In a somewhat-expected result, the second most voted topic of this blog’s pre-launch poll was about getting from $100,000 to $1,000,000.

Besides being the logical next step on the ladder of wealth, the fact that there isn’t too much of a gap between the first and second-most voted topic allowed me to assume certain things: that the people I have direct relationships with are the types who are already travelling towards $1,000,000 on their own, or are already thinking big enough about the next stage.

This is a promising start.

On this band, the name of the game is leverage.

What would life be like, if I could clone myself?

...was the question popped up in my mind around the third crisis of my life.

Rather than 26 being the ripe time for a quarter-life crisis, the catalyst had been that it was the second time I was forced out of a job, dealing with immigration’s will-I-won’t-Is, for the third time within the span of 5 years.

At that time, I had managed to save 6-months’ worth of emergency fund, as well as dabbling in a few index funds and some stock picking, betting on both black and red on the efficient market hypothesis. It was a time when $100,000 felt like a huge deal.

Unsatisfied with finally earning the market rate, I took over other people’s overtime shifts on the regular — almost as a second fulltime job — because every extra dollar was another weave in my safety net, which had anticipated $5,000—$10,000 sized chunks of immigration fees on the regular. I spent weekends in the office on the fast and free corporate internet, learning about how others have made it, in hopes of finding a way out of this precariousness. A perfect A+ student of the FIRE way by any measure.

Then life throws you a curveball, such as finding out that the company that had been employing you for the past year and a half had fumbled your visa transfer, making your employment for the past 1.5 years... questionable.

The immigration incident, though it had “only” costed me a month off the job and ~$7,000 in lawyer fees, was just the straw that broke the camel’s back, because the events that led up to it was the trifecta of disillusionment with the corporate world: don’t hire, don’t promote, don’t support.

That it roused such a visceral reaction in me that had me asking, “how do I not have to work anymore?”

As such, the cloning-myself question was less of a thought experiment, and more of a conduit for the more useful question: “what is me-like in terms of earning money, but is not me?”

It led me to the most common, and often the only, way the average Australians use leverage to build wealth: (residential) property.

Save $10,000 p.a. off your earned income, and you’ll get to $1,000,000 in 100 years.

Save $50,000 p.a., and you’ll get there in 20 years.

Try as I might, at that time, my best only amounted to a savings of $30,000 p.a. The thought of saving $50,000 p.a. didn’t seem possible, when the corporate budget wouldn’t even allow a $20,000 increase — pretax — to pay for the work of 3+ people.

If there were the two of me, I could save $60,000 p.a. to get to $1,000,000 in ~17 years, live off 4% of it — $40,000/year of passive income — and be done with this nonsense.

Now, if I could remain saving $30,000 p.a., but owning something that earns +$40,000 p.a. — such as a $1M property that yields a net +4% return, hypothetically — and suddenly, one gets to live as she does, and get rich in her sleep.

There’s the siren’s call of every passive investment gurus… and there I was, the willing recipient.

$100,000 — $1,000,000 is where the fun begins

Life in the $100,000 — $1,000,000 band, essentially, is when we have enough to cover the bases, and so the excess can be put to work elsewhere.

The lesser one’s needs are, the sooner one can reach this equilibrium of having enough, where the actual amount of having “enough to spare” can even be a two-to-three months’ savings of $10,000.

Anything that’s not consumed in the moment, can be put to work by buying assets, which have their own temperaments and quirks.

It is not so much that $100,000 is some sort of magical turning point when suddenly one has enough, than it is that at $3,000 — $5,000/month to cover the cost of living at a minimum, $18,000 — $30,000 means another 6 months of highly-probable continued existence, buying some breathing room in case said “stable income” suddenly goes through another episodic restructuring.

With that space, there’s time to think about what one can do with the rest.

As such, the big question in this band is: what do you want to buy?

A $100,000 in the bank, as we’ve seen, affords ~10 months of averaged living cost for 4 people.

A $100,000 in a home affords a dream, with all the terms and conditions that a mortgage brings.

A $1,000,000 in the bank, at the burn rate of $10,000/month, affords ~100 months, or around 8.33 years of life in a no-inflation world.

A $1,000,000 in a home affords a liveable retirement, with all the terms and conditions that a pension brings.

These are some of what $100,000 could afford, when seen from the lens of what things cost.

But what kind of life do they truly buy?

With a spare $1 — $100,000, one can afford publicly traded funds, which are priced anything from $0.01 to $500 per share.

With a spare $1,000,000, one can start affording a standalone commercial property, which pays better than most residential property.

These are some of what $100,000 could afford, when seen from the lens of what things pay.

This answers the unsaid, yet universal, question of someone who starts out with 0 financial knowledge: what can I buy? To which the unspoken answer is, “more money, as a conduit to having more choices”.

What, then, do they truly add to one’s life?

An Average Income for an Average Life, Revisited

Previously we posited an “average” couple, earning “Sydney average” salaries, paying for an “average” mortgage of ~$600,000+, with the rest of their cash flow servicing the life of an idealised atomic family of 4.

While it served as a fine example of what significant obligations in the form of a family and a home loan does to one’s degrees of freedom, it did not tell the whole story, when cash flow is not all there is when it comes to things that we consider worthy to call our assets.

The thing that’s common, whether you had bought a personal or investment property, is that this newfound item on the balance sheet now exposes you to the residential property market’s movements.

While this chart showed you what might happen in your bank account:

A balance sheet keeps track of what you own, balanced against what you owe, shows you a wider view on what else you can liquidate into cash — if needed.

Before buying a house:

After buying a house, with the help of a fairy godmother who covered the down payment:

With some capital and cash, even if the recession scenario eventuates, you do have the choice to liquidate the equity that’s been tied up in the property and get more cash.

As it often pours when it rains, the likely scenario would be that the value of your home decreases along with the job recession, making you lose money if you do sell.

This family has the choice to stay, because they still have that $100,000 in the bank. But is this realistic for most people?

In practice, how many will be able to pull ourselves together to sell at a loss, before they’re forced to?

This is why the family home’s mortgage is priced at -0.20% discount, than an investment property’s.

When someone buys a property with their hard-earned savings, this is what usually happens:

The grim reality is that for most people, post-purchase is the moment they’re most vulnerable, as that’s when their repayments is at its highest, and their savings at the lowest, with the penalty of ~1—3 months of illiquidity to convert it back from a home to cash.

The $100,000 of windfall that served as the down payment was an ex-machina that had to be, as the “realistic” scenario of $0 savings post-purchase makes for a terrible example to illustrate how cash burn rate works.

What was meant to be a cautionary tale would’ve turned into a straight-up horror show:

With some good luck, most people can build their savings back up, most of the time. This is the rationale behind the popular advice of “paying down your debt as quickly as possible”: that in comparison to paying the full amount of interest, playing to lose the least by paying the least amount of interest is a very sensible way to reduce one’s risks.

Just as being able to save part of one’s income is the beginning of wealth on the income side of things, paying down debt, too, is a form of saving, when applied on the cost-side part of the equation.

However, building wealth is not about avoiding risks entirely.

With some good luck, you now have a few more possibilities, because cash is not all you have.

Of Cash Flows and Balance Sheets

In the way that light exists as both a wave and a particle, an asset — any asset, really — exists as a duality of cash flow and ownership.

A Tale of Three Brackets: Part 1 talked about cash flow. Specifically, what happens when cash flow dries, as a cautionary tale.

But cash flow is not all there is.

In part 2, which was what some keen readers have asked about, is the part that was purposefully left out: the balance sheet side of the story. It tells the story of ownership, specifically the ownership of things that might make more money for you later.

Arguably cash flow control is the first and the most important financial skill that one could learn, for one can only ever live on money-now; the excess of which can be spent on the things that can bring in money-later.

The more free cash flow one has, that is, the money unspent in the now, the more room there is to move around, paving the way towards the future that eventually becomes the now, which allows us to the choice to do things that doesn’t have to get paid now, if ever, in money. For money only observes those which has a price; such that what isn’t priced in is unobservable, thus worthless within the strict measures of money.

Those which seem counter-productive to others; those which pay a lot more later, those which make one’s life richer beyond the measures of money; these are the things that the immediate money can’t see.

The present eventually became the past, as the rooms created expands into optionality, creating the privilege to choose. Amongst those, primarily, is the choice to say no to the wrong money.

The subset of which that can be measured with money, became line items in your balance sheet. Some add more numbers on your balance sheet, adding to your monetary net worth. Others give you even more cash flow, with which you can buy back time.

All of these, the priceds and the unpriceables, form the life that you now live.

The future, on the other hand, is about time travels and alternate dimensions... which we will explore in another post.

Technically, one does not have to lean on passive investments in order to reach $1,000,000.

Many such persons have “made it” through their inimitable positioning within the inner circles of the future tech unicorns, with many more imitables in the more realistic bands of small-to-midsized exits of $10,000 — $1,000,000.

It just so happened that when one’s ceiling of income at a particular point in time is a fulltime employment, in a context that did not permit a gainful unemployment, on what time can one earn more on?

Thus if the problem is time, the solution would be an income that earns on no time — a “passive” income.

Leverage

The topic of leverage, when touched upon in the context of wealth, unfailingly latches on borrowing money as a leverage to buy assets.

“Buy it with Other People’s Money”, they said sagely. “$0 money down”, so the choir sang. It is, once again, quite insulting, that in the age of unaffordability, that anyone is presumed to be blissfully unaware that buy now pay later is not only for buying Chipotle.

Time, energy, skill, capital are all common ways people leverage to earn more. In the age of attention, that too, is a leverage, as the script that is still writing itself drags us along into the singularity, where attention is all you need.

The common sense that’s not very common is that anything can be an asset, as long as one knows what, where, and how to use it, the way life is long, if one knows how to use it.

“This is the secret to the universe, levers.”

— Gina Chick

Your Job is Your Asset

When one takes on a student debt to get a degree, one is inefficiently spending to add another leverage — skills and licenses, derivatives of network and social proof really — to one’s market price, with $0 down.

While it’s not impossible to calculate the ROI, the simplest method being the median salary, the inefficiency is twofold: that a 18-year-old who calculates the dollar returns on their degree with all the information on its lifetime valuation is the exception, not the rule, and that the value proposition of a job is not sold on a pure monetary returns on the dollars spent.

Your job is one such asset which is one of the most potent, if only for the fact that with most jobs you can earn money right now, as opposed to most other ventures that ask for a lot of resources upfront — money down to buy the thing, paying for mistakes, paying for ignorance — before one understands the full nature of that particular type of income.

It is never earned from nothing, much to the chagrin of bootstrappers, for where hiring remains a risk to the business, even entry level jobs require some sort of ticket to play: local connections, proof of work, fame-notoriety, or all of the above.

Most publicly listed jobs, the ones that can be found on the job boards, are much like publicly listed companies’ shares: an asset that’s near-100% cash flow, near-0% growth. The idea behind this is the market efficiency: that once something is public, there is enough competing forces in the market to settle to an equilibrium of “fair price”, which is why a job listing is a poor avenue for getting above average returns. It is already, by definition, the price set by the average.

If you choose employment as your main vehicle to wealth, don’t just aspire to qualify for the most jobs on the board; aspire to set your own price.

A job is most people’s first asset. But it doesn’t have to be the only one. 

Your Capital is Your Asset

Capital, on its own, is just a measure potential. It is inert until it is used well; in this case, allocated to things that add to one's life, either in more money, thus more potential, or to afford certain kinds of life.

With passive investments, the math is simple, but the execution is… complicated.

Buy $100,000’s worth of investment with cash, and at a 5% p.a. net returns, and it earns you $5,000 p.a.

Buy $1,000,000’s worth of investment with cash, and at a 5% p.a. net returns, and it earns you $50,000 p.a.

While nothing had qualitatively changed, as the investment still only yielded 5% in either scenario, just as one’s hourly rate can remain the same yet one can earn more by trading more time, the more capital is invested the more one can potentially earn.

What if one doesn’t have $100,000 to begin with?

The tyranny of the yield means that turning $5,000 into $100,000 requires seeking the unicorn-level returns of 2000%, but where the unicorns live is in the gated gardens that require a minimum of $100,000 to enter.

If one has but $5,000 on hand, a 100% return on a $5,000 investment would still only yield another $5,000 — before tax. As such, one would be wise to keep working, where a $6,000 nett pay over a $3,000 living costs effectively equates to a net return of 50% every month.

A 50% return every month is very hard to beat. A quality source of income, that comes in without fail every month – with exceptions, is also very hard to beat. This is a very rational view of someone who lives on cash flow alone.

And yet, if there’s an opportunity to earn 14% on “no time”, who in their same rational mind would turn it down?

If one wants to earn more on less and less capital, the game is no longer about size, but rather, quality.

When it comes to capital investments, quality is spoken in percentages and time horizons. Percentages, not only on the returns, but also on the potential loss, the assessment of which is the underrated skill of the quiet compounders.

At what size compared to your total wealth, at what allocation is the risk that you can — and want to — afford?

Are you willing to accept that heads — you’re set for life, tails — it’ll set you back 10-20 years?

Do you go for the 50% returns with the 20% risk of total capital loss, or stick with the 5% government-guaranteed, “risk-free” interest in the bank, and get there in about 20 years?

The blind luck of being born naturally frugal meant that I didn’t have to think in order to save. It meant one less thing to manage; one less noise to the chatter around money. But that’s just about where my luck ran out, for the context I was born into was that of working hard and saving for the unforeseeable, terrifying future.

The second blind luck was that I had never accepted that a bleak future is all there is. And so, I sought ways to make money other than working harder.

In a bid to get to financial security faster than what my below-average salary could afford, I devoured all the free online financial courses I came across — Coursera, edX Harvard courses, Udemy, you name it — in search of the secrets to making money.

A lot of it wasn’t useful. What use was there to be able to model CAPM, when there was only $5,000 to play with? What good would learning macroeconomics have brought, besides magnifying the precarity of one’s situation?

But if one were to become an investor, one must believe in the future where there will be more than $5,000 to allocate.

To fill in the void where the knowledge to make my money work should’ve been, I sought, bought, lost some, gained some more, lived, and finally learned. Less of the ivory-tower, seeking-alpha kind of capital allocation, more of the actually-useful things: what is enough money in the context of one’s life, and where are opportunities to be found?

Resources, when distilled into percentages of dollars and time, then, are the score-kept that allows you to compare opportunities. What gives the best return on the amount of resources given at the shortest amount of time?

When it’s active, the more you can earn on less resources, at a higher certainty and at the least risk of loss, the better.

When it’s passive, the more you can earn on less resources, at a higher certainty and at the least risk of loss, the better.

They are practically identical, because the common sense that’s not very common is that all passive investments were once active endeavours. Instead of time, the fuel of passive investments has been distilled into dollar amounts, which has no worth of its own, until it affords some fractions of materials and other people’s time and energy instead of yours.

Once all of the demands for its resources can be quantified, it requires little to no time to run, at which point it then becomes “passive”.

Those who had forgotten this fact, have lost the plot.

The point of your first capital investment isn’t to make it big. It’s to learn the language. Doing is the only way to convert surface level knowledge into something that’s yours, which is something even LLMs cannot do for you.

Once you get it, you can do it all over again, faster and better this time around.

If the problem is time, the solution would be an income that earns on no time — a “passive” income.

However, passive investments is not without its own problem, none the least being that more money makes more money. Now the problem has shifted from time to size.

The solution?

As it turns out, you can just borrow stuff.

Other People’s Capital are not Your Asset

But they can be borrowed to buy an asset of your own.

Buy $1,000,000 worth of property with 90% debt, and at the same 5% p.a. yield, which now comes in the form of rent instead of dividend, and your property earns you $50,000 p.a. on your $100,000 — before interest costs.

Secure the $900,000 loan at a 4% p.a. interest rate, and $50,000 - ($900,000 * 4%) = $14,000 is what gets paid out every year.

You now earn $14,000 on your $100,000 instead of $5,000, or a 14% ROI. Other people earn that guaranteed 4% yield on their money before the middlemen’s fees, and because it’s their asset, not yours, you have to pay it back at some point.

The money from shares income isn’t green while a rental income’s is blue. On paper, the same mechanism applies everywhere: get cheaper debt than your asset’s returns. Remember the concept of arbitrage 101: buy low, sell high.

Other People, Meanwhile, are Potential Assets

People, when seen in their entirety of a human being instead of piecemeal skills to be bought and capital to bring on, can be great assets that you can never own 100%. 

When you buy a $1,000,000 property with 10 other people, this is one subset of it: other people’s capital, otherwise called equity contribution.

While you no longer earn 14% on your $100,000, you have $0 debt in exchange — a big deal depending who you are. As a group, you also are able to buy more expensive assets, which tend to have better returns due to the pricing power effect.

With equity comes voting rights and other non-monetary interests, a situation which at times is called, having “skin in the game”.

Just like any group project experience, when it comes to equity partners, who you bring on matters a lot more than how much they bring in.

With more people there are extra things to manage, in particular their expectations, risk appetite, and life requirements — which always changes — which is why aligning intent in the form of exit opportunities, outcomes, timelines and other things that prevent them from using their capital — is paramount, if there is to be a relationship after the venture.

Most people start out with family and friends as a joint partner, which is easy, but is not always right. Easy, because they are already invested in you in the absence of evidence, but not always right, as family members might not be the professionals you wish they were.

When the working day comprises most of one’s waking hours outside of the home and the family, it is, indeed, better to be alone than in a bad company.

In its most direct upside, only people could introduce you to more opportunities, should one seek audience with generosity. It is for this reason that I should never like to work with misers. Frugal, yes, but never the miserly.

Frugal people give you the best of what they have little of. While they would only order an entree for their lunch, they are somehow never without little treats to give out, or the latest discount hacks to offer.

Misers give you what’s left after they’ve taken what they can, as if candies in glass bowls make for a good Q4.

While what they give out might have been the same nominally, one doesn’t have to be fought tooth and nail in order to give something — anything.

Who is more pleasant to live with?

If one is in want of a good life, one must choose the good problems to deal with.

How to Get Rich Eventually

To make money, earn more, spend less.

There is a ceiling to each source of income, the tipping point where 2x the effort only yields < 50% total returns — that is, in both cash and capital growth combined. The clue is in the quiet voice that says, “it’s not worth it anymore”.

If one’s time can be traded for a lot more per second, as is the case with OpenAI and Anthropic recruits, one doesn’t always have to divert one’s efforts into buying things that can earn on its own time. But those with the salaries that lag behind the cost of living, will often have to.

When there’s nothing left to cut out of your personal spending, the next thing one can do is look at how much tax one pays. What income gets taxed less? Where a salary to cover for a minimum cost of living already gets taxed at 30%—45%, though not as good as $0 tax, a 25% maximum tax on capital gains is hard to beat.

The 3-steps to get rich eventually, in a nutshell, becomes:

• earn enough money to start betting on loaded die rolls. 50—90% heads, you win. Tickets start at $0.1 — all the way up to infinity.
• be able to afford the occasional bad luck, so you can recover and try again.
• don’t die and interrupt the compounding unnecessarily.

When one is about to buy an asset, the ideal way is to first decide whether it’s for cash flow or for capital growth, or in other words, if would you like more money now or (hopefully) a lot more money later.

It sounds very sensible in theory, except for one glaring flaw: How would one know what one wants or needs, if one has never tried it herself?

How much can be consumed now, how much is to be sown for the future?

What good is an abundant spring when one cannot survive the winter?

Financial planners can answer this for you based on what works for the average people. That’s their job: to put into perspective what your finances should look like in order to support the average good life. They don’t strive to beat the market, they strive for the 50th percentile.

This is an excellent start, because in the world that lacks universal financial literacy, the average is above average. Not to the extent that one never has to work anymore once it’s achieved, but that life becomes more solveable, because now you have some plans on how to afford the basics.

However… if one wishes of a life of one’s own design, why should one settle for the average?

Of Cash Flows…

Living on cash flow is to live in the now.

It is the one and only present you’ll ever experience, such that the quality of your life is directly related to the quality of your cash flow.

A residential property, for example, is one such asset class that tends to drain cash yet grow in capital, which is why the average experience of homeownership sucks even as one’s net wealth grows. When one can only save $3,612.67 on a very frugal month, $15,000 for the leaking roof or the cracking balcony of an apartment is decidedly unwelcome, even as market forces drive it to gain $50,000 that year.

Getting to $1,000,000, at a monthly personal income of $8,601.67, after a tax of $1,989 and a minimum cost of living of $3,000, equals to a savings rate of $3,612.67, takes 276.80 months — or ~23 years.

In the face of a wage that hovers around 3% on average…

…which attempts to afford the ever-increasing cost of living at around 4%…

…we, like most people, implicitly accepts the ceiling to one’s possible income and the floors of one’s expenses, and bargain with the years-to instead.

… and Balance Sheets

Living on capital, on the other hand, is to harvest the potential futures to use in the now.

Where on cash flow, a high-earner earning the extra $222,222 on a 45% tax bracket, or $100,000 after tax, to reach $1,000,000 in 10 years…

With a 90% leverage on $100,000, on a hypothetical capital growth of 10% YoY and $0 cash flow neutrality between its yield and its running costs, after the 25% tax on its sales, only takes… about the 10 same years.

Yet, what is asked of the first person is the kind of life that allows them to be paid $412,000 p.a. for the next 10 years, while the second person “only” needs to come up with $100,000 to begin with, and have the market carry them up.

When the direction is up, compounding becomes your friend, as you compound over $1,000,000 instead of your actual $100,000.

Inflation becomes your friend, as the 4% yearly erosion of your money-now makes your debt cheaper each year.

The tax treatment becomes your friend, as long as the powers that be keeps taxing capital growth less than it does earned income.

All of these can be had, at the cost of not being able to use it now.

One can never eat capital growth. It is only after a “liquidity event”, the alchemy with which paper turns into currency, that this becomes a liquid capital — usually money — to use.

When one sells, one forfeits the right for the future possible gains (and losses), as the asset ceases to be one’s own.

In the face of the average expected yields…

…and expected average capital growths…

…and a lender’s limitations on how much to lend…

…we, like most people, implicitly accepts the ceiling to an asset’s total possible returns, and bargain with the years instead.

If you have never seen a balance sheet before, learn it.

In this game of wealth, accounting is score-keeping, in the form of your net worth. You won’t know how to improve if you have no sense of how things are currently going.

What a net worth is not, is your self worth.

The expense tracking in A Tale of Three Brackets: Part 1 is one half of the standard Financial Statements: Cash Flow Statement, which deals with the matters of money now.

Balance Sheet deals with money past. It is a snapshot of your total assets at a particular slice in time, which is useful to track the overall direction one is moving, but is useless when it comes to the day-to-day, as having one’s eyes fixated on the written stars above means that one is at risk of stepping on loose stones below.

And yet… enough is not found in-between the steps, but in the appreciation that comes into view when one stops, looks around, and realise how far you’ve come.

Financial Projections, on the other hand, is not a financial statement.

There is a simple reason why financial projections don’t count as a financial statement: it’s not based on any fact.

For something to be factual, it has to have happened. If it hasn’t happened yet, how can it be true? This goes for any investment thesis and projections, no matter how “sure-bet” it is. In this sense all projectors and dreamers are liars, for the things they tell can never be true at the time of telling.

Yet there may come a time when it comes true, and so one hedges for the worst, and invest for the best.

Start with one set of financial statement: your personal balance sheet and cash flow statement.

The rest is about learning how to accumulate faster... without losing sight of what truly matters.

If one wants to learn the game of wealth creation, one must learn how to see things as they are. This is wealth preservation 101.

At the same time, one, too, must learn how to see things as they could be, in order to create the reality that one wants. This is wealth creation 101.

The language is contracts, and it speaks in %s of proportions and probabilities.

Enough money, in the context of growing wealth, is enough seeds to sow, or more commonly referred to as “ticket to play”.

With enough money to afford losses, one can now afford taking chances.

The more tickets one has, the more chances one can take.

The more one can risk, the more one can potentially gain, though a return is never guaranteed no matter how many people try to convince you that they’ve found “the secret to riches”. This is why putting all of one’s eggs in one basket is the strategy of the desperate: the ones who have nothing to lose, and the ones who have no other way than to make it work.

For everyone else, the long game is the sane game: risk some to win some, and still afford life in its entirety. Why aim for a good life if one doesn’t take time and enjoy that bit?

…this lukewarm point is where most people get stuck at.

This post was initially published as part of Affording Your First Home.

In its reception however, though knowing what you're getting into is integral to getting a loan responsibly, the mechanics of a loan isn't something that's going to be on a test that has to be passed in order to qualify for a home loan, so it was more of a distraction than an integral part of that post.

So now it lives on its own post for anyone who wants to take a peek into how residential mortgages work, saving 5,000+ words off of an already-dense read.

Why Bother?

Why bother understanding how home loans work, indeed? Don't you just keep earning more and spending less, and it should be good from here on?

Well, yes, if you're alright with buying one property and stopping there.

With a blank canvas, it doesn't matter if your loan is inefficient in terms of its financial impact to the rest of your life, but what if you want to buy another property, take time off to care for your aging parents, or get different kinds of loans to start a business?

What if you have to go back to study for a specialisation, in order to get paid more?

What if you're 60, and only now that you discover that you don't qualify for a 30-years home loan anymore, so you have to sell the family home just to continue living?

What if you don't want a life that's optimised to paying down a home loan, but rather, a full life where a mortgage is but an inconsequential part of it?

A contract is such that even if you don't understand the rules, you still have to abide by the rules.

But if you understand the rules, you plan ahead and set up your own terms, so that you can design a life that’s on your terms, and learn how to fit those loan contracts into it.

The Ideal Borrower

The ideal borrower is a 30-50 something, with 30 years of fulltime employment ahead of them.

If you fit within this category, congratulations. The odds are in your favour.

Why fulltime employment?

There are 2 fundamental assumptions in finance:

• Volatility is risk.
• Stability is safe.

Translated, it becomes:

• Unpredictability is risk.
• Predictability is safe.

The person who earns $0—$200,000 p.a. is riskier than the person who earns a stable $80,000 p.a.

A business owner who has 1000 things to pay (and potentially be liable) for, with fluctuating income, is riskier than a limited responsibilities, regularly paid, various-work-insurances-hedged employee.

In particular, fulltime regular incomes are more valued than variable incomes, such as bonuses or overtime payments. They still add to the amount you can borrow, but regular incomes have more weight in the underwriting, so a $250,000 base salary is more valuable than a $150,000 base + $100,000 bonus, even though they total to the same amount. You can test this on any banks’ borrowing calculators.

Why 30 years?

The short history of it was that what the US sneezes, Australia catches. With the wartime 30-year bonds having a successful market uptake, the enterprising country thought, "what else is not a bond, but is bond-like?" The answer to that was housing.

With the 30 years time horizon, the question of affordability shifted from “how can I come up with $1,000,000 to buy a property?” into “how can I come up with $4,613 every month to pay for it (over the next 30 years)?”

Suddenly, it all seems a lot more achievable.

Plus, what you lose in cash flow, has now been traded for a potential for leveraged capital gains from owning a property, which hasn't been included in the Years to $200,000 chart since we're not talking about paper gains.

While it is a coincidence that the current market equilibrium is such that one needs 10—20 working years to save for a deposit, with an instrument that gives one 30 working years to pay it off, but one cannot help but think that this is the implied life script for the everyday persons.

Residential property loans can go for as long as 30 years, but you’ll find that, as you age, mortgages are harder and harder to come by and if they do, the amount will be lower and it has to be repaid in ~5—10 years.

Someone who is 70 is statistically less likely to live for another 30 years than a 30-year-old. That’s a fact of life.

A 70-year-old is also less likely to have as strong an income to service the mortgage than a young, healthy working-age person.

Why not 20, then? Well, because most people whose source of down payment is through employment, wouldn’t have worked long enough to have saved an adequate amount of deposit, or climbed high enough to qualify for $1M loans. However, being young is not a penalty when it comes to getting a loan, unlike old age is.

As long as you can come up with enough equity and loan amount to add up to the price of the asset, you, too, can buy a $5M property at 20.

The Ideal Lender

Lenders are divided in to “tiers”: tier 1 being the big 4 banks, tier 2 the regional banks, neobanks and credit unions, tier 3 being non-bank institutional lenders, and tier 4 being private capital. This means nothing to the first home buyer, as a loan is a loan... right?

Everyone wants the lowest interest rate. A subset of it are the people who want, or have to, get the biggest loan. The more paranoid of the bunch would also want a lender that's won't go bust anytime soon, fearing of being asked to pay the full amount before the 30 years is up. You can have it all, just not at the same time.

At the heart of it is the question: what is affordable?

Is affordability measured by the shortest time to get into a property? If so, you'd want the least amount of deposit to save up for, in exchange of paying higher interest overall. Less down payment required means it's more affordable upfront, at the cost of paying higher interests and bank fees overall.

While it might not be the cheapest, saving up $100,000 to buy a $1,000,000 property with 90% LVR, for example, can be more affordable than another 5 years of battling inflation to save up to a $200,000 down payment, only to find out that the same property is now priced at $1,200,000.

The closer you are to being the ideal borrower, the more likely you can get the most amount of loan from the tier 1 lenders. After all, only they can lend up to 95% the purchase price, for a fee.

If affordability is measured by the lowest burden on your cash flow each month, you'd chase the lowest interest rate, and this typically is afforded by paying more upfront and paying down loan as quick and as often as you can. In this scenario, affordable means that it's affordable ongoing.

Tier 2 lenders are neobanks and credit unions. Their USP is that they are leaner due to various cost savings, from a digital only presence, non-profit requirements, or a streamlined loan underwriting process. The tradeoff is that they usually can't afford as much risk, so they can't lend as much.

In the recent years, in a bid to take back the market share that went to tier 2 lenders, the big 4 banks have come up with their version of "lite loans", as the one I've worked on a few years ago. In order to create the cost savings, they removed the complicated package benefits and only lend up to 80% of the purchase price.

On a $1,000,000 property, this means that the additional criteria is having you figure out how to come up with $200,000+ down payment to qualify. On a $1,000,000 property, this means that the additional criteria is having you figure out how to come up with $200,000+ down payment to qualify. It's more affordable ongoing, but it's less affordable upfront for the first home buyer without a substantial capital backing.

Tier 3 lenders accomodate for more irregular incomes at the cost of paying higher interest compared to other types of lenders. This is because their business model is to finance the higher risk loans, such as equipment financing, bridge loans, and other time-sensitive turnaround 1—3 years projects, not a 30-year bond-like, stable home loans.

The banks of mum and dad are technically tier 4 lenders, which lend to an even smaller, even more specific pool of applicants.

What if I don’t have enough savings for the down payment?

When you buy a property, you essentially convert your savings into the property's starting equity, on its own balance sheet.

You bridge most of the shortfall with the mortgage. If the amount still doesn't balance out, you cut costs, lower the price with subsidy, or get try to get more funding some other ways.

You have 3 options:

• pay with more time and energy to build up your savings
• pay with more energy and social capital to jump through the hoops and apply for the privilege of a grant, or
• pay with your social/money capital and get a guarantor.

As this Westpac Stamp Duty and LMI Calculator not-so-subtly hinted, you might be able to still afford the loan if:

• you can get more money from your future self through some type of superannuation release
• you can get more money from your government, through grants and fee-exemption schemes
• you can get someone else to put their money up, usually a family member, as a guarantee so the bank is willing to lend more to you
• you can pay the Lender’s Mortgage Insurance to get an insurer to put their money up as a guarantee, so the bank is willing to lend more to you
• to total to a minimum of 5% deposit all up.

An Aside: Guarantors

Guarantors aren’t silver bullets; it is a scheme to increase your borrowing power, that answers the question of “what is cash-like, but is not cash?”

This, one would suspect, is the compromise that is made when a culture that promotes “a fair go”, meets the pressures of housing affordability and the political correctness of keeping house prices up. No one’s giving any free money, but every bit still helps some to get ahead.

You can think of guarantors as the providers of “shadow” equity. It guarantees a part of the loan that’s normally assessed as unaffordable based on your financial circumstances alone, but is now considered safe enough to lend, because the gap can recouped from someone else if you stop repaying.

Where there used to be a gap between what you want to buy and what your cash + loan can afford:

In the meantime, the bank will now lend you that amount, and you will pay interest on that amount, like a normal loan.

In other words, the more collaterals the lender can get, the more likely the bank deems you safe enough to lend, thus lend more to you.

A Lenders’ Mortgage Insurance, or LMI, is technically a corporate guarantor that also serves to stretch your affordability, whom you pay with money-capital instead of social-capital. More of that in its own section below.

What if I can’t borrow enough for the property I’m after?

Find a better paying job, buy with more people, adjust your expectations in terms of what you want to buy, and don't forget to advocate for affordable housing.

As individuals, we can do the first three. But it does no good for the society, if the only solution is that everyone should learn to run faster, if they had missed the train.

We will discuss more about how a banks decide how much to lend you in the Serviceability section below.

The Terms of the Mortgage

A mortgage, at its core, is a business contract between you and the bank. There’s a give and take that happens, sealed with an agreement at the end.

It doesn’t feel like one, because:

a) the average homebuyer is neither familiar with doing business nor contracts,

b) bargaining has all but disappeared from our everyday transactions, and

c) the terms are generally about the same between lenders of the same calibre, so that

d) there’s not much you could do to negotiate the terms, besides going to another lender offering a bigger loan, better interest rate, or other perks.

With its high desirability, combined with the lack of experience on the applicant's side, it would’ve been very easy for the banks to create imbalanced contract terms. However the regulators are also aware of this dynamic, and had throughout the years put in a lot of regulations in favour of the people. This is why most mortgage terms are fairly standard and with a lot of leniency compared to other types loan contracts.

What this means is that while there is little room for negotiation, said guardrails also make mortgages comprehensive to the everyday persons without too much power imbalance.

To get a mortgage, there are two main things to pay attention to: Loan-to-Value Ratio (LVR) and Serviceability.

Remember these fundamental assumptions in finance?

• Volatility is risk.
• Stability is safe.

Sometime in history, some persons came up with a way of putting a price on risk, leading to the creation of insurances and its eventual adoption by the mortgage industry.

And so in the language of money, contracts, it becomes:

• Risky pays more.
• Safe pays less.

The less skin one party has in the game, the more tipped the terms are in favour of the other side, as a way to put a price on risk. This is the story of LVR.

Loan to Value Ratio (LVR)

How much you put down doesn’t decide how much you can borrow.

How much you put down does decide if the bank will lend to you at what interest rate, because they have a business rule that calls for a hard limit to what LVR ratio they will or will not lend.

LVR looks at the value of the collateral which, in this case, is the property.

To you, the property is an asset that you can control at anytime, but to the bank, it’s a collateral, meaning that they can only control — taking over and selling it, usually — if you break the contract. They refer to the same thing from the different stages of a contract.

Imagine yourself lending money to someone to buy a $1,000 TV. They sign a contract, allowing you to sell the TV if they miss even 1 repayment. Would you give them $1,000? Not if you think like a business! On top of the $1,000, remember that there’s still the money, time, and energy that you need to spend in order to sell the TV.

The established golden ratio for LVR is 80%. For mainstream banks, this is the point that’s deemed as the “safe leverage ratio”, according a combination of regulations, business rules, and skin-in-the-game theory of accountability.

Any more than that is deemed as “too risky to lend to”.

The risk that a hard LVR limit tries to address is that without enough skin in the game, people would not take it as seriously, leading to people abandoning their loans more often (defaulting).

That tipping point is set to be 80% LVR, and any gap above that has to be bridged by extra guarantees, or by more cash from your side.

It looks at your property’s balance sheet:

LVR, in essence, asks if you can put enough skin in the game for them to lend to you.

To afford higher priced property, come up with a bigger deposit.

…except that that’s not entirely true, because banks can now still lend at > 80% LVR, for an additional price.

Are you familiar with the Nudge theory?

Because banks are businesses, it is safe to assume that they want to make more money. When you sell a loan product, this is done in 3 ways: a bigger loan, a higher interest rate on the loan, or allowing more people take out loans.

Since they can’t bump up the interest rate too much before people refinance away, that leaves the other 2 ways to nudge potential borrowers: higher loan and allowing more people to afford the loan.

To have more people take out loans, technically there are only 3 ways to do so: be able to save and earn more to qualify for a 80% LVR loan, have more properties priced to a level affordable by more people, or be allowed to borrow more.

The first and the second way are outside of the lender's control. But the third way…

This is how Lenders’ Mortgage Insurance was born: a way to allow people to borrow more and have more people borrow more. You don't have to take it, but it's there if you wish to.

An Aside: Lenders’ Mortgage Insurance (LMI)

A common confusion regarding LMI is “what and who does it cover?” The answer is: the lender, and the lender. Your role is to pay for the privilege of a guarantee.

An LMI is the commercial answer to "what is not cash, but is cash-like, that could bring the LVR risk back down to a 80% LVR level?" the answer is: insurance.

A 80% LVR is a non-negotiable, acceptable risk-reward for a home loan as a product. When a bank lends up to a 95% LVR, it's done so in the way that the risk has been paid down to a level that's equivalent to a 80% LVR loan.

Similar to a family guarantee, an LMI means that someone else is putting up their money as a collateral, that can be paid to the bank in the case that you stop repaying. Cash-like, but is not cash. Since you and the insurer doesn’t have a longstanding relationship and goodwill, however, they ask you to pay in dollars for the bigger money guarantee.

Remember this screenshot from Westpac’s Stamp Duty Calculator?

In this extreme example of a 5% deposit, priced at an eye-watering $40,897, LMI surpasses even Stamp Duty as the biggest purchase cost.

What do you get in return?

Well, with a $1,000,000 property at 95% LVR, you pay the insurer $40,897 for the privilege to unlock a guarantee of (95% - 80%) * $1,000,000 = $150,000 to bring it down to a 80% LVR.

If you have $150,000 in savings instead, the LMI goes down to $18,246, because you effectively have 10.86% deposit.

After the upfront costs, the amount of equity that you have is ($150,000 - $39,735 - $331 - $1,300) = $108,634 = 10.86% of $1,000,000, or a LVR of 89.14%.

The amount that the insurer has to cover to fill the gap between the current LVR, 89.14%, and the ideal 80% LVR is 9.14%, so in dollar amount it is (89.14% - 80%) * $1,000,000 = $91,400.

If you have a family member that’s willing to put up their asset as a guarantee, consider giving something nicer than a pack of beer as a thank-you, since they just saved you the equivalent to 10 — 20 iPad Pros.

A $40,897 LMI, however, can still be more affordable than a $39,735 Stamp Duty.

How is that possible?

Unlike Stamp Duty, which has to be paid upfront, the nudge is that LMI can be capitalised, meaning that it can absorbed as part of the mortgage to be paid over 30 years, changing the conversation from upfront capital into cash flow.

Just like how 30-years mortgage changes the conversation from $800,000 into $4,613 every month for the next 30 years, instead of having $40,897 taken out as a chunk off of your cash at the start:

A capitalised LMI is changed into $204.49 interest + $40.71 principal every month, for the next 30 years:

With enough time, affordability can be stretched as far as people’s cash flow can go.

Optimising for LVR

Because LVR is about hard cash vs loan size, the only thing you can optimise, in order to pay the least fee and get the cheapest interest rate, is to buy with as much cash as possible, with the lowest amount of debt.

Serviceability

Serviceability looks at your cash flow. This is the portion that will be locked into repaying the loan, that affects your day-to-day directly, and it looks at the risk that your other expenses will eat into the amount that you can pay into your mortgage.

Just as there is a hard business rule about having no more than 80% LVR as the "safe amount" to lend in relation to the property price, there is another business rule that sets the "safe amount" of 30—35% debt repayment-to-cash flow ratio.

When you see a reverse mortgage repayment calculator like this, what it essentially does is assume the amount you entered and reverse-calculated it back to 30 years, to come to the amount that can be lent safely under this business rule.

The strength of your cash flow dictates how much you can borrow. The higher your free cash flow is, the more you can borrow. As such, anything that might regularly compromise your cash flow, becomes the biggest concern to the bank.

This logic works on the upside too; anything that increases your cash flow on the regular, increases how much you can borrow. With the way the Sydney property market is going, combined with the lack of opportunity to increase income in other ways, it’s only a matter of time until we see property-backed poly relationships to service a Sydney property.

What is not standardised across lenders is what type of income counts as regular cash flow, mostly on the income side, which is why some can lend more or less if you have a lot of non-base, regular incomes, such as overtimes if you work on a casual/part-time basis, or if you are in an industry that pays a lot of bonuses and benefits instead of a high base salary.

Here is where a mortgage broker is worth their weight in gold, because without a broker, you’d have to contact the lenders directly yourself to compare all these. The more you deviate away from the ideal borrower profile of a high-base-salary, stable full-time employed borrower, the more variations you can expect in what the potential lenders will lend to you.

Serviceability Modifiers: Income Side

Oversimplified, net income modifiers go as follows:

• 100% * base income
• 0—80% * overtimes, bonuses, commissions, benefits
• 75—100% * rental income
• ...and a plethora of other weightings for business and investment incomes.

While this can be seen as form of penalty, this is mostly as part of the government regulation to build in your margin of safety, as a guard against underreporting and under-risk managing, such as inflation. As the result, you can borrow less, and it also means that it's less draining on your cash flow by default.

What it implicitly says as well is that if you aren't comfortably employed with a regular base income, you ought to be able to earn a lot more to be able to afford the same loan.

Profit-only businesses, if left to its logical conclusion, would rather remove that margin of safety, because higher repayments means higher income when you’re sitting on the other side of the table.

Always remember: one party’s expense is another party’s income.

Serviceability Modifiers: Expenses Side

You might have heard that you should close down your credit card. Yes, that is essential, as a credit card is the perfect example of a competing, regular expense. Not only that the interest rates are a lot higher than the mortgage’s ~6% p.a. loan rate, incentivising the borrower to pay it first, but that said 12.99—29.99% also has to be paid each month without fail, which gets in the way of the mortgage’s desire to get paid first and to get paid the most.

That is why mortgage applications penalise credit card ownership quite heavily. By having one with a $15,000 limit, for example, even if you use $0/month, banks consider you as having maxed out your $15,000 credit card loan each month, reducing your cash flow by -$450, or a reduction of ~$67,000 on the total amount it's willing to lend to you.

They extrapolate it to 30 years of repaying $450 each month, because credit cards don’t have an end date. It only ends when you close it, so close it to soothe their minds. Nothing’s stopping you from opening it after you get a mortgage, if your credit card serviceability isn’t maxed out.

Different loans, different underwriting.

Optimising for Serviceability

Spend Less or Earn More?

Both. But if you can only choose one because you want to buy now, make increasing income your focus. Why?

Cutting your spend works, if you typically spend above the average. You have to be consistent for at least 3—6 months, because that's the length of time that the bank takes as your "typical spending pattern", in the bank statements you submit in the application.

As with any good lifestyle habits, this will take time to adjust, though it will benefit the rest of your life beyond the mortgage-getting phase.

The second reason is that if you already live at or below average living costs, the bank will still take the population average (Household Expenditure Measure, or HEM) as your living costs instead of your actual one. The floor has a concrete bottom, but the glass ceiling is breakable.

Meanwhile, if you can manage to get a higher salary at a new job, you only need... a letter from your new employer (and 1 payslip potentially), to have your income assessed at the new base salary.

The reason no responsible financial advisors would push for this is that without developing a good money habit, expenses do tend to fill up the room that this extra cash flow creates, leading to a situation where your lifestyle technically can afford the loan in the beginning, but is brittle enough to break at the slightest inflationary forces.

An Aside: Fixed or variable?

From the borrower’s perspective, fixed = easier mortgage expense projections for the next 1—3 years. Variable = rates might go down, let’s ride the wave.

From the lender's perspective it is reversed. High chance of RBA cut = fixed rate < variable rate, betting that fixed rate > averaged RBA cuts over [the fixed rate period].

If the outlook is one of RBA rate increase, fixed rate > variable rate, as some might’ve seen at the end of the COVID lockdown period as the crisis was contained.

Without the ability to accurately predict the future, the question of whether to go fixed rate or variable rate is less about which one lets you pay the least amount of interest, than it is how much you value being able to predict your expenses.

Repayment Term: P&I, IO, or Offset?

Principal & Interest, or P&I, is what it says on the can. You pay interest and parts of the loan over time.

On a monthly repayment, you pay for the interest portion of starting with $800,000 * 6% / 12 = $4,000 in interest in the beginning, plus $796.40 into principal, paying down the loan.

The next month, ($800,000 - $796.30) * 6% / 12 = $3996.02 interest, plus $795.61 principal. So on and so forth… until the loan goes down to $0 at the end of 30 years.

Interest Only, or IO, is P&I without the principal repayment part.

From the cash flow perspective, since you pay only the interest portion each month, the amount is lower overall. You pay $4,000 instead of $4,796.40, because you don’t pay down the $796.40. That’s +$796.40 back to your monthly cash flow.

However, since banks are also aware that you can afford to pay a bit more, and that not paying down your debt poses as an additional risk due to less-skin-in-the-game considerations, realistically they tend to add ~0.25% to the advertised P&I rate to make up for the IO rate, bumping it up to $4,166.67:

People who choose the IO repayment type are after the most free cash possible, in exchange of paying more interest overall.

Why would anyone want to pay more interest?

Well, we did this to build our savings buffer back up. After putting the down payment, our savings were lower than what we were comfortable with, so we prioritised building it back up as quickly as possible.

Money now was more valuable than money later.

One can eat with money now, but never with money later.

Offset is not a type of repayment. It’s an extra feature that’s attached to a repayment type that lets you not pay interest on the amount of savings you put forward as an offset.

Just like a guarantor’s dollars, offset dollars can be thought of as a “shadow equity”. Only, instead of other people's cash, it's yours. In lieu of earning a monthly interest on your savings, you now save on interest on that amount offsetting the loan.

So yes, it is possible to have 100% offset and not pay any interest, if you accept that you won't get paid interest from the bank for your savings.

Some people do just that, for the ultimate liquidity. Other times it’s a way to park money and save on interest while waiting for another deals to be funded.

You typically pay a higher interest rate for the privilege, but this compromise allows you to enjoy a blend of P&I and IO repayments: save more on interest without locking away all your savings into paying down the loan.

Which type of repayment terms is "best" then? The shorthand to that is:

• P&I: if paying off mortgage is your only priority. Your cash flow will take the brunt of it, but over 30 years, you pay the least amount of interest.
• IO: if free cash flow is your priority. You pay more total interest compared to P&I, but you pay less cash ongoing.

You can always refinance to either type, as long as your net cash flow is strong enough for when the next lender assesses you.

Between LVR and Serviceability, the final figure a bank will lend will be the lowest one out of the two.

Mortgage, and a Life of One’s Own

With the size of a home loan being so large relative to most people's wealth, it naturally forms an expense gravity so great, that life tends to reshape around repaying the mortgage. If one's greatest pleasure in life is in the form of a domestic life lived in homeownership, that is an acceptable sacrifice that's worth the joy.

Anytime you deviate from the profile of the ideal borrower, this will pose a problem, if you still want to keep the home and needing to afford it with the help of a debt.

The obvious solution, then, is to pay down your home loan as soon as possible, or to sell up and be free from debt again. What they don’t tell you is that this costs 30 years of your life before you can truly live, if your life isn’t to be centered around servicing a mortgage.

Selling up and packing away is fine if you're committed to remain single for the rest of your life: your decisions, your consequences. That's the beauty of the single, less complicated, life.

If you have a family that counts on you being able to qualify for the home loan still, however, if you don't prepare for it, there will come a time where you can only choose 1: continue affording a family home, or the pursuit of a life of your choosing?

Without understanding the nuances of a loan contract, the responsible person defaults to serving the loan first at all cost, while joy gets the leftover budget, if any.

The irresponsible person, on the other hand, prioritises joy, while leaving the burden of a mortgage repayment to the rest of their family.

Neither of these appealed to me, as I don’t want a life of my own that’s built on the sacrifice of those whom I’ve chosen to become a part of it. So I chose the create the third way: to find a way to afford both, at the cost of having to figure out how to live the perilous life outside of a stable 9-5.

I made my resolve to understand contracts, for money has a language: its name is contracts.

And so can you.

Ah, property… the sure-thing you can talk about with anyone, the saving grace of everyone who’s not into footy.

While gold has achieved the mythical status as the safe haven, residential property, in Australia, has an even better reputation than gold. Good as gold is not as good as backed by bricks, when the dream that has evolved from a quarter-acre block and a hills hoist, is still very much alive in a 65-sqm place with a deck on which to BBQ on… a place to entertain your extended family come Christmas time, the very picture of a good, honest life — having “made it”.

It’s no small wonder, then, that with my early audience of 30-somethings, I’ve been asked about property 5—6 times (and counting) already, such that the intrusive thought of getting a licence and start charging did cross my mind. But I mustn’t get distracted.

Because I, too, am in want of more free time, instead of spending 2 hours with the next persons who's asking, I've compiled the common concerns in this post, with the focus on the financing side of things.

If you find it useful, please feel free to share this around. Follow-up questions welcome; I might compile it into a sequel, once there's enough of them to make up a post.

Be assured that after you’ve done it once, you’ll see how tedious it is — more of a death by a thousand cuts rather than an insurmountable, once-in-a-lifetime-biggest-purchase-of-your-life, if you make it not so.

The how in property buying, as it turned out, is made up of 3 big questions:

• the asset-selection-how, as in the process of finding, filtering, and finalising on The One Property, and then there’s…
• the buying-process-how, as in how do I start and who do I engage?
• the getting-funding-how, as in how do I come up with this most intimidating amount of money in my life so far?

With regard to the first and the second hows, there's been a plethora of content covering the asset-selection-how and the buying-process-how on any real estate media. They’ve came up with frameworks to help get one’s head around the concepts, considerations, and mindset, which is just as well: the more comfortable people become with residential property, the better it drives their business, playing their part to facilitate for those who want to get into property.

The incentives and the outcome aligned.

Though everyone has something to sell, but that doesn’t mean that it’s all shill. That’s the kind of black-and-white thinking that we don’t do here. This asset selection framework in particular, to me, have captured the essence of residential property selection:

Which could be summarised as:

In Affording your First Home, the focus is to share my observations on how banks and lenders think when it comes to granting a mortgage. Keep in mind that though I’ve worked on banking applications before, including building a literal mortgage software product, this is not a financial advice, as usual.

If you’re here, you weren’t asking about “should I buy a property”, but that you’ve already decided that “yes, I would like to buy a property, how do I do it?”

Before You Buy: Assembling the Team

Buying a property, as a first home buyer, is hard. Not because it’s rocket science, but that before one even starts to look for a property, there’s about 1000 paper cuts from the checklists to tick and people to organise, when you don’t know who to talk to and everyone seems to be in a rush all the time.

Agents are always on the phone, brokers asking you about things you haven’t even thought about before, such as how is one supposed to know whether to go for an Investment Property first or a Principal Place Of Residence first? I thought you could advise me on that!

If it all seems daunting, be assured that the first time is the hardest. So how does one start?

Pick a professional; any professional.

Personally, I'd start with a mortgage broker, because without the bank money, I'd still be too poor to afford any property with my cash alone.

Starting with a financial adviser is also an excellent idea, as they could help you figure out your finances, and work with you on a plan to afford a property. When you go directly to mortgage brokers, you essentially represent yourself as your investment manager, and the assumption is that you are fully aware of what part does this property play in your overall lifestyle goals.

Whoever you go first with, ask them for referrals to fill up the roster for the rest of the team, as any professional never works alone in any multi-step endeavours.

Pre-purchase:

• lender: get you the bank money (mortgage).
  • banker: you get access to one lender's offerings
  • broker: you get access to more selection of lenders in their network. Not all lenders available, but they can compare more products — across banks and other lenders — rather than single lender bankers.
• financial adviser: optional. Hiring a qualified financial planner helps you learn about managing your money quicker, including making a roadmap on how you can afford a property.
  
  Ask grants and overall strategy questions, and you can consult them on your money management things going forward, including forming your investment portfolio.
  
  If you want to learn how to create your own wealth portfolio, it is possible to study the techniques and mental conditioning yourself, but have a realistic expectations of yourself that if you do this in your spare time, expect that it’ll take several years to learn the basics, depending where your start at, and a lifetime to master.
• buyer’s agent: optional, but does all the coordination for you. They work with you on your brief, recommends properties that match that brief, and you say yes/no to them. What can take ~1—6 months can be compressed into ~1 month from start to finish, if you're willing to pay for it.
• tax agent: optional. It's more important if you're buying an Investment Property or a flip. Does this deal make sense after tax? Ask tax questions, like Capital Gains Tax (CGT) and deductibility of certain expenses.

Buying:

• conveyancer/solicitor: to review the property purchase contract and work with the banker/broker to settle the amount. Property contracts could have funny things, such as easements, covenants, and other things that allow other people to legally do their things on your property. If buying an apartment, a solicitor can search the body corporate minutes and flag potential troubles.
• building & pest inspection: what is it that you’re buying? It doesn’t guarantee tip-top conditions on the property, but it points out potentially critical failures, things like the roof might cave in 2 years’ time, or that the foundation has shifted. In NSW you can buy this off the listing, but in other states you have to do this yourself.

Post-purchase:

• property manager (if buying an Investment Property): takes care of collections, arrears, rental reviews and arranging trades for maintenance requests.
• trades (if self managing or Principal Place Of Residence): to fix the things you’re not legally allowed to fix, such as installing electrical outlets, or if you have an allergy to changing a lightbulb.

When You Buy: Qualifying for the Mortgage

As a French friend put it, “mortgage literally meant mort-gage, or dead-pledge. You pay the debt until you die.”, she said, during her housewarming party.

Instead of saving $20,000/year for the next 50 years to buy a $1,000,000 property 50 years later, you can now buy a $1,000,000 property with $200,000 — or 10 years, and pay the rest within 30 years.

If the property is priced at $1,000,000, the only thing that the seller cares about is that $1,000,000 is paid out, not how or where the buyer came up with $1,000,000.

With the ~20% of the money to buy coming from savings, there’s only ever 2 levers: how much you can earn, and how little you can spend.

If ~80% of the money to buy the property comes from a mortgage, it follows suit, then, that focusing your effort on the 80% is the best use of your energy. If you want to understand how banks think, you can read the full deep dive in Contracts Explained: The Anatomy of a Home Loan.

If you just want to know how to get a mortgage, the first thing you have to get clear on is how does one define affordability, and what are you willing to trade off?

Affordable Upfront

Affordable upfront means that you have enough to cover for the costs of buying a property and to pay for the equity component of the property price, which according to the bank’s minimum Loan-to-Value-Ratio requirement of 80%—95% LVR, translates into affording to pay for 5%—20% of the purchase price after all buying costs.

When you go speak to a lender/broker, if you give them the price range of the properties you’re looking at, they could give you an estimate of the total down payment that you should aim for to afford the property you’re after.

This is not as easy as calculating 20% of a purchase price, because the fees involved are a mix of fixed costs (legal fees etc.) and sliding scale costs (for example Stamp Duty), so the best way is to either ask the lender for the $ figure, or use an online purchase costs calculator and work it backwards to find the price v savings that’s affordable.

To make a mortgage affordable upfront, there are only 2 ways:

• have more money:
  • save more faster, or
  • buy with more people
• lower the price:
  • get more discounts through government grants,
  • or buy something cheaper.

Lenders’ Mortgage Insurance falls under the “have more money” part, for reasons you can read up on in Contracts Explained: The Anatomy of a Home Loan. This allows you to put in less equity upfront, at the cost of higher repayment over the life of the loan, making it less affordable ongoing.

Affordable Ongoing

If you want something that you can repay comfortably, it means that you prioritise ongoing affordability.

This, too, has a convenient online calculator these days, where you can put in the rough amount that’s going to be borrowed to see how much you potentially will be up for each month.

Ongoing affordability is tied to how much you can borrow, and how much are you willing to borrow. How much you can borrow is based on the assessment of your free cash flow, meaning what you take home after all living costs and other loans, which is called serviceability.

There are also only 2 levers when it comes to making a loan more affordable ongoing:

• have more money equity: repay more and repay often
• lower the price: buy cheaper by borrowing less

Implicitly, when someone prioritises upfront affordability, what they prioritise is to get into a property as soon as possible. The price they commit to paying is to pay more each month, having weighed that the lifestyle improvement that the property will bring is worth the extra squeeze in cash flow each month.

Conversely, when someone chooses to go after lower repayments, they value the comfort of having enough money each month rather than what the property will bring into their life.

Upfront affordability is the battle of the people who start out without capital, and ongoing affordability is the battle of everyone who lives in fear of debt.

You have to choose at least 1, and both ways are difficult. Choose wisely.

Between LVR and Serviceability, the final figure a bank will lend will be the lowest one out of the two.

After You Buy: How to Keep Your Sanity and Your Home

The duality of the property journey is such that in the pre-homeownership stage, there is never a shortage of complaints about how buying a home is too expensive, yet post-homeownership, the same crowd, now exposed to the realities the responsibilities that come with the privilege of a property price growth, is never scant of complaints about maintenance and renovation costs.

After spending $5,000 on asbestos management and who knows how many thousands more on the big red hammer, I hear you, and I can confirm that spending hundreds on Aldi’s Ferrex range is a good value for saving thousands more on trades, if you're willing to work on your house for $0.

Risk, in residential property, mostly lives in the cash flow portion. Banks don’t seize and sell your house the moment the price drops to 50% off its starting price, despite the fact that to the bank, your loan is now a risky loan that’s overleveraged by 180% LVR. It is simply un-Australian to do so.

The point of purchase is where real estate media stops. Since everyone has been paid, it's all in your capable hands now, that there is always something to fix, and at times it comes in parcels of $500—$15,000.

Plan for the Unexpecteds

On your personal finances, if you have big ticket items that can’t be covered by your monthly cash savings, you can plan ahead and save to afford it. Property is the same. But unlike people, property doesn't qualify for Medicare benefits.

Remember that with homeownership comes the responsibility for funding various maintenance yourself. What used to be covered by rent, will now come directly at you in $500—$15,000 parcels.

Buying an apartment doesn’t exempt you from building repairs. Instead, you get to play democracy, and have to convince everyone else that yes, this fix is important, please fill up the sinking fund to save us the bigger cost down the line.

Having another 6-months savings buffer just for the property is prudent. This affords the small-medium urgent repairs that insurance doesn’t cover, usually in the range of $500 — $15,000. Coincidentally (or is it?), this matches up with about ~3—6 month living costs, as before.

That way, as you increase your buffer to match the cost of living increases from inflation, you don’t neglect to increase it to cover for the trades’ inflation increases, too.

Always have a buffer for the unexpected repairs. Cash buffers are not to be thought of as “wasted opportunity”, but rather, “sugar injections to finish the marathon”.

A quick aside: to afford expenses in the $X0,000 – $X00,000s, do as banks do, and get an insurance over what you can't afford to pay for yet.

Building insurance covers the cost to rebuild parts of your home, or even the entire home, under a limited circumstances. Contents insurance: self explanatory, but coverage varies so check the fine print.

Banks and insurances, with their access to a wealth of information regarding whether a property is worth insuring or not, are good sources to cross-check if you're about to buy a lemon or an asset. If it's uninsurable, don't even touch it, as even with salvageable cases you'd need a substantial capital to turn it around.

It's not as good as having $X00,000 ready to go, of course, but it covers some of the major ones until you can afford to cover it with your unconditional money.

Test Your Cash Flow

Before you get a loan, banks were already required to build some safety margin to lower how much you can borrow at that time of granting the mortgage so that you don’t overstretch your borrowing. You can borrow less as the result, but you can borrow safer.

What banks can’t guarantee is that there will be no interest rate raises during the life of your loan, should the wider economic condition calls for it. This is the part that you should model yourself. Historically, 17% interest had happened before, and there's no guarantee that it won’t happen again:

Curiously enough, I couldn’t find any sites that can quickly generate an interest-to-dollar repayment conversion table, which is more useful rather than changing the interest rate one by one. Here's a very rough one for you to give an idea of how much your repayments can jump to:

Mortgage Repayment Table Generator

This was how we were able to afford the recent ~6—7% interest rate comfortably: because we knew that 2—3% interest rate is the exception, not the norm. If anything, 6—7% interest rate is the historical average norm, so plan to afford that for the next 30 years.

When it comes to holding property, let cash flow be your excellence. The personal cash flow is the one thing you have some control over, and the better you are at creating a margin of safety, the higher your quality of life will be. This is life in general, but is especially important the more dependants you have to cover for.

A property is a dependant. You are no longer earning to cover for yourself, but also for a property that requires maintenance and upkeep.

When it comes to capital growth, let time be your friend. What the market thinks your property is worth this quarter is nowhere as important than how it serves you in the context of your life for the next decade, if only for the fact that no one person has control over the entire market direction.

A Timeline of a Decade or More

Australian residential property, very roughly, moves in a cycle of a decade, and every region has its own micro-climates. The drivers are different everytime, so are the exact length, such that there’s been lots of star chart reading in the attempt to making it more predictable. And yet, without the ability to predict the future, no one’s been able to do better than sounding confident about it.

While it doesn’t help in timing the precise entry point to buy in order to maximise the total returns, what this means is that when you buy a property without any other competitive edge, expect to buy it for the next 10 years.

The fully-intended consequence of stamp duty to deter property speculations is that buying and selling property is expensive, meaning that you start with a -$39,735 on a $1,000,000 property from day 1.

If you’re planning for selling within 1—5 years, you should have a competitive edge that’s better than “waiting for the market movement”, because a 5% gains to cover this shortfall is, for the most part, blind luck of the market movement.

This is where people fuss about finding the “hidden upside”, such as qualifying for a grant to be exempt from Stamp Duty, having a free land component to chop and sell (subdivision), or having the trades skills and/or partner to save on the 20% builder’s margin. This is why most flippers are a builder’s [adjacent-someones]: partner, child, cousin or close mates. Their access to wholesale labour and materials subsidised the deal.

In lieu of that, let time be your friend. Give it (and yourself) time to learn and grow.

If you find that you’d like to make residential property flipping your thing, make some builder mates or learn some trades. With the privilege of an insider, your subsequent returns will be better, as you find more ways to sweeten the deal.

Looking into 10 years in the future is hard. The best thing you can do is prepare for the worst, and hope for the best.

Hedge Against the Most Regret, Maximise for the Most Joy

What would've been the thing we regret the most?

Because there's the two of us, we had to approximate two priorities into one consensus.

The most regret, for my partner, was to be stuck in a perpetual state of renting, as he had been for the past nearing-two decades. He had come to a time in his life where having to move every few years became laborious, and the yearly inspections, intrusive. It was, in his proximate words, as if he had no sense of progress; a perpetual renter.

For myself, the most regret would’ve been in the form of us to overstretching ourselves, to the point that both of us have to keep working for the entire 30 years just to afford our family home. I would come to resent it, if not each other, because at that time residential property had become “a solved problem”, having bought on my own few years before we got into a relationship.

Years ago, when I went for an investment property as my first ever home, my most-regret was to be stuck working forever. It was a time where I was working in a place run by apathy and quiet deference to incompetence, so I asked, “how do I never have to work anymore?”

Property is the way out, or so I heard. Why not give it a go? So I did.

With nothing I was able to afford on my own where I lived, that comes with the returns that I was after, I accepted that I'd have to be able to pay more upfront – foregoing stamp duty reliefs and other grants – to buy an interstate property, because having options in the form of the most gains for the least drain on my cash flow was more valuable than living the Australian dream, if said dream must be paid by enduring that kind of life for the next 30 years.

As I moved on to work at a better place, I came to discover that what I wanted was the privilege to choose work – that is, to work with good people, who both care about the work and the people they work with, on the kind of work that's enriching mentally, physically, and monetarily – rather than to never work anymore.

What did the most joy look like for us then?

For him, this would've been his first home. Joy, for him, was in the form of stability, and yes, that accomplishment of having afforded the Australian dream. A place that’s ready to live in, a bigger space to start a family in the future, and it was a pure coincidence that it came in the shape of an almost quarter-acre block... with a hills hoist at the back.

As for me, getting a home of our own was an opportunity to try my hands out on home improvements, both from a life enjoyment perspective, and to build some sweat equity. That's why I didn't want a "perfectly renovated place", because I wasn't willing to pay the premium on a flipper's renovation that's made for a mass appeal. Yes, let it be known that I am neither short in wants, nor the impetus to go after them.

Of course, it didn't turn out quite the way we envisioned it, as from the returns and enjoyment perspective we could've gotten more for our dollars. We are constantly reminded of this when see another lot being knocked down, subdivided, and be rebuilt for a brand-new 5/3/2 that he stares longingly at every time we go for an evening walk around the block.

These were all the things that we didn't know that we didn't know about before buying. That our mistake was in that we dreamed too small, even though it seemed to be big enough at that time.

According to our original goalposts, however, this property had afforded us what we had hoped from it: a space to settle down at, with many projects to grow into, and a room with a view from which to write in that afforded me the space to dream bigger for our next decade.

Lastly… Most mistakes are reversible

So don’t kill yourself thinking about what could/couldn’t be.

Paid P&I, but are now realising that you’d like to have more cash on hand? Refinance to release the equity, and switch to IO if you want even more cash on hand.

Rentvested in a different city, only to find out that that particular Sydney apartment would’ve brought in nett $2,000 monthly after all costs? Sell up and chase the cashflow, now that you know that you value positive cash flow more than total returns.

Bought a PPOR, but barely keeping your head above the water? You have a choice to reorganise your other spend to create more cash flow, or sell before the bank repossess it and sell it for you, and after that you’d have some $XY,000 freed up pick yourself back up and try again.

Bought an IP, but losing sleep from the maintenance bleed? Sell and rethink about what investment vehicle suits you more, or if you should stick to maximising your salary for the wealth target you’re after. Property is just one form of asset, which in Australia is one that’s geared towards high leverage, cash flow draining type.

Bought for cash flow, but girlbossed too hard and are now paying too much tax? Sell up, restructure, etc. The stamp duty would suck. So is paying $50,000/year for a university degree that you don’t use. Consider that the cost of having lived, and rebalance.

In any way it goes, you’ll come out richer from having lived this experience.

Have you ever heard the term, High Net Worth Individuals (HNWI)?

Sounding a lot less intrusive than “is someone rich enough”, it asks the same question, with a higher chance of getting a straight answer: are you rich enough… to afford certain things?

In the States, the land of capitalism, the definitions of HNWI have largely converged into $1M to $5M as entry-level rich.

In Australia, there is less consensus about what the magic number is, ranging from just over $1M liquid assets, all the way to $50 million by the Australian Tax Office.

It would’ve been easy to pick any one of the existing HNWI definitions to stratify wealth. It is an established part of the financial world’s lingo, and we are talking about money and wealth, so why not use this existing definition that’s part of that world’s system?

Well, it is useless, to begin with. At least for now.

Finance’s typical stratification of wealth is commonly used by investment-seekers to determine their ideal investor pool. 0.0025% of one’s total wealth, you’d agree, sounds like a relatively small sum, but 0.0025% of someone’s $1,000,000,000 has a vastly different magnitude than 0.0025% of another’s $1,000. If one gets the same 0.15% cut for managing either amounts for almost-equal hassle, who wouldn’t choose the first one?

The usual definition of richness, commercially, is more about quickly finding out how likely you are to hand over $25,000 to them than it is about what $25,000 is in the context of your life.

A $25,000 is a $25,000 is a $25,000.

But is it a whole life, a year’s, a month’s, an hour’s, a fraction of a second's worth of one’s time and energy?

So as financial firms are wont to do, we, who want to excel at money, can apply that same logic: we, too, can define our own stratifications of net worths, in a way that serves us.

I’m not a financial advisor, and this is not a financial advice.

The good news for the both of us is that one gets certified as rich after acquiring $X million, instead of as a prerequisite to.

In a statistically satisfying event, my small pool of early subscribers represented a great sample of the greater populace: that most people are concerned with going from $0 to $100,000.

Life in the $0 — $100,000 bracket is perhaps the most diverse, if only for the fact that it’s where most people are. About 87.8% of the world's population in 2021, in fact:

As one might have intuited, accumulating $100,000 in a “third” world country is a lot harder than it does in Australia. Think of it this way: the equivalent of accumulating $100,000 in a third world country would’ve been closer to how one would go about amassing $10,000,000+ in Australia.

When your job only pays $300/month, even if you can save 50% of your income, you still can only save $150/month. The same effort, applied in a context that pays $3,000/month, will net you $1,500/month.

Two identical real returns, different nominals. One guess as to which one will get you to $100,000 faster.

Money is the measure. Even though it doesn’t capture the full value of things, it is easy to do. Do I have $100,000 or not? Nowhere does it say what a $100,000 life looks like. Quantity is comprehensible, but quality is ever-elusive.

When I write about reaching $100,000, it is in the context of per individual, working in a good enough job, usually for someone else, in a good enough place that allows you to save, usually in a first world country.

Just enough, that one can survive to begin with.

Then we can talk about dreaming of a bigger life.

$0 — $10,000 is the survival band.

It’s about making sure that one has enough to live on each month.

Then one pushes her limits, raising income and lowering spend, so that there is something to retain. This margin is how one can start building wealth.

The big question in this band is: do I have enough to survive?

When it costs an individual roughly $3,000—5,000/month to live, allowing for increases in unexpected expenses (but never unexpected income), $0 — $10,000 is roughly 0-3 months, or one bad luck away from not affording to live.

Under the ideal circumstances, an “average NSW salary” grossing $1,985.00/week can afford a “Sydney average” living expenses, which looks something like this:

$1,985.00 weekly gross pay is $1,526.00/week net, or $6,612.67/month net take-home pay.

When the bare minimum needed for lodging costs $450/week, $60/week on utilities, $100/week on transport, and $300/week on food, $616 saved weekly by never going out sounds achievable.

The idea of living an ascetic’s life isn’t for everyone, but it is doable, especially if you know that you’re doing this short term for the future.

But what about the long term?

The Expense Gravity

Let’s say that this hypothetical person, riding the high of the new year’s resolution, had managed to save up $10,000 by July.

They thought, “I’ve got this”, and would play it by ear. And they did — sort of.

Their savings never dipped to $0, but they didn't exactly know where their money went each month, either.

If the end result is such that one maintains an equilibrium of $10,000 in the bank, the only way it’ll remain so is if some months are surpluses, and other times deficits, averaging out to match the net income component in order to remain gravitating around the $10,000 net worth:

What does $10,000 afford then?

If one were to lose their income, one has < 2 months to replace it, because what it’s attempting to afford is not the average expenses of the population, but rather this particular individual’s rolling average living costs:

Population average is of little use when it comes to measuring one’s actual runway, when the real key to individual affordability is the rolling average of one’s expense habits.

In what looks to be the opposite end of the spectrum, someone else is earning double the “average NSW salary” of $3,970.00/week gross — or $11,934.33/month net — single handedly. Suppose their spend also doubled to suit their pay band, ranging from $6,000 — $10,000 instead:

Person #2 would still save faster, despite having doubled their average expenses and paid more tax. Extraordinary income does cover for extraordinary expenses in this case.

However, if their lifestyle only resulted in $10,000’s worth of savings, their spend is more likely to be around the range of $9,000 — $14,000:

It gets worse. What lasts the “average” person 0 — 3 months can only last them ~1 month under their averaged individual spend:

Leverage is a knife that cuts both ways.

There is a certain flavour; a mix between schadenfreude and disbelief when people see a “high earner” on struggle street. One is tempted to think that these examples are made-up, cautionary tales of the scarlet robe kind, but they do exist. They’re just not very visible; a self-preservation instinct, if you will, seeing as the stakes are much higher.

How they got there, you’d have to ask the specific person yourself; but the most tragic answer has to be that one lives too much in the now because they’ve given up on the future.

In an ideal world, no one has to cut corners in order to afford the bare minimum.

In an ideal world, everyone has the financial literacy to understand the rules of the game.

But that’s not real life… in a lot of places.

A dirty place is better than the streets. A low-paying job is better than no job. The wrong income is better than no income. The best time to start was 10 years ago.

In lieu of all of the above, the second best place is here, and the second best time is now.

Defying Gravity

Both the “average individual earner” and “average household earner” share one thing in common: they are subjects of their expenses’ gravity.

Going from $0 — $10,000 is one of the most tedious things on earth, if only for the fact that there is so much work involved for little to no results, in a world where only results are valued.

If you already live on the bare minimum, you don’t need yet another person to come and tell you to earn more. You “just” need to do the work of opening doors: getting the right visas, licences, certificates, referrals, to get into the rooms that you don’t feel, or was told that you don’t belong in, in order to get paid more.

If you spend on the high side, you also don’t need yet another person telling you to cut your spending. The work is to sit down and shut the doors... to spending, and other proxies of it.

If you earn high and spend high, that’s a lot of other people’s dreams and wishes living in your head, charging you rent on your own space.

Remember this adage well: your margin is someone else’s opportunity.

To put it bluntly: defying gravity asks you to first get over yourself.

Living in the $0 — $10,000 band is painful. Going against gravity is also painful. When either ways of being is difficult, why not as well pick the one with the most upsides?

It will suck; as all the work of showing up for yourself do.

It’ll be slow, and it always takes longer than expected.

You will compare yourself, because feelings don’t understand concepts like different starting points, knowledge inheritance, and applied contexts. The homo economicus is a mythical ideal, much like the person who’s perfectly “average” in every aspect.

But the alternative is to live like this for the rest of your life: on a rolling 1-3 months basis, payslip to invoices, and when you couldn’t work anymore, to live on the conditional, “wrong” money.

The first step towards making real changes is to acknowledge how things are in one’s life, as they truly are, without judgement. It does not come from empty complaints about how things should have been, for systemic changes takes years — decades, well into the next generation — which does not help if one needs to eat now.

These should’ves, could’ves, and ought’ves all consume one’s focus: the one thing that’s to be funneled 100% into escaping gravity.

First comes a wage. Any wage to cover the corners that one can’t cut.

Then comes a better wage. When there’s nothing left to cut, one can only add.

Most importantly, when it comes to facing the ghosts of “but how long will this take” or “I can’t afford to fail”, what is there to lose when there’s nothing left, where this current trajectory is heading towards?

Then, and only then, can one start to afford the privilege of having ideals.

Feel the suck, and keep walking.

$10,000 — $100,000 is the foundational band,

so learn to build a strong foundation.

It’s about making sure money in > money out every month. If what goes in equals to what goes out, one can never accumulate. The simple end result, the one final figure that we come to after skipping all of the complex hows and whys of it, is that wealth is what remained.

For many, this is where the greatest transformation happens: becoming someone who can build wealth.

The big question in this band is: can you consistently keep what you earned?

In the game of wealth there is only 1 end component: the amount unspent.

The amount unspent, in a post-barter society, is the closest thing to having real choices. The right kind of money represents real choices, ones that are not subject — for the most part — to the usage terms and conditions.

To accumulate wealth we play the game of finance, in which we seek the —potential— answers to the 2 components that resulted in the unspent amount: net income(s) and net expenses.

To appropriate another finance term, the higher one’s ceiling is and the lower one’s floor goes, the more breathing room one has.

The Income Component

If you have a fulltime job, finding out your ceiling is easy. Monthly salaries under the PAYG system comes in after tax, thus is already a net income that you fully take home.

We’ll talk about pushing your ceilings the salaried way — benchmarking, positioning, and ROI on degrees — in a separate post, as this topic is more opaque than expense benchmarking.

At this level, every cent counts. Moving banks to chase after the highest savings rate and a split transaction account to chase the most rebate is still a worthwhile hassle to tackle, as it is the most, and often only, available arbitrage for the ones without the means for higher-priced arbitrage opportunities.

If you’re working multiple part-time jobs, that too, is fairly easy, because the tax man makes it so you can one-click to generate taxable income reports. If you take cash and haven’t gone bankrupt, you’re already an expert and should skip forward.

The Expense Component

The expense component gets all the attention when it comes to the foundations of financial literacy. Rightly so, because expense varies a lot per person, and with high variance comes inefficiencies, thus is where the highest potential of improvements are to be had.

A good floor level to aim is the average of what other people had spent, based on a publicly available data from ABS or from other comparison site's reports. They're not perfect, they're likely to be outdated, and they certainly don't all apply to your personal circumstances, but it’s a good start, because population average is proof that that expense level is affordable for most people.

If your circumstances are more complex than this, you have to try harder to find the subset data of people who are most like you, or get a financial planner; it is their job is to keep tabs on those like-benchmarks, as a prerequisite to giving a useful, tailored advice.

If you can make do with a generic average spend, there is one thing left to do, and that is to make a habit of reading up your expense reports.

The thing about the spending habits is just that: habits.

Live long enough, and one accumulates things just because, regardless of whether or not they still suit us. The proof is in the many new parents who can suddenly find the spare $20,000/year after tax to raise a child, despite living hand to mouth prior.

That’s what happens when one gets clear about what really matters.

That it still so often requires bringing a new life into this world in order to make it a priority is a testament to how far we’ve yet to go, when it comes to consider ourselves as inherently worthy of the effort.

Keep it simple. Generate your expense report. It’s all there. You just have to sit down and read it, and save the judgement for when you can afford to.

And when’s that?

When your bank account’s line goes up every month without having to think about it.

Your receipts form the tapestry of your desire. Keep them, understand them, and get to know yourself.

Sort them from the largest to the smallest, and chip away.

For a lot of people in good-enough jobs, this band is comfortable.

From the average cost of living perspective, having $100,000 in the bank means that one can have ~2 years of runway should one loses their income. For example:

Individual circumstances will vary, as we have seen.

Having $100,000 means that even if there’s no income, one can still pay for those big expenses and live on:

If and when inevitably a recession happens, since most recessions had “only” lasted for < 20 months, it means that a single person on an average individual spend will have a good chance of making it to other side of the recession, when the market recovers and people start hiring again.

Knowing this won’t make the recession feel any shorter as you live through it; however, when all seems dark, knowing there’s light at the end of the tunnel is the single candle that holds one throughout.

Under business as usual, $100,000 buys a lot of things, not the least is the peace of mind that comes with knowing that one has enough to weather most sudden life expenses:

It doesn’t make any difference to wealth accumulation, since the cashflow model here is what goes in ≈ what goes out.

What $100,000 on hand does is essentially to act as a private safety net; the privilege to afford things that one’s ordinary income can’t pay for, that doesn’t require any begging or queueing up.

What this means is that in order to start building wealth, you must have at least one of the following: an average income on extraordinarily low expenses, or an extraordinary income on average expenses, if one is to start building a margin of safety.

An Average Income for an Average Life

$1,985.00/week Gross Pay, or $103,220.00 p.a. on $3,000 — $5,000/month gets you to $100,000 in 40 months, or 3.33 years — on average:

You save, on average, $1700—$3,500/month:

Because you’re on top of your finances, you feel good, maybe you have a good chance at getting a mortgage now to buy a place. CBA came back to you with this figure:

Which buys… nothing, in Sydney, where a shoebox studio starts from $600k. And you’re not that desperate yet to get into a mortgage-based relationship.

…are you?

In a move that has none whatsoever to do with mortgage affordability, you found someone to settle down with.

Your significant other just so happens to have the exact disciplined cash flow management as you, so together you are able to borrow ~$626k to buy your first home (apartment). And you did.

(You might be able to borrow more or less as the CBA calculator doesn't separate the current rent paid from the total expenses field… but that’s beside the point. We’ll talk about that actual underwriting in a post about Affording Your First Home.)

We won’t ask too much where the down payment came from, as it’s not culturally polite to ask about it uninvited. The end result still is that your $100k savings remains intact instead of being tied up into a property.

When the (e-ink) dries, you are now officially the members of Australians’ second unofficial religion: the church homeownership. Congratulations all around.

Where you, as a household, had been saving ~$3500 — $7,000 monthly before mortgage (as an oversimplified function of 2x individual cash flows):

Even after taking out a $627k mortgage, paying $3,876/month on P&I (Principal & Interest) mortgage repayment, your good money management keeps you on a very healthy savings rate, especially that you’re no longer paying 2 x $450/week on rent, adding a whopping $3,900 net after tax back to your cash flow:

Essentially, what used to go into rent now goes into repaying your new property, building wealth. Rent money is dead money, right?

Your savings kept going up, accordingly. Plus, you now hold another asset besides your savings: a property to call your own. It lives on a separate balance sheet that’s not tracked here, as this pertains your cash position only.

You feel good. And you should be. This is what good personal money management looks like.

Because there is still some excess cash, there’s room for one more:

And another… it’ll be tight for awhile, but it’s not forever:

And of course, to account for life’s surprises and family holidays…

It’ll be tight for awhile, but it’s not forever.

Afterall, we still have that $100k of savings to dip into.

In this way we are lulled into a false sense of security, rising our floor with every growing needs as we roll into our next season in life, pushing our ceilings for $10,000-50,000 every 3-5 years — if that.

What happens when all of the above happens?

Recessions are rare events; by nature, they’re neither urgent nor important, until they happen. So much so that every generation, collectively, gets recession amnesia. When life as one remembers it had always been good, why prepare for something that has never happened?

When it gets tight, such as when all of the above happens at the same time, one can look for a better-paying job, hoping that the market is benevolent enough that there is such a thing as a better-paying job with not enough qualified applicants.

Your sector was hit hard by the recession:

Sensibly, vacations and other discretionaries get cut off, affording you more time.

You couldn’t get another job that nets above the subsidy gap to cover for daycare, so you both decided to that you’d stay at home and become the fulltime primary carer to save costs.

It bought you even more time, on top of the non-monetary benefit of spending more time with your kids:

You might think of downsizing to a smaller accomodation, but there’s 4 of you now. You were already in a 2-bedroom apartment on the outskirts of town, thinking of either upsizing or moving closer to the city centre, before this all happened.

Then the very thing you've been dreading about happened: your partner lost their job, too.

Hopefully, this recession is one of those non-inflationary, 6-8 months recessions, and no one gets afflicted by what Medicare doesn't pay for.

This type of life is good enough when the going is good. The market works most of the time, except that when it rains, it pours.

When there’s rising living costs is when one typically needs a better paying job to offset the rising floor, but the market that’s made up of other people are also cutting costs, including the cost of paying other people’s salaries.

The housing market, too, has a bad habit of shrinking precisely at the moment when one needs to sell.

That’s what this band is all about: living market to market on a 9-5, Sisyphean and small, held up on a prayer for the next good market condition.

"We are what we repeatedly do.
Excellence, then, is not an act, but a habit."

— allegedly, Aristotle

Why was the post titled “A Tale of Three Brackets”, when there’s only 2 brackets mentioned?

$0 to $10,000 and $10,000 to $100,000 weren’t even meant to be separate when I first started writing this out.

I initially — and still do — consider $0 to $100,000 to be a single bracket, so there's yet another 2/3 of the point to go through. This is because for people on liveable incomes, good savings habit alone will get them to $100,000 automatically.

What this arbitrary delineation of wealth brackets is based on is about making sure that one can accumulate wealth consistently.

First on your own balance sheet, then another.

And another.

See how far you can go.

I do not wish for us to stop at personal budgeting. Nor do I think that the most we can do is passively invest and hope for the best. That part of wealth strategy has been covered over and over again, in the many blogs that others have written. For that reason, my future posts would be focusing more on exploring the possible pathways towards $10M.

And yet –

The basics drive everything.

Getting the basics right, giving it the proper respect is essential, as it sets the tone to everything that we would do towards $10,000,000 and beyond.

It’s fractals all the way up.

I wish for our conversations to move beyond budgeting, but we can’t talk about capital gains unless we get the cash flow right.

A hungry person can’t be asked to stockpile grains to trade it for buildings and machines, let alone to make bets on the future, instead of begging for scraps in the now.

I hope I had given it the proper respect it deserves, without rehashing too much the same old message.

Money now keeps you going in the game. This is positive cash flow.

Money later gets you out of the game. This is capital, and the many expressions of it: businesses, shares, property, and other assets that are collectively valued by us, for we are the market.

Whatever is practiced on 1 personal balance sheet, will be carried over to $10,000,000 and beyond, because for the rest of us who’s not an elite athlete earning $10,000,000+ annually, the way towards $10,000,000 is through excellence on multiple balance sheets.

All those perks and issues one encounters while managing one’s personal finances? Will be carried over, and magnified.

What can be cut; what should not be cut?

This is the shape of your integrity.

To face the music now is preferable, than when it’s the whole ensemble.

I've made my choice all those years ago.

Your turn.

If I were to draw a direct parallel with Woolf’s £500/year of passive income, in a literal measure it’d be worth £39,364.90 today, or roughly $77,000 AUD.

To a single person living in London, on the average cost of living of £34,704, it’s a liveable income.

To a family of four, still in London, living on £58,200, it’s not a liveable income.

If I were to take it at face value and apply it to a single person in Sydney, where I’m based at, $77,000 (gross) income is still a very liveable income, in the sense you can afford to live somewhere and not go hungry. Maybe take an out-of-town holiday or two, even.

For a family of 4 in Sydney, however, it is similarly unaffordable as it is in London.

To earn $77,000 in passive income, mathematically one would “only” need to get to around $2M net asset earning 4% p.a. If you’re in tech or middle-management and above, you can do this by saving $50,000 every year over the next 40 years.

Problem is, how many people can save $50,000/year?

I did it by having no dependants, below-average rent with bills included, no vacations, no subscriptions besides rent, phone and transport, and sticking to free hobbies only.

Now how many people would stay single and rent-share for the rest of their lives, on purpose, just so they can live off passive income?

A grand total of 1, out of all people I’ve met.

Money, on its own, is worthless. It is only valuable in relation to what it can afford of the beholder, be it something that can directly be bought, or in terms of affording second-degree privileges.

A Woman, if She is to Write, Must Have…

In the early days, I thought of my life as one of the forgettable ones. A tolerable existence.

Rich enough for afterschool lessons, but too poor for ballet and piano lessons, I was the good daughter that was could always be better. Then came the penultimate year of my bachelor’s degree.

Having taken the degree as a matter of compliance, I didn’t give much thought into what I would do after graduation. I had gone through the courses the same way I had always been: through the motions.

But that space and time away of my own, where my boundaries weren’t constantly trampled on, was all that mattered. I still didn’t know what I wanted to do or what to be; I only knew what I didn’t want: going back into the box. In the absence of a strong pull, a strong push was enough.

That small taste of freedom had me thinking for myself for the first time.

The first price to be paid was to earn enough money to survive on my own.

Money to Survive

My first job as an adult paid $10/hour, cash on hand.

As you can imagine, in a city where living costed a minimum of $2,000/month, it didn’t take me far.

Having squandered my time at the university to make any promising industry connections, I graduated a subpar candidate. Without connections, you see, why would any sensible business hire an average foreign graduate who needs a visa sponsorship, accruing extra costs from the get-go, when there’s so many citizens and permanent resident hopefuls applying?

Shy, awkward, and bad at talking to strangers, I wasn’t even able to get any casual waitressing job, until a friend referred me into a local corner chicken shop. That was my entry into the Australian job market: cleaning grills, emptying up deep fryers, mopping floors and packing BBQ chickens for $10/hour — cash only.

If you’re based in Sydney, you would've noticed that $2,000 is on the low side, even in 2014.

The secret?

Cutting one's corners.

In a polite company, we use nice-sounding aliases such as minimalism or frugality; in the end, they are all about cutting things down... to a point. There's only so much that can be cut until you start compromising your integrity, after all.

This was what a $2,000/month life looked like back in 2014.

A room, at that time, was a sharehouse found off Gumtree. Priced at $830/month bills included, without rental contracts, bonds, or access to the kitchen (but thankfully a fridge), it was the least dodgy place I could afford that wasn’t in a nudist sharehouse or a cupboard.

Sustenance came in the form of end-of-the-day discounted takeaways, padded with frozen vegetables to bring it further down to under $5 per serving.

Hobbies were long walks, not for my Tinder profile, but because it was free and I had — still have, thankfully — working legs.

That I was in my early 20s and had no dependants was a privilege of youth, which granted me the energy to work through midnights and weekends without repercussions, so I could lean out and earn more at the same time.

These were the privileges that I did have and used, in order to offset the privileges of rent exemption, Jobseeker allowance, and Medicare that I didn't have.

Luck was that barring the one incidence of a police raid, the rest of the years living there had been pretty uneventful, save for the noisy housemates. Luck, too, was that I didn’t have to pay with anything else besides the $830/month.

It was pure luck, that in the time that I didn’t buy any insurances to save $100/month, I didn’t get into any accidents.

Most things were circumstantial. They were outside my control. I could risk it all, because I had nothing to lose.

But the skill to make the most of what I’ve got? Priceless. That was the main and the most important skill that I took with me in accumulating $1M during the first decade.

There is no saint or sinner in this story.

You see, in the beginning, even after all that corner-cutting, at times my income still couldn’t meet the $2,000/month minimum required to survive. Especially in the beginning, when I had to do a lot of free work in order to get an in.

If the minimum cost of living can't be covered on your income alone, it has to come from somewhere else. Yes, after all that talk about surviving on my own, I wasn’t able to make it, in the beginning.

I had to take what I’ll call, “the wrong money”.

The wrong money doesn’t always come with bad intentions, but it always comes with restrictions.

The wrong money requires you to act a certain way, do things you don’t want to, and use it only on certain things in order to have access to it. Wrong money controls you. Somebody always has to pay for it, whether it's now or in the future, by yourself or someone who's willing to stand in for you. But the wrong money was better than no money.

People take the wrong money all the time. Money, afterall, dignifies what is frivolous if unpaid for, which is why it’s alright to take an Angel Investor’s money to start a business, no matter how unviable the business model is, or to stay in a job you hate, but not for anything else that does not money-make.

Don’t believe me? Well, what is the general consensus on subsidies?

People don’t look kindly on people who take subsidies, whether they’re from private hands or public pockets. But companies don’t quite get the same judgement, even though both essentially are attempts to bring something that can’t yet stand on its own into something viable.

By dismissing people for “not paying their own way”, it silences the stories of people who had been controlled by money, even when they’re paying in ways other than money.

Money can’t always buy happiness, but it sure can buy freedom, which is the beginning of all happiness.

That $10/hour — a pittance to anyone else, was the first key to my freedom.

This brings us to my second point: that if one were to survive, one must learn to use all the privileges that one have.

The less privileges you can apply in your current context, the better you have to be in using what little you can. It’s not whether one has or hasn’t got any privileges. Everyone has some, and the amount is not fixed. By all means get mad over the unearned privileges you don’t have. But don’t stop there. Realise, that as long as you’re still breathing, you can always earn more privileges.

Some privileges are more far-reaching than the others, but there’s always something that you specifically can use.

Sometimes it’s about hard work, working with all you’ve got to adapt better to your current context. Other times it’s about finding a new context that suits you better, as the expats with strong passports have found, because some privileges become more potent when applied in a different context.

That self-made way would’ve taken away time for building the way into better paying, stable jobs. Time, that I didn’t have, because my obscure visa was only valid for a year. This was my first inkling of the concept of opportunity costs.

6 months down. Still no fulltime jobs in sight. My parents, rightfully, were getting restless, waiting for my market adoption as I burned through their retirement money. 6 months left to break the circular dependency of needing the right visa to get a job to get the right visa, on top of needing the right experience for the first job.

I swallowed my pride and took the one with the highest ROI and the shortest time to profitability, like a good businesswoman.

Pride is for people who can afford to not use everything they have. If one has many other privileges to make it up in number, one does not need to lean so far on the few in order to get ahead.

This is what it means to give it your all. Ask yourself, can you really afford not using everything you have?

Over the next 2 years, in my attempts to join the ranks of the comfortably employed I’ve taken on 9 roles: as a cleaner-kitchen hand, a volunteer CAD drafter, a glorified data entry clerk, a startup “consultant”, an amateur day trader, a casual eBay seller, an unpaid intern, a freelance app developer, and finally, a fully employed junior software engineer.

4/9 roles paid money. 9/9 paid more than money. You won’t see this in my resume, because most things weren’t relevant. This could be said about success in general — that the processes are hidden, until it finally resulted. It wasn’t straightforward, nor it was picture-perfect; it was a real life that I was finally living.

The rest was a relatively stable stretch of period, during which I did the fulltime grind towards my first $1M.

…and a Room of One’s Own

In the beginning, my “room” was an amalgamation of the private and public space. The room that I rented was solely for sleeping in, because it was impossible to think with the paper-thin walls.

Lacking the space to think, I sought quiet places where I can be without having to spend. You’d think that libraries would be quiet, but not all libraries are created equal, and when libraries won’t do, train carriages would; they tend to get very quiet nearing the end of the line, and at a low, low cost of $7 per ride, for the duration of 4 hours, it was very well worth it.

I ended up spending most of my weekends at work, however. It is, hands down, the best and the most underused space to think. All of 1000m2 to myself, and the odd 1-2 persons who would come into the office on the weekend. The price for access was the other 5 days taking care of other people’s businesses.

It might seem sad to a lot of people, but in the context of my seeking space, it was perfect. Nobody who could afford a room of their own comes to work on the weekends. All the tools was there. I’d even cook breakfast sometimes. I spent hours and weekends learning about how to learn better, about programming, about entrepreneurship, and about more ways to make money other than “work harder”.

The answer to the right visa for the right jobs conundrum was to find the people who will accept the not-perfect candidate for the not-perfect jobs, in order to obtain the privilege of the right visa for the right jobs. This was market penetration 101. That right visa itself was a form of extension to my “room”: an earn-able privilege to be, which granted me stability and better opportunities, amongst many other things.

As my financial situation stabilised, I became able to afford more spaces. Gym memberships, cafes, and dance lessons became my extended “rooms” in which I learned more about myself. Live a little more. Try new things. Get to know what I like and dislike, what I will and will not accept, who I am when I’m not told what to think.

I had some lifestyle inflation, but I continued to live in survival mode until the 4th year when I finally acquired the right status. For better or worse, the second real crisis in my short life also happened around that time, which propelled me to accelerate into leveraged investing 101, otherwise known as the Australians’ second religion: property.

That’s another story for another day. Stick around, and you might just get to read it.

Fast-forward 10 years since then. I’m writing this in a room of my own. It’s a 3.5 bedroom house with about 600m2 of garden; there’s enough room for all 2 of us.

In a labour market that has priced double incomes at 2-3 bedroom apartments, even for above-median household incomes, this is certainly the exception, not the rule.

The best part is that we didn’t have to take the wrong money for it.

Having lived and having afforded a room of my own, I’m finally able to sit down to write.

So you’re approaching mid-career. You have a stable job that pays a good income. You save consistently, and you bring lunch from home when you come into the office. Only if you have to, of course, because why spend $60/day when you can spend $0? You still walk or bike where you can, and take only public transport everywhere. You might even already have ETFs with DCAs set up and contribute to your retirement fund.

You might have felt something was off, but couldn’t quite put your finger on it. Despite having “done everything right”, the dream of FIRE, Financial Independence, Retire Early that everyone touts so much is still so out of reach, and no amount of manifesting brings you closer to it.

Even though you’ve worked harder, sacrificed more than people who spend as soon as they get, you don’t feel like you’re getting ahead.

Well, join the club.

You see, thanks to 7 years of diligent saving and investing fairly early in my career, and the good luck of getting together with another good saver, our little household of 2 is projected reach $10M in today’s dollar by the time we’re 60. Problem is, we’ll be 60 by then.

A Sob Story

$10M sounds like a lot, before you realise that it’s 30 years away, and that the other $5M will only compound in the last ~10 years of it. The first 20 years is a grind of double fulltime incomes at a minimum of 50%+ post-tax savings rate.

In order to stay on track, as of 2024 we can only sustain the two of us and another 1.5 person. So we’ll have to choose who to support: a child, or one set of parents?

It’s a lean life on a long lease.

Heaven forbid that a family member gets a long-term health problems. That’ll put quite a dent in the compounding. Sorry mum, you can’t come live with us, because you’re 70 and you don’t qualify for social security. Best hope that neither of us will have to stop working, too.

30 years of good luck is a big ask.

Is this all that’s ahead of me?

Seeking £500 a year, and a Room of One’s Own

I looked around, and most FIRE blogs are focusing on “spend less, compound”. They teach you to be frugal and patient, but not go beyond “passive-invest, and homestead where you can”. If you’re lucky, it’ll graze on how to negotiate salary as well, addressing the underserved half of the personal finance component.

There are exceptions, but women-targeted finance blogs and investment products are especially guilty of feel-goods and not enough bite-hards. It’s the Bic pen for women all over again.

Without earning more nor compounding faster, there’s only 1 lever I can pull to reach there faster: live smaller.

Don’t have kids. Move to a “third world” country, which I’ve ironically moved out of. Never go out; live small. Maybe pick a New Game+ life partner for good measure; unfortunately I like mine too much, the lack of inheritance notwithstanding. Scrutinise every expense, maximise tax deductions (which doesn’t make sense as it encourages spending), stay home and save.

It echoes the message on how a good girl should live: keep small, and on someone else’s terms.

Double down on that if you’re introverted and shy, too.

There’s got to be another way.

A woman must have money and a room of her own if she is to write fiction. This rings just as true in 2024 as it was in 1928, when Virginia Woolf published A Room of One’s Own.

Should I choose to tread lightly, I want it not to be out of deprivation, but rather of my own terms.

If I should want a life that can support more, that too, should be possible.

I want to create a life that’s bigger than this. But how?