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Invest With FIRE and Never Look Back

Posted On: Wednesday, February 1, 2023

Invest With FIRE and Never Look Back

Retirement is wonderful if you have two essentials: much to live on and much to live for. (Anonymous)

As the economy struggles to get back on its feet, many clients have approached us to ask how they can save better and invest smartly. So, we thought it was a good time to introduce the topic of FIRE, which is becoming more and more popular all over the world.

What do you think of when you hear the word ‘fire’? Smoke and helicopters, the sound of a gun? The feeling in the back of your throat when you take a sip of whisky? Maybe even being fired in a recessionary economy? All pretty negative stuff, apart from the whisky…

But we’re not talking about actual flames. FIRE is an acronym for Financial Independence, Retire Early. It’s about maximising your saving power through reduced spending, greater earnings and wise investment. 

Frugal is the new black 

Being pennywise is cool these days – instant gratification is a thing of the past. Instead of fixating on all the ways in which you’re depriving yourself, focus instead on the boundless future freedom you’re buying.

Most financial advisors recommend saving and investing at least 15% of your annual income throughout your career. South African retirement regulations allow you to deduct up to 27.5% of your annual income for tax purposes – an even more challenging benchmark. FIRE investors prefer something like 50%! 

This may sound insane but it’s actually a lot easier than you think. Here are a couple of ways to light your FIRE: 

  • Ditch the car obsession. South Africans love to splurge on cars. This despite the recession and the fact that cars are comparatively expensive in SA. It makes no financial sense to try and keep up with the Joneses. Don’t trade in your old Polo for a brand-new Tiguan – the Polo is paid off and costs maybe R3 000 every year, whereas a new car on finance will cost you at least R5 000 – per month! You’ll be haemorrhaging interest and the car depreciates the moment you drive it off the showroom floor. Don’t do it!
  • Forget the mansion. The financial planning rule of thumb is that you shouldn’t spend more than 30% of your earnings on rent or mortgage payments. Many couples depend on a second income to fund the roof over their heads – a risky move when it comes to accommodation security. Buy modestly or downscale and use the spare cash to diversify into other asset classes.  
  • Give investments as gifts. Don’t give your children the latest gaming console for Christmas, rather give them an investment portfolio earmarked for travel or education. When you gift investments instead of material items, you’re saving in the short term and you’re investing in the future.   
  • Beware the credit card. If you’re not using your credit card like a debit card – in other words, if you’re accumulating debt each month – then you’re living beyond your means.

Increase your income 

The second important factor to achieving FIRE is to increase your income. This doesn’t mean giving up your current job, but it does mean working with real purpose and achieving greater results. This will enable you to negotiate the raise you need for financial independence, or to maximise your performance bonuses. 

The other key to increasing your income is to dedicate yourself to constant learning. Learning on the job and expanding your skillset into other areas will give you much-needed career flexibility.

Invest wisely 

South Africa represents less than 1% of global economic activity, which is why it’s imperative that you consider investing offshore. There are two ways to do this: The first is to invest in a rand-denominated offshore feeder fund, and the second is to move money offshore directly. There are allowances for the latter purpose: a R10 million annual investment allowance and a R1 million annual discretionary allowance. Using a feeder fund is administratively easy as the process doesn't require tax clearance. But a feeder fund tends to attract higher management fees than other bona fide offshore options.

Back home again, investing wisely also means maximising the benefits of retirement tax breaks. A retirement annuity provides the opportunity for tax-free growth within the fund and is also tax-deductible, thus lowering your tax rate and giving you more to save. A tax-free savings account is similar – it also gives you the benefit of tax-free growth within the fund and offers another way to escalate your investment growth.

Now it’s your turn to get FIRED up

You’ll be more motivated to achieve Financial Independence and Retire Early if you’re aware of the benefits of financial freedom. Of course, you don’t want to take the concept so far that it zaps all the joy out of living, but you do need to prepare for retirement. Which, with a little bit of FIRE, could come a lot sooner than you were expecting…

If you have any questions about how to streamline your expenses and boost your savings, drop us a line. Our door is always open.

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