Have a read of some of my most Frequently asked questions. If your still not satisfied, why not ask the Captain? Leave a comment or get in touch and your question might be featured in the monthly ‘This is your Captain speaking’ Q&A sessions.
What is FIRE?
FIRE can stand for a couple of different things. The most commonly accepted is Financial Independence Retire Early. It is the process of achieving financial independence as soon as possible, with other explanations for FIRE being;
- Financial Independence, Retire Eventually
- Financial Independence, Recreation Early
- Financial Independence, Redirect Employment
What is passive and active income?
Passive income is income that you do not have to do anything to earn; so it is independent of your time. Passive income continues to be deposited into your account, 24 hours a day, 7 days a week, 52 weeks a year. This can come from various sources such as bank interest, dividends, royalties or even some businesses that you run. Strictly speaking no investment or income is truly passive; as everything will require some degree of management or oversight. I would say that an investment requiring one or two hours a year of admin meets my criteria of being passive income. In general, passive income is income earned that doesn’t require your time.
Active income is income that you earn by exchanging your time – money for tine. This is like a standard job/career, or side hustle providing services such as dog walking or selling on eBay.
How long will it take for me to retire?
This is a very personal question. But the simple maths behind FIRE show that the more you are able to slash your cost of living and the more you are able to save, the earlier you are going to be able to retire.
Using the table below, if you are able to save and invest half of your salary, your working life will be about 17 years. If you are able to live well below your means and are able to save and invest 80% of your salary, you are looking at approximately 5 and a half working years until retirement. For the extreme cases of savings rates in the 90%s, due to your highly frugal lifestyle, you will be able to retire much sooner.
What is an Index fund
An index fund is a financial product which is designed to track a particular index. For example Vanguard Australian Shares (ASX:VAS) Exchange Traded Fund (ETF) is designed to mirror the ASX:300 index; that is, the performance of the top 300 Australian companies by market capital.
What is an ETF
An ETF is an Exchange Traded Fund. This is a parcel of shares that make up the index that the ETF is tracking. For example, the Vanguard Total US market ETF is a parcel of shares which seeks to track the performance of the US total market by providing exposure to over 3600 holdings. Buying one share of VTS gives you a slice of all of those holdings. ETFs have incredibly low fees, due to the automated nature of their portfolio management; if a company falls out of the index it is simply sold and replaced in the ETF by its replacement
What is a LIC
A LIC is a listed investment Company. LICs are actively managed portfolios which can have both ultra low fees, or ultra high fees, depending on the company. I only like ultra low fee LICs like AFIC, Milton and Argo.
What is a MER
A MER is a Management Expense Ratio, or the annual fee you will pay on your investment product. Some modern ultra low fee ETFs have a MER ranging from .03% or 3 basis points (VTS) to .10% or 10 basis points (VAS)
A basis point is one hundredth of a percent, or .01%. This means, for every $10,000 you have invested, you will pay $1 per basis point. This makes VTS incredibly cheap at only $4 per $10,000 invested per year.
How can I reduce my expenses?
Even the biggest boat will eventually sink if there is enough holes in the hull. Your expenses, or more specifically, your unnecessary expenses are these tiny holes you need to plug. The best way is to start tracking your spending – pay for everything electronically if able, and keep a diary for cash transactions. Secondly start writing a list of all your major expenses (such as rent/mortgage, food, phone bills and insurance). After a month or two, start going through your electronic statement and cross checking – Work out where you are spending the most on. Once you have identified some problem areas – get to work! Solutions include downsizing where you live and your car, transitioning to a more plant based diet, and some common sense when it comes to phone plans and insurance. Check out the content on the site for how to save money on these specific areas!
What does a domiciled and cross listed funds mean?
Domiciling means where is the ‘home’ of the fund. For example, Vanguard Total US market (ASX:VTS) is a US domiciled fund, which is cross listed onto the Australian Stock Exchange. This means shareholders need to register with the US IRS to pay tax. Thankfully, Australia and the US have tax treaties which mean you won’t have to be taxed twice on your investments. This means you will need to fill out a W-8BEN-E tax treaty form.
What does market cap (capital mean)?
Market Cap or Capital is the capital value of a listed security or share. This is the sum of the share price multiplied by the number of shares, plus any additional assets. Market Cap is often used to describe sectors of the market or index, for example ‘Big caps’ like Microsoft and Commonwealth bank, versus ‘small caps’ like start ups or newer, lesser known companies
How do I buy a share
To buy a share you will need to go through a broker. The Broker is kind of like a car dealer; they didn’t make the car – in fact they probably have nothing to do with the manufacturer – but they can help arrange for you to purchase the car (the share) in your name. You will pay a small price for this transaction – $9.50 using SelfWealth (which is the lowest price I’ve found for a decent broker in Australia). Once you have bought the share, it needs to be registered in your name (just like a car) – this process is automatic (and free!) and you can then manage the share through your share registry.
Still have questions?
Still have questions…? Why not ask the Captain! Leave a comment or get in touch for more information and for for your chance to be featured in the monthly ‘This is your Captain speaking’ Q&A sessions