How I money

(Technically, this article should be titled “How WE money” because everything I do, I do it with my wife.)

One of the things I pride myself on is providing financial advice that follows the “family and friends” rule. This means that I provide the same advice to my clients that I’d provide to my loved ones if they were in your position.

In fact, I’d extend that further. My advice reflects what *I* would do if I were in the shoes of my clients.

So when I provide advice, I tell my clients what I’d do – if I was in their situation, and shared their values and priorities. Stepping into the shoes of my clients isn’t easy, but it’s a sweet, sweet challenge.-

It’s important to stress, however, that the advice I provide to clients differs from what I actually do. The reason for this is that my wife and I have our own unique circumstances and objectives.

Everyone is different.

You do you.

All of the above is a caveat to what I write about below. Because I’m going to share how *I* (or “we”) deal with my (our) financial affairs.

I’m not going to share dollar figures. But I will share the broad contours of our financial situation and some of the reasoning behind what we do.

I write this to be transparent and provide an example. But I don’t encourage anyone to follow what we do exactly. Because we have our own unique circumstance and goals, and strengths and weaknesses, that won’t align with your own.

What is appropriate for you will almost certainly be different.

Some background

My wife and I are in a fortunate financial position. Our household income is higher than most household incomes.

Although this has been the case for some time now, it still feels like a foreign experience to me. I grew up very modestly. It’s more normal, however, for my wife, who grew up in a medical family. (Among her siblings and partners you can’t swing a cat without hitting a doctor.)

These backgrounds, along with our personal tendencies, colour our individual relationships with money, even though we’ve been together and shared our financial fortunes for around 15 years.

One other thing that is worth noting is that our income is variable. Neither of us have fixed salaries. It’s variable in the sense that we don’t know what we’ll receive in a given week, and also that we don’t know what we’ll earn in a given year.

One thing that we’re confident of is that our income in a given year will almost certainly exceed our day-to-day living expenses. The question is one of degree.

Our home

We own our own home. It is much larger than we technically need. But we love our home, and it’s very much a family home. We live across the road from a good primary school and near excellent secondary schools. We expect to be here for the next twenty or thirty years.

We also have a mortgage. It is much larger than it needs to be, and we could live in a smaller, more modest home with little to no mortgage, which would put us in a better financial position over the long-run.

But as I’ve discussed elsewhere, we have made this decision in light of our values and priorities. Wealth isn’t just about getting into the best financial position possible.

One thing that is worth noting is that we don’t expect to make money from our home. In a sense, we’ve locked in a rent that we’re prepared to pay for a period of time and that is that. The same goes with renovation decisions: we’re unlikely to think of these as “investments” but as consumption decisions. At the end of the day, we’ll have equity in a home that will be more than what we need. At some point in the future, we will almost certainly downsize (rightsize) and free up capital which will help support our retirement lifestyle.

A decent portion of our income currently goes towards repaying our mortgage. We pay more than the minimum required. Because as I’ve written before, a 30-year mortgage is too long.

(Having said that, I’m a little more sanguine about this than when I wrote on that article, and I touch on the perennial debate about whether to repay your mortgage or invest here. I’ll update the former article at some point.)

The mortgage is in two parts: most of it is fixed, with a small amount in a variable, offset account. In the past we had a larger offset account but we found that paying down this account didn’t work for us. (This works for some people: you do you.)

We have a trust

We have a trust. My wife and I are the co-trustees, along with a trustee company. The only asset of the trust is our home. Partly we’ve set it up for asset protection purposes. But we’ve mainly set it up to ensure a significant portion of the wealth we build is protected for the benefit of our children and their children.

Because the trust only owns a home which isn’t an income-producing asset, the administration involved with the trust is very straightforward. Having said this, I say this from the perspective of someone who has practiced as a trust lawyer and acted in a professional trustee capacity in the past, so my mileage will be different to the mileage of most people.

We aren’t big budgeters and are terrible when it comes to using accounts for specific purposes

Over the years, we’ve tried to allocate bank accounts for specific purposes. But to date it hasn’t worked for us.

If I ever tell you that I have a “splurge” account, a “mojo” account, or anything like that, the first thing you should say is: “where is the real Sonnie and what have you done with him”. Because I’m allergic to that level of micromanagement.

We could be a lot better at budgeting. In fact, I’d say we don’t have a budget per se.

Periodically, I will audit our expenditure – by going through our historical expenditure over, say, a period of three or six months. I also use Pocketsmith but I’m far from a power user.

If there’s an area where we could improve, it would be in this domain. We could probably increase our savings rate substantially. Fortunately we’re in a position where we can sustain our lifestyle even though our day-to-day financial management isn’t as good as it could be.

One thing I will add is that we are busy. My wife and I have a number of obligations. We don’t have time to “optimise” our expenditure. It would be nice. But there would be opportunity costs for our time. I suspect that spending too much time and energy on this domain would impact our performance in other domains – notably our professional lives – which in turn will reduce our earning capacity over the long-run.

It’s also worth noting that one of the reasons we’ve worked so hard to get where we are is so we don’t need to watch every dollar. Coming from a situation where this was the case, I can’t stress how nice this feels.

It’s really nice to go to a supermarket and not have to think about how much you spend. It’s nice to know that you can hop online and spend $100 or so on something without it impacting your long-term trajectory.

Sure, we could watch every dollar, and it might mean that we could retire earlier, but even if we got to that position, we’d probably continue working because we enjoy doing what we do.

My wife and I have both worked in roles we didn’t enjoy. We now work in roles, and for organisations, where we really enjoy doing what we do. We are confident in the stability and security of our professional lives. It’s hard to express how valuable this is.

KiwiSaver

Our KiwiSaver funds are with Simplicity, in the growth option. I sometimes think about switching to SuperLife’s High Growth Fund because we won’t be accessing the funds for several decades and the SuperLife fund is more aggressive (targeting 99% growth assets compared to Simplicity’s 78%). The main reason I haven’t done this is that I haven’t got around to it. I also have a personal affinity to Simplicity, which isn’t really a good enough reason. But ultimately we’re talking about shades of good.

I’m self-employed so don’t get any employer co-contributions. I make contributions of $1,043 to KiwiSaver each year, and I usually do this at the last moment each June (which is the last month of the KiwiSaver “year”). Part of my rationale for this is that I wait until June to make sure that I contribute the optimal amount to KiwiSaver to maximise Government Contributions (formerly known as Member Tax Credits).

My wife, on the other hand, has until recently contributed 8% of her income, even though her employer co-contributes only 3% and the “rational” amount to contribute would be 3%.

Yep. I’m comfortable admitting to the fact that we’re not Vulcans. And that in some ways we are terrible enough with money that it’s important for us to lock funds away.

Very recently, we reduced this, on the basis that we probably have enough in KiwiSaver and we would prefer to have access to funds in the short- to medium-term. But it has been a nice feeling to know that money is being put away, without us ever seeing it, for the long-term future.

We also have a decent amount of funds in Australia Superannuation, which for the time being I’m keeping in Australia. I’ve made sure that we’re not paying unnecessary insurance from within our superannuation accounts. We’re also in low-fee, index-based, growth-oriented funds.

Every now and then I do a back-of-the-envelope calculation of what our “locked away” funds (KiwiSaver and Australian Super) will be when we hit 65, even if we don’t make any more contributions, and it simply compounds at a real return of, say, 3% or 4% or 5%. Once this figure gets to an amount I’d be really comfortable with we will probably drop these contributions further.

We make weekly payments to SuperLife’s High Growth Fund

We have set up automatic payments to contribute weekly to SuperLife’s Growth Fund.

Part of the rationale is similar to why my wife has historically contributed 8% to KiwiSaver. We never miss the money we never see. To a large extent, we put in a “stretch” figure – a large enough amount so that we never feel “rich” and like we can really let go when it comes to our day-to-day spending.

The funds we put away in this fund serve a number of purposes. The main reason we accumulate these funds is for emergencies. Arguably, it might be better to invest this more conservatively. But this is an area where we have a fairly high risk tolerance, and is also impacted by our broader family situation. We are in a fortunate position where we have family members who would be able to assist if we really needed help at short notice.

We’ve also been known to access these funds for other purposes, like funding home renovations and furniture purchases. (In fact, I’ve recently incurred a number of costs of this nature and the balance of this account is a lot lower than I’d like it to be.) If and when we upgrade our cars, we’ll take the money from these funds.

Another reason for investing in a growth fund is for both of us to continue to get real-life experience with investing in financial assets. I’m a financial adviser, and I advise clients. But I know that even for me, intellectual understanding of investing isn’t enough. It’s important to experience investing, especially with your own money. As such, the value of investing in this way isn’t just related to getting better returns – it’s about education, self-knowledge, and weathering us for volatility in the future when the stakes are even higher.

We contribute to SuperLife because when I set this arrangement up, we didn’t have the minimum necessary to set up with Simplicity. We stay with SuperLife mainly because of behavioural inertia. When I experience a burst of motivation I’ll probably switch to Simplicity. But ultimately, they’re both good providers.

In the past I also had funds and automatic payments going to InvestNow. I scattered our investments across various funds, including the AMP Capital All Country Global Shares Index Fund and Vanguard’s International Exclusions Fund (I can’t remember whether it was the hedged or unhedged fund: for our purposes I was ambivalent about the cost/benefit trade-off.) At the end of the day, I got tired of using more than one platform and didn’t want to end up dealing with tax from investing in non-PIE funds (Vanguard’s funds). So I recently consolidated everything into SuperLife.

I also hold some funds in a trust-like arrangement on behalf of me on and a few friends in Simplicity’s conservative fund. Again, that’s another story.

We pay for most things on credit card and repay the balance at the end of the month

Well, we repay the balance most months. Sometimes we don’t. We could technically redeem funds from SuperLife to repay the balance in full. But I’m lazy. If this was a super regular event, it would be a concern. But if it’s an occasional thing, and the balances are never enormous (in the context of our broader situation). I don’t think this will significantly move the needle in terms of our long-term financial outcomes.

We don’t put money aside specifically for our children

This will be the topic of a more specific article. But:

• It is extremely unlikely that we will pay for private primary or secondary education for our children. For one thing, we’re zoned for very good public schools. For another, it’s insanely expensive. (And don’t get me started on the fact that many of the most “prestigious” private schools get most of their great grades from students who are buy-ins/scholarship students, rather than students who would otherwise attend that school.) We won’t rule it out, but our preference is to go public.

• We want to assist our children with their tertiary education. We value education and see this as part of the inheritance we provide them. We may also help them out with getting onto the property market. We haven’t put money to the side for this. Our rationale is that the better our financial position is at that time, the easier it will be for us to assist out of cash flow and capital without compromising our long-term financial outcomes.

We have lots and lots of insurance

We have a lot of insurance. This includes home, contents, and car insurance. We also have a lot of personal insurance.

Even though I’m a financial adviser, I engage an insurance specialist to make sure we have appropriate levels of insurance. I urge you to do the same. Our insurance includes:

• Life insurance. My wife is a higher earner than me, and her broader family situation is such that if something happened to me, she’d have more financial support. Her life is insured for significantly more than mine.

• Income protection. We both have policies for agreed levels, with waiting periods of 13 weeks.

• Trauma insurance. I can’t remember the level of cover we have off the top of my head. I believe it’s somewhere around $100,000. At some point in the foreseeable future we will probably reduce this.

• Total and permanent disability insurance. Our level of cover is fairly high. This is one of the scenarios where I don’t want me or my wife to be under-insured against. At the moment, I believe our policies are “any occupation” policies. Next time we update our policies, we will probably switch this around so a portion of my wife’s cover is under an “own occupation” definition.

We don’t have health insurance. The rationale for this is that we can (and will) be able to self-insure for most major health issues. There is some risk involved with this approach but it’s a risk we’re prepared to make.

When it comes to “insurances” like extended warranties… fuhgeddaboutit.

We invest in our careers

My wife is in the process of negotiating to buy an interest in the business she works in. This will cost a lot of money, and we will probably need to borrow a fair amount to do this. There will be risks associated with it. But when we do it, the returns (financial and otherwise) are likely to be worth it.

I’m investing in Fairhaven Wealth. Fortunately the up-front and on-going costs are not exceptionally high. The major investment relates to the opportunity costs of my income. After two and a half years of effort, I’m still a long way from getting a good financial return on this investment. But time will tell, and it has been good in many other respects.

We track our net worth

I have been tracking our net worth for approximately 15 years. For some reason the spreadsheet I currently use “only” traces our net worth back to July 2011. I can’t remember the specific reason, but I’m sure it’s a good reason. (I think it’s because until that point I was including non-financial assets in our net worth, such as cars and contents, and I saw the error in my ways and wanted more consistency.)

The main metric I measure is net worth. Although over time I’ve measured different metrics that are relevant to us at the time. At the moment, I measure:

• Net worth – consisting of our financial assets (including KiwiSaver, funds in Australia superannuation, SuperLife, and various transactional accounts; I don’t include funds earmarked for a specific purpose such as tax), plus our home (which I value at the price we paid and won’t update until if/when we sell the property), less our liabilities. It doesn’t include our “stuff” – including cars, furniture, clothes, or anything else around the home.

I also break this down into:

• Equity in our home (ie, the purchase price we paid, less the size of our mortgage), and

• Value of financial assets.

This goes back to an article I wrote a while ago: I tend to categorise assets as “stuff”, “home”, and “investments”.

Other metrics I track include:

• Funds locked away until we’re in our sixties (ie, KiwiSaver plus Australian superannuation funds).

• Liquid assets (ie, our funds for easy access, less our credit card balance).

Seeing our net worth rise over time is extremely rewarding. It’s also really surprising at times – there are periods where our net worth kicks up a lot faster than we would have imagined.

I’ve got a few fancy calculations on my spreadsheet, so I’m alerted if our net worth is the highest it has ever been. Funnily enough, quite often when that happens we don’t feel rich, because our day-to-day experience is of having less cash than we think we should – because we’re locking funds away into KiwiSaver and into SuperLife.

I’m not sure whether we’ve got the right balance of having cash available versus putting money away for the future or not. It’s a perennial challenge for everyone. For the past few years it has been about right but I will probably make some minor tweaks in the foreseeable future, so we can free ourselves up to spend a bit more.

Borrowing the words of many of my clients, my wife and I feel like we live a good quality of life but we don’t live extravagantly. Locking funds away keeps us from getting too complacent.

And of course, we flawcast!

Every few months I update our personal flawcast spreadsheet and explore a number of scenarios. At the moment, I adjust 26 active variables to see how various trade-offs and how some decisions might impact other decisions. (And yes, some of these variables relate to whether and when I buy a 987 Porsche Cayman and how much I pay for it.)

Based on everything, unless we suffer tremendous misfortune, it appears that we’re on track to continue to support a good quality of life over the course of productive careers and long, happy, healthy retirements.

Most of the time, we don’t think about our finances – apart from the balances of our credit card and transactional bank accounts.

Although we’re sometimes concerned about our cashflow situation, these concerns are within a broader context of knowing that we are on the right track.

What next?

We are due to catch up with our insurance adviser for a review. I suspect that we will be reducing one or more of our insurances (in particular, life insurance – although that may depend on if/when my wife becomes a shareholder of her business, in which case there may be additional insurance required as part of the shareholders’ agreement/buy-sell agreement). For some other insurances, we may be making tweaks.

At the time of writing this, my wife has recently reduced her KiwiSaver contributions to 4%, which should free up some additional cash flow. A portion of this will probably flow into our SuperLife investments.

We are also in the process of being a little more disciplined regarding how we treat our bank accounts. For instance, we are going to make regular payments into an account for predictable fortnightly/monthly/annual expenses (eg rates, insurance, utilities, Netflix, Spotify, and the like), which will let us focus our attention on more discretionary expenditure via our credit card and transactional accounts. We may even set up our own specific car/travel accounts, but that remains to be seen.

Boring, right!?

As I often say, make your financial life boring so the rest of your life can be interesting.

I hope your financial affairs are as boring as ours.