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Recently, The Escapologist offered a new online wealth building series: The 11 Secrets Every Wealth Builder Must Know. It’s free, so if you are interested, check out The Escapologist. They produce some very thought provoking newsletters.

I’m happy to report that the very first chapter ‘The Secret of the Golden Buckets’, has helped me to answer a question I’ve been pondering for a few months.

But firstly, what are the Golden Buckets? The diagram below illustrates the flow of money in our lives. Income flows from the well and into the first bucket, Spending. Whatever amount we spend each month leaks out of our Spending bucket, leaving less to flow to the Saving and Investing buckets. The concept is pretty obvious so I won’t belabour the point.

Golden buckets

What was interesting to me was the difference between saving and investing. In this article, the author distinguishes between them because he believes it will help to acquire wealth safely.

Saving and investing are the same in the sense that you are setting aside some portion of your current earnings for the future. The difference is the purpose of saving is to safeguard that set-aside money, whereas the purpose of investing is to grow it.

The Savings bucket

There are two main things the Savings bucket should comprise of.

  1. Anything you are saving for that you will be paying for in less than seven years, such as saving for a new car, upcoming holiday, home renovation project, deposit on a house or living expenses once retired.
  2. Start Over Again (SOA) fund – the money you put aside in case of a financial disaster. To start, your SOA fund should have a minimum of three months’ living expenses.

Money in the Savings bucket should only be in super-safe investments – investments that are highly unlikely to go down in value in the next 10 years. These include bank savings accounts, term deposits and safe bonds with short-term durations.

The Investing bucket

The purpose of the investing bucket is to grow wealth. This is the bucket used to fund all future, long-term expenditures (i.e. more than seven years).

If you are young, you may use this bucket to put aside money for your children’s school expenses. But for the most part, the money in this bucket will be for your retirement. And when you look at investment returns from a long-range perspective like that, even a few percentage points can make a huge difference.

The Investing bucket therefore, is where you can theoretically afford to take a few more calculated risks.

My Golden Buckets

When I read this article, a lightbulb went on for me. I have a lot of money in the Savings bucket and I was beginning to wonder if I should just transfer that over to the Investing bucket. However, knowing that I plan to retire in the next few years I was very reluctant to put those funds at risk. This is why I currently have so much of my portfolio in Cash.

The Golden Buckets analogy has helped me to put a value on the amount I need to keep in my Savings bucket, and gives me confidence to move the excess to the Investing bucket. Hurrah!

What are your thoughts on this analogy?

Do you have your own way of differentiating between funds for Saving and Investing?

Get A Life

I recently set a deadline for retiring at 40. I’ve worked out some scenarios, run the numbers and realised that financially it’s doable.

I’ve come to realise however, that there are really two sides to being ready to retire early. The first is financial preparation, but the second is mental readiness. When I really started to think about whether I was mentally prepared for retirement it became quite clear to me that the answer was no.

Firstly, I had no idea what I was going to do with my time. It couldn’t just be a replication of what I do on the weekends. The weekends are mostly about decompressing from the work week, domestic chores and family time. For me, retirement needs to be so much more than that if I’m to really enjoy it.

Secondly, I hadn’t yet worked out how to make the mental shift from an extreme saver to a spender. I realised I had some homework to do.

Since then, I’ve been reading through Ernie Zelinski’s book, How to Retire Happy, Wild and Free. One of the activities that has really resonated with me is the ‘Get a Life Tree’, where I brainstorm all the things I might like to do in retirement. It is still a work in progress, but it’s actually been such a wonderful exercise.

I now realise I have no shortage of things to do in retirement, and in fact I need to start incorporating more of these things into my life right now. So without further ado, here’s my ‘Get a Life List’.

Activities I Like Now

  • Spending time with my husband

  • Spending time with my son
  • Reading academic literature
  • Researching
  • Writing my thesis
  • Going to the movies
  • Personal Financial Planning
  • Reading about Economics and Investing
  • Reading about Peak Oil and energy descent
  • Watching movies and TV series online
  • Visiting Cafes for Brunch or Coffee

Activities I liked in the past

  • Spending time with good friends
  • Travelling the world
  • Photography – Travel

  • Photography – Dogs
  • Drawing
  • Running a Business
  • Going to the Theatre
  • Going to the Library
  • Creative writing
  • Playing cards
  • Having a dog
  • Buying houses
  • Renovating houses
  • Blogging – Travel
  • Blogging – Dogs
  • Blogging – Simple Living and personal finances
  • Playing computer games
  • Op Shopping
  • Reading – Literary Fiction
  • Reading – Historic Fiction
  • Reading -Science Fiction/Fantasy
  • Reading – Non-fiction
  • Being a member of a book club
  • Business Improvement Consulting
  • Growing vegetables and fruit
  • Preserving the bounty – Jams, pickles, chutney

Activities that will keep me fit

Travel

  • Camping trips
  • Train trips
  • Cruises
  • Slow travel
  • B&Bs for the weekend
  • Roadtrips to see family
  • RV trip across North America or Europe
  • Intrepid Family Travel

New activities I’ve thought of doing

  • Make new friends

  • Keep a journal
  • Write my autobiography
  • Write a novel
  • Publish a photo book
  • Hold an art exhibition
  • Run a B&B
  • Off-grid/sustainable living
  • Run a Hobby Farm
  • Get a PhD
  • Run a consultancy business
  • Learn to dance
  • Learn a language (or two)
  • Learn to ride a horse
  • Meditate
  • Learn Tai Chi
  • Become a coach – Life/Business
  • Become a renowned author/speaker
  • Learn an instrument – Ukulele, harmonica, drums
  • Become involved in Transition Towns
  • Become involved in a Train Museum
  • Become involved in Energy transition – renewable energy/energy efficiency

 

 

 

Income

September 2014 has been a big month in terms of income. MrRichLife finally started receiving payments from his TPD insurance and this month we received all the backpay since he lost his job. I also got a big rent payment this month from my investment properties. One of them is due to settle next month, so we’ll see a drop in that income going forward. We won’t be expecting this much income per month in the future, but it’s a nice one off.

Sep 14 Income

Expenses

MrRichLife has decided to use the backpay of his TPD insurance payout to invest in the setup of a few nano-businesses, so I’m going to start tracking those expenses separately since they are a large chunk of our expenses this month. I’ll dedicate a separate post to what he’s working on.

Tax and investment expenses were also large this month, mostly due to accountant and bank portfolio fees. I anticipate that we still have a few more months of high spending in this category as we get our family finances and estate plans set up. I’ll also do a separate post on what we have been up to in this regard soon.

We haven’t paid this months childcare, so that will be a big payment next month.

Discretionary expenses were a win this month. We spent well below our budget due to reduced spending on groceries and not spending all of our ‘personal’ allowances. Fuel, dining out and medical expenses were all high, but offset by savings in other areas.

Sep 14 Expenses_2

Savings Rate

Because of our high income and lack of spending on childcare this month, our savings rate was 64%. I’m not expecting a repeat of this next month unfortunately as we have all of our bills coming in, large business expenses and our income will be back to normal levels.

Sep 14 Savings rate

Savings Invested

We are doing well against our savings goal and hope to remain on track to invest $100,000 this year.

Sep 14 Investments_2

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As you can see from the chart below, our current asset allocation is heavily skewed towards property, with 75% of our current portfolio under our management in this one asset class.

Asset allocation Sep 14

Don’t get me wrong, property has done very well for us over the years. Since the early 2000’s we’ve bought a total of seven properties but we’ve gradually been selling them off so we now have three remaining. We bought at the beginning of the boom years and the properties we hold have doubled or tripled in value since then.

We sense that this happy story may not continue for much longer and because house prices have increased faster than rents, the yield on the properties are not what they used to be. In fact, we can get just as good income from term deposits, without all the headaches.

So, in order to lock in some of the gains, reduce our risk if there is a property correction and to balance our portfolio a little, we’ve decide to sell one house. It will settle in October.  Afterwards, our asset allocation will look like this:

Asset allocation Oct 14

You can see we are still heavily skewed in favour of property and cash, but a little more balanced than it currently is.

Over the next month, I intend to develop an investment plan to balance out our portfolio a little more.

What does your asset allocation look like? Care to share?

Photo by: Christopher Chan

Travel Hacks

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I came across a term ‘Travel Hack’ yesterday, and with interest I started reading the internets to see what it’s all about.

I love to travel, but since RichLifeJnr came along, our trips have been limited to visits to the family, short farmstays and weekends at a beach house. My Wanderlust has not gone away though and I’ve been getting itchy feet lately.

Now that we are trying to stick to a budget in preparation for early retirement, does that mean my travel dreams get put on hold indefinitely? No necessarily…I just need to be smarter about how we might travel.

Flights

Getting to and from anywhere when you live in Australia is just downright expensive. However I suddenly remembered that I have membership with both Qantas Frequent Flyer and Virgin Velocity. Out of interest I logged on to my accounts and was pleasantly surprised at the number of points I have.

Qantas

202,797 points. That’s enough to get returns flights to Bangkok for all three of us.

In researching Travel Hacks, I also came across ideas to boost the number of points you have. After a bit of research I discovered that  ANZ is currently offering a credit card with 50,000 bonus Qantas frequent flyer points. I’m going to look into that a bit more seriously, because buying those extra points would cost over $1000.

50,000 extra points would mean all three of us could get return flights to Johannesburg, Tokyo or Honolulu!

Virgin

41,437 points. For that, I can get a return flight to Fiji for one of us or all three of us to Brisbane or Melbourne return.

I haven’t yet been able to find any amazing deals to boost my Velocity points, but realised that I can add my car rental for my upcoming trip. That might add a bit.

Cruises

I’ve never really been that interested in cruising, but after reading a few blogs from Families who are travelling the world in slow time, I might be converted. The idea is that if you have excess time, but limited funds you can actually use cruises to get you between locations, whilst providing accommodation, food and entertainment for a reasonable daily budget.

As an example, VacationsToGo currently has a deal where you can travel London to Boston for AUD$801 per person ($57 per night) or Vancouver to Los Angeles for $181 per person ($31 per night).

I have even seen deals where kids under 17 travel for free. Obviously this type of travel requires extreme flexibility, but I have dreams of being free enough to take advantage of such deals. It might be something we consider when RichLifeJnr is out of nappies and old enough to go to the kids club.

Accommodation

In Australia, I regularly use Stayz to book reasonably priced, self contained apartments or houses. I love that you usually have your own cooking and washing facilities and can live more like a local, without breaking the budget. There are probably better ways to organise longer stays, but I find short breaks have been well accommodated using this website.

AirBnB is another website I’m hearing good things about, but I haven’t used it yet. It seems Australia hasn’t quite embraced it yet, but some of the places in Europe look fantastic. Dreaming of an apartment in Prague for a month!

 

How about you? Have you got any Travel Hacks you care to share?

Photo by: Norma Desmond

In my last post, I indicated that we need to get our expenses down by 25% if we have a hope of me successfully retiring at 40. By successful, I mean we don’t go broke before we die. Today, I thought I’d spend a bit of time looking at what our expenses consisted of last financial year.

FY13-14 Expenses Ms

Figure 1: MsRichLife FY13-14 Expenses

FY13-14 Expenses Mr_2

Figure 2: MrRichLife FY13-14 Expenses

Savings (50.0%)

Last year we saved 42.3% of my net pay (after tax and rent) and about 65% of MrRichLife’s income. We could have done better than this, but as you’ll see we had some big, one off expenses last year which shouldn’t be repeated this year. It’s not too bad considering we weren’t being particularly conscious of our spending. There is much room for improvement though, and I’ve set the immediate goal of saving at least 50% of my net pay each month from here on.

Income Tax and Investment Expenses (12.0%)

Income taxes (in addition to what is taken from my pay) accounted for 11.7% of my expenses. Ouch! I called the ATO the other day and questioned how much I’m paying to them every three months and told them to go back through my payments to check they are correct. Guess what! I was overcharged $1500 and I can expect a refund soon. I hate how much I send to the Tax office, but there is little I can do to reduce the amount at this point. We are planning on selling one house soon and moving the cash into MrRichLife’s account, so that should help.

Investment Expenses mostly consists of Landlord insurance payments that are not taken care of by my property manager. They have slowly been creeping higher and higher and it’s about time I get some new quotes!

Rent (8.0%)

At the moment we are very happy with our rental arrangements so won’t be making any savings in this category.

Motorbike (6.8%)

MrRichLife bought himself a motorbike last year. Hopefully this one off expense won’t be repeated regularly!

Groceries, Dining Out & Alcohol (6.1%)

This category presents the biggest opportunity to make savings in our budget. These calculations don’t capture all the food and coffees we buy with cash, so in reality we are spending more on this category than indicated. I’d like to work with MrRichLife to work out a plan to reduce this item significantly. I’ll endeavour to write a separate post on what we come up with.

Childcare (4.8%)

In reality we get 50% Child Care Rebate so this expense is not as big as shown here. We could cut back on days, but honestly we think we’ve found the right balance for our family with The Boy in childcare for 2-3 days a week.

Bills (2.9%)

Gas, Electricity, Phone, Internet, Insurance and Medical. I know that our Gas and Electricity usage has crept up this year. We’ve recently had our central heating replaced so hopefully that will be operating more efficiently than the old one.

Holidays (2.0%)

Most of our holiday expenses have been incurred in visiting our families interstate. This also includes flights that I’ve already paid for an upcoming trip to see my family and attend to my high school reunion. We’ve also been away for a couple of weekends as a family.  I love to travel and am prepared to cut other things out of our budget to ensure we can continue to do so. I don’t intend to reduce spending in this category, and actually expect it to rise this year.

Emergency Cash (2.0%)

We keep a bit of cash available in case of emergency, so this isn’t actually an expense. The withdrawal hopefully shouldn’t need to be repeated in future.

Car (1.8%)

We only have one car, and we don’t put a lot of kilometres on it each week. MrRichLife does most of the maintenance himself to save some money. I could ride my bike some of the time to save a bit of fuel and wear and tear, so I’ll revisit that topic in a separate post.

Job Expenses (1.1%)

Most of these expenses are reimbursed or tax deductible, so this category needs no work.

Other (4.3%)

The ‘other’ category captures all the smaller categories, that do add up to a lot. These are things like shopping, clothes, entertainment, hobbies, personal care etc. Given that all these ‘little’ expenses add up to a large chunk of our budget, we probably should see where we can cut down.

Summary

That was an interesting exercise to undertake. The most expenses were incurred through extra income tax payments and investments expenses. This is something I need to spend some time analysing further. There were also quite a lot of one off purchases and withdrawals last year which shouldn’t be repeated this year. The next biggest opportunities for improvement are in the ‘food’ and ‘other’ category. It might be worth setting ourselves some challenges to start bringing these expenses down.

 

 

 

 

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I’ve recently discovered Mr Money Mustache and have consumed all of his posts and delved headlong into the Forums. What a treasure trove!

One of the themes of his blog is The 4% Rule, which is essentially a rough guide to how much you need to retire. This little figure is based on The Trinity Study, a study to determine “safe withdrawal rates” from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time. This study defined ‘success’ as not going broke during a 30-year test period.

So if I accept that a 4% withdrawal rate won’t leave me broke in my old age, then the assumption is that I would need a portfolio of $1 Million to give me $40,000 per annum.

The interesting thing for me, is that (as MMM points out) the trinity study assumes a retiree will:

  • never earn any more money through part-time work or self-employment projects
  • never collect a single dollar from social security or any other pension plan
  • never adjust spending to account for economic reality like a huge recession
  • never substitute goods to compensate for inflation or price fluctuation
  • never collect any inheritance from the passing of parents or other family members
  • and never spend less as they age

I fully expect that we will do a bit in our retirement to keep some money trickling in; we expect to get a bit from superannuation in our old age (but when or how much is yet to be seen); and we know that we can downscale our life if circumstances require it. So, in short, the 4% rule is theoretically quite conservative.

After reading all of this, I started to feel like maybe it was possible to retire easily at 40. However being the careful person that I am, I wanted to test some assumptions by running a few scenarios. This is where some Early Retirement calculators came in very handy. You can check them out here:

I decided to base my simulations on the following set assumptions:

  • Starting portfolio $600,000
  • Property portfolio providing an income of $20,000 per annum
  • Superannuation or pension of $30,000 per annum starting when I turn 60.
  • Additional savings of $50,000 per annum until 40 (retirement age).

cFIREsim1

Scenario 1. In the first simulation, I assumed that we continued to spend like we currently do (minus things like childcare that we would no longer use), that we would continue to rent a house in our retirement and that we make no additional income. This scenario has a 63-71% chance of success (i.e. that we don’t go broke).

Scenario 2. On the second run, I cut our living expenses by 25%. This time, we have a 95-100% chance of success. Okay, that sounds better, but we don’t really want to rent forever. We want to buy ‘The Farm’ when we retire! Let’s see what happens.

Scenario 3. Ok, so this time we bought ‘The Farm’ for $500,000 upon retirement. I reduced our expenses by the equivalent of the rent we wouldn’t pay. This scenario has a 73-81% chance of success, which is not good enough for conservative old me.

Scenario 4. What if we bring in a small income of $10,000 per annum in retirement? Well, it looks like we have 97-99% chance of success! That will do!

So what does all of this mean? Essentially I can retire easily at 40 IF we reduce our current living expenses by 25% before then. If we want to buy ‘The Farm’ then we have to be prepared to find an additional $10,000 per annum from some side hustles, which I think is more than achievable.

That was a very worthwhile exercise and I feel like we now have something concrete to work towards:

  1. Develop a budget such that we can live comfortably on 25% less than what we currently spend (not including childcare and other work-related expenses that would disappear in retirement).
  2. Identify some opportunities for side hustles that could bring in $10,000 per year.

 Photo by: Matt Shalvatis 

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