I have just recently started on the road to financial independence, so bear over with me. After reading countless posts and being well into Jacob’s book, I thought I would introduce myself and the early stage of my “journey”. Would love any input on the below
For me it pretty much started with reading an article about ERE in the Danish newspaper, Berlingske Tidende (http://www.b.dk/livsstil/bliv-oekonomis ... -fylder-40). I was curious when reading it, but simply could not believe that it was possible to reach financial independence before age 40, as the article suggested. Definitely not for me - or any other ordinary person, living as a salary man. After crunching the numbers and reading Jacob’s philosophical and practical guide I know it is, and that it is about more than just the financial indecency.
After finishing my degree I moved to Copenhagen and immediately bought an apartment. So, I initiated my post-academics life with shifting cash flows around in time, paying the high price of fees and interest charges to finance the apartment, with my salary and anticipation of future increases hereof as a gateway to the debt drug. It is not all bad, though, as apartments are scarce in Copenhagen, and good ones even more so. I bought a fantastic apartment, which my girlfriend and I can live in for many, many years. Still, I was in debt to my eyeballs, and from the day I received my first salary my expenses magically increased as well. This was true for my first increase as well.
My monthly housing costs were USD 1.000 (DKK 6.350), with fixed expenses totalling approximately USD 1.700 (DKK 11.300). My variable expenses where at a whopping USD 2.020 (DKK 13.636). Even with interest deductions, my expenses exceeded my monthly salary. Not the greatest road to financial independence...
My outflow was approximately USD 220 higher than my monthly inflow. I receive a bonus each year, so the yearly net has a small positive margin. However, I am now budgeting for a monthly net with a large, positive margin, and each bonus is used for investments, either in currently unidentified investments or in paying off existing debt.
My accounts and budget (in USD) looks like this (accounts – budget respectively):
Fixed expenses:
- Housing: 1.000 - 1.000
- Food: 227 - 227
- Labour union and unemployment fund: 172 - 172
- Internet: 27 - 27
- Sport/Fitness: 128 - 0
- Motorcycle insurance: 26 - 26 (antique one - good for seniority)
- Repayment of overdraft facility: 197
Subtotal: 1.777 - 1.649
Variable expenses: - Maintenance/improvement of apartment: 125 - 125
- Food: 454 - 150
- Vacation: 122 - 122
- Entertainment: 314 - 103
- Gifts/presents: 75 - 75
- Clothes: 106 - 106
- Dentist/medicine/hairdresser: 55 - 55
- Transportation: 118 - 48
- Hifi: 365 - 0
- Furniture: 122 - 122
- Miscellaneous: 163 - 163
Subtotal: 2.019 - 1.069
Total: 3.796 - 2.718
The cash freed up by cutting expenses will be invested, with USD 377 “invested” in the mortgage debt and USD 392 invested in yet unidentified projects.
Comments on apartment and “investing” in repayments on loan:
The following is a long stretch on purchasing an apartment by purchasing a share in an cooperative housing associations and the cash effects of “investing” USD 377/month in paying off the debt. Below this long passage is the overall thought on my budget – I would love input here as well as in the following!
My apartment is not a freehold flat, but a cooperative housing association. I am unsure whether this exists in the states (or anywhere outside the Nordics, but what it means is that I have purchased an undivided share of the association, which owns the apartment, and receive a right of use to my particular apartment. In that sense, my rights over the flat are almost identical to renting. What I actually purchased was 1/25 part of the association and not the individual assets (sort of like owning shares in a company). The association functions much like a business, with general assemblies, board of directors etc., but is heavily regulated in terms of law (can only hold certain assets, like the apartments, can only have certain economic activity and only to some extent – but in turn is untaxed on its profits, there are maximum prices for the shares tied to a particular way of valuating the association etc.).
The value of each undivided share is tied to the value of the association more than the value of the individual apartments.
You are not playing the market when purchasing an undivided share in a cooperative housing association. But the value of the share is tied to how well the association is operated. A more “safe” investment in my case due to how well the association is operated, and due to the lower purchase price it was possible to buy an apartment with a relatively big bathroom and three rooms, which my girlfriend and I can basically live in forever. It is central, meaning we can bicycle almost everywhere and the subway is only 10 minutes away if needed.
If you want to discuss or know more about owning an apartment through an association, I will be happy to elaborate!
Long story short though – a consequence of owning an apartment this way is that you cannot finance it by way of a traditional mortgage in the apartment, as you do not own the apartment – the association does. Therefore, it is financed with a traditional bank loan, with higher interest rates due to the value of the security. On the other hand, the purchase price is significantly lower than that of freehold flats (because of the legislated valuation meaning no free market there).The financing is divided into two loans, both with a variable interest rate of 3.75%. The remaining debt on Loan 1 amounts to USD 207.152 (DKK 1.373.000) whereas the remaining debt on loan 2 amounts to USD 56.643 (DKK 375.000).
Loan 1 is free of amortization for the first 10 years (8 years and 3 months remaining) and loan 2 is amortized over the 10 year period (8 years and 3 months remaining). The installments each month for the rest of the 8 year and 3 months-period amounts to USD 1.353 (DKK 8.970), comprised (for the June settling period) of USD 838 in interests and USD 517 in repayments (DKK 5.552 and 3.428 respectively). In addition, USD 561 (DKK 3.720) is paid to the association for usage, insurance, debt etc. Total = USD 1.916 (shared by me and my girlfriend)
After the 8 years and 3 months, the installments – will amount to USD 1.235 (for month 1: USD 658 in interests and USD 577 in repayments), plus the USD 561 to the association = USD 1.796.
This installment will continue for 20 years (payment to association unchanged).
Total interest expenses = USD 162.271 By “investing” USD 377 each month from now on in additional repayments, the total interest expenses will amount to USD 80.881, meaning saved interest expenses of USD 81.390.
In addition, the loan 1 will be linearly amortized in 16 years (from now), even after loan 2 is paid off, meaning that the total installments after loan 2 is paid off (8 years and 3 months) will be fixed at USD 1.034.
By dropping the free of amortization-period, 12 years are cut off the total life of Loan 1 (meaning 12 years where this cash can be invested and compound.
Comments on budget
With the above budget, I understand that I am not living particularly frugal. For me, there are certain expenses which can be cut without risk of setbacks – no-brainers, which should have never existed. Hifi for example. I do not “need” this, and certainly not if the price for purchasing it is living under the load of the 100% debt-financed apartment for 30 years.
I am very scared of budgeting unrealistically. So I have eliminated the obvious sinners mentioned above, and as part of a plan to eliminate the freedom of choice and create breadth of view, I opened new separate bank accounts for the following 4 expenses: vacations/gifts, maintenance/furniture and clothes, and established a bank account for an emergency fund (the optimal size of which I do not really focus on at the moment - it's just one small part of a bigger strategy). These expenses are the ones where I will let my accounts for the previous year derive the budget and transfer these amounts to separate accounts. My rationale is that I do not want to have to consider these expenses in my everyday life. When transferring the budgeted amount to a separate account, I have both set a bar for the expense allowed when the time comes, and separated the reflection on these expenses from everyday expenses.
The residual, which remains on my wage account, is for the everyday expenses, e.g. restaurants, take away, coffee, the movies, music, cabs fares, hairdresser and such. This is where I thought real money could be saved and it is where I direct my focus at the moment.
At the moment I really love my job, so early retirement is not a particular goal. However, financial independence is. Part of my strategy is to pay off the debt in the apartment in 16 years (or more). Currently, I am focused on cutting everyday expenses. I am already investing the freed up cash to make extraordinary repayments on the loan, but the next focus is to invest the additional freed up cash. I would love to hear your input to my thought and approaches!
I am really excited about this, and extremely happy that I stumbled upon the article in the Danish newspaper. It has already changed my way of thinking, and I expect that it is going to have a life changing effect on the longer term. If anyone from Denmark are keen, I would love to meet up and talk.
If anyone is interested, I would love to send my spreadsheets with graphs etc. and hear your input on this (or just share it)
Thanks a lot.
/Chris
