I am sharing my road to Financial Independence (FI) 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. FI 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. You can read more about this in the article 9 reasons why money can buy happiness.
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 made me really appreciate the effort that has gone into reducing our monthly expenses. Every now and again you get that unicorn month where all the stars just align. There was no unforeseen expenses and no emergencies this month. On top of that I got my yearly promotion this month (4 months earlier than usual). Our savings rate for March was a satisfying 56.4%. 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 after-tax salaries and all other income. Then I subtract all the costs of generating the additional income and our monthly expenses to calculate our savings. I do not include debt repayments in the savings, although I know some people do.
This month’s savings rate increased our average savings rate to 30.5%. Creeping ever closer to that target average of 40%. It is funny how one good month can suddenly make you believe it is achievable. Hopefully 2019 has a few more big months in store for us.
Spending for the month
Your savings rate is completely dependent on your spending habits. With our savings rate as inspiring as it was this month, let’s look at what we spent our money on.
Our transport was down significantly, since last month had insane repair costs. To reduce this even further, my wife was on vacation for half of the month (I should become a teacher), so did not have to drive to work. Insurance was down, food was down and even housing was down slightly. Granted, the salary increase helped to reduce the relative percentage, but in real terms is was down as well.
We also received awesome news last month, we are pregnant with our first-born. We are very excited, and I will keep you posted on the gender. So, don’t be surprised if you see a baby category on this pie chart soon. Our medical expenses were slightly elevated as a result of the scans, but the medical aid covered most of it.
In April we will start systematically buying a few stuff for the new family addition. The switch to Discovery Insure should cancel out some of the additional expenses. I discussed this in the article is Discovery Drive worth it, if you want more information on this.
Then I also switched banks this month. I’m officially with Capitec now after a lot of research and weighing all my options. I’m making the move from Investec. After reaching 30, and not being part of their young professional scheme anymore, the banking fees just tripped the fuck out. I should have made the move earlier.
From mid-April, my banking fees will effectively be reduced by R600 per month. Yes, you read that right. My fees will reduce from R535 to about R20 per month. Since the Capitec transaction account will be interest bearing, it will even earn me a bit of interest on money that is patiently waiting for their debit order fate.
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 money’s 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 savings rate of 27.3% in December 2018 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. I see that a lot of people aiming to achieve FI is targeting 45. This feels like an ambitious target without being unrealistic.
We ended the month on a net worth of R1.5 million. This is a net-worth growth of just under R60 000 for the month. At this stage, we are at 12.2% of our savings target. Our investments gave us about 3% growth this month and our savings rate really contributed nicely as well.
Our portfolio is weighted towards property. I am in the process of reducing our exposure to this asset class. You can read more about this in my article why I’m selling my real estate and 9 reasons why I don’t want to retire with property. At this stage we still have two properties left. Our allocation can be seen below.
Any new savings goes predominantly towards share investments, as Exchange Traded Funds (ETFs). This month we split our investments 80/20 between share and cash investments. We’ve stopped contributing to property altogether. This will see the weighting systematically shift towards equities. As a result, our property weighting is down 0.7% relative to our portfolio size.
We’ve maxed out our Tax Free Savings Accounts (TFSA) and will continue doing so in the future. This is arguably the best investment option in South Africa at this stage. It is just frustrating having to wait 12 months before we can invest in our TFSA again. It If you haven’t started contributing yet, there is no time like the present.
My blog reads in March increased from 1689 to 4145. Thanks for reading and if you have any specific topic requests please feel free to let me know.
Be safe out there,
Quote of the week
“If people concentrated on the really important things in life, there’d be a shortage of fishing poles.” – Doug Larson
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