The Fat Wallet Show from Just One Lap - #54: How much money do you need?

#54: How much money do you need?

Explicit content warning

06/25/17 • 61 min

The Fat Wallet Show from Just One Lap

“Is it really possible to live off my investments?” This is a question we field often. We recently did a podcast about early retirement that deals with a variation on this theme. The question concerns me, because the answer lies at the heart of all financial planning.

Firstly, if living off your investments isn’t the end goal of investing, what is? How else do you differentiate between long-term investments and short-term savings? Intentionality is a theme that keeps cropping up on the Just One Lap platform. Good financial decisions aren’t possible without understanding the purpose of investing.

Secondly, the answer affects your judgement around whether your retirement annuity or pension fund is any good. How do you decide how much to contribute to these funds? All too often companies set the retirement savings rate on behalf of employees. If you can’t answer this question, how will you know whether the company-mandated savings rate or the oft-cited 15% is enough to see you through retirement?

When I started dreaming of an early retirement, I calculated I would need around R7m to be financially free. At a 4% draw-down rate, this would earn me a monthly income of just over R23 000. At 4%, so says the theory, my capital would keep on growing if my returns beat inflation.

Imagine I never ran this calculation and decided instead to contribute 15% of my monthly salary to an RA. If I started this month and continued my 15% contributions for the next 20 years, providing I earned an annual yield of 12%, I’m still almost R700 000 shy of my early retirement goal.

In this podcast, we talk about the numbers you have to run and the assumptions you have to make to know whether you have enough money invested. I highly recommend you visit the Stealthy Wealth website for a lot more information about this. While his goal is early retirement, the principles are the same.

Kris

Previous Episode

#53: A bespoke financial plan

I’m slightly obsessed with having a solid financial foundation. I talk about it often. Here’s what I have as my foundation:

No short-term debt.*
An emergency fund. I work on somewhere between three and six months’ expenses.
Dread and disability insurance, in case you lose your ability to earn an income.
Medical aid.
Retirement annuity.

You should have this foundation regardless of your financial plan. However, you also need a road map. To get one, start by asking yourself what you want your money to do. This might seem oversimplified, but it can have a great impact on your financial choices.

For example, if you want to travel as much as you can while you’re earning an income, your money has to go towards travel. If you want your money to buy you financial independence in 10 years, your money will go towards investments. These options are equally valid. As long as you have your retirement savings sorted, none is more justifiable than the other.

Only once you have a plan and a foundation should you start worrying about discretionary investments. If your plan is any good, it will help you figure out what types of investments would serve you best. For example, if your plan is for your money to buy you a year off work to travel South America, you already have a savings goal and an investment horizon. This will affect how much money you would have to put away and help you find a risk-appropriate investment or savings vehicle.

Knowing the answer to what you want your money to do will impact every financial and lifestyle decision. If you know traveling is your financial priority, you'll also know how buying a new car will impact your ability to travel.

Your financial plan doesn’t have to be perfect. It does have to be written down. It has to be detailed enough to keep you on course, but also adaptable enough to allow for major life changes.

In this episode, Simon and I talk about putting together a financial plan. We use that foundation to answer two reader questions about investments. It’s a must listen, regardless of where you are in your finances.

*One could make allowances for a home loan here, although I don’t have one.

**I say Australian astronaut. I meant Canadian.

Kristia

Next Episode

#55: Leveraging your portfolio

I had to fight the urge to throw my laptop away and run for the hills when I read Jurie Lombard’s mail this week. This is not Jurie’s fault. I’m overly-cautious when it comes to debt - once bitten and all that.

However, I’ve also wondered about using my portfolio as collateral to borrow money. Borrowing can be a powerful way to create wealth. People who swear by property often cite the ability to use existing capital as collateral to acquire more capital as an upside of the asset class. As Simon points out in this episode, small business owners also often borrow start-up capital to create more capital. Why should our share portfolio be exempt from leveraging?

In this episode I try to push past my discomfort to figure out how to leverage a portfolio smartly. Simon did this excellent seminar on risk and leverage. In the video he’s talking about contracts for difference (CFDs), but the principles hold true for borrowing against your portfolio.

The biggest risk we could identify is some sort of market crisis. If the value of your portfolio drops overnight, you can expect a margin call in addition to watching your portfolio getting klapped. That’s not a good day at the office.

The product Jurie was asking about can be found here.

Last week Simon challenged Stealthy to create a spreadsheet. Of course, Stealthy already had the spreadsheet. Download it here. At my current savings rate, I will be financially free in just over 16 years. If the market did what I wanted it to do when I started, I’d be a bit further along by now, but we accept what we can’t control and then complain about it bitterly on our podcasts.

Medical students, interns and professionals, check out this blog. Thanks to Alexis for sending it along.

Lastly, by the time you read this I will be on holiday. That means there will be no Fat Wallet Show on 10 July.

Kris