How to start your Financial Independence Journey

Trying to figure where to start can be daunting, this guide is how we started our journey to financial independence, nothing better than keeping things simple!

Determine Your Financial Goals

This is the most important step, this should determine what are your goals regarding time lines, your ability to control yourself during market downturns which will assess your risk tolerance, how hands on you want to be managing finances, future lifestyle goals etc. There should be a mix of dreams and aspirations but should remain relatively realistic. There is some power in stating out of reach goals because even if you’re not going to achieve it you’re still 100x better off from the process. How much money you need to retire should be stated here and using the 4% rule or even lowering to 3% for a more conservative approach you should figure out your total cost. Example $1 million will allow safe withdrawal of approximately $40K per year at 4%.

How to achieve your defined goals

How will you reach your designed goals? This can include career progression and investment mix. Where do you want your career to end up, this is undoubtedly the biggest and best investment you can make, yourself. The biggest wealth building tool there is. The more you earn the more ability to save and invest. In this case for the Yield Project the defined goal is to create a high yield portfolio producing a high income with minimal capital erosion to compliment a broad based index fund portfolio.

An important aspect of the how is to maximise the gap between spending and saving. Using a budget can be especially helpful so you know where your money is going. Take a look at our How to Start a Budget as a Beginner guide for some tips on where to start.

Selecting a stock broker

Most people opt for an online broker these days due to their low cost. What to look out for in an online broker:

• Chess sponsorship or custodian model.
• Brokerage cost per transaction
• Depth of market data if you want it
• International exposure if it’s in your plan
• Investment automation

Chess Sponsored Vs Custodian Model

There is a lot of debate between these two ownership models. CHESS stands for Clearing House Electronic Subregister System. Not overly clear cut but it means you own the shares under a Holder Identification Number HIN. The shares are managed through a registry. If your broker was to fall under bankruptcy it means this would have no effect at all on you and your shares simply just transferred to another broker via your HIN.

Custodian model, the broker holds your shares, no HIN or registry. There is a negative stigma on this model as in the past it was seen if the broker was to go bankrupt it could take a long time for the process to follow through and receive your shares. However your shares are still safe as they are held in a trust. Whether it would still take a lot of time to receive your assets in this day and age is unknown.

The rest of the world operate on a custodian model, there are pros and cons to both. We personally use both, a custodian and CHESS sponsored model. The major benefit of the custodian model is the vast amount of tools at your disposal regarding reporting and ease at tax time. So for us we use CHESS sponsored for our long term never selling index portfolio and for individual stocks we use a custodian model broker.

CHESS sponsored

• Selfwealth,
• Pearler,
• Stake,
• Big banks, Comsec, Westpac, NAB etc..
• CMC Markets

Custodian model

• Vanguard Personal Investor,
• Superhero
• Betashares Direct
• Moo Moo

Make the investment

A lot of people have trouble with this one, how hard can it be to buy something? Well human psychology comes in to play again. Referring to your financial plan you should already have picked out what investment mix you are after. The trouble is the human psyche tends to gravitate towards investing at the top of the market when things are looking good. And then the reverse when there is too much outside noise on the news whether a downturn is coming. It can’t be stated enough that nobody knows what the market will do. There is a famous qoute “the best day to invest was yesterday and the next best day is today”. The best thing you can do is invest often and regularly, tune out the outside noise and focus on living your day.

Some popular investments, and again the broad based index fund:

• IVV, SP500, Aus domiciled
• VTS, Total US stock market, US domiciled
• VAS/A200, Australian ASX stock market, Aus domiciled
• VGS, MSCI Developed world index
• VDHG/DHHF, nicely diversified ETF of ETFs, for the true set and forget investor

There are many more but as always do your own research, find what suits and works for you and make sure it is in your WRITTEN financial plan, this helps you to stay the course.

The Waiting Game

Aside from investing in yourself time is the next most powerful tool. Compound interest is not easily understood by the human mind but alas it is there and working. $10000 invested for 10 years adding just 500 per month at 10% will grow to around $129K, but what about another 10 years? $452000! Almost quadrupling the return. Starting early is definitely a bonus.

The power of your savings rate will determine your time to retirement. The savings rate is two sided, the more you save the more you can invest. But the other side which is less thought of is the more you save the less you are actually spending which means the less you require in your early retirement!

Savings rates and time to retirement estimates.

20% – 36 years

40% – 21 years

60% – 12 years

80% – 5.5 years

So a simplistic example might look like this, you auto transfer ~$250 per week into your online broker Pearler, once this amount reaches $1000 the automatic investment tool will automatically buy your set allocation of the SP500 ETF IVV. After 30 years of set and forget investing the return can equate to over $2.5 million, and this is including never having to increase the investment amount so just imagine if you increased your contribution in line with inflation! People will often argue saying $2.5 million won’t be worth anything in 30 years time, but it is a whole lot more than nothing and is minimal effort, and if you can make better returns through work or your own business more power to you! This is truly how simple it can be, and when you provide your TFN to your broker the ATO will automatically receive the data from the online registry at tax time. Fully automatic, simple and you will achieve good average returns.

Conclusion

Time is your most powerful advantage to building wealth. Take advantage and start investing as early and as often as you can. Automate as much as you can and don’t forget to enjoy every day while on the journey.

Yield Project