H1-2019-financial update

Halfway the year, our first financial overview of the year is long overdue! One of the reasons not to write about our personal finances is that the road to FIRE is a marathon and we are just steadily moving forward. Our incomes are stable. We set up an investment system and we stick to it. Very effective but very boring. Still good to see our lines are moving up north steadily!

Our savings rate

is at an impressive 44.54%, well above the 35% annual target. We have had a few helpful events that boosted our savings rate. The costs of remortgaging are tax deductible. So our yearly tax refund was bigger than usual. I ditched my worst insurance ever. I had a one-off side hustle that paid out 700 euros in January. No surprises are expected from expensive holidays either in the remainder of the year. Our next holiday flights have been paid with KLM flying blue points. This severely dented our points total, so if you want to sponsor our travels, have a look here how and why you should get an AmEx flying blue credit card as well 😁. Or just click here to get one.

The mortgage

is boring. With a 1.8% interest rate fixed for over 9 more years there is no need for extra payments. So in H1 we simply paid our monthly instalments, resulting in a slightly lower remaining debt. We have paid off 32% of our mortgage by now.

FI percentage
is over 22% now. A stock market going bzrk is really helpful and is only getting more helpful now that we are playing the game with 6 digits at stake.

It's all relative
It is very hard to lower the amount of cash locked up in our house; 54% of our net worth currently. Putting substantial money into VWRL every month does not seem to help much. This calls for drastic measures! I added a new category to the inset of the figure. No money is in it yet but that might chance very soon. We'll keep you posted!

Six digits in four letters

As of today we have over 100k invested in the low-cost index fund VWRL. Arguably divided between my pension and our private investment account. That does not stop me from being proud and happy we made it this far on our FI journey! But what can reaching this 6-digit milestone bring to our financial future? Let's look at some scenarios.

FU money

100k is over 4 years of net median income. If one of us looses a job here or there, we will be fine. And that is even ignoring social security we would be entitled to the first stretch of time. Seems like we are getting close to the point we don't have to put up with BS in case we start to dislike our job. And no big worries in future economic downturns, our jobs might not be save but we are!

Let's start withdrawing!

Maybe we should just give up on this whole FI idea. Let's spend the money! Well, maybe stick to the 4% rule, we don't want to loose it all. As off today, we can start paying ourselves 333 euro every month. We'll throw in an inflation correction as well each year, no problem we are loaded!

And you know what is really cool? Without saving another euro of our income in the 30 years ahead, and while spending an inflation corrected 333 euro each month from our current stack, the median outcome is that our portfolio will grow to just over 1 million. That is a handsome bonus by the time I reach my traditional retirement age!

How much can you spend anyway?

One problem in the above scenario is that I would not have a clue what to spend all our income plus the bonus 333 euro on. So a more realistic scenario is that we just continue saving and acquiring even more VWRL. Compounding will mean that the second 100k will come faster than the first one! 

One thing to consider is diversification into real estate. This is an option that does not come cheap. Substantial investments are required but are becoming realistic.

The future looks bright. I feel like a bank, too big to fail! 😊

Should I trust the government?

There is a big fuzz about the lowered income tax. Almost everybody will have more money to spend in 2019. Repeatedly promised by the government. Is this actually gonna be true for us?

In
Our January after tax salaries were definitely higher; €44 and 117 to be precise. Arguably the €117 euro includes a 2% raise as well but this cannot explain the higher net salary fully. So at least part is thanks to the lower income tax. Can't be bothered to separate these out, we have a €161 higher income. Thank you government!

Out
The daycare got more expensive. But the tax return ("kinderopvangtoeslag") increased even more! €29 extra coming our way. Our child support ("kinderbijslag") goes up €14. I changed my phone contract, €4 in my pocket. Basic health insurance covers the same whichever company you take it from. So check the cheapest one each year! We could save €9. Total extra's: €217.

Minus

There is some bad news as well. Hard to predict exact numbers. But energy bills will go up, around €25/month. VAT tax will go up. if you would for example spend €10,000 per year (bye bye savings rate!) on taxable goodies, you'll pay around €300 more tax. So another €25/month. 

I am surely forgetting a few other things that will get more expensive. But I am confident we'll get out with more money to spend save invest.

Should I trust the government?

The government is not living up to it´s promise. Many stories appear of people being disappointed and I fully understand. But if you are a below-average spender you'll be just fine! Simply invest what is left at the end beginning of the month. 

Unfortunately it is not easy to convince the general public that switching to a FI spending life style helps much more than complaining about the few euro´s on the income side of things. Not complaining saves me tons of energy as well. Free to spend on the nice things in life!

The worst insurance. Ever.

Back in the days it was common to buy a funeral insurance for your kids. I got one. I can see the feel-good emotion behind it but let's talk numbers and see whether such insurance is a smart money decision. 

Penny wise...

I can't be bothered to look back into my own over 40-year old forms to do the math on my own policy. Let's pretend we buy a new one and see what happens. Let's assume we buy an insurance policy for our new born. No need to congratulate us, it is a hypothetical child.

I only checked the situation at Yarden, one of the bigger players on the Dutch market. We'll be paying €5.63/month for 30 years to get  paid for an €8000 funeral. 

At first sight not a big monthly amount. If you would invest this amount yourself in an ETF you would end up with €5486. This is assuming a 6% annual return. So Yarden is offering more than a modest ETF can bring you. €2027 of premium payments gives you an €8000 funeral. 

Pound foolish!

But what happens after the 30 year payment period? At Yarden the payments stop after 30 year but the amount you'll get for your funeral remains €8000, however long you may live. Off course we don't know at which age we die. The average for today's newborn is well over 80. 

This is where the calculation starts to look different, very different. If you would leave your €5486 invested in an ETF and have an average return of 6% for 50 more years (until the age of 80), you'll end up with €100563. The opportunity loss is enormous!

Calculations with averages are nice but in real life this is not what happens. You should obviously check whether you can carry the financial burden of the black swan event (a way-before-average age funeral). However, many people also have partner pensions or life insurances or savings. Or all of them. So that it quite likely more than enough financial backing to decide not to go for a funeral insurance policy.

Do the math and act on it

The friendly people of Yarden only give back half of the money you paid if you want to back out of the deal while still alive... In the example above this would be half of €2027 once you are over 30. With - in my case - a life expectancy of around 40 years left, you should still decided to take half the money you put in and run. A 6% return on €1013 will yield €10368 in 40 years. 

So as of today, I am out of there.

Passive me against my pension fund

Let's see how my passive investment strategy did when compared to my active pension fund in 2018!

The bull run

Most of my colleagues have their pension actively managed by our pension fund. This is the default option. This means Nationale Nederlanden puts your pension money in their NN first class return fund. This fund is currently a mix of actively selected stocks (70%) and bonds (30%). This can always change in the future. Whatever the wise experts decide.

I am one of a few that has taken matters into his own hands. I am fully invested in a passive tracker. Stocks only, worldwide. I reported before that my returns have been consistently higher for years on end. While my costs are lower. We started using this defined contribution pension in 2014 and my total return is more than double that of the pension fund. Passive wins active. No surprises there.

The cool thing is I am in the pension steering committee. So I got a chance to address  their poor performance. "Why do we pay you fees to pick stocks that underperform the market average?". They had a clear answer. My risk profile was too high and the only reason they underperform was because of the bonds. 

They were derisking as they expected some turmoil on the markets. In a turmoil I would loose more money. My risk profile was wrong and I just got lucky because of the long-lasting bull market. I would reason they are timing the markets and this is a loser's game. But anyway; turmoil there was in 2018. Great opportunity to put them to the test!

The bull shit

Indeed my pension strategy did not work out great in 2018. My ishares developed world index fund yielded -5.53%. And now for the NN first class return fund -drum rolls-; they managed to go up by..... -5.80%. They have again failed to keep up with a passive strategy. 

I am not great at statistics but just picking random stocks should have given them a winning year by now. It is actually quite an achievement they did worse than a passive strategy every year since 2014. Can't wait till the next meeting with them!

Financial update 2018

Another year has passed and the stock market stopped gradually moving up in Q4 of 2018. At the moment the market is volatile and intraday swings of up to 5% are not uncommon. Swings are more down then up and as a consequence stocks have lost around 20% of their value. Let's see how this impacts our journey to FI.

Savings rate

Our monthly savings rate has been 35% throughout the year. We simply pay ourselves first. On top there is the once-a-year lump sum consisting of holiday money (2x), an end-of-the-year bonus and tax returns. We aimed to simply save 35% of all this as well to keep our yearly savings rate at (surprise!) 35%. However, we miserably failed this year and spend it all. 

We paid a substantial fine to lower our mortgage interest rate for the coming 10 years to 1.8%. This will save us money in the long run (see here) but is hurting our savings rate for 2018. We love our holidays and they are worth every penny. Our holidays are getting even more expensive as we are mostly forced to travel in the peak season due to our school-aged daughter. To top it all of we prepaid a holiday that is coming up in January and with that the full lump sum has gone with the wind, leaving us with an annual savings rate of 30%. 

The mortgage...

is boring. In Q4 we simply paid our monthly instalments, resulting in a slightly lower remaining debt. We have paid off 31% of our mortgage by now. With the new interest rate our monthly payment will now go down, while a larger percentage of the payment goes to paying off the house (rather than interest). Pretty neat, eh?

FI percentage

Our FI percentage is stuck at 16% for Q4. In fact our net worth is down a tiny bit in Q4, despite throwing more money into ETFs at least once a month. It's all part of the game. You can't be on FIRE if you can't stand the heat. We'll stay calm and stick to the plan. Markets will always recover in the long run. Plus we are buying cheap at the moment, we love discounts!

It's all relative

Our house still represents over half of our net worth (inset of the Figure). This will get even more dramatic when the new higher valuation comes in soon ("WOZ waarde"). We did manage to increase our ETF percentage a bit by throwing in some extra money to buy discounted stocks. 

We are happy campers and hope to keep up the good work in 2019! Many things will change this year, more on that later. For now we'll continue saving 35% of our income every month.

Thanks random strangers from the internet!

I got a really nice Christmas gift this year, My credit card statement! Turns out four random strangers from the internet have signed up for an AmEx credit card through me which has made our total amount of KLM flying blue miles surpass 100,000! Effectively you gave us free flights to our next holiday destination, thanks!

Finally some good news

With the markets rapidly moving into bear territory our net worth is not moving up as fast as we would have liked (understatement of the year). The timing of this post turned out to be brilliant. I correctly predicted the market peak. But I consider this pure luck and did not act on it. Timing the market does not beat time in the market anyway, remember Bob? So we stick to the plan. We buy and hold our low-cost ETFs and buy more every month. 

This would in fact be a good time to squeeze out every euro we can spare to invest into the market. So that's what we do. OK, maybe we spend some money on Christmas gifts as well but let's consider it a new years resolution.

Flying for free helps. See here for several good reasons to apply for a free gold card yourself (in short: it is making you money and let's you fly for free) and sign up here.

Have a good one!

Last but not least I hope y'all have a great festive season. Thanks for all the nice interactions and discussions, see you next year!