I’ve done reasonably well out of COVID-19. Even though my net worth dropped back in March by about $120k, it has since recovered and grown much more rapidly than normal.
Working from home has saved me a lot of money e.g. I used to buy coffee and lunch every day when I was in the office, in addition to spending money on public transport, petrol, etc.
Even though I am saving and making a lot of money, I am somewhat keen to get back to the office. Working from home is mostly terrible.
My first gripe with working from home is OHS. My back is hurting. Ever since I started working from home, I have purchased a new desk, footrest and chair, but my back still hurts. Back in the office, someone else sets up my desk and made sure that it was ergonomic. With all the work I am doing at home, my back is really starting to hurt.
Another issue I have with working from home is that it is lonely and isolating. I miss socialising with people at work. I had a Zoom catch up with some coworkers about a week ago and we reminisced about some of the fun moments in the office, but when I thought about the last eight months working from home, nothing came to mind. It’s like I did nothing in the last eight months except work and sleep. There are no good memories. The thought that a person does nothing but stay in a small room all day by himself working, eating, watch Netflix, sleeping etc seems sad and dystopian.
Another problem with working from home is the drop in productivity. A lot of work gets done much slower when people are working from home. Simple work like writing a report or emailing can be done remotely very easily, but work that requires collaboration or quick exchange of ideas is difficult to pull off in a remote environment. Remote meetings are also really bad. When you are in the office and in a meeting, people are engaged, and I think this is because they know they are being watched, so they chip in and add value. However, in a remote meeting, the person who sets up the meeting really has to drive the meeting. Most people just turn off their video, mute themselves, and do something else e.g. check their e-mail. Workers seem to be more disengaged when working remotely.
Another reason why working from home is difficult is because the home can be a distracting place. I am somewhat lucky in that I don’t have children, so I am not interrupted much when I work, but many people do have children, and it definitely affects their productivity. Now that childcares have reopened, many parents are putting their children in childcare, but many parents do not, and due to their drop in productivity, a lot of work falls on other people.
It has been a few months since the COVID-19 crisis has hit, and as a result of this crisis, I have settled into working from home. I’d like to describe my experience working from home from my parents’ home for the last few months.
Disadvantages of remote work
First of all, I find I have been quite busy. I would often either wake up early or work into the night in order to get work done. It seems there is more work to do when working from home. There are definitely advantages of working from home, but there are definitely disadvantages, the main disadvantage being that it is more difficult to work with others. For example, when you’re in an office, you can walk to someone’s desk and talk to them about something, but in a remote environment, you need to e-mail or call them, and they may not respond to your e-mails or calls. Furthermore, when I am in the office, I can walk to someone’s desk. If they are on the phone, it is clear they are busy, so I can walk away and come back at another time. However, when working remotely, I am more reluctant to ring someone because I have no idea what they are doing. They might be in the toilet or they might be changing their baby’s nappies, so there is this fear that I may intrude on their private lives whereas at work the expectation is that you work at work so you have no private life at work. Working from home does not seem to work well for “fast-paced” work where quick communication is necessary, especially when there is a deadline looming.
Advantages of remote work
There are advantages of remote work. In my opinion, there are more advantages than disadvantages. If I had to choose between working at home or working at the office, I’d prefer working at home, but ideally I’d prefer to have both options. There are some tasks I’d prefer to ask colleagues to come into the office to do, and there is also better socialisation in the office. For those who do live by themselves or who do not have too many friends outside of work, the office becomes the source of friend and family.
For me, the key benefit of working from home is I save a considerable amount of time not commuting. You don’t need to drive or take a train to work, which benefits me greatly because it takes one hour for me to get to work, which means I get two extra hours per day to sleep, exercise, read or watch Netflix. Another benefit is that you don’t need to worry about what you wear. When you go into the office, you need to dress correctly. However, when you work from home, you can wear anything. You can just put on sweatpants and a hoodie or you can stay in your pajamas. Even if you are on a Zoom call, you can turn off the video or you can position the camera so your clothes are off the screen.
Another benefit of working from home is that you don’t need to concentrate in meetings. This might sounds bad, but there are many meetings where you can safely turn off video and audio and do your other work. You can dedicate half your attention listening to the meeting (in case you need to speak) and the other half doing your other work.
Something I have noticed ever since working from home is that I am signing up to many webinars. Back in the office there are plenty of optional training sessions that I do not sign up for because I simply don’t have time. If I needed to get off my desk to go to one hour of training, that is one hour I would not be working. I only go to those training sessions that are mandatory. However, since all these training sessions are now online, they are quick and easy to sign up for, you can listen to them while doing your other work, and if something urgent comes up at work, you can simply and easily leave the webinar without any embarrassment or shame. As a result, I have gone to many webinars and feel I have learned a considerable amount about many different topics, from HR all the way to finance, retirement planning, etc.
Another benefit of the COVID-19 crisis is the amount of money I have saved. I don’t drive much, but in the last three months I have not driven at all, so I have saved a lot of money on petrol. Even when I have the option to drive short distances, I prefer to walk instead because I spend so much time indoors that I want to walk more to be outdoors. (When you drive, you are indoors.) I also never eat out, go to cafes, etc. Any socialising needs to be online, so it is free. I watch Netflix rather than go to the cinemas. Basically everything is done at home or online, which is much cheaper than “going out.”
The impact of COVID-19 on the property market is very unclear. There is a considerable amount of stimulus being applied to prop up not just the property market but also the stock market. That being said, if remote working becomes the norm, there is no advantage of working near the city anymore. This means I can live in the outer suburbs without worrying. Even if it takes me two hours to commute into the city, if I do so rarely, it’s not a problem. This means the cost of putting a roof over your head goes down considerably. It costs about $1600 per month to rent a one-bedroom apartment in the city, but in the outskirts of the city it costs about $1000 per month, so automatically you save $600 per month. Using the 4% rule, this means you only need to save $300k to pay rent forever (rather than $480k).
The frugal non-consumerist post-COVID lifestyle
Based on quick calculations for a single childfree person living in an Australian city, COVID-19 has reduced the cost of living by about one-third, from $3500 per month to about $2111 per month. Once again, using the 4% rule, this means you only need about $633k to retire rather than $1 million.
How is this possible? Because you no longer need to live near work, you can minimise costs by moving to the outskirts of the city, which should halve your rent. I am assuming the cost of a one-bedroom apartment in Melbourne CBD vs a one-bedroom unit in the outskirts of Melbourne (e.g. Frankston). Because you are not going out at all but eating at home all the time, this should halve your food costs. You also don’t need a car because you can walk, bike or take public transport everywhere. Assuming all other expenses stay the same, this cuts costs by about one-third.
Monthly Post-COVID Cost
Monthly Pre-COVID Cost
Estimated monthly cost of living pre-COVID and post-COVID. “Other” includes electricity, internet, streaming services, etc.
In my opinion, one of the benefits of the COVID crisis is that it has forced people to live a non-consumerist lifestyle, which may result in many people realising that they are able to retire early if they want to. You don’t necessarily need $1 million to retire because living in isolation has taught you that you only need about $650k to retire.
In my opinion, a post-COVID lifestyle presents an opportunity to live more environmentally sustainably. A lifestyle with less car use, less overseas travel, less “going out” and more bike riding, walking, having meetings online, etc are better for the environment. I also think that caring for the environment can help you save more money because it provides extra motivation. For example, I am driving less today not only because I save money driving less but also because I am starting to feel very guilty driving a car. This extra guilt helps to discourage me from driving or travelling or going out to restaurants.
What about the economy and personal finances?
There is a considerable amount of uncertainty about the future of the economy. Some believe there will be a V-shaped recovery whereas others are expecting a W-shape or even an L-shape. Regardless of what letter of the alphabet the stock market resembles, I am not too concerned because I have diversified my portfolio to include not just equities but also bonds, gold and even cryptocurrency.
Another benefit of the COVID crisis is that interest rates have fallen. The interest rates on my CommSec margin loan as well as NAB Equity Builder have both fallen (5.6% and 3.9% respectively). As I have explained in other posts, debt can be positive because you are able to deduct interest expenses. Many people invest with debt when buying a property, and they deduct interest expenses. It is possible to do the same with ETFs, but in my opinion the main benefit of holding debt to buy shares rather than property is that stocks or ETFs can quickly and cheaply be sold to extinguish the debt whereas a property is very expensive to sell. For example, if I borrowed money to buy ETFs and suddenly wanted to retire early, I can sell ETFs and with the proceeds I can pay off all my debt. However, if I borrowed to buy a property and suddenly wanted to retire, selling a property to extinguish the debt would cost me about $30k in real estate agent commission.
Another benefit of ETFs vs property is that you can avoid or minimise capital gains tax. If you own an investment property with debt on it and you suddenly retire, you need to sell it to pay off the debt. Selling it will trigger capital gains tax. For example, suppose you buy a property for $500k and it increases in price to $1 million. Then you sell it but need to pay CGT on the $500k price rise. However, the benefit of ETFs is that you don’t have to sell all ETFs at once. Suppose you purchase $500k in ETFs and it rises to $1 million in price. Rather than sell all the ETFs, you only sell half thereby realising only $250k in capital gains. Then you sell the other half the next year thereby maximising the amount of capital gains subject to lower income tax rates. This works in Australia because capital gains tax is based on the progressive income tax rates. Under the Australian income tax system, income (including triggered capital gains) under $18200 in the financial year is exempt from any tax whereas any amount above that is subject to tax. So if you sell a property and realise $500k capital gains, then only $18.2k of that is exempt from tax with the rest being subject to tax. But if you sell half your ETFs in one year and the other half the next year, then $36.4k is exempt from tax. ETFs are highly divisible, which allows this, but property is not. You cannot sell half the house and then the other half the next year.
Because I have invested in a range of different ETFs, if I needed to retire quickly and needed to extinguish the debt, I would simply sell an ETF that has made large gains and then offset these gains by selling off a different ETF that has made losses. The losses and the gains would roughly cancel each other out, which means there is little capital gains tax to pay. Any existing capital gains can be left untriggered. ETFs allow you to control your capital gains and therefore your capital gains tax.
Some people say that an easy way to avoid CGT is to put your money into your principal property of residence (PPOR), which is exempt from CGT. However, this does not work. When people buy an property, there is a reason why investors prefer to put a tenant into it even if doing so removes CGT exemption. It is because putting a tenant into a property provides the landlord with rental income as well as the ability to deduct expenses. The gains from the rental income and interest deductions is greater than the loss of CGT exemption. If this were not the case, there would be no investment properties because landlord would put any extra money into their main residence rather than invest it in a rental property. This means it would be impossible to rent because no landlord would put money into rental properties because the tax advantages would be greater for main residence. The government must provide rental property investors greater tax benefits for rental property compared to main residences otherwise the rental market would not exist. That rental income and tax deduction on expenses from owning investments is greater than CGT exemption on a PPOR is the key factor that justifies “rentvesting” but that is a topic for a separate future post.
Am I close to retirement?
There are two main reasons why I would feel uncomfortable retiring today. One is that I have quite a bit of debt. Of course, I can sell assets to pay off the debt, and some of my investment income can be used to meet the debt repayments. However, I feel reluctant to do this. Part of me feels that I should pay off more debt or at least generate more dividend income to meet all debt obligations.
Another reason why I am reluctant to retire is because a substantial amount of my personal wealth is in my superannuation fund, which I don’t have access to until I am 60. This means that if I retire now, I will need to implement the “two bucket system” and run down my non-super bucket that will tide me over until I have access to my super, which will help me pay off my debts. If I implement the “two bucket system” right now, I’d be living a very frugal lifestyle with a pre-super safe withdrawal rate of about 2 per cent rather than 4 per cent. I want to build up more wealth in my non-super bucket that will tide me over until 60.
New podcasts and website
While under lockdown, I have been listening to many podcasts. A recent podcast that I highly recommend is FIRE and Chill which discusses personal finance in Australia.
Another website that I find useful is the Nomadlist FIRE calculator, which helps you determine which countries you are able to retire in based on your net worth. The most expensive city to live in is New York, so if you have enough net worth to be able to retire in New York (about US$1.1 million), in my opinion you are effectively financially independent. However, what this site teaches you is that even if you have low net worth, there are many countries all around the world where the cost of living is low, which means you will be able to retire very quickly. Many people assume that they need to live in expensive cities e.g. Sydney, Melbourne, New York, London, etc. However, the world is enormous and there are so many places where it is cheap to live. For example, in Liverpool, UK you can live off US$500k. In Davao, Phillipines you can live off US$250k. Looking at sites like this is a strong motivator because as my net worth grows, I am able to tick off cities around the world where I am able to live. The ultimate achievement is ticking off on New York because then you’d have the safety and security of knowing you can retire early in the world’s most expensive city.