Dear Patrick,
You’re a big fat liar and you dress funny. Financial independence is a joke, and compound interest is as useless as JZ’s legal team. I’m just basically putting my own money into the market and seeing practically nothing happen. There’s no way in hell I’ll ever have enough to retire, this whole website is a scam being pulled onto us normal peeps by you one-percenters. You can’t really believe any of this rubbish you put up here every month, are you insane?
Goodbye,
Great Disbeliever
If I had a Rand for every time someone called me a funny dressing liar I’d be rich. It’s true, but only because I’m already rich thanks to spending less than I earn and investing the rest. Sadly it’s also true that I’ve been told I’m not the snappiest dresser around. Fairly often. I married her anyway.
So if you’re feeling a little like G-Dis above and getting rather demotivated you’re going to like this blog post. Time for a story.
Once upon a time in a land far far away lived a young woman called Princess. Now this far far away land is just like South Africa in every single way, costs are the same, earnings are the same, the only difference is that inflation doesn’t exist. This is really a stroke of luck as it means we won’t need to adjust earnings or costs up for inflation, we can simply let them cancel each other out, which means all the amounts we calculate have the same value in the future as they do today.
But let’s get back to Princess. Princess didn’t want to have to kiss any frogs or lose any slippers trying to find a prince. Instead she decided to make her own fortune through a career in teaching! Her goal was an impressive R10 million, plenty of money for anyone to live a really good life. She was just hoping she could get there before she needed a new hip.
Now while I wholeheartedly agree that our teachers are horribly underpaid, I don’t think that should be an excuse for not ending up very rich one day.
Princess agreed, clearly she’s a very smart lady. So with a 3 year bachelor’s degree and a 1 year post-grad certificate of education this young 21 year old starts on a salary of R263 688 a year, just a few rand short of R22 000 a month, with around R18 000 left over after taxes. So with that R18 000 she makes up a budget:
That leaves princess with R5 000 a month to invest, and taking the advice advice of someone who is definitely licensed to give advice and most certainly not in any way me or anyone even vaguely related to this website, she automated that investment.
First she set up two debit orders, one to go into her tax free savings account for R2750 a month, and then another to go into the regular brokerage account for R2250 a month. After that she logged into the brokerage accounts and set up recurring investments to buy a single low cost globally diversified index fund. My hero!
Now of course people earn more as they grow in their career, but everyone knows getting an increase is actually just a fancier car or a bigger house in disguise. Princess spent all of her increases just like everyone else does, houses in big estates, German cars and coffee pod machines. Stuff she doesn’t need, hoping it’ll impress people she doesn’t like. Fortunately though she didn’t want to go through the effort of cancelling that debit order, and so every month like clockwork another R5k was squirreled away.
Now global stock markets over time have averaged 7% over inflation, and as we mentioned in this country there is no inflation, so the total return for this index was 7%. Time for a quiz:
Loading ...If you picked option c) you’d be right, to be more accurate, it took her 11 years to reach her first million. That’s a pretty long time, and that leads to a follow up question, so…
Loading ...Not even close Well done you got it! It took less than a year and a half! That’s where the beauty of compounding comes into play, even when savings aren’t adjusted at all, every million just takes less and less time. The first million took over eleven years, the next around six, the third about four and a half. From then on things just go berserk and before you realise it, you’re rich.
It really is a case of the first million being the hardest, but if you can reach that level the rest will come almost on auto pilot, with your savings doing most of the heavy lifting for you.
Here’s the full breakdown of the amount of time it would take someone saving just R5000 a month to reach each million:
For this young teacher, retiring with R10 million would happen in just 37 years. She would be retiring extremely well, able to spend R400 000 a year at the age of 58. Sure it’s not super young, but it’s most definitely in the realm of what normal people consider early retirement (readers here are much earlier), and with a net worth most can only dream of, all by saving just R5 000 a month.
And that brings up some other interesting stats:
- When you get to R400 000 you’re not halfway to R800 000, you’re actually halfway to your first million.
That’s pretty impressive, but not nearly as impressive as the fact that
- When you reach R2.2 million you’re halfway to R10 million!
Just stay the course…
If you don’t trust yourself the best strategy is to automate your investments and then forget about them!
Yes really, Fidelity, one of the largest asset managers in the world did a study on which investors did the best. Amazingly it turns out that the best Fidelity investors were the ones who completely forget they had Fidelity accounts. Be like your favourite forgetful grandmother forget your way to millions!