Five paydays to go*

With retirement at the end of September now less than five months away, it's time to check off a few items. I have been taking a long hard look at our expenses and we have taken steps to reduce a few:

1. as posted, I have cancelled my term life policy - this saves HK$41,000 in annual premium;

2. we will complete the switch from my unsubsidised medical insurance to my Mrs Traineeinvestor's partly subsidised medical policy. While our current policy provides higher coverage, the premium is many times what we will be paying going forward. Based on a look at our actual medical bills for the last few years, we will be better off by several thousand dollars a year unless we have a major incident. In effect we are reducing costs by taking on a bit more risk;

3. my disability insurance will fall away at the end of September saving us HK$12,729 in annual premiums;

4. I have been shedding management responsibilities which has shortened my working hours. As a result, there is less pressure on me to get to and from work quickly and I have begun substituting bus for taxi. Depending on my overall commuting usage post retirement, by the time the process completes, I expect my annualised savings will be around HK$8,000;

5. my SCMP subscription was up for renewal this week and I have switched to the on-line version saving HK$1,239 per annum;

6. we have decided to spend Christmas in Hong Kong this year. Last year we went to Australia which cost multiples of the cost of the previous year's Christmas holiday in Thailand. This year we are going to the other extreme and cutting from three family holidays to two (Easter and summer). Holiday plans in future years will depend on the state of the finances;

7. we have decided to defer our home renovation project for one or two years.

Of course, I do have some planned and unplanned expenses in the pipeline, including my university enrolment fees, the cost of a new computer (I had originally budgeted to replace my lap top every three years but due to a HD failure will be doing it a year early and switching to a more expensive Apple product) and the cost of recovering data from my failed HD (about HK$5,000).

Among other items in my "to do" list is updating my will and cleaning out my office.

There really isn't much else to do.

* previous "X paydays to go" posts were based on a 30 June retirement date.

Reviewing accruals

Like many people I make an accrual each month for expenses which are incurred at irregular intervals. This avoids wild swings in the budget in months were substantial payments fall due. It also ensures that I keep enough cash on hand.

Currently I have accruals for:

1. luxuries - usually some over-priced and over-hyped Bordeaux, but I also took my iPad from this accrual. Since this is wholly discretionary, I can say that the accrual is accurate - right up to the point where I overspend;

2. travel/holidays - this is a significant cost item. I have probably under provided for this and will add to this provision this month and slightly increase the monthly accrual going forward;

3. taxes - a necessary evil and the largest accrual by a considerable margin. After going through my estimated tax liability for 2010, I concluded that I have significantly over provided for my taxes;

4. home renovation project - our home will need redecoration at some stage and I started setting aside some money each month in 2009. The kitchen and bathrooms are now 11 years old and the last time it was painted was in 2005. It is likely that we will have to move into a serviced apartment for a couple of months while it is done. Whether this is over provided or under provided for will depend on when the renovation takes place. If this year, there will be a significant shortfall.

Accordingly, I will transfer some of the excess tax accrual to the travel accrual and the home renovation accrual and the balance of the excess is now available for investment - time to go shopping.

From two incomes to one (1)

Mrs traineeinvestor will make the transition from a full time career woman to a full time stay at home mum when she leaves her office for the last time on Friday. With our children starting school and needing a degree of supervision and support which is difficult to provide through other means, we felt it was the right thing for one of us to take on this role.

What does the shift to a single income mean for our household?

The loss of income. Having run the numbers through the spreadsheet a few times, we have concluded that it should not affect my plans to retire in 2012-2013. If it does, it will only be by a year - because we are so close to hitting our number savings have less of an impact on the timing than return on investments.

Vulnerability to job loss. Clearly, if I were to lose my job we would have no income coming in and would need to live off investments until one of us could find a new job. This does not cause us any concern - if we really had to we could make some significant cuts in expenditure and probably get by indefinitely on our investments.

Boredom. The only thing worse than a bored spouse is a bored spouse who tries to relieve her boredom by going on shopping binges. We have come up with some projects to keep Mrs traineeinvestor busy - both physically and mentally. One of which will be tracking our spending in far more detail than we do at present. There are also some projects around the home which need doing. She is considering doing some further study.

Expenses. We are unsure whether expenses will go up or down and will monitor the situation carefully. In some respects, this is a dry run for my own retirement.

Savings. With time on her hands, we will be looking to get better deals on some of our household expenses. At the moment, we simply do not have the time to search out the best deal.

Portfolio. At the moment we do not keep any money set aside for an emergency fund. Having considered our situation, I see no need to change this arrangement. There will still be enough cash coming in from my job and our investments each month as well as money set aside to pay tax to deal with just about any emergency which could conceivably arise.

Insurance. Our medical insurance is provided by my wife's employer and will cease at the end of the week. I have arranged replacement insurance through my employer but have to pay for it myself. This is a significant expense.

Looking forward to the day when I retire.

Underspending

Is there such a thing as underspending? When it comes to personal finance, definitely when it comes to essentials such as health, children's education etc, but otherwise probably not. That said, it is nice to "live a bit" and part of my budget is allocated to luxuries - non-essential things which I allow myself to splurge on without worrying about blowing my savings rate. Examples of spending over the years have included paintings, en-primeur wine, hand woven carpets and an "L" lens for my camera.

Each month I accrue a fixed sum to the luxuries account. (I have a separate accrual for holidays.) Whenever I spend something on luxury items, the cost is deducted from the account. I have been operating this system since 2005. However, with the exception of 2007 when I overspent on wine and carpets, I have consistently failed to spend all of the money which I have put aside. As a result, the balance accrued in the account is now more than double the annual budget for luxuries (even after what I have just spent on this year's en-primeur campaign and replacing my increasingly unreliable iPod classic).

The temptation to make a single handed attempt to stimulate the economy with a spending spree is something I can resist easily enough. If I do spend the money, it will be on something which either has lasting value or which will generate a memorable degree of satisfaction. However, I am struggling to think of anything else other than, possibly, another painting. The reality is that I have most (if not all) of the things I need/want which would fall within the budget. (The Ferrari is, sadly, outside the budget and likely to remain so.)

Of course, I am in no hurry - I can just keep the accrual running and wait until I find something that I want to splurge on. Of course, I could just ask mrs traineeinvestor.....

2009 Budget

I have drawn up my annual budget for 2009.

The expenses side was quite straightforward as I expect little change in most areas. The noticeable exception is our holidays where we spent relatively lightly in 2008. This year I have budgeted for a slightly more expensive Christmas holiday for the family and also a short, children free holiday for mr & mrs traineeinvestor. I have assumed small increases in school fees and that the rates waiver given by the HK government will not be repeated. Overall I have budgeted for a 4.9% increase in expenses. My tax burden will be higher this year (I have just paid the first installment).

As I do not earn a fixed salary, there is always an element of uncertainty associated with my budgeted income. The degree of uncertainty in 2009 will be higher than in previous years due to a change in jobs which will take place shortly. Quite frankly, it is difficult to predict my level of income in 2009 with any degree of confidence. Accordingly, I have arbitrarily assume it will be the same as in 2008 (which may prove to be either conservative or an exercise in optimism).

My savings rate is likely to depend more on my income than my expenses. Given the uncertainty associated with my income, my savings rate is also something of a guess but I have (again arbitrarily) set my self a mental target of 50% or more of pre-tax income.

Savings Rate For 2008

As part of the final sign off on 2008, I completed added the December spending numbers to the spreadsheet to work out my overall savings rate for 2008. I was surprised to find that during the course of the year I managed to save 57% of my pre-tax income. I had initially assumed I would save less than the 55% achieved in 2007.

Income

My income in 2008 was slightly higher than 2007. My monthly income fluctuates a bit and was higher in the first half of the year before generally declining in the second half. This is effectively where the improvement in the savings rate came from.

Expenses

My expenses in 2008 were slightly lower than in 2007. This was a case of higher school fees and general household expenses (in spite of the rates relief and partial electricity bill subsidy from the HK government) being offset by lower discretionary spending on holidays, wine and collectibles.

Tax

My provision for tax increased by more than the reduction in expenses.

Other provisions

I accrue provisions for various anticipated expenses and treat these as an expenses as and when they are provided for. Year end provisions were increased sightly as I anticipate some expenses in 2009 (e.g. our old style TV set is beginning to die on us and will need replacing soon and I will need to get a couple of new suits made for work).

2009 Financial Goals

One of the positive things which I took from 2008 was that it is now possible to acquire assets that offer considerably better yields than could be obtained 12 months earlier. Even if a fall in distributions (rent, dividends) of around 20% is assumed, the current yields on both real estate and equities remain attractive.

Given my retirement model and the current market conditions, would it make sense to acquire assets and minimise the holding of cash? To a certain extent, I have been doing this already (I purchased some ETFs in November and December) and my cash position has been reduced to about 2 years worth of living expenses (with no attempt to economise) or 3 years (if we cut back in certain areas). I also have a high degree of confidence in my ability to generate income from employment which gives me confidence that I do not need a wasteful emergency fund.

Accordingly, my financial goals for 2009 are:

1. maintain my employment position and the high income and high savings rates it allows me to generate. Due to some changes in what I do and the way I am remunerated my income in 2009 (and after) is likely to be much more erratic than in previous years (although overall at least as good). Accordingly, if this objective is met then I should be able to retire at around 50 years old even if the markets perform badly for a few more years. That said, I am still hoping for a 2012/2013 retirement date. Target savings rate is 55% of pre-tax income;

2. maintain a low cash position by investing most of my cash flow into the equity markets. Yields are the cornerstone of my retirement plan. I cannot afford to pass up opportunities to invest at prices which generate yields higher than are required for my retirement objective. Unless I am saving for a property purchase (see #3 below), cash should seldom be more than 3 years of budgeted living costs + accrued tax reserve;

3. at some point, I would like to acquire another property in 2009. I like cash flow. The issue will be obtaining mortgage finance from the banks which have shown themselves to be increasingly reluctant to lend (and, when they do, they require higher deposits and charge higher interest rates). While I am sure that I will get the finance, the terms are unlikely to be as favourable as my current mortgages;

4. I will continue to do some active trading - but only with small sums of money. I more or less broke even on active trading in 2008 and have no illusions about day trading for a living. Trading is fun but should be nothing more than a minor diversion.

Simple isn't it? It's the execution that will require effort. I'll do a separate post on

I have also set myself a number of non-financial objectives for 2009. Some of these will get more attention than in previous years (where financial consideration have dominated).

Budget updated

I have updated my budget through to the end of the year to take into account:

(i) the recent sale and purchase of properties (including different rental levels and mortgage payments)

(ii) changes to spending to reflect additional costs associated with my children (which I fear will be the beginnings of a trend)

(iii) changes to my income projections for the rest of the year

(iv) a short holiday at Christmas for the family in Asia instead of further away (at lower cost).

Even after putting aside money for tax I will still have a cash surplus at the end of the year and the surplus will be slightly larger than the previous budget. The question is: what should I do with it?

Spending - some controls needed (2)

Having spent a few days thinking matters over, I have identified a number of potential cost savings. These are:

1. en primeur wine: With the season nearing its end, I am being bombarded with e-mails from the wine merchants. This year I will limit myself to a single case of mid priced wine for future consumption. I have deleted my multi-case "wish list";

2. food: I can save a bit of money with my lunches and snacks without compromising the quality of the food. Fruit and other items purchased at the supermarket is a lot cheaper than food purchased at the likes of Pret, Mix etc. I also have the option of attending various training courses which usually come with a sandwich lunch. Sitting through a training course that I do not really need is a pretty high price to pay for a "free" lunch but when I am trying to get into some better spending habits, every gesture helps;

3. wine (again): in terms of the wine purchased for drinking at home, I will set a price limit on purchases. In case you hadn't guessed, my wine consumption is a bit more than what my doctor would suggest is optimal. In any case, I will be spending more time looking at the bin end specials and less time reading the reviews of the more expensive stuff;

4. personal training: I signed up for a set of personal training sessions as a means of motivating myself to get into the gym a bit more often. When the current set runs out in September, I will not sign up for any more sessions. I will have to look at the waistline as a source of motivation.

The two economies I considered but do not intend to implement are:

A. taking the bus instead of a taxi: taking a bus will save me HK$25 per trip. This is a worthwhile saving. Unfortunately the price of that saving is often not seeing my children before they go to bed in the evenings. Family is more important than the savings;

B. charity: I tend to give quite freely when friends and colleagues are looking for support for various charitable endeavours. While there is no obligation to give, I would prefer to continue to support worthwhile causes.

The above ideas are not much, but I have to start tightening the purse strings somewhere.

Spending - some controls needed (1)

This month's spending has been horrendous due to a number of reasons:

1. we went on holiday - which had been largely budgeted for but it still hurts to see the cash leave the bank account. The fact that the holiday cost more than expected was a reflection of the original budget being inadequate rather than a lack of control on the spending side;

2. we (meaning me) went a little berserk with the shopping while on holiday buying new carpets and paintings. We will have to pay for the latter to be framed. In effect, I have spent about twice my annual budget for luxuries in a single month;

3. a succession of minor routine non-routine expenses for items such as medical expenses, insurance premia, a birthday party for one child, increased school and tuition expenses (another child will start school in August) which collectively have had a significant impact on this month's savings. Some of these expenses will be recurring.

With the latest property purchase due for completion in the first week of July and refurbishment and mortgage payments starting immediately after completion, I will also be bleeding cash until the refurbishment has been completed and the property has been rented out.

I have revised the budget for the second half of the year and it is not a pretty picture to reflect both the June blowout and the expected recurring increases in expenditure for the rest of the year. Although the savings rate will still be "high" by general standards it will fall short of what I had hoped for.

I will be spending some time over the next few days working out where I can cut some expenses.

Budget For 2007

I finally got around to completing my rather simple budget for this year.

On the income side I am predicting that my monthly income for 2007 will be the same as for the second half of 2006 (i.e. slightly higher than the average for 2006 as a whole). It will fluctuate from month to month but I hope it will average out at this level.

Expenses are a bit harder to predict, however I am expecting my monthly household expenses to rise slightly. The biggest increase will be school fees when our youngest child starts school in August. This will be partly offset by the fact that (I hope) the floating interest rate on our home mortgage will average less in 2007 than they did in 2006 . The current rate is less than the average rate for 2006. I am also intending to be more disciplined in my spending on luxuries. Last year I spent far too much on overpriced wine and a couple of paintings - something that I hope will not be repeated in 2007.

The bottom line is a projected savings rate of 42% of pre-tax income. This compares to a savings rate of close to 40% in 2006.

Savings Rate For 2006

I finished going through my financials for 2006 and was surprised that my estimated savings for 2006 amounted to close to 40% of my employment income. This was just above the high end of my projections after the first six months where I estimated an annual savings rate between 35% and 39%.

Alas, the higher savings rate was not due to any particular virtue on the budgeting front (if anything I spent more than I should have last year). It was almost all attributable to my income in the second half of the year being higher than it was in the first half.

I describe my savings rate as an estimate because I adopt a lazy man's approach to budgeting and do not keep detailed records of expenses. Instead I simply go through my bank statements and add up (i) my income and (ii) transfers out of my bank account which are of an investment nature and work out (iii) the difference between my bank balance at the start of the year and at the end of the year. I then deduct (iv) any expenses which have been incurred but not actually spent (e.g. an accrual for holidays, credit card balance) and (v) an estimate for my tax bill. This exercise took less than an hour for the whole year.

The result is still an estimate in that my tax liability is not known but given how simple Hong Kong's tax system is the number I have used should be quite close to the actual bill (which is late in arriving).

An Unwanted Emergency Fund

I am not a fan of having an emergency fund (at least not the sort that earns a low rate of return sitting on deposit at the bank) in our personal circumstances.

Unfortunately, I am struggling to identify investments that look sufficiently attractive to justify investment. As a result I am accumulating a modest amount of money which is sitting on deposit at the bank earning a rate of interest which is barely above the official inflation rate (and below the real rate of inflation). At least under Hong Kong law I do not have to pay tax on the interest.

Potential uses for the money:

1. increase my monthly payments into mutual funds (currently divided equally between an Asian small cap fund and a European small cap fund). Valuation considerations make me slightly cautious about this although I am still looking for a Vietnamese country fund;

2. make early repayments on one of my mortgages. This will show a better rate of return than bank deposits but with mortgage rates settling below 5% pa (and all tax deductable except for my home mortgage) this is only marginally more attractive than leaving the money on deposit;

3. be patient in the expectations that better opportunities will arise.

The default option is to be patient - although it is irritating accepting such a low rate of return even on a short term basis.

Save Money - Do Not Buy From Amazon

I read a lot of books, although not as a many as I used to do before we had children. Amazon has a lot to offer, most notably an inventory which is much much bigger than any book store in Hong Kong. Frequently, the discounted price of the books on offer will be competitive. However, it is expensive once the cost of shipping is taken into account.

When I find a book that I want which my local book store (Dymocks) does not have in stock, I simply ask them to order it for me. I do not have to pay for shipping. Delivery time is similar to Amazon and the price is less than Amazon's price + the shipping I have to pay when ordering through Amazon.

Savings rate - known for the first time

I spent a romantic evening with a bottle of shiraz and my bank statements. It took a couple of hours but I know know how much I have saved in the first six months of 2006 and have a projected range for the year as a whole.

The good news is that I saved about 42% of my pre-tax income in the first half of the year. The projected savings rate for the year as a whole will be less than this because (i) I will spend more on holidays in the second half than the first half and (ii) the wine bill (en primeur) was paid in July. My estimate for the year as a whole is somewhere between 35% and 39% of my pre-tax income. The range is largely due to the fact that my income is slightly variable and the cost of our Christmas holiday is unknown at this time.

I realise that there is room for improvement in these numbers and will look at ways to try and lift the annual figure to the upper end of the projected range (without compromising the planned holiday).

The calculations are based on pre-tax income and after-tax savings. They do not take into account income from sources other than my job.

All men have vices

As I told Mrs Traineeinvestor before we got married, all men have vices. The question is not whether a man has vices, but which vices he has. In my case, it's a reasonably long list with being a little bit too fond of good wine close to the top. This week my passion for wine wrecked havoc with my simplistic (and rather pathetic) approach to budgeting.

About five years ago, I decided that the easiest approach to budgeting for "completely unnecessary luxuries" was to allow myself a vice budget of a fixed amount each year - and no more. For the last four years I have been sufficiently disciplined to spend less than the budgeted amount. This year I let things get out of control. With the 2005 en primeur season now underway, I purchased a couple of cases of ridiculously over priced claret. This is consistent with my practice for the last few years. So far so good. I then noticed that the prices of the 2004 wines were starting to edge up, but that not all merchants had increased their prices. So, you guessed it, I went and ordered a couple of cases of 2004 which broke this year's budget. Add in the art purchased on our holiday last month and I have spent about twice the allocated vice budget for 2006 already.

I could claim that the wine is an investment (it does have some prospects of appreciating in value) but this is a bit hard to reconcile with the intention of drinking at least some of it when it matures.

Back to budgeting school and an austerity regime for me.

Expense review - food and drink

This is one of the weaker areas of our financial management. Quite frankly we subject ourselves to a rather lax discpline in the food and drink department.

For eating at home the majority of the food we buy is unexceptional and cannot be viewed as extravagant. The exceptions are wine (one of my many vices) where we (i.e. me) tend to stock the wine fridge with reasonably good wines. chocolates (at the expensive end of the price scale) and a few other odds and ends. On the whole eating at home falls into the "not too bad but could do better" rating (much like my old school reports).

It's the eating out which fails the economy test. As a couple or family, we eat out quite a lot, probably averaging 2-3 evenings a week and lunches most weekends. Most of the places we go to could be described as being in the middle price bracket (not cheap) and some are at the more expensive end of the scale (especially after taking into account the price of a bottle of wine). I have no qualms about eating out quite often (especially with the family) but have some reservations about the cost of the some of the meals.

The other weak area is the food I eat in the office (breakfast, lunch and dinner with snacks in between some days). I do not make much effort to economise here - in fact none at all. Given the rather frenetic pace of work, convenience takes priority over cost. Also, where I work the options if I want to go cheaper are a bit limited unless I opt for more food which is fried, deep fried or otherwise unappealing on taste or health grounds (and I have enough problems in that area as it is) or pay a price in terms of convenience.

In summary, not a lot of restraint is exercised in our expenditure on food and drink. Some discipline is needed.

Expense review - transport part 2

The previous post rationalised the case for using public transport over owning a car. This post will fail to fully rationalise the case for using taxis over buses to the extent that we do.

Taxis are more expensive than buses. The cost of a taxi ride to the office is about HK$30. The same journey by bus is about HK$5. This is a big difference. Over the course of a month or a year the difference adds up to a meaningful sum of money. So I take the bus all the time? Right?

No. I take a taxi about 70% of the time. Why? The answer is combination of convenience and practicality. At some times of the day (off peak traffic) a taxi is quicker. At other times (peak traffic or raining), finding a taxi can take a while so I take the bus. The difference in commuting time is anything from 10 minutes to half an hour and is usually difficult to predict in advance.

I value that 30 minutes more than I do the HK$25 price difference. If I finish work early (say 7:30-8:00 it is the difference between spending some time with the children before they go to bed or not seeing them at all. If I work late, it is extra time with my wife or just unwinding before going to bed or, in some cases, extra sleep - all of which are very important to me.

While there are times when I think I am just being lazy, the non-economic price of switching to buses is just too high for me.

Expense review - transport part 1

The first item of household expenditure for review is transportation. This entry discusses the decision to rely on public transport rather than to own a car

For most households transportation is a major expense, primarily because of the cost of owning and maintaining one or more cars. In Hong Kong it is even more so because of the exhorbitant first registration tax on motor vehicles and, also, the cost of renting or buying a parking space (most apartments do not come with a parking space).

The first registration tax is on a progressive scale from 35-100% of the cost of the vehicle. A carparking space in a middle class housing estate could be about HK$3,000 per month. Parking at work is even more and the hourly rates for casual parking vary depending on where you wish to park but can add up quite quickly. Insurance, maintinance, petrol and the other costs need to be factored in. Lastly there is the opportunity cost on the purchase price which could be invested elsewhere.

The cost of renting a car parking space in our development alone would equal about 80% of the cost of using taxis for all transportation needs. If parking at the point of destination is factored in then parking cost alone would comfortably exceed the cost of using taxis at all times (even more if we use buses). Not owning a car is one of the easiest financial decisions to make.

There are some non-financial factors:

1.convenience: actually this favours using taxis in almost all circumstances;
2.child safety: taxies do not come with child safety seats. This is an issue for us and the only factor that favours buying a car (although offset by the fact that taxi drivers are better and drivers than either myself or my wife and therefore less likely to have an accident in the first place);
3.pleasure: I enjoy driving - but not as much as I enjoy investing the money I am saving by not having a car;
4.drinking: if I drive I wll not drink at all. I like to drink.

We thought quite a lot about factor 2 but decided that the trade off between better drivers and child safety seats was not something we could evaluate. In conclusion, not owning a car is saving us a huge amount of money each year.

Next up: the taxi-bus trade off.

Are we frugal?

This is a question which I have been asking myself a lot over the last few years without coming up with a definitive or even satisfactory answer.

I know that there are people who manage to account for every dollar that they earn and for every cent that they spend. Unfortunately, I am not one of them. I operate a lazy man's budget (separate post to follow) and do not track expenditure closely. So long as my expenditure is roughly within the budget, I pay relatively little attention to my spending on day to day items. Larger items do get closely scrutinised. Some examples:

1.We shopped around for mortgages to get the best terms available each time we borrowed;
2.We do not own a car, prefering to rely on public transport.

I do save a respectable portion of my income each year - but I do not know off the top of my head exactly how much or what percentage of my income is saved each year. I suspect it would be possible to do better.

I can only give myself a C or, at best, a B grade for frugality. In future posts I will examine my budgeting system and selected items of expenditure to see where improvements can be made.