Frinans introduction series – part 4: How do I plan to achieve financial independence

This is the fourth and final post in a short series on Frinans. This time we will be looking into the how part, meaning how am I trying to achieve financial independence.

The introduction series

This is part 4 in a series of 4 posts written to give a basic answer to the questions of who, what, why & how of Frinans. Part 4 therefore will be about how I am trying to achieve financial independence, granted I have touched a bit upon this in the earlier posts since the questions overlap. I will show you how I intend to achieve financial independence through optimising the three components of the get rich(er) formula. In terms of investing I will keep the focus on my stock and bond portfolio. Without stalling any further, let’s simply dive into the how part of the series.

Conclusion

As always we start out with the most important part, the conclusion. Getting rich is ESI, Earn more, Spend less and Invest.

Earning more

Not my strong suite as it hasn’t been my focus

Spending less

I define goals and keep my eyes on the price. I value disciplin higher than motivation

Investing

  • Dollar Cost averaging = buying a fixed amount every month
  • 80% global stocks & 20% local Bonds
  • I use danish index investment funds as these are best suited for taxation purposes
  • My broker is Nordnet and I use the monthly savings feature (månedsopsparing) to buy stocks
  • I rebalance every 6 months

You can always check my portfolio at Shareville under the username Frinans

The get rich formula

My overall plan is fairly simple since it involves optimising the three pillars to financial independence and the components of the get rich(er) formula:

Earn more,

spend less &

invest the difference

Note that this only has to do with the financial side of achieving financial independence, there are many other aspects to life and more important ones too. Just as there are may other skills which can help you, and me too, on our to becoming finically independent.

Spending less is bar far the component I have conquered the most, and earning more the one where I have the most to learn still. As of now I have a steady job with a take home pay of roughly 18.000 DKK (Use this tool for converting to your currency) per month and my spending is around 8.000 DKK per month. This leaves 8.000 DKK for investing in stocks and bonds, 1.000 DKK for a savings account and 1.000 DKK for Bitcoin. This is a rough layout of how I spend my money.

Once I am rich enough to unlock the possibility of retirement, I will be financially independent. Easy peasy lemon squeezy. In essence it isn’t actually very complicated, the hard part is sticking to it and remaining disciplined/motivated once the boredom sets in.

 

Earn more

So, as I quickly mentioned, this is the part of the formula I have mastered the least. I’m publicly employed, actually I technically work for the government since I work for a university, and this doesn’t pay very well compared to the private sector. There are other perks when employed this way, a good pension being one of them, but if the goal is to earn a lot this isn’t ideal. For now though I plan to stay where I’m at. My job isn’t too stressful and it leaves me time for educating myself and running this blog, which is something I love doing. I hope to earn a bit of money on this blog eventually, at the least to cover somewhat for the amount of time I spend on it. I do love keeping the blog so I am not doing it for the money per se. Overall I don’t have a whole lot of insight on this part, so let’s just keep it short and move on.

Summed up: Not my strong suite as it hasn’t been my focus.

 

Spend less

This part however is where I excel. I’m quite frugal by nature and don’t actually want a lot of luxury, but I have also cut costs actively. In order to spend less I plan every meal I eat, I quit smoking, I don’t have a car (actually I don’t even have a license) and I live close to work to mention but a few aspects. Budgetting is not just something I do, but actually a hobby of mine, yes I’m just that exciting. You can read more about that next week if you’re interested. I find it difficult to teach others to be more frugal or generally give good advice on how to spend less. If there is something I want, I don’t have a glorified method of how not to buy it, I generally just don’t buy it. Maybe it is about keeping your eyes on the grand price at the end of the road, or maybe this is just how I am. If I were to offer a little insight on the subject though, I would argue it has to do more with disciplin than motivation. Figure out how you want to do things, who you want to be and then stick to it regardless of how you feel about it. As an example, I work out three times a week in the morning before work and I never feel like doing it or want to do it, I simply do it. I find disciplin to be undervalued and motivation to be overvalued. I might be a good fit for a military career with this kind of mindset, albeit I have no intention of ever pursuing this path. Basically it has to do with the ability to delay gratification. If you find this interesting you could read more about the Marshmallow experiment. Come to think of it I should probably write a post about this.

Summed up: I define goals and keep my eyes on the price. I value disciplin higher than motivation.

 

Investing the difference

This is probably the part I have spend the most time on, both in terms of writing and researching. How I invest is getting simpler and simpler and anyone and everyone can do so the exact same way I do. Remember though, that this is not investment advice I am merely showing you how I do. If you want to read more about my investing, check out the subsite Investing. I will briefly line out how I invest here.

 

Index investing

Through trial and error I am slowly convincing myself, and my ego, that I am not capable of beating the market, at least not when it comes to singling out stocks. In Denmark there are fewer options still when it comes to passively managed options, but it seems banks and brokers are increasing their efforts to bring more options to the table. I use Sparinvestindex as they are the ones with the lowest cost of operating. I have had various of their index products but now only use a global stock fund and a local bond fund.

 

Taxes

ETFs are taxed way harder than local funds and therefore I do not use ETFs. Regular stock funds are taxed at 27% for the first 50.000 DKK (roughly) and 42% above 50.000 DKK. I have to pay taxes on both dividends that are paid out once a year, as well as any increase in value if I sell stock funds. The tax rate on bonds depends on how much I make as well as other factors and are considered capital gains. For me dividends from bonds and money made when selling bond funds will probably be taxed close to 42%.

This is very simplified but serves as a quick take on taxes.

 

Timing the market

I don’t believe in timing the market, meaning being able to tell when is a good time to buy stocks or other investments. Therefore I make use of a strategy called dollar cost averaging, which simply means buying for a fixed amount at the same time every month. This evens out the highs and lows as I buy more when the market is low, and less when market is high.

 

Keeping fees low

Since I buy index products there is no incentive to try and outperform the market. This means the only competitive parameter is costs. I use Sparinvestindex funds because they are the cheapest ones I have access to, and then I make use of a monthly savings feature from my broker Nordnet, which means I can buy the global stock fund without being charged extra fees for buying. I can’t do the same when buying the bond fund and so I buy this in bundles less often.

 

Risk tolerance

Each person his/her own risk tolerance. I manage risk by diversifying heavily through the use of index funds and by maintaining a portfolio of 80% stocks and 20% bonds. In generel the stocks are the riskier part of the investment, and their role is to add percentages to the increase in value. Bonds are less risky and therefore also add less to the value increase. They remove risk though, and so this is their main use in the mix.

 

Rebalancing

In order to maintain the same risk, I rebalance my portfolio every 6 months or so. This keeps the 80/20 ratio intact.

 

Conclusion

I intend to achieve financial independence through a focus on the get rich(er) formula, which states:

Earn more,

spend less &

invest the difference

Earning more

Not my strong suite as it hasn’t been my focus

Spending less

I define goals and keep my eyes on the price. I value disciplin higher than motivation

Investing

  • Dollar Cost averaging = buying a fixed amount every month
  • 80% global stocks & 20% local Bonds
  • I use danish index investment funds as these are best suited for taxation purposes
  • My broker is Nordnet and I use the monthly savings feature (månedsopsparing) to buy stocks
  • I rebalance every 6 months

You can always check my portfolio at Shareville under the username Frinans

 

That was it for the Introduction series, I hope to see you back here again next week where I will have post ready concerning budgetting. Until then you can check out some of my other posts or ask questions below.

 

As always comments are most welcome and I will do my best to answer all questions. You can follow or like the facebook page or follow frinans on twitter to get notified of new posts as well as interesting links and stories I stumble across. If you are interested in getting into Bitcoin you can sign up for Coinbase through my affiliate link, if you buy Bitcoin for a minimum of 100$, we both get a 10$ bonus. If you are interested in diversifying your investments further, then how about signing up for crowdlending through my Mintos affiliate link and gain an exclusive % on your investment.

May your savings rates be high and your returns be at the market average

/Sune

11 thoughts on “Frinans introduction series – part 4: How do I plan to achieve financial independence

  1. Very interesting! I am on a similar journey, although I don’t rebalance as the fees hurt a little, don’t they? I just try to balance it out with a single monthly investment (and then investing in what is furthest away from my target share).

  2. Hi Sune! Nice blog you’ve got here. It seems like we have a lot in common in terms of income, expenses and investment strategy. I’m from Denmark as well and I’ve just started blogging at http://www.worldsworstemployee.com.

    Have you ever considered changing your strategy in terms of avoiding the relatively high cost of the Sparinvest Index funds? I’m considering to review my strategy at the moment, and hope to have a post on the topic within a few weeks.

    Anyway I look forward to follow your journey 🙂

    1. Hi,
      Thank you. Yes, I have considered changing to cheaper ETF funds, but so long as they are taxed harder in Denmark I don’t consider this an option. I’ll be sure to check out your site.
      Have a nice weekend!

      1. Med det nye aktiesparekonto in mente (fra 35% til 17% lagerskatning), bliver ETF’er så ikke en hel del mere interessante?

        1. Hej Mikael,

          Jo ETFer bliver da bestemt mere interessante. Men de 50.000 DKK der kan indsættes på kontotypen til at starte med er bare meget lidt desværre.
          /Sune

          1. Enig i at beløbet er meget lavt, men jeg tænker at det det omfang jeg overhovedet kommer til at bruge en aktiesparekonto, vil det blive til ETF’er.

          2. Ja det kan sagtens være, at det også bliver tilfældet for mig. Jeg skal have tænkt lidt mere strategisk over det. Jeg overvejer også et eller andet mere højrisiko i den kontotype. Eksempelvis en Bitcoin ETF, hvis det findes til den tid, ellers så den Bitcoin ETN der findes. Men jeg skal i hvert fald lige have tænkt det lidt bedre igennem.

            /Sune

  3. Hej Sune,

    Din strategi med at investere løbende er vel teknisk set ikke det samme som DCA? (se fx. https://personal.vanguard.com/pdf/s315.pdf).

    Hvis du nu fik en større sum penge på een gang (arv, lotto, whatever…) ville du så bruge DCA, eller ville du investere hele beløbet på een gang?

    1. Hej,

      Kan du prøve at uddybe, hvorfor du ikke mener det jeg gør er DCA? Jeg ville da netop sige, at det er DCA.
      Så ville jeg investere det på een gang fordi, ganske som studiet du refererer til konkluderer, omend med andre ord, ‘time in the market beats timing the market’.

      /Sune

      1. Jeg hæfter mig bare ved udsagn som “Dollar cost averaging is not the same thing as continuous, automatic investing” (https://en.wikipedia.org/wiki/Dollar_cost_averaging). Altså DCA antager at man står med hele beløbet i hånden fra start, og så deler det op i små bidder, som investeres løbende. Men ja, det er nok lidt pedanteri fra min side 🙂

        1. Hej,

          Ah okay, så man kan sige DCA er reelt kun som alternativ til at dumpe det hele på een gang. Hvis det er definitionen, så er det jeg gør ikke DCA, men jeg opfatter det nok anderledes. Resultatet af continuous, automatic investing er jo i hvert fald det samme som DCA.

          /Sune

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