Become $867,000.00 Richer with Solar Power

In this post we’re going to compare mortgages with, various investment options and solar power for your home, and how you how you could become $256,000 to $867,000 richer by choosing to go solar today.

Lets cut to the chase. If you own a home with a mortgage, you could become $794,000.00 to $867,000.00 richer buy going solar and putting the cost of it on your mortgage.

Or if you have $10,500 and you’re looking to invest we’ll show you how you could become $256,000.00 to $567,490.70 wealthier by choosing solar over term deposits or share market investments.


The assumptions we’ll be working with today.

  • Mortgage amount, $400,000 interest rate 5% per year, 30 year term
  • Term deposit return after tax 4% per year
  • Sharemarket investment returns after tax 7% per year
  • Power price inflation 2% per year
  • Cost of 4.5kw rooftop solar and power diverter $10,500 delivering:
    • Conservative estimated power savings of $85 per month
    • Optimistic estimated power savings of $100 per month
    • Power savings are used to repay the mortgage early, or invested in the share market
  • Annual solar output loss 0.5% per year
  • Finance deal on solar system 24 months no interest, no repayments

The simple stuff

This table shows you how much you’ll save of your power bill each year after installing a solar power system, including 2% rise in electricity costs per year, and a 0.5% reduction in power output.

Year Annual solar power savings conservative Annual solar power savings optimistic
1 $1,035.36 $1,218.00
2 $1,050.84 $1,236.24
3 $1,066.56 $1,254.84
4 $1,082.64 $1,273.68
5 $1,098.84 $1,292.76
6 $1,115.28 $1,312.08
7 $1,132.08 $1,331.76
8 $1,149.00 $1,351.80
9 $1,166.28 $1,372.08
10 $1,183.80 $1,392.60
11 $1,201.56 $1,413.48
12 $1,219.56 $1,434.72
13 $1,237.80 $1,456.32
14 $1,256.40 $1,478.16
15 $1,275.24 $1,500.24
16 $1,294.32 $1,522.80
17 $1,313.76 $1,545.60
18 $1,333.44 $1,568.76
19 $1,353.48 $1,592.40
20 $1,373.76 $1,616.28
21 $1,394.40 $1,640.52
22 $1,415.28 $1,665.12
23 $1,436.52 $1,690.08
24 $1,458.12 $1,715.40
25 $1,479.96 $1,741.08
26 $1,502.16 $1,767.24
27 $1,524.72 $1,793.76
28 $1,547.52 $1,820.64
29 $1,570.80 $1,848.00
30 $1,594.32 $1,875.72
31 $1,618.20 $1,903.80
32 $1,642.56 $1,932.36
33 $1,667.16 $1,961.40
34 $1,692.12 $1,990.80
35 $1,717.56 $2,020.68
36 $1,743.36 $2,050.92
37 $1,769.52 $2,081.76
38 $1,796.04 $2,112.96
39 $1,822.92 $2,144.64
40 $1,850.28 $2,176.80
41 $1,878.00 $2,209.44
42 $1,906.20 $2,242.56
43 $1,934.76 $2,276.28
44 $1,963.80 $2,310.36
45 $1,993.32 $2,345.04
46 $2,023.20 $2,380.20
47 $2,053.56 $2,415.96
48 $2,084.40 $2,452.20
49 $2,115.60 $2,488.92
50 $2,147.40 $2,526.24

Notice how the amount saved increases every year even though the output you panels generate decreases ever so slightly. We use a 50 year lifetime for the solar power system. This represents the half life of the solar panels, were power output will be 50% of the original specification. This aligns with most quality solar panel guarantees of 80% output after 20 years.

Got a mortgage?

So what does this mean as a home owner with a mortgage. If you put the cost of the solar power system on the mortgage, you will pay off your mortgage 5 years earlier.

But it gets even better, after your mortgage is paid off, if you invest your previous mortgage payment for the remaining 5 years (as if you had a 30 year mortgage), and invest the power savings you could become $867,000.00 richer.

Year Mortgage Mortgage plus solar conservative Mortgage plus solar optimistic
1 -$394,106.98 -$393,058.88 -$392,873.91
2 -$387,911.85 -$395,987.29 -$395,606.04
3 -$381,399.10 -$388,808.99 -$388,217.68
4 -$374,552.46 -$380,987.71 -$380,173.61
5 -$367,354.82 -$372,487.77 -$371,437.47
6 -$359,788.16 -$363,271.53 -$361,970.96
7 -$351,833.59 -$353,299.57 -$351,733.80
8 -$343,471.20 -$342,530.29 -$340,683.63
9 -$334,680.09 -$330,919.87 -$328,775.94
10 -$325,438.29 -$318,422.35 -$315,963.81
11 -$315,722.68 -$304,989.28 -$302,197.91
12 -$305,508.98 -$290,569.74 -$287,426.39
13 -$294,771.65 -$275,110.21 -$271,594.72
14 -$283,483.83 -$258,554.40 -$254,645.49
15 -$271,617.33 -$240,843.02 -$236,518.42
16 -$259,142.45 -$221,913.76 -$217,149.93
17 -$246,028.02 -$201,701.09 -$196,473.30
18 -$232,241.25 -$180,136.13 -$174,418.37
19 -$217,747.66 -$157,146.35 -$150,911.28
20 -$202,511.02 -$132,655.49 -$125,874.37
21 -$186,493.24 -$106,583.39 -$99,225.89
22 -$169,654.27 -$78,845.79 -$70,880.01
23 -$151,952.01 -$49,353.95 -$40,746.36
24 -$133,342.19 -$18,014.63 -$8,729.99
25 -$113,778.29 $15,270.24 $25,269.10
26 -$93,211.41 $44,514.18 $55,474.42
27 -$71,590.11 $76,087.07 $88,078.72
28 -$48,860.34 $110,154.80 $123,252.67
29 -$24,965.27 $146,894.87 $161,179.02
30 $0.00 $186,497.22 $202,053.42
31 $0.00 $201,206.17 $218,143.24
32 $0.00 $216,961.56 $235,379.04
33 $0.00 $233,836.75 $253,841.28
34 $0.00 $251,910.40 $273,616.03
35 $0.00 $271,266.50 $294,795.44
36 $0.00 $291,994.96 $317,477.95
37 $0.00 $314,192.09 $341,769.03
38 $0.00 $337,960.82 $367,781.52
39 $0.00 $363,411.42 $395,636.06
40 $0.00 $390,661.74 $425,461.82
41 $0.00 $419,838.00 $457,397.05
42 $0.00 $451,075.16 $491,589.67
43 $0.00 $484,517.72 $528,197.80
44 $0.00 $520,320.18 $567,390.78
45 $0.00 $558,647.98 $609,349.82
46 $0.00 $599,678.03 $654,268.76
47 $0.00 $643,599.73 $702,355.07
48 $0.00 $690,615.75 $753,830.57
49 $0.00 $740,942.81 $808,932.77
50 $0.00 $794,812.93 $867,915.78

Looking to invest

Do you have $10,500, and are looking to invest. Lets compare term deposits with share market investments and solar power.

Year Investing Term Deposit Investing Shares Solar conservative Solar optimistic
1 $10,920.00 $11,235.00 $12,293.28 $12,480.03
2 $11,356.80 $12,021.45 $3,728.02 $4,117.34
3 $11,811.07 $12,862.95 $5,079.24 $5,650.58
4 $12,283.51 $13,763.36 $6,541.37 $7,309.83
5 $12,774.86 $14,726.79 $8,122.41 $9,104.15
6 $13,285.85 $15,757.67 $9,830.93 $11,043.37
7 $13,817.28 $16,860.71 $11,676.10 $13,137.88
8 $14,369.98 $18,040.95 $13,667.74 $15,398.80
9 $14,944.77 $19,303.82 $15,816.35 $17,838.15
10 $15,542.56 $20,655.09 $18,133.29 $20,468.68
11 $16,164.27 $22,100.95 $20,630.59 $23,304.02
12 $16,810.84 $23,648.01 $23,321.13 $26,358.86
13 $17,483.27 $25,303.37 $26,218.68 $29,648.97
14 $18,182.60 $27,074.61 $29,337.99 $33,191.04
15 $18,909.91 $28,969.83 $32,694.95 $37,003.09
16 $19,666.30 $30,997.72 $36,306.44 $41,104.28
17 $20,452.96 $33,167.56 $40,190.53 $45,515.20
18 $21,271.07 $35,489.29 $44,366.67 $50,257.93
19 $22,121.92 $37,973.54 $48,855.57 $55,356.05
20 $23,006.79 $40,631.69 $53,679.48 $60,834.70
21 $23,927.06 $43,475.90 $58,862.10 $66,720.88
22 $24,884.15 $46,519.22 $64,428.93 $73,043.49
23 $25,879.51 $49,775.56 $70,407.09 $79,833.47
24 $26,914.69 $53,259.85 $76,825.76 $87,123.89
25 $27,991.28 $56,988.04 $83,716.15 $94,950.17
26 $29,110.93 $60,977.21 $91,111.53 $103,350.18
27 $30,275.37 $65,245.61 $99,047.62 $112,364.46
28 $31,486.38 $69,812.80 $107,562.63 $122,036.39
29 $32,745.84 $74,699.70 $116,697.48 $132,412.49
30 $34,055.67 $79,928.68 $126,495.80 $143,542.44
31 $35,417.90 $85,523.69 $137,004.41 $155,479.37
32 $36,834.62 $91,510.34 $148,273.39 $168,280.27
33 $38,308.00 $97,916.07 $160,356.35 $182,005.99
34 $39,840.32 $104,770.19 $173,310.64 $196,721.65
35 $41,433.93 $112,104.11 $187,197.63 $212,497.04
36 $43,091.29 $119,951.39 $202,082.97 $229,406.83
37 $44,814.94 $128,347.99 $218,037.06 $247,530.81
38 $46,607.54 $137,332.35 $235,135.08 $266,954.48
39 $48,471.84 $146,945.61 $253,457.47 $287,769.29
40 $50,410.72 $157,231.81 $273,090.32 $310,073.02
41 $52,427.15 $168,238.03 $294,125.86 $333,970.38
42 $54,524.23 $180,014.70 $316,662.64 $359,573.43
43 $56,705.20 $192,615.72 $340,806.26 $387,002.05
44 $58,973.41 $206,098.83 $366,669.56 $416,384.54
45 $61,332.34 $220,525.74 $394,373.42 $447,858.17
46 $63,785.64 $235,962.55 $424,047.06 $481,569.82
47 $66,337.06 $252,479.92 $455,828.85 $517,676.76
48 $68,990.55 $270,153.52 $489,866.87 $556,347.17
49 $71,750.17 $289,064.26 $526,319.54 $597,760.99
50 $74,620.18 $309,298.76 $565,356.28 $642,110.88

Here we see a solar power vs term deposits creating up to $567,490.70 extra wealth. And solar power vs investing in shares creating $256,057.52 to $332,812.12 extra wealth.


Do your own maths, make your own assumptions, get independent investment advice and call around various solar power installers. It could be the best financial decision you’ll ever make.

When broken stuff can’t be fixed.

Our broken gate latch. A little glue is not going to fix this.

So you’ve broken something around the house, or more likely one of those monkeys you call children have managed to brake it, and it simply can’t be fixed. What do you do? Pony up the dollars and buy a replacement? No way. Use this quick little quide to get it replaced for free:

1. Track down the manufacturer.

2. Email their customer support with a modified version of this template.

Hi, I have a XXX. The XXX has broken. What’s the best way to repair it or get a replacement?


Thank you.


Your Name.

3. Attach photos of the damaged object to the email and hit send.

4. When they respond be super grateful, and answer any of their questions.

5. Watch in amazement as the company or their local against offers to send you replacement items/parts at no cost to you.
Now this isn’t going to work every time. But my success rate is much higher than I ever expected. Especially considering in many cases I was not the original owner and they had no obligation to replace their products that were broken by monkeys running wild.

What have you had replaced by a manufacturer? Let us know in the comments.

The importance of savings rate

If you’re interested in FIRE, you understand the importance of having a high savings rate. If you want to be financially independent and/or retire early, having a high savings rate is essential.

Because it’s so important, it can pay to reinforce this message, again and again, in many different ways. In the video below, I illustrate the importance of savings rate with a humble spreadsheet – not to mention, a number of wild assumptions.

Other articles and resources worth checking out include Mr Money Mustache’s article “The Shockingly Simple Math Behind Early Retirement” and the Networthify Early Retirement Calculator.

Another article that might be of interest is “You may not need to save as much for retirement as you think” on the NZ Wealth & Risk blog.


(Sonnie Bailey is the author of this article and is an Authorised Financial Adviser (AFA). A disclosure statement is available free on demand: click here.)

The Best Way to Invest for Your Children in New Zealand Part 2- What to Invest

This is the second part of my investing for children series. In a previous post, we talked about why should we invest for your kids and what you need to know beforehand. Now, let’s dive into what to invest for your children in New Zealand.

Index Fund & ETF for Kids

In case you don’t know, I am a big fan of the low-cost index fund and ETF because this is a low-cost investment option with a diversified portfolio and low entry requirement. Naturally, I will put my kid’s investment into them as well as a managed fund with ETF and Index fund in it. However, lots of investment services won’t accept anyone who is under 18 years old as investors. Basically, under their terms and conditions, you will have to be 18 years old or over to sign that agreement. Therefore, there are not a lot of choices for children.


Looking for investment options for my kids

Furthermore, a good investment for kids is kind of the hidden gem out there. The one that advertised heavily aren’t very good, and you will have to dig deep to find the good ones. After lots of googling, emailing and reading, here are my top picks.

SuperLife MyFutureFund

Hidden Gem No.1 is Superlife MyFutureFund. This is a different service from SuperLife KiwiSaver and SuperLife Invest (non-KiwiSaver Service). This service doesn’t have a web page at the moment so you won’t find it on SuperLife web site. The information is buried under SuperLife Invest Product Disclosure Statement, page 26 and 27 of that PDF file.

(Superlife is currently redesigning their web site. MyFutureFund page will return after that.)

MyFutureFund itself is NOT an index fund or managed fund, it’s just a way that allows children to invest in SuperLife’s product. The account is in the child’s name but the guardian/person opening the account has control of the account including access to the funds through until 18 years of age. The account is separate from parents account, but you would be able to view the account through a “linked” membership.

MyFutureFund has access to the all Superlife investment options. There are over 40 different investment options available for kids including ETF, index fund, sector fund and managed fund. My personal picks for my kids are SuperLife 100 and Overseas Shares (Currency Hedged) Fund.

SuperLife 100 is made up of mostly Vanguard Index fund and ETF plus fund from Somerset. The investment included, 55% of international shares, 33% of Australasian shares and 12% listed property. The management cost is 0.52% and risk indicator at level 4. Three years return after tax (PIR at 28%), and fees are 8.35%. Seven years return is not available.

Overseas Shares (Currency Hedged) Fund is made up of eight Vanguard ETF. Invested 100% in international shares and mainly in US and Europe stock market. The management cost is 0.48% and risk indicator at level 4. Three years return after tax (PIR at 28%), and fees are 7.52%. Seven years return is 11.47%.

I picked those two funds because they are both diversified and contain 100% growth asset. Regarding fees, the management fees are relatively low, and SuperLife’s annual admin fees are only $12/years. They do not have regular contribution requirement, minimum investment amount can be just $1. So Superlife is great for both regular and irregular investing for your kids. I already got an account with SuperLife on my own so linking the kid’s account is straightforward and easy.

What about Investment for Mid-term

Those two fund that I suggested were 100% growth asset, so they are aggressive fund. They provide a great return on long-term investing. However, they will be too risky for mid-term investment. If you plan to use that money within 4-10 years, you may consider some other fund with lower growth asset.

SuperLife 30, 60 and 80 are similar to SuperLife 100 but added a different percentage of income asset. Fund with more income asset will have a lower range of gain and loss in any given year, and better return during recession compare to 100% growth asset fund. On the other hand, when the market is booming, that fund will have a lower return.

I think Superlife 30 will be ideal for 4-6 years investment, Superlife 60 will be great for 6-8 years, and Superlife 80 will be ideal for 8-10 years. For example, if your kid is 12 years old and planning to use that money for the university at 19-year-olds. Your investment timeframe will be 7 years, and you should consider Superlife 60. For any plan under 4 years, term deposit with the bank is a good choice.

How To Join MyFutureFund

SuperLife doesn’t have the easiest way to join so there is how you can join them. You will need to fill in the application form from SuperLife and send it over by mail or email.

  1. Download and read SuperLife Invest Product Disclosure Statement
  2. Go to Applications form (page 22 of the PDF file) and fill out your kid’s details and use a separate email set up for kids investing.
    Screen Shot 2017-09-11 at 10.35.29 PM.png
  3. Under Saving section, you choose how you are going to invest. It can be one lump sum investment, regular investment or both. The example below starts with $500 lump sum investment with NO regular contribution.
    Screen Shot 2017-09-11 at 10.45.08 PM.png
  4. Fill out the Communications and ID verification. You should be using NZ passport or NZ Birth Certificate for the kid.
  5. Under Investment strategy, they will ask if you would pick their managed fund first.  If you wish to join SuperLife 100, just tick as below.
    Screen Shot 2017-09-11 at 10.50.27 PM.png
  6. If you wish to join other funds or join multiple funds, you’ll need to tick “My Mix” and go to the next page.
  7. At page 5 of the application form (page 26 of the PDF file), fill in initial investment or regular investment. You can set the amount by actual dollar value or by percentage. At the example below, I invest 50% to Superlife100 and 50% to Overseas Shares (Currency Hedged Fund).
    Screen Shot 2017-09-17 at 10.11.54 PM.png
  8. On the right side of My Mix page, you can decide what to do with your investment income. They can be reinvested into the fund or save the return in cash fund. Reinvestment is the most common choice for kids. Below that, you can decide rebalancing options, I suggest to use the standard rebalancing for the kids.
  9. At the next page (page 25 of the PDF file), after you pick the beneficiaries (usually “My estate”), DO NOT sign at the bottom. You should move onto the next page.
    Screen Shot 2017-09-17 at 10.36.14 PM.png
  10. At the next two pages (Page 26 and 27 of the PDF file), you will have to fill in your own information as the guardian, supply the ID information, and sign it.
  11. Once you completed the application form, you can send it over to SuperLife, and the investment account will be ready in a couple days.

If you have any other questions, contact Superlife with or call them at 0800 27 87 37.

InvestNow’s Vanguard Fund

The second gem is InvestNow. InvestNow is an online investment platform provides multiple investment funds for their investors with low entry requirements and no middle-man fee. You can check out my blog post on InvestNow here. Unlike other investment services, InvestNow’s term and condition do not have an age restriction. Therefore, InvestNow opens the door are a whole range of investment fund for your kids. You can check out the full range of investment fund from InvestNow here.

Screen Shot 2017-09-17 at 10.42.19 PM.png

Out of all those investment options, my pick for my kids is Vanguard International Shares Select Exclusions Index Fund.  That fund launched for AUS and NZ market in late 2016. It contains about 1500 listed companies across 20 developed international markets (without Australia). This fund is an ethical fund as they excluded Tobacco, controversial weapons and nuclear weapons investment.

The BEST things about this fund are the cost. It only charges 0.20%/year on management fees and NO annual admin fee. The fund itself is a wholesale fund, which means it usually only accept institutional invest. The minimum initial investment required was AUD 500,000. The good news is, investors can join this fund via InvestNow with just $250 investment. (InvestNow will lower that requirement to $50 shortly.)

There is two version of this fund, one with NZD currency hedged with 0.26% management fee and one without currency hedged with 0.20% management fee. Without currency hedge, the fund is exposed to the fluctuating values of foreign currencies. So this fund will have a higher risk and lower cost. On the other hand, you will pay a higher fee for a more stable return with the currency hedged fund.

Here is the link to check out those two funds in details.

Vanguard International Shares Select Exclusions Index Fund

Vanguard International Shares Select Exclusions Index Fund – NZD Hedged

Pay Tax on Investment

Those two funds have a different tax treatment compare to normal PIE fund. With PIE fund, the investor usually just need to submit their IRD number and PIR rate once, then they don’t need to worry about tax. With those Vanguard funds in InvestNow, they are Australian Unit Trusts and will be taxed under Foreign investment funds (FIF) rule. Investors are required to submit their income from FIF and file a tax return every year. If the holding amount is under NZD $50,000, which should be the case for most children investors, you will need to pay tax on the dividend you received with the kids’ RWT rate. If the holding is over NZD $50,000, you will have to calculate your taxable income with either Fair dividend rate (FDR) method or Comparative value (CV) method.

For children investors with portfolio value under $50,000, filing a tax return on dividend received is not too hard. You will need to file a Personal tax summaries (PTS) with IRD, and it can be done online. I will share how I do that with my kids next year. Regarding FDR and CV method, I personally don’t know how to do it. You better to talk to a tax accountant for that.

How to Join InvestNow

InvestNow sign-up process is very straightforward so there won’t be a step by step guide. You’ll need to click on the join link on InvestNow home page and use a separate email address to sign up. After you sign up an account, InvestNow will ask you to provide information on identification. You don’t have to complete that. Instead, contact them directly with contact form or call them at 0800 499 466 and let them know you want to set up an account for your children. Make sure you got the following information ready

  • Email address of the account
  • NZ birth certificate or a passport for a child
  • IRD number of the child
  • PIR and RWT rate for the child
  • Proof of guardian’s address

InvestNow will be able to set up an investment account from here. They can also link multiple child accounts to your current InvestNow account if you have one already.

Update on functions

Currently (at 19 Sept 2017), InvestNow don’t have an auto-invest function, and the minimum transaction amount is at $250. So it’s not the best choice for someone who wants to regularly invest for their kids because they will have to transfer $250 into InvestNow, then login to their platform and manually invest that money into the fund. The Good news is InvestNow will implement auto-invest function and lower the minimum transaction limited to $50 shortly. So Investors can set up instruction to let InvestNow automatically invest into your preferred fund everytime you transfer money to them.

(Update, InvestNow added auto-invest function with minimum $50/transaction.)


Here is the breakdown of my top picks compare to our kid’s investment requirement.

Screen Shot 2017-09-19 at 2.43.56 PM.png

  • Superlife MyFutureFund provides a full range of fund for different investment timeframe. They have all necessary function for you to setup different investment plan for your kids. A great “set and forget” solution. However, they don’t have the lowest fee.
  • InvestNow allows user to invest in a great Vanguard investment fund with 0.20% management fee and no annual fee. However, you will have to do the tax return for your kid every year.
  • Feel free to contact them before you sign up and understand the process. I found both companies are great with answering customer questions.

In next part of my investing for kids series, we will look at some other investment options including KiwiSaver, Bonus Bond, SmartShares and more. If you are currently invested in or considering some investment program for your kids and want me to cover them, drop me an email at I will try my best to cover that.

Breaking News: Happy Saver has a Podcast!

Attention all podcast lovers, for too long the NZ savings and early retirement community has been dominated by American, Australian and even British content and stories. While the principles of saving and investing are the same everywhere the specific examples of 401k accounts or Roth IRA’s or Australian self managed super are not that helpful in the NZ context.

Now that all changes, the fantastic Ruth has created a podcast to accompany The Happy Saver blog. 

Check it out on her site or subscribe via your preferred podcast app:

“Fees never sleep.” – Warren Buffett’s bet

(The following article is an edited repost from the New Zealand Wealth and Risk blog.) 

I’m an Authorised Financial Adviser. For most of my clients, I advocate investing in low-cost, index-based investments.

I’m not alone. Warren Buffett is probably a bigger advocate than me.

In Berkshire Hathaway’s 2016 annual report, Buffett talks about index-based funds in detail.

I quote from Buffett extensively below, but you should really read the report yourself.

All emphasis is added.

Financial advice from Warren Buffett

Warren Buffett gives some clear financial advice:

“Over the years, I’ve often been asked for investment advice…. My regular recommendation has been a low-cost S&P 500 index fund.”

(I wouldn’t necessarily agree with this for NZ investors, but I agree with the key point: a diversified, low-cost index-based fund is generally a good way to go.)

Buffett’s bet

Buffett put his money where his mouth is and made a $500,000 bet that over an extended time period, a low-cost investment strategy would get better after-tax returns than a sample of hedge funds.

He provides background to his bet:

“In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.”

He quotes some of the text from his bet:

“A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”

The nature of the specific bet was as follows:

“I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting a little of their own money on the line?

“What followed was the sound of silence. Though there are thousands of professional investment managers who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides [of Protégé Partners] – stepped up to my challenge.”

“For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be distorted by the good or poor results of a single manager.”

The results so far?

Buffett is a long way ahead:

“the five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000 [with a compounded annual increase to date of 7.1%].”

“Fees never sleep”

Buffett is quite explicit about fees:

“I’m certain that in almost all cases the managers at both levels were honest and intelligent people. But the results for their investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have put it: “Fees never sleep.”

I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. That was their misbegotten reward for accomplishing something far short of what their many hundreds of limited partners could have effortlessly – and with virtually no cost – achieved on their own.”

He’s quite explicit on this point:

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

Will this type of underperformance continue?

In Buffett’s view, yes.

“In my opinion, the disappointing results for hedge-fund investors that this bet exposed are almost certain to recur in the future.”

He adds:

“Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich.”

Some people can beat the market, even after fees. Picking them is the hard part.

Buffett explains that “There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would accomplish this feat.

“There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose abilities would equal those of the people I’ve identified. The job, after all, is not impossible. The problem simply is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well.

Why don’t wealthy people and institutions invest more in low-fee investments?

“I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed [my advice to invest in a low-cost S&P 500 index fund] when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

“That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.

“The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

“In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is – on an expectancy basis – clearly the best choice.”

Trust me. Read the report yourself. It’s worth it.

(Sonnie Bailey is the author of this article and is an Authorised Financial Adviser (AFA). A disclosure statement is available free on demand: click here.)

Where are you on your journey to FI/RE?

One of my favourite podcasts is ChooseFI and over the weekend I listened to a cracking episode with with Joel of Financial 180.   The topic was the “Milestones of FI” and I thought it would be interesting to think about where each of us is on our journey.

Milestone 1:  Positive net worth

You hit your first milestone when your debts no longer outweigh your assets.  Some folks are fortunate and never start out with debt but, for most of us, we will normally start out with some debt e.g. a student loan.

Milestone 2:  $100K net worth

If you are a Personal Capital (financial tracking tool – US only so not much use for us) user then apparently when you hit $100K they start phoning you up to try and sell you their paid services.  It’s a somewhat arbitrary point but I think there is something deeply satisfying about hitting round numbers so I think it applies to us Kiwis as well.

Milestone 3:  F#$% U! money

F#$% U! money is classified as having about 2-3 years of expenses saved up.  Your amount will vary depending on your risk tolerance.  I’m reasonably risk averse so for me it would probably be at least 5 years!  It’s called “F#$% U” money as it enables you to walk away from a bad job if necessary.

Milestone 4:  Half FI

You need to know your “number” in order to know when you hit this mark.  You need to know how much you spend/want to spend and multiply that by 25 to get the standard FI amount.  Divide that by 2 and you have your half FI milestone number.

Milestone 5:  Lean FI

Lean FI is the amount you need to basically just survive with very little discretionary spending.  This is a bit extreme for me as I like some of life’s little luxuries but some folks are quite happy being relatively hardcore.

Milestone 6:  The crossover point

This is where you start to earn more from your investments than you are managing to earn from your salary.  You may feel that this makes you FI but realistically investment income can fluctuate so it is just a milestone.

Milestone 7:  Flex FI

Flex FI occurs when you are close enough that you are likely to be safe especially if you retain flexibility in your spending patterns or are willing to return to some form of work if your investment returns drop dramatically.  The value for this milestone is a net worth of 20x your annual spending.  I personally exclude my home from my net worth as it doesn’t generate an income but you may wish to include it if you are happy to sell up to support RE.

Milestone 8:  Financial Independence

You are technically financially independent when you hit a net worth of 25x your annual spending.  Any work you do now is by choice.  You could retire early and be reasonably sure you would not run out of money.

Milestone 9:  Fat FI

Fat FI is what you aim for if you are very risk averse or you want a retirement that has room for a large amount of luxuries.  The value for this milestone is a net worth of about 30x your annual spending.

The journey to FI can often seem long and boring.  Having a list of milestones that you can tick off seems like a good idea.  I’d strongly urge you to listen to ChooseFI and visit Financial 180.

Which milestone are you up to?

Accelerating your path to financial independence and retiring earlier

(This is an edited repost from the New Zealand Wealth and Risk blog, originally published on 30 May 2017.) 

Life is full of seasons. There are times in life when it’s harder to build wealth, such as when you’re a student, or you have a new-born child. And there are times in life when it’s easier, such as when you’re a working empty-nester with no mortgage and serious savings.

There are a number of life events that can put you in a position to turbo charge your path to financial independence and early retirement. It’s valuable to be aware of these situations and taking advantage of these opportunities when they arise. If you’re not mindful, you might find that your excess cash gets eaten up in lifestyle expenses that, while nice, may not help you with your ultimate goal of becoming financially independent and retiring early.

For example:

When you couple up for the first time. When two people move in together, they often find that many of their expenses reduce. You often find that something that you would’ve had to buy on your own, is now effectively half the price because you’re sharing the item and its cost. It’s valuable to use this as an opportunity to increase your savings rate.

When you pay off your student loan. If you have a New Zealand student loan and you’re working in New Zealand, you effectively have a 10% additional tax on your income in the form of student loan repayments. Once the loan is repaid, you essentially get a 10% pay increase. If you were able to live without this 10% before, it’s a good idea to “pay yourself first” and let it bump up your saving rate.

When you pay off your mortgage. Paying off the mortgage is a huge financial milestone. Once the mortgage is out of the way, you’ll have a lot of extra cash flow to put towards building up wealth. (The sooner you can pay off the mortgage, the better your long-term situation is likely to be. Consider the difference between repaying a mortgage at the age of, say, 40 compared to the age of 60. That’s an extra 20 years of extra cash flow.)

When you’re able to self-insure. For any given level of cover, personal insurance premiums will generally increase over time. (The biggest risk factor for most health issues is age…) Ideally, however, your insurance needs should reduce over time as you become better positioned to self-insure. The sooner you can get into the virtuous cycle of having enough wealth to be able to self-insure in relation to most events, the less you’ll need insurance, and the more you can put the money that would have gone towards premiums into building more wealth.

Whenever you get a decent raise. If you’re used to living on a certain level of income, a raise is a bonus – you have money that you previously didn’t need. Consider pre-committing to saving a portion of any future raises, which over time, will result in the percentage of your income that you save continuing to increase.

Don’t get me wrong – when you have an event that frees up cash flow, it’s great to increase your spending and the quality of your life. But as with any spending decision you make, it’s important to make decisions that align with your long-term goals and values. If you’re reading this blog, it’s likely you’ll want to take advantage of these milestones to help you become financially independent sooner and retire earlier.

Three Steps to a Freedom Mindset

Ellen Goodman - Normal is...

Lets not sugar coat it, becoming financially independent and retiring early will be HARD. Leaving the rat race years or decades before what is ‘normal’ and having a large enough stash to last past your 150th birthday is no small feat. It will take hard work and commitment, but most important of all it will require a radical new mindset. Here are three ideas that may help along the way:

1) Redefine Successful

The biggest barrier to changing the way we spend and save is our status anxiety. The fear that if we don’t abide by the norms of modern western consumer culture and buy and do all the things the media and advertising define as ‘success’ that we’ll be miserable losers. So instead we make crazy decisions like buying fancy cars, expensive clothes and electrical gadgets which we think will make us happy, or cool or both. Of course, when we take time to reflect on the absurdity of this way of living we see it for the madness that it is. But everybody else seems to be doing it and we don’t want to be the odd one out (humans are pack animals) so we just kind of go along with it anyway.

The good news is that embracing a less consumerist lifestyle and not keeping up with the Jones’ doesn’t require masses of willpower (remember this is a blog post about mindset). If you really believe that the trappings of status will make you happy then denying yourself these things will make you miserable. But its not the presence or absence of things that makes us happy or unhappy, it is the presence or absence of desire for things.

 Craving and desire are the cause of all unhappiness. Everything sooner or later must change, so do not become attached to anything. Instead devote…

–  Buddha

Nurturing a sense of inner peace and devoting yourself to higher spiritual goals is one way of redefining success as many great spiritual and religious leaders have taught.

Thankfully for the weaker of spirit among us there is another way to free yourself of the desire for superficial status symbols – become an obnoxious smug know-it-all!

The Jones’ are sad, status obsessed wannabees wasting their money on frivolous crap because they are stupid.

– Me

There is something darkly enjoyable about feeling smugly superior to people and it makes frugality a breeze. You don’t want to be like the Jones’. The Jones’ are idiots. What kind of moron spends $40,000 on a car when you can get one that does all the same stuff just as well for $4000? Why would you pay full price for clothes when you can get the same stuff second hand for a fraction of the price – do you enjoy paying more to have to remove stickers and labels? All those people paying for cafe lunches 5 days a week instead of spending a fraction of that money on a packed lunched – financially illiterate fools! I wonder whether people will look back when they are 65 and still working and think “Wow – I’m so glad I spent those extra few hundred dollars on that phone that did all the same things as my old phone but had a curved edge – what a great investment of my hard earned cash”.

So there it is. It’s up to you whether you prefer to take the high road or the low road, as long as the road leads away from all that stuff you don’t really need.

2) Focus on Freedom

This might seem counter-intuitive but one of the best ways to become financially free is to become aware of the many ways your freedom is constrained. If you are lucky you have a job you enjoy, and that can be great, but it would feel even greater if you were free. While you are dependent on the income your job provides to support yourself (and or your family) then work is not optional and that makes it not fun. There is something in the Kiwi psyche that is fiercely independent and anti authoritarian, we don’t seem to like stuff that is compulsory. This can be seen in the way Kiwis (including many low income workers) rejected compulsory unionism, we rejected compulsory retirement savings, even though we know it is something we should do – we just didn’t like to be told we had to. We even rejected when the ‘nanny state’ tried to make energy saving light bulbs compulsory: “Screw you NZ government, you can’t force me to save energy and massively reduce the cost of lighting my house!”.

One of the more entertaining personal finance bloggers is a British guy called ‘The Escape Artist‘. He compares the journey to financial freedom to The Great Escape in a kind of fun way. Your boss and the system represent the guards trying to keep you imprisoned in your 9-5 workaday life till you are old and grey. Your family, friends and colleagues are mostly docile prisoners resigned to their sentence, unwilling to rock the boat or question the propaganda the guards feed them. But once you know that escape is possible you become animated by it, unwilling to accept your fate you are constantly and quietly working away towards your eventual release. Freedom is not something that just all arrives out of the blue one day, it is bought slowly piece by piece over time. Think of each investment or saving adding to your speed and altitude until eventually one day you reach escape velocity and can soar over those prison walls.

The first step for me was a bank account given the name ‘Freedom Fund’. Lots of people have a rainy day fund/emergency savings account. The difference with the Freedom Fund is it has a positive focus and long term objective. Having savings in case something bad happens is a short term goal with a negative focus, purchasing freedom from the rat race is a long term goal with a positive focus. Every dollar that is put in the fund is purchasing a tiny little slice of freedom and those pieces add up quickly

Purchased freedom has great value well before full Financial Independence is achieved. One of the recurring themes in Financial Independence blogs is the concept of ‘F – You Money’ this is an emergency fund sufficient to cover for loss of income for a lengthy period of time should you ever decide you want to tell the boss “F – You”. I can personally attest to the power of this concept. I have never told my boss “F – You” and probably never will, but having a decent emergency fund means that if I ever felt I needed to I could. It also means that the time I went to ask for a 6 month leave or the time I asked for that promotion, or the time I went to ask for flexible working hours I was able to approach it with confidence and negotiate as an equal partner rather than accept whatever was offered, safe in the knowledge that if push came to shove I could just walk away from the job. The money was still sat in our bank account unused, but on some psychological level I had spent it buying just a little bit of my freedom and that felt great!

3) Get Some Perspective

One of the foundations of financial literacy is learning to distinguish between needs and wants. In our 24/7 advertising saturated consumer culture it is all to easy to forget that human beings really have a very basic set of needs. We need food and water and warmth and shelter. We are social animals, we need company and belonging and love and affection. In a practical sense we need some form of income or employment to pay for these things. We are now on level three of Maslow’s Hierarchy of Needs and it’s about here that we start to get a little wobbly. Once we are in the area of ‘esteem’ our needs stop being absolute and start to become relative. We start caring about the Jones’ again. Before we know it we find ourselves trapped in a work and spend treadmill where we are sacrificing those basic needs like our health and well-being just to compete – madness!

So what is the antidote to this loss of perspective? One part of it is around taking a big picture view and practicing gratitude. Even the most hard up of Kiwi’s are able to live a lifestyle of massive opulence compared to 100 years ago. Even if we compare ourselves only within the present day, we live in a country of incredible wealth. We have safety and security, a fantastic natural environment, a first world healthcare system and a social safety net which means that unlike many parts of the world and many generations past it is basically unknown to see people starving or suffering from preventable disease. Of course we can always be wealthier than we are, but lets not feel too hard up just yet. Visit the Global Rich List to see how you rank, then remind yourself that you may be in the top 5-10% of wealthy people in the world and have aspirations to be in the top 1%, things aren’t so bad – then say thank you! 🙂


Purchasing your freedom is a long journey and it’s not always going to be easy. But having the right mindset is half the battle. If you know what success looks like, you understand why you are making the change and you have a rational perspective on your current position and what your real needs are then that’s a good foundation. All that’s left is just to get started. Happy saving!