Welcome to this month’s Reader Case Study in which we’ll address Jemma’s question on whether or not she should buy a home in Sydney, Australia. Case studies are financial dilemmas that a reader of Frugalwoods sends to me requesting that Frugalwoods nation weigh in. Then, Frugalwoods nation (that’d be you), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.
P.S. Another way to get support on your financial journey is to participate in my free Uber Frugal Month Challenge! You can sign-up at any time to join the over 12,600 fellow frugal sojourners who’ve taken the Challenge and saved thousands of dollars.
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Frugalwoods is a judgement-free zone where we endeavor to help one another, not to condemn.
With that I’ll let Jemma, this month’s case study subject, take it from here!
Greetings, Frugalwoods nation! My name is Jemma, I’m 36 years old and I live in Sydney, Australia with my 46-year-old husband, Greg, our two-and-a-half-year-old son, and our two Ragdoll cats. Greg and I have been married for five years and together for seven.
We love eating good food, trying new restaurants, drinking good wine, reading good fiction, meditating, traveling, and spending time in nature and with family and friends. Not all of those things are necessarily frugal, but since we own a restaurant, many of them are a tax deduction for us – even travel in some cases!
Greg was a chef before we bought our restaurant, and it was always his dream to have a place of his own. This dream came true for him at the beginning of 2013 when we purchased a French bistro in a formerly rough neighborhood that is now very much in the process of being gentrified.
There are fancy apartment buildings going up in the area and new, trendy businesses opening up all the time. We think this will have a positive effect on our business. We have a 6-year lease for the business premises, which expires in 2022, and the landlord can increase the rent by 4% each year, but no higher.
I love learning languages, and speak fluent German, Spanish and English, having worked and studied in Germany and Mexico for several years. I studied a Master of Applied Linguistics, and up until mid-2016 I was working as a linguist for a tech company in the field of speech recognition and machine translation. I quit last July to work with my husband on our restaurant business.
I now take care of the bookkeeping and marketing for about 20 hours each week. The rest of the time I take care of our son. I work from home, and my mother comes over to watch him two days a week so I can get some work done without being distracted. We’re really grateful not to have to spend money on childcare, and it’s really lovely that my mum is able to spend so much time with her eagerly awaited only grandson!
Our only baby-related expenses apart from his food are diapers. Our son is mostly potty-trained, but still uses them for sleeping, so we spend about US $2 a week on diapers.
We’ve barely spent a cent on clothes for him, having been fortunate enough to receive hand-me-downs from friends and gifts from my mum, who can never resist sales at baby stores.
He has been given most of his toys by family, but occasionally I buy things like Play Dough and crayons, which are dirt cheap. Thus far, much like the Frugalwoods, we’ve found baby-rearing to be quite inexpensive! Certainly much cheaper than the mainstream media would lead you to believe.
Where Jemma and Greg Want To Be In 10 Years
I’ve only just started paying attention to our finances in detail since having our son. I realize I’m actually an adult now and need to be financially responsible and stop spending all my savings on travel like there’s no tomorrow! I’m sure a lot of other people get their act together before they have kids, but anyways…
I would like us to own our own home, have a six-month emergency fund and be making good, regular contributions to a low-fee index fund. If we stay in Sydney (we have often talked about moving somewhere with a cheaper cost of living, such as Canberra, where my parents live), our home will most likely be a two-bedroom apartment, as housing prices are astronomical here.
That being said, I don’t mind living in an apartment, and I’m confident we could do that even with two children, as we are quite minimalist and don’t have or need a lot of stuff.
Sydney has good weather conducive to taking kids out to play at the park almost every day, so I’m happy to let the local government pay for the upkeep of “my backyard” rather than buying a property with a yard.
We’d like to have another child and I imagine things to be quite similar to how they are now. I would be staying home with my kid(s), doing lots of outdoor activities together as a family such as going to the beach and bushwalking (hiking), continuing to travel now and then, spending time with friends, etc. I’m really happy with my lifestyle now. Although Greg works five nights a week while I’m at home with our son, I love having that time to myself to read, write, meditate and potter around, and it means our son gets to spend a lot of time with both parents during the day when he’s awake.
To be honest, I have no idea! Since becoming a mum, I feel like any career ambitions I had have gradually disappeared – perhaps because most of my mental and physical energy is taken up by my toddler! I’m sure that will change as he grows up and goes to school, so perhaps I’ll have a better idea about this in a few years.
In any case, I’m grateful to have a flexible work situation for now, so that I’m able to help my husband grow our business, learn new skills like bookkeeping and marketing, and be able to spend a lot of time with my son and not have to put him in daycare.
We would like to have a second and final baby soon, so my earning potential will be quite limited for the next 5 years or so, as I would like to keep the same working arrangement to enable me to spend lots of time with my children.
Jemma and Greg’s Finances
Note: all values are in US Dollars, converted from Australian Dollars on May 1, 2017
Yearly Take Home (Net) Income
|Jemma and Greg’s combined monthly income||$6,846||After taxes and student loan repayment deduction for Greg’s student loan|
|Rent||$1,472||This rent is low for where we live as our apartment is pretty run down. We’re not a ritzy suburb by any means, but we’re close to a popular shopping/cafe district (and our restaurant), and therefore real estate is expensive here. We could move farther away, but that would mean more time and money spent on commuting to and from work and to see friends. We’d rather live in a shabby apartment in a nice area, which allows us to be close to work, friends, good schools, nice parks, etc.|
|Groceries & household supplies||$735||Includes all food bought at the grocery store and market as well as non-food items such as shampoo, toilet paper, diapers, etc.|
|Vacation expenses||$423||Flights, accommodations, taxis, etc.|
|Entertainment||$261||Includes eating out, buying occasional books, hiring DVDs (we are quite old-school), the occasional toy/art supplies for our son, going to a music gig about once a year (we forked over $225 to see Adele back in March, but it was worth every cent and was on my bucket list. 🙂 ).|
|Bills (electricity, gas)||$223|
|Car insurance/registration/service/tolls||$161||We have a Toyota CRV 2010, which we paid cash for two years ago. We get it serviced twice a year.|
|Dentist||$158||Two check-ups a year each plus X-rays, fillings, etc. This is after we claim expenses on our health insurance.|
|Gas for the car||$130|
|Cats||$66||Includes food, de-worming every quarter, annual vaccinations, and check-ups. We have friends feed them for us when we go away, so no boarding fees.|
|Haircuts||$54||I cut our son’s hair, but Greg and I both get our hair cut by a hairdresser. I go 3 times a year for a cut and colour, and Greg goes every 10 weeks, more or less. However, I recently purchased a pair of hair scissors with the aim of learning to cut my own hair!|
|Cell phone||$30||My cell phone plan provider is Virgin Mobile. Greg’s phones are paid for by the business.|
|Donations to charity||$28|
|Health insurance||$0||My parents kindly pay our health insurance for us. It was their generous gift to us when we told them we wanted to start a family.|
|Internet||$0||This is a business expense since we both need to work from home.|
|Current Savings Rate:||41.31%|
|Restaurant business||$135,000||This is our restaurant’s approximate current value, although we think it will increase as the neighbourhood becomes more gentrified.|
|Superannuation (Australian equivalent of 401k); Jemma & Greg’s accounts combined||$51,574||Superannuation is basically a way to make sure people save for retirement. It is compulsory for an employer to pay 9.5% of the employee’s gross salary into his or her chosen superannuation fund, usually on a monthly basis. The superannuation fund invests the money so that it (hopefully) grows by the time you are allowed to access it at the age of 60. My husband and I have separate superannuation accounts. It is possible to make extra contributions to superannuation, and in cases of low income, the government will match contributions. We currently don’t make any extra contributions. Australia also offers an age pension for low income earners over the age of 65.|
|Money the business owes us||$41,870||We loaned the business this money when we bought it, but have prioritised paying off other business related debts which incurred interest.|
|Money in a holding account for the business||$18,783||The landlord for our restaurant requires us to have this money in a holding account as a guarantee. This money is earning interest, but we can’t touch it unless we sell the business, so it’s more like retirement savings than emergency fund material at this stage.|
|Emergency fund||$6,000||This is only enough for one month’s worth of expenses. In theory, we could simply pay ourselves back money that the business owes us in an emergency, but that would depend on the business having that money available when we needed it, so I’d rather not count on that. I want to increase our emergency fund to be $18k.|
|Our son’s savings||$1,591||We transfer $15 into his account every week, and family members give him money for his birthday and Christmas, which we save in this account.|
|Greg’s Student Loan||$12,000||This is Greg’s student loan. He studied a teaching degree before deciding that teaching was not for him and he wanted to open a restaurant. The loan has 0% interest, although the remaining amount is adjusted for inflation on an annual basis, and payments are automatically deducted from his wage.|
Jemma’s Questions For You:
- While we own our business outright, we don’t own our own home and are currently renting a two-bedroom apartment. We would both love to buy a place of our own, but the median price for a two-bedroom apartment in the area where we live is $600,000 (and it’s not a ritzy suburb, either!). My question is: once we have 3 months’ worth of expenses in our emergency fund, i.e. another $12K, should we:
a) Focus on saving for a down payment for a home (we’d need approximately US $120k)?
b) Start investing in a low-fee index fund (we’d need around US $3,700 as an initial investment in a Vanguard index fund here) and put any leftover savings each month towards a down payment for a home?
c) Take the money and go on a big vacation? Just kidding ;)…
At our current rate of savings, it’s going to take about seven years before we have enough money for a down payment unless we sell our business! And by then, inflation will probably have kicked in again and we’ll have to keep chasing the market. Then again, if we put off investing until we’ve purchased a home, that’s seven years of compound interest that we’ll miss out on.
I’m inclined to go for option b, but am not sure if I’m missing something. I’m also wondering whether the reliability of index funds as a long-term investment is only valid in bigger markets like the US, or whether they are also a good idea in smaller markets like the Australian Stock Exchange?
Finally, I’d like to offer a big thanks to the Frugalwoods for providing so much inspiration!
Mrs. Frugalwoods’ Recommendations
I am so impressed with Jemma and Greg’s low spending on their son! I love seeing other families prove that parenting doesn’t have to be disastrously expensive. And, I want to commend Jemma for taking charge of her family’s finances! Well done all around. Jemma and Greg are in a good position and we’re going to get them into a great position!
To Buy Or Not To Buy A House
I’ll cut right to the chase: I don’t think Jemma and Greg should buy a house. My rationale for this is several fold:
1) Sydney is a remarkably expensive real estate market and it would take Jemma and Greg a very long time to build up an adequate down payment. It seems that real estate is abnormally expensive there and, given what it would cost to buy something vs. the cost of their rent, it seems that renting is a logical decision for them.
2) Jemma and Greg are happy with where and how they live right now.
They’re close to work, amenities, friends, and parks, and so I see no reason for them to move. Jemma mentioned that they’re content living in a small space and don’t really want to care for a lawn, so their apartment seems to suit their needs perfectly.
I’m going to quote Jemma back to herself now, because I think her words are very telling: “We could move farther away, but that would mean more time and money spent on commuting to and from work and to see friends. We’d rather live in a shabby apartment in a nice area, which allows us to be close to work, friends, good schools, nice parks, etc.” I think that’s Jemma and Greg’s answer right there.
Since Greg is often working late at their restaurant, it seems to me that adding a long commute just to own a home would dramatically decrease their quality of life. Plus, since so much of their time is invested in the restaurant, I’m going to make a prediction that they wouldn’t have time to do the unending repairs that home ownership entails. The beauty of renting is that tons of their time is freed up by virtue of their landlord performing their repairs and maintenance for them.
Owning a home is a time-consuming proposition and since the restaurant and travel are their priorities, I don’t see how a home fits in there. You should live where you love living, and you should do what you love doing, which is what they’ve done. Jemma and Greg have crafted a life they love and it doesn’t seem to me that owning a home would increase their happiness in any measurable way.
3) Jemma and Greg don’t have enough in retirement savings or emergency fund savings.
Jemma identified their need to build up their emergency fund, which I completely agree with. However, I actually recommend that they save up closer to a year’s worth in an emergency fund (which is more than the 3-6 months I normally advise) for two reasons:
1. Jemma and Greg both work for the same employer–their restaurant–and so, all of their income eggs are in the same basket. In the event of a downturn, a slow season, or a disaster, both of their sources of income would evaporate;
2. Restaurants are not very recession-proof and if Australia experienced a downturn, it’s likely their business (and hence their joint livelihood) would suffer.
Having a year’s worth of expenses would provide Jemma and Greg with a very comfortable buffer and would give them ample time to figure out their next move if their restaurant were to tragically go under.
In addition to their emergency fund, Jemma and Greg need to get serious about beefing up their retirement savings. The $51K they have jointly saved in their Superannuations won’t last them long in retirement. At their current rate of spending, that’d last them a mere 9.4 months. I recommend they start contributing to this fund from every paycheck to ensure they’ll be able to retire when they reach 65+.
Savings Accounts Side Note
One of the easiest ways to optimize your money is to keep it in a high-interest savings account. With these accounts, interest works in YOUR favor (as opposed to the interest rates on debt, which work against you). Having money in a no (or low) interest savings account is a waste of resources because your money is sitting there doing nothing. Don’t let your money be lazy! Make it work for you! And now, enjoy some explanatory math:
- Let’s say you have $5,000 in a savings account that earns 0% interest. In a year’s time, your $5,000 will still be… $5,000.
- Let’s say you instead put that $5,000 into an American Express Personal Savings account that–as of this writing–earns 1.70% in interest. In one year, your $5,000 will have increased to $5,085.67. That means you earned $85.67 just by having your money in a high-interest account.
And you didn’t have to do anything! I’m a big fan of earning money while doing nothing. I mean, is anybody not a fan of that? Apparently so, because anyone who uses a low (or no) interest savings account is NOT making money while doing nothing. Don’t be that person. Be the person who earns money while sleeping. Rack up the interest and prosper. More about high-interest savings accounts, as well as the ones I recommend, here: The Best High Interest Rate Online Savings Accounts.
4) Jemma and Greg love to travel.
Since travel is a high priority for them, owning a home would only decrease their ability to travel frequently. I’m of the belief that you should spend on your priorities and it doesn’t sound to me like home ownership is a true priority for Jemma and Greg.
I advise they instead save and invest the money that would go towards a down payment to fund further globe trotting adventures. Money should be used in service of how you want to live–not how you think you should live (more on that below).
5) Home ownership is not “the ultimate” financial destination.
Jemma and Greg’s case gives me a perfect opportunity to point out that buying a house is not the end-all, be-all of financial wellness. Owning a home is not necessary for financial stability, wealth, or any other metric of financial success. It can be one factor in a sound financial portfolio, but it is by no means a requirement. In fact, in some cases, buying a house is a massive detriment to your longterm financial future (and I tend to think that’d be the case for Jemma and Greg).
There’s a myth that home ownership provides all the financial security you’ll ever need, but just ask anyone who experienced the 2008 housing crises how that one worked out. A home might be an investment, but more often than not, it’s a money pit that’s nice to live in.
For more reading on the wisdom of buying vs. renting, may I recommend:
Is It Better To Rent Or Buy -The New York Times
Why your house is a terrible investment -JL Collins
Is buying better than renting? -Mr. Frugalwoods
6) They have other goals for their money.
Jemma has already identified two other destinations for their money: investments and travel. Investing in the market is an excellent strategy for building wealth and ensuring a secure financial future–in fact, it’s not just excellent, it’s a requirement.
Jemma mentioned using Vanguard’s low-fee index funds, which is 100% what I advise. I happen to use Fidelity’s low-fee index funds (FSTVX), but either is a great product–the key is that you want low-fee index funds.
For more on how to start investing on your own, check out this post as well as this one. Investing is easy, you can do it yourself, and it’s a crucial ingredient to building longterm wealth.
The caveat here is that I’m nowhere near an expert in the Australian stock market; however, I know we have tons of Aussie Frugalwoods readers who can lend their insight on Jemma’s question about the longterm viability of investing in the market. So please chime in with your experiences!
“Shoulds” Vs. Your Actual Goals
What I hear in Jemma’s above write-up is that she and Greg don’t really want to own a home, but feel they should in order to be financially secure. I am here to say that you do not need to own a home in order to be financially secure.
There is absolutely nothing wrong with not wanting to own a home. It’s a perfectly fine financial approach and, in fact, in a lot of cases it’s actually a better financial decision. I encourage Jemma and Greg to ignore the societal pressures they might be feeling to buy a home in order to be “adults” and instead focus their money on the things they do care about: investing, travel, and saving for retirement.
There are plenty of things–in life and in the financial world–that we’re told we should do, but in reality, few of these things are actual requirements. Many times, charting an unusual path is a more interesting, fulfilling way to live and can allow you to pursue the things you enjoy.
By divesting yourself of the “shoulds” of life, it becomes a lot easier to instead focus your time, energy, and financial resources on what you actually want. For Mr. FW and me, that was retiring early to our homestead in the woods, which isn’t a conventional path. For Jemma and Greg, I think it’s the ability to live in the city centre and travel extensively. The wonderful thing is that everyone has different dreams and aspirations and there’s no need to all hew to the same path.
There are basic premises of financial stability: saving at a high rate, saving for retirement, and investing in the market. Beyond that, how you decide to deploy your capital is entirely up to you. Buying a home does not rank as a requirement.
Since no Frugalwoods case study would be complete with a rundown of expenses, here’s my advice on how Jemma and Greg can cut back on their spending:
- Travel: I know this is a priority for them and I dearly want them to be able to travel in the future. However, given their low emergency fund and retirement savings, I recommend dialing this back to zero for the next few years in order to beef up their savings. This’ll be $5,076 saved per year.
- Entertainment: Here’s another one that needs to go on the chopping block. There’s so much fabulous free entertainment to be had in cities (in the country too, actually), so I challenge Jemma and Greg to scope out free concerts, free festivals, free baby & me events and more in their city. Check out my Entertainment category for ideas on securing free entertainment! That’s another $3,132 saved per year.
- Clothing: I recommend a clothes-buying ban for Greg and Jemma. It’s totally possible to go for very long stretches without buying clothes–I’m three years in with only one pair of work boots purchased–which will save them a whopping $1,164 per year.
- Gifts: $70 per month on gifts strikes me as quite high. I encourage Greg and Jemma to think creatively about how they give gifts and identify opportunities for homemade, less expensive options. Here’s how Mr. Frugalwoods and I give gifts frugally. That’s $840 they’ll save.
- Haircuts: Jemma said she bought scissors to cut her own hair, which is wonderful! Greg needs to insource his haircuts as well, which’ll save the family $648 per year. Here’s my tutorial on how Mr. FW cuts my hair and here’s how I cut his.
If Jemma and Greg are able to make all of these reductions to their spending, they’d stand to save $10,860 in a single year, which will help them enormously in their need for an emergency fund and retirement savings.
It’s also true that if they eliminate these line items, they’ll permanently reduce the amount of money they need to live on. Frugality is a virtuous cycle: the less you spend, the more you save, and the more you save, the less money you need to earn because the less you’re spending, and on it goes.
In summary, I advise Jemma and Greg to do the following:
- Build their emergency fund up to a year’s worth of expenses.
- Reduce their spending in order to both save more and also permanently decrease the amount they need to save in the long run.
- Begin investing in low-fee index funds and make regular contributions to grow their wealth (after saving up a years’ worth of emergency fund).
- Make monthly contributions to their Superannuation accounts in order to ensure their ability to retire in old age.
Ok Frugalwoods nation, what advice would you give to Jemma? She and I will both reply to comments, so please feel free to ask any clarifying questions!
Would you like your own case study to appear here on Frugalwoods? Email me (firstname.lastname@example.org) your brief story and we’ll talk.
Updated July 22, 2017 with Jemma’s decisions:
I’m now pregnant with our second child – woohoo! He/she is due in February. I’m planning to keep working for our business from home until the second child goes to pre-school (in 2022!). After that, I’ll reassess what I want to do with my career. In the meantime, we might move out of Sydney, but for now, Greg wants to keep the business and make it work as well as it can.
We are going to build up our emergency fund with the goal of having a year’s worth of expenses ($48k) saved by August of next year (we now have $10,500 saved), but hopefully we can do it sooner as we reduce our expenditures in the areas that you all mentioned. After that, we’ll start investing in a low-cost index fund.
We’re currently looking into contributing more to our superannuation funds, and are going to have a meeting with our accountant soon about the most tax-effective way to do so. As far as buying a property is concerned, we have put this idea on hold for now. I think travel will also become a lot less of a feature in our lives for a while. To be honest, it’s not that enjoyable with a toddler, and especially with two little ones, but we will continue to visit my husband’s family in NZ every two years, and will do some small local road trips here and there every now and then. We are also planning to go to Melbourne, another Australian city, just the two of us for a weekend getaway before baby 2.0 makes an appearance.
We really appreciate all the advice given by the Frugalwoods and their readers!
-Jemma & Greg