The journey to Financial Independence comes with many things to learn along the way.

To help fast-track that process for you, we’re running an ongoing Q&A series.

These questions are provided by your fellow readers, who are often wondering the same things you are. Hopefully these posts help further your thinking as you progress towards your goals :)

Just so you know, in many cases there’s often not a “right” answer, so be sure to think carefully how to adapt any information to your own circumstances.

If you have a question you’d like answered, feel free to leave it in the comments below, or post it on the Pearler Exchange .

In this Q&A session, we’re tackling:

– Is it smart to invest in a small business?
– I save $650 per week, can I retire early?
– Are expensive hobbies compatible with FI?
– Is investing through a trust worth considering?
– How to add government bonds to a portfolio

Is it smart to invest in a business?

Q: I love investing in ETFs, but I’m curious why you haven't decided to invest in a small business, given the high potential returns. I’ve heard a lot about your real estate endeavours and index funds, but very little about your thoughts on investing in small businesses. Could you share your perspective on this?

Interesting question.

To be honest, the main reason I haven’t spoken about small businesses is because I don’t know enough about it. I just haven't done enough research to figure out whether it's worth it.

In any case, I'm happy with the overall approach I have now. My favourite thing about owning investments is the sheer simplicity and lack of work involved in earning returns. To date, I’ve just bought the assets and they’ve effortlessly generated more money for me over time.

On the other hand, business ownership requires a lot more monitoring, work, and mental energy, even if you're just the owner. There’s more risk, more things to manage, and a lot more responsibilities.

Don’t get me wrong, owning a business can be an excellent wealth generator. You can use the strong cashflows generated by a business to acquire assets (I interviewed a Strong Money reader here who did just that).

Keep in mind, though: in business, the odds of success aren't super high. And many times, it can also be like buying yourself a job rather than an investment. But it also depends entirely on which small business one is looking at; what your ongoing role will be; how much you know about the industry; competition; profitability; hours required; and expected returns compared to investing.

It's really tough to say whether it's a good idea, as the details will differ enormously in each case. For what it’s worth, I guess you could say I have invested in a small business, since I purchased a very small stake in Pearler a few years back. But that’s nice and passive, just the way I like it.

Cash vs shares

Q: We currently rent and have over $200k in savings. We own both of our cars and I have about $10k in shares. My wife has a credit card, however I am completely debt free. I’ve been putting $650 into savings each week and $50 here and there into shares. After reading your book I’ve started to think to myself: “am I doing this all wrong?!”. I guess my question is – should I put a massive chunk of that $200k into shares? And if I was to steer that $650 a week into the market rather than savings, could I actually reach FI before retirement?

Excellent job on the savings stockpile!

Here’s the thing: savings accounts are great for short-term money. You get a stable return and the value doesn't usually go down. But over the long run, they historically can't compete with assets like shares.

While it can often seem like a small percentage difference from year to year, the result over decades between cash and shares is mind-blowing. I put this chart in my book from the RBA, comparing term deposits and shares.

Since 1900, returns for shares have been literally 200x greater than cash, after inflation. That’s the power of compounding.

As for how you invest it, well, that's up to you. You might want to take a slower approach rather than a lump sum given you're still starting out. Maybe check out this article I wrote: How to Invest A Lump Sum .

Now, to whether you can reach FI before retirement. That depends on your expenses (which determines how much you’ll need), plus how old you are now. Given I don’t have either of those metrics, I’ll just make an example.

If you invested the $200k now, plus added $650 per week, in 25 years, you’d have about $2.3 million. This assumes a return of 5% after inflation. From this, you could achieve a passive income of about $100k per year. Is that enough? You tell me.

I strongly encourage you to play around with a compound interest calculator to see what scenarios you can come up with, and create a specific goal and timeframe that motivates you.

Are expensive hobbies acceptable when pursuing FI?

Q: Do you think an expensive hobby like jiu-jitsu ($50 a week) can be worth it while pursuing FIRE?

Great question. I think this is probably something many people wonder about.

I definitely do think it's worthwhile and perfectly acceptable to have an expensive hobby while building wealth. And to be fair, that’s not overly expensive. Many folks spend way more on takeaway food each week!

You've also chosen a hobby that is not only a great productive outlet (because it's skill-building), but it's also good for your mental and physical health. I'm assuming it's something you really enjoy too, so I give this a big green light – no guilty feelings needed whatsoever!

I know it’s easy to get so enthusiastic about saving that we begin to see every expense as the enemy. I’ve done this too. But it’s not really the case. Some things really do add value to our lives, and something like this is a good example.

Rather than trying to get every cost down to zero, you want to prioritise based on how much something means to you, and what it’s bringing to your life – I call this Deliberate Spending. If your outlet is an expensive hobby or a weekly social event, yet you’ve nailed down everything else, then you can happily engage in that activity, knowing that it’s a net positive in your life.

Should I invest through a trust?

Q: I’m wanting to borrow against my property equity to invest in VAS/VGS. I’m leaning towards investing through a trust to distribute income to my low-income partner and also for asset protection. What are the pros and cons of investing through a trust?

There's a lot to consider when thinking whether to invest through a trust. More than I can cover here. And to be frank, the intimate details of a trust arrangements are outside my knowledge scope.

In cases like this, it really does pay to sit down with someone who does this for a living to get proper guidance on your specific situation. You want to make sure you set it up correctly and understand the ins and outs, so there are no issues with interest deductibility and/or future tax complications.

As a general rule, a trust brings more complexity, more yearly ongoing costs, and more admin to deal with. That’s true even if you invest in a simple portfolio.

The main benefits are possible tax savings and asset protection, like you've said. This can become quite valuable for those in certain situations, but is typically unnecessary for most people.

Keep in mind, you can also invest directly in a low-income spouse's name to achieve some of the same tax benefits. Super may also be an attractive vehicle depending on your age and long term plans.

Whether you go ahead will depend on how important the benefits are relative to the cons. Either way, avoid making your situation more complex than it needs to be. Be totally clear on the value that having a trust will bring you before going ahead. Unfortunately, many people are “talked into” setting up a trust even when it’s probably not needed, just because it sounds smart and the lure of tax benefits.

Adding Aussie government bonds to a portfolio

Q: I would like to invest in Australian government bonds. How exactly do I do that?

Below are two tickers for Australian government bond ETFs. These will provide exposure to a portfolio of government bonds from each of the states in Australia (including the Federal Government).

For new investors: bonds like this are basically short-term loans to the government. So, about as low-risk as you could get aside from a bank account.

If you google these codes, or search for them on the Pearler Shares page, you’ll find more info on each fund.

• VGB. Vanguard Government Bond ETF .
• AGVT. Betashares Government Bond ETF .
  

Why would someone invest in bonds?

Well, they generally provide a stable income return, like a term deposit. Bonds also often, but not always, move in the opposite direction to stocks. That’s why they are commonly used as a “diversifier” for those who want to reduce the volatility of their portfolio.

Having said that, you need to understand that the value of a bond fund can and does move around a bit. For example, as interest rates have gone up, the value of bond funds have gone down. The price of VGB and AGVT are both down 10-15% over the last 5 years.

Keep in mind, if/when rates fall again, these bond funds are likely to rise in value and recoup those losses.

The reason this happens is that bonds are always compared to broader interest rates, or central bank cash rates. If a better rate is available elsewhere (like a term deposit) then bonds are less attractive (hence the price goes down).

In this way, bonds are not as safe as cash. Over the long run, as the earlier chart shows, bonds tend to provide slightly better returns than a savings account/term deposit, for slightly more risk. Not my cuppa tea – I prefer the simplicity of cash in an offset/savings account – but many folks find bonds useful.

Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community – like myself, someone more knowledgeable, or one of the Pearler team.

You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.

Until next time, happy long-term investing!

Head to Amazon to buy Dave’s best-selling book, Strong Money Australia . You can also listen to the audiobook on Spotify or Audible.