Deliberate Ignorance of Net Worth

When I started working, I tracked my net worth religiously. I did it every month. I was living with my parents and saving 80% of my salary. I invested in shares, ETFs, etc, and now I am putting a little into crypto.

However, something that annoyed me was that everyone kept asking about my net worth and they would automatically compare me to this person or that person. Gradually I increased my savings rate to 100% of salary and lived off my investments, but now I don’t bother with checking my net worth. For some reason, everyone keeps trying to pry into my finances. So now I don’t keep track of my net worth. I simply spread all my pay into many different investments and don’t even look at it. I don’t keep track of the performance. I keep myself deliberately ignorant.

People keep asking me when I am going to buy a house, when I will marry, when I will have children, how much I’ve saved, why I am still living with my parents, when will I grow up and be a man, etc, and now I simply tell them that I am a minimalist so don’t want much. I don’t want to be burdened by debt or obligations or social customs. I also don’t keep track of anything so I don’t know my net worth.

The benefit of this is that all the consumerism is gone. People cannot compare anything to me and I too cannot compare myself to others simply because I don’t know how much I am worth. So long as the dividends come in, I just live off it. This I believe is what money is all about: living and having freedom. However, an obsession over net worth distracts people into thinking money is about comparing yourself with others to see who is better, who is “more of a man” or who “has his life together.”

After living like this for a while I found that it is more calming. I no longer compare myself to others and others cannot compare themselves to me. Because I am limited by how much I can spend because I can only spend investment income, I cannot splurge on anything. This keeps me from indulging in consumerism.

My main point is that net worth is important but not as important as passive income. Passive income can keep you alive but net worth doesn’t necessarily do so as your wealth may be locked up in illiquid assets. Furthermore, an obsession on net worth seems to make you obsessive with consumerism and materialism as you’re comparing yourself with others. At the end of the day what matters is freedom, and freedom comes from having no debt, no obligations, and passive income.

The Problem with Dividends #Podcast

Passive income is often considered a very important aspect of personal freedom and autonomy. An easy way to generate passive income is through dividend investing. However, while living off dividends is a great safety net to allow you to generate income without any work, there are two main problems, namely a lower capital gains and tax inefficiency.

Property vs Margin Loan vs Internally Geared Funds

I have mentioned in a previous post that I don’t like to buy a house. Instead, from experience, I find that it’s best to invest in ETFs. The reason is because ETFs give you flexibility to invest in what you want. If you buy a house as an investment, you are leveraging into one house, and although the general property market may behave one way it’s very hard to know how your house will perform individually. For example, the house price indexes from the Australian Bureau of Statistics averages out results for a number of different houses. If, say, you have a house in Sydney and Sydney house prices went up 5% this does not mean your house specifically went up 5% but that houses in general in Sydney went up 5%.

Furthermore, if you buy a house to live in, you have nothing but debt (unless you buy a house outright without a mortgage, but this is rare). You have a mortgage that you must pay monthly and any benefit from the investment is in the form of capital gains, which you cannot access until you sell the house. You cannot see capital gains, and you cannot access capital gains. Capital gains are invisible and, if there is suddenly a recession, all your capital gain that may have taken you decades to accumulate may disappear in a matter of weeks or months.

Capital gains do not provide the same sort of comfort that cold hard cash income provides. If you have a house, this problem can easily be fixed if you turn your house into an investment property and rent it out, but even if you had an investment property, the performance of an investment property just doesn’t compare to ETFs, in my opinion. Unless you really know how to pick good property, residential property in general has low yields, and after you pay property management fees, taxes, house repair and maintenance, etc, you don’t end up with much, especially not when compared to ETFs that have been engineered to seek out and pay high dividends.

Property is not a good investment. From my experience with residential property, once you buy a property, suddenly everyone wants money from you and everyone sends in their bills. Once you buy property, you need to pay bank fees, mortgage interest, lawyer fees (for conveyancing), real estate agent commissions, taxes (stamp duty and land tax), and property manager fees. Once something goes wrong in your house (e.g. the shower breaks) you need to get a repairman in to fix it, and he send you a bill as well.

Investing in high-dividend paying ETFs is completely different. You use an online broker (e.g. CommSec) to buy ETFs listed on a stock exchange, and then you sit back and watch money flow into your bank account. That’s it.

What about leverage?

One of the benefits of property is leverage. Because you borrow money from the bank, you have more assets exposed to the market, which means potentially higher gains. However, leverage works both ways. If the asset price does not go up enough to compensate you for the interest expense, you will lose money, and when you are leveraged, you will lose a lot of money.

That being said, leverage is a legitimate strategy if you want to accept higher risk to get higher returns. You are effectively moving up the efficient frontier.

Leverage is easy to achieve using ETFs. There are two options: (1) invest in leveraged ETF (e.g. the Betashares Gear Australian Equity Fund (ASX: GEAR)) or (2) apply for a margin loan to borrow money from the bank to buy stocks or ETFs.

Based on the modelling I have done, all these options (property, margin loan, and leveraged ETFs) have somewhat similar returns, so it doesn’t matter which you do so long as you feel comfortable with the risk you are taking. However, that being said, I think that out of these three choices, property is the worst because once you sign up to borrow money from the bank, you have a monthly mortgage that you must pay. You basically have a noose around your neck. If you don’t pay it, the bank will sell your house, and you will incur substantial transaction costs. When you have a margin loan, many people will try to scare you about the dreaded so-called “margin call” but this I think is overblown. The bank will only step in to induce a margin call when your debt levels are high relative to the value of your assets (they look at your loan-to-value ratio or LVR). They do this because, if you have a high LVR, the risk you are taking is too high, and the bank will get worried that the size of your debt will be too high relative to the size of your assets, which means you may owe the bank money that you may not pay. As part of their risk management, banks will monitor your LVR and intervene to lower your LVR if you raise it too much. This applies not only with stocks but also with property.

Banks will intervene to lower your LVR if you have not been paying your mortgage. If you miss a mortgage payment or two, the bank may allow it because your LVR will not be too high, but if it goes on for too long and your debt levels start to rise too much, the bank will intervene to sell your property. Therefore, regardless of whether you have a property or a margin loan, the bank will still intervene if the LVR is too high. So long as you keep watch of your LVR and make sure it is not too high, you will be fine.

When managing your LVR, the problem with property is that you have zero control over your portfolio. Once you buy your house, there’s littel you can do to affect the volatility of the asset. You have zero control. However, if you own a portfolio of shares or ETFs, you can control how much volatility there is in the portfolio by buying specific listed assets. Managing volatility is important to managing your LVR because volatility affects the value of the portfolio, which of course impacts the denominator in the LVR. If you use a margin loan to leverage, say, into the Chinese stock market (e.g. the iShares China Large-Cap ETF (ASX: IZZ)) then the risk you face (and therefore the probability of a margin call) will be much higher than if, say, you invest in stable assets such as global infrastructure (e.g. via the AMP Capital Global Infrastructure Securities Fund (ASX: GLIN)).

There is a much easier way of leveraging that involves zero risk of a margin call, and this is by investing in internally geared funds. With internally geared funds, you don’t borrow. Rather, you take your money and invest it in the fund. The fund manager collects your money (as well as money from other investors) and uses this to borrow money from the bank in order to invest in stocks. Because debt is handled by the fund manager (rather than you yourself), you don’t owe anyone anything ever. Betashares currently offer two listed internally geared ETFs: GEAR, which leverages into Australian stocks; and GGUS, which leverages into US stocks.

According to the Betashares website, the fund is “‘internally geared’, meaning all gearing obligations are met by the Fund, such that there are no possibilities of margin calls for investors.”

Gearing via an internally geared ETF, in my opinion, is the optimal strategy unless you want to borrow money yourself so you can claim the interest expense as a tax deduction. However, that being said, if you borrow money yourself, because you are only one man (or woman), you will typically pay between 4 to 6 per cent at current rates, but if you invest in a leveraged ETF, the fund manager is responsible for borrowing, and the fund manager has access to low institutional interest rates (supposedly around 3%) thanks to its buying power. You are therefore able to gain even greater leverage with internally leveraged ETFs.

Conclusion 

I used to be very much against gearing because I strongly believe that debt is slavery, but now I accept that gearing can be a legitimate strategy so long as you have robust downside protection. I believe that no matter what you do (when investing and in life in general), it’s good to take risk because more risk provides greater return, but risk must be managed. It is okay to take risk so long as you have a safety net or a fallback plan if everything goes wrong.

Whether You Are a Slave or Not Depends on the Direction of Your Future Cash Flow

 

I couldn’t help think today about how great it is to work. I love working now, but that was not always the case. Only a few months ago I was dreading work. I hated it. I am happy now because I was able to transfer to a different area, and I did this simply by asking someone.

I now work because I want to work. I don’t have to work because I earn dividend income that covers my living expenses. I earn around $25k to $30k per year and I spend around $15 to $20k per year. But I like to work not only because I like my job at the moment but also because I like to grow my dividend income. This means I can improve my standard of living. When I am getting a coffee with my work colleagues, I notice that many of them buy the cheapest option, which is a small coffee with dairy milk whereas I always buy the biggest latte with soy milk or almond milk. Personal finance guru David Bach is anti-coffee (see latte factor) but I am a big believer in small expenses spread over time that make you happy. Getting a coffee is more than a coffee. Some people only care about the caffeine and are willing to stay at their desks and take caffeine pills. For me, getting a coffee allows me to get out of the office, get fresh air and sunlight, get some exercise by walking, and I can chat to my coworkers and even the barista girl who is serving or making my coffee. Then I can slowly sip the warm and smooth coffee when I’m back, which calms me. At any time, I can stop buying coffee. It’s not like a huge debt or a long-term contract. I’m free to walk away. 

For me, small expenses such as a coffee are not a problem. The main problem comes from large expenses, especially those that we put off to the future (i.e. debt). I will explain this in further detail later in this post.

Back to my job…I think I love my work right now because I don’t need to work. I’m happy to put in extra work after hours and over the weekend. I am not a manager or an executive or anything. I am still quite junior. If suddenly things go wrong and I end up with a bad manager, I am confident I can transfer to another area. If things really go bad and I cannot transfer for whatever reason, I can just quit and do something else. I plan to just pack up and go to Chiang Mai and become a freelance web developer. Even if I am not successful, it doesn’t matter because I live off dividends, but it would be nice to work on my own terms.

Recently UberEATS has opened up in my area. I thought about signing up for it and working on the weekend, but I have decided against that because I actually want to use the weekend to focus on learning how to code so that I can be a remote coder or a digital nomad. Today at the library I spent about an hour on Codecademy. I wish I spend my university days studying computer science or software engineering, but my major was in economics, which wasn’t that bad, but if I had to choose again I wouldn’t major in economics. Instead I’d study a tech degree instead. Luckily, many tech workers learn a lot of what they learn online, and they are self-taught, so that gives me hope that I can change careers.

Freedom is the purpose of my life. Freedom gives me happiness. Freedom gives me the option to experiment with and pursue what makes me happy rather than hope that whatever circumstance I am in makes me happy. It was Robert Kiyosaki who introduced me to the importance of cash flow, and I think freedom and slavery can be thought of in terms of cash flow. As much as possible, you want to increase passive income and decrease future obligations. Future obligations are expectations (including the risk) that in the future money will flow away from you. If you take on debt (e.g. a car loan and even a home loan) then in the future some debt collector will take money from you, which forces you to work. Anything that forces you to do something means that you have fewer choices, and so your freedom goes down and your level of slavery increases. Most people think this only applies to monetary debt, which is obvious because it is written down and it’s clear, but even e.g. having children creates future obligations that tie you down. The more you avoid debt, obligation, and commitment, then you increase freedom and reduce slavery. The words “commitment” and “responsibility” or even “duty” are just euphemisms for debt and slavery. If you tell a slave that he must clean a toilet because he is a slave, he will likely try to revolt or may reluctantly clean the toilet and will probably do a bad job at it because his heart is not in it. However, if you reframe and tell the slave that he must clean the toilet because it is his duty or responsibility, he will likely clean the toilet with pride and enthusiasm. So it is that many men proudly work 60+ hours per week at a job they hate just to fund the mortgage on the mansion, the children’s private school fees, the loan for the luxury car, and maybe even a stay-at-home wife as well. If they shirk these obligations, they are told that they are not “responsible” or that they are not fulfilling their “duty” and that they need to “man up” and get back to wage slavery.

In all these situations (car loan, home loan, credit card debt, children, school fees, etc), there is an expectation that money will flow away from you in the future.

Alternatively, if you create passive income from dividend income or even e-book royalties, Adsense revenue, Amazon affiliate revenue, etc, then there is an expectation that money will flow towards you in the future. You then have a choice of what to do with this money. This gives you freedom. It gives you more options rather than reducing your options. It results in less slavery and more freedom.

As much as possible, make money flow towards you in the future rather than away from you. In practice, this means getting rid of all debt, commitment, obligations while simultaneously increasing passive income, mainly from savings, investments, and building businesses.

Don’t be Desperate

If you’ve been to a developing country, chances are you’ve walked along the footpath and you’ve had people coming up to you trying to sell you things. As I was walking around in Kuta, Bali, there were many people sitting on stools on the footpath. These people look poor in that their hair is all over the place and their clothes look dirty. When they see you, they likely assume you are rich and immediately try to sell you something, and the immediately knee-jerk response is to just say no.

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Kuta, Bali

If a ship you are in hit an iceberg and everyone had to jump into the ocean, some people may have life jackets while other would not. If you had a life jacket and were floating in the water, but you see someone who does not have a life jacket and was struggling to keep his head above water, you’d be reluctant to help the man, not because you’re a bad person, but because you know he is desperate, and desperation drives people to do whatever they can to survive, and if you try to help the man, he may through no fault of his own try to steal your life jacket, and you may drown instead of him.

It is the same with the man trying to sell you things on the road. You know he is desperate. Chances are the products don’t have any price. There is an expectation that you haggle over the price, and you just know that he will try to rip you off, so the initial reaction is to just say no and get away. At least that’s how I feel.

The same applies to relationships. If you’re with a girl and suddenly she seems clingy and desperate, that is, she messages you all the time asking to meet up with you, then it’s the same knee-jerk response. You immediately try to distance yourself because you know that desperation drives people to do crazy things, and a desperate girl might pressure you into marriage or children even when you may not feel ready for that.

A relationship is like sales. When you’re with a girl, she is providing female intimacy, companionship, as well as other hard-to-define services, and you are providing something of value back to her as well.

The retailers you feel comfortable with are those that don’t push you overtly. When you’re in an Aldi store, you don’t feel any desperate person trying to pressure you into buying their almond milk. It’s there on the shelves. The price is clearly labelled. If you want it, bring it to the checkout and pay for it. If you don’t want it, just walk away. There’s no pressure on you. You can feel that Aldi is not desperate at all. Aldi is a huge business.

This lesson should be applied to your business and relationship dealings. Don’t be desperate because people can detect desperation, and desperation repels people.

When you are in a relationship with someone, don’t behave as if you must be with them. You need to have a life of your own. Don’t be desperate.

Even in your career you should not be desperate. Too many people, once they get a job, they buy a house and take on a large mortgage, borrow money to buy a nice car, get married, have multiple children, and go on multiple expensive exotic holidays, and these high expenses and high debts make them dependent on their job, and if there is suddenly a recession or if there are job cuts, they go into desperation mode, and employers can smell desperation. It is best to keep your expenses low and invest surplus cash so that you are less dependent on income from work because you are building up income from investments. Passive income makes you less dependent on your employer.

 

Passive Income vs Laptop Income vs 9 to 5 Income

You do what you want, when you want, with whom you want, wherever you want, how you want.

I am a strong believer in passive income, which is defined as income you earn from doing nothing. Passive income includes dividends from shares, interest from savings accounts, or even revenue from Amazon eBook sales or Adsense revenue from YouTube videos.

However, passive income tends to be low. Interest from a bank account will give you about 3 per cent. Depending on which shares you buy, dividend yield tends to be around 6 percent or so, although it varies across companies and across countries. An investment that I invest in that currently pays a yield of about 12 per cent is the Betashares Australian Dividend Harvester Fund.

While passive income is excellent because you don’t have to work for it, I do not hate working. I hate my nine-to-five job, but it’s not the actual work I hate. I just hate having a manager tell me what to do, and I am not the only one. Studies show that about 70 percent of Americans hate their job and their bosses and are disengaged.

This is why it is important to earn money online. I call this “laptop income.” It is not as good as passive income but definitely better than the salary from a 9 to 5 job.

Earning money online is not necessarily passive. You may need to post videos on YouTube, run an eCommerce store, send emails, write blog posts, trade shares online, and so forth, but it is work that can be done on your laptop while you are in a cafe. It is work that you can do anywhere where there is internet connection, and you don’t have a boss watching over you.

You do what you want, when you want, with whom you want, wherever you want, how you want.

If you are new to working online, here are three ideas.

  1. Work online: This is not that great because freelance work is a lot like a 9 to 5 job in that you have a client you work for, a client you need to keep happy, but working online means you get to choose who your clients are. Filling in surveys (e.g. at Pureprofile) and completing projects at Upwork or Freelancer can earn you money, but the amounts are not huge. Freelance work can make you serious money if you are talented in a specific area.
  2. Create or build something: This includes blogs, ebooks, YouTube videos, websites, eCommerce stores, etc. This is the best way to make money. You must be a creator rather than a consumer. Rather than watch YouTube videos, make them instead. Rather than read articles, write them. This is where it is important to get rid of distractions because too often distractions from Facebook and other social media can make you too much of a consumer rather than a creator or a builder. I manage distractions by simply putting it off. For example, suppose I am browsing my email and I see a link to an article I need to read. I use the app Pocket to save it and read it later. This is a very useful app. If there is a YouTube video that I feel I need to watch right away, I save it to a playlist where I can watch it later. Put off distractions for later and focus on building and creating things of value.
  3. Monetize what you create or build: This can be achieved using advertisements with, say, Adsense (I prefer to use Anonymous Ads, which pays you in bitcoin and allows you to remain anonymous). That being said, advertising does not make much money. Other options include affiliate links (e.g. via iHerb and Amazon) or even creating your own product or eCommerce store and advertising your own products on your products. Creating and advertising your own products allows you to make the most.