Financial independence – May 2019

Man looking at sunset

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.

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 39.7%. This was due mainly to the new dining set we bought. Winter is coming and we can’t dine at the patio set anymore. We shopped around as much as we could and ended up spending R5 000.

I don’t foresee any massive expenses for next month. The only additional expenses for June should be the family hunting trip. Since I’m not hunting, this shouldn’t break the bank. Our savings rate can be seen below (3-month trailing average in orange).

Savings rate

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 32.7% (45.7% trailing average). We hope to keep hitting this 40% savings rate sweet spot. I suspect this will get harder once little Alex joins the family.

Spending for the month

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

Spending habits

The big outlier this month was the house expenses. This was the result of the dining set we bought, so I won’t stress it too much this month. The maternity scans, medical aid and doctor costs increased our health and medical expenses to similar levels to last month. The other category costs are also a bit higher since we contributed to my sister’s studies this month.

On a positive note, the insurance costs are down significantly since we switched to Discovery. Transport was also down. We did not buy any items for the new baby in May but in June we will start preparing the baby room which I’m looking forward to.

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. 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.

Savings plan

We ended the month on a net worth of R1.554 million. This is a net-worth growth of just over R20 000 for the month. We had a horrible equity month (like everyone else I assume), which impacted the net worth growth. At this stage, we are at 12.5% of our savings target. This is 0.6% 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.

Investment allocation

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 1.1% the month (relative to our portfolio size).

This month I decided to do a breakdown of our equity investments. As you can see, the majority of our money is in global shares. I want to increase this even further to about 60%. The 10.6% in Real Estate Investment Trusts (REITs) are added to the property section of the previous pie chart. The three ETFs that I invest in is the Ashburton Global 1200, Satrix Top 40 and the Coreshares Proptrax Ten.

Equity distribution

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 May increased from 3026 to 4255 (up 41%). I really appreciate the massive amount of supporting emails I’m receiving. Thanks for reading and if you have any specific topic requests please feel free to let me know.

Be safe out there,

Hendrik

May articles

Retirement tax calculator optimised

How to start an online store for next to nothing

What is your income after work costs?

Quote of the week

"Money is the opposite of the weather. Nobody talks about it, but everybody does something about it." – Rebecca Johnson 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. If you enjoyed this article and really want to throw me a bone, please share it.

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Comments

  1. William Goosen

    “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.”
    So to make sure I understand correctly, you include the home loans in the monthly expenses then, or don’t include them at all?

    1. Post
      Author
      1. William Goosen

        The nice thing about the house expense, in a few years it will disappear once it is paid off.

        1. William Goosen

          The home loan part of it at least. Maintenance and purchases will unfortunately always be there.

          1. Post
            Author
            Hendrik Brand

            Yeah, I can’t wait for that last payment to go off one day. It reduces your living expenses significantly (and with it the capital you need for financial independence).

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