Our Financial Independence Journey: Monthly Update #53 (September 2021)

Friends,

It’s autumn, the evenings are getting darker (at least where I live), our kids are growing by the minute (can we stop the time please?), and the financial markets are filled with uncertainty. We are indeed in for some interesting months ahead. Oh, and we have reached a quite important milestone this month.

In the coming months, we will have more cash available to invest. Why? Firstly, we are done renovating our house. Secondly, we have stopped paying off our loans.

In the past months, we have been busy finalizing the renovation of our new house. For now, this means that we will start investing more money in stocks and potentially a fraction in a few other high-risk asset classes. I have been excited about investing most of our savings again after spending most of it on renovating our house since we moved last year.

Historically, we have paid off our housing loans quite aggressively, but as you will see, most of our net worth is now in real estate. Thus, I do not want to be even more exposed to the real estate market. As a result of this (and a much higher credit valuation of our house), we have decided to stop paying off our loans and instead invest the difference in stocks.

Aside from this, I mentioned an important milestone. After a new credit valuation of our house following the renovation (usually conservative valuations), our net worth has increased. This means that our net worth just barely surpassed the USD 1 million threshold meaning that we are now dollar millionaires. I am not sure why this milestone means so much in a Danish context, but somehow I am quite proud that we managed to achieve this after personally being in debt with a negative net worth just seven years ago.

I know that a large number of our net worth is in illiquid assets, but hopefully, the increased amount of cash available to invest will change this balance in the coming years.

Let’s dive into this month’s numbers.

The September financials

Our savings rate remained stable for September compared to previous months as it only contained mortgage repayments as we made the final payments for renovating our house and didn’t invest anything. The savings rate should look different from next month on.

As you will see, we have crossed the 1.000.000 USD line. Also, we have nearly doubled our net worth in a single year. The stock market has performed OK, but the main reason is the increase in our real estate. The real estate value has increased substantially due to high market price increases in our area, additional square meters built in our house, and a full renovation of everything inside.

Real estate increased 27% due to the new valuation while my pension and stocks did not deliver in September. However, we have had a great 2021 so far concerning returns, and as I am a long-term investor, I don’t mind a bit of volatility in the market.

That’s it for September. Thanks for reading all the way to the end ๐Ÿ™‚

Onwards,
Carl

6 comments

6 comments

Storm October 9, 2021 - 16:17

There is also an often overlooked benefit of having a mortgage (depending on the type of underlying bonds).

With a mortgage you are effectively shorts bonds, this means that a rise in interest rates are good for that position (bonds will fall in value). This means you can refinance (at at higher rate, but with a gain on the principal). This is a benefit because house prices will typically fall when interests rates rise. By having a mortgage and refinancing (taking profit on your short bond position), you take a smaller net worth loss overall with rising interest rates, compared to having no mortgage.

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Carl Jensen October 9, 2021 - 20:08

Yes, a mortgage with a fixed interest rate in Denmark can be interesting based on the benefits you outline concerning re-financing. I have been very active in re-financing earlier, but there are certain drawbacks of the strategy:
1) Cash flow – in the first period (typically 3 or 5 years), you will have a better cash flow by not having a fixed interest rate loan that can be used on investing etc. (after the first period, it is anybody’s guess based on the development in the interest rate)
2) You might increase your real estate net worth (“frivรฆrdi”), but the funds are illiquid, and unless you want to sell your house and rent – or downsize to a smaller house in a less expensive area – you will not be able to use that money. Thus, it would not add any benefit to the goal of becoming financially independent compared to investing in stocks
3) You assume the same credit rating that you currently have – in our case, if one of us decided to go part-time or similar, we would not be able to take out a new loan and get a credit approval due to a significant reduction in our income relative to our debt. Thus, if our life situation changed, we could risk not being able to re-finance anyway
4) The banks are not always the fastest at executing the re-financing, so in case of short-term increases and decreases, they can be hard to execute in practice
5) It typically requires you to own the property for several years to really get the benefits of the fluctuations over time – honestly, I don’t know where we live three years from now

Now, I am not saying fixed interest rate loans are never a good idea, but there are certain caveats. I have actually always made a split-loan between fixed and flexible interest rates because I want a bit of the benefits/disadvantages of both. The effects of the two loans offset each other if interest rates go up or down, but I know that people have strong feelings about this, and it is probably not always the wisest strategy.

Reply
Nick @ TotalBalance.blog October 12, 2021 - 13:07

“honestly, I donโ€™t know where we live three years from now” <- I'm curious as to why this is? ๐Ÿ™‚

We've had that same approach to "not knowing where we'll be in 5 years", but since our kid started school and has a ton of friends there, it would be unfair to move her I think…Of course I know that people do this, and the kids survive ๐Ÿ™‚ But I think we're stuck where we are now for a while…

And we're planning to do the same as you when our loan is up for re-finance next year. Are you on the 30-year interest-only or the 10-year? (10-year is cheaper, but not by much). I can't decide whether to go for the 10-year or the 30-year…
Have you also split your current loan between fixed and flex?

Looking forward to see which "high risk" investments you have in sight ๐Ÿ˜›

Reply
Carl Jensen October 15, 2021 - 10:28

Lots of good questions as always, Nick! ๐Ÿ™‚

Yes, our kids are still 3-4 years from beginning school and we have decided to re-evaluate our housing situation at that point in time. I agree that moving kids around from school to school is not necessarily optimal, so we also want to avoid that.

We decided to go with the 10-year interest-only due to it being cheaper (and a gut feeling that we will move once more within the next five years). I strongly considered splitting it between fixed and flex, but instead, I went all-in on the flex, but at the promise of investing the entire difference every month (no exceptions).

I will let you know more about the high risk investments – but there’s nothing exotic that hasn’t hit mainstream media before ๐Ÿ™‚

Reply
Jakob October 7, 2021 - 22:39

I would argue that you donโ€™t reduce your exposure to the real estate market by halting your mortgage amortisation. Rather you just increase the volatility of your overall portfolio slightly by replacing investments in risk free investments (paying back loans) with investments in the stock market. Swings in the real estate market will hit you just as much as before even though your dollar investment is lower (the investment is just more leveraged because of a higher debt/equity ratio)

Reply
Carl Jensen October 8, 2021 - 09:50

Fair point, Jakob. I probably used the wrong word when I wrote “exposure”. I agree with you that my exposure to the real estate market will remain the same.

My point was that I wanted a better balance between liquid assets (stocks, in this case) and illiquid assets (real estate, in this case). When I start pouring money into stocks instead of paying down the loan, liquid assets will be a relatively larger part of my net worth over time (assuming the same or better returns on stocks than real estate – which we, of course, do not know anything about).

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