Julia: The South African Saver

I found a gem this week: Julia 🙂 She is a South African (can I get a happy dance please?!) who has been aggressively saving for the last 8 years so that she can reach financial independence as soon as possible. And what financial independence means to her is being able to CHOOSE to work IF she wants to (when/where/how etc.). We are totally on the same page.

Here is the link to the podcast – scroll down to the 7th July (it’s from about 35 minutes in to about 60 minutes). These are the things that stood out for me though:

  • Based on the long-term history of the South African stock market your investment DOUBLES every FIVE YEARS (due to the magic that is compound interest).
  • Over 8 years she has invested R2.3 million. But compound interest means that she now has over R4 million. Beautiful, beautiful compound interest. (Based on your investment doubling every 5 years, by the time Julia is 65 she will have R128 million if she never adds another cent to her investment).
  • “Early days set me up” (again because of the magic of compound interest). In other words, it is always better to save whatever you can NOW than to delay it until later.
  • “Procrastinating their way to poverty”. That hit me hard. Not what I want.
  • She invests using index funds. I clearly need to research what the hell those are…
  • She earns a shit-tonne of money. Which sucks because it makes it too easy to write off her message with “well I don’t earn that much so I will never be able to do what she is doing”. However, if you keep listening you will hear the point: she could have easily bought a fancy-smansy car (like most people with her income do) but instead she chose to invest/save. The rest of us plebs might be choosing between buying a coffee or investing/saving but the principle is still the same.
  • [After a certain baseline] income determines lifestyle (not savings percentage).
  • Very interesting for me (because of the complete lack of blogs/information about this in South Africa) was her savings percentage: one-third to tax; one-third to life and travel; one-third to savings/investments. Her investment rate has slowed since she had a baby and bought a house though.

I’m really excited to have found Julia. And I’m also really excited to have discovered The Money Show with Bruce Whitfield. I’m becoming such a financial nerd! 😉 Now to find out about those index funds….

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Charlie Bucket looking into the sunset (Secunda, South Africa)

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Our South African Financial Life

So now that I feel like I have a vague grasp of the numbers, I thought that I would try applying them to our lives in South Africa.

Step 1: (Brutally) Look at our expenses

This is where Husband’s teacher’s salary went on a typical month for the both us last year (because I really did keep Excel spreadsheets!):

 Salary: R18 817

Tax and other deductions: R2724       Unavoidable

Medical aid (entry level): R3211         Unavoidable bare minimum

Rent: R5300                                            A VERY cheap deal for a lovely two bedroom cottage

Lights and water: R500                         Could have reduced a bit…

Car payment: R2048                            Entry level car. Unavoidable.

Car insurance: R854                             Unavoidable

In terms of cars, the formal public transport in South Africa is almost non-existent, which means that you have to have a car. And given that we both worked, and at different jobs with different hours, we had to have two cars. We bought one second-hand car outright but couldn’t afford to do that with a second car (second-hand cars are VERY expensive in South Africa) and so we had to get one on credit.

Petrol: R1754                                                      Unavoidable.

The petrol is simply Husband’s petrol because my petrol was a business expense.

Total spent: R16 391 (87%)

“Surplus”: R2426 (13%)

The percentages of spending vs surplus are not awesome. But as you can see, dear Reader, there is almost no room to cut down. Knowing what I have learnt since starting the Brat Experiment I imagine that we probably could have shopped around for better deals initially. But my fellow South Africans will know that this takes significant resolve and patience as the inefficiency, personal time and high jumps required for seemingly simple tasks (e.g. change of address, renewing your passport, getting a landline for internet etc) is mind-boggling. I shudder to think of the emotional-sanity price of changing deals mid-swing…

I was self-employed in a new business, which meant that I never knew how much money would come in each month so Husband paid for all the routine expenses and my money was used for bonus “luxuries” (i.e. food, internet, cell phones and any anything else). On a typical month these were:

 Food: R3343

Internet: R427

Two cell phones: R627

Total spent: R4397  

 The real bugger with being self-employed was that if I didn’t work I didn’t earn. Which is fine until we want to have children and I need to take maternity leave. This means that the initial financial implications of having a child are:

  • the medical fees not paid for by our entry level medical aid
  • all the baby equipment (although I don’t think this would be much as we would do it South African style: hand-me-downs, second-hand things etc as much as possible)
  • the loss of my potential earnings (and so having to stop our internet and cell phone contracts and eating less or more cheaply)

Taken all together, we would be living on a financial cliff with NO buffer and NO room for anything to go wrong i.e. financial hell. You can see, dear Reader, why we felt we had to change things before we had kids.

But anyway, I digress. The point of this post is to apply early retirement numbers to our lives in South Africa. So: ultimately the minimum (I haven’t counted anything extra in spending like medication, haircuts, the occasional clothes shopping, presents, alcohol, holidays/travel etc) total spending of our household per month was: R20 788. Step 1 complete.

Step 2: Work out what we need to retire (A rough guesttimation)

Spending per month = R 20 788

Therefore spending per year = R 249 456

So applying the magic number (5%) for South Africa means that our minimum retirement amount is our spending per year X 20: R4 989 120. Step 2 complete.

Step 3: How long it will take us to get there

This is of course based on our savings rate… which you have already seen was not awesome… And for a long time we genuinely felt that it was impossible for us to save anything… Until we wanted to go on holiday to Italy.

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Florence, Italy (July, 2015)

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We have a problem: I’m not American. Part 3.

However, cultural and free stuff aside (see Part 1 and Part 2 if you haven’t already), there seems to be a bigger problem with the fact that I am not American. And that is the numbers. The actual maths calculations required for working out how much you need to retire on. And it turns out, dear Reader, that this number is dependent on which country you live in. Bugger.

All I can say is thank goodness for my brother. My Humanities brain had skipped over the numbers, being much more interested in the philosophy, culture and way of life behind the idea of Early Retirement. Don’t get me wrong, I knew that the numbers were important, but I figured that they were minor details that I could grapple with when I felt like it. So I absorbed the 4% rule, felt like a hero and marched forth 🙂 But then my brother, who miraculously marches face-first into numbers without any fear, pointed out that I might have a little problem…

This is because the 4% rule is 4% because:

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Except that I’m not American. This means that I need to use numbers specific to where I am living. The challenge is that while the inflation number is quite easy to find, the average investment return is not. So with my best googling foot forward this is what I’ve guesstimated:

In terms of South Africa:

  • South African average investment return: 14% (8% real return + inflation – fin24)
  • South African inflation: 6% (tradingeconomics.com/south-africa)
  • Therefore, South Africa’s magic number is: 8% (and I need to save 12.5 times my living expenses to retire). On a side note, maybe this evens out the lack of free stuff in South Africa?

But, I not currently living in South Africa and don’t plan to for a few years. We are currently in South Korea but are planning to head to New Zealand next year so:

  • New Zealand average investment return: 7% (rounded down from returns over 20 years – NZ returns)
  • New Zealand inflation: 1% (rounded up – tradingeconomics.com/new-zealand)
  • Therefore, New Zealand’s magic number is: 6% (and I need to save 17 times my living expenses to retire)

What this means is that if we are going to do this Early Retirement thing I can’t rely on my Experts to give me my exact numbers. And given that I haven’t been able to find any South African or Kiwi Early Retirement Experts (if you know of any PLEASE let me know!), I am going to have to take a deep breath, put on my grown-up pants and try to work out the nitty-gritty of my numbers myself.

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P.S. Since writing this post I have spoken to a (South African) friend of mine who is MUCH better with numbers and money than I am. He says that South Africa’s challenge is that our rate of inflation for education and health is higher than normal, which means that 8% isn’t going to cut it in the long term. Instead he says that 5% is our magic number. Now, dear Reader, you don’t know my friend so let me tell you a little about him: he’s brilliant with numbers, a rather intelligent fellow and highly risk adverse. In other words, if he says 5% is safe then it absolutely is.

P.P.S. It hadn’t even entered my brain as a possibility that there could be different rates of inflation for different things. And it scars the crap out of me. I’m going to need a bigger pair of grown-up pants…

We have a problem: I’m not American. Part 2.

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Oudtshoorn, South Africa (January, 2015)

The other problem (see Part 1 if you haven’t already) with not being American is that I don’t think that I get as much free stuff as an American would (one of the differences between a developed and developing country I assume? Although after doing some reading it’s not a simple concept…). This means though that I can’t cut costs like an American can. In South Africa you have to pay for EVERYTHING that you get. To give you an idea, dear Reader:

 

 

    • Paying for medical aid (which is no small sum by the way!) is a high priority because public health care is so under resourced. If you can even vaguely afford it, you have it.
    • Good education needs to be paid for (and by “good” I simply mean acceptable e.g. teachers are in the classroom during school hours and each child has their own textbook). Tertiary education is horrifically expensive across the board.
    • Second-hand cars are almost as expensive as new cars (I think because we see nothing wrong with something that’s second-hand??).
    • It is illegal for our banks to give credit without first proving that we can afford to pay it back (if they do the banks are liable for the debt instead of the individual). Credit cards are certainly not given out like candy at Universities.
    • Interest rates are MUCH higher in South Africa (at the moment 0.5% vs. 7%). This means that you pay a LOT more for any debt you have.
    • In terms of social grants, the MOST you can get is R1500 a month (about 105 US$ – for pension, disability and war veterans). You can get R350 (about 25US$) a month if you have a child. (See here for more details). Unfortunately, this amount of money does not go very far. And, given that I have a roof over my head and food security, I would never qualify for any of these grants.

 

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Oudtshoorn, South Africa (January, 2015)

 

My main concern that comes out of the difference in free stuff is children. According to my Experts, children don’t seem to put that much extra strain on the budget. In South Africa though, they get exponentially more expensive the older they get (mainly because education gets more expensive the older they get). This is so much so that the main reason that Husband and I have not had children yet is because we cannot afford them (like sheer, blind panic when we think of the financial implications of having kids). All this makes me desperate to find a South African Early Retirement Expert to shed some light but alas the online search keeps coming up empty (apart from a guy who is very critical of the idea of reducing spending but wants me to retire by buying houses with some magical capital I somehow have)… Maybe if I stick at this long enough I can become the South African Early Retirement Expert?!?! Hahahaha…

 

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