Quarter 2 2020 – Net worth up $201,000, 93.2% savings rate : fiaustralia

Quarter 2 2020 – Net worth up $201,000, 93.2% savings rate : fiaustralia

Quarter 2 2020 – Net worth update: Up $201,000

Well, who expected that turnaround on the markets? Personally, I thought there’d be a U shaped market recovery at best. But the state of the wider economy is the gorilla in the room…

Many states in America are experiencing their worst weekly increases in coronavirus cases only weeks after coming out of lockdown, and countries such as Brazil are still peaking. It doesn’t bode well for the future for as long as we don’t have a vaccine or an effective treatment. Meanwhile, Victorian lockdowns show that coronavirus still walks among us in Australia.

Tellingly, while the market has recovered significantly off its lows, when a few brave individual companies have provided updated guidance, their share price have usually been smashed as their earnings have (understandably) taken a significant hit. Others simply pulled all guidance. Yet the rest of the market largely rolled along with blinkers on.

Earnings season in August has the potential to be a real eye opener for the market. The long term potential of companies might not be severely impacted, but the short-to-medium term won’t be all roses. So I find it hard to rationalise the market’s behaviour, especially as the market’s favourite thing is usually certainty. As pointed out in our concerns, the last thing the market currently has is certainty.

Irrespective of all that, given the market rebound and that shares are our biggest asset class, this was a good quarter for us financially after taking a nasty $277,000 hit last quarter.

Let’s take a look at what transpired and what the impact as been to our net worth over April-June 2020.

Our financial goals

As always, here is a reminder to our early retirement goals. We’re looking to retire early before the age of 45 (and we’re currently 35 and 36) with a pre-tax FatFIRE budget of $150,000 a year, comprised of following in assets:

  • $2,000,000 in shares

  • $600,000 in two investment properties

  • $700,000 in superannuation

  • $1 million primarily place of residence

  • Total asset goal = $4,300,000.

You can track our net worth in our previous posts.

April-June: Shares

After our shares lost $244,000 in value in Q1 2020, a market turnaround is a welcome mental health relief. But the scale of what’s happened with the market recovery is quite unexpected.

Regardless, Q2 2020 wasn’t just a case of watching the share market rocket back up. As my wife Ellie covered, we also threw some money into purchases.

We didn’t time the bottom, but we did buy in and held our nerve not to sell.

In all, we bought $25,000 in one Listed Investment Company (LIC) that we hadn’t held before. It came with a nice discount off its pre-crash high, and plugged a gap in our share market exposure. It’s only a fairly small holding compared to some of our others, but we’re closing that one off as done and dusted already. If we think of it in comparison to its pre-crash high, it’s the equivalent of around $40,000.

We also finished off our holdings in another LIC, which was also the last holding we bought before the crash (ouch). This was only a smaller $15,000 purchase, but it was the equivalent of $20,000 in pre-crash value.

Since Ellie’s article on our coronavirus crash purchasing, we also bought $10,000 via a Share Purchase Plan (SPP). We had the option to buy into half a dozen others, but this was the only one we took up. The other options were for companies where we’d already hit our holding goals. In the interests of diversification, we thought it better to hold our money to open new positions in other stocks that meet our investing targets.

Going ahead, our sights are now largely set for investing in international stocks. While we still have minor plans for investing in Australian shares, about 80% of our remaining purchases will be internationally focussed.

So, between $40,000 in share purchases and a rising share market, how did we go in Q2?

Having started the quarter with a share portfolio worth $876,000, it ended the quarter on $1,044,000. That’s a hearty 19.2% or $168,000 increase.

While the rise is welcome, the next quarter will be rocky. Worsening outcomes with coronavirus internationally, and domestic fears arising out of Victoria show us that we can’t be complacent, and true economic recovery is a long way away. Hold on tight!

April-June: Superannuation

Amid drops of 25% or so for the broader share market last quarter, our superannuation only dropped 7.2% – down to $397,000 from $428,000 at the start of 2020.

I’m not entirely sure why that was. Perhaps because superannuation funds invest in a lot of ‘illiquid’ assets like infrastructure (roads, airports, power generation, etc) that get valued less frequently? In any case, it was good to see resilience in our super – and we’re not using defensively minded investment settings there either.

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I wrote earlier in the year though why we’re not making extra contributions to our superannuation. So we’re just getting our employer contributions in there, and otherwise relying on the whims of the market.

In any case – how did our super perform in a rising market? Well, it ended Q2 with $423,000 – a rise of 6.5% or $26,000. Not anything amazing. But then again, superannuation didn’t drop as much during the initial plunge.

April-June: Primary place of residence

It’s too early to see the long term impact of coronavirus on the real economy and house prices. We’ve seen some building work going on locally, but not much in the way of listings. People are holding their cards close to their chests.

However, national house prices in May dropped by 0.4%, and only 0.1% in Brisbane where we live. In June, prices dropped 0.7% nationally, with a 0.2% decrease in Brisbane.

That’s somewhat corroborated by Onthehouse.com.au, which put our house price at $775,000 – identical to Q1. Meanwhile, an ANZ property report said our house is worth $713,000 – up a hefty $42,000 from $671,000 last quarter. I think not!

Under previous rules of not moving the price unless we have a pair of sources agreeing on a price move, we’ll keep the house price at $655,000.

We’ve consistently seen higher value estimates from online sources for our property than that $655,000 value, but with an on-the-ground view of things, a value in the $700,000s is too high. Perhaps it would be worth more and pop-up around the $675,000 range, but we take the view of being better safe than sorry for these sorts of things.

It’s better to have a pleasant surprise than a nasty one down the track, given that our retirement plans are to upscale our house. As a result, we wouldn’t want a shortfall in our projected net wealth. Perhaps we should just get a real estate agent out for a valuation? It’s been around five years since our last one.

In order to calculate our net worth, our mortgage is fully paid off with money in an offset account. So all of the full capital value is ours.

April-June: Investment properties

Last quarter we saw a small drop in the value of our two investment properties. The combined value dropped by $5,000 after both Onthehouse.com.au and ANZ both indicated a small decrease.

So what about this quarter?

  • Onthehouse.com.au – combined value $700,000 ($675,000 in Q1 2020).

  • ANZ – combined value $617,000 ($610,000 in Q1 2020).

They’re both up: $25,000 and $7,000 respectively. Given that the market has been pretty flat otherwise, maybe last quarter’s numbers were just a blip?

As a result, we’ll readjust the values back up by $5,000 to $605,000. In this case, I’m fairly confident in ANZ’s values as being close to true market value. $605,000 is still a little down on what ANZ says, but close enough.

So that’s the property values sorted. As we have a pair of mortgages on these properties, what about the debt owing? Well the quarter saw the combined amount owing dropping from $371,000 to $369,000.

That gives us total equity of $236,000 – an increase of $7,000 or 3.0%.

Financial state of the union

We finished Q1 2020 with a net worth of $2,157,000. Here’s how things look three months later after Q2 2020:

Asset Value
Shares $1,044,000
Superannuation $423,000
Investment properties value $605,000
Investment properties debt -$369,000
Primary place of residence $655,000
Total $2,358,000

Having started Q2 on $2,157,000 and seeing rises almost across the board (apart from our home), a jump isn’t unexpected. However, we ended on $2,358,000 – an increase of $201,000 or 9.3%.

We’re not quite back where we were at the start of the year ($2,434,000), but it’s hardly a disaster.

Instead, at this time our bigger financial concern is around our income – both in terms of jobs and passive income.

With a dividend approach to investing, we’re really wanting to see how our income is impacted during a severe economic downturn. So as always, our next post will investigate our income and expenses for the quarter.

These are still very uncertain times. While I’d rather our net worth went up than down, the champagne will remain on ice. There’s still a long way to go.

BLOG POST LINK: https://hishermoneyguide.com/quarter-2-2020-net-worth-update/

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r/fiaustralia - Quarter 2 2020 – Net worth up $201,000, 93.2% savings rate

Q2 2020 income and expenses: 93.2% savings rate

Off the back of a big jump in our net worth for Q2, how did our income and expenses go between April to June?

The good (great!) news is that we both still have our jobs, so nothing has drastically changed. We both worked from home for the quarter, and were otherwise largely housebound.

So it’ll be interesting to see if there are any noticeable changes to our expenses. Personally, because we’re so frugal already I don’t think there will be significant changes. But it’ll be interesting to cast an eye over the quarterly expenses chart later on.

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However, while we’ve kept our jobs, our income has taken a hit this quarter.

As many fellow investors would have experienced, the economic downturn has impacted dividends. Because we’re dividend investors, this is something we’re particularly interested in, as we’ll get the majority of our income from dividends once we hit financial independence and early retirement.

So let’s dive into this quarter’s income and expenses.

April-June: Income and side hustles

We had seven pay cycles this quarter – an extra one compared to Q1. That brought in $43,313 after tax, and makes for a nice bump in income.

Unfortunately, I received news that thanks to coronavirus I won’t be getting a pay rise anytime soon. My wife Ellie will at least be getting a small one from July onwards, so that’s something. We’ll see how exactly that plays out next quarter.

Additionally, our job security isn’t under imminent threat. However, rumours are now swirling about medium term security in 2021 onwards. So we’ll see, but the longer we can ride things out the better, obviously.

As for other income from side hustles…

With things reopening, we managed one bottle recycling run with what we had mostly underneath the house before the lockdown. That earned us $84 that we redeemed at Woolworths for hard currency. Our bottle collecting efforts are well down on last year – we’re only picking up bottles we see discarded for more than a few days. Bottle collecting certainly isn’t a huge earner for us, but if you look at the article we did on it, it can certainly add up over time.

After a big first quarter from Google Adsense, we didn’t get any blog revenue this quarter, though a payment will go through next quarter. Similarly, after having birthdays in Q1, no gifts this quarter either.

Things were a bit brighter on the online survey front. We received $290 in eGift cards across a few different platforms. Membership programs where we get redeemable rewards (eg: gift cards) also earned us $85.

So in total that brings our total salaries and side hustles to $43,772. That’s only a small gain of $316 or 0.7% compared to $43,456 last year. (No work bonuses or election official jobs this time around, sadly.)

Luckily we didn’t only get income from work – we also had extra passive income from share dividends. However, the news there wasn’t very bright.

April-June: Dividends

Time to talk about everybody’s favourite topic: share dividend income.

Unfortunately we had five holdings announce a “deferral” of their dividends due in Q2 due to the coronavirus crisis. We’ll see whether or not those dividends actually eventuate later in the year after the companies reassess their financial positions. I’m not holding high hopes, but we’ll see in due course. Fingers crossed in any case.

Thankfully though, some dividends did still flow through amid the turbulence. So how did we go compared to the last two years?

Q2 2018 Q2 2019 Q2 2020
DRP/DSSP reinvested/Direct debit, excluding franking credits $4,488.78 $9,728.34 $8,885.30

A dividend total of $8,885.30 is a decrease of $843.04 or 8.7% compared to Q2 last year. At face value, not a good result at all. It also included a $1,700 special dividend that actually helped to significantly boost the numbers.

Naturally, coronavirus had a huge impact. With about $4,000 in deferred dividends, that number could have been a sizeable improvement on last year, but it wasn’t to be.

However, when comparing these numbers between 2019 and 2020, it’s worth remember that it’s not an entirely equal playing field. Because of the May federal election last year and the issue around franking credits, some dividend income was pushed forward. That inflated the numbers for Q2 2019 compared to 2018 (hence the giant jump you see in the table above).

Yet we also bought shares since this time last year, which increased our theoretical (pre-COVID) earnings. So clearly there has been a hit to our share income. Who hates 2020?

In any case, the sooner the good times return, the better! Hopefully next year this will all be behind us, the economic impacts won’t be too severe, and we’ll have an extra year of share purchases behind us to increase this dividend growth. It’s nice to dream, right?

*The numbers listed above are ‘somewhat net’ – for the purposes of calculating our savings rate. It includes franked and unfranked dividends – but not franking credits (which are essentially pre-paid tax credits). We pay additional tax towards the end of the calendar year on the unfranked dividends (and a small additional 7% portion of the franked dividends due to our higher marginal tax rates). For reference, we received an additional $2,750.03 in franking credits for the period – giving us a total of $11,635.33 in gross pre-tax dividends for the quarter.*

April-June: Expenses

Let’s take a look at our expenses for Q2 2020, with a comparison with Q2 2019:

[EXPENSE CHART IN BLOG POST]

We had living expenses of $3,559.33 for the quarter – a marginal $54.60 or 1.5% decrease on the same time last year. For the 2020 year-to-date we’ve spent $2,633.65 or 31.2% more than this time last year – thanks Q1 New Zealand holiday for blowing out the numbers!

Our bills for electricity and water don’t yet reflect what the extra consumption we will have had by working from home. But it’ll be interesting to see what they’re like next quarter when those bills do come through. They’ll actually be a lot more reflective of what we’d see our consumption would be like in retirement. So it’ll be a really useful exercise for accurate budget projections.

We’ll also certainly be taking advantage of the Australian Taxation Office’s shortcut method to claim $0.80 per worker, per hour worked from home between 1 March and 30 June, and strongly encourage our Australian readers to do the same and claim their work-from-home expenses when you do your tax return.

In good news, our car repairs for this year were down compared to last year ($551 vs $669). We saved $118 while also getting a set of four new tyres. With luck we don’t pick up a puncture, and they’re good to go for another three or four years. However, the bad news was that last year’s car service was in July, so that’s a pretty big expense added to this quarter. Que sera, sera.

Otherwise, I was actually surprised that our total quarterly expenses were marginally lower, given that we had that extra car service in there. But avoiding a lot of expenses just added up. No new clothes, no chipped teeth (thank heavens), and Ellie got rid of her professional membership (which was a big saver). We’re also saving on our health insurance and mobile costs – offsetting inflationary increases in areas such as our council rates.

Also, take a look at that fuel bill! Minimal driving, paired with cheap petrol when we did refuel, is great for the hip pocket. Will we ever see sub-$1 a litre fuel again? If it means enduring an economic downturn like this, hopefully not.

On the groceries front, April at home was a fairly cheap month, but things returned more to normal in May. We’re still seeing expensive fresh food because of the lingering impacts of the drought. But improved growing conditions should see that drop, and we’ve started to see some reductions in prices for fruit and vegies flow through. Our grocery expenses have also gone up though with some added costs like ice cream. Comfort food is needed.

No big surprises though – which is always how we like it. However, we’ve got an article coming up on some expenses that could sink our savings rate in the future.

How are we tracking? Q2 savings rate

Let’s throw it all together and see what our quarterly savings rate was:

Q2 Value
Income $43,772
Share dividends $8,885.30
Expenses -$3,559.33
Total savings $49,097.97
Savings rate 93.2%

Total savings of $49,097.97 and expenses of $3,559.33 for the quarter gives us a savings rates of 93.2% – identical to this time last year.

After the last two quarters came in with our lowest quarterly savings rates since we started the blog, getting back into the 90s is a good result. And given the economic devastation occurring around us, it’s a result we can’t take for granted.

With alarm bells starting to sound around our job security, we want to be able to save and invest as much as possible, for as long as possible.

The hit to our dividends is jarring, but unavoidable. Bigger pain is yet to come. However, like we spoke about in a prior blog post, at least it’ll be a valuable opportunity to stress-test the portfolio and see if there are any particular weaknesses that we could still try to rectify while we’re working.

Our FatFIRE budget will likely go out the window during inevitable future downturns in the decades ahead. But the good news is that we know we can live frugally now, and we could largely replicate it in retirement if needed.

This quarter still rode on the back of some of the pre-Covid happy days, so it really doesn’t tell the full story. The second half of the year will reveal the extent of the impact to our passive income and job security.

Until next time: stay safe out there, and best wishes to you and your families in these troubling times.

BLOG POST LINK: https://hishermoneyguide.com/quarter-2-2020-income-and-expenses/

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