One of my favourite podcasts is ChooseFI and over the weekend I listened to a cracking episode with with Joel of Financial 180. The topic was the “Milestones of FI” and I thought it would be interesting to think about where each of us is on our journey.
Milestone 1: Positive net worth
You hit your first milestone when your debts no longer outweigh your assets. Some folks are fortunate and never start out with debt but, for most of us, we will normally start out with some debt e.g. a student loan.
Milestone 2: $100K net worth
If you are a Personal Capital (financial tracking tool – US only so not much use for us) user then apparently when you hit $100K they start phoning you up to try and sell you their paid services. It’s a somewhat arbitrary point but I think there is something deeply satisfying about hitting round numbers so I think it applies to us Kiwis as well.
Milestone 3: F#$% U! money
F#$% U! money is classified as having about 2-3 years of expenses saved up. Your amount will vary depending on your risk tolerance. I’m reasonably risk averse so for me it would probably be at least 5 years! It’s called “F#$% U” money as it enables you to walk away from a bad job if necessary.
Milestone 4: Half FI
You need to know your “number” in order to know when you hit this mark. You need to know how much you spend/want to spend and multiply that by 25 to get the standard FI amount. Divide that by 2 and you have your half FI milestone number.
Milestone 5: Lean FI
Lean FI is the amount you need to basically just survive with very little discretionary spending. This is a bit extreme for me as I like some of life’s little luxuries but some folks are quite happy being relatively hardcore.
Milestone 6: The crossover point
This is where you start to earn more from your investments than you are managing to earn from your salary. You may feel that this makes you FI but realistically investment income can fluctuate so it is just a milestone.
Milestone 7: Flex FI
Flex FI occurs when you are close enough that you are likely to be safe especially if you retain flexibility in your spending patterns or are willing to return to some form of work if your investment returns drop dramatically. The value for this milestone is a net worth of 20x your annual spending. I personally exclude my home from my net worth as it doesn’t generate an income but you may wish to include it if you are happy to sell up to support RE.
Milestone 8: Financial Independence
You are technically financially independent when you hit a net worth of 25x your annual spending. Any work you do now is by choice. You could retire early and be reasonably sure you would not run out of money.
Milestone 9: Fat FI
Fat FI is what you aim for if you are very risk averse or you want a retirement that has room for a large amount of luxuries. The value for this milestone is a net worth of about 30x your annual spending.
The journey to FI can often seem long and boring. Having a list of milestones that you can tick off seems like a good idea. I’d strongly urge you to listen to ChooseFI and visit Financial 180.
However, there are three investment options are objectively better than ETF and Index fund with low entry requirement, low risk and high (sometimes guarantee) return. They are the low hanging fruit of personal finance that everyone should do it. Those three investments options are pay off consumer debt, join KiwiSaver and reduce the mortgage. I will go through each one of them and talk about they risk and return.
No.1 Pay off Consumer Debt
Credit card debt, car loan, payday loan, personal loan, hire purchase, P2P loan… All of those are consumer debt. Debts that are owed as a result of purchasing goods or services that are consumable and do not appreciate in value. Those debts usually have high-interest rate and exorbitant admin fee. If you are paying interest on depreciating assets, they are dragging back you financially. You won’t go forward if most of your income goes to those stupid bills. You need to get rid of them ASAP!
Paying off debt is Investing
This concept may not be obvious to everyone but PAYING OFF DEBT IS INVESTING. For me, debt and investing are just two sides of the same coin. One side (investing) is to increase your wealth (with a given level of risk). Like you buy NZ Top 50 ETF from SmartShares, if the share price increase and they pay out a dividend, your wealth increased. On the other hand, the shares price may drop, and your wealth will decrease. So there is a risk of losing money with investing.
The other side of the coin (debt) will reduce your wealth. If you have $1000 credit card debt with 20% interest, your interest expense for the first month will $16.67. So your wealth reduced by -$16.67. Unlike investing, the debt will guarantee to reduce your wealth and drag you back financially. Therefore, reduce your debt will move you forward financially, guaranteed.
Whats the return and risk?
I will use a simplified sample to present the financial effect of paying off debt.
Assume you have $1000 in cash and $1000 credit card debt with 20% interest. If you keep the $1000 in cash and don’t pay it off credit card debt, in one year, you will be $1000 x (1 + 20%) = $1200 in debt. Financially you moved backwards by $200.
Now, you invest the $1000 cash in a 12 months term deposit with 3.25%. You still keep your $1000 credit card debt and not paying that off. In one year, your earn $1000 x 3.25% = $32.5 in interest from your term deposit. Take away $9.75 as tax; you will have $1022.75 in cash. On the other hand, your credit card debt still cost you $200 in interest. So financially, you moved backwards by $177.25.
Instead of invest that $1000 into a term deposit, you use that $1000 to pay off your credit card debt. Since the credit card debt is gone, it won’t occur interest. In one year, you will be in the same financial position.
Look at all three scenarios, pay off credit card debt resulted in the best financial position. As you putting that $1000 cash to pay off your credit card debt, you are in fact getting 20% return on those $1000. Unlike other investment, those returns are Tax-free and guaranteed. If you need to get 20% after-tax return on investment, the pre-tax return will need to be 27.77%. That is an excellent return on investment. I am not saying you can’t get 27.77% return out there, but I am sure there is no investment (except KiwiSaver) can guarantee a 27.77% with no risk.
If we look that those high-interest-rate consumer debts, paying them off will be a great return for your money. Also, paying off consumer debt will reduce your financial risk and stress. You will be in a much better position when you negotiated mortgage term and resulted in better deals. That why paying off consumer debt is one of the top three investment options.
What about Student Loan?
The student loan in New Zealand is interest-free as long as you are staying in the country. The payment only occurs when you have income. So you should just pay it off as you’ve got income. I would not be paying them off early unless you plan to leave the country for a long time.
No. 2 – Join KiwiSaver
KiwiSaver 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. Once you join KiwiSaver, at least 3% of your income will invest into a KiwiSaver fund. You can only access those fund until you use it to buy your first home or turn 65. What makes KiwiSaver to be a top investment option is because of employer contribution and member tax credit.
If you’re over 18 and is a member of KiwiSaver, when you make your KiwiSaver contribution, your employer also has to put money in. By law, the employer required to contribute at least 3% of your income. The employee can choose to contribute either 3%, 4% or 8% but employer only requires to match at 3%. Some employer may decide to match 4% or 8%.
It may seem you will be making 100% return on investment on your 3% contribution. However, IRD will take out tax from you employer contribution, so the actual return on your contribution is about 67%-89.5%. (You can find out why here) It’s still an unbeatable risk-free guaranteed return.
Member Tax Credit
KiwiSaver Member Tax Credit is to help you save on your KiwiSaver. The government will make an annual contribution to your KiwiSaver fund (a.k.a Free money). The amount is $0.5 on every dollar up to $521.43. You will have to be 18 or above to receive the tax credit. This is a way of government help you save for your retirement and encourage you to join the plan. It cap at $521.43 so it will benefit for the most full-time employee but not favour mid to high-income earner.
Return on Employee
If you are over 18, fully employed, annual income at $55,000 before and contribute at 3%. Your minimum return on your contribution will be like this.
Your annual contribution (3%): $1650
Employer contribution after tax: $1361.25
KiwiSaver Member Tax Credit: $521.43
The return on your investment: (1650 + 1361.25 + 521.43 – 1650) / 1650 = 114%
Return on Self-Employed
If you are self-employed, you won’t get the employer match, but you are still entitled to member tax credit as long as you make a minimum manual contribution for $1042.86
Your manual contribution: $1042.86
KiwiSaver Member Tax Credit: $521.43
The return on your investment: (1042.86+ 521.43 – 1042.86)/ 1042.86 = 50%
Those are only your base return; you are likely to make investment return on your KiwiSaver Fund as well. Here is a couples data on a KiwiSaver fund with different income level. The KiwiSaver fund cost and return data are based on SuperLife 80.
No. 3 – Reduce your Mortgage
Mortgage payment can easily be the biggest expenses on most homeowners’ budget. Average first home buyer will spend $1500/month on the mortgage, and it will cost more if you have a mortgage in a major city. Imagine what you can do with that money if you don’t have a mortgage payment.
Return on Reducing Mortgage
Paying off have the same effect on paying off consumer debt. It will give you a tax-free and guaranteed return. The return is not as high as those consumer debts because the interest rate on the mortgage is lower at 4% – 6%. The equivalent pre-tax return is around 8.3%.
Reduce your Mortgage or Invest elsewhere
Some people may think 7-8% is not a very good return, and you can achieve that with other investment options without taking a lot of risks, like the share market. However, I still think paying off the mortgage on your own home is a better option because you are paying off an asset that will provide you with a place to live, offset the cost of renting in the future and the house will increase in value (in the long term for most cases).
If you can’t decide to reduce mortgage or invest elsewhere, ask yourself a simple question:
If you fully owned your house today, will you borrow $500k on your mortgage-free house to invest in share market? Or you will use your income to invest in the stock market every month?
If you say you won’t borrow on your mortgage-free home (like me), then you should focus on reducing that mortgage now. I basically asked the same questions but put it in a different perspective. If you have the money to reduce the mortgage, but you put it into the share market, you are basically borrowing on your house to share market.
Saving Big on interest expense
Since the mortgage size is usually over $200K (over $500k in Auckland) and the payment terms are 20-30 years. You end up paying A LOT on interest expenses. Check out the chart below.
For a 30 years term mortgage at 5% interest rate, you will end up paying 93% extra for interest payment. So what will happen if we increase our payment and shorten the mortgage by ten years?
When we shorten the mortgage term by ten years (-33%), our monthly payment increased by 23%, total interest paid decreased by 37.3%! Only 36.9% of your payment went to interest.
Reducing mortgage may not give you a high percentage return, but due to the size of the mortgage, the saving you are likely to make is in the hundreds of thousands. I will have a series of blog posts in the coming month to show you how to be smart on your mortgage with different setup and tips.
The top 3 investment options in New Zealand are paying off consumer debt, join KiwiSaver and reducing your mortgage.
Paying off consumer debt is investing. The returns are in the range of 15% – 35%. You will be in a better financial position once you pay off your debt.
A KiwiSaver member can enjoy instant return from minimum 50% – 110% due to member tax credit and employer match. However, that money is locked-in until you purchase your first home or turn 65.
Paying off return about 7% – 8% on your dollar, not as high compared to other. However, due to the size of the mortgage and interest paid, you are likely to be saving hundreds of thousand of the dollar
Sharesies started rolling out their trial run (a.k.a beta) investments options a couple of weeks ago. I got their invitation recently and checked out their offering. Sharesies is currently offering six SmartShares ETFs for their investors including NZ Top 50, AUS Top 20, US 500, NZ Bond, NZ Property and AUS Resources. You can check out their current offers here.
What is Sharesies
Sharesies is a New Zealand financial start-up company supported by Kiwibank Fintech Accelerator. They are an investment platform where users can make investments with small amounts of money. Their mission is to make investment fun, easy and affordable.
The main selling point of Sharesies is that by paying a $30 annual fee an investor can invest into multiple investments with the minimum at just $5. Also, there is a $20 credit for the early Beta investor.
Invest $5 into ETF
By comparison, SmartShares ETF’s initial investment is $500, set up cost is $30/ETF and monthly contribution minimum is $50. So Sharesies is a great way for beginner investors to invest a small amount into many low-cost, diversified ETFs. It bypasses the $500 initial investment and $30 set up fee with each ETFs.
While Superlife also doesn’t require initial investment and the minimum contribution can be just $1. How does Sharesies stack up to SuperLife and SmartShares on ETF investing?
Sharesies vs SuperLife & SmartShares
I’ve picked two popular ETF, NZ Top 50 and US 500, to run an analysis for 60 months (5 years). The analysis will compare the results on different contribution level(low and high contribution) for all three services. The low contribution will be at Sharesies minimum requirement, $30 initial investment (for the annual admin fee), $20/month contribution (about $5/week); The high contribution will be at SmartShares minimum requirement, $500 initial on each ETF, $50/month conditions.
NZ Top 50 ETF at low contribution
Here are the fee structures on the ETFs:
This is the amount of low contribution and expected return:
So Sharesies have a higher admin fee ($30) and ETF management cost (0.50%), so its expenses should be higher then Superlife NZ top 50 ETF. Since Sharesies are aiming for beginner investors, I put around $5/week as a low-level contribution. The $30 initial investment cost is to cover Sharesies annual fee. Smartshares will not be included in this analysis as the investment amount is too low.
Here is the investment return each year:
Superlife did better as it has a lower management fee and admin fee resulting in a higher return for the customer. The 5-years different is $135.81, 8.4%.
NZ Top 50 ETF at high contribution
This is with a higher contribution and expected return:
We increased the contribution to $50/month, put $500 as an initial investment and include SmartShares into the mix.
Here is the investment return each year:
SmartShares came out on top despite the fact that they have a higher management cost. The main reason is that Smartshares don’t have an annual admin fee while Superlife charges $1/month. However, if you wish to cash out those Smartshares at this stage, it will cost you at least $30.
The difference between SmartShares and Sharesies is $163.34, 3.3%. Although both services have the same management cost, Sharesies charge $30/year admin fee which brings down the balance.
US 500 ETF at low contribution
Here is the fee structure on US 500 ETF:
This is the amount of low contribution and expected return:
This is more interesting as Sharesies have a lower management (0.31%) cost compared to Superlife (0.44%).
Here is the investment return each year:
Due to the smaller holding, the lower management cost (0.35%) did not cover the higher annual fee ($30) with Sharesies. Superlife holding was $122.28 more than Sharesies in year 5, 8.1%.
US 500 ETF at high contribution
This is the amount of high contribution and expected return:
Now we will do the same thing by increasing the investment to Smartshares minimum requirement.
SmartShares USF came out on top with no annual fee and lower management cost. The different between SmartShares and Sharesies at year 5 is $154.75, 3.3%. The difference from Superlife is $41.5, 0.9%.
In both scenarios investors with a low contribution level are better with SuperLife. If you have $500 and $50/month to invest, SmartShares is the cheaper way. (Although I will suggest going with Superlife on NZ top 50. I’ve already covered that in another post)
How about portfolio building?
Since Sharesies investors can bypass SmartShares setup fee and initial investment requirement Sharesies is actually a great tool to build a simple portfolio. I will use US 500 ETF, NZ Top 50 ETF and NZ Bond ETF to build a portfolio.
Here is a balanced portfolio you can easily build with Sharesies. 25% NZ Bond, 37.5% US 500 and 37.5% NZ Top 50. If we keep the low contribution at $20/month, you can put $5 in NZ Bond, $7.5 in US 500 and $7.5 in NZ Top 50.
If you wish to set up something similar in SmartShares, you will have to spend $30 x 3 =$90 on set up fees, at least $500 x 3 = $1500 initial investment and $50 x 3 = $150/month contribution. Not feasible at all.
SuperLife, on the other hand, as my best pick for portfolio builder in New Zealand can easily build the same portfolio. Let’s check out the cost difference:
Here are the contributions and return:
Here is the investment return each year:
Superlife still edged out at year 5 with $123.15 more, 8.2%. I didn’t do a high contribution comparison here because SmartShares are really not for for portfolio building.
Based on the analysis, SuperLife is still the better choice on low contribution and most of the high contribution (except US 500 ETF) regarding cost. However, I still think Sharesies is doing something good here.
Sharesies is promoting to young Kiwis who never invested before by providing a straightforward and easy-to-use app. The sign-up process is simple and painless. The interface is robust and delightful. They’ve done an excellent job on explaining each investment options to beginner investment and make it accessible. Check out the screenshots below.
I don’t mind about the $30 admin fee if that what’s it take for a newbie to start investing for their future. I’ve been telling readers to spend $12/year on Superlife as they have a better user interface and functions over SmartShares. Sharesies interface and user experience are way better than both of them. They made investing as easy as shopping online, which should bring a lot of people into the world of investing.
Sharesies are still in beta, so there are some functions are missing, like reinvest and auto allocation. I am sure Sharesies will continue to improve on their functions and bring in more investment options. Hopefully more companies like Sharesies will pop up in New Zealand to bring more people into investing.
More investors, increase the market size, lower the cost!
Life is full of seasons. There are times in life when it’s harder to build wealth, such as when you’re a student, or you have a new-born child. And there are times in life when it’s easier, such as when you’re a working empty-nester with no mortgage and serious savings.
There are a number of life events that can put you in a position to turbo charge your path to financial independence and early retirement. It’s valuable to be aware of these situations and taking advantage of these opportunities when they arise. If you’re not mindful, you might find that your excess cash gets eaten up in lifestyle expenses that, while nice, may not help you with your ultimate goal of becoming financially independent and retiring early.
When you couple up for the first time. When two people move in together, they often find that many of their expenses reduce. You often find that something that you would’ve had to buy on your own, is now effectively half the price because you’re sharing the item and its cost. It’s valuable to use this as an opportunity to increase your savings rate.
When you pay off your student loan. If you have a New Zealand student loan and you’re working in New Zealand, you effectively have a 10% additional tax on your income in the form of student loan repayments. Once the loan is repaid, you essentially get a 10% pay increase. If you were able to live without this 10% before, it’s a good idea to “pay yourself first” and let it bump up your saving rate.
When you pay off your mortgage. Paying off the mortgage is a huge financial milestone. Once the mortgage is out of the way, you’ll have a lot of extra cash flow to put towards building up wealth. (The sooner you can pay off the mortgage, the better your long-term situation is likely to be. Consider the difference between repaying a mortgage at the age of, say, 40 compared to the age of 60. That’s an extra 20 years of extra cash flow.)
When you’re able to self-insure. For any given level of cover, personal insurance premiums will generally increase over time. (The biggest risk factor for most health issues is age…) Ideally, however, your insurance needs should reduce over time as you become better positioned to self-insure. The sooner you can get into the virtuous cycle of having enough wealth to be able to self-insure in relation to most events, the less you’ll need insurance, and the more you can put the money that would have gone towards premiums into building more wealth.
Whenever you get a decent raise. If you’re used to living on a certain level of income, a raise is a bonus – you have money that you previously didn’t need. Consider pre-committing to saving a portion of any future raises, which over time, will result in the percentage of your income that you save continuing to increase.
Don’t get me wrong – when you have an event that frees up cash flow, it’s great to increase your spending and the quality of your life. But as with any spending decision you make, it’s important to make decisions that align with your long-term goals and values. If you’re reading this blog, it’s likely you’ll want to take advantage of these milestones to help you become financially independent sooner and retire earlier.
Lets not sugar coat it, becoming financially independent and retiring early will be HARD. Leaving the rat race years or decades before what is ‘normal’ and having a large enough stash to last past your 150th birthday is no small feat. It will take hard work and commitment, but most important of all it will require a radical new mindset. Here are three ideas that may help along the way:
1) Redefine Successful
The biggest barrier to changing the way we spend and save is our status anxiety. The fear that if we don’t abide by the norms of modern western consumer culture and buy and do all the things the media and advertising define as ‘success’ that we’ll be miserable losers. So instead we make crazy decisions like buying fancy cars, expensive clothes and electrical gadgets which we think will make us happy, or cool or both. Of course, when we take time to reflect on the absurdity of this way of living we see it for the madness that it is. But everybody else seems to be doing it and we don’t want to be the odd one out (humans are pack animals) so we just kind of go along with it anyway.
The good news is that embracing a less consumerist lifestyle and notkeeping up with the Jones’ doesn’t require masses of willpower (remember this is a blog post about mindset). If you really believe that the trappings of status will make you happy then denying yourself these things will make you miserable. But its not the presence or absence of things that makes us happy or unhappy, it is the presence or absence of desire for things.
Craving and desire are the cause of all unhappiness. Everything sooner or later must change, so do not become attached to anything. Instead devote…
Nurturing a sense of inner peace and devoting yourself to higher spiritual goals is one way of redefining success as many great spiritual and religious leaders have taught.
Thankfully for the weaker of spirit among us there is another way to free yourself of the desire for superficial status symbols – become an obnoxious smug know-it-all!
The Jones’ are sad, status obsessed wannabees wasting their money on frivolous crap because they are stupid.
There is something darkly enjoyable about feeling smugly superior to people and it makes frugality a breeze. You don’t want to be like the Jones’. The Jones’ are idiots. What kind of moron spends $40,000 on a car when you can get one that does all the same stuff just as well for $4000? Why would you pay full price for clothes when you can get the same stuff second hand for a fraction of the price – do you enjoy paying more to have to remove stickers and labels? All those people paying for cafe lunches 5 days a week instead of spending a fraction of that money on a packed lunched – financially illiterate fools! I wonder whether people will look back when they are 65 and still working and think “Wow – I’m so glad I spent those extra few hundred dollars on that phone that did all the same things as my old phone but had a curved edge – what a great investment of my hard earned cash”.
So there it is. It’s up to you whether you prefer to take the high road or the low road, as long as the road leads away from all that stuff you don’t really need.
2) Focus on Freedom
This might seem counter-intuitive but one of the best ways to become financially free is to become aware of the many ways your freedom is constrained. If you are lucky you have a job you enjoy, and that can be great, but it would feel even greater if you were free. While you are dependent on the income your job provides to support yourself (and or your family) then work is not optional and that makes it not fun. There is something in the Kiwi psyche that is fiercely independent and anti authoritarian, we don’t seem to like stuff that is compulsory. This can be seen in the way Kiwis (including many low income workers) rejected compulsory unionism, we rejected compulsory retirement savings, even though we know it is something we should do – we just didn’t like to be told we had to. We even rejected when the ‘nanny state’ tried to make energy saving light bulbs compulsory: “Screw you NZ government, you can’t force me to save energy and massively reduce the cost of lighting my house!”.
One of the more entertaining personal finance bloggers is a British guy called ‘The Escape Artist‘. He compares the journey to financial freedom to The Great Escape in a kind of fun way. Your boss and the system represent the guards trying to keep you imprisoned in your 9-5 workaday life till you are old and grey. Your family, friends and colleagues are mostly docile prisoners resigned to their sentence, unwilling to rock the boat or question the propaganda the guards feed them. But once you know that escape is possible you become animated by it, unwilling to accept your fate you are constantly and quietly working away towards your eventual release. Freedom is not something that just all arrives out of the blue one day, it is bought slowly piece by piece over time. Think of each investment or saving adding to your speed and altitude until eventually one day you reach escape velocity and can soar over those prison walls.
The first step for me was a bank account given the name ‘Freedom Fund’. Lots of people have a rainy day fund/emergency savings account. The difference with the Freedom Fund is it has a positive focus and long term objective. Having savings in case something bad happens is a short term goal with a negative focus, purchasing freedom from the rat race is a long term goal with a positive focus. Every dollar that is put in the fund is purchasing a tiny little slice of freedom and those pieces add up quickly
Purchased freedom has great value well before full Financial Independence is achieved. One of the recurring themes in Financial Independence blogs is the concept of ‘F – You Money’ this is an emergency fund sufficient to cover for loss of income for a lengthy period of time should you ever decide you want to tell the boss “F – You”. I can personally attest to the power of this concept. I have never told my boss “F – You” and probably never will, but having a decent emergency fund means that if I ever felt I needed to I could. It also means that the time I went to ask for a 6 month leave or the time I asked for that promotion, or the time I went to ask for flexible working hours I was able to approach it with confidence and negotiate as an equal partner rather than accept whatever was offered, safe in the knowledge that if push came to shove I could just walk away from the job. The money was still sat in our bank account unused, but on some psychological level I had spent it buying just a little bit of my freedom and that felt great!
3) Get Some Perspective
One of the foundations of financial literacy is learning to distinguish between needs and wants. In our 24/7 advertising saturated consumer culture it is all to easy to forget that human beings really have a very basic set of needs. We need food and water and warmth and shelter. We are social animals, we need company and belonging and love and affection. In a practical sense we need some form of income or employment to pay for these things. We are now on level three of Maslow’s Hierarchy of Needs and it’s about here that we start to get a little wobbly. Once we are in the area of ‘esteem’ our needs stop being absolute and start to become relative. We start caring about the Jones’ again. Before we know it we find ourselves trapped in a work and spend treadmill where we are sacrificing those basic needs like our health and well-being just to compete – madness!
So what is the antidote to this loss of perspective? One part of it is around taking a big picture view and practicing gratitude. Even the most hard up of Kiwi’s are able to live a lifestyle of massive opulence compared to 100 years ago. Even if we compare ourselves only within the present day, we live in a country of incredible wealth. We have safety and security, a fantastic natural environment, a first world healthcare system and a social safety net which means that unlike many parts of the world and many generations past it is basically unknown to see people starving or suffering from preventable disease. Of course we can always be wealthier than we are, but lets not feel too hard up just yet. Visit the Global Rich List to see how you rank, then remind yourself that you may be in the top 5-10% of wealthy people in the world and have aspirations to be in the top 1%, things aren’t so bad – then say thank you! 🙂
Purchasing your freedom is a long journey and it’s not always going to be easy. But having the right mindset is half the battle. If you know what success looks like, you understand why you are making the change and you have a rational perspective on your current position and what your real needs are then that’s a good foundation. All that’s left is just to get started. Happy saving!
There’s a quiet revolution in personal finances going around the world at the moment. It’s called FIRE (Financially Independent, Retire Early) and our messiah is the one and only ~Mr Money Mustache~. Before launching into the review it may be timely to go over what exactly FIRE is in order to appreciate the approach in the book ‘How To Retire Early’.
What is FIRE firstly?
FIRE advocates living frugally, calculating your savings rate AND investing surpluses early and regularly in your working life in low cost funds and being able to retire early due to the compounding effects of turbo charging your retirement stash in this way. Saving and investing more than 50% of your net take home pay is not uncommon in the FIRE world.
FIRE differs from mainstream financial advice in that it advocates virtually solely investing in growth assets like the sharemarket apart from your emergency fund when you are in your wealth accumulation phase. When you are in retirement you may consider some bonds to iron out volatility but not as much as main stream advisers would recommend. It then advocates a ‘safe withdrawal rate’ on your savings of 4% or less and says you could quite easily leave a lot for your heirs despite withdrawing your capital to live off.
The advent of low cost index funds and the ability to invest and withdraw small amounts regularly has facilitated and made more popular the concept of FIRE. Ie the liquidity of being able to access your funds has made all this possible for the average person starting out.
This goes totally against traditional portfolio asset allocation retirement planning that is telling us to save up huge amounts of money, slowly moving to a more conservative portfolio as we get older and then living off the income from meager returns from conservative investments like term deposits. This mainstream way of thinking may defer your retirement years by many and cause you to save far more than you really need and work for much longer before you retire.
A strong component of the FIRE ethos is keeping things simple, not holding too complex a portfolio and getting on with your life.
Now onto the book…
If you are going down the FIRE way How to Retire Early is a an excellent addition to your personal finance book library. I read this from start to finish more or less in the week it arrived at my door from Amazon (it rates 4.8 stars on Amazon which is an indication of it’s worth).
It’s the real life story of a couple, the Charltons, who have documented their journey to early retirement using the FIRE way of thinking. They explain the maths behind the FIRE concept. The Charltons reached FI in their early 40s in 2004 (after 15 years of working and saving) so they are really ‘walking the talk’ having been FI now for 10 years. They generously lay out all their numbers and go on to prove you don’t have to be earning 6 figures to retire early. Their income averaged around $89,000 between the two of them in their working lives and they retired within 15 years of embarking on FIRE.
The remarkable thing is they started before the FIRE movement started to gain traction. One of their main messages is to invest in yourself and make sure you have trained yourself in something marketable when you are on your journey to FI. They also provide many tips on living below your means.
Admittedly there is still a lot of aspects of the book that apply only to the US, but there is still enough great general information in there that I’m sure I’ll be referring back to it on many occasions. For eg 401k is our Kiwisaver (although they have many variations on that over there). Also the chapter on the tax advantaged/non tax advantaged funds is not relevant to NZ, nor is the health care section. (they talked about the Affordable Care Act which may or may not stay under Trump).
Some other things to keep in mind when reading this book are:
The Charltons started saving for retirement in the early ‘90s when the stockmarket was going through a big upswing, hence why they may have been able to achieve the 11% average gain on their portfolio before retiring. Even though timing isn’t everything, the time in the economic cycle when you start to invest and when you start to retire can have significant effects on your returns and your safe withdrawal rate.
Children slow down the path some what (don’t we know that if we have kids!) and maybe add another 5 years to your FIRE target.
Housing appears to be a lot cheaper in the US outside of the main cities which allows FIRE aspirants to have a lot more housing options there than in New Zealand to achieve their goals.
Health care is one of the biggies they have to take into account over there in the US with early retirement plans. I was thankful for all that is available to us in NZ after reading this. The tip to go down over the border to Mexico for dental and medical tourism was fascinating. Apparently the American retirees park on the border, walk over and there’s a whole load of medical centres on the Mexico side!
The book is very well written, clear and easy to read – lots of white space- which is a main factor for me in any books I read (I’m doing most of my reading on the internet these days!). I noticed on reading a few FIRE blogs that you have to get control of your numbers, there’s no way around that. And the ones that have reached FIRE track their numbers fastidiously. The maths behind Mr Money Mustache approach, which is very different to traditional financial planning is all contained in this book with very practical and easy to follow illustrations.
The fact that the Charltons are sharing their numbers and a practical system to enable us to forecast our numbers is a huge gift to the FIRE community and I’d say it’s one of the MUST have books for FIRE proponents. They even share their compounding spreadsheet which is brilliant in it’s simplicity and could easily adapted to NZ conditions substituting 401k with kiwisaver.
The Charltons now travel the world and include their very street wise tips for travel and also for living well but frugally in retirement. (favourite tip of mine was advising slow travellers to go to the local YHA and then sign up an airbnb lodging AFTER you arrive at the town so you can inspect the place beforehand). That’s one cool tip from some savvy travellers.
One thing that came through was that their first trip once they retired was to New Zealand, they love hiking and the outdoors and couldn’t say enough good things about our country! If you want to follow their travels they have a great site documenting all their trips on wherewebe.com. Look out for the NZ section of their gallery!
On their website they also share their fantastically simple planning spreadsheet. If you’re a dab hand with spreadsheets you could easily modify for NZ conditions by swapping the 401k for our kiwisaver and also changing the Roth IRA to your cash holdings.
I’d definitely recommend taking the time to read this book, it’s one of the true personal finance books that follows the mustachian principals. I challenge you to read this book and use the methodology to calculate when you will be FI. It may be sooner than you think! Also a visit to their website, www.wherewebe.com will give you the inspiration you need to continue on the path to early retirement.
SmartShares is an excellent way to invest in low-cost, diversified ETF in New Zealand. Especially if you wish to invest in the top 500 companies on US stock market. Smartshares S&P 500 ETF (USF) is a great option for all investors as it is simple to understand, the management cost is low at 0.35% and has a long positive track record. I’ve been getting questions on how to start with investing with various investment service I covered and the most of the questions on Smartshares. So here is the guide on Smartshares.
How long will it take?
Let’s set the right expectation here, its gonna take a LONG time to set up a monthly contribution plan with SmartShares. For average Kiwi investor (without any connection to politician or United State), will take about 2-5 days to set up with most investment services. However, with SmartShares, you will have to spend around 27-53 days. Yes, that is not a typo. Just make sure you are prepared for it.
Sign up with SmartShares
We are going to walk through the setup process for an individual investing $500 into S&P 500 ETF with a $50/months contribution. Before we start, you will need to prepare the following items.
Under investment options, select “Individual”, leave it blank on “Common Shareholder Number” if you are a new investor. Put $500 (minimum) on US 500 (USF) investment and $50 (minimum) as regular saving plan.
Next page is your personal information and email address. That email address will be your main point of contact. You will receive an email during the set process to confirm your email address.
Next is your ID verification. Put in your NZ Drivers license details.
Next, confirm your payment details with your bank account no. Please make sure you have enough fund at 20th of each month.
Next part you will have to review your information and confirm your contact email with an authentication code.
Here is the authentication email with the code.
Once you completed this process, you are done with the sign-up. The next part is the long wait….
What you are waiting for?
The SmartShares signup process is straightforward and painless. However, investors need to wait a long time to check up on their holding. An investor cannot log on to SmartShares to check their holding. SmartShares will direct investor to use Link Market Service to do that. To register for Link Market Service, you will need two pieces of information: FIN (Faster Identification Number) & CSN (Common Shareholder Number). FIN will send to you by mail (physical letter), and CSN will be on your holding statement in an email. You will need those two numbers to prove you own those stock. Check out this page from ANZ Securities on what is FIN and CSN.
The long wait
So here is my timeline on signing up with SmartShares.
4/5 – I submitted my application on SmartShares website.
8/5 – I got a confirmation email on my SmartShares application and my direct debit.
20/5 – $500 initial investment withdraw from my account, and it supposes to make the purchase at the beginning of June.
6/6 – the purchase happened
7/6 – a letter came into my mailbox with the FIN number. I still can’t log onto Link Market Services because I don’t have the CSN number.
12/6 – got an account statement from Link Market Service with my CSN number.
I managed to log into Link Market Service and check out my holding. Yeah!
So it took 39 days for me. To be fair, I can submit my application on 12/5 or 13/5, it will still make the 20th direct debit cut-off date. So you can shorten 7-8 days there. On the other hand, if you submit your application right after the 20th cut-off date, you will have to wait over a month.
Why it took so long?
Smartshare is NOT an investment service or fund manager. They are an ETF issuer. ETF is not an investment fund; they are tradable shares. Usually, you will have to set up a brokerage account and pay a fee to buy shares in New Zealand Stock Exchange. The minimum is $30/trade.
SmartShares offer a service allow investor buy shares in a small amount monthly without paying a brokerage fee. If I have to do it in the with a stock broker, it will cost me at least $360/year on brokerage fee alone. I am happy to wait a couple of days to save $360.
If you don’t want to wait that long, you can open up a stock brokage account and buy SmartShares directly on the stock market. It will take 2-5 days to set up a brokage account, and it will cost at least $30/trade.
Hope this blog will set an expectation for you when you sign up SmartShares. Don’t be panic when they took your money for 2 weeks without any communication. Your FIN and CSN will arrive…eventually.