“The method of bookkeeping is the art of placing our accounts in such an easy manner, that the whole, or any part of the money received and advanced, may, with the greatest clearness, be attained in a very little time.
Whatever is paid into a ship’s account and whatever is remitted to the owners the ship must be a debtor for it.
Whatever is received on a ship’s account and whatever bills are drawn upon a ship’s account the ship must have credit for the same.” The Ship Owner’s Manual published 1795
While they stressed the importance of keeping a Ship’s Accounts in the late 18th century. It still holds to be true in keeping your accounts manageable and easily readable.
My accounts have become rather complicated over the years, with multiple products, automation and debt adding to the complexity. Below is a mud map of my general financial account system, where I hope to shine a light on some of the nuances of my financial system.
The Mud Map
Mud map, napkin plan, bucket system or whatever you call it, it is the best method of seeing the whole picture of your situation. I would encourage you to individually sketch out your map to see the bigger picture.
This map has given me the ability to visualise quickly where my money flows. It starts with our two salaries feeding into our offset and main savings account. A credit card is linked to this account and paid off every month. This allows us to ensure we have the majority of our savings in our offset. allowing us to offset interest payments on the variable loan aspect of the mortgage. Investment and other accounts can easily been see on how they interact with each other.
I love automation. Being able to just set and forget allows me to focus on the other aspects of my life or financial journey. Automation is basically setting up rules, direct debits or other aspects so you don’t have to manually do it.
You most likely are doing it right now with your subscription services. Netflix will automatically bill you at the start of the month’s servicings. So why not automate everything possible?
To make this complex system work, I employ as much automation as I can. Here are a few examples on how I automate my system:
Direct debit – I prefer to have my bills direct debits from my credit card. This puts the onus on the company to charge you, and they only charge on the day it’s due. Plus I am also able to receive reward points for an expense I would have anyway.
BPay – some companies don’t have a direct debit feature. The only time I have come across this is my council rates and water charges. Unsure why some councils don’t direct debit.
Mortgage Repayments – Having all my accounts in one place I can easily transfer set amounts between accounts. I have an automatic transfer put in place on the same day I am paid into my mortgage accounts. Paying fortnightly allows me to have an extra payment in the year, compared to being monthly billed by the bank.
Credit Card – there is a rule in my credit card settings to allow it to be paid off in full every month. This ensures I am never paying interest on my expenses, and allowing the maximum amount of money offsetting my mortgage.
Equity Builder – being an investment account I like this to be paid monthly with automatic transfer. This allows me to not worry about the fluctuating interest rates.
Superannuation – I salary sacrifice a portion of my pay, this once again is fully automated and I don’t see it disappear.
I love automation, as in the past I would simply forget to pay a bill then be stung with a late fee. This eliminates this risk, while also giving me a piece of mind.
The investment property is all fixed for four years principal and interest. We fixed it purely because the interest rate was rock bottom low. I am a firm believer in paying down debt. Paying down debt reduces risk and increases equity. I do not see any benefit in having an interest only loan in my investment strategy.
Our owner-occupier is split. Something like 15 per cent variable and the rest fixed. Once again capitalising on the ultra-low interest rate, while still paying the same amount from when we first took out the loan. We are looking at paying off the loan 10 years earlier.
Why didn’t we fix all of it? Fix loans don’t come with an offset account and you can only pay up to $20,000 extra off over the fix term. Splitting the mortgage allows us to benefit from the ultra-low fix loan interest while enjoying the benefits of a variable account, that is 100% offset with our emergency fund.
Credit Card and how to pay less interest with an offset mortgage account
We use credit cards because we are disciplined. Having it automatically paid off in full at the end of the month. We don’t purchase things that we don’t need, and we do not use it for anything else outside of the day-to-day purchases. If you can’t be trusted with credit, don’t get one.
The credit card we currently use is through the same bank we bank with. A NAB Qantas Rewards Signature Card. This card has no annual fee due to a home mortgage; we also get frequent flyer points used for any travel we or our family plan in the future.
The biggest thing with looking at getting a credit card is that it should not cost you a cent to own. I am sure there are hundreds of other cards out there, but this is the one our bank provided at no extra cost.
I would prefer a cashback card over a frequent flyer card any day.
How do offset mortgage accounts work? This is an Australian product, not seen overseas. An offset account is a transaction or everyday banking account that is linked to your mortgage. Every dollar you have in that account ‘offsets’ the balance of your loan – reducing the amount of interest you pay every month. This can shave years off your mortgage.
A $400,000 mortgage with your $50,000 emergency fund as the offset, could see you saving nearly $36,000 in interest and paying off your loan 5 years 10 months earlier. Might sound like years away, but I’m sure future you would appreciate it.
4 ways to get the most from your offset account
1. Put any savings straight into your offset account
On your path to FI, you would be well aware of the importance of an emergency fund. No point locking your emergency fund away in low-interest savings account that is not working for you.
For example, let’s say you store your $20,000 emergency fund into a savings account at a 1.5 per cent interest rate (highest rate as of recoding). Once you pay tax on your interest at 32.5 per cent (assumed tax rate), your after-tax (net) return is only 1.01 per cent. Is that less than your mortgage interest rate? If it is, your money will work harder for you in your offset account.
You can also set up regular savings payments into your offset account – so if you’re use to putting away money for an annual holiday, you can still do that with an offset and withdraw it when you’re ready to make the booking.
2. Deposit your salary or other income into the offset account
If you can get a debit card with your offset and online access to payments, why not use it as your default transaction account and tell your employer to make salary payments into the offset account? Every dollar helps.
Interest is calculated daily on an offset account, so even if the balance goes up and down with your day-to-day transactions, you’ll still be ahead.
3. Have all your bills direct debited.
This allows you to have the maximum amount of money in your offset account, and only pay the bill on the day it’s due. Once again, every dollar helps reduce interest. See above on automation.
4. Combine your offset with credit card payments
The more money you can keep in your offset, and the longer you keep it there, the more you will save. So if you are disciplined, you could use a credit card to defer everyday expenses by being clever with the interest-free payment period.
I can’t stress the importance of ensuring that a no-fee credit card is used. Also to ensure that the bill is automatically paid in full at the end of the month before interest payments are due. This is the trick to ensure you don’t pay any interest, as the interest on your credit card will be much more than the interest you pay on your mortgage.
Why not also double-dip and accumulate some rewards. As with my card, I earn QANTAS points, allowing me to use it on future travel. There are hundreds of credit cards out there and you should research and find what is best for you. BUT ONLY IF YOU PAY IT OFF IN FULL!
Lastly in the middle column is the long-term savings account, this is the savings we don’t include in our net worth tracking. For example, this account was used for a saving account for the new car we recently purchased.
Share Portfolio Accounts.
I have been with Commsec since the beginning of my investment journey. I know there are better brokers to use, but we have stuck with them because we are lazy. The brokerage isn’t too bad, compared to when I first started. Plus, I don’t buy shares that regular, maybe twice a year.
All my dividends are paid into my Netbank account that is connected to my broker. This allows me to re-balance my portfolio without needing to sell shares. This comes with discipline, every time my account reaches $2,000, I buy a parcel in shares.
I used to also add an extra amount from my main account; however, the equity builder now receives that money.
Can you suggest a better product to manage my share account, would love to hear what you recommend?
Equity Builder and Car Loan.
I hope this has provided you with some insight on how we manage our ships account. I encourage you now to go and sketch out on a piece of paper your Ships Accounts. Providing you with the fundamental map than can be used to steer your finical ship into independence and freedom.