Hello again and welcome to Mortgage Advisor on F.I.R.E. I am in good spirits at the moment. The pain in my ankle and foot has reduced considerably. I have been able to take a taxi to the city centre and have lunch, but I still cannot walk for more then a couple of minutes before needing to rest. My other leg still hurts but the pain is not anything like as severe as the problems that have kept me holed up inside my apartment for almost a month.
I wrote last week about my weight and how it has increased due to comfort eating and my not being able to exercise. Just over a week ago I started a new type of diet. It is something I have done before with some success, but I did not stick with it long-term. It’s nothing too revolutionary; I simply have three meals a day and one snack. Between meals I do not eat anything. No grazing or snacking allowed. I am, however, allowed to drink water or coffee between meals. I keep myself on track between meals by setting a timer on my phone. A typical day looks like this:
8am – breakfast. Timer set for 4 hours.
12pm – lunch. Timer set for 7 hours.
3pm (ish) – latte.
7pm – dinner. Timer set for 3 hours.
10pm (ish) snack.
I’m not too concerned with the content of each meal, within reason. The point is not to count calories but get out of the habit of pointless grazing and snacking. In the last ten days or so I have lost a kilogram doing this whilst being physically inactive. I do get hungry, but glancing down at the timer on the phone and seeing it ticking down second by second is motivating me in a bizarre way.
From next Tuesday, 3rd December, I should be back at work full-time. I have the rest of that week, and the first part of the following week before going to Romania for a week to spend time with my girlfriend’s family. Then, I have a decent schedule over Christmas and before we know it, it will be 2020.
I am thinking that in the New Year, I will be making a slight change to the blog. The whole point of this blog is to chart my course to financial freedom through passive income. So, from 2020, I will keep a running track of the passive income received that year. The aim, as mentioned in the first instalment of this blog, is to get to £1,000 per month passive income. At first, I expect a slow start, but it should be encouraging watching the income snowball over time.
As for this week, I will start with my weekly financial update and then discuss the concept of Safe Withdrawal Rate (SWR) and look at how short-term goal setting can help one stay on track for the long-term goal; financial independence.
Premium Bonds: £9,150 (no change from last week).
Stocks and Shares ISA: £7,068.36 (up £177.61 from last week).
Credit Card Debt: nil (no change from last week).
Loan Debt: £3,855.95 (up £5.95 from last week due to initial interest).
F**k It Fund: £1,000 (no change from last week).
I am removing the tech fund and surplus cash from the equation, as those figures will eventually be spent and not invested. This is still a new blog and I may make changes like this going forward.
Total Wealth Figure: £190,719.36 (total assets including property now valued at £173,501 according to my lender) minus £138,774.78 (total debts including mortgage) equals £51,944.58 (up £772.66 from last week).
Safe Withdrawal Rate
The SWR is a rule, or guideline, as to how much of your investment you can withdraw each year whilst making sure you do not run out of money in retirement. There is much debate about what SWR is correct and it will vary according to your age, expected remaining life, inflation and the economy in general. I have heard figures ranging from 3% to as much as 8% from different authors and experts.
The SWR assumes that in retirement you will draw down a percentage of your investments to live off. The remaining investment should continue to compound and if you get the SWR right, you should have enough money to live off for the remainder of your retirement.
Although the SWR is an interesting way to conceptualise how one will fund retirement, I think it’s looking at the issue backwards. The SWR assumes that you will be selling the assets you have and then using the cash received to fund retirement. Once the asset is gone, you can’t get it back. Once the cash is spent, it’s also gone. Operating from a passive income perspective assumes that the assets will remain in place indefinitely and the income they generate will fund retirement instead. There is, however, something to be taken from SWR and applied to my own situation. When I do achieve F.I.R.E., I will want to continue investing in some form. I don’t want my assets to simply stand still. I want them to continue to grow so that my position improves over time instead of just treading water. By factoring in continued investment once I have obtained financial independence, this helps to safeguard against a stock market crash. When the next crash comes, and it will come, if I continue to buy stock, I will be buying it at a lower price and getting more bang for my buck.
My interpretation of the SWR will be somewhat different as a result. Instead of asking myself “how much do I need to sell to maintain my standard of living?”, I will be asking “how much of my passive income is it wise to spend?”
Once I achieve F.I.R.E., I am thinking that the property income will be the backbone of my regular income and the income from stocks will supplement the rental income. I may not need to spend the dividend income from stocks, and so that money would be reinvested.
There may be a time at which my total wealth is large enough that it hits critical mass. What I mean by critical mass, is the point at which the investments are compounding at such a rate, it is possible for me to safely sell some assets and still have my investments intact. However, if I was to sell stock in the future, I think it would only be for reinvesting that money in another asset such as property. Selling off assets to live off the proceeds feels a little too much like killing the goose (the investments) that produce golden eggs (the passive income). If you have only invested in assets that produce capital growth, then you will not have much, if any, income from them. This is one reason why I prefer income generating assets over capital growth. There are some exceptions to this.
Within my Stocks and Shares ISA there are several funds I invest in, such as the Vanguard FTSE100 Index and US Equity Index. My holdings are of the Accumulation class. This means that profit earned through the fund is reinvested to increase the value of the units owned within the fund. No income is produced as such. Once I get to a certain age, I will transfer those Accumulation units into Income units which means my holding within the fund will produce an income. I could, in theory, continue with Accumulation units and then sell them off bit by bit in retirement and follow SWR guidelines, but that just seems so counter intuitive. I think it would be better to transfer those Accumulation units into Income units and live off the income generated.
In addition to the value generated through those types of funds, I do invest in a selection of individual stocks that have an established record of dividends. As per the rules I posted last week, any dividend income received over the next few years will be reinvested. However, once I achieve financial independence, I may choose to keep half the dividend income to spend and then reinvest the rest. The balance I achieve at this point will be by personal equivalent of the SWR.
Goal #1: My goal for the first six months of 2020 is to save another £5,700 towards my BTL deposit.
The first goal is to get that first BTL. It will be a huge psychological boost to have that first property bought and let out. Once I see that rental income coming in, this whole journey will feel like it’s underway. Now, I feel like I’m in the queue waiting to drop my bags off at the airport. Once I have that first property let out, it will feel like I’m hurtling down the runway. To get the first BTL, I need to finish saving my deposit. So, my first goal is to gather £14,850 – my share of the money needed to fund the deposit, legal, tax and refurb costs associated with buying a property to let out. My JV partner will be contributing an equal amount. I need my share by the end of May’20, giving me six months to accumulate £5,700. I’m currently saving a minimum of £400 per month towards the deposit, although this month I saved £500. Even at £500 per month, I would still be £2,700 short. However, I will receive £1,800 in December as well as a bonus in March’20.
Assuming a worst-case scenario and I only save £400 per month for the next six months, I will be £3,300 short. The £1,800 received next month reduces that deficit to £1,500. Typically, I would expect my bonus to raise my salary by around £1,000 net for that month. So, the deficit is roughly £500.
Goal #2: My goal for 2020 is to receive at least £2,000 in passive income.
Passive income is the name of the game. Ultimately, I am aiming to receive £12,000 per year in passive income. My goal for 2020 is more modest. Based on my calculations for anticipated rental income from the first BTL, for the latter half of 2020, and considering projected dividend income it is not unreasonable to aim for £2,000 in passive income in 2020.
As we are only a couple of weeks away from the election, next week I will discuss how the new government could impact my plans. I will also look at some contingencies I have in mind if BTL becomes a non-starter. So, check back next Friday for part six of Mortgage Advisor on F.I.R.E.
Thanks for reading, and if you have any questions, comments or feedback, I would love to hear from you in the comments section.