Friday, 1 February 2019

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?

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!

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.

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!

Wednesday, 16 January 2019

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.

Monday, 7 January 2019

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!

Wednesday, 2 January 2019

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 installments, 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.

Tuesday, 25 December 2018

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!

Wednesday, 28 November 2018

Does free money exist after all?

The price of houses in the Netherlands is exploding. Annuity mortgages are the new norm. Both facts contribute to the increasing gap between the market price and the remaining mortgage. Unfortunately this only makes me (and others) rich on paper. After all your money is stuck in bricks and mortar. It does not have to be that way. With the interest rate still at historical low levels, an alternative can be to take part of the money out of the house and invest it elsewhere to generate cash flow or accumulate wealth. Or both.

The basics of taking the money out
Let's assume someone bought a house for €300,000 in 2013 right at the bottom of the market. They paid off by an annuity scheme, lived frugally and did some extra down payments, leaving them with a current mortgage of €200,000. The market went up and the house is currently valued at €400,000. Selling the house would give these imaginary people €200,000 in hand to play with. But what if they don't want to sell but still want to play? 

I checked the situation at Rabobank. These people are wise and don't want to max out their mortgage. The Rabobank has the lowest interest rates on offer for mortgages with an loan-to-value (LTV) under 67.5%, meaning a mortgage of up to €270,000 for the example house. Hence an extra mortgage of €70,000 can be taken. An interest-only mortgages ("aflossingsvrij") comes with an interest rate as low as 1.5% (1-year fixed rate) or €87 a month. That is not much at all to get €70,000 in hand to play with! 

Be aware there is no mortgage interest tax deduction ("hypotheekrente aftrek") on this extra mortgage as it won't be used for improvement on the house. This tax benefit will go down to a maximum of 37% by 2023, so we are talking about €32/month you can't deduct. The Dutch government typically stimulates debt but even they have their limits.

On the other hand there is no wealth taxation on the €70,000 as there is a mortgage debt of the same size in tax box 3. This saves 0.58% or €34/month, assuming you already filled up your free wealth tax bracket (first €30,316 of savings for 2019). 

Where not to invest
This is one of those rare cases where I would not feel comfortable investing in a low-cost index fund. I am sure you can find a fund that yielded 8% over the last few decades but the problem is that this is an average and the deviations are huge. Imagine the market goes down 30% in the first year. At that point you borrowed 21,000 more than you still possess in stocks! This is not even considering your monthly interest payment of  €87. 

The one rule not to break when investing in index funds is to sell in a crash. I am not sure if I would keep my calm in the not completely unlikely situation described above. I prefer to not test my nerves and stay out of this construction all-together. Still very happy to dump anything into index funds that is left at the end of each month.

You can be the bank!
Websites like and connect people looking for money to purchase real estate for the rental market and people who have that money. Interest rates are around 6%. No defaults have occurred. In our example the €70,000 would generate interest-based income of €350/month, so a net cash flow of €263/month after taking off our interest payment to Rabobank. This is excluding annuity payments that apply at and which further enhance the cash flow (but does not impact on wealth accumulation). 

Essentially we are the bank now. We get money in at a low interest rate and we lend it out at a high rate. We are also the bank in the sense that there is a notary document between the parties. If things turn for the worse and our monthly payments stop we claim the real estate and sell it at an auction, just like the bank! We also don't care if property prices drop. Not our problem, we don't own the real estate.

At projects typically run for 5 years. If you would fix your interest rate at Rabobank for 5 years (2% at the moment) and lend it onwards at 6%, you generate a 4% cashflow. This fully excludes any risk of your interest payments going up while your interest income stays the same. So the cash flow is guaranteed for the full 5-year period. Can someone explain me where the flaw is in this reasoning? Otherwise the imaginary people might go to the local Rabobank soon to execute this plan 😉

Tuesday, 13 November 2018

I want it all and I want it now

FI gives you freedom to fill your days with whatever you desire. But becoming FI takes time and that does not go well with my lack of patience. People around me buy nice stuff. I have ETFs and an empty fridge. Where is my freaking reward after doing everything by the FI rule book for 5 years!?

The scene
I lived abroad and traveled the world. It was awesome. After being well in my 30s I settled down. I finally started doing everything by the book. Not my book but most peoples book. We got jobs, bought a house and are proud parents. We paid off a substantial chunk of the mortgage. We make good money, spend mindfully and invest what is left. Above all; everyone is healthy.

The mind
Geldnerd recently made an awesome tool which confirmed my own back-of-the-envelop calculations. Ten more years and I can walk out of my office and never look back. At the tender age of 52. Not bad at all. We both work four days. Every Friday is already a partime, pre-pension day for me. My job offers a great DC pension with low costs. The math is clear; I should just sit it out for ten more years.

The heart
I don't like my job. Not this one in particular. I have nice colleagues and the projects are interesting. I probably will not like any job where I sit behind a computer in a company where the only goal is more profit. Ruled by computer systems that say no when common sense says yes. I would love to walk out now and start my own business. Maybe in the same field, maybe not. But my mind is stopping me from doing that, see above.

How is this fair? Once people find the FI concept you cannot expect them to hang around in their jobs for a few more decades! We have better things to do. We could make a real difference to the world instead of working!

Everyone is raving about compounding but it has one big disadvantage. It takes forever. Five years into the FI journey and all I have to show for it is a number of ETFs on my computer screen. And the computer says no again when asked whether it is enough to quit. 

I want it all and I want it now.