Million Dollar Investing Mistake

Jason · 00:00Welcome to episode 164 of The Numbers Game. I'm Jase. I'm here with Nick and Marty. How are we going today, fellas?

Nick · 00:06I'm really nervous, Jase. I'm away for one episode and my game over has been stolen by Nick Riley. You know, that was— if you haven't listened yet, go back to the last episode. What was it? If you want to do it easy, call breezy.

Marty · 00:21Yeah, that'll do.

Nick · 00:24Along those lines, top shelf.

Marty · 00:25Well, mate, top shelf set standards.

Jason · 00:28Sometimes they need to be lifted. You know, he felt the pressure.

Nick · 00:31So I'll tell you what, well, you guys talk on because I really got to work out the quote for today because I've, uh, mate, that was, that was next level A-grade. So I'm feeling good. Um, big night in the Vids household. Um, dog had too much wax in its ears and we had to spray this stuff in its ears and it's been about It's been about 3 hours on the carpet side by side trying to get it out.

Nick · 00:55So I think we've done the right thing, but the dog— we breached big trust. Big trust. Dog will not come up for a pat, but we have to make sure it's got clean ears. So that's about the extent of my excitement, boys. Nick, surely your life is, uh, you know, better than that.

Nick · 01:11What's going on, mate?

Marty · 01:13No, mate, just, uh, had a busy weekend actually. Lots of family stuff. Like, um, baby showers. I had a christening I had to go to, then a couple more things coming up this weekend. So it's really impacting my golf— well, not ability, there's a few things that are impacting that— but, um, it's impacting my, my weekend golf, which is a bit of a conundrum.

Marty · 01:35I'm just trying to work out what I'm going to do there. But, uh, busy weekend, but recharged. Um, yeah, I don't— grew up with dogs, I don't recall ever trying to get wax out of their ears. So I'm I'm intrigued. I'm intrigued. Is that, is that like a, a modern day thing?

Marty · 01:51Same as dogs coming inside?

Nick · 01:53Well, I don't know. Maybe it's just a sell, you know, it's a sell by Pet Barn, you know, in order to keep your dog's ears clean. Lucky you didn't have to do that for any family members, mate. So it's, uh, and you can't let family get in the way of golf. Just, you just gotta reassess.

Marty · 02:09Thanks. Thanks. That's what I was thinking. Yeah, you just, you've just confirmed it for me.

Nick · 02:16Jase, how are you, my friend?

Jason · 02:17Made a slight error over the weekend. Uh, I'm 8 weeks into a 16-week marathon prep building, so this was meant to be a down week on the kilometers, and I think my subconscious brain saw that as an opportunity to, um, let loose a little bit.

Jason · 02:32I was at a concert on Saturday afternoon, saw Grinspoon, Temper Trap, Veronica's, bunch of others, and yeah, got in a little bit of a one-for-one with my brother. I'm having, you know, a couple of, uh couple of cold beverages in the sun. And let's just say, after 8 weeks off, I was not feeling very well the next day.

Jason · 02:50So, uh, back, back into the training now, staying focused, and, uh, looking forward to sharing with you guys how to, how to be a million dollars richer by the time we get to the end of this episode.

Nick · 03:00Oh, that sounds, uh, intriguing, mate. Go on, go on.

Jason · 03:03All right, I will, mate. I, uh, I happened to— must have been somewhere with Greg end of last week, and he, uh, you know, opened up an article and shared it with me and said, Jase, this would be really interesting. And I thought, oh, anything Greg finds interesting is usually definitely full of numbers.

Jason · 03:19He's wired like an accountant and loves his numbers and unpacking things. So I thought, all right, I'll give it the attention. And ultimately what he'd found was an article saying that rather than paying down your mortgage or your home loan, which, you know, is a common— not misconception, but it's a common thing that a lot of people would do and would understand.

Jason · 03:40You'd go, you pay down your home loan, you know, you want to own your family home. And the smartest thing you can do is put money against that home loan. You know, it's— you've got an interest rate, it's non-deductible debt. So you pump as much money into your main residence to pay that down and it creates equity. Now, you know, from my understanding and maybe you guys as well, you'd probably hear that a fair bit, correct?

Nick · 04:02Yeah, definitely. I think, yeah, the great Australian dream is property and you're trying to get out of debt as quick as possible where you can.

Jason · 04:09Glad that we're all on the same page. And I found this interesting as well because, you know, I've got kind of very similar mindset as well. Clients ask, you know, we talk about putting money in the offset, reducing non-deductible debt. It's a pretty common thing that people do. But maybe, you know, potentially it's not the only thing that we need to be talking about, given that this article talks about how to make people $1 million richer, which obviously got my attention and Greg's attention.

Jason · 04:30So to give you some of the numbers, and especially right now, you know, while we're talking about historic high interest rates, you know, the highest we've dealt with in a very long time, rather rather than the need to pay down your mortgage as fast as possible, this article talks about paying— if the difference between paying $200 a week off your mortgage over 30 years and what that equates to is $558,000 in saved interest.

Jason · 04:56Now, on the surface, I'm going, that's, that's bloody pretty good interest saving, right? You pay your house off quicker, you've saved half a million dollars in interest that you would have been giving to the bank anyway. Now, the flaw in this— Ben goes on to say in the article, and we'll post in the link, it's, uh, $1 Million Investing Mistake Many Aussies Make.

Jason · 05:17That's the name of the article if you want to go looking for it. Basically, if you took that same $200 a week and rather than paying it off your home loan, you put it into an index fund, which is like a managed fund— and maybe we'll get Nick to explain what an index fund is shortly— basically, that $200 per week over the same time you would have been paying off your mortgage equates to an investment at end of $1.565 million.

Jason · 05:42So rather than saving $500 off your interest bill, you've now got an investment worth $1.5 million. So I might stop there for a second because there's some big numbers. It's a million dollars difference between the interest saved and the money you've now squirreled away and earned through an index fund.

Jason · 06:01But I might pass to either of you who want to chime in and say, what do you think of those numbers at a high level?

Marty · 06:06I'm not surprised. Not surprised. I think there's a couple of things to think about there. First being 9.8%. And I know that you can only look at what markets have done historically and that's what you should be judging it off. And it is quite— certain is the wrong word, but it's— there's a big chance that if you left in there for the long term, you'd be 9.8% and, you know, compounded over 30 years.

Marty · 06:33I think the other thing to think about is at the moment we're paying sort of low 6s in interest, as you've outlined. There's absolutely no doubt that that will be less soon. So I think that makes the gap even bigger. But yeah, there's also a lot to be— and I'm just from a financial planning background— there's a lot to be said for peace of mind and the ability to sleep.

Marty · 06:59And for a lot of people, no debt goes a long way towards giving you that peace of mind. So sometimes it's not all about the dollars, and I've definitely learned about that being in this industry.

Nick · 07:11The interesting thing for me was a couple of things. Was if you're paying down debt, you got to think of the investment of your house as well because you've got no capital gains tax. So I go on the back end, we go, you know, houses double, they say, every 8, 9 years or so.

Nick · 07:31But let's say houses double every 15 years. So if you had a million dollar home, 15 years' time, it's worth $2 million. But then in another 15 years' time, it doubles again. So it's worth $4 million. So I go, even on the surface, when you look at, you know, shares compounding at 9.8%, which is very good.

Nick · 07:51Um, I still come out of it and I go, well, you probably pay your home loan off in 20 years. You're going to have your property double and then double again in that time. And then you're also going to be freed up in 20 years to put more money into the investment.

Nick · 08:08And the only reason— and look, I'm not talking from a financial planning aspect. I'm just talking from logically in my own head. And I still feel like I've got money going into my superannuation at that point as well. That's compounding at that rate. So It's, it's an interesting one because I feel like it's, I don't know.

Nick · 08:29I think super's in super, so you can't get at it because I think people would get at it and spend it in some way. We saw that during COVID like soon as people had accessibility, they were paying off personal loans, pumping it into mortgages. It wasn't just cost of living and survival.

Nick · 08:44Um, they had access to the funds. So, and that even worries me when people put money in the offset account. Against their home loan and they have access to it. I'd rather people put that $200 directly straight into the mortgage because it's just less tempting to, um, to get at.

Nick · 09:01But the other thing is, is the capital gain, um, issue in regards to shares and tax on dividends. I'd sort of ask you, Jason, explore that as well. And I'm sure from a financial planning standpoint, there'd be ways to deal with that effectively on the back end.

Nick · 09:19But that's the sort of thing that goes through my mind going, well, I know I'm not paying tax on that owner occupied, you know, at the back end. And I'm going to get $4 million of value, pay out the debt in 20 years. And I've got an upside. I just downgrade the home, you know, at that time and, you know, maybe have a million bucks in my pocket with a $3 million home, you know, on the back end.

Nick · 09:40So yeah. So I'm interested, Jason, on the tax. Implications and how I might need to be thinking about that because the strategy's got me interested.

Jason · 09:50I love it, Marty. And look, my not pessimistic accounting brain, but I think I'm like you. The numbers intrigued me and I was interested to unpack them. And great to be in a room with smart people like both of you because we're already starting to think that way. The capital gain thing was what got my mind ticking on.

Jason · 10:07Yep, it's all good and well to say that this is a million-dollar mistake Aussies are making and this is a trap that we're falling into by paying off our homes. But exactly what you touched on, Marty. Right now, one of the best investment opportunities that Aussies have is that they have no capital gains tax to pay on their main residence.

Jason · 10:24So if you're primarily a primary place of residence, we are one of the lucky countries because there's other countries around the world where you'll get taxed when you sell your property and make a profit on it. Now, at this point in time, and I say at this point in time, it's, you know, March 2024 at point of recording.

Jason · 10:39We don't have capital gains tax on our main residence. Now, with government debt blowing out, who knows what the next government tries to do. And I say good luck to any government who does try to bring in capital gains tax on a main residence. But it is one of the most expensive tax concessions that our government has here in Australia, is letting people sell their home without paying tax.

Jason · 10:59On the flip side of that, as you've touched on, if you put $200 a week away into an index fund and end up with $1.6 million in total investment size, you would have definitely paid a fair whack of tax against that along the way. Franking credits on dividends would come out at usually $0.30 to the dollar.

Jason · 11:18But if you're, if you're earning, you know, low six figures, you're paying, let's say, close to $0.37 to the dollar or as high as $0.47 to the dollar. So the whole way along that you've been reinvesting your earnings, you've been also snipping a little bit of extra tax to the ATO the whole way along, whereas on your property, every year it goes up $500,000 to $1 million, you're not getting taxed on that.

Jason · 11:40Then on the flip side, again, when you sell your main residence, let's say that example you had, Marty, where it was worth $1 million today and $4 million in 30 years. When, when you put the net cash in the bank, you don't pay tax on that. If I was to try and sell my $1.5 million index fund and I'd— and most of that came from deposits of about $300,000 over that period of time.

Jason · 12:04So it's about a $1.2 million gain in reinvestments or capital gain. There's going to be a big whack of tax to pay on that. Yes, you get the 50% CGT discount, but you're still going to lose up to $0.47 of the dollar on half of your gains. So while it's a great strategy and maybe I'm not a financial planner either, so to Nick, we might touch on what's an index fund and does this work from a diversified portfolio point of view?

Jason · 12:30But it's great to then not just, I guess, take the article on face value, but to unpack a little bit further and say maybe it's not that simple just to have an extra million dollars in the bank by doing this strategy.

Marty · 12:42Yeah, there's so much to unpack. And yeah, this is why financial planning is so important because there's no one strategy that's right for everyone. Firstly, in index funds, and an index fund is— most of our listeners will know this, but it's It's a, I guess the easiest way to describe it, it's a bundling up of a lot of different companies, whether they're on the ASX or the US stock market.

Marty · 13:07There's property in there, there's bonds in there. So it's just a really simple way for you to own an entire market or markets instead of buying one share in BHP. You can buy an entire market, so you get great diversification. It's the best way to invest if you're not a stock trader or stock picker, even if you are in a lot of cases, it's still the best way to invest.

Marty · 13:28Couple of things that come to mind, you know, you talked about the value of the house. That's going to happen anyway, whether you got debt or not against it. So you're still going to get that uplift in the value. I think what we're dealing with here is do you pay the debt off or do you go into a managed fund?

Marty · 13:44The other thing is you talked about capital gains. Well, at the end of the day, if you get to retirement, you probably don't need to sell that fund down. Look, what are we doing as parents? We're trying to support generations that come after us.

Marty · 14:01We're trying to support kids. So, you know, if you get to retirement, it's taken you 30 years to pay your house off, that's fine. You paid it off, you got no debt on it. You've got that $1.6 million fund. It's probably earning you somewhere between $80,000 and $90,000 a year in dividends, depending on how you've got it invested.

Marty · 14:19It's obviously going to pay income on those dividends, but hey, happy days. So, you know, I don't think we assume that you have to sell that. You know, you could just let that continue to build, take your dividends off it, and it's an asset there for your kids. So it's— but then I'll go back to my original comment, which some people just don't like to have debt.

Marty · 14:41My argument to that, if you were one of those people that didn't like to have debt, you've got backup. If you're investing like we're talking about here and you know, you've got a million-dollar investment, you don't really care about having a bit of debt because you know if something goes wrong and you need to leverage off an asset to get access to money, you can do that really easy with a fund.

Marty · 15:05You know, you can sell some of your index fund down and have the money within a week. So it kind of supplies that safety net that you're looking for. So yeah, it's just getting the mix right. And it's— there's so many variables based on individuals and what their long-term plans are.

Marty · 15:21To Marty's point, have you got super? Have you got the ability to put more money in super where you can do index funds inside of super? So that's where you should be going because of the tax advantages. But if we're purely looking at it on the surface, tell me how I can make the most amount of money as long as returns are as we think they should be in line with historic.

Marty · 15:40Then you would invest, really. What's happening now is if I go back pre-COVID or around the COVID time, that's what people were doing. They were getting into investments because markets were bouncing back, interest rates were so cheap.

Marty · 15:59Why would I pay my loan off at 2% when I can invest? We've actually seen a backflip now. So I've actually had clients that had managed funds that they were building up that have rang us to sell them because, okay, if you look at 9.8%, you factor in tax, you take tax off and you're paying 6% on your home loan.

Marty · 16:18Your home loan's probably getting you a similar saving with zero risk because you know exactly what the saving is. So there's actually been a switch in mentality, in mentality the last sort of 12 months. But I would say to people, what's happened in the last 12 months and what your interest rate is versus what the market's doing is actually irrelevant.

Marty · 16:36If it's a long-term plan, you should stick to it no matter what the interest rates are doing, 'cause we know they're gonna bounce around. So, so many things to unpack, but yeah, my main two points are that the capital gains, you know, we are assuming that we're gonna sell the investment down. And I think if it gets to that level, we don't need to, we can simply live off the dividends.

Marty · 16:54And with the house, we're gonna have it anyway. So we're still gonna get that uplift in-house. And, you know, talking about the capital gains, I just think it's a matter of time before they start taxing us on our owner-occupied houses. Someone's gonna take the bullet, as in politician-wise.

Marty · 17:11It's just a matter of who it's gonna be, but it's just too incentivising for them, I think.

Jason · 17:16If you vote me in as PM one day, it'll be GST that gets changed before CGT on the main residence, and payroll tax will be gone as well. But we'll save this for another time. Sorry, Marty, you gonna jump in?

Nick · 17:27No, I was just gonna say, Nick, in regards to where we're at now with home loan rates at 6.2% and, you know, people wanting to make a better decision. Do they put more into super? Is that— I know it's individual, but if you're looking at dollar for dollar going into an index fund externally or going into your super with that couple of hundred bucks extra, there's tax incentives around that that are interesting that Or

Nick · 17:58is that not the way to go?

Marty · 18:00No, that's definitely the way to go. And the ATO or the government's increased the concessional contributions to $30K up from $27,500. So it just comes down to money plays a small role in these decisions, Marty. And if you're purely looking at the money, I would say to someone, if it's long-term and it's for your long-term future and retirement, you should absolutely max out what you can do in super before you think about an investment outside of super because of the tax advantages.

Nick · 18:30Yep.

Marty · 18:31However, people know that, but they also know that if it's not inside the super fund, they can get access to it if shit hits the fan. So it's that combination of almost, if you have the cash flow, getting your debt to a point where you're okay with it.

Marty · 18:47Getting yourself a safety net outside of the super fund where you know you can lean on that. It might be 12 months worth of— me personally, I work on 12 months worth of expenses. Like if something really bad goes wrong, I want 12 months of liquidity there that I can grab pretty quickly.

Marty · 19:04So if you've got those two buckets ticked, then maybe the next bucket is, well, I might as well put the rest into super. I've got the backup outside of super, 12 months of expenses. I'm managing the home loan, no problems. I know if I'm not managing it okay, I've got that backup there. I'm going to start putting money in super.

Marty · 19:21And the reality is super is coming for most people. It's coming quicker than you think. Like I'm 41 now and I think super for me was something I'll never be able to touch almost. But now I'm actually at the point where, geez, I'm going to be able to get this as much as I hate it.

Marty · 19:39I'm going to be able to get access to this before I know it. So there's also a balancing act as to where you're at in life. What do you got going on outside of retirement? Education for kids? Like, what do your expenses look like? So, but yeah, but if money's not a problem, you maximise your super for sure.

Nick · 19:59There's the need for a planner, you know, just in regards to like you, what you said, Nick, about getting the balance right. Because again, just by What you're saying, you have a year's worth of liquidity and expenses covered. You need access to, I guarantee you, if people are putting that $200 in their mortgage with redraw, they'll see that as an opportunity that, that, that will present itself at some point where you need to get that money.

Nick · 20:24And the reason super's really strong is because you just can't get access to it in most cases. So, you know, it just keeps compounding. So it's really interesting. I immediately, when I hear you talk, I think about, I need my $200 weekly strategy on a mortgage, but I also need my emergency fund building up, which might be an offset account that's linked as a, yeah, as a secondary account from my usual transacting as my emergency fund building up as

Nick · 20:54well. So if I can put a couple hundred bucks a week on the mortgage, I put an extra amount into super. To get the balance right and then have my emergency, my liquidity if I need it in case of emergency and have access to it. But there's the need for a planner in going, you know, you just generally don't think about these things.

Nick · 21:12And if there is chaos, you will draw the money wherever you can get it. So it's a really good point.

Marty · 21:18And I really like your point around the super and the fact that money's gone because the reality is it's just in our nature, it's very difficult to save. And you know, we often save and you know, whether, whether that's by way of an offset or it's in your redraw, just the fact that you've got that money there, you might not spend that money, but you might be loose with some other money because you know that the backup's there.

Marty · 21:43So I love the idea of super, particularly for people that are good income earners that have the ability to save and will always find a way to get by. I love the fact that super's gone and you can't touch it. It's But one thing it is doing, it's doing, working at its absolute maximum capacity for you to make sure you're not going to have an issue when retirement comes.

Marty · 22:02Absolutely love it.

Jason · 22:03I've got a couple of sentences here I'm going to reel off and maybe get a comment. But ultimately what, what these sentences are telling me is that having a financial advisor or financial planner is exactly what people need in their lives to be able to unpack these convos. So I'll preface this with, if you haven't got in touch with Innov8, Nick's team, in the financial planning area.

Jason · 22:24Absolutely just know what they're talking about and are great to deal with. So innovayt.com.au, get in touch with Innovate or connect with Nick Riley on LinkedIn. He will be all over it. But a couple of quick rapid-fire misconceptions that we may have even covered some of this.

Jason · 22:41Paying off your home before you invest is a must.

Marty · 22:44Incorrect.

Jason · 22:45Incorrect.

Nick · 22:46Cool.

Jason · 22:46I thought so too. And we've unpacked that a little bit here. Investing in the stock market is like gambling. Incorrect. Beautiful. All things you can talk to a financial advisor about.

Marty · 22:57Do you want me to say anything more or just like this one?

Jason · 22:59No, that's fine. It was just kind of, you know, getting people if they've had this thought.

Nick · 23:03I wanted to know a little bit more.

Jason · 23:05Yeah. Marty, what do you want to know? Well, you need a lot of money to start investing.

Marty · 23:11Incorrect. Yeah.

Jason · 23:12So we've just touched on $200 a week is more than enough to get you $1 million in 30 years. So not bad. Investing in real estate is always a safe bet.

Marty · 23:21Incorrect.

Jason · 23:23Oof.

Nick · 23:24Oof.

Marty · 23:24Why? Well, there's a lot of reasons. You could talk about the asset, number one. Yeah. You know, you look at the apartment market in Melbourne. You know, we've got people that are getting close to retirement that are selling apartments that they bought 10 years ago, 15 years ago for the same price they paid for them.

Marty · 23:43Because they can't plan a retirement with that asset because it's illiquid. They're paying body corporate costs. So, you know, that's Melbourne apartments haven't supplied the return that people needed. You can buy in areas— mining, we've seen a lot of people lose money in mining areas where the returns seemed too good to be true and they were.

Marty · 24:05So yeah, nothing's a safe bet.

Jason · 24:08Fair enough. And the last one, after 45, it's too late to start saving for retirement.

Marty · 24:13No, that's a perfect time. And what I'll— the only thing I'll say to that is a lot of people come to us at the age of 50 to 55 because they, they get this moment where they go, holy shit, I've got 10 to 15 years of my work life left.

Jason · 24:28Yeah.

Marty · 24:29And that's when they really focus on retirement and putting things away for retirement. So 45 is a great age. A lot of the times you've got kids and they're either in school or not far from finishing school. So, you know, you can start with, you can start with $20 a week and that's, you know, that's, that's an extreme example, but you can, you really can.

Nick · 24:48That's how, what I want 25-year-olds and 30-year-olds to think. We're only 15 years away from retirement and think about what actions they'd take in regards to that with their super and various different things too.

Jason · 25:01What a different mindset people would have.

Nick · 25:02It is. Yeah, absolutely.

Jason · 25:04Love it. Well, we love unpacking numbers. We love unpacking interesting things. So that's been the million-dollar investing mistake that people are making and then unpacking a little bit more. So hopefully you found some value and some interest in that. What we do want to drive from this is people to make decisions and have conversations around investing and their wealth and their futures.

Jason · 25:23So, you know, Nick, Marty, and I are always happy to take calls, emails, messages, LinkedIn. Email us hello@thenumbersgamepodcast.com. Au if you do want to start a conversation, or as you know, connect with the three of us on LinkedIn or Instagram.

Jason · 25:38Um, but thank you for joining us. Like, follow, subscribe, share this with a friend who you want to turn into a millionaire.

Nick · 25:44And until next time, compounding knowledge is the greatest asset of all. Game over. I hope that stood up.

Jason · 25:52I love it.