financial independence retired early

juni 30, 2021juni 29, 2021Investing, Money

Pay yourself first at the beginning of each month

Until now, I’ve always had the strategy of saving what’s left at the end of the month. This works fine for me, there is usually some money left over. Frugal living pays off, I have already saved a nice amount. However, I do it differently than a lot of advice I read. A lot of financial advice is to pay yourself first. For example from the book Rich dad, poor dad and also The richest man in Babylon. Even Warren Buffett gives this as advice. The people who say this know what they are talking about. They are all millionaires who are very good with money. In the FIRE community there are a lot of people who also pay themselves first. So we can’t get around that.

Not paying rent this month…

Investing immediately after your salary has been received and only spending what is left is also called pay yourself first. Some things are not open to negotiation. It is not optional whether you pay your rent or mortgage this month or whether you do or don’t pay your electricity bill. You just do it because otherwise you will get into very annoying problems very quickly. There is no room for negotiation. The pay yourself first principle states that investing every month is also non-negotiable. You do this every month, preferably a fixed amount.

By doing this at the beginning of the (financial) month, you live frugally. You see how much is still in your bank account and it is easier to decide not to make a purchase if your account is almost empty. I want to implement this, pay myself first and I will start on July 1. I have to pay close attention, because my bills are only debited at the end of the financial month. If I can’t manage my budget, then there isn’t enough to write off the direct debits from the fixed costs.

Resolutions to pay yourself first

From the coming month on, I will think in advance what I will need in the coming month, on what things I expect to spend money. Then I calculate what comes in. I will use the difference according to my investment strategy.

To me, that’s what it looks like for July 2021.

Mortgage	595	Same every month
Electricity and heating	65	Low because of the solarpanels
Phone/spotify/netflix/internet	59	I share Netflix and don’t have a tv
Groceries	200	On the higher end (especially since i’ve stocked up) but I like some room here.
Car (Taxes, insurance and gas)	300	I commute to and from work 4 times a week and it’s about a 120km per day drive. With the gasprices rising it’s a lot. I get compensated more than half of this by my boss.
Eating out	100	The past couple of months (one and a half year) I barely went out to eat or for drinks, but now that we can, I will not cut back.
Miscellaneous	300	All the other stuff, like going away for a weekend, a laser treatment and birthday gifts.
Total	1619

pay yourself first — Waiting for the bridge to close with 30C. Luckily the windows open!

I round to 1700 and anything above that in income goes towards my investment strategy. If I have more left over because I broadly calculated, the remaining money will go to the investment account with next months round.

Planning a big purchase

I’m thinking about buying a camera. I allow myself flexibility in that. If I want to buy it, I take the money from the savings account. I top up the emergency fund the next month to the minimum of 3 months in expenses. If my emergency fund contains a little less than 3 months of expenses for a week or two, I won’t lose any sleep over it. After all, I still have the investments to back me up when shit hits the fan. The money from the investments can be put into my bank account within a day or two if there is an emergency.

I am very curious if budgeting in this way at the beginning of the month will help me to organize my finances even more tightly. That’s why I’m going to try to keep it up for a few months, not just one month. This forces me to start thinking about what I’m going to spend in the next month and then stay within budget. A good exercise in planning and thinking ahead.

How are you doing it, are you paying yourself first?

Do you also plan your finances at the beginning of the month? And can you stick to it? Let me know, I’m curious about your experience.

Until next time!

Elske

I am not a financial advisor, and therefore not your financial advisor. I am not a financial professional. This blog is for entertainment purposes only.

Elske 1

juni 7, 2021juni 8, 2021Investing, Money

Disadvangates of paying off your mortgage extra fast

The feeling of having a fully paid off house is incredible. But at what cost should you do it as fast as possible? I like to highlight the disadvantages of paying off your mortgage fast. This is a topic that is highly discussed in the financial independent retire early movement. ‘You should pay of your mortgage and only then start investing, mortgage is a debt and therefore it is bad’. Or the opposite: ‘Don’t pay off your mortgage fast, invest the money in stocks’. Which is right?

Well, it depends…

What answer is right depends on your own situation. For example your interest rate. If you pay off your mortgage and your house is paid for in full, you have a lot more money to put in your index funds and other investments, making you more profit by compounding interest after you’ve paid off the house. On the other hand, if your interest rate is low, you can consider just paying of the minimum required and invest the surplus in a low fee index fund or however your investment portfolio suggests. Chances are you can easily make a higher profit on that.

Look at it this way: the interest rate on your mortgage is your guaranteed return of investment if you pay it off. If you have an 8% or more interest rate, you are probably better off paying it off as soon as possible, for the chance of making more on the stock market is a gamble. If your interest rate is low, say 2%, your return of investment is probably higher on the stock market then when you down pay it on the mortgage. I heard of people in the Netherlands that bought a house with just over or even under (!) 1% interest rate these days. It is not that hard to outperform that with investing. Index funds like the S&P500 perform at an average of 8% per year. Please don’t look at this in the terms of one or two years. Look at this more in the 15-30 year range. If you put your money in an index fund, in the long run you will earn about 8% on it. Yes, even if you are at loss right now or the first few years.

Inflation

Other disadvantages of paying off your mortgage for example are inflation. So if you pay of your house now, you are putting a higher percentage of your income to it. In the future, with inflation, your income will increase and the same amount of mortgage left will be worth less than it is today. So in that sense, it would be better to pay if off as slow as possible. But of course it all depends on the percentage of interest you pay.

More than 6%.

What to do if your mortgage interest rate is higher than 6%? What will happen if you pay it off faster? On the ROI (Return of investment) side, you will get more return on your money (by not handing it over to the bank as interest).Think hard on doing a down payment, once it’s in the mortgage you can’t spend or invest it anymore. This is called the opportunity cost. It’s basically gone until you sell your house, but probably it will be in another house you buy next.

My best bet is check if you can refinance to a lower interest rate. This may cost you a fee right now but calculate it and see if it will be cheaper in the long run.

Between 3-6%.

What if your interest rate is between 3-6%? Try and refinance it as well, call your bank, check how to refinance, shop around at other providers as well. Calculate what you save vs. what the fine of refinancing is. Make your own decision. Same as for the high interest rate, maybe it will be good to do down payments but you will not be able to touch that money for anything else anymore. The opportunity cost is at stake here too.

Under 3%.

If your interest rate is low, let say under 3%, I would not pay it off any faster than required. Put money you are not spending in a low-fee index fund every month and grow your stash that way. The chances of having a higher return of investment are on your side. Especially in the long run. The big benefit here is the money is more liquid, easier to access in case of emergency.

In the netherlands

The taxsystem in the Netherlands makes the disadvantages of paying off your mortgage even bigger. Here in the Netherlands chances are you are getting hypotheek rente aftrek (tax deductionon the interest). This makes the net interest rate even lower. And there is the possibility your paid off house will cost you more in taxes in the future. If your house is currently worth more than the remains of the mortgage, call your bank to ask for a lower interest rate (schuld-marktwaarde verhouding). This only works when you don’t have NHG on it. Chances are the interest rate will be lowered.

But if anything, don’t store surplus money on your savings, as it is zero or close to zero at the moment.

And remember:

I am not a Financial advisor nor am I your financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.

What’s your thought on this subject?

Untill next time,

Elske

Elske 0

mei 17, 2021mei 18, 2021Investing, Lifestyle, Minimalism, Money

How to get rich with compound interest

I want to help you save 25 euros this week because it can yield 65,000 after 20 years with compound interest! Who would not want that!

einstein — Compound interest is the 8th world wonder.

This week I invite you to do a challenge with me. I want to help you with saving and investing the first 25 euros (or more!) and grow your money tree. Do this every week and you will have saved up a wonderful pot of freedom in 20 years. You deserve it! Join the hashtag #simplechallenge and tag me in your post! @simplewithmoney on instagram.

Compound interest

Earlier I wrote about the 8th wonder of the world as Albert Einstein described it. Whether he really said this or not is unclear. That it’s true is certain! If you understand how compound interest works, then you will benefit from it. If you don’t understand it, you pay for it.

Today we are going to calculate with interest. “Ewww, numbers, I really don’t like that. So difficult! “

Okay, I get it. Still, I ask you to calculate with me. If you invest in a well-spread indexfund, the average return over 20 years is around 8% per year. If you invest 1 euro now, it is worth about € 4.65 in 20 years with 8% growth per year. That doesn’t sound very impressive.

Invest 100 euros.

If you are going to invest 100 euros now, it will be worth 466 euros in 20 years’ time. That sounds like more fun, but it doesn’t make you rich.

If you invest 100 euros every month this year, that will probably be worth more than € 5500 in 20 years. Sounds better allready. Your investment has then been doubled more than 4.5 times!

I want to challenge you to do this. Deposit 100 euros every month. And if you can do that for a year, just go on and do it for 20 years in a row!

Invest 100 euros every month for the next 20 years gives you a possible return of 65,000 euros!!! You have then deposited 24,000 euros. The profit is therefore € 65,000- € 24,000 = € 41,000. You didn’t have to do anything for that, except put in 100 euros every month. Add another 10 years to this and with an average return of 8% per year you suddenly have doubled, around €159,000 in your investor account! Mindblowing!

Now you know how compound interest works and you can benefit from it for the rest of your life. This works the other way around as well. If you have a mortgage with 8% interest, you pay compound interest on it too! Let that sink in for a moment.

Hardcore investers

For the high flyers, I will put an example below under what happens if you save 500 per month for 20 years. I also realize that for many normal people with normal incomes this is not possible to set aside 500 euros every month. It may succeed in a season in your life, but with a family expansion, divorce, renovation or loss of income / job, it may not be very realistic to set aside 500 every month for 20 years. I encourage you to live frugally and below your means and if you have a nice salary or team up with your partner to cut living costs in half, you can certainly get very far! And of course keep reading this blog 😉 Therefore, here is the calculation to motivate you.

Join me on this challenge! Take a picture of what you saved with the #simplechallenge and tag me @simplewithmoney.

At the end of the week we are going to deposit the 25 euros in an indexfund.

Until next time!

Elske

I am not a Financial advisor nor am I your financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.

Elske 2

mei 10, 2021mei 10, 2021Investing, Lifestyle

Retirement is not an age!

Retirement, there are people who don’t look forward to it, who prefer to work well beyond this age. Yet almost everyone I know dreams of retirement. Nobody wants to be old, but the freedom to decide for yourself what you do because you are retired, that seems amazing to almost everyone!

The problem with retirement

There are two problems with retirement. The retirement age is constantly shifting and there are regular reports that (possibly) less pension is being paid out. That’s because life expectancy keeps getting higher and higher. So people receive money from the pension pot for longer. There is also an aging population, so the pension pot is replenished less quickly than is paid out. I do not blindly assume that the pension that I am accruing now will actually be available when I reach the respectable retirement age.

Then there is the General Old Age Pensions Act. This law entitles every Dutch citizen to a basic pension from the state at retirement age. Due to the increasing life expectancy, the state pension costs more and more money. I cannot look into the future and assume that in 40-45 years the state pension will still exist or that this is enough to live off of.

Freedom

I think it would be great to have freedom of not having to work for money anymore a lot earlier then the prescribed retirement age. Don’t wait until I’m 72 (or whatever the state retirement age may be around that time). Hopefully at 72 I will still be healthy and fit to do what I feel like, but is that worth the gamble?

Time to take matters into your own hands. What are the conditions for retiring? It’s just that you need enough money to live the rest of your life. It would be nice to also leave something to children or other loved ones. So pension is not an age, but an amount! Let’s calculate what that amount is.

The safe withdrawal rate

This calculation will be different for everyone and it is also different in every country. Taxes on equity and savings are different in every country.

To calculate the amount we need, we can turn to the FIRE movement (Financial independence, retire early). People who support this movement save for their pension themselves in order to be able to retire early, sometimes decades before the retirement age. A rule of thumb from the FIRE movement here is to save 25 times your annual costs. That way, you can then spend 4% of your assets every year without losing your assets. This is the Safe Withdrawal rate.

This 4% has been calculated in the so-called Trinity study. On average, Stocks and other investments such as real estate grow about 8% per year. Remove an inflation rate of 1.5% and you are left with 6.5%. So if you were to spend 4% of your assets every year, your assets are still growing every year! In the Netherlands, however, you pay tax on your savings above 50.000 euros. Some people think 3.5% is safer. I can agree with that, but we must not forget that with 4% of your assets to be spent, the chance that your assets will become more valuable is still quite high.

And in addition, you will still receive the General Old Age Pension and probably accrued pension when you hit retirement age. When you retire early, this also means that when you retire, you probably also have a paid-off house, so you will have fewer monthly costs. You also spend less and less with age. So I think that the 4% safe withdrawal rate is safe enough.

How much do you need?

It now depends entirely on how much money you need, how high the pension amount is for you. Are you highly motivated to retire and do you think you can live below the poverty line, for example on 1000 euros per month? Then you need 12,000 * 25 = 300,000 euros. Do you need 2000 euros per month? Then you already need 24,000 * 25 = 600,000. Double!

This is the reason that people working with FIRE are not only focused on gaining as much income as possible but also keeping expenditure as low as possible. It is quite different whether you try to rake 300,000 or 600,000! And living on 1000 euros is very difficult, but if you have a paid-for house and have enough time to do the maintenance, the garden and the cleaning, then it is already a lot cheaper than if you outsource those kinds of things and you still pay monthly rent or mortgage.

There is a chance that you will still earn something during your “retirement”. The idea is not to do nothing but sit in a rocking chair all day. The idea is that you are passionate about working on something that does not necessarily generate money, but where your heart lies. It may of course be the case that it generates money. After your retirement age, the pension will also be credited to your account. That is why you may be able to retire at 200,000, for example. You may spend more than the 4% for a number of years on your saved capital, but you still have enough left to supplement it with the general pension and any accrued pension.

Start early and stick with it

The amounts I mention are of course astronomically high and difficult to achieve. That’s why I encourage you to start early, take full advantage of the interest-on-interest effect, and take advantage of the snowball effect. If you live like everyone else, you will get the same outcomes as everyone else. Spending and saving like everyone else ensures that you retire at the same age as everyone else. Set your own course and set your own goals. I will encourage you along the way!

Until next time,

Elske

Elske 0

januari 25, 2021mei 19, 2021Investing, Lifestyle, Money

The 4% rule for financial independence

Do you dream of financial independence? You can achieve it!

Have you ever heard of the FIRE Movement? It started in the USA and is now making its way to Europe. FIRE stands for Financially independent, retire early. People of the FIRE movement work/hustle to earn as much money as they can. They are frugal and spend as little as possible and invest the surplus. This way they can live off of their investments in the future without needing to work. Sounds impossible? It’s really not!

Playing with fire

Return of investment

If you put your money in low-fee investments, the average annual return is about 7-8% a year. Now of course this is on average. Some years it is less and some years it is more. In the FIRE movement the general rule is as follows: If you invest your money and on average you gain 7-8% in returns when you retire you take out of your investments 4% per year. This way you will never run out of money and even account for inflation (your money will grow).

So if you need let’s say 40.000 euro per year, you will need 40.000*25=1.000.000.

(4% of 1 million is 40.000)

One million! That is hard to save up before your actual retirement. This ofcourse depends on what you make and where you live.

But! There is a but! If you happen to only need 20.000 per year, you will need ‘just’ 500.000.

If you need less every month…

I can only speak for myself of course but if I pay of my house entirely, I can almost cut that in half again to live off of. Now i ‘only’ need 250.000. Especially since when I an not working for a boss anymore there is more time for home cooked meals, insourcing, repairing things myself and there is less of the fancy clothes bought just of wearing at the office, less fancy car and less gas because I don’t have to commute every day and I could go on.

All the time in the world to cuddle this cutie pie!

Track your expenses

So I have tracked my expenses to the euro for the past 8(!) years already and I know how much I spent in any given month. So after I pay for the mortgage I usually spend between 600 and 1600 per month on groceries, internet, electricity and everything else combined. That to me is a pretty wide range still, but it’s something I can work with. If I pay off my house in full I will need somewhere between 800-1500 per month to live off.

If I want to retire early I will need:

800 per month = 9600 per year * 25 = 240.000

1500 per month = 18.000 per year * 25 =450.000

Hypothetically I start off with zero, and save 100 per month and have 8% per year return. How long do I need to work to retire?

With 240,000 euro’s I will need to work for 36 years to have saved enough for financial independence. With 450,000 euro’s I will need to work for 45 years to have saved enough to retire. That is 9 years longer!

Now let’s do the same but we save 500 per month starting at zero. With 240,000 euro’s I will need to work 18 years to have saved enough and withfor financial independence 450.000 about 25 years. Sounds a lot better already. And how about 1000 euro’s saved per month? Well 240.000 I need 12 years of work and 450,000 just 17,5 years.

So a person that starts at 20 years old can really retire in their early 30’s if they just live frugal and manage to save a lot. It can be done people! Also if you feel like working ans hustling for 15-25 years straight to then finally do what you love is not what you want? You can do a semi-retirement way before this and work part time and save just a little to non and make your savings more by investing.

What is important to you

Also if you feel like living frugal is not worth it? I really want you to think about what is important in live. Is it to impress people, is it to go to work every day for 45 years straight? Is it to raise your own kids and have some time for your hobbies, is it maybe some fast and expensive car to impress the ladies? Think about it and let the path to financial independence be your own path and not something somebody else expects you to do. Be clear on what makes you happy, what are your goals in life and what you want out of it. Take control of it yourself!

Happy Saving!

Elske

I am not a Financial advisor nor am I YOUR financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.

Elske 2