Growing your capital

I’ve had some thoughts about investing and getting to financial independence. Clearly a key part of this is having enough passive income to cover your day-to-day expenses.

To get passive income, I find that dividends from businesses is a great form. One of the easiest for the average guy to access being via dividends from the share market. Business income through owning shares in the private sector are even better, but not easily accessible outside the industry. Listed companies provide great access to dividends and therefore passive income.

Now, what do you really need to get access to dividends?  Money, ie capital. It’s all very well knowing that you got to get dividends, but actually you need capital, meaningful capital to do so. And the best way for me to get capital has been historically?

To earn it.

The quickest way I got increased capital was through earning more. And not spending it all. It was far quicker than growth from my existing investments, or from building a business. It was just earning more. And I did that by, firstly working and billing more hours when I worked effectively as a consultant. Then it was by switching to a career that paid more. Then it was by adding real value and getting share and equity options. These all helped grow my capital the quickest in the beginning, because I had little capital to begin with.

Once I’d built up decent capital over a period of 10 years (like 5x my gross annual salary), it was much easier to compound it, because now a 10% growth rate on the capital base actually made a difference. Prior to having this, I could’ve made a 100% growth and made the same difference as a monthly paycheck.  Now a 10% growth would equate to half a years pay!

Until you get to any decent scale of capital, the best bang for your buck, in my opinion, is to shoot the lights out on active income, ie job/your time for income.  Heavily invest that capital, spend like a business owner (ie low expenses, high margins) and after 5-10 years have a strong base to take yourself to the next level!

 

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Reducing some costs (life insurance)

So been looking at making some changes to life insurance and car/home insurance in order to reduce some unnecessary costs.

A lot of great ideas for reducing this cost are explained in one of my favourite books, Living rich by spending smart

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that details one of the best ways to save cash is to increase excesses or to cancel unneccessary cover. Excesses can be increased since you have savings and are self-insuring. Insurance should only be obtained for catastrophic events.

Another site that explains this well is one of my favourite blogs, Mr Money Mustache: 

In my case that would be death or disability of a significant earner, theft of all household contents, fire, or third-party liability on motor vehicles.I have also kept my comprehensive insurance for the vehicles, since they’re both still 2 years old and have value in the R200k range – so not quite ready to completely remove my own theft and collision insurance and self-insure. I could move up the excess to like R20-R50k and still be comfortably insured, while reducing premiums – or use Discovery insure’s excess funder. But that is an idea for another post.

For now, I’m reducing life insurance premiums by removing unneccessary cover (life cover and income cover for my spouse as we have more than enough savings and we are not dependent on her income). The extra cash will just go towards our own investments.

Every Rand saved has two benefits:

1. One rand of extra savings, which compounds rapidly over time,

2. One less rand of costs that needs to be replaced with investments. This equates to R12 per annum less costs, and at a 5% withdrawal/income rate a total of R240 less in savings required. The R500 savings on the life insurance per month would be the same as having an additional R120k in savings.

 

My life insurance is through Discovery Life, and together with high credit card spending through their credit card products, being on Gold for Vitality (just reached in April), and their health intergrator products (through their medical aid) I have reduced the premiums quite significantly and reduced the increases. Their payback is awesome, so will be getting between 20%-50% back on my premiums after 5 years as well which further reduces how much I’m paying. I haven’t found anything else that comes close – the only option to further potentially reduce my premiums would be to switch to a life insurer that offers term insurance. DIscovery only does insurance that pays out at death, so you are guaranteed to get a capital amount, while term would expire at say age 65 at retirement. I think that I’ll probably cancel my life insurance long before that due to having enough savings to cover any life insurance payouts my dependents would actually get. Probably another 5 years or so.

Next up is reducing premiums on car and home insurance – looking at switching to Discovery Insure. With the paybacks on life cover (integrator product) as well as paybacks on fuel (required to be spent at BP) I might be able to cut the costs on this quite significantly. Will assess and see.

 

April 2014 progress

I have started tracking the amount needed to retire based on the 4 percent rule. Seems that at my current savings rate of 45% of after tax income it will require another 5-7 years depending on investment return assumptions. I’m currently assuming around 5% above inflation of 6%.

Am tracking monthly expenses with 22seven. Budget seems to be fine. Want to check a few expenses and alternatives.

Need to check:
1. Life insurance – do I need cover or for Mrs.
2. Home and car insurance – perhaps third party only? Or higher excess? Discovery insure with cash back?
3. Groceries – discounts, bulk…
4. Gifts – discounts,  sales and pre season shopping. Online and bargaining.

Just some areas to focus on for potentially reducing expenses. Easier to retire off low expenses than replace high income. More importantly get to spend money on things I really want.