How to make up for lost time (#216)

Most of us kick our 20-year-old selves for spending all our money making poor decisions in Melville instead of taking full advantage of compounding. The financial independence, retire early (FIRE) movement has given us valuable tools to reach our financial goals despite those late nights in Melville. I discussed that with FIRE-man Patrick McKay here.

Since regret over lost investment time is something so many investors grapple with, we wondered whether we could quantify exactly how much we missed out on in order to make it up. It’s a simple question, but the solution is hella complicated. I tried to do this for my own situation like this:

1. First I worked out how much money I would have needed today so I could stop contributing to my savings and still reach financial independence in 10 years. I never considered this before, but it’s basically the baby version of financial independence.
   
   To do this, I multiplied my current expenses by 300 to get to my FIRE number. (I always do this, even though I know that number by heart.) Then, using an average growth rate of 8%, I worked out what that amount would be in today’s money. 8% is slightly below the 9.4% annual return the JSE ALSI achieved over the last 10 years. (You can use a future value calculator online to do this.) 
2. Next, I subtracted what I managed to save so far. 
3. I divided the difference by 120 months—10 years—to get to the monthly rand amount.

The bad news is it’s a lot of money. To add that to my current investments to reach my FIRE-goal, I’d have to take on another job. The good news is, I don’t have to stop investing now. Remember, that’s the amount of money I would have needed to stop contributing to my investments today.

I wanted to arrive at a simple rule of thumb to help us think about making up for lost time. It turned out to be far more complicated than that, but hopefully this discussion gives you something to chew over. I’m excited to hear your thoughts.

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Win of the week: Stippled 

I recently listened to your perfect money month podcast. 

I for the last 20, and my wife and I for the last 10  years, have followed a very simple "perfect money month" template. We are both 43 now and have recently become financially independent based upon the 4% rule (we are actually aiming for the 3% rule which will probably take another 3 years to achieve).

The monthly template has been as follows:

• Give 10% of after tax income.
• Save 15% into a Pension, Provident or RA.
• Budget discretionary spend at the beginning of each month. [We use 22seven]
• Initially pay down debt, then Invest, the extra money [after we became debt free 7 years ago redirected to global broad based ETF . .  no individual shares].
• One great dinner out each month . . .  but only one :-)

General rules

• No debt except for housing [This means we still driving "student" cars]
• Automate as much as we possibly can
• Review insurance, cell phone and medical aid annually [In November for us]
• Review wills annually [In June for us]
• Balance investments evenly between each other to maximise tax benefits later on.
• Married out of community of property with accrual

This has really been an unsexy and boring process to follow month in and month out.  However the results have astounded us.  

They are:

• My wife was able to resign from her job when our first child was born seven years ago to be at home with our kids (we now have 2) which was always a dream of hers.
• We are now financially independent and we have made more money from our investments over the last three years than from my full time employment!
• We are able to afford to send our kids to any school of our choice which was always an important goal for us [Not that we automatically chose the most expensive, we just never wanted money to dictate the choice].
• We are able to support friends and family financially if and when the need arises [Never a loan, always a gift]

We also recognise how luck and privilege have played a very large part in our journey.  We both have tertiary education and have never been unemployed unwillingly.  But we have not wasted that good fortune and rather used it to create stability and choices for us and our family.

Just in case I give the impression of all work and no fun . . .  I took a year off work in my mid to late twenties and spent it backpacking from Cape Town to Addis Ababa and climbing mountains in South America.  We take regular holidays locally to the beach and have taken 4 great international holidays in the last 10 years [We were even able to take my mom inlaw to Venice - It was her first trip out of SA].

We can honestly not recommend more strongly the boring "Perfect money month" idea.  It has benefits far in excess of what you can imagine when you start.  Approximately 240 months in, and we can say that without any hesitation. 

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Mike 

The TERs of our global index trackers are extremely high compared with for example Vanguard. Is it not better to purchase them directly through the USD Account rather than purchasing a global tracker from one of our local providers at more than 6 times the fees? Eg. Vanguard VOO is 0.03% and the cheapest S&P500 tracker in SA is I think Sygnia @ 0.2%.

I wonder why our RA providers use global trackers from local providers if the fees so much are higher? Maybe it is just easier for them cause they don’t have to move any money offshore but surely it would be worth their while to do it?

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Edwin

I have been wondering if you or Simon have some tips or observations regarding the income side. I have been a salaried employee for most of my 15 year career and have spent a total of 6 weeks in my working life unemployed. I am currently employed. 

My question, therefore, is what else can you advise me to do in the area of increasing income, besides simply starting a side gig. I have tried a few side gig ventures before. Some are still going, but could never replace my income. It's a lot of work and I’m wondering if it’s worth giving up on this and just focus on being indispensable to my employer. Should I be job hopping multiple times maybe? Is increasing your income supposed to be this hard? Is it a worthy goal to actively chase?

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Hans

If Jared is doing contract work in Kuwait and spends some of the year in SA, he might owe SARS tax on his foreign earnings over R1m. This is a change in the tax code as of March this year.

Satrix has an ALSI Unit trust. Given that Satrix and Easy Equities (same platform) already treat ETFs as Unit trusts, i.e. aggregate buys and execute them in bulk, how would this be any different?

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Terence 

Many companies will be taking on that strategy in the future instead of paying bonusses etc. In fact retainer shares, bonus shares & even shares relating to ROCE (return on capital employed), BEE scorecard achievements etc are included in share awards these days.

We are probably going to get to a position in SA where inflationary  increases will be negligible (like Europe as an eg) and there will have to be creative ways to retain good staff. 

If your friend is working for a good company and believes that the potential can be achieved during his tenure, why should he not participate in a share scheme? Many employees are in the pound seats when the company lists on the JSE as they potentially make buckets of cash at vesting. Agree, many don't as well, but you should rather encourage that thorough homework prior to participating and or limiting the amount you purchase. Normally they discounted shares anyway and Management knows the upside on vesting or buyout occurs.

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Marielle 

My grandmother was drawing her dividends from Ecsponent on a monthly basis to sustain herself.

She does not have a lot of money. I believe she has around 300k. She is 68 years old and in good health.

What would be the best way forward? Any ideas on where to invest so that she can draw an income and have funds available for a rainy day.

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Nico decided to move his RA from Momentum, where he pays 3.2% per year, to OUTvest because he qualifies for the R4,500 fixed fee. Momentum want to charge 15% of this lump sum to move his RA. It’s double the growth he achieved over the past 10 years.

I know you went through this process recently and I really need help.