DevRaga Podcast Episode 4 - I’ve Paid Myself 20%, Then What?

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Dev Raga Personal Finance Podcast - Episode 4 - I’ve Paid Myself 20%, Then What?

This is a summary of the Dev Raga Personal Finance Podcast - Episode 4: Episode 4: I’ve Paid Myself 20%, Then What?

The original podcast can be found here: Episode 4: I've paid myself 20%, then what? by Dev Raga Personal Finance • A podcast on Anchor

Please Note: The material on this site, and in the podcast, is purely for educational purposes only. It is not intended to be financial advice. If you need advice regarding your personal financial circumstances, please see a financial advisor or financial planner. Please read the full disclaimer here before participating in this thread.

  • Episode 1: Power of Automation and Compounding
  • Episode 2: Mortgage tips and tricks!
  • Episode 3: Financial personalities I listen to
Once you’ve paid yourself 20% of your earnings, there are a variety of investment vehicles available to you with regards to allocating those funds:

1. High Interest Savings Account
If you are looking for a safe savings strategy that allows you to earn a relatively high amount of interest, placing 20% (or more) of your net income into a high-interest savings account may be a powerful tool that will enable you to save towards purchasing your first home or reaching other savings goals.

2. Bonds
Bonds are a way for an entity to borrow some money (e.g. when the government issues a bond, that means they want money). You can purchase the bond and lend them the money. There is an agreed interest rate, term for the bond and when interest is credited to you. Once that bond is purchased, it can be traded on the open market, or you may keep them. The corporation or government that issue the bond to you will have to pay the entire amount by the term’s maturity date. This is similar to term deposits in some respects.

3. Purchase Commodities
Commodities are resources that can be interchanged for money or another asset class (e.g. iron ore or coal).

4. Buying Rare Items or Collectibles
This investment option poses a higher risk because it is often very expensive to get into and is not readily available for the average investor. For example, Bill Gates is an avid reader and has a library that contains many rare books, including Leonardo Da Vinci’s ‘Codex Leicester’, which he purchased for a massive USD $30.8 million. For those who are interested in rare items or collectibles, this may be a viable option for diversifying their 20% income.

5. Cryptocurrency
Cryptocurrency has received a lot of attention lately, with the most famous form of cryptocurrency being Bitcoin. I am currently not knowledgeable in cryptocurrency and have a preference for asset classes that can provide cashflow in the form of dividends. If the risk is something that does not deter you from investing, there is the possibility for exponential growth for your initial investment.

6. Maximising Super
In Australia, employers are required to pay a minimum of 9.5% of their employee’s earnings towards their superannuation. Employees can also contribute a maximum of $25,000 before tax towards their super, which is usually taxed at 15%. It is an attractive option because your earnings may be taxed at a higher rate, depending on the tax bracket you belong to. After tax, Australians can pay up to $100,000 towards their superannuations, and anything over this amount is taxed at 47%. This is controversial because of legislative risk, as the laws may change and increase the amount of money you are taxed. As we are all affected by legislative risk in areas that are outside of finance, maximising your superannuation is still a worthwhile investment of your earnings if personal circumstances allow.

7. Investing in the Stock Market
Australians are some of the most active shareholders in the world, largely because many of our superannuation portfolios are already in the share market (log into your super account and have a look at the asset classes your super is invested into! You may be pleasantly surprised at what you find). Buying stocks is similar to investing in bonds in that you choose a company, buy shares (meaning you own part of the business). The company you invest into may pay dividends into your personal account or into your share portfolio account. You then have the option of buying shares in another company or reinvesting in the company. You may also receive an increased dividend over time for the shares that you own, meaning your income increases! The price of the share is determined by the company’s performance. Over time, you may find that the price of each share in the company you have invested in has increased or decreased. In this way, investing in the stock market is risky and actively participating needs to meet your appetite for risk.

As you can see, you can choose a single asset class to invest your 20% ‘pay yourself’ amount in or diversify by investing in a variety of asset classes. With each asset class comes advantages and disadvantages, risk profiles and costs. It is important to look at each of these elements and carefully consider where to put your hard-earned money. Diversification is investing in a range of asset classes to balance out your overall risk. For example, if you invest money in property, shares and bonds, when the real estate market goes down, your share portfolio may still increase in value while your bonds are earning a fixed amount of interest.

Diversifying your investments is important in building wealth, but it doesn’t stop there. Having various sources income is also important because it provides access to funds that can support in the event that you lose your primary source of income. But wait, isn’t that what an emergency fund is for? Yes, having emergency funds to tide you over until you get back up on your feet is crucial. However, diversified income means you are far less likely to dip into your emergency funds and can be used as a means through which you can retire early.

In the medical field, it is very common for doctors to have their full time job and locum during their annual leave or weekends as a source of additional income. Using your spare time to make extra money leads to the development of income per unit time. You know those hours you spend procrastinating? That presents an opportunity cost - you are not earning any income. Of course, people need time to take care of themselves, spend time with family and rest, but this is a trade-off between how much time you need to do all these things and how much you could use this time to boost your income per unit time. Increasing your income per unit time (e.g. business you run on the side, sales etc.) provides you with additional money that you can apply the principles of automation and compounding to generate passive income and become financially free.

The Stock Market
I used to be afraid of the stock market but now I invest consistently without having to think as much. An analogy that may simplify buying shares for you is as follows: there is a distinct similarity between buying shares and buying groceries (stick with me, it will make sense). Grocery shopping is important because it allows us to replenish things that we need (e.g. food). We prepare a shopping list, go to the shops and purchase our groceries. Easy, right?

We all have to retire at some point and in order to retire, we need money. So in the same way you prepare a grocery list and purchase your groceries, you can plan for your retirement by investing in the stock market and buying shares. Usually when you go to the grocers, you buy a variety of items; milk, vegetables, fruits, etc. When we apply this to investing in the stock market, it is a good practice to buy shares for different companies. This is called index investing. It diversifies your investments and reduces your overall risk, as discussed previously. When you find that your favourite brand of milk is discounted, you stock up, right? In the same way, when the value of certain shares goes down, it makes sense to buy more shares in a stock that you believe is stable and profitable.

You may ask which companies may perform well and allow you to earn money on your investment. To answer that, I have another analogy. If you think about what your average day may look like: you woke up, brushed your teeth, had a shower, went to work, had lunch, came back home, watched television, brushed your teeth and went to bed. Let’s look at your day in a different way:

- You woke up and brushed your teeth: probably using Colgate branded toothpaste
- You showered: used water and electricity, which are provided by resource companies
- You drove to work: using a product that consumes petroleum or gas
- Had lunch made using ingredients sold by a major retailing company (e.g. Woolworths, Coles or Aldi)
- Returned home using the same car
- Had dinner that was made using ingredients sold by major retailer and the same electricity or gas company.

You are already using resources that are produced by the Australian economy. A good starting point for investing would be to buy shares in companies that provide resources and services that you are already using on a daily basis. As you become more confident, you may find other investment vehicles that will continue to building your wealth.