Transfer to HSBC Australia Didn't Work

I transferred USD 1,000 from Interactive Brokers to the HSBC Everyday Global Account. I was surprised to find that they converted it to Australian Dollars. I am confused about whether I did something wrong or not. I posted a question about it in the mobile chat and the app said it was still learning and didn't understand and a consultant would get back to me.

P.S. 30Aug22

So, the consultant explained that first you have to add the US Dollar "product" to your account before you can transfer US Dollars to your account. I now applied and was approved.

Even if I get this working properly this is a slow method of converting currency. First I need to transfer money to IB, then wait before I am allowed to withdraw it again, then wait while the transfer to HSBC happens, then do another transfer. Of course, we could simply have lots of US Dollars lying around at HSBC just in case, but there is an interest cost to doing that... So all this might be too much hassle.

For September's investment in Unpopular Ventures, I'm planning to sell some shares at IB and then transfer US Dollars to HSBC and see how it goes.

P.P.S. 30Aug22 

So now I know when you get the 2% cashback on debit card purchases. You need to deposit at least $2,000 a month into the account. That is a tremendous rate of return compared to passing that spending money through our offset account - about 5 times the rate of return. So, I am going to get Moominmama's salary deposited to this account in future. I'm not sure about opening one myself as I have a lot lower rate of spending on a debit/credit card.

 

Reduced Our Health Insurance Premium

 

Inspired by Jessica Irvine's article on health insurance in the Sydney Morning Herald (I get her weekly newsletter), I phoned BUPA a couple of times and reduced our monthly health insurance premium from AUD 596 to about AUD 530. I switched the hospital coverage from gold (which we wanted when Moominmama was pregnant) to silver advanced (which is probably still too much coverage) and the extras from Budget Extras to Freedom 50. I think we should probably just drop the extras but Moominmama seems to think we'll use it. I'll monitor after a year or two and see if we are getting our money's worth. I estimate that the extra tax we would have to pay if we didn't have private health insurance is about AUD 370 a month. Moominmama likes private health insurance (and private schools etc.) whereas I don't get the point, really.

HSBC Everyday Global Account

Back at the beginning of 2021 I opened an HSBC account for Moominmama because Plus 500 refused to send money to an account in our joint names. Moominmama has just been using it for shopping getting 2% cashback some months. I just realised that it can hold foreign currencies. So, instead of using OFX to convert and transfer money to the US to invest in Unpopular Ventures and Masterworks I could convert the money at Interactive Brokers at the best exchange rate, transfer it to HSBC and then transfer it to the recipient from there for an AUD 30 fee. OFX have about a 1.4% exchange rate cost plus an AUD 15 fee for small orders. And one day when there are distributions from Unpopular Ventures we could transfer the money back to HSBC without converting it.

Sam Dogen Interview

Sam Dogen of Financial Samurai has first video interview. Finally, you can get to see him, even if you still don't know his real name 😀

A Tale of Two Bloggers

Enough Wealth has a new post comparing our two NetWorthShare net worth curves titled a Tale of Two Bloggers. He took out the step changes due to inheritance in both our histories. But the two curves are in different currencies - mine in USD and his in AUD despite us both living in Australia. I wanted my track record to be comparable to the majority of other members who are US based. The volatility of my net worth is much lower in AUD than in USD. This is by design. The Australian Dollar tends to fall during "risk-off" periods reducing losses in AUD terms and increasing them in USD terms.

So, I thought I'd post a comparison of my net worth curve in both AUD and USD terms:

These go back way before the record on NetWorthShare. Back to September 1990, the month I started my PhD in the US... In addition to bigger moves during bear markets, the US series has a number of flat periods compared to the AUD series - around 2015, 2018-19 and in 2021. Overall, the AUD curve ascends more smoothly. We can also reminisce about that time after the GFC when the Australian Dollar was worth more than the US Dollar!

Save, Inherit, and Invest

I love reading the Millionaire Interviews at the Earn, Save, and Invest Blog. One of the questions they get asked is "What would you say is your greatest strength in the ESI wealth-building model (Earn, Save or Invest) and why would you say it’s tops?" Compared to many of his interviewees, our earning has not been that strong. Despite my salary putting me in the top 5% of Australian earners, it's only nominally about USD 125k per year. On the other hand, our household income including superannuation contributions and net investment income is nearer USD 250k per year. Historically, I would have said that our strength was in saving. Before we bought the house and had children, we had a very high saving rate. But, in the last few years, our investment profits have really taken off. Now the sources of our net worth are roughly 25% saving, 30% inheritance, and 45% investment returns.

I've posted earlier versions of this crazy chart before:

It separates net worth into saving and investment returns in superannuation and non-superannuation accounts, inheritance, and housing equity. Part of housing equity is saving and part gains. Maybe, in the future I will split that up in the graph. Only recently is that difference becoming significant.

Up till the end of 2014, we saved a lot apart from the meltdown following the dot.com crash. Since then we moved savings into housing equity and superannuation, resulting in negative current savings. More interesting is that after the first transfer to housing equity the growth rate of savings (i.e. the slope in the segments without a transfer) is much lower than before 2015. On the other hand, retirement contributions remain strong.

P.S. 25 November

So, I made a chart showing just total savings, inherited money, and investment returns:

Investment returns are the gap between net worth and the other two categories. As investment returns went negative a few times, plotting them in the same way as the other two sources would be confusing. This graph shows that savings continue to increase but at a slower pace than they did in the first part of the previous decade.

FI or FIRE?

 

I wrote about FIRE (Financial Independence Retire Early) at least once before. The Retire Early bit is the problematic bit. It makes much more sense for people to use financial independence to do what they want to do rather than just stop working.

A while back I heard that Mr Money Mustache got divorced. Seems his wife wanted to spend more money given their high income. But that wouldn't fit with his frugality message. Now here is a FIRE blogger who retired with a small nest-egg - so-called "lean FIRE". His wife got tired of not spending much either and of having too much leisure time and not making "progress" in life. And here is another blogger who is tired of not having enough money. Many FIRE bloggers who supposedly retired actually work on their blogging business. They stopped being an employee and became self-employed. This is great.

With a net worth of approaching AUD 6 million we are financially independent by any reasonable definition. But I'm not planning on retiring. As I mentioned before, I like my job, at least the research part. I am hoping to not ever teach more than one course a year again. I am sacrificing more than AUD 40k to take long-service leave next year to reduce my teaching load. After that I am planning to take on a "leadership role" for a while and once I turn 60 I hope to go part-time. Also, I don't want to sacrifice the "prestige" and become a nobody. Unless we plan on moving somewhere else, it seems to make sense to do my very flexible job.

And actually I am thinking that our money isn't enough. Our older child is going to private school and the younger one probably will too. The alternative is to move to a top public school catchment area. My wife isn't happy with the public schools here, though I think they are fine. With the way the property market is going that means an AUD 2 million + house price. Or maybe move to Sydney because the best public schools in Sydney are better than the private schools here. My wife puts a big weight on education. I thought Jewish parents like my parents and me were into education. Chinese parents are at another level.

And, actually, I did the retire early bit already. I just wasn't financially independent.

Most People Think They are Financially Average

Well not quite. But people think they are more average financially than they are, on average.

But the strange thing is that most people think they are more intelligent than average. Was just chatting with someone on Twitter who stated that the norm in Australia is to get paid weekly and most people don't own a house. In fact, 67% of homes are owner occupied and getting paid every two weeks is most common. On the other end of the spectrum, my wife thinks our financial situation is "normal", when according to the statistics we are in the top few percent.

New I Will Teach You to be Rich Podcast

 

 

Ramit Sethi has started a podcast titled of course: "I Will Teach You to be Rich" and subtitled: "Real money stories from behind closed doors".  It's like a couples therapy session with Ramit as counsellor. It's great, but often the numbers don't seem to add up. For example, this couple makes USD 250k between them. Let's take off 1/3 for taxes etc. They say they spend just over 10% on housing and save 20%. They have "very low expenses". The guy scrimps and saves on everything. But, apart from what I listed, they would have to have another USD 90k in expenses. That's near what our family of four spends on everything including housing and private school and daycare. So, what is really going on here? Does the woman spend a lot of that on her own outside the household budget stuff? So this doesn't sound like "very low expenses" to me.

Time-weighted Versus Dollar-weighted Returns

There was an interesting comment in the latest Millionaire Interview at the ESI Blog:

"I find it a bit silly how most people focus on their time-weighted returns instead of their asset-weighted returns... Your financial freedom is affected by your asset weighted returns, not your time weighted returns."

I have thought about this before, but not exactly in these terms. This is an interesting way of putting this idea. 

The way I thought about it is: When you start investing you will probably make mistakes. But you will have less money and so they matter less. What matters more is what your returns are when you have a lot of money.  So, you can afford to pay some tuition fees. I really paid too much tuition...

This graph shows an index of my returns in Australian Dollar terms starting at 1000 in 1996:

Initially, I did well. But then the dot.com crash came and I started losing, ending up below where I started. Then I rode the next bull market. I started getting out as the financial crisis began to appear. But I got back in again too early and crashed. I wasn't quite back to square one, but not far from it. Not much happened in the next few years following the crisis and then things took off from 2012 on. These are my time-weighted returns.

In the last 10 years, my rate of return has been 11.1% vs. 12.0% for the ASX 200. In the last 20 years it was 4.8% vs. 10.6% for the ASX 200. Since "inception" the numbers are 6.2% and 11.2%. I got through the COVID-19 crash a lot better than the previous bear markets. Hopefully, that improvement will be maintained in the future.

The following graph shows relative out-performance compared to the ASX 200 over every time horizon:

The way to interpret this is: If you invested with me in 1996 then you would have under-performed the ASX 200 by 4-5% p.a. since then. However, if you invested with me in some months in 2012 you would have matched or just beaten the ASX 200 since then. Similarly, investing in the year before the COVID-19 crash you would now be ahead of the ASX. Investing with me in the year after the COVID-19 crash you would be behind the ASX and so forth.

This graph shows my absolute profits in Australian Dollars:

A simple way of showing dollar-weighted returns. Basically, things went nowhere till 2012. All the gains have happened since then. So, I "wasted" 15 years learning to invest while saving.

Spending 2020-21

For the last four years I've been putting together reports on our spending over the Australian financial year, which runs from 1 July to 30 June. This makes it easy to do a break down of gross income including taxes that's comparable to many you'll see online, though all our numbers are in Australian Dollars. At the top level we can break down total income (as reported in our tax returns plus superannuation contributions):

The gross income for this year is just an estimate. Tax includes local property tax as well as income tax and tax on superannuation contributions. Investing costs include margin interest. Mortgage interest is included in spending, while mortgage principal payments are considered as saving. Spending also includes the insurance premia paid through our superannuation. Current saving is then what is left over. This is much bigger than saving out of salaries because gross income includes investment returns reported in our tax returns. The latter number depends on capital gains reported for tax purposes, so is fairly arbitrary. Still, it has increased each year over this period. Spending also increased until this year when it was flat. Graphically, it looks like this:

We break down spending into quite detailed categories. Some of these are then aggregated up into broader categories:

Our biggest spending category, if we don't count tax, is now childcare and education, which has risen steeply. Given this it is surprising that spending didn't increase this year. Commentary on each category follows:

Franking credits: Income reported on our tax returns includes franking credits (tax paid by companies we invest in). We need to deduct this money which we don't receive as cash. Foreign tax paid is the same story.

Life and disability insurance: I have been trying to bring this under control and the amount paid has fallen as a result.

Health: Includes health insurance and direct spending. Spending peaked with the birth of our second child.

Housing: Includes mortgage interest, maintenance, and body corporate fees (condo association).

Transport: Continues to rise as I spend more on Uber and e-scooters and Moominmama drives more.

Utilities: This includes spending on online subscriptions etc as well as more conventional utilities.

Supermarkets: Includes convenience stores, liquor stores etc as well as supermarkets.

Restaurants: This was low in 2017-18 because we spent a lot of cash at restaurants. It's low this year because of the pandemic.

Cash spending: This has collapsed. It's hard to believe it is really that low, but that's what the numbers say. Moominmama also gets some cash out at supermarkets that is included in that category.

Department stores: All other stores selling goods that aren't supermarkets. No real trend here.

Mail order: This continues to rise. For example, I recently bought a new iMac by mail order.

Childcare and education: We are paying for private school for one child, full time daycare for the other, plus music classes...

Travel: This includes flights, hotels etc. It was very high in 2017-18 when we went to Europe and Japan. This year it was down to zero due to the pandemic and having a small child. We haven't travelled in Australia either. With the family it needs a lot of planning and borders are likely to suddenly close.

Charity: A growing category.

Other: This is mostly other services. It includes everything from haircuts to professional photography.

Clearly, we only kept spending under control in 2020-21 because we have stopped spending on travel and greatly reduced spending on restaurants.

Cancelled Moominmama's Income Protection Insurance

In 2019 I cancelled my own, but didn't know I could cancel Moominmama's. As she is 11 years younger than me, the premia were nowhere near as high yet but going up quickly. Like me, she has a year of sick and annual leave accumulated. It's hard to imagine her being so ill that she's off work for a year but not bad enough that she is still is planning on returning to work. Anyway, we wouldn't suffer any financial hardship if she stopped working. We would just be investing less and we already have more than AUD 5 million in net worth. Again, I still kept the death and disablement insurance, because the premium is not so much, though I'm not sure I should. I also learned more about disablement insurance in the process. In Australia, it turns out that it is a lump sum like life insurance, I didn't realise that.

Plus500 Update

I got a statement from the new HSBC account and submitted it to Plus500 and it was approved! So, now I tried to withdraw $1,000. They at least allowed me to submit the request now. However, there was a statement that they will refund the original source of the money.... Which would mean they will send it back to the credit card we used to fund the account, even though that is a joint account. Let's see what happens. 

P.S. 8 February 

The money showed up in the new HSBC account! So we successfully withdrew money from Plus 500.

Closing Plus 500 Account

 

 

I opened a CFD trading account with Plus 500 in Moominmama's name in order to hedge Bitcoin trades over the weekend and do other trading experiments with small position sizes. I no longer need the account and they are charging monthly inactivity fees. So, I tried to withdraw the cash in the account. But they wouldn't transfer the money to our joint Commonwealth Bank account. They also refused to transfer the money to Moominmama's Interactive Brokers account, even though it has a BSB and bank account number. So, I opened a new bank account in her name at HSBC. But now we have to wait a month to get a statement that would be acceptable to Plus 500... To be continued

Breakdown into Taxes, Spending, and Saving

Following up on yesterday's post on our spending over time in different categories, I made another pretty graph, this time of the breakdown of income into taxes, spending, and saving. Everything is in Australian Dollars:

 

 

Total income is our gross income on our tax returns plus superannuation contributions that are not on our tax returns. This means that it includes taxable investment income. As a result, current saving looks quite big, but saving from our salaries is much smaller than this, nearer to AUD 20k per year. Superannuation contributions include employer and salary sacrifice contributions and not "non-concessional contributions", which I treat as transfers from current savings totaling AUD 180k during this period.

Mortgage principal payments were low last year when I paid off and redrew the mortgage. Even though in my investment performance reports I now include mortgage interest as an investment cost, for the purposes of these posts on spending I include it in housing costs to make our numbers more comparable to other people's. Investment costs are mostly margin interest as well as other fees. Taxes include income and property tax.

Spending Over the Last Four Years

The chart shows our spending over the last four Australian tax years. The 2020-21 figures are an estimate based on the first five months of the year:

This year's spending is predicted to be lower than last due partly to COVID-19 and a lack of major house maintenance expenditure this year. Travel and cash spending have gone from significant items in 2017-18 to almost nothing or nothing this year. I deliberately reduced cash spending when I started this tracking of our spending in order to make tracking easier. The category that seems to have increased the most is childcare and education, which is not surprising as we went from one child in daycare only a few days a week to two children for more days of the week. The childcare subsidies we got have also been reduced. 

Also of interest are restaurants, which are the tiny sliver above supermarkets, which also declined a lot this year for obvious reasons (I think I got food delivered from a restaurant maybe a couple of times ever in my life). In 2017-18, restaurants were very low because I would usually pay with cash then. Really, restaurant spending was much higher than shown in the first two years. Last year it was AUD 3k and this year is estimated to be AUD 1k. Travel only includes flights and accommodation.

2019-2020 Spending

Here is our spending for the Australian financial year 2019-2020. The shaded areas are sub-categories of the main categories above them. The table also shows the spending shares in the previous financial year and the change in share. These numbers include some spending that we don't include in our usual monthly reports to make the report more comparable to others you might see online. This includes mortgage interest and life insurance. Health insurance and medical expenses are net of reimbursements by the health insurer and the government. All numbers are in Australian Dollars.

Monthly spending increased from $10.7k to $12k (USD 8,250). This is more than my after-tax salary... Housing was again the largest spending category but supermarkets overtook health as the second largest. Spending on mail order and childcare and education are now both ahead of health. The shares of health and housing fell the most due to reduced mortgage interest and medical spending. Our second child was born 26 June 2019 and expenditure around that was mostly incurred in the previous financial year but we got some reimbursements in this financial year. Mortgage interest was down because we had a lot of money in our offset account leading up to the "mortgage inversion" and because the loan is just getting smaller and interest rates are falling.

I spent a lot more on taxis and Uber (I don't have a driving licence). A lot of this was because in the early months of Moominmama's maternity leave I took Moomin to daycare at her workplace before going on to my work. But also, I am getting less patient with the time it takes to get around on public transport when I have increased childcare duties. When it's convenient I get a bus, when it's not I get an Uber or taxi.

Childcare expenditure rose because we now have two children and because we got a lot less subsidy as our income rose. On the other hand, after the pandemic started we got free childcare, so this category will rise even more next year, probably. Mail order spending was up 86% on last year. This is partly because after Moominmama went on maternity leave she did a lot more mail order. But department store (all non-supermarket goods retail) and supermarket spending were also up. Across the three categories, spending was up 47%. Cash spending fell further to just $1,600, though some of the supermarket spending includes cash withdrawals by Moominmama.

I'm also tracking income, tax, and savings in the same spreadsheet. But these numbers are all still really uncertain until we are ready to submit our tax returns in a few months time. Very roughly, half our income goes to spending, a quarter to tax, and a quarter to saving.

Mortgage Refinancing: Reality Check

I met today with a "Premier Relationship Manager" at HSBC. We are going ahead with the mortgage refinancing. They will send a valuer to value our house tomorrow...

So, she first checked whether I could service the loan based on the data I submitted. Based on just my salary of AUD 176k per year and our spending and a AUD 500k loan the answer was no. Given my salary is supposedly in the top 5% or higher, our house value is only a bit above the median price for houses here, and lots of people drive luxury cars etc. and we don't, you'd think this wouldn't be a problem. She said our spending was "very high". Either government income data is too low (but the banks ask for tax returns), or people somehow hide spending from the banks (but the banks ask for bank statements), or what? It's hard to reconcile what I see with the data.

Our net worth is in the top 300,000 or so of households and my income in the top 400,000 of taxpayers according to this official data.

By the way, five plus years ago, when we were looking to buy a house, the banks were willing to lend us much more money. Lending standards really have tightened.

Mortgage Inversion Complete, What Next?

I completed the transfer of money into our brokerage accounts from the "mortgage inversion".  That completes a major step in our financial restructuring since the inheritance. We've completed the first two steps on this list. I am thinking of refinancing our mortgage to get a lower interest rate now I don't care about having an offset account with my main bank. But how to go about this? Should I go to a mortgage broker or just contact a bank, like HSBC, who are offering a low rate?

Mortgage Almost Paid Off

It won't be for long!