Back to Reality

Oh, the joy of returning home after a five and a half week overseas holiday! Or not 🙂

So it’s now back to reality.

And surprisingly it has been a struggle, even though my new role at work is much less stressful compared to what I did before. I finished up at the stressful site at the end of the financial year, then sauntered off to my longed for holiday.

After spending weeks of only being concerned about where I would spend the day or what meals to eat, it was a rude shock to come back to chores and waking up to go to work.

My biggest shock though?

I no longer had access to a work car!

Let’s backtrack ….

My work car

I have had a work car for the last 26 years, ever since I started work for my present employer. There were a lot of deliveries to clients and we always had a fleet of cars. One of my perks was to take a car home. And over the years, it became a part of my remuneration package.

They were not flash cars – just cars that did the job. Variously, I drove a Toyota Corolla, Camry, Hyundai, and most recently a Honda CRX. That is, until I was involved in a car accident in November which wiped it out. But thankfully I was ok.

Due to the tough economic times of my industry, I did not ask for another car – I just drove one of the other cars in the fleet. My boss agreed to get me a new car in the new financial year ie in July.

But of course since then, I had resigned from my stressful role and negotiated a much less stressful role to start from July; but the car perk was attached to the stressful role.

My boss offered to pay me a bit more to compensate for not having a car but I chose to have a car instead.

Savings from having a work car for 26 years

Not having my own car has saved me thousands of dollars over the years. My ‘back of the envelope’ calculations are as follows –

Car registration – $800 annually x26

Comprehensive insurance – $1000 annually x26

Maintenance – $800 annually x26

Total = $67 000 !!!

That is not including fuel. When I first started working here, I lived with my parents 30km away so fuel costs would have added up. It was only the last 16 years or so that I lived 15 minutes away from work.

Upon my return from holidays …

I discovered that I could not use one of the other cars in the fleet from the other workplace. As technically I am no longer employed on that site. And my new car was not ready.

But luckily my boss was negotiating a better finance deal with the car dealer and that had delayed the whole process. So I was still getting a car, just not right now.

During those ten days, I relied on my colleague to drive me to and from work. And on the weekend, I borrowed a car. I live in the suburbs where public transport is just not readily available. A 15 minute car commute to work would take an hour by bus and train.

All this brought home the fact that over the years, I have taken for granted the availability of a work car. Transport has not been a line item in my expenses for the last 26 years. I am incredibly fortunate.

It was a good reminder that it is not a God given right and that really, it can be taken away just as quickly.

My new work car

Emergency Fund

But the biggest reason why I fought hard to have a work car is that I cannot cash flow a car right now without touching my emergency fund. Which I am so loathed to do. It is taking me so long to build this up that I really do not want to touch it. Unless maybe a life and death issue? I am so close to my goal of having 6 months’ expenses saved.

And I most certainly do not want to borrow money to buy a car. I so enjoy being debt free ever since I finished paying off my mortgage. That feeling of freedom … I just cannot stomach being in debt again.

I know in the FI community, the prevailing advice is to buy a second hand car. But I want a car that will last me till the end (maybe the next 20 years?) and that I can drive around Australia on road trips. That is a dream for when I retire; when maybe I no longer feel the need to travel overseas. And when I have time – Australia is rather big.

So an old bomb is out of the question – I don’t want to break down in the middle of the Outback.

In saying that, I also don’t want an expensive European car with all the mod cons. Can you tell I am not a car person at all? I don’t know enough car lingo. I just want a reliable car that is not going to break down every 5 minutes.

So, I am open to buying a 2 to 3 year old car but I guess with my inexperience, I am worried that I may pick a ‘lemon’. My estimate is I may need $15000 to $20000 for a decent car.

Final thoughts

Ever since I discovered FIRE, it has been at the back of my mind that I need to save up for my own car; for the eventual time when I retire and no longer have access to a work car.

This episode just highlighted the urgency. It made me very aware that I really must start saving for a car as soon as possible. Though I must confess that my secret strategy is to buy my current car from my employer when I eventually retire 🙂

Do you enjoy a current perk at work that you will miss when you retire? How will you cope with the loss?

Emergency fund & sequencing of risk

In a previous post, Emergency fund … Mojo .. FU Money, I explained the need for an emergency fund. To recap, my emergency fund is set up in an online high interest savings account (HISA). It is easily accessible should I need it, whenever I need it. I don’t have to jump through hoops to access it.

My goal now is to continue to build this emergency fund & contribute weekly until I retire – yes, you read it right – until I retire.

Conventional wisdom in personal finance worlds suggest I have three to six months of living expenses in the emergency fund. The advice for retirees range from having one to three years of living expenses saved to the very conservative three to five years! (My blood pressure rises just typing the last sentence)

Why? This is to protect against ‘sequencing of risk’. Let me explain – for most people, money set aside in retirement accounts is often invested in shares on the stock market. In order to live in retirement, shares are sold to generate an income.

So what happens if the stock market crashes right at the time you want to retire? Or just before your long awaited, longed-for retirement date? Your retirement nest egg is now significantly reduced AND you may have to sell your shares at a loss. Do you delay your retirement? Postpone that overseas trip?

In Australia, many retirees invest in dividend producing shares e.g. Telstra, Commonwealth Bank etc as another strategy. These are shares that traditionally in the past have paid a high dividend. In this way, even if the share market crashes, passive income in the form of dividends are still forthcoming. These companies may not pay out as well to shareholders in bad times (compared to the good times) but they will still pay something.

However, if you have cash readily available, you can use this cash to overcome any shortfalls in dividend income. It should see you through for the short term. You do not need to incur a loss by selling any shares at unfavourable prices. It will buy you some time to allow the stock market to recover. History has shown that the stock market will recover & share prices will rise again, but it may take some time as in years, not months.

As I am in my late forties, I need to prepare for traditional retirement, considering I may very well not achieve the RE (Retire Early) part of FIRE. It has taken me more than six months to save up to two months of living expenses. So it will take me ages to save three years worth of  living expenses. My strategy is to reduce my weekly contribution once I hit the six month figure and just keep going until I retire, whenever that may be.

I understand there is an opportunity cost here. This cash that is accumulating could very well be invested elsewhere with a higher rate of return. Currently my online high interest savings account (HISA) is paying 2.8% interest (if I meet the minimum requirements of depositing at least $200 per month with NO withdrawals). Interest rates have been low in Australia for a while. I will continue to monitor HISA’s interest rates as this cash reserve is building unobtrusively in the background. 

As I continue on the path of increasing my savings rate and reducing living expenses, the amount I need to save will decrease correspondingly. So this is really a work in progress!

Right now, my plan is to always have six months of living expenses in a HISA. Once I have saved this target, I will invest any excess in a term deposit. When it is time to eventually retire, I will increase my emergency fund to one year’s worth of living expenses. I will invest year two and three’s cash reserves in a rotating one year and two year term deposit. This ensures I will always have access to one year’s worth of living expenses in cash as an emergency fund.

My strategy is not written in stone – it will evolve as I read and learn more from the existing FIRE community and the retirement literature out there.

How do you prepare for sequencing of risk?

Disclaimer: Nothing I write here should be construed as financial advice – these are my opinions only and how I personally manage my money may be vastly different to how you manage yours. Please seek professional financial advice should you need it.