An update on my journey to freedom - 2020
By Lizelle Steyn
29 November 2020
2020 - a giant leap towards financial freedom
In June 2019 when I started this blog, I was 52% on my way to not needing to work for financial compensation. End of 2019 that figure was 57%
In the past year my financial freedom percentage jumped from 57% to 75%!
How did I do it? Well, mainly by converting 'lifestyle' assets into financial assets and, secondly, by contributing 27% of my salary to my employer's retirement fund. Very little of this jump came from growth in my portfolio this year. Pandemic-induced austerity and not being able to go overseas also helped; I could save my entire bonus and share pay-out this year instead of splurging on airbnbs and plane tickets.
A reminder: How much does one need for financial freedom?
You've reached financial freedom the moment you have enough in your portfolio to cover 300 times your monthly expenses. If you want to read more about this 'magic number', the Rule of 300 and the 4% rule have been covered in a previous blog post.
What do I use as my roadmap to financial freedom?
I have a roadmap to financial freedom with 10 milestones, so there’s some sense of accomplishment every year/every few years.
Ironically, while I've made huge strides this year in terms of my financial freedom percentage, I've sacrificed some of my personal freedom in the process. Last year I was at milestone 9, no longer working five days a week for our company. But this year, because of the crisis and increase in the need for investor communication I found myself often working seven days a week, but only getting paid for four. So, I asked to go back to full-time employment at my full pay. I've put in a proposal to go back to four days a week again in 2021.
What’s changed in my portfolio?
The biggest change to my portfolio was selling my Durbanville flat, keeping a few hundred thousand rand aside to build a studio in my new backyard next year, and putting the rest of the proceeds from the sale in my financial freedom 'pot', mostly in the money market - for now. Having a city place for work and a weekend spot in Swellendam was a big lifestyle luxury that I enjoyed for a year before packing up my city life and making Swellendam my permanent base.
What financial products do I have?
Not using an adviser, I have a hotch-potch of financial products that matched my needs at different times in life and to which I allocate on the basis of what makes sense from my tax perspective and view on our country at the time.
Similar to last year, in my financial freedom pot I have an:
- Offshore account
- Umbrella fund with my employer
- Private retirement annuity (RA)
- Unit trusts
- Preservation fund
- Tax-free savings account (TFSA)
Outside of my financial freedom pot I also have:
- Emergency funds across two different banks
- An African Bank fixed deposit for one day when my Clio wants to retire
- Some test-the-experience ETFs with EasyEquities
What is my offshore vs local split?
Because SA makes up less than 1% of world markets, it's important to cast your net wider. My ideal long-term strategic offshore allocation is between 50% and 55% of my portfolio. 100% offshore would not be ideal in my case, since I have no plans to emigrate and at least half of my future annual expenses will be in rand and not on imported goods or living/travelling offshore. When throwing all my financial freedom products together and aggregating the asset allocation across them all, I currently have 51% of my assets exposed to offshore markets and 49% to local markets. Last year the split was 55% vs 45% but putting so much of my property sale proceeds in SA money market has lifted my local exposure.
Long-term strategic asset allocation is the key driver of investment returns and it's really important to take stock every year and check that your asset allocation is still within your strategic asset class bands. My asset allocation at the end of November 2020 is:
- equities (shares): 72%
- bonds: 10%
- cash: 13%
- listed property: 5%
My cash allocation is too high. But I'll re-allocate a chunk of it to equities in the coming year.
Top 5 fund allocations:
- Orbis Global Equity (dollar based offshore active)
- Allan Gray Money Market
- Nedgroup Investments Core Diversified (local balanced passive)
- Fidelity European Growth (euro based offshore active)
- SIM Moderate Absolute (local balanced active)
Which funds were the top performers?
The biggest return in rand for the year to 31 October (the November figures are not out yet) came from the Orbis Global Equity Fund (12%). Two-thirds of this figure comes from the weakening of the rand against the dollar, the currency in which this fund is based. The rest is the manager's performance. The Foord International Trust gave just under 10% in rand over the same period. The Allan Gray Money Market Fund gave 6.4%. None of my other fund choices could beat inflation over the 12 months to 31 October 2020.
My biggest flop of 2020
It's the same as my biggest disappointment of 2019: my listed property unit trust actively managed by Bridge Fund Managers on behalf of Nedgroup Investments. It’s lost 40% of its value over the past year. Of the R159 000 that I contributed to this fund since opening my TFSA and choosing this particular one as the underlying fund, I have only R74 000 left. Poof! There's no point in switching out of the fund now; that will only lock in this stupendous loss. Who knows, maybe it recovers and I still get my capital back over the next 5 years. But since the outlook for SA listed property has become so bleak, I'm not throwing any additional money down this hole.
Quite a re-shuffle in my expenses
Moving into my Swellendam weekend spot and selling my Durbanville flat have made all my Cape Town expenses disappear. Except for 'cleaning'. One day I was still driving my conscientious cleaner to the taxi rank after her monthly cleaning swoop; the next minute we're in lockdown and restricted to cell phone contact - probably forever since I can't see myself returning to the city. And as she has no other income other than her SASSA grant, I'm happily paying her double her wage as a pension, because that is the only way she can survive at the moment and it's the least I can do for her after 16 years of service.
Also related to my move to the platteland, having fruit-bearing trees and generous neighbours mean I no longer have to buy fruit and since I started my vegetable garden, my veg bill has come down substantially. Actually, it's astounding. In Cape Town I used to spend about R4000 a month on groceries; last month it was only R3000 here in Swellendam. Now, having plumbing for my washing machine, I no longer need to spend money on laundry; I can do this myself. Working from home has brought my petrol bill down. Lockdown has seriously curbed the amount I spend on airbnb and air travel. We're eating out less frequently this year and when we do, Swellendam is about 20-25% better value than Cape Town. I've reduced my PPS income protection to the minimum cover allowed and that item has subsequently fallen off my Top 20 Expenses list. Working from home, I suddenly feel like I have a mountain of clothes and seldom feel the need to go shopping for anything new. Moving out of the city has cut down on my yoga and dance classes, but I'm sad to see those pleasures go and hope to bring them back into my life again.
The only amount that's gone up hugely is what I regularly spend on my garden and home. What I'm saving on my monthly grocery bill, I'm wiping out through the need to 'round off' my home, basic landscaping, new trees, seedlings, compost, soil, and gardening tools. But from next year the nesting should start to calm down. At least I now have killer loppers and secateurs and using them makes me happy every time.
Top 20 expenses at end of 2020
- Parents’ medical aid and insurance: R4600
- Food and groceries: R3000
- Own medical aid: R1877
- Municipal account: R1200
- Car maintenance, license and fines: R1000
- Home maintenance and garden: R1000
- Retreats, workshops and studies: R1000
- Gifts: R1000
- Cleaner's pension: R900
- Travel and breakaways: R800
- Critical illness insurance: R789
- Petrol: R600
- Gardener: R600
- Eating out: R600
- Short-term insurance: R571
- Donations: R500
- Electricity: R450
- Cell phone and data: R315
- Dentist: R300
- Gap cover: R280
Greatest learnings of 2020
The greatest shift this year was the letting go of the idea of financial assets only as security. 2020 has taught me that I've previously overlooked two almost magical assets: 1) the power of a supportive community and how that can save you a lot of money (like the family member who fixed my car's oil leak for free and the one who brought me a week's supply of exceptional fruit and veg as a gift), and 2) the ability of nature to alchemically transform seeds and cuttings into food, medicine, mulch, teas, building material and more. Often exactly what I need at the right time.
Plans for 2020 that didn't work out
I was so sure I was going to open a TFSA with Easy Equities this year, but until their book keeping and client service improve in leaps and bounds, I'm staying with the more expensive Allan Gray.
Where I'm putting my money in 2021
There's no need to urgently switch out of any of my existing funds as none of them meet the criteria for a full or partial withdrawal, namely: 1) the fund has outperformed its peers or other asset classes dramatically and perhaps it's time for some profit-taking; 2) my asset allocation is dramatically moving away from my long-term strategic allocations; 3) there have been some manager or mandate changes that worry me. The existing funds stay where they are with the exception of my money market discretionary money; some of that can be allocated to the equity market, either offshore or local. I still need to decide which.
As far as new contributions are concerned, a slight tweak is necessary. My retirement products are now substantial at 50% of my total portfolio. It's time to lower my contributions into my employer’s retirement fund slightly from 27% of my salary to 25% and redirect the difference into discretionary (non-retirement) products. If I'm going to 'retire' before age 55, I need a good chunk of discretionary savings that I can access before 55 - not allowed with employer funds and RAs. Although retirement products offer multiple tax benefits, my discretionary money can be allocated 100% offshore, should I want to, unlike retirement products that are limited to 30%. All new contributions into my employer's fund are still going into a low-cost Satrix managed balanced index tracker. The existing money from my first 5 years of being with my current employer stays in the active balanced and absolute return funds originally chosen.
Over my December break I also want to explore allocating part of my money market assets to hedge funds, as I have zero allocation to this diversifier at the moment. A big oversight and, having been a hedge fund manager myself (in the distant past), I'm a bit disappointed in myself for not keeping up with developments in this asset class that is now much more accessible to retail investors than 10 years ago.
When will this journey end?
Thus far in my life I've been incredibly blessed with good health and mostly good fortune, and there are a lot of special human beings directing prayers my way, I'm convinced all contributing to my wealth being able to grow every year. Good health and no medical bills or disasters = healthy finances. Sometimes my savings pot grows in a giant leap, but most years in baby steps. If there's one thing 2020 has taught us - on a global scale - it's that there are human plans, and then there is Destiny. So, the short answer to how long it will take before I reach my financial freedom goal is: I don't know.
If I put on that old and dusty actuarial hat of mine, I can do some forward projections. Imagine I can save R200 000 every year for the next 3 years and my existing portfolio grows on average at 7% per year, and if no unexpected additional expenses come into my life, I can be at the goal post in three years' time, aged 51.
That would be sooner than I thought when I started this journey.