New Job: New Financial Decisions

With the new year, I started a new job. I was aiming for full time teaching work, yet ended choosing to work three days per week.

There were many sleepless nights over this decision. Working three days a week gave me a work-life balance. I was still in my chosen career field, and I had flexibility to be more involved in my own children’s lives.

After all, my youngest had just started school, the eight year old has a complex heart condition, there’s still an 18 (going on 14) years old at home, plus a 24 year old with a newborn baby. Did I mention there’s another two adult children, grandchildren, a mother-in-law going through cancer treatment…

I had finally come to terms with working part-time, until I received my first pay check.

The First Pay Check

I was NOT pleasantly surprised to see my first payday amount.

For six long days of work (teachers work huge hours for a salary and are not paid by the hour) all I received in my take home pay was $1160 for the fortnight.

Like all wages, money gets removed from your pay before you receive it.

As this is not my ‘first employer’ for the financial year, I’m not eligible to claim the tax free threshold of $18,200. It means I get taxed at the rate of 32.5%. That’s right, almost one third of my wages went on tax.

Then, a compulsory payment came out for my Higher Education Contribution Scheme (HECS) debt to the Australian government. Thankfully, this loan does not attract interest payments and is only indexed to keep up with the CPI. During 2019, a one off indexed payment of 1.8% was added to the loan.

Future Plans

Our combined financial goal for 2020 is for one wage to be used for living expenses following the Barefoot Investor principles. The other used to pay the mortgage and to invest in index funds in the stock market to create a passive income source during an early retirement.

However, now I’m working part-time these goals don’t seem so rosy anymore.

My take home wage of $1160 p/f, less the minimum mortgage payment of $500 p/f only leaves $660 p/f for:

  • Investing in the stock market
  • Paying extra on our mortgage
  • Increasing our emergency fund

When I realised there was only $660 p/f for the above goals, I had a sinking feeling in the pit of my stomach.

Ironically, at the same time, we are now hitting our best savings rate ever at 37%.

For us, figuring out the savings rate calculation was simple. Mr Hack’s wages are used to cover all the living expenses, my wages at $580 p/w fund all the investments – both property and shares. Therefore: our savings (my wage) $580 divided by our combined net weekly income equals .37 or 37%.

However, this is still not the minimum of a 50% savings rate needed to reach early retirement.

Whilst I realise factoring in our residence into our savings rate won’t lead to early retirement as we can’t eat a house, it is still building up our net worth. Plus, we’ll have options: we could sell up, or downsize, or rent it out, or take in a boarder (when the house is not so full).

We both also pay a compulsory 9.5% from our wages into a superannuation fund, however I’m reluctant to add this amount to our savings rate as it’s an employer contribution paid on our behalf on top of our wages.

It was time to run calculations through on a variety of scenarios.

Scenario One: Home Loan

We put the entire $660 p/f as extra payments on the mortgage.

Currently, we owe $144,430 at 3.28% interest which will take 14 years to repay.

However, with an extra $660 p/f, the mortgage will be paid off in a much faster time frame of 5 years and 3 months!

These projections came from using the Aust. government MoneySmart mortgage calculator.

Scenario Two: 50 – 50

In this scenario, we take the net pay of $1160 p/f and split it evenly into two.

Now there is $580 p/f to invest in shares, coming to an annual total of $15,080.

And $580 p/f to put on the mortgage. However, this is only $80 extra in repayments, and a 14 year mortgage becomes 11 years and 8 months.

Scenario Three: What’s Left After the Mortgage Repayment

Using the $660 p/f left over after the mortgage is paid, we put $330 p/f in extra payments on the mortgage and $330 p/f invested in the share market.

Our home loan is effectively halved, ending up reduced to 7 years and 7 months.

And we will have $8,580 to invest in the share market over the span of a year. This part disturbs me the most as it is less than we invested during 2019, although we weren’t making extra payments on the home loan at the time.

Scenario Four: Including the Emergency Fund

The beauty of having an emergency fund is that you know you’re covered in the event of a major change such as losing your job.

The Barefoot Investor recommends a minimum of $2,000 kept in your Mojo account aka emergency fund.

We know through tracking our expenses that our large family costs around $5,000 p/m to support. Therefore, to have three months of cash squirrelled away for an emergency, we’d need at least $15,000 saved.

Currently, we have $2,000 in emergency money.

Scenario three involves $660 p/f broken down into:

  • An extra $330 p/f on the mortgage
  • $165 p/f invested in the share market
  • $165 p/f saved into the emergency fund

The mortgage has still halved the time to pay completely off.

Yet, after 12 months we will only have invested $4,290 in shares.

And, it will take 36 weeks to have enough savings to reach one months emergency fund of $5,000.

Quite frankly, I wasn’t encouraged by the shares or emergency fund outcomes.

(Another option is to funnel all of our Fire Extinguisher – oh, shit money – into the Mojo – oh, f**k money – emergency fund.) Have a read of the Barefoot Buckets for a greater understanding of this system.

Scenario Five: Shares Only

In this scenario, we don’t worry about paying extra on the mortgage or the emergency fund, we funnel all money excess to the mortgage into the share market.

Some personal finance experts don’t recommend paying extra on debt if the interest rate is less than 5%, as your money works more efficiently being invested.

In the shares only scenario, we’d have $17,160 to invest over the year, increasing our passive income (based on the 4% safe withdrawal rate) to an extra $686 p/a on top of what we already have invested.

As an experiment, using the MoneySmart compound interest calculator, $17,160 invested at 10% in the share market (10% is the average over the last 100 years) for 20 years and adding no further money comes to an astounding $115,444. Not bad from a one off investment of $17,160.

Yet, we are still left with a mortgage…

Now What…

I feel like I’m getting all worked up about what’s essentially a first world problem.

We have all our bills budgeted for so there is no bill stress. We put money aside each pay for an annual holiday, and we still have a little splurge money each week.

I enjoy working three days per week (who wouldn’t) for the flexibility it gives me with having a large family.

Yet, we are not going to reach our early retirement goals with me working part-time. Quite simply, we need more funds to reach F.I.R.E.

Which scenario do you think would be heading in the right direction to reach financial independence? Or should I just go and get full-time work?

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