Financial independence – April 2019

Stars over mountain

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.

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 was slightly lower this month, as expected. We have a little one on the way early October. So on top of the scans, we are starting to purchase some of the larger items in preparation. This will allow us to spread the costs over a few monthly budgets.

This is not the best approach since you would ideally hold on to the cash for as long as possible to earn additional interest. However, you are hunting for specials and running around in the last month trying to buy everything sounds like a very good way to get yourself murdered by a pregnant lady. This month we did the research and bought a stroller. Our savings rate for the month was 41%, which can be seen below (3-month trailing average in orange).

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. Our only debt is our home loan and the loan on the rental property, which I classify as good debt.

This month’s savings rate increased our average savings rate to 32.5% (up 2% from last month). Creeping ever closer to that target average of 40%. Once I have one year’s data, I will start stating this figure as a one-year trailing average. We hope to keep hitting this 40% savings rate sweet spot. If you are targeting financial independence, what is your savings rate (please post in comments)?

Spending for the month

Your savings rate is completely dependent on your spending habits. Let’s look at what we spent our money on.

This month there were only a few outliers. Firstly, the transport category was up 3.8% since my wife started driving to work again after the school holidays. I also had to replace coils on my car’s rear wheels. Insurance was also up slightly, as PPS forgot to charge me in March and deducted two payments in April.

Medical expenses were up slightly since we had our second scan in April. Discovery covers a surprisingly small portion of the scan cost, so we had to pay in more than R1 000. Food was up about 2%, which was just down to bad spending habits. This is one area that we need to focus on.

The category that I am happy about is the house costs. This has been coming down consistently from around 19% to 13.6% of our income. This is the result of additional payments into the bond and we aren’t spending as much on furnishing the place as we did when we moved in.

The biggest new addition to the pie chart is the baby section. In April we bought the most expensive item, so this should come down as we approach the due date.

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 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%. The blue line is our extrapolated savings. The methodology can be seen in the March financial update.

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 R1.532 million. This is a net-worth growth of just over R30 000 for the month. At this stage, we are at 12.4% of our savings target. This is 0.5% behind where we should be, but going strong.

Investment allocation

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 articles 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 I invested all our savings in ETFs. We’ve stopped contributing to property altogether. This will see the weighting systematically shift towards equities. As a result, our property weighting is down 1.3% 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. If you haven’t started contributing yet, there is no time like the present.

My blog reads in March decreased slightly from 4145 to 3026. Thanks for reading and if you have any specific topic requests please feel free to let me know. I have two exams coming up, so will only be posting again at the end of next week. Talking about exams, I should get back to studying.

Be safe out there,

Hendrik

April articles

Performance of unit trusts in South Africa

Dividend paying or total return ETF?

How would I spend the Lotto?

Capital gains tax harvesting

Quote of the week

"A goal without a plan is just a wish" – Antoine de St Exupéry Click To Tweet

Endnote

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.

Lastly, if you want to be bombarded with emails known as the newsletter I send out once a month (if I remember), please subscribe on the right. There are also links to my Twitter and Facebook pages on the right (or at the bottom if you are browsing with a phone). All information is based on my opinion and you can read more about this in the legal disclaimer.

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