermore, going back to shares, companies don’t need to pay dividends to provide value to shareholders. Simply retaining and reinvesting profits back into the business helps the business grow, which increases stock prices. Once the shareholder sells the stocks, there is an obligation to the shareholder to receive the proceeds of the sale. Outside Australia where there is often no franking credits, building wealth through capital gains is much more popular due to tax efficiency.

In summary, holding debt can be consistent with the idea that it is important to minimise obligation because you can have obligation from debt but have it offset with other people’s obligation to you. However, what I should emphasise is that offsetting obligations in this way increases risk. You may have debt to the bank and rely on dividends to pay back the debt, but there is no guarantee dividends will not be cut in the future, and so by playing the middleman game effectively you are taking on risk. The reason why middlemen exist in the world is because of risk transfer. Those on either side of the middleman have transferred risk to the middleman. The same concept applies at work. Middlemen are middle managers who also have obligations from them (to deliver for their manager) but need to match this with obligations to them (from their subordinates). In many areas of life, there is greater risk in aligning these two sides (obligations from you and obligations to you). The key is in if you are able to stomach and manage these risks.

Why financial capital is better than human capital

Obligation needs to be seen not just in terms of money (e.g. debt) but also non-monetary obligation needs to be considered as well e.g. something that takes away your time such as work. Most people go into debt but don’t think about what they need to do to service that debt and so they end up working for the rest of their lives. When I speak about balancing obligations from you and obligations to you, I speak mostly about your financial capital providing income (e.g. dividends) that cover your expenses. However, this ignores human capital. When banks lend you money, they not only look at your financial capital e.g. how much shares or property you have, but they also look at your human capital e.g. your income, job stability, etc.

However, relying on human capital to offset obligation is much more risky than relying on financial capital because income from human capital (i.e. a salary) is active rather than passive. If you borrow to invest and the cashflow is greater than the repayments, there is no obligation from you to do anything. However, if you borrow to invest and you have an obligation to make repayments and if your investments pay low income (e.g. it is a high growth asset) then you top up the difference with your salary which comes from human capital (e.g. your work skills). The problem with relying on human capital is that you are obligated to work in order to derive income from human capital, which reduces your freedom.

In order to take into account non-monetary obligation and to also keep a check on whether you are relying too much on human capital rather than financial capital, I recommend what I call the “do nothing” test. Basically if you do nothing e.g. don’t go to work, don’t take care of the children, etc. If you simply stand where you are and do nothing, will everything collapse? If so, you need to fix this. If not, you are a free man. Even if you have debt, if that debt is being paid for by passive income, it is as if you have no debt. Looking at non-monetary obligations e.g. childrearing, suppose you have children but they are taken care of by a childcare or nanny whose expenses are covered by passive income. You are also free. I have described the “do nothing” test in more detail in a separate post called My Changing Views:

Another key principle I feel I have not let go of is the idea that freedom depends ultimately on the absence of obligation. An obligation is something that compels you to do something in the future e.g. debt compels you to work to pay the debt. Obligation can be non-financial e.g. if you feel you must follow a particular social custom. Obligation is everywhere, and many obligations give people meaning and satisfaction in their lives e.g. obligation to their family or children. However, obligation is indeed the enemy of freedom, so if you want more freedom, you need to minimise obligation. I am a big believer in what I call the “do nothing” test, which is the idea that you are truly financially free when you can do nothing and everything is fine. If you must work to pay the bills, you are not free. There must be automated income coming into your bank account to cover all your obligations.

Can you retire with debt?

Yes, you can retire with debt, but it is harder. For one, you are no longer deriving income from human capital, so you are relying purely on financial capital to pay for debt, which is higher risk not because financial capital is riskier than human capital but because you are drawing down on one type of capital rather than two. It is much harder to get into a job than to get out of a job, so if you need a job suddenly because your financial capital is failing you, there is more effort you need to put in.

A key benefit of borrowing to invest is deducting interest expenses, which is likely to not be necessary or less necessary when you retire because your income will drop.

It all depends on how much risk you are willing to take. The good news is that it is often simple to sell down assets in order to pay off debt. Personally, when I retire, I would not want to keep debt and will simply sell assets in order to pay off debt completely.

Shares vs property

I’d like to end by discussing shares vs property. Most people think borrowing to invest is someting only property investors do. In fact, most people think stock market investors are cocaine-snorting men in suits who perform thousands of trades every day in order to capitalise on small price movements in stocks. In my opinion, shares and property are much more similar than the stereotype suggests. Shares or at least ETFs are safer investments than property because they can hold many different types of assets in them and can provide instant diversification. You can negatively gear into property and you can negatively gear into shares as well. It used to be the case that property allowed you to leverage more because you can borrow to buy property at lower interest rates than with shares (e.g. interest rates for property is around 3% or 4% but a margin loan has interest rates of 6%). However, banks are now starting to understand how similar shares and property are and new products like NAB Equity Builder allow you to borrow at 4.3% which is higher than the interest rate for most property investors (approximately 3.8% as of now) but only slightly higher. Furthermore, banks allow a property to be geared at 80% to 90% LVR whereas NAB Equity Builder allows gearing at up to 75% LVR. Even though LVR is slightly lower and interest rates are slightly higher, stock market investors are not exposed to many of the costs that property investors are exposed to e.g. stamp duty, land tax, and council rates. You also need to factor in franking credits as well as the peace of mind that comes from having a truly passive investment. For a property to be passive, you need a property manager, which eats into your rental income. Furthermore, property is not cheap. The cheapest property you can find in an Australian capital city will likely be about $400k. With ETFs, you can put in $4000 deposit to buy $15k worth of ETFs or you can scale it up. You can dollar cost average with shares but you cannot with property. You are in more control with shares, and when you sell, it can be done within days rather than months and for a much lower cost. Weighing all this up, I think shares are better than property. I would even go so far as to say that you don’t need to buy property at all, even property to live in. Rent is not dead money. If you rent and invest at the same time by leveraging into ETFs (also known as “rentvesting”) you can be better off than if you had purchased a place to live in, and you have much more flexibility to live where you want to live. But that is a post for another day.

Photo by Jamison McAndie on Unsplash

How Much Passive Income Do You Need?

Most people I speak to, when they want to measure someone’s wealth, measure wealth by referring to how many houses they have. For example, “John owns 14 houses. He is rich.” However, someone may own 14 houses, but each house may only be worth $200k, which gives total assets of $2.8 million. However, what if he also had $2.7 million worth of debt? His net worth would be $100k whereas someone who owns one house worth $1 million that is fully paid off would be 10 times wealthier even though he owns 14 times fewer houses. This example clearly demonstrates how misleading a count of houses is. A more sensible approach is to calculate net worth.

However, net worth can be misleading as well. For example, suppose you inherited a house from your parents that was worth $500k and you live in this house. Suppose suddenly this house went up in value to $1 million. Are you better off? Your net worth has increased by $500k, but because the extra wealth is within the house, you cannot unlock it unless you sell the house. If you sell the house, you’d still need a place to live, so you’d buy another place. The problem is that if you buy another place, that home will have risen in value as well, so the net effect is that you have paid taxes, real estate agent fees, conveyancing fees, etc but there is no difference in your living standards. You are worse off. If you downsize and buy a cheaper place, you’d be able to unlock your extra wealth, but then your living standards drop (e.g. extra commute time).

This point highlights that net worth, although better than a count of houses, has its flaws. An alternative metric, in my opinion, is passive income. Passive income (e.g. from dividend income but also from rent, interest, etc) is income you receive by not working. Passive income should subtract any debt as debt is negative passive income. Debt is the opposite of passive income because you must work to pay off debt. This applies if you hold debt as a liability. If you hold debt as an asset (e.g. you own bonds) then this is passive income. The bonds generate interest for you that you can live off without any work.

Passive income is more useful because it directly measures your standard of living. If your net worth goes up by $500k, that may have zero impact on your standard of living. However, if your passive income goes up by e.g. $1000 per month, that is actual cash in your hands. It directly impacts how much you spend and directly impacts your standard of living.

So how much passive income is enough? It all depends on the person. Everyone is different. It also depends on the city you live in. Some cities are expensive while others are cheap.

However, using Melbourne, Australia for this example, in my opinion, to cover the basic necessities of life, passive income of about A$2000 per month (US$1500 per month) at a minimum is needed, in my opinion.

Currently I work, and I do like my job at the moment, but loving my job is a recent experience. For a long time I have hated my job mainly because I have had bad managers. Something I have learned is that things change all the time at work, so you need to have an exit plan at all times. Too many people get a job, expect they will always love the job and always make good money, so they go into debt to get a mortage, have children, inflate their lifestyle, etc and then suddenly they find they hate their job, but by then they are trapped. I made this realization early on in my career because, when I started working, I went through a restructure in the organisation. I learned quickly how risky it was to have debt and obligations, and I realised the value of structuring your life so that you have the ability to walk away from anything, not just your job but from any person or any organisation. There is great power in being able to disappear at the drop of a hat, and this is achieved with passive income coupled with minimum or no obligation (including financial obligation i.e. debt).

Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.

~ Neil McCauley

Even if there were a restructure at work or a tyrannical manager took over and started legally abusing staff, with passive income of $2000 per month, it is easy to stop work and live an urban hermit lifestyle e.g. renting a one-bedroom unit on the outskirts of the city (e.g. this place in Frankston), living off Aussielent, and surfing the internet all day. The only costs are rent ($1000 per month), Aussielent ($320 per month), wifi ($50 per month), electricity ($100 per month), and water ($100 per month), which comes to a total of $1570 per month. I round that up to $2k per month just to give a little buffer. Nevertheless, this is quite a spartan minimalist lifestyle. Doubling it makes $4k per month passive income, which I feel is enough to really enjoy a comfortable and luxurious lifestyle e.g. travelling, living in the city, eating out, etc. Nevertheless, $2000 to $4000 per month in passive income is a good range to aim for.

Why You Don’t Need Debt

I do have debt, but it’s a small amount. For example, I have credit cards, but I always pay it off before there is interest. I also have a margin loan, but I have this so I can buy easily when the opportunity presents itself, and I try to pay off any debt quickly.

Many people talk about how debt is a tool for making money, and theoretically this can be true. For example, if you borrow at 4% from the bank and invest in something an asset, e.g. an investment property that makes 8% then you make a profit. However, if you borrow money from the bank to invest, you need to ask yourself why the bank didn’t invest in that investment itself. The answer is that it is risky.

Banks have a certain level of risk they are willing to take. The property could have gone up 8% but there is no guarantee that it will. If there were a guarantee that the property would go up 8% then the bank would simply invest in it rather than let you borrow money to invest in it. By letting someone else borrow money to invest in the house, the bank effectively transfers risk. If the bank vets the borrower to make sure they e.g. have high enough income, etc and if there were clauses in the contract enabling the bank to seize assets in the event of default, then that 4% the bank makes is almost risk free.

But don’t you need to take on more risk to make more return?

Risk appetite is a very personal topic because everyone has different risk appetite. Generally speaking, it is recommended that young people take on more risk because they have greater ability (and time) to recover should something go wrong. This is the main principle behind the “age in bonds” rule, which states that you own your age in risk-free investments, i.e. government bonds. For example, if you are 25 you should own 25% of your wealth in government bonds.

However, if you’re a 25-year-old who has higher risk appetite, the “age in bonds” rule can be modified to e.g. (age – 25)% in bonds. This slightly more complex rule states that the 25-year-old would have zero in government bonds, which would increases to 1% when he or she is 26 and so forth.

A 25-year-old who has no government bonds and puts all his or her wealth into, say, the stock market, has a high risk appetite, but more risk can be taken if he borrows to invest.

You don’t need to borrow to take on more risk

However, even if someone does no borrow, he can still take on more risk. This can be achieved by investing in internally leveraged ETFs (e.g. GEAR and GGUS) as well as investing in more risky investments, such as emerging markets (e.g. VGE), small caps (e.g. ISO), tech stocks (e.g. TECH and ROBO), and cryptocurrency (e.g. bitcoin, ether, or litecoin).

Right now bitcoin and cryptocurrencies in general are making headlines because of spectacular growth. Had you purchased $10k worth of bitcoin in 2013, you’d be a millionaire today. However, everyone knows that bitcoin and cryptocurrencies in general are risky, and when you hear stories about people borrowing money from their homes and putting it all into cryptocurrencies, most people think this is stupid. It is not that it is stupid but rather than their risk appetite is very high.

However, the example of leveraging into cryptocurrencies shows that you don’t need to borrow in order to gain access to high risk and potentially higher returns. If you simply invest in a riskier asset class, e.g. cryptocurrencies, you already increase risk and the potential for higher returns.

Debt is slavery – the psychological benefits of having no debt

I would argue that there is no need to borrow to increase risk and return because you can simply reallocate your money to risker assets (unless you believe that leveraging into bitcoin is not enough risk).

The benefits of having no debt goes far beyond the lower risk you’re exposed to. Debt is slavery. Happiness is an elusive goal. It is almost impossible for you to know what will make you happy in the future. You may think a particular job, relationship, car, holiday, or house will make you happy, but once you actually have it, you may not be happy. Trying to predict what will make you happy is hard, which is why the best way we humans can be happy to experiment and try out different things. In order to be able to try or experiment with different things that will make us happy, we must have the freedom to do so, and you don’t have that freedom if you’re forced to work in order to pay debt.

Even though freedom does not guarantee happiness, freedom is the best assurance we have of being happy.

Freedom comes from reducing your obligations. Obligations are mostly financial obligations (debt) but can be non-financial as well.

Ultimately it depends on your risk appetite

As I mentioned earlier, everyone has a different risk appetite. I have a fairly high risk appetite myself, but there are limits. For example, I’m happy to put 5% of my net worth into cryptocurrencies. I invest in certain sector ETFs because I estimate that they will outperform in the future (e.g. I am bullish on the tech sector).

Market fluctuations can result in the value of my ETFs and shares to go down by tens of thousands of dollars and I would sleep fine at night. However, there have been many times in my life when I have gotten carried away with buying too using my margin loan account and regretting it. You know you’re taken on too much risk when you worry about it.

Results don’t matter

The outcomes from investing are probabalistic, not deterministic, so results don’t matter. This is a common investing fallacy. Some guy would claim that he is worth $100 million due to borrowing money to generate wealth and that this is proof that you must use debt in order to become rich. However, this is misleading.

The outcomes from investing are probabalistic, not deterministic.

A person may borrow money to invest and be very successful, but another person may replicate the process, borrow to invest, and lose everything. What happens for one person may not necessarily happen for another person. For example, in 2013, there were many people who stripped money from their homes using home equity lines of credit and invested all that money into bitcoin. Just about everyone called these people stupid, but now they are multimillionaires. Does this mean you should borrow to invest in bitcoin right now? No. Just because bitcoin went up from 2013 to 2017 it doesn’t mean the same thing will happen e.g. from 2018 to 2020. Investing is not deterministic. Luck plays a major role.

Do you need debt?

Suppose you put 100% of your investments into risky areas such as cryptocurrencies, frontier market ETFs, mining stocks, etc. If you feel that this is not enough risk, borrowing to invest may be the answer, but I believe that most people do not want to take on this level of risk.

Where debt may be appropriate is if you having little savings and need to borrow money to invest in something that you are fairly certain is greater than the cost of borrowing, e.g. borrowing money for education and training can in most circumstances be a good idea. Even though borrowing money will cost you in interest, you boost your job prospects and your income. If you have savings (or if your parents have savings) then it is better to use those savings to educate or train yourself, but if you don’t have this, you need to go into debt as a necessary evil.

unsplash-logoAlice Pasqual

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.

My Thoughts on “The Big Short”

Yesterday I was watching a movie called The Big Short and it’s an awesome movie about the GFC. The movie makes me wonder about whether we are in for another financial crash. Stock and property markets went down about 50% in America and most countries around the world, but since then central bank injections of cash seem to have restored everything.

This movie blames the property crash on subprime loans, but at the end of the day subprime lending popped the entire American housing bubble. The bubble was there in the first place, and the bubble was in property, not just subprime property but also prime property, which is why property prices in the US fell across the board.

This movie also really exposed how corrupt and fraudulent the financial system is. The biggest injustice of all, in my opinion, is that investment banks created these toxic assets (CDOs, etc) and then when they were worthless they simply did a deal with the government to unload it onto the government in return for printed money (or bailout money). This pretty much means the banks can do whatever they want knowing that if things go wrong they can simply get the government to bail them out. If you or I started a cafe and the business failed, the government will not bail us out. However, this does not apply to bankers, the holders of capital. Capitalism, therefore, does not apply to capitalists. Bankers can create bubbles, create bad assets, and then sell these assets, and if everything goes wrong they can just tell the government to take it off their hands. There should be no bailout, and those who held CDOs should have been left to learn the errors of their ways. By bailing them out, you only reward bad behavior.

Looking at it this way, the banking industry is simply an arm of the government. Banks are simply government business enterprises.

The original view was that if the government prints money to buy these toxic assets off bankers, this would cause inflation, but these toxic assets are usually highly leveraged, and more debt actually increases the amount of the money in circulation, which is inflationary. As debt prices go down (e.g. there is a debt bubble that pops) then this means the expectation is that loans will not get paid, and the amount of money in circulation goes down, which is deflationary. The government printing money simply restores the money supply back to original levels.

How to invest

My investing strategy is pretty simple. I’ve been focusing mainly on dividends and looking at funds that provide low volatility. The perfect ETF on the ASX, in my opinion, is Betashares’s HVST, which has a double-digit yield and pays monthly. It also uses derivatives to lower volatility by selling futures when volatility is high. If the market crashes, I’m sure this fund will go down, but it won’t go down that much, and while everything is rosy, this fund will produce great dividends, which is awesome.

If there is a GFC 2, I expect to take a hit. My net worth will go down, but I have been loading my portfolio up with funds that are designed to be low volatility (such as HVST) as well as other defensive investments like gold mining ETFs (ASX: GDX) as well as bond funds, and so if my net worth goes down, it won’t go down much, and when the market bottoms, I will definitely be plowing as much money as possible into leveraged ETFs expecting the government to print money to restore the economy. While the market is likely in bubble territory now, it’s also a good idea to keep debt levels low because a major risk when there is a market crash is that a margin call will be triggered. Keeping debt low reduces the risk of this happening. Furthermore, as the market bottoms, if your debt levels are low, you have more ability to take on more debt to invest when the market bottoms, which means you can leverage into leveraged ETFs and achieve “double leverage” to magnify your returns once central bankers start firing up the printing presses.

Bottom line is that at this stage you should load up your portfolio with defensive assets, e.g. cash, bonds, gold, as well as “smart beta” low-volatility ETFs, but don’t go all into these defensive assets because it’s almost impossible to determine when a bubble will pop. As they say, a market can stay irrational longer than you can stay solvent, so often when a bubble is formed, it’s often best to simply ride the bubble and make money, but always have a plan to protect yourself if the bubble bursts. There must be a plan B.

Take Responsibility: Don’t Blame the Banks

Property investors are borrowing money from the bank and then blaming the bank for lending them that money

I have just read Banks Are Loaning Too Much to People Who Can’t Pay it Back on News.com.au. Here are some snippets:

An explosive 60 Minutes investigation, which airs on Channel 9 on Sunday, has discovered banks are irresponsibly loaning large amounts of money to people who just can’t pay it back due to a collapse in the property market.

The 24-year-old, who was an ordinary income earner, was loaned $6.5 million by a bank and encouraged to invest in a “highly volatile” market in the little mining town of Moranbah in Queensland — she bought 10 properties.

She has now obtained documents from the bank that loaned her the money, which show they knew there was a medium to high risk of the values collapsing and her homes being left abandoned by potential renters….

“The investors bought their properties during a peak in the market, some were $600,000 or $700,000 for ordinary buildings, but now some are worth just $100,000.”

Mr Coulthart said people with an average income who wanted to buy an investment property had to borrow 10 and 20 times their gross income.

“That is a preposterous amount of lending,” he said. “Property values in Australia are out of control and the level of mortgage debt in Australia is something like 3.8 times the gross domestic product.”

He questioned why people are being encouraged to borrow 10 to 20 times their gross income.

“It’s an unsustainable level of borrowing,” he said.

The 24-year-old featured in the 60 Minutes report doesn’t entirely blame the bank for the millions she borrowed, admitting to being greedy.

But she said while she didn’t look closely enough at her capacity to repay the loan, she believes the banks also had a duty of care.

“What this has taught her is banks are throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money,” Mr Coulthart said.

“To some degree that’s true, but they should have a duty of care to make sure people have the capacity to repay.”

One of the main businesses banks have is lending money to people who want to borrow.

However, I shake my head in disbelief when people willingly borrow money from the bank, put it in a high-risk investment, lose their money, and then turn around and blame the bank for lending them the money in the first place.

Banks don’t want to lose money. They are a business. As such, it makes no sense for them to lend to someone who will not pay them back. They will try their hardest to filter out bad borrowers, but this is an inexact science. You can look at income statements and check creditworthiness, but with so many borrowers on their books, banks can only do so much, and borrowers need to take responsibility for their own actions.

It may be true that banks are “throwing money at people in the good times and now in the bad times banks will blame the borrower and say it’s their fault for borrowing all this money.” However, it works the other way as well. Borrowers fall over each other trying to borrowing as much money as possible during the good times and now in the bad times they will blame the lender and say it’s their fault for lending all this money.

Debt can be useful if you use the borrowed money to make more money. If you borrow at 4 percent and make 10 percent, you’ve made a good 6 percentage point difference. However, in business and investing, things don’t always go to plan. There is such thing as risk.

This is why debt is like a knife. It can be used for good, but if used poorly it is a dangerous instrument.

A knife can be used to cut vegetables. Eating vegetables is good for your health. However, a knife can be used to cut yourself or cut others. Debt is similar. Debt can help you, but used irresponsibly debt can hurt you.

Suppose I were to buy a knife from a shop. Suppose I then take this knife and stab myself. I go to hospital due to heavy bleeding. Then suppose I blamed the shop for selling me the knife. That is no different to those who borrow from banks and then blame the banks for lending them money when investments turn bad.

How to Live Off Dividends

It’s the Christmas season now. My family does not really celebrate Christmas. I remember being really disappointed not receiving any presents when I was a child because my parents were always busy and didn’t really think about Christmas. Over time, I began to accept this as normal, and now that I am an adult, it doesn’t bother me at all. There is definitely something wasteful about Christmas. People suddenly splurge on toys, clothes, and gadgets. They eat large amounts of food. Then when January comes around, they are back at work slaving away. Chances are their bellies are bigger, and when they get their credit card bill, they realize their debt is bigger as well.

For me, Christmas in 2015 has been a spartan and minimalist Christmas. I remember my previous Christmases. I would buy all sorts of presents for family and friends, and I’d usually have a credit card debt in the thousands, but nowadays I usually use a debit card to make purchases. I do have credit cards, but I pretty much only use them for emergencies or online or foreign purchases. Even when I use my credit card, I pay it off maybe within a few days.

During past Christmases, I would always dread going back to work the next year. When everyone winds down at work, it’s a nice feeling. Office Christmas parties, Christmas decorations, and so forth set a nice and relaxed atmosphere, and I look forward to having time off to relax.

However, during the holiday period, and especially during the new year, you think about the year that has ended and naturally you think about your life. You think about your career and whether you’ve done the best you can. It can be stressful.

This year is different for me mainly because my dividend investing has gotten to a point now where I can live off dividends. When I started working, I was saving about 85% of my take-home pay and living off just 15% of it. I invested in shares, managed funds, or ETFs that pay high income. As time goes by, the amount your investments pay you will rise, and when they reach a point where they are equal to your expenses, you are a free man because you are no longer dependent on your job. If you quit, you can live off your investments.

“Although freedom does not guarantee happiness, it is the best assurance we have for obtaining happiness.”

~ Andrew Perlot

Every man should strive for freedom, and the easiest and simplest way I know of obtaining freedom is to build passive income.

I am going to lay down below the steps I took to live off passive income. Most people should be able to do what I have done.

Save 85% and create two separate bank accounts

As I have said earlier, living off dividends starts with saving up about 85% of your income. I recommend setting up two bank accounts. Talk to HR and ask them to send 85% of your income to one bank account. The other 15% will go to a separate bank account.

Having two bank accounts is an excellent system to separate your “spending money” from your “investing money.” Spend only from your spending account. Use your investing account for investing.

Live with others to keep costs down

Living with others can be tough, but it is the easiest way to save significant amounts of money to allow you to hit your 85% savings rate. Accommodation is the biggest expense most people face, so it makes sense to hit it hard. Most people focus on trying to save money on small things like coffee (see David Bach’s latte factor) or discount vouchers for t-shirts!

In my opinion, don’t bother with the little things. If you want to have a soy latte, drink it! So long as you are spending 15% of your income, you’re fine.

Living with parents is the best policy, in my opinion, especially if you get along with them. If this is not possible, then renting with others is also another option. You can even buy a house and then rent out spare rooms to bring in rental income. All these three options should cost approximately the same (although living with parents could be free depending on how generous they are).

Related reading: How to Live with Annoying People

Save money via abstinence, not discounts

When trying to save money, most people make the mistake of trying to look for discounts. For example, when buying jeans, they look for jeans that have 50% off, or when they travel to Thailand they look for airfares that are 30% off.

An even better strategy is to just not buy the jeans in the first place and not travel. Discounts often lure people into spending more than they otherwise would. Often discounts are fake, that is, an apple may be $10 but be 50% off, and so the discounted price is $5, but in reality that apple only cost about $0.50 and the retailer made a $4.50 profit. In other words, forget about the percentage discount and think about the actual price.

Basically the only necessities in life are accommodation, clothes, transport, internet, and food.

Do not conform. Rebel against society

If you’re living with your parents, driving an old car (or taking public transport), watching YouTube rather than cable TV, then many people will think you’re weird. They will put you down and try to persuade you to conform. Try to resist. Don’t conform to society. Do what you want to do. Also remember that this is not permanent. As your savings go up, your dividends will go up, and your standard of living will go up, but this will take time.

If you must, borrow from yourself

Spending only 15% of your income might be difficult, and you may run out of money when you need to spend on something you need.

If this is the case, one option is to borrow from your own savings. This is where setting up two bank accounts is a great idea. You transfer money from your investment bank account into your spending bank account. You then keep track of how much money your spending account owes to your investment account. The aim is to pay yourself back as quickly as possible.

Invest for income

Invest in a variety of assets that pay high income, e.g. ETFs, shares, and managed funds. If you’re unsure where to go, sign up for an online broker and buy shares in banks. Banks typically pay high dividends. As of December 2015, shares in Australia’s ANZ bank provide a dividend yield of 9%. I recommend using Bloomberg to find the indicated dividend yield of an investment.

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Diversify your investments and always direct dividend payments to your “spending account.” This means that over time, the amount you have to spend increases, which should motivate you to keep saving up.

Invest 100% of your income

Once your passive income from dividends (or other sources) is high enough, talk to HR at work and direct 100% of your salary to your “investing account” so that you are living off passive income. This may be difficult to do, but just remember there is no rush. Once the 15% you get from your salary seems like a small amount compared to your passive income, this is a good time to cut it off completely so that you can actually live off dividends.

Is Your Primary Residence an Asset? Yes, But…

I was having lunch with a colleague a week ago and he said the following to me: “Your primary residence is not an asset but a liability because you have to continually pay for it. You don’t own your house. The bank owns it.”

This got me thinking because years of education has taught me that a house is an asset since assets are defined as anything that produces value. A house can be rented out to produce rental income. Indeed, it is an asset according to this definition.

But technicalities aside, I do understand what my friend was trying to say. After some googling, I found that this concept derives from the book Rich Dad, Poor Dad in which Robert Kiyosaki explains that a house generates negative cashflow and therefore is a liability for you.

He is wrong. It is not the house that creates the negative cashflow. It is the mortgage. The problem is, for most people, in order to afford a house, they need to accept the mortgage because they simply don’t have enough cash to buy a house outright.

It is this connection that the bank has concocted that fools people. When you buy a house, you get an asset, but it doesn’t end there. Two sets of assets are created. The first asset is the house, which you hold. The second asset is debt, which is held by the bank. Houses tend to go up in value, but not always. House prices tend to move up only slowly and are volatile. The asset the bank holds, on the other hand, is much more valuable. The bank holds debt. It produces income no matter what. Even if you default, the bank simply takes your house. Effectively, when the bank lends you money to buy a house, it is doing two things: (1) directing cashflow from you to itself and (2) transferring risk from itself to you. The cash the bank would have held would have sat in a vault doing nothing but by lending it to you, that cash now generates interest that flows to the bank. Rather than buying real estate itself and suffer from the risk of volatile prices, the bank simply puts that risk on you by lending to you. It gets a steady income while you wear the risk.

I am not against buying a home. What I advise against is the debt. Unfortunately, when most people buy homes, it is connected to debt. It is like coffee. Research shows the antioxidants in coffee prevents prostate cancer in men. But if you put four teaspoons of sugar in your coffee, the sugar will hurt your health. Likewise, even though a house is great for you, the debt that is attached is what will work against you. If you need to buy a home, I recommend you buy a small home to minimise the debt. Otherwise, pay off the debt as quickly as possible. Rent out spare rooms. I have nothing against buying a house as an investment, but it is best to stay out of debt.

The Borrower is Slave to the Lender

I am not religious, but I am definitely not an atheist because I don’t know for sure that a god does not exist. The best word to describe me is agnostic.

I have my doubts about the Bible, but there is no denying that the Bible is an excellent manual for personal finance. If you want advice with money, forget financial advisors. Go to the Bible.

Perhaps the most important biblical financial verse in the Bible is Proverbs 22:7, which states that “the rich rule over the poor, and the borrower is slave to the lender.” This Biblical verse wowed me when I read it as a teenage boy in school. It opened my eyes to the fact that far from being equal, the world we live in today has powerful people and weak people, and coercion and slavery in modern times is carried out not with whips and chains but with debt, fees, penalties, and compounding interest.

The question is, which will you be? Will you be a borrower or lender, a slave or a master?

“Neither a lender nor a borrower be,” says Shakespeare, which is very noble. I personally like to be a master rather than a slave.

Borrowers are pathetic. They go to the bank and beg for money. Then they work nine to five, whoring themselves to the organization in order to earn cash to pay back the banker. These banks make incredible profits from lending. Which would you rather be, the borrower who works like a slave or the bank who owns the slave? I prefer to be the bank, which is why I own bank shares or, even better, bank ETFs.

When I recommend you lend, I don’t recommend you lend money to family and friends. Do not do this! You lend by getting experts to lend for you, that is, put your money into bond funds or, as I said earlier, buy bank ETFs. If you’re new to investing and don’t know what a bond or an ETF is, a savings account is a good start. Banks lend out money in your savings account to others.

What about borrowing to invest? Is that not good debt? The answer is no. There is no such thing as good debt. Debt is debt is slavery. Debt is a legal obligation to pay, which means you must work in order to repay. If you must work against your will, that sounds like slavery to me. Investments in real estate, shares, and even education can be lucrative, and when they pay off, the debt you incurred may in theory be worth it. But these investments are not guaranteed. You are taking a risk. The more you borrow, the bigger the risk is. The bank, who lends you money, takes no risk. The bank collects interest repayment from you regardless, and if you default, they take your house or have some other legal means to collect the debt. All the risk is on you. You might win, you might lose, but the bank always wins.

If you absolutely must borrow (for example, you need a car to drive to work), be careful you don’t get carried away. Make sure the debt is as small as possible and repay it back as quickly as possible. Sacrifice everything (vacation, etc) to get out of debt quickly because your freedom from slavery is at stake.