How Does Your Food Budget Measure Up?

Untamed food spending habits can push out early retirement plans by years, not only by stopping you from turning those dollars into hard-working interest-earning “employees” in your investments, but also by inflating your on-going cost of living.

Of course, none of us want to live on legumes and rice alone, it wouldn’t be a balanced diet and we’d be bored and miserable. The whole idea of Early Retirement is to free us to enjoy our lives, not shorten our lifespans or reduce our enjoyment. But let’s work out how much those takeaways, snacks, packet meals and out-of-season fruit and veges could be costing in years spent in the work force and see if anyone is inspired to be more badass about their food purchases.
(If you’re confused by my use of the term ‘badass’, check out this link.)

A Toy Example

Lisa works hard and rewards herself with some treats. Lunches from the café downstairs from work, a meal out at a restaurant most weeks, the nice cuts of meat. She spends $200/week on food, she’ll need to save $260,000 just to cover these food costs when she’s retired.
($200 x 52 weeks / 0.04 to find the invested amount that would return $200/week)*

Cassie works hard and buys the odd treat, but she has cultivated a few frugal habits that have become second nature. She cooks a big slow-cooker meal on Sunday to take for work lunches, and stops by the local greengrocer for budget in-season produce. She spends $50/week on food, she’ll only need $65,000 in her nest egg for food expenses.*

If both are saving an incredible $30,000/year, Lisa will be in the workforce over 6 years longer than Cassie!

To put the same point more controversially, my $4/week avocado habit adds $5200 to my retirement savings target. I think I’m about to start buying avos only when they’re in season and on sale!

How much do you need to save to cover your food costs while retired, based on how you eat now?
To work out how much you need to save to fund an expense you’ll have in retirement, multiply the weekly total by 1300. (Math details: multiply by 52 to get the annual expense, divide by 0.04 to find how much you’ll need to invest to get that amount as a 4% return on your investment.)

How many years earlier could you retire if you started some delicious-and-frugal eating habits?
You can check how long it will take you to save a goal amount with the Sorted.org.nz savings calculator.

An Objection

You might say  “Konnifer, I object to your reasoning: I know I spend up large now, but that’s because I’m working long hours, really pushing myself to save, I need the convenience. My food will be cheaper when I’m retired.”
That’s probably true for many of us. However, personally, I don’t want to plan for my retirement to be a step down from my current lifestyle. I don’t want to retire and think “Well that’s over, now I have to give up some luxuries.”
If I do reduce costs in my retirement (maybe I have more time to garden and cook fresh?) then that’s a bonus, it’ll free up some money to spend on more hobbies. (Fancy automatic watering system? Shiny new cookware?)
I’d rather retire with the mindset “This is a pretty sweet lifestyle, and I can keep it all even if I stop working.” I don’t want to cut my spending until I’m miserable, but I do want to experiment with my habits and see which ones are really contributing to my happiness.

The University of Otago Food Cost Study

Here’s an interesting way to see if you’re at the top of your frugal game. Use the graph below to see how your weekly shop compares to a basic, moderate, or liberal (read “indulgent”) diet in the University of Otago Food Cost Survey 2016. The basic level is the minimum the researchers thought it possible to spend without “increasing the risk of not getting all the necessary nutrients.”**

 

This graph shows the results of the Otago Food Cost Survey 2016 for adult Aucklanders. It includes enough for a healthy range and amount of food for all a week’s meals, but does not include any take-away and restaurant food, ready-meals or household and personal cleaning items.
See the full survey for a list of included foods and methodology, results for Wellington, Christchurch or Dunedin, and costs for adolescents and 10, five, four and one year olds. It’s an easy, well-presented and fascinating read!

Are most of us living at a ‘basic’ level as per the survey? Or is it normal, even as a frugal saver type, to spend a little more than the bare minimum?

Sharing My Numbers

I live in a 2-adult household. We spend $70/week on groceries, he spends $20/week on treats and takeaways, and I spend a whopping $30/week on takeaways. I’m not including non-food items like cleaning products, or alcohol. So overall, we spend $120/week on food. That’s $60/adult/week.

I’m happy with our work-week spend – we cook plenty of treats but somehow it never seems to blow the budget. My most indulgent regular expense is a ~$10 “I’m hangry and must buy takeout now” episode while running errands during the weekend. Funding that requires an extra $13,000 in my retirement fund – nearly 6 months extra in the workforce at my current savings rate. That’s something I’ll consider next time I want to dash out the door on a Saturday without eating breakfast. I’ll probably still do it occasionally 😉

How about you? Let us know in the comments. If possible, tell us how many people in your household and include only your food costs so we’re all looking at the same thing.

* I’m assuming a “safe” 4% withdrawal rate after retirement, See Mr Money Mustache’s article for details
** https://ourarchive.otago.ac.nz/handle/10523/6659 page 2.

Kiwisaver

So i guess one of the first and easiest places to start investing is in kiwi Saver.

www.kiwisaver.govt.nz

What is Kiwi Saver?
Kiwi Saver is a voluntary, work-based savings initiative to help you with your long-term saving for retirement. It’s designed to be hassle-free so it’s easy to maintain a regular savings pattern.

If you choose to join, contributions are deducted from your pay at the rate of either 3%, 4% or 8% (you choose the rate) and invested for you in a Kiwi Saver scheme.

FREE MONEYYYYYYY!!!!!
– The key win here is that your Employer also contributes a percentage
(Normally 3%) Already you have 100% profit gain just by being involved!!!!! where else can you get that kind of return?!!

but wait there’s more…..

Member tax credit
To help you save, the Government will make an annual contribution towards your Kiwi Saver account as long as you are a contributing member aged 18 or over.

Government will pay 50 cents for every dollar of member contribution annually up to a maximum payment of $521.43. This means that you must contribute $1,042.86 annually to qualify for the maximum payment of $521.43.

$1,042.86(member contribution) + $1,042.86 (employer contribution) + $521.43(MTC)

=$1564.29 for your first $1,042.86!
this is an 150% return!!!!!!! on your first $1,042.86. ( before any fees or returns taken in account of course)

 

More to come….

 

 

 

Logan Kirk |

The 3 simple steps to building a strong property portfolio in NZ

So, you’ve probably read the NZ Herald and Stuff articles on property. The classic story of an ‘investor’ goes something like this

‘Mr. x has bought this property and then sold it on a week later for $200,000 more!!!’

Well, it’s sensational, jealousy inducing, it grabs eyeballs and yes, it makes us all salivate just a little bit. So how do you find a property like this?

The answer – you don’t.

Much like everything on the news and TV, it’s a facade and a rather thin one at that. Not to say each individual instance isn’t true but the idea that every investor goes out and buys something and just flicks it on for huge gain simply isn’t true. That sort of speculation (and it is speculation, not investment – see this lovely chart if you’re not sure on the difference) is fraught with risk. That’s also not to say that no one makes a living out of it, some do, but equally some people make a living out of poker or craps and you certainly wont find many competent investors in those areas.  The issue is that you’re only hearing about the winners, not the losers. Survivorship bias for those into their psychology.

So if you’re a bit more like me, a bit more thoughtful in your investments, you like making a good income and growing your capital but not risking everything you’ve got and being able to PLAN for your retirement, not simply hope. If this sounds good then I might have something for you.

Some people have preconceived ideas about property relating to how to make money. So I’d like to kindly ask you to drop those and in it’s place I will use the metaphor of the box. Thanks for that. What we are investing in now is a box, a bland plain box that’s only purpose is to make money for you. A box you need to watch, nurture and take care of.

There’s many ways to skin a cat and our boxes are no different, I’ll guide you through the principles only and we can look at the more interesting techniques and ideas in future.

Let’s say we see a box for sale. This box is $100. Is this a good price? Is it a good investment? How do we know with some back of the envelope calculations whether it makes sense?

Test 1 – Cashflow

You’re going to rent out this box to someone.

Cashflow is an oft misused term so lets define it here. The amount of profit or loss you make over a given time, simple. We will use the annual amount.

Positive Cashflow – Profit and good times
Neutral Cashflow – You might have to try not to fall asleep in your investment. You’re not losing anything but you’re not really gaining anything either.
Negative Cashflow – You’re making a loss. You’re paying for someone else to borrow your box. Why?

If we borrow the whole $100 (always calculate the full amount, any investment can be shoehorned into looking good with a large deposit), the bank says this will cost us $5 per year in interest.

Our other costs (box insurance, box maintenance, box management etc) come to $2 per year.

We find out from local box rental companies that they can rent this box out for $10 per year.

So $10 – $5 – $2 = $3 profit.

Fantastic, it’s passed test 1, it’s profitable on a cashflow basis. This is extremely important to the stability of your investment. You never know what’s around the corner, borrowing costs can rise, rents can drop, your tenants could leave and you might not be able to fill it, you could lose your job and so much more. A profit means this place holds it’s own and pays for itself.

If it’s zero or less, find a new box and try again.

Test 2 – Capital Value

So to borrow on your first box you’ll need a 20% deposit.

n.b. I’m going to use 20% deposit as the current 40% LVR restrictions are temporary and will likely be repealed once the excrement hits the fan which is also likely to be when you’ll get the best deals. It can also be done now through non-bank lenders and other means. Come to your own conclusions but I feel this explains the principals better, especially with confusion between owner occupied, rentals, holiday homes, eurgh. 20% ok? ok.

Let’s say you’ve got $20 saved up for your first box. Well done you! You could afford this box and be making a tidy $3 per year. A great investment, yes?

Well it’s a good investment but it might not necessarily be a great investment. It depends on how much other peoples boxes are worth.

The local box sales suggest boxes similar to the ones you’re looking at buying are worth $110. With some cosmetic repairs, a better example might go for $125.

If you were to buy this box today, you would have an extra $10. What’s not to like? If you sell it tomorrow you’ve already made a profit (not that we’re going to sell).

This is a great investment. It has both Cashflow and Capital requirements sorted. Not to say there’s no risks but you’ve greatly reduced any potential pitfalls in future.

If there’s no ‘meat’ on it, negotiate the price lower or move on to the next one.

Test 3 – Preparing to buy more boxes

How would you buy your second box? Well you’d have to scrimp and save and get another $20 or so together.
There’s another way. If the bank gets a valuation for your box at $125 and the debt on box 1 is $80, then that’s your $20 deposit sorted for your next box. Crazy? Probably. Legal? Yes. Useful? Definitely. Let me explain.

So you buy the box, get your paint rollers out and make some repairs and get it professionally revalued at $125. You knew it would revalue around this amount because the valuer told you it should and your own comparisons with other boxes suggested they were correct.

Box 1 Value – $125
Debt on Box – $80

Your want to buy another one of these boxes and make another $3 per year. It’s logical, why not?

It looks like this – (125 x 0.8) – 80 = 20

Box Value – $125
Now take off 20% – (or x 0.8). This is taking off the deposit amount that you must keep in the property until you sell it. = $100 remaining
Now Take off the remaining debt – Remaining debt is $80, therefore $100 – 80 = $20.

$20 is the remaining value and the deposit on your next box. Honestly, I’m not making this up. Done right, you’ll only ever need to raise capital once to enter the this market. The rest remains on either good luck (values rising) or your ability to create capital value through improvements or otherwise.

Your ability to continue in your investment journey depends on how well you bought the last one.

Rinse and repeat, in no time you will have a strong cashflow income and a portfolio that is likely to grow well over time.

Replace the work ‘box’ with ‘property’ and add a few zeroes to the dollar amounts and you’ve got the basics of property investment. Well done.

Also note that we don’t rely on chance. The numbers we procure are all from reliable, qualified sources. Government websites, Definite sales figures, experienced estate agents with no conflicts of interest, not the one trying to sell you the box. No salesmen.

If the property goes down in value then guess what, it sucks – but here’s the key part – you’re still making a cashflow profit every week. How long can you keep that going? As long as you need to. If it was cashflow negative, you’d be forced to struggle, sell or to realise your loss.

If the property goes up in value, which isn’t guaranteed, then it’s a bonus and should be treated as such. It’s not because you’re a whizz kid investor and you know everything (yeah, that was me a few years back, sorry everyone), it’s because of good luck, things like government incentives to buy property, lower debt costs, higher wages or strong immigration. If you can control any of those things, then you can take credit for your fantastic knowledge and foresight, until then, it’s luck.

Be aware that this is using the principle of leverage, the bank multiplying your buying capacity by 5. This also increases your risk factor by roughly the same amount, there’s no such thing as a free lunch. If you win, you’ll win big, if you lose, you’ll lose bigger. Be careful and make your own judgement calls, these strategies are designed to ameliorate any risks, not remove them entirely.

Here’s some great places to find out different things

  • Property values – https://www.trademe.co.nz/property/insights
    Be honest and compare what you own or what you’re looking at owning against recent sales or similar properties. Similar being the key, a 4 bed 1900’s villa does not compare to a 4 bed luxury new build, even if it’s in the same neighbourhood. A fantastic tool and completely free
  • Potential rents – https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/
    Simply input your area and you’ll know exactly how much your property will rent for. Be careful that there enough bonds lodged for your type of property, anything with a low number of bonds held can be statistically off.
  • Mortgage rates – The advertised (carded) rate is for suckers. Find out what people are really getting at property talk. Again, be aware that some will get better deals for having large amounts of debt with a bank, some will have long standing histories and some might be telling porky pies.
  • Insurance – Try getting quotes from various providers
  • Management costs – Usually around 6-8% of the rental intake
  • Repair costs – if you’re not keen on doing them yourself, use the 3 quotes system. Get 3 quotes for what you need, go with the best one
  • The library – One of the best sources for information on how to start, read every property book you can get your hands on

Millionaire Habits

I read this post from Budgets Are Sexy recently and I thought the habits of millionaires that were outlined applied to us Kiwis as well.

8% shopped at Goodwill stores

I just bought 2 nice jackets at the Dove hospice shop.

20% used coupons

I use coupons when I can find them.  Especially if I’m buying stuff online – I always do an online search for discount codes for the retailer.

64% said they lived in a modest, middle-class home

Hmm, I live with my in-laws in a very big house.  Think I fail on this one.

28% mowed their own lawns to save money

Yep, don’t pay anyone to mow my lawn and don’t think I ever will.

44% only purchased used cars

I’ve never bought a new car in my life although my last car was only 3 months old – I still got close to 20% off the sticker price so I was happy.

19% managed their investments themselves – they do not use financial advisors in order to save money

Likewise.

60% said they were frugal with their money

 

I’m definitely improving on this one.  My wife has always been super frugal and I’ve been the spender but now it is very rare that I will buy something that I don’t need.

81% used credit cards that offered reward dollars — this way they could get something for free

I definitely do this.  I look with envy at the US credit card hackers as we have very few opportunities for travel hacking etc. in NZ.

And lastly, 41% spent less than $3,000 on their annual vacation

I’m not sure about this one.  Is it per person?  Then I’m ok.  If it is for the whole family then I probably spend more.

How about you folks?

Hello folks who want to set themselves free!

This blog is set up to be a community hub where Kiwis (and the odd Aussie) of all means can learn tips and tricks to becoming financially independent so that you no longer have to work for money.

If you’d like to contribute (via blog posts, links or what have you) use the contact form below and I’ll add you in.

 

Do you need KiwiSaver if you plan to retire early?

(This is a repost from thesmartandlazy.com, published on May 17, 2017. This post contains the concept of  Financial Independence & Retire Early (FIRE), and terms like 4% withdrawal rate that may sound confusing. If you like to know more, jump to the end of this blog post for more information.)

When we approaching June in New Zealand, you can see lots of personal finance articles tell everyone to put in some money into their KiwiSaver and get the free money. I want to focus on a group of people who is working toward financial independence and wants to retire early. They may think since they are planning to retire way ahead of 65, KiwiSaver is irrelevant to them. They could be in KiwiSaver, but not sure if they should include KiwiSaver as part of their financial independence plan.

KiwiSaverlogo_6.jpg

Return on your KiwiSaver contribution

If you wish to live off your saving and investment, you ought to find the best return on investment out there. For KiwiSaver, your employer has to match your 3% contribution, and some employer may go higher. That’s 100% return on investment! (Correction: Actually is not 100% return because the employer needs to pay tax on their contribution. So the ROI is 100% – Tax, from 10.5%-33% less. Still a great return)

The government also provide KiwiSaver member tax credit for the first $1042.86 contribution from you each year (not counting your employer contribution). The Government will pay 50 cents for every dollar of member contribution annually up to a maximum payment of $521.43.  That’s 50% return on your first $1042.

If your wife/husband/partner is not working and you are working full time, you should consider contributing $1042 into their account as well. Those credits are risk-free and guaranteed.  It is hard to find such return on the market with basically no-risk.

Locked until 65

Some people think the big problem of KiwiSaver is you cannot access the fund until you turn 65 or to buy your first home. For the people who are planning an early retirement, they like to put every dollar into their investment so the investment can generate enough income to support their living expenses.  They don’t count on KiwiSaver and NZ superannuation to retire. However, you should still put money into your KiwiSaver.

One simple question: Do you plan to live beyond 65? If yes, then you should contribute to your KiwiSaver because it’s your money! You will spend on your investment before 65, and you will still spend on your investment after 65. The KiwiSaver fund is just one of your investment funds, and you don’t draw on that fund before 65, it will still help you to achieve your financial independence.

KS Before and After

Include KiwiSaver fund into your early retirement number

Look at the graph below. We assume you need 1 million portfolios to retire early, $300k in KiwiSaver and $700k in a normal investment fund. Your annual withdrawal rate 4%.Blank Diagram - Page 1(1).jpeg

You just need to stack up your investment and put KiwiSaver at the bottom and only draw the fund at the top. You keep drawing your non-KiwiSaver investment fund before you turn 65 and let your KiwiSaver Fund untouched. Yes, your non-Kiwisaver fund may get smaller and smaller (depends on your withdrawal rate) because you are drawing $40K (4% of 1 million) on a 700k investment fund. However, your KiwiSaver fund will keep growing. When you reach 65, you can draw from both funds.

Therefore, you should keep contributing to your KiwiSaver and include KiwiSaver as part of your early retirement plan.

Don’t over contribute into KiwiSaver

The key is you should not put too much into your KiwiSaver. You don’t want your non-KiwiSaver fund run out of money before you reach 65. Although it’s unlikely but possible.

Let’s assume you are 40 years old and have 1 million investment portfolio. You plan to draw 4% on your investment every year for living expenses. The expected return on investment is 6%. However, for some unknown reason, 70% of your investment are in KiwiSaver, and only 30% of your investment are in non-KiwiSaver Fund. You can only draw from your non-KiwiSaver fund before you turn 65.

Blank Diagram - Page 1(1).jpeg

By age 48, your total portfolio growth to 1.24 million but your non-KiwiSaver fund ran out. Most of your money are locked in KiwiSaver, and you are 17 years away to access them. You need to go back to work.

To avoid that, you just simply contribute up to wherever your employer will match and enough to get the member tax credit every year. Put all extra cash into your non-KiwiSaver investment, including paying off mortgage, shares, bond, property, etc.

Now, if we reverse that situation and put 30% investment in KiwiSaver, 70% in non-KiwiSaver. That non-KiwiSaver fund will least 30 years. Here is the how the fund works.

RE KiwiSaver 1.jpeg

How long will you non-KiwiSaver fund least?

I actually worked out the formula on how many years your non-KiwiSaver fund will least base on percentage of your portfolio in KiwiSaver. The graph was based on 4% withdraw rate. KS empty at 4.png

X is the percentage of your KiwiSaver and Y is the number of years will your non-KiwiSaver fund last.

If your Kiwisaver is about 18% of your total investment and you are 28, do you need to worry? Using that formula y = -24.61(0.18) + 0.3429, y =42.5. Your Non-Kiwisaver fund will least 42.5 years, by the time your non-KiwiSaver fund runs out, you are already 70 years old.

If you plan to retire at age 38, you will have to draw on your non-KiwiSaver fund for 27 years. Using that formula 27 = -24.61 In(x) + 0.3429, x = 33.85%. So your KiwiSaver needs to be less than 33.85% of your total investment portfolio.

That formula only works with 4% withdraw rate. You can work out how long will your non-KiwiSaver fund least with your own figure. Check out this google sheets. Make a copy and play around.

Conclusion

  • KiwiSaver is a great investment with a high return on investment due to employer match and government tax credit. It is one of the best investment in New Zealand.
  • You should contribute toward your KiwiSaver to achieve Finacial independence and include your KiwiSaver amount into your equation.
  • Do not over contribute into your KiwiSaver.
  • If you are employed, you should contribute up to your employer match and no more.
  • If you are self- employed, just put in $1042.86 to get your $521.43 tax credit every year.
  • All extra cash goes into non-KiwiSaver investment.
  • If you are not retiring extremely early (in your 20s) and your KiwiSaver is below 20% of your total investment portfolio, you will be alright.

She-ll-be-right-mate.jpeg


About FIRE

If you want to know more about Financial Independence & Retire Early, I will cover that in the future. Meanwhile, Check out the link below.

What is Financial Independence & Retire Early (FIRE)

The Shockingly Simple Math Behind Early Retirement

The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”

Kiwi Mustachians – New Zealand FIRE community (Facebook Group)

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.