Financial independence – February 2019

Stars over mountain

I am enjoying writing this blog and hope to create a community of like-minded people. I am sharing my road to financial independence to help me get my shit together, or at least get you to think about where you are. The reality is that we all want to be financially independent. Financial independence does not imply quitting your job and is not a synonym for retirement. It is the freedom to ignore finances when you make life decisions. It means choosing what makes you happy.

Savings rate

Your savings rate is arguably the most important metric to analyse where you are going financially. You rarely have a say in how much you are earning, but you have 100% control over how much you keep. You can read more about saving rate in my article how savings rate influences your retirement.

Our savings rate this month was the worst since I started in September, at only 20.2%. Yes, it is not ideal. We had ridiculous car expenses this month. We literally spent R18 460 on maintenance. When people tell you that Volvos are expensive to maintain, they are not screwing with you. Especially when two Volvos break in the same month. My savings rate since I started writing the blog can be seen below.

I calculate our savings rate by adding me and my wife’s salaries and all other income. Then I subtract all the costs of generating the additional income and our monthly expenses. I do not include debt repayments in our savings, although I know some people do.

This month’s low savings rate dragged our average down to 26.2%, from 27.4%. Our long-term aim is to get the average savings rate to around 40%. We plan on doing this by gradually reducing our living costs while letting salary increases take care of the rest. We both have salary increases on the way, my wife in April and me in July.

Spending for the month

Your savings rate is completely dependent on your spending habits. With our savings rate as low as it was this month, let’s look at what we spent our money on.

We had massive car expenses. The transport and fuel category was up from 11.6% last month to 30.4% this month. On top of the maintenance costs of R14 000 that was predicted for my wife’s car, we also had to replace my car’s swing arms. To add to the problem, we were without a car for three weeks in total. This reduced my travel claims and as a result, my income. Not to even mention the numerous Uber trips.

Our health and medical costs were a bit higher this month at 10.7%, in comparison to 6.7% last month. Our medical aid did not cover some of the expenses of an operation my wife had in November. We got this surprise in February as well. These unexpected expenses murdered our savings rate. It looks like March will be a much better month, so I look forward to the monthly update in April.

Financial independence

I also track our progress towards financial independence. For this, I set a target using the 4% rule, which I tested in the article back-testing the 4% rule. I started with a required income of R40 000 per month and worked back. That is an income of R480 000 per year, which translates to an investment target of R12 million.

The problem with a target set today is that inflation erodes your spending power. The target increases the longer you take to save it. Our target is the green line on the graph, which I have adjusted with inflation of about 5%.

Based on our present savings rate and a 10% yearly increase in contributions, I extrapolated our net worth. The extrapolated savings is the blue line on the graph, which is our target net worth going forward. The orange line shows our progress since September 2018, at which stage we had about R1.3 million saved.

I assumed an annual return of 12% on our investments, which could differ from year to year. Presently the math says we will retire in 2033 at which stage I will be 45. We ended the month on a net worth of R1.44 million, after the slight recovery of the JSE.

Investment allocation

This is where I feel I might take some flak. Our portfolio is weighted towards property. When I was younger, I was a big proponent of property and has since decided to start selling them off. You can read more about it in my article why I’m selling my real estate. At this stage, we still have two properties left. Our allocation can be seen below.

Any new savings go towards share investments, mostly as Exchange Traded Funds (ETFs). With the poor market performance we had over the past 5 years, we also had more money in cash products earning about 10.25%. We are slowly starting to filter this back into shares. A combination of these two investment strategies will see the weighting systematically shift towards equities.

It is finally the beginning of the new financial year and we have maxed out our Tax-Free Savings Accounts (TFSA). This is arguably the best investment option in South Africa at this stage. If you haven’t started contributing yet, there is no time like the present.

My blog reads in February increased from 360 to 1689. Thanks for reading and if you have any specific topic requests please feel free to let me know.

Be safe out there,

Hendrik

Quote of the week

“My retirement plan is to get thrown into a minimum security prison in Hawaii.” – Julius Sharpe Click To Tweet

End note

Thank you for reading to the end. Apparently, the average person spends 8 seconds on a page, so you are special. If you have any suggestions, feel free to drop me a mail on the contact page. If I missed anything or you have questions, don’t hesitate to comment below. I might even notice it and respond.

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Comments

    1. Post
      Author
      Hendrik Brand

      Hey RJ,

      I actually did not. Thinking back, it would have made things easier. I had a lift back in the evenings, so only drove to work. At 6 km it was about R73 per day, which is still cheaper than renting.

      Thanks for joining in the conversation.

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