It happens in every generation – one passes the baton to its successor, and says with sorrow, “I wouldn’t want to be growing up in today’s world”. Our grandparents said it to our parents, and our parents are saying it to us. Wages are chasing property prices like cat and mouse – and failing – and in the process millennials are falling for the media’s lies that it’s all too hard and we’ll never enjoy the financial freedom that many baby boomers are.
But what if it’s all bullshit? What if we and our slow-growing salaries actually can find financial freedom? Somewhere between the underquoted properties and the interest rates lower than Flo Rida’s apple bottom jeans, there just might be an opportunity.
Today, The Broke Generation chat to an ordinary Aussie couple in their twenties, who discovered that the one thing millennials DO have on our side, is time. On track to retire at 40, the pair known as @TreadingFire on Instagram tell us all their secrets in this interview. It’s a juicy one, so get yourself a cuppa and settle in.
The Broke Generation: Hey guys! Thank you so much for agreeing to chat to me about your journey to net worth glory! Can you tell us a little about yourselves?
Treading Fire: Thanks for having us! Mr TF and I are not your average 20 somethings (for those wondering, I’m 27 and he is 29). We live in Melbourne, I work in Human Resources and Mr TF is a Paramedic. On the outside we may seem normal, but little would people know that for the last few years we’ve been on a journey to retire by the time I’m 40 – or possibly earlier! We’re working towards something known as FIRE – which means Financial Independence, Retire Early.
TBG: Wow! Now that would be the dream. How would you describe your relationship with money and finance? Are you a ‘save it for a rainy day’ gal or do you treat yo’self more often than you should?
TF: When we first started our FIRE journey 4.5 years ago, we were incredibly disciplined. Mr TF would work like a man possessed, he was all about increasing revenue and I was all about saving every penny and cutting down on all expenses. Our combined strategies allowed us to save a 6 figure deposit for our first house in just 2 years. As much as we enjoyed the challenge at the time I’m glad it was only short term as it was not sustainable. Since then we tend to ‘optimise’ rather than ‘deprive’. Nowadays we spend money but only on things that truly provide value or happiness to our lives. We still go on holidays, pay large vet bills (our dog has cancer) and go out on dates. But they all add value to our lives.
TBG: Why do you think you’re like this with money? Can you trace it back to any habits you formed as a child, or lessons learned from your upbringing?
TF: Neither of our families were wealthy. Mr TF’s Dad worked 3 jobs at one point just to afford to pay the mortgage. Our parents are now on the pension with very little savings. They didn’t understand the power of saving and investing from an early age. I think internally this was a driving force for both of us to become wealthy because neither of us wanted to end up like our parents.
A few years ago Mr TF also started to question different aspects of society. He noticed that the social norm was to essentially work your ass off until you’re 65 and then suffer through ill-health in retirement. It’s sounds crazy when it’s put simply like that! Mr TF thought there had to be more to life than just paying bills before you die! And so he started to research the money habits of the wealthy and quickly realised that it was actually attainable. Together we both learned that a combination of discipline, research and time will turn anyone into a millionaire.
TBG: That’s a really interesting notion. So, has your relationship with money changed over time?
TF: Totally. When we were younger, late teens and early twenties, we used to take money for granted. Like many people, we didn’t understand what money actually represented. But as we started to embark on our FIRE journey we realised the relationship between money and time. The most valuable resource on earth is time. It is the one thing that we can’t get back. When you’re born the clock starts ticking. Most people fill up their time with sleep, watching TV and working in a job they don’t like. These same people don’t make the connection that time = money. When they purchase a Gucci handbag for $1000 they have really purchased it with a week’s worth of time. To put it another way, if you don’t purchase that handbag you can retire one week earlier (or 3 months earlier if you know how to invest it).
It’s a very powerful lesson that we’re glad we learnt while still in our twenties. It’s not to say we don’t buy anything but it comes back down to value again. We’re not stingy people who just save for the hell of it and never have fun. But any purchase of significance needs to beg the question…is this really worth my time?
TBG: So, what made you decide to tackle this net worth thing in your 20s?
TF: It all comes down to the power of compound interest, which Einstein famously said is the ‘8th wonder of the world’. For those that don’t understand it, compound interest allows you to earn interest on both the money you deposit, as well as on the interest you have already earned. This means you earn interest on your interest! Whether you invest in shares using a dividend reinvestment plan or simply an online savings account, compounding is the most powerful tool for wealth creation. However, for it to work in your favour you need TIME!
When we were bored one night we actually played around with some figures with the help of compound interest calculators. We realised that if we invest $12,000 a year into the share market for only 10 years (after which point we stop investing altogether) the end result can be remarkably different depending on when we started investing. Even at a modest return of 7% a year, investing between the ages of 25-35 will result in $1.45 million at age 65. If we did it between ages 35-45 we would have $734,000 at 65. And if we did it between 45-55 we would have only $373,000 by 65. This blew our mind! The fact that the same initial investment could produce such different results purely on when it was invested was incredible. We now realise that every $1 saved in our twenties is the equivalent of saving at least $4 in your forties.
TBG: For our readers who might not be aware, what does ‘building your net worth’ actually entail? How did you get started?
TF: There is no right or wrong strategy to build wealth. Everyone’s situation is different. But in its simplest form, building wealth is all about increasing your income, reducing your expenses and investing the difference.
Before we could really focus on that, our first priority when we embarked on this journey was to pay off all consumer debt i.e. credit cards and car/personal loans. The interest rate on consumer debt is ridiculously high (much higher than what you’ll earn in a savings account and even in the share market on average). So we realised that the best was to save was to actually pay down debt first.
Once we smashed our bad debt, we focused on saving as much money as we could for a home deposit. Mr TF is all about increasing revenue so he would work lots of overtime, take up a second job and do other side hustles as well. On the other hand, I would focus on ways to keep expenses as low as possible. While saving up a deposit for our first house our savings rate (income minus expenses) was over 80%. Since we’ve moved into our home our savings rate hovers around 50-60%.
Nowadays that leftover 50-60% is invested into income-generating assets like shares and property. The aim is to keep building up these assets so that one day they generate enough passive income themselves that we can quit our jobs (if we want to).
TBG: You’ve been on a bit of an investment journey with property and shares. Can you tell us how you started and where you are now?
TF: In 2014 we purchased a block of land that we intended to build our first home on. We were so excited to build our dream home right away. It was going to be a big (and expensive) double story house. But just before the land settled, Mr TF was surfing the net when he stumbled upon a young and successful property investor name Nathan Birch. It was a lightbulb moment! Rather than stupidly building our dream home straight up, Mr TF decided we should sell the land and purchase something a little more conservative to start with. Property was booming at that time so we actually made a small profit from the sale of the land in only 12 months. Since then we have purchased the much smaller home we are currently living in as well as two investment properties.
When it comes to shares, the main influencer has to be the Barefoot Investor (Scott Pape). He believes shares are the way to go. We started off a few years ago by joining his barefoot blueprint which is a membership only club where he gives tips and advice on shares. We started off by buying a few of his recommendations but in the last couple of years we focus on simply buying various exchange traded funds (ETFs) and listed investment companies (LICs) which are types of share index funds that Scott Pape preaches. We have steadily built our share portfolio to over $75K and aim to keep adding to that alongside further property purchases.
TBG: What systems or apps do you use for your investing? Did you teach yourselves or do you use the advice of experts?
TF: When it comes to property we have read books, attended seminars and spoken to some pros. We continue to read property reports and speak to real estate agents. Nothing too left field. The rest is just summoning up the courage to have a go. Too many people acquire a lot of knowledge but in the end can’t pull the trigger on investing. They get analysis paralysis. As long as you have a modest financial buffer and exit strategy you’ll be fine if you’ve done the research. For property we don’t use any apps or anything.
When it comes to shares the barefoot investor gave us the initial inspiration. He also recommended to buy exchange traded funds (ETFs). An ETF is essentially a fund that gets traded on the stock market like any other share. However, rather than just comprising of one company, an ETF contains hundreds if not thousands of individual companies. For example, an ETF might contain the top 1000 companies in the world. Companies like Apple, Google, BHP and the banks. By investing in an ETF, you track an index and your money is a lot more diversified. They generate steady gains and are very safe. You don’t have to even know much about shares.
TBG: Lots of young people begin their pursuit of financial control with a bit of a disadvantage – student loans, credit card debts, Afterpay obsessions… you know the usual! What advice would you give to young people starting on a journey to financial independence?
TF: The absolute first priority is to pay off all consumer debt. This includes credit cards, personal and car loans. The interest rates on these are exceptionally high and so it’s important to pay them all off before even thinking about saving or investing your money.
Once they are all paid off, you can then focus on saving a small amount of money as an emergency fund. From there it is safe to start investing in shares and property.
Student loans are a tricky one. They don’t incur an interest rate (in Australia anyway) and only increase with inflation so in relative terms they don’t get bigger. We decided not to pay anything extra off ours (in saying this, they are now fully paid off). When you do the maths, it works out better to invest your money elsewhere. But each to their own with this one.
TBG: Do you think FIRE is possible on all salaries? How do you go about earning more money if your salary isn’t as high as you’d like?
TF: FIRE is certainly possible on any income. We quickly learned that your FI date (how long it will take to retire) is directly proportional to your savings rate. An article called ‘the shockingly simple math behind early retirement” by Mr Money Mustache explains this concept perfectly. If you can save 50% of your income you can retire in 17 years. If you can save 80% (yes some people do) you can retire in just over 5 years. These figures were based on some fairly simple and conservative principles. Most people would find the idea of saving 50% or more of their income almost impossible. But it’s really not that difficult. There are so many little savings tips and hacks that I could talk about to save money but the most important thing is for people to change their mindset. Many people from our generation spend too much money on brand names, expensive clothes and materialistic items that add no value to their lives. Put it this way, too many people “buy things they don’t need, with money they don’t have to impress people they don’t like.” It’s really not about becoming stingy or depriving yourself from doing the things you love. But it’s important to be smart with money and cut out the unnecessary and expensive crap form your life.
TBG: Finally, at The Broke Generation, we’re all about getting nifty with money, not thrifty. Basically, we want to have our avo and eat it too. Do you have any nifty money saving tips for newbies to the finance game?!
TF: Funny you mention avo as I’ve been eating homemade smashed avocado for the last 6 years! Hot tip #1 – make it yourself instead of paying $17 at a restaurant! In all seriousness though, I’d suggest to anyone starting out to make a list of every single expense. All of them. Then line by line, try and find a better deal or think of ways you can reduce each one. You’ll be surprised how much you can cut down. Don’t stop it there either, always keep tracking your expenses – every month, every year. You will start to see trends and can plan ahead when big expenses are coming up. Every dollar should have a purpose!
Guys, thank you SO much for being a part of The Broke Generation. Your story is certainly going to inspire us to put down that $16 acai bowl and get excited about money!
Follow @treadingfire on Instagram to keep up to date with their journey.