Hawkes Bay family on mission to reach financial independence by age 40

About MoneySecrets: MoneySecrets offers a peek into the financial lives of our fellow Kiwis. The story below was written using pseudonyms to remain anonymous. When commenting, please remember that the writer has laid bare their financial life, which can be a scary thing to do. Please be kind, and enjoy!

INTRODUCTION

Kia ora! We’re Matilda and Jack, and we’re on a mission to reach Financial Independence (FI) before we’re 40. We are currently both 31, married, and have an 18 month old boy. We have been together 7.5 years now, 4 years in Auckland, and the last 3.5 years in sunny Hawkes Bay. Jack is an Accountant by trade but works in Tech. Matilda is a Physiotherapist.

Before we walk you through our financial goals, you might be interested in how we arrived at them. See when we first met, we had no financial goals, and were living like there was no tomorrow. We got by paycheck to paycheck, and Jack often fell into debt, leaning on a $500 limit credit card to fill the gap between his meagre monthly salary.

Six months later, at 24 years old, we sold the little we had, quit our jobs and travelled through South-East Asia for 6 months (after some painfully tense conversations with our parents).

People often say that experiences shape who you are, or will become, and that you’ll learn a lot about yourself if you step outside your comfort zone. We found all of this to be true.

We lived on less than $20USD a day each for 6 months, and the culture shock of discovering how far our Dollars would go in places like Bali, Vietnam, and Cambodia fundamentally shifted our perception of money permanently. Once you saw you could stretch $200 to a week of food, drink, sightseeing, and accommodation on a tropical island, it was one of those things in life you could no longer unsee.

When we arrived back in New Zealand, the backpacker version of PTSD (Post Travel Stress Disorder) kicked in. We went out to the Viaduct to have a look around and when we were greeted with $20-$25 lunch menu, we both remember looking at each other and being super uncomfortable with the price tag. Our priorities and judgement of the value of money had permanently changed and we both feel this was a watershed moment for us, and the start of our journey to financial independence.

FINANCIAL GOALS

In the 12-18 months post Asia, we stumbled upon the Financial Independence Retire Early movement (FIRE) and we went deep down the rabbit hole. Through hundreds of hours of study and deep conversations we came up with the financial vision, mission, and goals for our lives:

Vision - Be the change we wish to see in the world.

Mission - To reach financial independence (FI) and retire early (RE) before we’re 40.

Goals:

• Save $100,000 (completed November 2016).
• Buy a House (completed September 2017).
• Pay off our mortgage as fast as possible (completed June 2020).
• Establish an emergency fund of 3 months of expenses (target date of December 2020).
• Save and invest to reach our FI number of $500,000 (technically “Lean FI”, with a target date of July 2028 / before Jack turns 40!).

Assets

• Cash: The small negative balance represents the last of our mortgage, as our current account is also our floating interest home loan. By the time you read this post, we'll have paid this off and will be aiming to build our cash buffer / emergency savings to around $6,000-$9,000, representing 3 months of expenses. Pre-mortgage we used to always have a $1,000 buffer in our current account. We feel this was a small but tangible taste of early financial freedom where suddenly you no longer feel like you’re living paycheck to paycheck. We will build our buffer up again until we feel confident about it. It’s not the dollar amount we’re aiming at, but how confident it makes us feel.

• KiwiSaver: In September 2017, we cleared out our KiwiSaver to help with the deposit on our home. Both of our KiwiSaver funds are invested in Superlife Growth, which is roughly 80/20 equities to bonds. One of the mistakes and lessons we learned along the way was with our KiwiSaver. We always knew we would be using our KiwiSaver for our house deposit, but upon starting to learn about FI strategies, index funds, and compound interest, we put both our KiwiSaver and cash savings into high growth funds. We then proceeded to login and check/stress about our balances every day. On the first day we gained $500 and thought we were geniuses, a month later we had lost thousands. We then had to nervously stay the course until we broke even again, and after a number of months we moved out of the red and quickly back into cash, having thoroughly learnt our lesson.

• Real Estate: Our house is our pride and joy. A sunny, warm, and reasonably new 2 bedroom house in Hawkes Bay on a 300m2 section that backs onto a park. With plans to only have one child, we have no intention of moving. Currently 85% of our net worth is in our house, and while some people don’t count the family home as an asset (when thinking about FI), we believe that acting like it’s our number one asset gives us an increased sense of pride, gratitude, enjoyment, and ensures we give it the appropriate level of care.

• Managed funds: This is the beginning of our FI fund. During the last few months of paying down our mortgage, the market began to dip during Covid-19. While initially we planned to start this fund after paying off our mortgage, it made sense to us to start dollar cost averaging in as it was falling and start early. We currently contribute $500 a week by direct debit, but will begin ramping this up alongside building our cash buffer. By 2021 this will be where we place all of our residual income. Our investment strategy is based on the Boglehead three-fund 75/25 portfolio, and with Superlife this looks like 60% Total World equities, 15% NZ Top 50, and 25% NZ Bonds.

• Shares: Jack receives 10% of his base salary as company shares each year. These vest in equal thirds over three years, and in the past we’ve sold some every few years to put towards the mortgage. We will continue to sell every few years but future sales will be reinvested into our FI fund to keep our portfolio aligned to our FI goal.

• Vehicles: We share the common FIRE belief that vehicles are just a mode of transportation and are not part of our identity or status. Jack drives a 2001 Daewoo Lanos which he picked up for $1,500. Matilda drives the family wagon, a 2005 Subaru Legacy which we picked up on $1 reserve on Trademe for $3,550.

• Other: We have a few thousand dollars in cryptocurrency, and we consider this a gamble more than an investment. Alongside crazy volatility, lots of things can go wrong in the crypto world and we lost some of our crypto through the hack of the New Zealand based cryptocurrency platform Cryptopia.

Debt

• Credit Card Balance: Throughout the 3 years we had our mortgage, we put all of our expenses on our credit card and then paid it off in full once a month. With the interest on our floating mortgage being calculated daily, the idea was to minimise the amount of days in a month you have expenses coming out, and maximise the amount of days your income can sit against your mortgage balance before you take one big hit paying off your credit card balance. We had ASB Platinum Visas which accrued True Rewards which we used to purchase garden and home maintenance items from Mitre 10. The fees were $75 p.a but when we signed up in 2017 we received $250 credit so our fees for 3 years were cost neutral. We now no longer have credit cards, and we don't think we'll go back to them, this is what our emergency fund will be for.

• Student Loan: Jack came out of uni with around $40,000 in student loan, and Matilda with $24,000. Matilda's was paid off during 2017 and Jack's will finish up in late 2021. Having this debt standing in the way of being truly debt free is an itch we’d really like to scratch. Like a lot of financial decisions, what’s logical and what makes you feel good can be two separate things. Since it’s interest-free, we’ll continue to try and resist the urge to pay it off early.

• Mortgages: We are incredibly proud to be mortgage free at 31 and to have got there all by ourselves. We paid $365,000 for our house with a $143,000 deposit which we'd saved plus $42,000 in KiwiSaver. This left us with a mortgage of $180,000, which we managed to pay off in pretty much 3 years to the day. Geo-arbitrage, small house, big deposit, and aggressive repayments meant we only ended up paying just over $10,000 in interest.

Income

• Salary: Matilda works 3 days a week and earns an annualised salary of $77,330 which comes to $46,398 pro-rata. Jack currently earns $82,400 base salary plus a $5,000 higher duties allowance while on a secondment. When we began our financial journey in 2014, we both earned around $50,000 each. Matilda works for the DHB and as part of her union agreement, she has managed to increase her salary by $3,000-$5,000 a year. Similarly Jack has worked for the same company for over five years, but has had 7 roles (each with a pay rise) during that time. We both love our jobs, but also feel financially tied to them. Matilda has dreams of becoming a florist or conservationist after we reach FI, and Jack has a huge list of projects and skills he’s itching to fill his day with.

• Bonus: As mentioned earlier, Jack receives 10% of his base salary as company shares each year which is classed and taxed as income. There is an additional "long term incentive gross-up" which essentially adds another $4,059 income which covers the full amount of tax and Kiwisaver deductions on the shares so that the full value of the shares becomes "take home pay".

Expenses

Some more explanation of these expenses below:

• Housing: We are fortunate to no longer have a mortgage payment, so this amount represents monthly spends of $110 for house insurance, $29 for contents insurance, $195 in rates, and $220 for home maintenance and garden. A small property and a minimalist lifestyle means we enjoy lower rates, and cheaper house and contents insurance through AMI. Our home maintenance spend this year was mostly one-off costs for toddler proofing our deck. Most of our flower and vege garden spend was using True Rewards from our ASB credit card.

• Grocery and supplies: This averages out at $150 a week. We tend to shop the perimeter of the supermarket filling our trolley with meat, fruit, and vegetables. We bolster this with low-cost staples like pasta, rice, beans, wraps, and bread. We buy very minimal cleaning, bathroom, and laundry supplies, making some of them ourselves. Our son was breastfed and wore reusable cloth nappies during his first year so our grocery bill didn't increase very much. Now in his second year, disposable nappies for day care and a few age-appropriate lunch and snack foods have started to increase our bill. Breakfasts and dinners he eats what we eat.

• Eating and drinking out: This averages out at $50 a weekend. In reality it's distributed more like $15 a weekend and then a $100-200 weekend. We have two rules of thumb here.

  1. Rule 1: Instead of a full meal, go for coffee or a bowl of fries. Part of the joy of heading out for breakfast is getting away from the house, exploring new cafes and restaurants, and catching up with family or friends in a social environment. It’s also nice to have someone else wait on you while you relax. We try to keep this luxury while reducing the price tag by grabbing breakfast at home and then heading out for coffee instead. Sometimes we even splash out and stay for a second coffee and still be under half the price tag - luxury. For evening outings, we switch from dinner to a glass of wine and a bowl of fries or bar snack to share.
  2. Rule 2: Rule 1 goes out the window when friends or family come to visit. This is where the $100-200 weekends come in, we always say yes to family and friends from out of town, and always pick up the bill for our parents.

• Entertainment: This is a fun one, we challenge ourselves to never pay for content. Spotify seems to offer 3 month Premium trials about once a year. If you have both a Visa debit and credit card each, this equals 4 cards you can link to 4 separate email accounts and you'd have a year free. We don't have a TV in the house, but on occasion we stream a TV service, again relying on bouncing between free trials and multiple accounts and emails. We read a lot, but primarily from the local library and swapping books with friends. We went to one concert last year, but this spend is absorbed in our “eating out” budget.

• Transport: With our two cars totalling $5,000 in value, we opt for third party car insurance only. Both cars are just new enough to be on annual WOFs. Jack drives about 5km a day and has been known to bike. Sometimes a tank in Jack's car will last 3 months. Matilda's commute depends on where she's placed for work. In 2018 her commute was similar to Jack’s, but last year this went up to a 40km round trip each day. 2020 has brought Matilda back closer to home so we expect this to trend back down. We roadtrip to Bay of Plenty and Wellington regions maybe once every 6 weeks for a long weekend or week holiday to see family and friends.

• Utilities: For us this is Power, Internet, and Mobile.

  1. Power - Our budget is $220 a month, but we have plenty of months under that. We are with Mercury which we find a little expensive. Before we bought our home we were with Electric Kiwi and we loved their free Hour of Power programme. Our home doesn't have a smart meter which limits our options to more traditional power companies. Hawkes Bay is great for solar, and we were very close to pulling the trigger on a $10k install last year. After a few long conversations we prioritised paying off our mortgage instead as it was our primary financial goal.

  2. Internet - This might be a bit controversial, but we're actively trying to avoid Fibre. From our research, 4G, if available in your area, appears to always be cheaper. We normally pay $39 a month for Skinny 4G although during lockdown we went up to $59 for 300GB to facilitate video calls while working from home. We have had no problems with speed or reliability on 4G.

  3. Mobile - Our 2 Degrees prepay strategy is as follows: First month - $70 monthly plan for 25GB of carryover data. Subsequent months - $9 a month ($10 for new customers now) plan until your original data runs out. This works out at $180 a year each, which is cheaper than $228 for 12 months on the $19 plan. You have to be a bit more intentional with your phone use here, we don't play videos or download podcasts etc while away from the home, which isn’t too hard to do if you tweak your iPhone settings to turn off mobile data on some apps.

• Sports and hobbies: Matilda likes to get out amongst nature, using bush walks, park visits, and neighbourhood walks for exercise. Jack bounces in and out of CrossFit so the $900 here represents 6 months membership within a 12 month period. Some years this would be double ($1,800).

• Health: We budget for 1 dentist visit a year but in reality it's been 3+ years since either of us have been to the dentist. Doctor visits have a budget for ~2 each per year.

• Shopping: Our clothing budget is ~$200 each a year. We both have a minimalist wardrobe. Matilda wears a work uniform, and Jack wears a self-imposed work uniform of a work-brand t-shirt and plain shorts. Jack spent $0 on clothes in 2019. Matilda has gotten into 2nd hand clothes lately and her last purchase was a brand new pair of Lee Riders jeans for $20. During lockdown Matilda replaced her 13 year old 2007 Macbook with a brand new Macbook Air to facilitate working from home.

• Kids: We are super grateful for our healthy and beautiful son. He also represents the largest item on our list. Daycare for him is $56 a day, for 3 days a week. That accounts for $8,736. The remaining $2,400 or $200 a month was our average spend during his first year of life. Mostly bigger ticket items like a cot (2nd hand), pram (new), and a car seat (new). All of kiddo's clothes are 2nd hand either from friends, the local Plunket shop, or Trademe bulk lots.

• Personal care: Matilda cuts Jack's hair and Matilda pays for one maybe two haircuts a year. Jack shaves his face with his hair clippers, and Matilda wears almost no makeup. There would be a small cost here for soap, shampoo for Matilda, and toothpaste/dental floss. These costs are absorbed into the grocery bill.

• Travel: This would represent flights for 1 overseas or South Island family holiday for us. When travelling, we always prioritise staying with family and friends which we enjoy more but also costs less. North Island road trip fuel costs are absorbed into our “Transport” costs. In the past we used to fly to the pacific islands every year for a week of volunteer work but also add a day or 2 holiday on to the end, having to only pick up the cost of the additional days.

• Insurance: Medical insurance for the three of us through Southern Cross is $140 a month. Income and Mortgage protection insurance, plus Life insurance for Matilda (Jack's work pays for his) is $65 a month.

• Pets: Rightly or wrongly our cat's food budget is about $5 a week, which is a mix of biscuits and meat. We haven't taken her to the vet in 3 years, and we deworm/flea her sporadically. We haven't put her in a cattery before, trips up to 1 week we just leave lots of food out, and trips over a week we ask friends to help feed her. Our cat loves the peace and quiet when we’re away as she’s not constantly terrorised by our son!

• Fees and charges: 2 Visa Platinum credit cards = $75 per annum. 2 Visa Debits = $20. Budget $5 for the occasional ATM fee. We no longer have credit cards so this should drop to $25 per annum going forward.

• Donations and gifts: We don't buy christmas gifts or birthday gifts for each other but instead have a tradition of taking the time to write a poem or detailed card and read it aloud to the other person on the special day. When it comes to buying things, we are reasonably considered with our purchases, and always discuss larger purchases with each other first, so rather than waiting for birthdays or christmas, we just buy them for ourselves when we need them, which isn't very often. For family and friends, Matilda makes a lot of gifts like Christmas baking or earrings and both of our parents normally get a hamper from us or a restaurant voucher. We spent ~$400 on gifts last year, mostly baby presents, and gifts for nieces and nephews. We spent ~$120 on ad-hoc donations like GiveALittle or Movember.

Remaining income

All residual income for us always went towards our current financial goal. This started as being transferred to our “six figures” account, which then morphed into our house deposit account, and then when we became homeowners it was diverted to our floating mortgage account.

Now as we move toward our next financial goal, all residual income we have will go to our Superlife FI fund.

Inviting feedback from readers

• We aim to grow our FI fund to $500,000 in 8 years, and then withdraw ~4% of it per year to pay our fixed expenses.

  1. What do you think of our 75/25 three-fund portfolio (60% Total World equities, 15% NZ Top 50, and 25% NZ Bonds) to achieve this?
  2. How would you see our portfolio changing over time, if at all?

• What income or mortgage protection insurance should we hold:

  1. After paying off our mortgage and starting to save towards our FI number?
  2. After we reach our lean FI target where our passive income would sustain our expenses?

• Also interested in anything else that jumps out at you that you think we could improve on or tweak.