Category: Personal Finance

November and December 2021 Financial Update

Posted on January 16, 2022 in Investing, Personal Finance

Hey there, fellow readers, I wish you all a HAPPY NEW YEAR!!

First, I have to apologize for my late monthly Passive Income Updates. The last few months have been incredibly dynamic.

I have started my own business

In December, I made the jump and resigned from my job.

Currently I am building my own consulting business and am also working part-time for my former employer in order to ensure a smooth hand-over to my successor.

It’s a win-win I guess, as I have still a few months where I get paid while at the same time I can get my business going.

It’s super exciting and so inspiring, but also a lot of work! I’ll certainly keep you informed about how things are developing.

A brief look at the financial numbers

More than USD 100’000 wealth accumulated in 2021

The previous year has been an amazingly strong one in terms of wealth creation.

Our savings rate hit almost 70 % in November and December and over the year, total market value of our investments surpassed USD 550’000 with USD 600’000 in liquid assets plus corporate bonds. Unfortunately, once again, due to the COVID-19 pandemic we have not been able to realize our major real estate project abroad and deploy our cash pile.

Very strong performance of backbone stock positions

On the back of very strong performance of my largest positions such as Nestlé, Roche, LVMH, SIXT, L’Oreal etc. but also of medium-sized holdings such as Campari, Ferrari, Pernod Ricard and Diageo my dividend portfolio grew handsomely.

As I have always been quite heavily invested in insurance businesses (Swiss Life, Zurich Insurance, Swiss Re, Aviva, Legal & General, Axa, Allianz etc.) and still have some exposure in bank stocks (HSBC, UBS etc.), my investment portfolio has been a beneficiary of rising interest rates.

Positions in oil supermajors and miners (Shell, BP, Total, Chevron, BHP, Rio Tinto, Glencore etc.) did particularily well in the past months while my tech portfolio came down quite a bit. There is clearly a secor rotation going on which is fine, as this always provides nice buying opportunities.

December passive income + 345 % YoY

While November 2021 passive income was pretty in line with the same month in 2020, I finished December with a big jump: Swiss francs (CHF) 1’239 resp. almost USD 1’400 which was roughly 3.5 times higher than in the previous year.

Main December passive income contributor has been our “parking money”, some portions of our relatively large cash pile we put into corporate bonds and on savings accounts to generate interest income.

A total of USD 14’330 passive income in 2021

For the previous year, I had set a goal of USD 15’000 which we slightly missed.

But still, it’s significantly higher than the USD 9’721 in 2020, we are speaking here of a + 47 % passive income jump YoY.

The main reason for the “earning miss” was the fact that I sold off my tobacco stock positions (Altria, Imperial Brands, British Tobacco) early in 2021. Without these disposals, the USD 15’00 passive income target would have been easily achieved.

But what clearly showed as a drag in terms of passive income generation has been great in terms of wealth accumulation as with the free cash from stock disposals I had bought shares of L’Oréal, Pernod Ricard, Ferrari and French oil supermajor Total early in 2021. All these investments had an excellent run so far and I am very confident in the growth potential of these stocks.

So, despite the “passive income earning miss”, 2021 has been an excellent year and I am looking forward to what the new year will bring.

What about you, fellow readers, did you achieve your financial goals in 2021? Thanks for sharing your thoughts below in the commentary section.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action

August 2021 Financial Update

Posted on September 24, 2021 in Investing, Personal Finance

Hi there, thanks for stopping by for another monthly financial update.

In case you are a first time visitor, My Financial Shape documents the path of me and my family towards Financial Independence. My wife and I want to achieve that goal by the end of 2024 through dividend growth investing and by establishing other passive income streams.

We will hit the USD 15’000 passive income milestone for 2021

In the past eight months of the year, we collected CHF 9’150 resp. around USD 10’065 in dividends, representing 67.1 % of our annual goal.

We have almost reached the level of the whole previous year in just eight months. For the whole 2020 we had cash inflows from our investments in the amount of CHF 9’721 resp. USD 10’700.

Compared to August 2020, the passed month really has been a slow one, with “only” USD 150 versus over USD 1’000 in the same month one year ago. This difference is mainly due to the fact that last year I received in August a reimbursement of witholding taxes (I report all passive income amounts net after taxes and show the reimbursements of witholding taxes separately). Furthermore there were several changes in dividend payments dates. 2020 not only showed several dividend cuts (Disney, Nichols, HSBC, LVMH etc.) but also several changes of the timing of shareholder distributions.

So, a year over year comparison on a monthly basis shows quite significant discrepancies.

But as said, over the whole year, we will end up with prospected total passive income of around USD 15’000, roughly 50 % higher than the year before, mainly due to the fact that the majority of businesses having cut their shareholder distributions reinstated their dividends. Furthermore, there are a few companies in our portfolio that increased their payouts quite heavily (for instance mining giants Rio Tinto and BHP Group).

How about you, fellow reader? How was your August in terms of passive income?

Disclaimer
You are responsible for your own investment and financial decisions. This article and this YouTube Video are not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

Why your household’s Jaws Ratio matters

Posted on August 6, 2021 in Lifestyle, Personal Finance

The key ingredience to your financial wellbeing

Sometimes I hear people say that achieving Financial Independence is only for people with

  • either great wealth,
  • and/or a very high income job,
  • or an extremely frugal lifestyle,
  • and/or particular investment skills,
  • or a great deal of luck in life (e.g. a windfall which would put these people financially in a positon so that they can leave their job).

Over the last decade, I have been extremely interested in personal finance in general and in the topic Financial Independence Early Retirement (FIRE) in particular.

That’s why I have started this blog to document our path to Financial Independence by 2024 and sharing our experiences along the way and giving tips on various topics such as

From my own experience and from what I have read over the last decade, pursuing Financial Independence is certainly not just for millionaires. In essence, it all buils down to

By the way, I am referring here to a household’s wellbeing in general. Not everyone wants to achieve Financial Independence.

But in case you want to become financially independent in 10 to 20 years, that’s perfectly possible. Yes, the higher your wealth and/or your salary is, the easier it might be.

But here’s the catch: I high income could also make it even harder.

Why is that?

Because high income households are quite “vulnerable” to a Creeping Lifestyle Inflation (read here How Lifestyle Inflation takes your freedom).

On MyFinancialShape I often write about establishing an ever growing passive income stream by investing into dividend paying stocks such as Nestlé, The Coca Cola Company, PepsiCo etc. I document our monthly cash flow streams from our investment portfolios. I write about some of the best long term dividend stocks, about dividend reinvestments and on taking advantage of the compound effect to accumulate substantial wealth over time.

But in essence, when we are talking about achieveing Financial Independence, it really just boils down to the Savings Rate.

The Savings Rate tells you

Tracking, analysing, streamlining and optimising the cost structure is key.

A positive Jaws Ratio reduces risks, enhances profitability and flexibility

Mister Money Mustache wrote a brilliant article with the title Frugality as a Muscle. I highly recommend his blog in general and to have a look at that article in particular.

Here’s your “workout to gain financial muscles” that I would recommend:

  • know all your cost positons;
  • write them down, track them month by month in an excel sheet;
  • group the positions into fixed costs blocks (such as insurances, rent etc.) on one side and discretionary spendings (such as holidays etc.) on the other side;
  • analyse all cost positons and assess whether you could optimise them without significant disadvantages (these are the low hanging fruits);
  • discretionary spendings often can be influenced immediately but make sure you are cutting costs for things that don’t mean much to you;
  • get creative, many spendings positons could be altered quite easily (e.g. insurance shopping, improving costs by comparing, negotiationg, changing);
  • But always keep in mind: it’s absolutely important to remain motivated and enjoy the path toward Financial Independence as its a long term goal
  • tackle in particular the fixed costs because once they are streamlined, there is a recurring benefit. Fixed costs are always to the detriment of a household’s financial flexibility, as it takes most often six to 12 months to have an influence on them.
  • know all your income sources, track them monthly and work on adding passive income sources to them, diversify your cash flow streams over time.
  • And last but not least on the list: apply the Jaws Ratio Concept!

If you know your cost structure you can optimize it over time and even plan your spendings.

You get full control over your financial life. You then have created options. You have then a tremendously strong position, for instance towards your employer. That’s what sets you apart from the majority of people.

And here’s another point: if you can change your total costs faster than your income dynamic, then you are so much better off than litterally anybody you know.

And here comes the Jaws Ratio Concept which can have a life-changing effect.

I wrote an article How to use Jaws Ratio to improve finances some years ago. On how that concept – which originially has been used in the context of corporate finance and security analysis – could (and should) be applied in personal finance to optimise a household’s financial position over time. If you haven’t read that article, I would definitively recommend to have a look at it.

The Jaws Ratio tells you whether your income grows faster than your spendings or the other way around.

You can calculate it with the following formula:

Jaws Ratio = Income Growth Rate – Expense Growth Rate

The Jaws Ratio can either be positive or negative depending on whether the income increase surpasses the expense increase or not. A positive result means that income grew stronger than expenses and therefore profitability increased.

I know people that got a pay rise, got promotions year after year which led to fast growing income. The savings rate was shooting up. But make no mistake: an increasing savings rate does not necessarily mean that your personal finances are healthy.

Here’s the flipside these people are often confronted with: if spendings have been climbing at a faster pace than income, then the household is in a very risky position.

As we all know, cash income streams can abruptly change, they can plummet dramatically or even stop completely. Just think of losing your job.

Income streams can all of a sudden dry out and litterally go to zero. By the way, that’s also why it’s important to have Passive Income Sources and diversify and strengthen them over time.

But costs always remain. It’s pretty tough cutting spendings in a matter of a few weeks, but it is completely feasible doing so over the medium and long run. As said, frugality is like a muscle which can and should be trained.

My wife and I have been applying the concept of Jaws Ratio for years. For instance, we reduced our work pensa from 100 % to 80 % while still keeping a more or less unchanged savings rate.

That was possible because we managed to slash our costs by more than the reduction of our work incomes. A 20 % salary drop should be accompanied by measures that lower the cost basis by at least 20 % which results in a Positive Jaws Ratio.

A Positive Jaws Ratio signifies

  • improved profitability of the household,
  • more flexibility and
  • also a lower risk profile.

But in contrast, when costs climbe faster than cash income streams that results in a Negative Jaws Ratio. It’s then vital to detect such a development at a relatively early stake and take measures. That’s why, the Jaws Ratio Concept really is so essential.

So, just track for each year, whether your income has been moving in line with your spendings. If that’s the case, put the process forward, make sure you always have a Positive Jaws Ratio and you are are seeing your journey towards gaining financial flexibility put on autopilot.

How lifestyle inflation takes your freedom

Posted on July 17, 2021 in Personal Finance

Costs tend to creep up, if you take no actions

Almost every household is confronted with that phenomenon: Lifestyle Inflation. It means that costs climb with income (for instance after a pay rise), all too often disproportionally.

What’s the problem with Lifestyle Inflation?

Well, it decreases the profitability of a household.

There is nothing wrong per se with consuming and enjoying an increasing salary, but there’s a flipside as climbing spendings often go hand in hand with a massively growing fixed cost block. This means people build up cost positions they cannot scale back in the short term.

For instance

  • renting a larger apartment leads to a higher rent
  • and higher costs for house insurance
  • as new furniture is bought etc.

The list goes on an on, and fixed costs are adding up really fast.

Fixed costs are to the detriment of the financial fexibility and stability of a household.

People tend to focus on discretionary spendings, such as going out to restaurants every week. These cost positions are low hanging fruits when someone wants to cut spendings to save money.

But let’s look at the fixed cost block and think about that: how fast could you slash your spendings for your rent and insurances if you lost your job or earned substantially less from one day to another? It could easily require months, even a year, to adapt your cost structure.

Eroding profitability of a household due to Lifestyle Inflation enhances its risk position and makes people stuck in a rat race having to work more and more just to pay their bills.

Lifestyle Inflation happens often slowly, over time, it’s a creeping process.

So how to tackle lifestyle creep and increase your financial shape?

It’s possible to keep Lifestyle Inflation at a minimum if you are conscious of that effect and take action. Many good things happen in a financial sense if you hold costs steady (or only marginally increasing) while boosting your income. You gain a whole lot of flexibility in life, and with consistency, patience and hard work, achieving Financial Independence becomes a viable option.

Focus not on the salary but on your savings rate

It was a few years ago that I followed a conversation between two guys, one of them planning to buy a house for USD 1 Mio in a rural area.

That guy told his friend, that the down payment would be USD 250’000 and that he had saved that amount during the last 10 years.  He said that his nest egg surpassed at least his “spending budget” of one year.

As the conversation went on, the future home owner said that – considering his high salary of USD 300’000 annually – his bank better offered him an attractive interest rate for the mortgage. After all, he added with a wink in his eye, he was now a millionaire.

That conversation showed a general misconception many people have on wealth and income.

Wealth is what you accumulate over time, not what you earn. The key factor in the process of wealth building is the saving rate. A high salary does not automatically translate into substantial wealth.

Read more… »

First Semester 2021 Passive Income

Posted on July 10, 2021 in Investing, Personal Finance

Establishing solid passive income streams is the first step to set a compounding machine in motion, putting us more and more into a position where we are less and less reliant on our daily jobs.

As long term oriented Dividend Income Investors, shareholder distributions from over 60 stock postions have been our main passive income sources in the past years, together with interest income from corporate bonds and Peer to Peer and Crowdlending Investments.

In June, roughly Swiss francs (CHF) 1’225 (USD 1’350) have been generated by our investments. Roughly 18 % lower compared to the same month in the last year. This was soleley due to one technical aspect: British insurer Legal & General – one of our largest divident payer (contributing almost USD 600 per semester) – last year made its semestrial payout in June while in 2021 that payout has been made in May.

For 2021, we set our target of at least USD 15’000 in total passive cash income.

Let’s look at the first semester 2021. In the first six months of 2021, over Swiss francs (CHF) 8’700 have been generated from our investments, corresponding to around USD 9’721. So, almost 65 % of our annual target has already been achieved.

Compared to the first semester 2020, we saw a very nice Year over Year increase of roughly 37 % amid several stock positions having resumed their dividend payouts. In the first semester 2020, we also had to make a write-down of over USD 2’000 due to the collapes of two Crowdlending Platforms (Kuetzal and Envestio) I had invested in. That write-down very negatively impacted our 2020 annual passive income results which stood at around USD 10’000.

But 2021 will be significantly stronger and our passive income sources as a group are now much more diversified and more resilient.

So, as for now, it looks very realistic to smash our USD 15’000 annual passive income goal, which sets us one step further towards Financial Independence which we want to achieve by the end of 2024.

How was your June in terms of Passive Income?

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.