Buying a home and the desire to do better than our parents

I have recently started posting on how I have started hunting for my own home (as opposed to an investment property) and how I seriously underestimated the level of house prices in Australia.  Indeed one of the things in that latter post which shocked me the most was that I ended up looking "where my parents lived".  This post is to examine why so many people have this viewpoint and how it can create real disappointment when it comes to house hunting, especially if you were brought up in an upper middle class or affluent area.

The desire to do better than our parents is a goal shared by many people

Almost everyone has a desire to achieve something in their life.  It does not need to be financial (although in my case it is) but almost all of us have hopes and dreams that we hope to fulfil in our life.  When thinking about our goals and objectives our base line is often set by the example of those closest to us - our parents.

This does not mean that we in any way diminish what they have achieved in their life - we are often proud of what they have accomplished (sometimes in the face of great adversity).  It is just that when we set our own goals and objectives, our parents achievements are our 'norm'.  It is what we have grown up with and we do not experience the harder times when they were much younger - we experience the pinnacle of their achievement (when we are of an age to appreciate the way in which they live).

With this 'base line' set our goal is all to often to live our own life and achieve our own goals.  Our goals, however, are often set at a level higher than our parents achieved because this is 'improving our lot in life'.  It is not a particularly revolutionary idea or statement - in fact I think most people would share this way of thinking and living.

However, when we go to buy our first house...we often find ourselves going backwards

This desire and goal is

Taking partial profits with shares: A sensible strategy

One of the biggest problems that most people have with investing is knowing when to sell and take the profit they have made on their shares.  If you have bought a share which you thought was cheap and you have a significant margin for error built into your valuation the chances are that you will face the problem of having a share that has performed significantly well in percentage return  terms but still represents value in an absolute sense.

An example of how the issue can come about

I recently faced this problem after FKP (a share that I have posted about extensively on this blog) performed very well.  I first purchased FKP, an Australian retirement and residential property stock because it was trading at a significant discount to it's net asset value (NAV).  However not long after I did so they had some serious debt issues and did an equity raising at a significant discount to the stock price.

I participated in the equity raising and managed to get a significant over allocation because of my particular broker (most people got scaled back which was rather annoying at the time).  In the following months the stock performed terribly which was nerve racking because it represented 1/4 of my share portfolio.  Given how low the price fell I would have liked to purchase more but from a portfolio concentration point of view this didn't make sense.

You may wonder why I didn't sell the stock and just take my losses when it was performing so badly.  I had researched the stock well and I believed that the management team was doing the right thing and the news that was coming out was incrementally positive the whole time even though the market was not recognising it as such.  I was keeping on top of my existing shareholdings which is easy to forget to do.

Recently, after more good news the share market finally responded positively to the stock and the stock moved to a point where I had made a ~20%+ return and I was faced with a dilemma...this stock could go up by another 20 - 40% but I had already made a good profit off it...should I sell it or should I hold onto it?

Taking a partial profit allows you to lock in some of your gains

I decided in the example above to sell about 1/3 of my

My first Google Adsense paycheck! I definitely don't do this for the money...

People reading my blog would no doubt have noticed that I have some advertising on this blog.  However they are really limited  - I have a few Google Adsense banners, I have written one sponsored post (I have been offered others but they wanted to write the content of the post which I didn't want)  and I can potentially receive affiliate revenue if you click through one of my book review posts to one of the book sales websites that I link to.

1. I don't really write this blog to make money - if I put the amount of time and effort into actually making money that I put into this blog I would have made significantly more
   
2. I hate websites which over-advertise - we have all had the experience of websites which may have good content but which are just covered in advertisements.  It really distracts from the content and I really write on this blog now to help others out in the same way I have been helped.  Pop up ads are the ones that drive me insane.

Because I am not really willing to push the advertising thing (as mentioned above) I do not really make a great deal of money from this blog which I'm completely fine with - I'm looking to start my own business as a second income stream.

But...I do get a little bit of revenue and Google just paid me for the first time!!

I do get a little bit of revenue from this website (mostly when people click on the links to the advertisements but some for the people that visit the page) and it was very exciting when earlier this week I got a notification that I had been paid for the first tine. 

It was not a huge amount - about

People weren't kidding: Property is really expensive in Australia

I posted recently about the fact that I have started searching for my own home and how I was doing this well in advance of when I actually wanted to buy my own place.  I have actually been surprised at the number of developments that have taken place in relation to this in the relatively short time since I did that post.

Some of the big things that I have done since I decided that I actually wanted to buy my own place included

• Talking to my girlfriend about it
• Getting on the same page with my girlfriend about where we were heading etc. was a great idea (although for the life of my I can't remember how the conversation came about) because it forced the discussion about other life factors
• It is really really hard to work out what you want and a price range for a property when you have no idea of what your life plans are going to be 
• If you are thinking about buying a place make sure you think about your life plans
  
• I started narrowing down areas where I wanted to buy
• I actually sat down and thought about where I wanted to live and what I wanted to buy and then thought about what I wanted to spend and how much I could afford now and potentially in the future as well 
• I then worked out what areas fulfilled all three requirements

Then something scary happened...

You know how you read people complaining all the time in the newspapers and on blogs and in social settings about how expensive real estate is?  They weren't kidding.  I earn a really good wage for

The US Government Shut-Down has me reconsidering my sector allocations

I posted recently that I was rather disappointed that the markets had not over-reacted to the news of the US government shut down and I was hoping that it would go a bit nuts and that there would be a buying opportunity.  It appears that I may have missed some short term gains as the market rebounded significantly in the days following the apparent resolution of the crisis.

Below is a chart of the US share market (represented by the S&P500) and how it performed in the lead up to (in anticipation of) and during the shut down as well as the strong rebound post the shut down.  Although the market did slip early on the market did not really over-react however as outlined before, perhaps people are celebrating too soon.

However...before you think that everything is back to normal...

The solution the US government comes to appears to be a short term solution - i.e. the government is only being funded until January 2014 and the US will once again have to raise their debt ceiling a month later.  Although I try and keep abreast of US politics for financial reasons (and because the drama is frankly more interesting than anything I have in Australia) I do not have a deep understanding of what it would take to resolve the situation.

It seems to me that the US politicians are going to be shooting themselves and the US economy in the foot if they continue to govern and negotiate through crisis tactics. Further it is pretty to easy to see why it is bad for the US economy and share market to continue to do so.

If both domestic and international (e.g. me) investors are unsure about when these types of crises are going to hit again we are going to require a greater premium on our investments (such as interest rates) or demand a higher return on our shares to compensate for the fact that the market seems to blow up every few months based on the newest drama created by US politicians.  This means that borrowing costs for the US government are going to be higher than they would ordinarily be and the share market is going to bake in a discount to account for the fact that there is more short term volatility.

What does this mean for my investment strategy?

Although the share market has responded significantly since the announcement of the short term resolution to the crisis, the US dollar has

The Corporate Paradox: Communism inside a Capitalist Entity

I'm sure there is more extensive research on this out there but I was recently struck by a discussion I had with a colleague about the nature of capitalism and the players that act in it.  The crux of this post is that it is a strange dichotomy where the main players in our capitalist system - i.e. the corporations (especially the large institutionalised ones) work more like a communist economy internally while spouting the benefits of capitalism and free markets externally.

In several posts before I have identified as a 'realist capitalist'.  That is I know and appreciate the benefits of free markets and capitalism however I do not think they are perfect and we add enough distortions to the system which means that rational actors do things and act in ways which are perfectly rational from an economic standpoint (such as forming unions).  I think that accepting the rhetoric of capitalism and ignoring it's shortfalls are dangerous and leads to bad policy outcomes.  Besides which - it can be a fun thought exercise.

Corporate entities often work like communist economies

Most people would call me out for being ridiculous for suggesting that the bastion of free market capitalism - the corporation - is more like a communist government than the free market hero they position themselves at.  They may be a free market hero when they are operating as an entity as a whole but if you look through to how corporations (especially large institutionalised ones) actually work...they are remarkably like a communist economy.

You can take this analogy quite far however at a very high level:

• Like communist countries, corporations are centrally planned
• Corporations have a very strict hierarchy of control and the ability for any part of the corporation to act economically independently of another to maximise their own profitability or outcomes is squashed for the greater good of the corporation
• Like communist countries workers within a corporation rarely have an input into their job function
• There is an allocation of labour in corporations based on where the resources are needed and people find themselves often doing things that they originally didn't come on for because that is where they were needed...a system awfully like that of communism
• I'm not saying that you cannot leave the corporation...just that if you want to stay in it you need to play within these rules
• Ideas and independent initiative are subject to approval of those further up the chain 
• How often have you seen employees of a corporation come up with and implement independent ideas without the approval of their managers and how often can they quickly respond to a need or want without this approval?
• If a corporation acted like the free market bastion it claimed to be there would be a maximising out outcomes within the corporation through things like competition and innovation

You can keep going with this analogy for as long as you want - there is a centralised media strategy, only approved people are allowed to set strategy and to message this strategy to the outside world etc. etc. 

Yet corporations are often the most vocal proponents of capitalism

I find it incredibly ironic that probably the most centrally planned entities within our free market economy are the ones that are constantly calling for deregulation and an ability

What should I do with my bonus?

People in many industries (including finance) get paid on a salary + bonus structure every year.  However because of what it is called, even if a bonus is relatively certain and you know the approximate amount you are going to receive, people still treat it as a windfall rather than as an ordinary part of their income.  I would argue that you should plan to spend and invest your bonus in much the same way you do your ordinary income - spend a part of it, save/invest a part of it and put some aside for a rainy day.

What is the problem with treating a bonus like a windfall

There are a couple of major problems with treating a bonus as a windfall which include

• No one really plans for a windfall which means that most people, when they receive one tend to blow it or invest it haphazardly.  Just think about what you have ever done if you have one a cash prize or received a modest inheritance - most people do not do sensible things with it
  
• Even if you do invest it...lump sum investing is always more risky.  There are others (and I fall into this category all to often) who treat the bonus like a windfall and know we should invest it but then go out and do it in one hit so we don't have piles of cash lying around.  The big problem in this is that we may not be doing this when we have a great investment idea and if we stick it in something like index funds then you're effectively saying that this was a cheap point in the market
  
• People rarely stick some aside for a rainy day.  I have never been a 'rainy day stash' kind of person however I've realised that having a small amount of cash that doesn't get touched except in extreme emergencies is a valuable thing.  Putting aside a very small amount of income every month can help you build up this slowly and bonuses (where you have excess uninvested capital) offers an opportunity to top this up

How do you plan for a bonus?

The simplest answer is to plan to spend and invest your bonus like any other budget.  However you need to put less into personal expenditure as your regular income normally covers this and more to saving and investment.  Here are some steps which

Fuel dockets are useful but don't get sucked in

This is a post for my Australian readers once more and will deal with fuel dockets which you get from Coles and Woolworths when you spend more than $30 (which typically reduce the cost of petrol at selected petrol stations by 4c / L).  We all know how they work and where we can use them and they are particularly handy, especially with fuel as expensive as it is (especially if you need to fill premium fuel in your car as I do).

Before you get totally sucked into this mindset...think about how much you are saving

The amount will differ for everyone but if we use my car as a typical example.  My car requires premium unleaded fuel (why I will never understand as it is just a standard Japanese made car) and has a 60 litre tank.  I am not the most efficient driver so I only get 10 km / L when I drive.  I typically only fill fuel when I need to and sometimes I leave it quite late so I am filling my whole tank up.

The maximum amount I can save is $2.40.  This does not vary when the price of fuel goes up and down which seems to be one of the strange mindsets that people get into.  I save 4c / L and I have a 60L tank...the maths is really easy.  Indeed because my tank is never completely empty I normally save far less than this.

Don't get sucked into buying something at the check out so you cross the $30 mark

I'm sure we've all done it - we are a few dollars below the $30 so we pick up one of the

High Interest Savings Accounts are starting to pay very low rates

Interest rates are probably the one financial metric that almost everyone has a handle on.  People generally know the official cash rate and also know what they are paying on their mortgage as well as the rate they are getting on their savings.

Conventional wisdom is that decreasing interest rates are good - but this is only for those who have loans - if you have cash savings (especially in bank accounts) - then you are disadvantaged when the official cash rate comes down.

Australia is now starting to experience what many in western economies have been experiencing for a while - interest rates so low that the amount you earn (even on high interest savings accounts) that you are barely keeping up with inflation and you are certainly not earning a decent return on your invested capital.

Check your high interest accounts - you may be surprised how low the rate is

I have a high interest account which I use primarily for expenditure smoothing and I realised recently that I was only receiving 2.5% p.a. on this account.  I did a quick check of other high interest savings accounts and I realised that they had all come down as well.

The best rates I could find were introductory rates which were around ~4.5%.  I have written before about how to roll the best introductory rates available which should help you keep the rate up if you really want to stick with savings accounts.  However these accounts were limited as well - some of them had maximum cash levels for the high rate (e.g. you would only get this high amount up to $10,000) while others would not let you withdraw at all or required a minimum deposit each month without any withdrawals.

The first thing that you need to do is to check your current high interest savings account - find out whether you are getting a rate of interest that you are happy with.  I would suggest that anything less than the inflation rate (~2.5%) is not

Damn! No one seems to be over-reacting to the US Government Shut Down

About a week ago now the US government went into shut down after Democrats and Republicans could not pass a budget.  There are many causes of this - all political and I do not have a good enough understanding about US politics to understand how it is going to end or how long it is going to take.

Similarly, most people know that the likely economic effect will be bad if the shut down goes on for long enough but people do not know how bad or what the impact will be on confidence or markets generally.  There is much speculation and reporting out there on this very fact and it is not something I have a great deal of insight into so won't post about.

Why do I want people to over-react to the government shut down?

You may be wondering why then I am posting about it and why I seem disappointed (from the title of this article) that people are not over-reacting to the news.  The fact is that I am looking for a (personal) silver lining in the shut down.  Markets typically over-react to all news (good and bad alike) and this creates opportunities to buy or sell depending on which way the market goes.

I have posted recently on how the market had run so strongly and I was actually finding it hard to find places to invest.  I am not a short term investor nor am I in need of my invested money in the short term so I would be quite happy for the share market to tank temporarily (or even for a few months) which would give me the chance to invest some of the cash I have been building up.

Interest rates are so low at the moment that having this cash has been really inefficient however I have not found any value in the share market (other than some of my current holdings) so I have been sitting waiting for buying opportunities.

I want people to over-react.  Panic is good if you (as a rational individual) can control your own feelings and invest when others are panicking.

Unfortunately...people seem quite sensible about it this time around

I think one of the reasons that the markets are not over-reacting is that it very much seems like ground hog

Razor blades...can you save money by buying non standard blades?

This will be a post for the male readers today - not that I discriminate but for this weekend post I will be writing about the cost of razors and whether it is worth buying non branded blades in order to try and save on what is a very very expensive product.

Let me say upfront this is a personal observation and not scientific.  If you have had a different experience I would love to hear from you.  The test subject for this 'experiment' was my face and I'm one of those guys that needs to shave every day so it got some fairly robust testing.

What are the options when it comes to razors and shaving?

• Buy a brand name razor and replace the blades with authentic branded blades
• This is the super expensive option which we all bemoan
• Most people buy a Gillette or Schick and then replace the razor 
• Buy a brand name razor and replace it with generic blades
• There are a lot of websites which sell generic blades for brand name razors.  This is particularly useful for those of us who already own a brand name blade which (let's face it) look and feel better than the disposable razors (discussed below)
• Use disposal razors
• There is a view that disposable razors are actually just as good as the brand name razors for a fraction of the costs
• The argument is that you get exactly the same quality of shave for a fraction of the cost

I actually decided to try all of these options - I figured that I was going to be shaving for the rest of my life and if I worked out the best option reasonably early then it I wouldn't mind taking the pain early.  I basically assessed them on how good the shave was and

September 2013 Expenditure Tracker

This is my second month of my reset expectations and the first where my expenditure smoothing technique has started to come into effect (i.e. whereby I save money in one month to offset future expenditures).  This month had so many one off large expenditure items that it would have taken almost my whole wage if I had not used the smoothing technique.

Item	Sep 2013	Target (new)	Over/(Under)	Target (old)	Over/(Under)
Share Investments	+$1,094	+$2,500	-$1,406	+$2,000	-$906
Offset Acct.	+$169	+$2,400	-$2,231	+$3,500	-$3,331
Personal expenditure	+$5,828	+$2,800	+$3,028	+$2,200	+$3,628

As you can see above I once again underperformed all of my old and new expenditure goals however given the different expenditures I had due I am not as disappointed as I would normally be.  This was just one of those months that happen every so often where everything falls due and there is no way of getting around this.

The major movements in my 3 accounts are discussed below.  I will deal with the personal expenditure first (as this pretty much drove my whole result)

• Personal expenditure
• My credit card bill this month was ~$3,700 which is significantly more than my reset amount - this alone was enough to break the budget
• However offsetting this was ~$1,800 which I had put away previously
• This still left a significant amount which had to be cash covered but it was definitely not as bad as it could have been!
• I put away ~$1,000 to cover future expenditures in the month which obviously detracted from my cash balance (and somewhat neutered the effect of the amount that I was funding my credit card bill with)
• I had significant cash expenses this month including
• A cash wedding present - these always hurt and there is no way of getting around them
• Paying for flights and accommodation for my overseas holiday in November - this was the major culprit
• Home Loan Offset account
• With the expenditure smoothing that I was doing above, I was able to put $1,000 into my home loan offset account for the month which I was pretty happy about given the number of expenses I had due this month
• However offsetting this was that a lot of annual bills fell due this month including my annual insurance bill as well as my quarterly rates bill
• The net effect of this was the small increase seen above
• Share investments
• I actually still have quite a lot of cash sitting in my share investment account and I will not be transferring money into this account until I work out where I can place the cash
• As I recently mentioned I am re-evaluating the stocks in my portfolio and I will start moving back into shares once I work out where there is value in the market

On a cumulative basis my (reset) performance is as follows:

Item	Aug 13 -Sep 13	Target (new)	Over/(Under)	Jan 13 -Sep 13	Target (old)	Over/(Under)
Share Investments	+$2,188	+$5,000	-$2,812	+$16,187	+$18,000	-$1,813
Offset Acct.	+$2,319	+$4,800	-$2,481	+$8,848	+$31,500	-$22,652
Personal expenditure	+$11,420	+$4,800	+$5,820	+$43,322	+$19,800	+$23,522

Unfortunately I am still way out on my expectations.  I am hoping it starts to come back in the coming months with my tax return and the payment of my bonus as well as more controlled expenditure (perversely I spend much less when I go overseas because I tend to pay most of the expense in advance).  I did a quick calculation of October and I think my personal expenses will be much more in control over this coming month.

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August 2013 Expenditure Tracker
September 2013 Net Worth: $394,000 (+2.4%)
Resetting budget expectations in 2013
If you find budgeting hard...try 'Expenditure Smoothing'

September 2013 Net Worth: 394,000 (+2.4%)

	Value	% Change
Assets	$752,000	+1.0%
Liabilities	$358,000	-0.5%
Net worth	$394,000	+2.4%

As in recent months, this month's net worth performance was quite volatile.  After a flat performance last month I had quite a good performance this month.  My net worth target for this month was $390,000 and you can see above I have quite significantly exceeded that goal.

September 2013 had some swings in various accounts (most notably my share portfolio) which I will outline below however there was a mixed effect including a significant reduction in cash as I had to pay for two overseas trips (one to visit family and the other my annual holiday).  Interestingly my cash spreading technique is starting to work and my credit card bill was not as bad an influence as in previous months even though I had quite a large bill due.

Below I have outlined the factors (both positive and negative) which affected my performance this month:

Positive factors

1. A really positive performance in the share market
• The share market and particularly high beta stocks (which disproportionately represent my portfolio) performed really well over the start of the month which boosted my returns significantly
• They pulled back towards the end of the month however not enough to impact my net worth performance
2. A much lower credit card balance
• My credit card balance dropped by almost $1,000 as I had less one off bills due this month
• Interestingly this month my cash balance did not drop as badly as I had expected because I had started to expenditure smooth some of my larger bills (as posted about before)
3. Continued saving into my employee share plan
• As posted about every month, the enforced saving that comes from my employee share plan is a constant source of performance in my net worth performance.
• I always thought I was a pretty disciplined saver, however if I look at how much I save into my home loan versus my employee share plan, the difference is pretty stark

Negative factors

1. Lower levels of cash
• I have had to