Rickardo's 10 years to freedom blog

[Rickardo]

Hi All,

Thought I would start a journal to assist in tracking my progress and keep me thinking and motivated.

About me
29 year old male living in Australia, have a partner but currently with separate living arrangements and finances, no children. These things may change within 5 years, at which point I'll reassess the plan.

I have been working in the same profession for almost 9 years and enjoy it, to the point where I am in no massive rush to retire, however the earlier I can have the option the better.

I have always been reasonably financially astute and sensible but i'm looking to really step up my savings rate through ERE lifestyle design, to be in a position to retire in full from paid employment after 20 years working.

All figures below are annually in Australian dollars. I’m keeping things simple for the purposes of this blog and not discussing inflation or investment returns here, as this blog is more about my savings rate)

Income
120,000 employment

Investment/Tax Expenses
-4,000 rental (negatively geared property)
-2,500 retirement contributions
-20,000 income taxes

Lifestyle Expenses
Between July 2012 and June 2013 I spent $51,845 on lifestyle expenses.

So far between July 2013 and current date (3 December 2013) I have spent $21,630. I’m trying to keep this to $45,000 to June 2014.

Then for the period July 2014 to June 2015 and beyond, I’m trying to get these down to around $40,000 per annum. Budget will look something like this:

Rent 10,400
Food/groceries 2,000
Take out/dining 2,300
Coffee 300
Entertainment 1,000
Alcohol 1,400
Car 7,000
Public Transport 800
Utilities 2,500
Travel 4,000
Financial Education/Books 200
Health / Fitness 2,000
Clothes 700
Snowboarding 1,500
Family Assistance 2,400
Presents 1,000
Other 500

Total $40,000

Rough Savings Rate over last 5 years
30-50%

Desired Future Savings Rate
60%

This is going to be a challenge with my current lifestyle. Between 30-50% isn’t as challenging, however I really want to give this a shot to see if I can get it working without a significant reduction in my happiness.

Assets
45,000 cash
1,751,000 investment properties
150,000 retirement account
5,000 shares

Liabilities
1,428,937 investment property loans

Net Worth
Approx 525,000 (includes 150,000 in retirement account which can't be accessed until age 60)

Housing and lifestyle
Live in a house with 2 others, approx 5km from work. Use public transport / walk as much as possible. Use car 2-3 times a week to attend second job and visit family / friends. As mentioned these arrangements are likely to change as I get more serious with my current partner.

Long Term Goals
At 40 years old (10 years 6 months from now), obtain a passive income through investments of $70,000 per annum. This will be a mixture of investment returns and drawing down cash savings.

Investment Strategy
I won't go into too many specifics around my particular strategies on this blog (unless anyone asks), but it mainly involves buying Australian property.

A significant amount of my cash savings over the past 6 years has been used to build a property portfolio (acquisition and holding costs). As my portfolio matures it will start producing income and I expect it should be returning at least my proposed living expenses ($40,000 pa – through a mixture of rental income and capital) by the time I retire at 40

What i've done in the past 6 months
Moved from my principal residence and rented it out, and moved to a share house closer to the city. This has significantly lowered housing, utility and transport expenses
Lowered work lunches and coffee expenses by making it myself and not buying an expensive coffee every day
Lowered alcohol consumption and completely quit smoking

What I’m planning to do to get to 60% savings rate
Lower the following expenses:
Mobile phone
Take out/dining
Entertainment
Alcohol
Car (as I’ll be driving much less)
Snowboarding

I have been tracking all my expenses for a number of years and usually calculate my net worth quarterly. I am planning on updating this blog at least quarterly, if not monthly, to let people know how I’m going.

Any questions please feel free to ask!

Rickardo

[elegant]

Seems like you're in a great shape!

I'm especially curious about your housing arrangements.

I'm also 29 and own a small flat. I'm seriously considering renting it out and moving in with some roommates, but I'm concerned it might be too much for me (being too old etc). However this could mean a lot financially.

Was it easy for you to find tenants, then find a property you'd like to rent, find suitable roomies etc? How did you go about?

I subscribed to this thread.

[Rickardo]

I'm also 29 and own a small flat. I'm seriously considering renting it out and moving in with some roommates, but I'm concerned it might be too much for me (being too old etc). However this could mean a lot financially.

Was it easy for you to find tenants, then find a property you'd like to rent, find suitable roomies etc? How did you go about?

Hi elegant,

I’ll take you through my thought process. As a bit of context I have previously lived at home with family, with a single house mate, and alone.

For me it works out much better financially to rent with 1-2 people. I didn’t mind living alone however financially it was hurting. I knew this but took my time moving as I didn’t want to rush into a house that wasn’t right for me.

I started the process by determining exactly how much it was costing me to live alone, being interest, utility expenses, housing ownership costs etc. I then checked to see how much rent I could get for my house by looking at comparables on the net and getting a property manager to give me an appraisal (who also took care of tenant selection).

I then ran all the calculations to see what the net savings would be, when taking into account what my rent/bills in a share house would be. For me this worked out to be well over $10,000 in savings per year.

Financially it’s obviously a no brainer, however the emotional decision is different. I didn’t really want to just live with any random people. So I used my social networks and waited for a house to come up with someone I knew I could live with, in an appropriate location.

If I had have done a share house in my early 20’s it would have been very different – lots of partying etc. But I’m not as keen on those things now, so made sure I moved in with people who were a bit quieter and who are happy to do their own thing (we talk and sometimes go out together, but essentially are fairly separate with meals/entertainment etc).

So I suppose my advice would be don't rush, try and match your housemates to your personality, and have some discussions early on about expectations. Things aren’t perfect but going well, it really helps that I’m pretty easy going and just don’t let small things get to me. The disadvantages of living in a share house for me are significantly outweighed by the massive financial incentive. Hope this helps!

[Hildred]

Always get a little jealous when I read about folks who didn't waste their twenties like I did

What's the investment strategy from here on? Will the assets you currently have be enough to produce the income you're looking for, or are you still looking at more properties to buy? Sorry, I know you said you were just looking to discuss your savings rate - I am curious.

[Aus_E_Expat]

I am not sure I wasted my 20s - but I certainly did not make much money and what money I had got blown away in the 1987 market crash.

I then left Australia and have been an expatriate living and working in Asia. I have spent lots of money and had a good lifestyle (but not extravagant) but have also accumulated a reasonable amount of assets.

So I think wasting your 20s does not matter as long as by 30 you are focussed.

[Rickardo]

Always get a little jealous when I read about folks who didn't waste their twenties like I did

What's the investment strategy from here on? Will the assets you currently have be enough to produce the income you're looking for, or are you still looking at more properties to buy? Sorry, I know you said you were just looking to discuss your savings rate - I am curious.

Thanks Mildred, I realise I'm in a pretty good position for my age but I always feel I could be doing a little more to get things moving faster! But slow, steady and meticulous seems to be the key to low risk long term wealth accumulation.

I do not think the assets I currently have are enough. I would like to accumulate at least 1 more residential property, bringing the purchase price of all properties to around $1.8-2mil. Australian residential property in capital cities is relatively low yielding (around 4-5%) but generally has had good historical growth.

I have run some projections based on certain assumptions:
6% capital growth
rental yields to stay between 4 and 5% of current value
reduce debt overall by $500,000
a long term interest rate of 7%

These projections show by holding 5 residential properties over 10 years, by the end I will have a positive yearly cashflow of somewhere between 20-40k, but the big draw is I should also have equity of over $2mil. This equity may be drawn down to fund living expenses (but this strategy has become a lot harder post GFC) or alternatively drawn down to invest in higher yielding assets such as shares or commercial property.

So I feel the minimum I need is 5 properties as my 'relax and do nothing from here on in' point, but realistically I'll probably adapt this strategy and buy more, or alternative investment classes, as I'm not very good at sitting around doing nothing investment wise year after year.

[bigchrisb]

Well done on the savings rate goals. One of the really controllable ways to impact upon financial independence! Please report back here to let us know how you go - I know I have found regular reporting has helped keep me a bit more accountable.

From an Aussie guy in a similar position (high income, no dependents, 31 years old, leveraged in my investments albeit share rather than house focused), I'm curious about your thoughts on leverage. I found that any calculations I did for residential property were highly impacted by what capital gain rate I assumed. If I used an assumed capital gain rate from data from the last 20 years, things looked very rosy indeed, whereas if I used data from the last 100 years, it was much more marginal. As such, I've been rather put off being that geared in residential property. What has your rationale been for being 4:1 geared in Australian housing, as opposed to a more diversified asset base?

[Rickardo]

If I used an assumed capital gain rate from data from the last 20 years, things looked very rosy indeed, whereas if I used data from the last 100 years, it was much more marginal. As such, I've been rather put off being that geared in residential property. What has your rationale been for being 4:1 geared in Australian housing, as opposed to a more diversified asset base?

Hi bigchrisb

I thought about asset classes a lot in my early investment years. I'm certainly not against other assets such as shares, cash, listed real estate funds etc, however personally property fits into my investment style the best. A couple of reasons in no particular order:

1) It's less volatile in the short term and therefore can be highly geared - Given I was young, had a stable secure income stream and was investing for the long term, property allowed me to maximise my asset base (this is probably the biggest thing, availability of finance to leverage asset growth in the early days is very important)

2) You have more control and can value add - I am not a handyman but like the idea of being able to give properties a paint or reno, something you can't do with shares. You're also making all the decisions rather than a board of directors, therefore the accountability stays with you.

3) It's easy and boring once you've bought it - You aren’t constantly checking share prices and market reports and I'm much more confident of picking a good property than a good share. It can take a fair bit of research to find something suitable but once it's purchased there is a very minimal time commitment.

4) Rental income is relatively secure - People will always need to live somewhere and tenant demand in Australian capital cities is generally pretty stable. Dividends/capital growth in shares and other asset classes are much more volatile and it's possible for a company to become almost worthless (if it goes into liquidation). This is much less likely in residential property. The market is also not only driven by investors, home owners are much more emotional and generally I have found this keeps volatility much lower than other asset classes.

I know a lot of people say to diversify, but a simple system of purchasing good quality residential property over the long term works for me and I am comfortable in using it to build my initial asset base. If you run the numbers shares look better on paper, but the leverage effect, plus some of the other factors I've outlined above make property more appealing to me.

[Rickardo]

Hi Guys,

Before I complete a month end update, I wanted to share the growth in my net worth over the past 8.5 years. This roughly covers the period I've been working full time.

As you can see from the image below, when I started I had almost no wealth, and before this I was negative as I was accumulating university loans and spent a fair chunk of my early savings buying a car.

It's nice to put it in image form to see a steady incline. As is the case with investing, compounding is starting to do it's thing and my wealth has grown most in the last couple of years. Over the next 5-10 years is when it really should start taking off.

While the yearly trend is generally up, when I look at the quarterly figures it's a bit patchier, as it takes into account large expenditure such as purchase costs for residential property, overseas travel, one off expenses such as purchase of motor vehicles, etc. However it's encouraging to see it starting to snowball!

I was really hoping to make $1mil net wealth before I turned 30 but that's unlikely to happen, however If the property market picks up say 10-20% and I keep saving strongly over the next few years, I shouldn't be too far off.

[Rickardo]

Update for December:

Income: $6400 (primary job) + $2502 (secondary job) = $8902

This was a bigger month than usual as I received the pay from November for my second job, which sometimes may be $0 or quite low depending on how much time I devote to it.

Expenses:

Rent: $867
Family Assistance: $400
Christmas presents: $253
Alcohol: $247
Groceries: $231
Take out / dining: $213
Car: $127
Train: $108
Entertainment: $105
Other: $29
Financial Education: $19
Clothes: $11
Utilities: $66
Health: $10
Coffee: $13

Total: $2,697

Savings Rate: 70%

Net Worth: $533,490

Considering it was December and the countless events and outings this brings, I think I did pretty well. Spent a bit more on alcohol and take out than I'd like, but apart from that I was conscious to keep my spending in check and no unusual expenses came up. I also had a really fun month without having to spend too much, so that's promising.

As a bit of a reflection on 2013, during the year I accomplished the following:

• Got a new position at work, which has been a nice change and given me the opportunity to learn some new skills and do a little bit of interstate travel
  Spent 6 weeks away with my second job (military service) which I enjoy
  Got a great new girlfriend, who is very open to investing and ERE (before we met she knew almost nothing but has read a heap of books already)
  Been overseas twice, great snowboard holiday to Japan and relaxing beach holiday in Indonesia
  Moved into a share house much closer to my employment and the city
  Increased my net worth by $183,377

So on reflection quite a bit happened. Things are moving forward well and I'm excited about the future, and will be happy if I can keep the momentum rolling into 2014. Happy New Year to all!

[Rickardo]

Wanted to share some of my thoughts over the past few days. Over Christmas I took 12 days off work, during the time I didn't do a whole lot - caught up with family/friends, spent a lot of time with my girlfriend, watched some movies, read some books, exercised, etc.

I went back to work yesterday morning. When I woke up I felt a feeling that comes from time to time, a feeling of dread, nervousness and anxiety that relates to not wanting to go to work. I remember it well from my time when I was doing some intern work while at university 11 years ago, I hated the job, it made me depressed and I wanted to get out of there as soon as possible. I suppose that was the time I realised that working 60-80 hours a week really wasn't for me, unless it was for something I was really passionate about.

I don't get the feeling very often anymore (because I quite enjoy my current job) but every now and then, especially after returning from a break, I feel it. Yesterday I had a heap of work to catch up on, but I couldn't focus, was very flat, procrastinated and spent a lot of time reading non work related forms, tinkering with spreadsheets, etc.

Today I had a great day at work, had some very stimulating conversations with co workers, was really focused and very productive - massive contrast from yesterday.

The point I'm making is, when I have really down days I'm very grateful I've taken the path of investment and early retirement. The day may come where I'm perpetually in a down day spiral, and that's the day i'll be calling it quits and getting out of the rat race. It may come soon, or it may never come, however I'm really glad I'm preparing for it, and this makes me feel a lot better. Does anyone else have a similar mindset?

[Rickardo]

January 2014 Update

Income: $9,600 (primary job) + $426 (secondary job) = $10,026

This was an unusually high month as due to how the calendar days fell I received 3 pay cycles worth of income (usually only get 2).

Expenses:
rent 866.66
car: 882.29 - Spent a bit more than usual on petrol driving far for second job, and my yearly registration was due
travel: 698 - Airfares for an upcoming mid year overseas trip. Budgeting for about $3,000 overall, i'll be cashing out 2 weeks annual leave to fund the trip so should work out around cost neutral
utilities: 401.3 - Much higher than usual due to some final payments relating to my old place, all are paid up now and the total shouldn't be more than 100-150 per month from now on
food / groceries: 349.06 - spent a fair bit of the month on a new diet, which involved a lot of fresh fruits/veggies/meats. This is much more expensive, but not following it as strictly now so should drop a bit
take out / dining: 207.5
coffee: 38.5
entertainment: 31
alcohol: 81.3
train: 80
sport: 6
health / toiletries: 126
clothes: 110
other: 95.67
presents: 30

Total: $4,003

Savings Rate: 60%

I've even put together a chart!

[Rickardo]

Feb 2014 Update

Income: $6,400 (primary job) + $337 (secondary job) = $6,737

Expenses:

Food / Groceries: $237
Rent: $867
Financial Assistance: $400
Take out / Dining: $334
Presents: $236
Alcohol: $206
Car: $178
Utilities: $66
Public Transport: $50
Health: $36
Coffee: $29
Clothes: $20
Sport: $18

Total: $2722

Savings Rate: 60%

Not a bad month, spent a little bit more on food and alcohol than I'd like but apart from that pretty happy with spending.

On the investment front, I'm slowly moving away from acquiring significantly more residential property and instead increasing my exposure to ETF's and my retirement contributions. I realised last week I can access my retirement savings at 55 rather than 60, and while both ages are still quite far away that 5 years does make a bit of a difference.

Long term plan is to still be in a position to retire from any paid employment by 40 years old, which is still looking on track. Only changes I've made recently is to the type of income, it's now more likely to include higher dividends rather than rent.

[Ricky]

The point I'm making is, when I have really down days I'm very grateful I've taken the path of investment and early retirement. The day may come where I'm perpetually in a down day spiral, and that's the day i'll be calling it quits and getting out of the rat race. It may come soon, or it may never come, however I'm really glad I'm preparing for it, and this makes me feel a lot better. Does anyone else have a similar mindset?

That's actually a very good point. You're shooting for security, not freedom. I mean you're always technically free to do what you want, but just not while you're at work. But that's fine since you enjoy what you do and you see it as a great alternative to what you might otherwise do, which I think is awesome.

It's nice having the feeling know if you had to hit the eject button tomorrow, you could.

It's interesting to see everyone's specific preference for investing strategies. It proves there is no right or wrong. *Everything* in life is a risk so you might as well go with your gut! It's funny that to me owning real estate seems more risky than securities.

Would your "passive" income now cover your bare minimum expenses? Just curious.

[steveo73]

The point I'm making is, when I have really down days I'm very grateful I've taken the path of investment and early retirement. The day may come where I'm perpetually in a down day spiral, and that's the day i'll be calling it quits and getting out of the rat race. It may come soon, or it may never come, however I'm really glad I'm preparing for it, and this makes me feel a lot better. Does anyone else have a similar mindset?

Yes and no. I do get where you are coming from and my job is pretty decent as far as jobs go but its not who I am. I just don't want to keep turning up. Funnily enough I'm a little concerned about making sure that I have enough to do when I retire.

[Rickardo]

Would your "passive" income now cover your bare minimum expenses? Just curious.

Hi,

At this point in time my passive income wouldn't come close. But it was never my financial plan to grow my passive income quickly, as I started off growth focused. This is starting to change, as I'm getting closer to being in a position to retire I'm trying to build my passive streams faster.

If I lost my job I've thought about backup plans, I could easily last a few years unemployed by significantly cutting back expenses, drawing down cash savings, taking up a part time job and if all else failed moving in with family. But at some point I'd still need to work to maintain my current lifestyle.

[Rickardo]

March 2014 Update

Income: $6,400 (primary job) + $977 (secondary job) = $7,322

Expenses:

Rent: $867
Presents: $600
Travel:$547
Alcohol: $283
Take out / Dining: $238
Food / Groceries: $234
Financial Assistance: $200
Utilities: $177
Clothes: $169
Public Transport: $126
Coffee: $30
Sport: $10
Car: $3
Other: $2

Total: $3,486

Savings Rate: 52%

Had a pretty high expense month. Categories that were once off included presents, had a big family event that was costly but worthwhile.
Travel involved some accommodation payment for the trip in July. Staying in places that average around $15 per night, however decided to spend a few nights in luxury and will be staying in one of Kuala Lumpur's nicest hotels. The other components of the trip will be much cheaper.
I'm embarrassed about the amount I spent on alcohol, mainly because I don't really know how I spent that much, will have to keep a bit more control over it next month.

Onto the Net Worth, in AUD (1USD = 1.08AUD, so similar value)

Assets
Property: $1,758,400
Retirement Account: $162,078
Cash: $33,510
Shares: $28,686

Assets Total: $1,982,674

Liabilities Total: $1,428,937

Net Worth: $553,737

Reasonably happy with how I'm tracking. I'm starting to move cash into ETF's with quarterly purchases and DRP's. If I keep this up over the next few years my position in shares will grow significantly. I'm planning on putting a fair bit of my saved cash into these, and any future property purchases will be majority funded through equity loans.

[Rickardo]

Hi all,

Another month down.

Income: $6400 (primary job) + $959 (second job) = $7359

Expenses:

Rent: $867
Take out / dining: $542
Food / groceries: $291
Car: $212
Alcohol: $210
Utilities: $141
Travel: $130
Public Transport: $50
Presents: $50
Coffee: $39
Sport: $33
Health: $13
Other: $13

Total: $2591

Saving Percent: 65%

Had a few dinners/outings so spent a fair bit on dining out/alcohol but apart from that spending was pretty normal.

On the work front had a bit of bad news in terms of having to move to a position which is less preferable (although kinda similar work and the same pay) due to work needing more resources in that area. Whenever I get some bad news at work, I just try and keep on thinking, the more financial independent I become, the less I really need to be here..

[Rickardo]

Would your "passive" income now cover your bare minimum expenses? Just curious.

Hi,

At this point in time my passive income wouldn't come close. But it was never my financial plan to grow my passive income quickly, as I started off growth focused. This is starting to change, as I'm getting closer to being in a position to retire I'm trying to build my passive streams faster.

If I lost my job I've thought about backup plans, I could easily last a few years unemployed by significantly cutting back expenses, drawing down cash savings, taking up a part time job and if all else failed moving in with family. But at some point I'd still need to work to maintain my current lifestyle.

Before I get to the monthly update, I wanted to expand on the above, as there have been some updates! There is a huge restructure going at work over the next few months, resulting in significant job losses (I should be ok but not 100% sure at this point). It has resulted in me doing some ‘worst case scenario’ analysis in case I was to lose my job (get a retrenchment).

This particular retrenchment includes a cash payout and early access to company retirement benefits - if I was to leave in the future I may not have access to the same benefits but for this current worst case scenario analysis I would be able to obtain them. I would get a cash payout (75k) plus access to a lifetime CPI indexed pension of about $10,000 per annum. When combining this with current savings / shares it would result in having about 140k in cash / shares.

I have done some rough calculations based on the following assumptions:

- Annual expenses at 40k
- Increase working at my second job to earn 20k
- Including indexed pension of 10k
- 0% investment returns

My annual expense shortfall would be around 10k. This means I could survive for at least 14 years, just by performing some part time work (which I enjoy). When I take into account investment returns including rent / dividends / capital growth and assuming there are no catastrophic drops in the property / share market and I have no significant unplanned expenses, I have already potentially become fully financially independent of a full time job, just shy of 30 years old.

My preference is to keep working full time, as it significantly increases my overall financial position but more importantly I enjoy the work. I have thought about what I would do if I lost my job, and it would probably involve finding another full time job (in a related but different field). I guess I’m just not ready to retire from employment, or maybe I’m just not really sure what else I’d do, or where my real passion lies. I think I’ll need to consider these things much more in depth as my financial position improves further, but I just don’t know at this point.

Anyway it’s good to have these options, and while I’m sure I’d feel significant stress if I was to lose my job involuntarily at least it wouldn’t destroy my life, unlike some colleagues who have a similar income, but spend most of it on lifestyle. This has really highlighted to me how much more flexible and resilient having a (semi) ERE mindset can be.

[Rickardo]

Now onto the monthly update.

Income: $6400 (primary job) + $335 (second job) = $6755

Expenses:

Rent: $867
Take Out / Dining: $517
Financial Assistance: $400
Alcohol: $289
Groceries: $237
Entertainment: $111
Utilities: $66
Presents: $56
Public Transport: $40
Coffee: $39
Sport: $27
Health: $41
Car:$5

Total: $2,690

Saving Percentage: 60%

Overall not too bad but I'm still spending way more on restaurants and take away than I'd like, and way too much on alcohol. I really don't feel like I'm getting enough value out of them to justify the expense, so i'll look at very consciously trying to lower them in June. Will see how we go!