Financial Freedom Sloth

achieving financial freedom one lazy step at a time

Category: essential truths (page 1 of 3)

My thoughts on an emergency fund

Everybody will agree that you having an emergency funds is something you definitely need to have. But how much you should put into it is a lot trickier.

The reason to have one is simple: having readily available cash can solve a lot of problems. Life in general is bumpy and even if you live a pretty frugal life you will, from time to time, be confronted by unexpected costs. It is never fun to have to shell out a couple of thousand euro’s to replace something that was working fine JUST 5 MINUTES AGO!! But even less fun is having something break down and not having the money to fix it. And some things need fixing immediately. Having only cold water to shower with is an ‘adventure’ when you are a 20 year old student (you are young, tough and do not mind having an excuse to go take a shower at that attractive friend of a friends place, since she happens to be staying in Ghent during the Christmas holidays as well …). But as a 43 year old I prefer to have enough funds to have this fixed immediately.

The size of your emergency fund, that is an entirely other matter. There are so many variables that determine the best size of an emergency fund that a one size fit all approach does not work.

Some reasons are very tangible: if you own a house you will need a lager emergency fund than when you rent because you have a bigger change of being confronted with unexpected costs. Some are psychological: you may find it a very reassuring thought to have a bucket full of cash at the ready.

So I will not be telling you how much money you should put into your emergency fund. I will tell you my thoughts and how they evolved.

You see, I was one of those people who liked a decent emergency fund mainly because of psychological reasons. I liked having buffers. Buffer one was my checking account. I liked to keep that at 2.000 euro. And that Is at the end of the month, NOT the beginning. So yes, it frequently shot up to 4.000 euro at the beginning of a month.

Buffer two consisted of my savings account where I liked to have 10.000 euro in it (this was as somebody who rented and did not have car).

And then there were my investments.

This three layered approach meant I was a financial rock! Life would have to be pretty creative to get me into financial trouble!

Looking back at it I blame my mother. Yes, I know, therapists always blame the mother but in this case he/she would be spot on! It’s my mother who manages the finances at my parents and she is a big believer of healthy cash buffers. Well, it’s more unhealthy cash buffers in her case as they frequently end up with 6.000 euro on the checking account! And the cash in their saving accounts … As an active investor making pretty decent returns for the last 17 years, it can be maddening thinking about their missed returns …

But in all honesty, I can’t really blame my mother. First off, she probably picked this behavior up from her mother and secondly, saving and putting money on the side is a good start!

But what is missing is a clear vision, goal on what to do with the excess cash. This is something most people do not have. How else do you explain that we Belgians have 365 billion (BILLION!!) euro on savings accounts (and with interest at 0,11% and inflation close to 2%, actually losing purchasing power each and every year!). With 8,6 million adults not living in poverty in Belgium this would mean an average cash amount of 42.000 euro per person. A bit much for it to be an emergency fund and some savings. Clearly, we Belgians keep to much cash. The newspaper De Tijd currently even has a special segment for it: van spaarder tot belegger.

Hell I myself only started investing because I like numbers and looking at companies. I had no clear plan! Sure, when the stash grew bigger you start thinking that maybe, someday you perhaps could live off dividends. But this was a vague idea. Not a concrete goal that seemed achievable.

It was the FIRE community that brought me that clarity and thus also had an impact on how I look at the emergency fund.

Now my emergency fund is truly an emergency fund, only to help with unexpected costs and not to provide some psychological safety feeling. I have to admit I am not yet fully cured as I still prefer to have 2.000 euro in my checking account (damit Mom!). But in general I want my money to work as hard as possible for me, not sit idly in a savings account losing purchasing power.

Because I keep a budget now I also have a better view on my expenses. Being frugal means that most of my stuff costs less, hence takes less money to replace (a washing machine is 200 euro used, not 600 euro new, a car max 8.000 euro, and so on …). Since I also save a nice portion of my income each month I also need less funds to cover a period of reduced income as there is a nice savings buffer that will take the first hit.

I also believe that the bigger your stash is, the smaller your emergency fund can be. Perhaps it is because I am an active investor but I know I will always be able to have my stash produce some cash flow. The bigger the stash is the easier this becomes. Sure, this will take a bit of time (perhaps even a week or two) but it also means your stash does not need to cover six months of living expenses. If you have regular option premium income or dividend income you definitely can reduce the size of your emergency fund.

All the above has helped me a lot in determining the right size of my own emergency fund. It used to be 10.000 euro even if I was renting and had no car. But even with a house, a car (and a Vespa) now I have put the size of my emergency fund to 6.000 euro.

The same amount for my girlfriend means we have 12.000 euro which would be more than enough to replace a broken car AND something in the house at the same time. Or cover a nice period of reduced income (the Belgian social security system does also help in case of unemployment or sickness).

As I said in the beginning. The size of your emergency fund is something personal and there are a lot of variables at work. But I have come to the realization that for us FIRE people conventional wisdom does not apply. Then again, isn’t conventional wisdom wrong for a lot of things?

The ethical side of FIRE

Apparently some people wonder if this financial freedom/early retirement stuff is morally right or wrong.  Cheesy finance posted the question here and I was only going to type a short comment. And then I started typing and the short comment turned into a long one, which turned into this post …

The tax side

The ethical debate seems to be revolving around the question if we are committing a mortal sin because we will pay less taxes. Personally I have zero issues with it. I find our government incredible wasteful with the money people had to work so hard for. Frugality isn’t a trait often found in government bureaucracy. If they are just going to waste it, I do not feel very inclined to keep on providing my money to them. I also would like a much smaller government as in my mind they are now active in area’s better left to the private sector. Cutting the government budget in half would be a good start. And then cut it in half again …. This because I firmly believe a smaller and more efficient government would benefit our society a lot more than the over bloated wasteful one we have now.

So for me the tax side of FIRE is not a problem, on the contrary 😉 I sometimes refer to my frugal living as financial guerrilla warfare against the ever hungry government caterpillar.

The bigger picture

What I do wonder is if by checking out early from the workforce if we are slowing down the progress of society in general. With progress being defined as a better standard of living for the most people possible. Sure, most of us have jobs that do not really contribute to this and the job itself will be done by somebody else, so no actual loss there. But I have found I get more stuff done when I am working. I get pretty lazy without external pressure. That might just be me off course. And a whole lot of people who have reached FIRE seem to keep pretty busy or devote more time to self-development. But since, once FIRE reached we do not pay a lot off taxes, are we contributing in another, perhaps a more meaningful, way to society?

I have been wondering, where are the FIRE people who did truly exceptional stuff in their retirement? Stuff they would have never done if they still needed to work and is not only personal development but does benefit society as a whole? An innovation, a charity accomplishment, or even making big amazing structures for burning man …

Perhaps I look at it the wrong way. Perhaps the impact of the FIRE community will not be a few big exceptional accomplishments (because realizing the big exceptional accomplishment would probably turn into work at a certain point). Perhaps the impact will be more in a sort of grass root movement. Lots of people whom make small improvements in their own personal life and community because they have the time to do it. Buying less useless crap and focusing on meaningful experiences and relations with other people cannot be bad for our society.

Perhaps it will only be when a certain threshold of FIRE people in the society is reached that network effects and scalable stuff will start to happen and the impact on the whole society become visible….

Using options when you are a dividend growth investor

It’s my not so humble opinion that options are perfect for those whom pursue a dividend growth strategy. You see, as a dividend grower who likes to buy and keep stock for a long period you get something for free with options.

The price of an option is determined by the current stock price, the intrinsic value, time to expiration or the time value, volatility, interest rates and cash dividends paid.

It’s the volatility part that is interesting part. You see, as a trader who goes in and out potions a lot volatility is indeed a risk factor for which you want to be rewarded. But as a dividend growth investor you don’t really need to care about volatility at all. All that matters is your purchasing price as that determines your dividend yield.

Volatility is the movement of the stock price: stock A which goes from 100 euro to 94 euro, then to 107 euro and then back down to 105 euro has a higher volatility than stock B that goes from a 100 euro to 102 euro and then settles on the 105 euro. For a trader the more volatility is indeed a risk as he might get forced out of a position. Both stock may start and end at the same price but the higher volatility of stock A makes it more riskier for our professional trader than stock B. As a dividend grower who is going to keep the stock for the long run, not so much. You want your dividend yield (the same for both stocks) and some long term capital appreciation (also the same for both stocks). But if you use options to buy stock A, thanks to the higher volatility, you can actually buy stock A at a cheaper price than stock B because the option premium you collect will be higher!

Buying a stock with a put

And that is not the only advantage options can give you. Playing with the strike price can lower your purchase price and playing with the expiry time can let you travel in time a bit.

A few practical examples of the fun (and bigger yield) you can have with options.

AB Inbev’s current price is 105,4 euro. Let’s say you like AB Inbev but prefer to buy it at 100 euro.
You could enter a limit order and wait, and wait, and wait. Me, I prefer to be paid to wait. So you could sell a put at strike 100. The December series still pays around 1 euro which means that until the third friday of September you have the obligation to buy AB Inbev at 100 euro a share. Deduct your premium from this and you will actually only pay 99 euro out of your own pocket. If the option is not exercised you just made a 1% return on your money just for waiting. It probably will not be exercised because as long as AB Inbev has a higher price than 100 euro in the market nobody is going to exercise this option as they can get more money for their shares by selling to somebody else at market price. Also, 1% in less than two months isn’t bad. I really have no idea why us Belgians have so much money on savings accounts bringing in next to nothing while such attractive yields still exist in the market. the only possible downside is you have to buy AB Inbev at 100 euro which will then get you a dividend yield of above 2% net (which still is a lot higher than your savings account).

But what if you want to be sure you get the shares AND pay less than 100 euro a share? That is easy, play with the strike price and expiry time. Going down the ladder here you will find the September 2018 puts. The 110 euro strike price gives you a current bid of 12,6 euro premium which means you actually buy at 97,4 euro and the 120 euro gives you a bid of 20 euro premium which means you buy at 100 euro exactly. Personally I would go for the 110 strike price.

If it gets exercised you bought at a price lower than today. If it doesn’t get exercised you just made 12,9% in less than a year (you only need to set aside 97,4 euro of your own money as the rest you get from the option premium). Actually, you do not even need all that money now! If you have a broker like Lynx which lets you use your other stocks at collateral you can even do it with money you still need to save. You need to have the money by expiry date which means you still have 9 months to save up the 9 740 euro you will need to buy the 100 AB Inbev shares. If you are able to save 900 euro a month you could already sell that put and pocket the option premium with 0 euro in the account to actually buy the shares. (American style options can actually be exercised any time before the expiry date but that does not happen a lot. And even if it would happen my broker is more than happy enough to lend me the money at a 3% interest rate. Selling the put either gets me 6% reduction on the current stock price or a 12.9% return if not exercised. I’ll risk the small chance of needing to borrow the money at 3%). You are in fact making money on money you not yet have. Perfect for a person who saves a lot of his wage and wants to invest it to achieve early retirement (hmm, I wonder where I could find somebody like that …)

So selling a put is used to lower your purchase price or play a bit with time and get you a stock in the future even if you do not yet have the money.

Selling a stock via calls

Once you own a stock it is time to take a look at calls. Selling calls is what you will do when you want to get rid of a stock because the dividend yield is too low. Or to create an additional cash flow from a stock.

Personally I would only buy dividend stocks if the dividend yield after taxes is above 2.5%. If it dropped below 1.6% I would want to sell the stock and then go on the hunt for a new one paying above 2.5%

Let’s say you already own AB Inbev. And you are not too happy with them not raising their interim dividend. But at the present 105 euro price you do not wish to sell. But 120 euro, that is a different matter. 120 euro, that might tempt you. Well, the September 2018 calls at strike 120 euro will pay you 2.2 euro. If you do not need to sell you just made an extra yield of 1.8% on your AB Inbev (and option premiums are tax free in Belgium folks!) If you do need to sell, well you got the price you wanted and now have the cash to write a put on a stock with a better dividend yield … I had a friend who usually doubled his dividend yield by writing some well chosen calls.

The fun part is you get your call premium now, when you sell the option, for a future obligation. But the premium money is yours to keep (with puts you need to leave the money in cash as it might be needed to buy the shares if the put is exercised). Since you already have the shares which you may or may not need to sell you the premium income of a call can be put to work immediately! You could perhaps use it to sell a put to buy some other shares …

A little word to the wise. While selling a put when you do not have all the money necessary to pay for the underlying stock is ok (as long as you know you can save that money by the time the expiry date comes around) do not ever do it with calls! Only sell calls on stock you own as your potential loss is unlimited.

Personally I would make an excel sheet for all my positions that calculates at which stock price my dividend yield drops below 1.6% and then go look if I can sell calls at that strike price and book some extra, tax free returns on those positions.

Why do it?

By buying dividend stock via puts and selling via calls I think you could add at least 1% to your return. That might not seem a lot for the effort you need to put in. But 100.000 euro which returns 7% during 10 years (and the return each year reinvested at the same 7%) gives you 196 715 euro.

Push your return rate to 8% and it is 215 892 euro. That is a 20.000 euro difference in 10 years. And who doesn’t like a big return?

It is also the reason why I would limit my number of stocks I buy to only 5 or 6 well chosen stocks. It is less work, and I am lazy. But putting more money in fewer stocks lets you use options. An option contract always work with multiple of 100 underlying shares so selling 1 put option on AB Inbev at strike 100 means you will need 10.000 euro to buy the shares. Having a lot of money in a few positions also means your option premiums start to become significant which means you can invest the money a lot faster where otherwise you would need to wait longer and sell additional options to get enough money to play with.

And your turn over rate does matter! The faster you can get money re-invested the higher your return will be. It is another advantage of a broker like Lynx. When an option is close to expiration and will definitely not be exercised you can always leave the position expiry but already sell a new option having your money or the underlying stock pull double duty for a week or two and save a bit on trading fees (every little thing helps).

I am not a dividend investor because of the high tax the Belgian government has on dividends (30%, auch) but if I was one I would have a highly concentrated portfolio with only 4 or 5 stocks (you can always choose a holding like GBL if you really want diversification). I would only buy new stock via puts and sell stock via calls. An excel sheet would track the dividend yield and determine at which strike price I would want to sell those calls. With only a handful of stocks the work would be minimal and your return should be 1 or 2% above those not using options …

Even if you want to skip buying the shares and you chose your strike price so that your options are not exercised (in essence being a premium hunter, which is something I do at times. Tax free money bitches!) I recommend to do it with stable dividend paying stocks. The reason being that once in a while you will get assigned and might even have to wait a few years before you can start selling calls on the stock at a profitable level. The dividend will make those years a lot more comfortable, especially if you are FIRE …

Adventures in day trading

I already talked about how I ended up at Lynx here. Lynx offered a multitude of new possibilities for me and in my first post about how I was going to use these I also mentioned day trading.

I had this to say about it:

With the SAB MILLER position active and me not needing to work at the time I grew bored. So I tried my hand at day trading. Technically it was day trading because I was buying and selling on the same day. But actually I had identified some stock that was cheap and I wanted to buy some. I just didn’t feel too comfortable with already having a 200.000 GBP leveraged position so as soon as I made some profit I closed the position (and thus the extra leverage). I practiced a bit with Berkshire Hathaway and Coca cola. And then when Google went down to 730 USD I really had some fun with it. Real day trading is off course have dozens or even hundreds of trades and playing both an uptrend and downtrend in stock price. I just bought stock I thought was cheap and then sold with a small profit. Sometimes I only did 1 or 2 of these trades, and some days 6 or 8. I found it to be way to much work and also too much stress but I did make around 2.500 USD in profits from it (another 1% added to the stash). But it would have been much more profitable to just buy Google at 730 USD, keep it for a few months and then sell it around 780 USD. I just wasn’t very comfortable with that amount of leverage at that time.

I stopped day trading when I started working again but then my temporary contract ended at the end of January. Since I once again had a leveraged construction at 2x leverage in my portfolio I decided to start day trading again.

Let’s do it again

My approach remained the same. So I chose google again to trade in.

The reasons for this is that I believe in the long term prospects of google (by which I mean the stock price should go up over time) and it usually has enough volatility during the day to make a small profit of at least a 100 USD of it with a trade.

I usually buy 100 CfD’s on Google. This costs me 5 USD in fees as that is the minimum fee Lynx charges. Selling will cost me another 5 USD so Google needs to go up 0,10 USD for me to break even. I usually try to make 100 USD on a trade. So google needs to move 1,10 USD for this to happen. This is about 0.0011%. So changes of this happening are pretty good.

Pretty good doesn’t mean guaranteed. Last Thursday would have been a bad day to try to day trade in google.

One of my own rules is that really bad days I stay away. Yes, even Thursday there would have been 2 or three points (red arrows) where a quick in and out hopping could have made some money but chances of picking the exact right time are too low to risk it.

I also do not trade when the stock is at an all-time high price (though I broke that rule to buy just below 1000 USD and then sell just above 1000 USD just so I could say I traded Google went it went over the 1000 USD share price. I now, stupid. Especially because nobody but me cares about something like that…). I also do not trade when the stock is at a high for that day.

What do I trade? Little drops in the stock.

15 August would have been a good day to trade.

There are 4 moments where I might have traded. We had a friend over so I didn’t go and sit behind the PC but I did want to show off a little bit so late in the afternoon I did log in. I was just in time for the last moment and opened a position. The upward movement wasn’t as strong as I thought it would be (should have sold at the first black arrow) so I left some money on the table but in the end was able to close the position with a net profit of 50 USD (sold somewhere around the second black arrow).

The trick is off course to identify that the dip is in fact a dip and not the beginning of a big downward movement. Either I have been lucky so far or I kinda have a ‘feel’ for it. But I have also closed positions at no profit or only 5 or 8 USD profit because the upward movement I thought would happen just didn’t materialize. I have had Google do nothing but go down after I open a position. Lucky for me this happened at prize points where I didn’t mind holding Google. So my day trade position then became a multi-day or in two occasions even multi-week position until Google rebound so I could exit the position at a profit. It is why I do not day trade when Google is at (or near) an all-time high (with the one exception, I knew it would cross the 1000 USD mark). Let’s just say I am pretty happy with the last drop in Google price. It is now at a level I feel comfortable trading it again.

As you just read there is nothing sophisticated or glamorous about it. But it is some extra money on a regular basis. Last year I made around 2.500 USD (in a couple of months) and this year I am around 3.250 USD (the price of the Vespa!). It is a little bit extra I now do in an effort to get the home renovations done quicker. My estimate is that the remaining home renovation will take around 50.000 euro. The girlfriend and me can save around 10.000 euro a year so these should take 5 years to  complete. If I make an additional 10.000 euro by day trading in the next 4 years well that is one year quicker that our house is finished. Since I do not want to retire before the renovations are done this could shave off a full year of me working!

I can feel my mind slipping

Before I started day trading I had read it is mostly a mental game and I can confirm it is.

First and all, you need to be able to stare at the price of a stock for hours. It literally is looking at a screen. So you have to be able to do that (luckily I have had lots of training at my previous jobs for this). And then you have to fight the urge to open a position. Believe me, this is hard! That is why you are sitting there after all! And the longer you sit there, the more you want to enter a trade.

Then when you do enter a trade there are nerves. Because your timing is never perfect. Meaning you buy in a dip, but the dip continues … And every 0.1 USD drop is costing you 10 USD. You are sitting there thinking: I should have waited a bit longer! I am leaving money on the table!!

Then the stock goes up. Oef, yes, it was a dip, yes I am going to make money here!

Then it goes down a bit again. We are talking cents here, cents on a 925 USD stock. So off course it is moving up and down. I always does that but what you need to determine here is: is the dip over and will it go higher or is the dip not over yet? Is this a little upward bounce before going down a lot more? How strong is the upward movement?

In all honesty, sometimes I exit the trade just in time before it drops another dollar. In those cases I feel pretty smart. But sometimes I get out with 5 or 10 USD profit thinking the stock will go down again but then it starts a strong upward movement, going up 2 or 3 dollar. Which means I just missed 300 USD profits. I feel pretty stupid then.

You need to leave your emotions at home. But you also need to be able to not give a fuck about the fact you missed profit. That is hard, because you are there, sitting behind the computer to make a 100 or 200 USD. You are thinking 10 cents movement = 10 USD. And since your timing is never going to be perfect you will always miss profits. So even if you know you missed some profit. Even if some part of your brain is screaming: nice going dimwit, you just missed 80 USD another part of your brain must scream back and say fuck it, I made some profit and I will continu to make profits, shut up other part of the brain! And that second part of your brain needs to win the shouting match! So you can continue trading and open a new position. And then the entire circus starts again. As you can read, it goes from utterly boring to utterly nerve wrecking.

Why do I do it then?

well, I seem to be decent at it. Within the rules I made for myself I am capable of making a little bit of profit. I don’t find it a pleasant activity to do but the 3.250 USD of profit so far equals 1,5 months of working in Brussels. Honestly, I prefer the day trading over the going to work. It takes less effort, and I don’t need to go to Brussels for it.

It also helps that it is a little extra on the side. I do not do it a lot. As a day job  I think it would be very exhausting. A little bit left and right is very doable. Sometimes I plan on doing some trading one evening and then when the time comes I don’t feel like it, so I don’t. Or the stock doesn’t move right so I stop after an hour. When I was unemployed I put in longer sessions. But even then, sometimes I made a nice profit in the first two hours so I just stopped for the rest of the day (or even week) and was off to do something a lot more fun than staring at a screen for hours.

So for the time being I am going to continue doing it. Hopefully get another 10.000 USD in profits from it over time so I can finish renovating the house one year earlier …

 

 

Tax the middle class, always tax the middle class. Until …

Amber tree had an overview of the latest taxes our beloved government will put at the feet of the Belgian investors. Although this dedication of targeting the private investor is somewhat new, the broader trend of taxing the middle class is not.

Tax the middle class, always tax the middle class

It is pretty logical to tax the middle class. The rich are hard to tax because they can afford to spend money to find ways to avoid taxes (and if everything else fails they can always chose for the nuclear option and relocate to a more favorable country). The middleclass not so much. Spending 10.000 euro on a financial expert to avoid 100.000 euro in taxes is smart. Spending 10.000 euro to avoid a few 1000 euro’s in tax not so much. And the poor, well they are poor. Take away the little they have and you could face open revolt in the streets; And if there is one thing the government want to avoid at all cost it is a revolt (rulers tend to lose their head when Europeans revolt).

So the middle class it has been for the last decades! In those decades labor has been taxed so heavenly that an increase there would actually diminish total tax returns. Consumption too is taxed at its maximum: 21% on most products. Go higher and in a small country like Belgium everybody will start shopping in France or Germany. Since earning money and spending money are out, they are now looking at what is not earned or spend: savings and investments. Looking for ways to tax it and trying to determine the maximum they can tax in that category. I am afraid they have just begun with this exercise. Fortunately for us it will be an exercise in futility.

Until …

It has been my conviction for some years now that the increasing digitalization of our world is decreasing the taxable base for our government. A digital world is also a winner takes all world. As a government you either make damn sure your country hops on new innovations when they starts or you are left with nothing. A real life example to illustrate this point.

Sigarettes. When filter cigarettes came on to the market (the filter once was an example of great technological innovation and created an entire new, bigger market of smokers), as a government, you could afford to be ‘late’ to the party. No matter when you would allow them on your market (either soon after it was invented and commercialized or years later because you had a non-filter tobacco industry you tried to protect) once you allowed it, the follow would happen. Factories would be built in your country, an entire logistics/distribution chain would be created (wholesale – retail sellers) and marketing would happen in your country. Each and ever of those things could be taxed. The only thing you lost by being late to the party was the headquarter and part of the net profit (all those years you waited, foreign brands grew bigger and bigger. Once you allow it, they flood into your country leaving no room for local entrepreneurs to launch a national brand).

Fast forward to the next innovation on smoking: vaping. Being late to the party (as Belgium is because it first did not allow the sale of it and now has a very restrictive law) means that everybody just orders it at foreign web shops. Production, marketing, almost everything now happens in another country and the only thing the Belgian government can tax is the low paid guy in his delivery van who delivers your package at your home. But he is low paid, so taxing him more could lead to revolt. See above why that is a no no. In other words, being late to the party before the internet left you as a government with about 90% of this new market still to tax. Now, it leaves you with nothing to tax.

Digitalization also, in itself has the effect of either shortening value chains or destroying them completely. Renting a movie used to have a pretty decent chain to tax: wholesale, marketing, video shops (called videotheques in Belgium). A lot of parts to be taxed. Now it is Netflix. Same for music, games, banking … pretty soon we will have self-driving cars and instead of having 6 million individual owners to tax our government will have Google and such as an opponent. And Google is a hell of a lot harder to tax than those 6 million individual owners …

So digitalization leaves less parts of value chains to tax. But, and I circle back to the taxing of individual investors, it also increases the possibilities to avoid taxes. Even if you are not part of the wealthy. The internet is a gigantic information database where people share their wisdom. Which means that as soon as 1 person finds a way to avoid a certain tax, everybody knows of it.

I am member of Facebook group about frugal living where each and every day dozen of tips are shared on how to buy stuff cheaper. Remember, every euro not spend on consumption is 0.21 euro of VAT tax lost to the government. My dad, 64 years old, spends his day on cycling forums. As a result he is now buying cycling gear in China. Those new tax laws have not yet been voted and implemented, and already ways of avoiding it are appearing on line.

And if all else fails, the nuclear option is also a lot easier to use than in the past. Relocating has never been easier and cheaper than now. You can find tons of information on the internet. Keeping contact with friends and family in the mother country is easier thanks to social media and popping over the cheapest thanks to cheap flights or buses . All this means that where once you needed a couple of million to make it feasible to relocate, I now think that 1,2 million euro is sufficient. This would give you 24.000 euro a person to live off. More than enough to live a very comfortable life in most places on this world. With a wealth tax that starts at 500.000 euro and a nuclear limit that can be deployed at 600.000 euro that does not leave a whole lot of tax room for our beloved government to tax.

The sad thing is that they know it. But where our videotheques accepted their fate and quietly disappeared (or re-invented themselves as fast-food or mobile phone shops) our government seems to have no interest in slowly fading away. Just like the industrial revolution has come to an end and been displaced by the digital revolution. The government form that evolved with that industrial revolution will sooner or later be displaced. Just look at our history. There was a long time where the land nobility ruled our society. Then the industrial revolution happened and things changed. In most countries they accepted their fate, stepped aside and let progress follow it course. In other countries they resisted and were unwilling to relinquish their power. Those got their head chopped off … Personally I abhor the value destruction that a revolt brings with it. But hey, I am sure you can find the building plans to a guillotine somewhere on the internet….

 

 

To all the nay-sayers

Well, early retirement got some exposure in the Belgian mass media with article’s in Humo and De Tijd. It started with this article by FOB.

Especially the one at De Tijd got the usual nay-sayer comments. Comments we all know not to be correct. So in the name of efficiency and laziness (devote one decent post to it, in future encounters with nay-sayers provide link to this page, done) I put up this rebuttal post.

It can’t be done in Belgium

Most nay-sayers seem to believe that sure, in the USA it can be done but no way it can be done in Belgium! With our high taxes and all …

Sure it is possible. I actually know of two people (one of which was significantly below 40) who did it and a few more well on their way. Some of them even blog about it.

You need to earn a lot of money

Nope. I have only made around the average net wage and I am going to get there around age 47. I even did an additional year of study just for the fun of it (it clearly didn’t result in a high paid job). And made several mistakes. Hell, I have only focused on financial freedom/early retirement for the last two years. I was naturally frugal and started investing as soon as I got my first real job. But still, a better focus would have saved me a few years of working. Actually, if I hadn’t bought my current house 7 years ago I would have probably been financially free now.

In reality, most people who earn lots of money also spend lots of money as they need to wear the ‘right’ clothes/watch, drive the ‘right’ car … Lifestyle inflation is real. And strong among the high earners.

It’s possible if you come from a good (rich) family

Nope again. It helps, that is for sure. Both my parents only went to school until 16. They had saved around 8.000 euro for me when I started working. Yes, one of the guys I know who achieved financial freedom got to live cheaply at a family property. Then again, he has worked for less than 10 years in total. Needing very little money to cover your basic needs is not very motivating to tough it out at a job it appears. Also, he got to live there for cheap because the place was a rundown little farm that hadn’t been renovated since the 1960’s. Since he did a lot of repairs and upgrades to the place, the family probably got the better part of the deal.

You need to know a lot about investing

Thanks to ETF’s (exchange traded funds) with very, very low cost this is no longer the case. Yes, most people trying to achieve financial freedom are interested in investing but that is just because they are the first to realize it is actually possible! Save a good chunk of your pay check, throw it in a decent low cost ETF and you will get there. It really is that simple. No active investment approach necessary.

You need to be lucky with your investments

It does help ;-). The other guy I know off, got lucky with Apple. Good for him. That lucky investment did shave some years of his work career. But that is all it did. He would have still have gotten there. It just would have taken a bit longer. The other guy I know actually got wiped out during the dot.com crisis of 2001 (there was a reason he went to life in an old crappy little farm). I did reasonably well with my investments and avoided the big mistakes. But you know who gets lucky at investments? People who invest. Not investing is the best guarantee to never have any investment luck …

You need to live a very cheap life

Well you need to live below your means. Spending less money than you earn and investing the rest. But frugal living and cheap living are two different things. I didn’t get a car before I was 35 and that did help my savings rate. But I lived in Ghent and worked in Ghent, and then later in center Brussels. Owning a car would have been impractical. I always lived on my own but had several friends who shared a house. So I saved on a car, they saved on rent and utilities. I actually rented a pretty charming little house. I just looked around a lot until I found something with an affordable rent.

And yes, as a guy I hardly spend any money on clothing and furniture. But a friend of mine now even has a side business find cool furniture on second hand sites and markets, cleaning it up and selling it on line. Her house is always full with cool stuff. And she actually makes money of it! Another friend combines vintage stuff with self-made clothes and looks fantastic! Nice furniture or clothes do not need to cost lots of money. I didn’t go on a holiday trip until I moved in with the current girlfriend because I am not big on holidays. But I did buy 60 euro whiskey bottles and even a few above a 150 euro. I also liked to combine Belgian fries and stoofvlees from the frituur with drinking a Taittinger Millesime (it goes together fantastically). We all have stuff we like and value. And that is the essence of frugal living. Only spending money on things that really add to your life and eliminating the mindless spending. And believe me when I say that a lot of your spending is mindless.

It’s also fun to find a more frugal way to get the same thing.

I want nice, quality things

So do I. My current bedroom is a full oak one from Etnicraft. It didn’t come cheap. I bought a Vespa scooter. One from Sym looks pretty much the same and would have cost a 1.000 euro less. Thing is, I only bought those AFTER I got a decent stash of money working for me. I didn’t even have a bed until I was 38 because, well, I am guy and a mattress on the floor served me just well. So nice, quality things are absolutely possible, but only when you actually can afford it.

I wouldn’t know what do to with the time

Really? Are you serious? Honestly, I am bit sad for people saying this. Do they really have that little of imagination? Books, music, series, movies: there is a ton of quality entertainment that exists. Exploring all of that would take me three lifetimes. And that is the passive stuff. Learning new stuff (raspberry pie, maintenance of old timer motorcycles), improving my health (eating better, more sports), travel, organizing classic trance parties, spending time with old friends and meeting new friends … honestly even when I do not need to work I think I will not have enough time to do everything I want to do. Go speak with a pensioner (my parents both retired around 56 -58) and most of them will tell you they are busier after retirement than they were before

I like me job so I do not mind having to work

Great for you! Now are you sure you are going to like it for 45 years? Or perhaps the job/boss/co-workers will change and the job you used to like is now a complete and utter crapfest. You might get fired … Aiming for financial freedom/early retirement doesn’t mean you cannot work anymore. I certainly plan on working after achieving financial freedom. Just not a whole lot. If I stumble upon something I enjoy and it pays all the better. But money will no longer play a role in that decision. I’ll be free to do with my time whatever I want to.

Frugal living: keeping the old timer motorcycle or not?

A little confession and question time. When I was in between jobs (feb – april) this year I bought a 125 cc Vespa scooter (and did some day trading). I am very happy with the Vespa and I am now wondering why the hell I didn’t buy a motorcycle earlier.

The thing is, and this is the confession part, I did. You see, I also was in between jobs roughly a year before. Kinda from sept 2015 till may 2016. Kinda because I only was really unemployed from march ’16 till 1st of may 2016. But I also didn’t really had to work between sept ’15 and march’16 (part of a severance deal with my employer). It’s a long and complex story. And yes, the severance package was finger licking good. Well anyway, during that period I also bought a motorcycle (and did some day trading, yes I am starting to see a pattern here …).
I bought an old-timer. A berini m21 (probably deluxe version) form the 1950’s. It’s a beauty.

 

Berini is a Dutch brand and has some following in Holland but is largely unknown in Belgium. Meaning I got it at a good price: 350 euro. I haven’t really driven the motorcycle as the old breaks needed some work and I put it at a friends place who is an old-timer aficionado. But he is taking his sweet time ….

Anyway, I bought it because I like old-timer motorcycles and part of me views it as a fun pass time once I am semi-retired. Working on it. Learning some mechanical skills. Driving around the country roads here. Perhaps going to an old-timer meet up …. And old-timer motorcycles are a hell of a lot cheaper (especially if you limit yourself to 125cc max) than cars ….

I still like that idea. But with the new job in Brussels and going swimming and still needing to do some renovations at the house, our large garden and such I am not going to have the time as long as I am working full time. I do have plenty of storage space to put it. And it is not costing me anything just standing there.

On the other hand I know I can sell it and easily get my money back. It is 400 euro after all. But then, day trading in 2016 made me 2.455 USD and last Friday I passed the 3.000 USD mark for 2017. If I really want another 400 euro I can easily suck it up and do some extra day trading in the evening. I hardly do it anymore since working again because it is sitting behind a screen and staring at numbers, something I already do for 7,5 hours at my job … But it would also take me time behind the PC to sell it. So spending that time day trading would get me the money AND I would get to keep the motorcycle. And I know that kind of reasoning is a very dangerous slippery slope. It is one of the reasons I am not a big fan of the day trading. It screws with your view on money. Last Friday I made 300 USD in less than 30 minutes. You start getting these thoughts where 100 USD equals a quick in an out trade in Google… But the psychology of day trading is something for another post if some of you are interested in hearing my thoughts/struggles with it.

Back on track for this post. The confession part was that when I do not need to work I seem to buy a motorcycle and do some day trading. The question is, do I keep the Berini M21 or not? Even if I will probably not use it or have time for it the next 5 years?

On investing, being lazy, cumulative returns and scalability

I love investing. Which is good because I believe to be any good at it you need to love it (link). When I figured out my leveraged construction I was ecstatic. If it worked (and it does!) I only needed to do a roll over once a year and be done. It was the ultimate lazy approach to investing and an almost guarantee to beat the market for 4 out of 5 years (backtracking over the last 25 years showed 5 out of 25 years where it would have not worked). So about half way 2016 I really believed my active investments days were behind me. My inner sloth was very happy!

But then, well a curious thing happened. I kept reading financial stuff. ‘Old habit’, I thought. ‘It will tapper out’, I thought. Then I got a bit more active in the whole FIRE community and some people do really cool stuff. And I grew restless. I may not have needed to be an active investor anymore but I really wanted to! You see, it just tickles my brain in all the right places.

My weird mind

My mind likes numbers (I am crap with names, hell, I am bad with people). It also likes to figure stuff out. Find loopholes. Find errors in reasoning. It’s perfect for finding stock that is cheap but shouldn’t be. It would probably be good for shorting too but I rather have the stock go up (guess I rather am optimistic).

I just love to know how a company makes its money. Why it is better at it than other companies.

When I am bored I like to replay old trades in my head. See where I could have done better.

I often use sexual references to describe the attractiveness of a certain company at a certain price point or of a particular ‘cool’ construction. I don’t do it too shock or amuse people. It’s just that this is the connection my brain makes. An attractive young lady in a la fille d’o outfit or writing a nice put option: they have me both drooling. I know this is not normal but that is how deeply imbedded in my brain the investing stuff is. I could be completely, utterly drunk. So drunk that walking or uttering one coherent sentence is completely out of the question. But walk up to me and say ‘coca-cola below 40’ and my slurred drunken response will probably be: write put now.

So I started to dabble with puts and such again. Just because I was bored. Sure, the money is always welcome but I know it will at the very best only reduce the time I need to work with one year. It’s peanuts compared to my overall portfolio. But it is so much fun!

My lazy, lazy side

The other reason I like investing is because you can be very lazy at it and still make the big bucks. If done right it’s a one-time effort for a life time of profit. Do your homework, find an excellent company at a reasonable or cheap price and done. Buy it, hold it, go do something else (except if you have my weird brain).

Now this is a very, very exceptional thing. With almost everything else you need to redo the effort to get the same reward. But not with investing. Actually, the reward can even increase while you do nothing. Most companies try to increase their dividends over time. A 10% increase on a 100 EURO stock gives you a 10 EURO reward. But hold onto that stock for many years and it might increase another 10% when it is worth 200 EURO, giving you a reward of 20 euro! Cumulative returns for the win!

The only thing I can think of that came close to this was the music industry (before the internet and MP3’s). Make a record once and then have income of it for the rest of your live. For most of us, becoming a successful music artist is out of grasp. But ETF’s provide a good way to all of us to profit of this unique aspect of investing.

This makes for some truly ‘fun’ consequences. My first real job was at a telecom operator. My total wages there for those 6 years will have been around 144.000 euro (around 1.800 euro a month but holiday money, 13month and profit bonus ..). With savings averaging around 500 a month this means I saved 36.000 euro in total. Add in another 12.000 euro I was able to save from my severance package (a story for another post). And my total savings for that time are 48.000 euro. Investing this sum at a 7% average return will have this amount double every 10 years. Give it 20 years and it should become 192.000 euro. Deducting the original investment from this means that my investments on my savings from that job will equal my TOTAL pay I ever made at that job! The higher your savings rate and the higher your return rate, the less years it will take for your investments to eclipse the total wages of the job! If that prospect doesn’t excite you and gets you investing I don’t know what will.

Scalability

The last great quality of investing is that it scales so easily. Investing 10.000 euro or 100.000 euro takes the same amount of effort. It’s just typing in an additional zero. Yes, there are some limits where having to deploy too much money can become a hindrance. But you are talking about hundreds of millions of euro’s before you start encountering  that issue. And even then it depends on how the stock market in general is doing. When the overall market is setting record after record (like now) it may be difficult to deploy large sums of money at favorable returns. But for us, small time investors, for all practical purposes the scalability of investing is limitless.

I love scalability. I wish that housecleaning or doing the dishes was scalable!

I find we do not talk enough about scalability and cumulative returns in the FIRE community. This whole early retirement thing is, in my mind, only possible thanks to the combination of these two powers. Savings also have a certain scalability to it. Once you have developed the savings ‘skills’ you soon discover you can apply that skill set on a wide variety of items/events. And savings also have a certain cumulative return where making a saving in one area often has knock on effects in other areas. Buying a hair trimmer and no longer going to the hairdresser saves money. But it reduces your car use, thus unlocking additional savings in gas cost and wear and tear on your vehicle. It also frees up time which you can use to find additional savings … But savings alone is not enough. You then have to invest these savings so they can benefit again from the cumulative returns of the market. Both of them together is what enable you to achieve financial freedom.

Get yourself a will!

There is one thing I haven’t read a lot about in the financial freedom community. And it’s lack is a bit strange since it is about money and is probably the biggest wealth transfer you will ever handle. It is the need for a will. EVERYBODY should have a will. NOW!

Contemplating one’s own mortality might not be the most ‘fun’-activity to do but it is something that needs to be done. Personally I am hoping that when the time comes my consciousness can be transferred to a giant robot who will then go on to play a crucial role in the battle to save earth from aliens. But that doesn’t mean I have no need for a will!

A well thought out testament will not only lower the tax burden for those you chose to leave your earthly belongings but might also prevent fighting among them. In my own family it took three years to wrap up the last of the inheritance issues after the dead of the last grandparent!

DIY

The quickest and easiest way is to write one yourself. You can find examples all over the internet and if it is a simple and straightforward affair this might suffice.

Get a professional

But once property, an investment portfolio and such are added in the mix it might be best to employ the services of a notary. It is usually not that expensive (a couple of 100 euro) and they know what is possible within the law and how to best phrase it to avoid any discussion.

Since our politicians are contemplating a big change in Belgian succession law it might be best to wait until the new law is published before paying a notary. But this shouldn’t stop you from thinking this over and already writing your own testament. The better you are prepared before visiting the notary the cheaper his services will be.

Revise it every 5 – 10 years

We got ours the day we moved into our jointly bought house and officially registered at our community as living together. The one thing we forgot to take into account is what would happen when we both died at the same time. Since the girlfriend is my main beneficiary and we both live in the same house and often travel together that possibility definitely exists! (The girlfriend does not accept the giant robot scenario, even when I showed her it could be a cute robot, grr women!) If there is a realistic possibility that your main beneficiary can die at the same moment as you, you should write out this scenario also.

But it has been 7 years since we wrote our testament. Our assets have grown considerably and a new nephew has been born in that time. So a new testament will be drafted at the notary as soon as the law has been changed. We always considered this testament as ‘good enough for the next 5 years of our life’. Once you have a will it is best to revisit it every couple of years and see if changes are necessary. For small changes the do it yourself approach will suffice but for big changes a new visit to the notary might be best.

Have a talk

Another thing I would like to stress out is the need to talk. Like the old publicity of the KBC –rightfully-  claimed: talking works! Explain why you want certain things the way you want them. Your will should not contain any surprises for anybody! In the case of a will, a good surprise for somebody often means an unpleasant surprise for somebody else. Also try to avoid to ‘rule from beyond the grave’. Know your limitations! Trying to determine how somebody should use the money you gave him/her is a waste in futility and can cause problems in your family for decades to come. You are dead, stop wasting your time with these mortal issues and learn to play the harp or avoid the pitchfork 😉

 

How I keep up with the news

Well that is simple. I don’t really. I have got the log in from a friend for the gopress database and once a week I catch up with De Tijd (the Belgian financial newspaper). Reading it with a delay reduces the time necessary to be caught up significantely. Because, when you read a weeks old newspaper you quickly realize how much is utter drivel not worth your time to read at all.

I am not alone in this. Mr money moustasche has a great post about it. He calls it the low information diet. The magazine Humo had an article about it a few weeks back. My parents still have a subscription on it. They keep them and when I visit I take a bunch of them with me. The girlfriend reads them. Since there is always one lying about at the toilet I might leaf through it when I didn’t remember to bring my smartphone with me.

The reason I do this is not to save money but purely to improve my quality of life.

The news is hardly news anymore. It is a lot of speculation about what might happen or what might be the consequences of what just happened combined with a lot of opinions about what happened, or why it happened. At best, reading this is just a waste of time. At worst it will annoy you and sour your mood for a few hours or even a few days (some Belgian politicians have developed an unique talent to deliver in 5 second soundbites such complete and utter ridiculous proposals that any sane person needs a week to just barely regain some of his mental capabilities).

Since the news hardly contains any worthwhile information. It wastes a lot of my time with other stuff that is not news and in most cases delivered information that had no impact on my life or I couldn’t change even when it does impact my life (short of leading an armed revolt to topple the EU leadership and found the Republic of the Sloth, all hail the sloth!). And on top of that it annoyed me more often than not! So I stopped reading newspapers, magazines, watching the news …

This doesn’t mean I do not read or get new information. But now this is on my terms and for subjects I find interesting or will improve my life. Informative sites or blogs about finance and technology mostly. Some fun things on boredpanda or a fun/absurd thread on reddit. Basically I want to either be informed or entertained and the internet can provide both of these in spades at no cost. The classic media offers very little of either and then has the guts to charge money for it! One wonders why they are in trouble …

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