Reader Case Study: Moving To Europe From South Africa, Trying To Make Ends Meet
Welcome to this month’s Reader Case Study in which we’ll address Clara’s questions on where to move her family and how to make ends meet every month. I’m particularly excited about Clara’s story as it’s a unique angle we haven’t addressed before: she currently lives in South Africa with her family but plans to move to Europe in the near future.
Case studies are financial dilemmas that a reader of Tikhvinskoe sends to me requesting that Tikhvinskoe nation weigh in. Then, Tikhvinskoe nation (that’s you!), reads through their situation and provides advice, encouragement, insight, and feedback in the comments section. For an example, check out last month’s case study.
P.S. Another way to get support on your financial journey is to participate in my free Uber Frugal Month Challenge! You can sign-up at any time to join the over 19,800 fellow frugal sojourners who’ve taken the Challenge and saved thousands of dollars.
I probably don’t need to say the following because you all are the kindest, most polite commenters on the internet, but, please note that Tikhvinskoe is a judgement-free zone where we endeavor to help one another, not to condemn.
With that I’ll let Clara, this month’s case study subject, take it from here!
Greetings, Tikhvinskoe nation! I’m Clara (age 41), my husband is Ben (age 45), and we have three children ages 4, 6, and 9. We also have three cats and three dogs! I’m a dual national–American and British–and my husband is as also a dual national–French and South African. Before having children, we lived in the US and the UK. For the last 12 years, we’ve lived near Cape Town in South Africa
I want to offer a “Privilege and Gratitude Disclaimer” before I go any further: We live in a beautiful town that has extreme wealth and extreme poverty side by side. I’m reminded every day of how fortunate we are to have a roof over our heads, food on the table, and the luxury of choices. I am writing this with a grateful heart, knowing how very, very fortunate I am and with deep respect for our neighbors who had a different start in life and face hardships daily. Africa never lets us forget that.
Clara and Ben’s Background
I have an M.A. and used to work with a graphic design company back when we lived in the US and also did portrait work on commission as a side hustle. Now I’m a stay-at-home homeschooling mom and I manage our finances and two rental properties. Ben has a B.Sc. in Computer Science, and after a few jobs for small and medium-sized companies, he struck out on his own and is self-employed doing systems administration and IT support for several clients. He loves having the flexibility of working for himself so that he can spend a lot of time with our children.
We love the outdoorsy lifestyle here as well as the joyful, optimistic and creative cultural mix that somehow survives despite our enormous wealth divide and political strife. I value the natural beauty of living between the mountains and the sea as well as our low cost of living! I can share amazing experiences with our kids through just a few annual memberships: trips to our world-class aquarium, an enormous bird park, and the botanical gardens. There are beautiful hikes in the mountains as well as sunny beaches. Having said all that, we’re planning to move to another country… more on that later!
Clara and Ben’s Homeschooling Decision
We’ve been frugal parents from the start with cloth diapers, thrift-store toys and hand-me-down clothes. When our oldest son was two-ish, we researched the fees to send him to the local government school and realized that, in order to afford it, either I’d have to be a working mom, or, we could homeschool. If our oldest two kids were in school now, the monthly cost (excluding after-care, books, uniforms and extra-murals) would be $286.90, and that would go up to $430.43 when our youngest starts school in 2019. We opted for homeschooling and are now part of a large, diverse community of families who have also decided to sacrifice one parent’s salary in order to DIY their kids’ education. Four years into it and the kids’ social lives are full and this choice is working very well for our family
Hobbies and Community Involvement
Before we had children, I didn’t have a work visa and so I did volunteer work for two organizations. The first was for destitute mothers with babies and toddlers who had traveled to the city to find work. The second was our local animal rescue society, which is how we ended up with 6 rescue ‘children’ before we had our human kids!
My volunteer work is now online: I edit a journal for an association I belong to in the UK, which supports people who raise funds for many different charities – cancer research, youth and sports charities, animal welfare, etc. It’s published three times a year and I spend about 100 hours on each issue. I love editing and I plan to do paid freelance work in the future.
I don’t have a lot of spare time in this life season of caring for three small children. My priority is my family and I spend most of my time with them: reading, chatting, walking, teaching, doing craft projects, arranging dates with their friends, washing dishes, doing laundry… and just being present. That means I feel a little frustration about not earning an income, but I see these as their precious years of childhood that I don’t want to miss. I do go running and we love hiking in the Cape mountains and walking the dogs. I enjoy sewing and quilting although that’s mostly manifest in putting patches on the knees of kid clothing! We are big readers and visit our local libraries often.
Ben co-teaches in our homeschool co-op and loves math puzzles. However, for all his mathematical talent, he isn’t remotely interested in money, doesn’t like discussing finances, and prefers to leave the investment decisions to me. I am new to investing (except for our rental properties), and still have a lot of homework to do to figure out how we can accomplish our goals.
Why Ben and Clara Have No Debt
Ben’s mother generously paid for his undergraduate degree and so he didn’t incur any student loan debt. He saved his earnings by living at home until he was 28 and then bought an apartment for cash, which is now one of our rental properties. I had $38,902 in student debt from my B.A and M.A degrees, and began paying this off aggressively with my first job after graduating.
While we were working in the UK, Ben’s aunt, who had no children, passed away and left her estate to her very fortunate nephews. This enabled us to pay off the remainder of my student debt, buy our home (which has a cottage on the grounds that’s our second rental property) for cash in 2004 for $219,450, and for Ben to start working for himself. I didn’t know Ben’s aunt well, but she has blessed our lives beyond measure.
Ben and I share a 2000 Nissan Sentra which we bought second-hand for cash. We have no mortgages, no credit cards, and no debt whatsoever. Hooray!
Clara and Ben’s Elephant In The Room
We’re not making ends meet. This year, our food costs went up dramatically due to a triple whammy of inflation, drought, and our children growing up and eating more. At the beginning of 2016 we spent $423.50 per month on food and 18 months later, we’re at $592.90!
Also, the kids are attending more extra-curricular classes as they get older, which all cost money. We know we need to sell our home and move to a smaller place – our biggest asset is this home and its in an expensive neighborhood. For these reasons, we’re thinking of moving abroad.
Why Clara and Ben Want To Move Abroad
1) Personal safety: Crime rates are high here in South Africa and we’d like to give our children more freedom to roam than we’re able to here. I’d love to let them ride their bikes down the road and walk to friends’ houses but we can’t conscientiously do that in our current location.
2) To be closer to family: My extended family is in the UK and the US, but flights are so expensive that we can’t travel to see them as much as we’d like. Since moving here, we’ve been back to the States only twice (and my brother generously paid for our tickets one of those times!)
3) Our future: Our kids’ tertiary education and future work prospects are limited here. I would also feel vulnerable living here as an elderly person in terms of personal safety. We’ve seen quite a few elderly folks get ‘trapped’ in South Africa with their children and grandchildren having moved abroad. Their retirement savings aren’t enough to support them in other countries with higher costs of living. We don’t want that to happen to us!
4) Changes for middle-income families in South Africa: The municipality is going to stop supplying a base amount of free water and electricity to properties above a value of $77,000, which includes us. I think this does need to happen (we’re in a severe drought), but since we’re already unable to cover our monthly expenses, this is going to hit us hard.
Where Clara and Ben Want To Be In 10 Years
- We’re not planning on having any more children. In ten years, we’ll be in our 50s, and have three teenagers – yikes! We’d like to have sold our home in South Africa, moved to Europe, and own a home there. I’d like to understand investing more concretely than my current newbie grasp and have the rest of our capital invested for our children’s tertiary education and our own retirement.
- I’m not averse to sticking with rental properties for income as we’ve done in South Africa, but I don’t want it to be the bulk of our income and net worth. We’d like to have saved some money to help start our children out with tertiary education, apprenticeships or entrepreneurial ventures – whatever they choose to do!
- We’d like to live in the country and enjoy an outdoorsy lifestyle with a veggie garden, plenty of hiking and walking paths, and live near places to go camping on weekends. I’d like to be somewhere safe enough that the kids can enjoy nature unsupervised and have freedom to roam.
- Friendships are important to me so I’d like to live near enough to connect with a few good friends. I’m aiming to see my US family every two years. If they take turns on the traveling and come to see us too, we’d only need to purchase plane tickets every four years.
- By 2027, we both aim to be self-employed, working part-time, and covering our living expenses with that work. I’d like to do freelance editing online, take portrait commissions, and make and sell arty sewing projects like quilts and bags.
- Ben would like to continue with his freelance work, but switch to software support instead of hardware support, so that he can do more virtual work and not go see clients.
Clara and Ben’s Finances
Note: currencies are converted from South African Rands to US Dollars
|Rental Cottage on our Property||$14,340.48||This is before expenses, which are listed under “Monthly Expenses” below.|
|Rental Flat||$5,959.80||This is before expenses, which are listed under “Monthly Expenses” below. We just sold this flat for $129,360 and it’s being transferred now. I sold it privately, so there were no agent fees!|
|Ben’s IT Income||$2,671.75||This is net. Ben’s income is quite erratic – $0 one month, and a few hundred the next.|
|Annual Total Income:||$22,972.03||We are under the tax threshold, so we don’t pay income tax.|
|Monthly Total Income:||$1,914.34|
|Groceries||$592.59||We’re vegetarian. Food costs have really gone up in the past year. We don’t eat out.|
|Kids||$308.69||Educational materials, annual memberships, extra-murals, sports and birthday gifts for our kids’ friends.|
|Cats and Dogs||$223.46||Good food, vaccines and vet care (averaged)|
|Medical||$214.95||This amount is for Ben, who sees a counsellor twice monthly (non-negotiable). We don’t have medical insurance. There is national public health care for which one pays according to income. Most middle-income people prefer to buy insurance so they can go to private hospitals, but this is unaffordable for us. We go to a private GP when we need to and pay out of pocket.|
|Rates and water for our home and the rental cottage on our property||$208.08||Our tenants pay for their own electricity. It’s fairly common for landlords to pay for tenants’ water in South Africa. In the rental cottage next to our house, we share the same water meter for our whole property because I can’t split it accurately. I have a really nice tenant in the cottage who is quite careful about saving water, and our bills haven’t been high at all, even with the council raising the price of water because of the drought.|
|Gas for car||$158.83||There’s a nationalized road accident fund which covers accidents for uninsured people. We (legally) don’t have insurance.|
|Rates, levies and water for our rental flat||$153.50||The tenant pays for electricity. These costs will be gone after the sale of this property is complete. “Rates” are the taxes we pay to the council (I think you might call it property tax in the US?). “Levies” are what we pay to the property management company who looks after the apartment complex. It covers building insurance, salaries for the gardeners, maintenance, and expenses such as repainting every few years. Water usage for all 33 flats in the complex is split among the owners.|
|Housecleaner||$83.39||We’ve known her for 10 years. She comes and cleans the floors once a week, and has other jobs as well. We have talked about cutting this expense, but it would be hard on both her and me!|
|Internet and landline (bundled)||$49.01||There’s a monopoly on landlines here. Ben needs good internet for work and he thinks he has the best option available.|
|Clothing||$42.42||Only necessities, mostly for the kids.|
|Electricity||$42.35||We really conserve electricity. This cost is lower than anyone I know.|
|Household supplies||$41.26||Things I don’t buy at the grocery store, such as: lightbulbs, vitamins, a new kettle (our old one broke recently), shampoo, soap, etc.|
|Property Insurance, structure only||$36.63||We choose not to insure our household contents.|
|Two mobile phones||$13.90||We use cheap phones for calls and texts only. There’s no contract and we buy prepaid airtime as we go.|
|Radio license fee (instead of a private security company)||$0.48||Almost all of our neighbours pay a private security company as house robbery is so common here. We have a neighbourhood watch radio instead, and pay a $11.55 radio license fee once every 2 years.|
|Total||$2,169.54||We’re spending an average of $255.20 over our income every month and not saving anything. Eek!|
|Our home and rental cottage||$385,000.00||This figure is the market value from three estate agent valuations I had done a year ago.|
|Rental flat, which we just sold||$129,360.00||We haven’t received the payment for the flat yet. Transfer of property here takes 90 days, and our transfer was delayed. We are expecting the payment this week or next, and it will be put into our savings account with an interest rate of 5.35%. From there we will transfer it to wherever we decide to invest. Some Capital Gains Tax will be due on this, but I haven’t worked out how much yet.|
|Savings account in the US||$4,192.34||Interest rate 0.75%|
|Emergency fund savings account in South Africa||$1,868.69||Currently being depleted! I’d like to build this back up to 6 months’ of expenses. Interest rate is 5.35%|
|Savings account in the UK||$799.09||Interest rate 0% – I need to move this!|
|2000 Nissan Sentra||$2,464.00||Blue book value|
Clara’s Questions For You:
1) Can you suggest any stop-gap measures to help us make ends meet today?
We are environmentalists and try to live frugally. Thanks to the Tikhvinskoe’ advice – and necessity – we’ve cut every bit of fat off our living expenses, apart from the kids’ classes and good food for our pets. We save our shower water to flush the toilets (as I mentioned we are in a drought, but this also helps keep our water bill down), we only heat our house in winter with firewood from our own trees (free!), we don’t eat out, and we mend our clothes and receive hand-me-downs from generous friends with older children. I would welcome any advice! One idea we have is to move to a cheap rental further away from Cape Town, and rent out our home. However, our house needs some work before it would be presentable, and this would entail an extra move, and probably delay our move abroad, which we’d like to accomplish as soon as possible.
2) We recently sold our rental flat for $129,360 and it’s in the process of being transferred. Some Capital Gains Tax will be due and I haven’t worked out just how much as it depends on our annual income. Given our moving plans, how should we reinvest the profit from the rental flat until we move? Should I move this money abroad immediately? We’ve been receiving $343.15 per month in net income from that property. I’ve been looking at a 2-year South African government retail bond for a fixed 7.75%, with interest paid monthly. There are also 1-year fixed-term bank savings accounts offering 10%! We are hesitant to invest in ETFs and index funds as we don’t want to invest (even small portions) in alcohol, tobacco, oil, military equipment, weapons, or practices that harm the environment, like palm oil farming.
3) Where in Europe should we move to? The obvious choices, in light of our citizenship, are the UK and France. We’re nervous about the higher cost of living and the colder weather in northern Europe. We would love for our family to become bilingual, but recognise the big social challenge that would involve. We’ve been talking about making a home base in the UK and doing some frugal traveling south in the winters.
4) In the longterm, how should we invest the proceeds from our home once it’s sold? We plan to rent for at least our first year in Europe, but would eventually like to buy again when we feel ready to put down roots. I am attracted to the high rate of return possible when investing in South Africa, but recognize the danger of the Rand devaluing, especially when we will be living on a different currency.
Notes On South Africa (from a non-finance person!)
South Africa’s inflation is high, at around 6.13%. The interest rate in my savings account is 5.35%! The mortgage rate on home loans is 10.5%. It’s potentially a great country for investing, but is also more risky because of the exchange rate. Over the past 10 years, I remember seeing the Rand at 7 to the dollar, and now it’s at about 13 to the dollar. If we transfer our assets into another currency, we need to time the move carefully.
Mrs. Tikhvinskoe’ Recommendations
I want to start off with a huge round of applause for Ben and Clara’s absence of debt! They’ve done a wonderful job staying debt-free and I commend them heartily. I also congratulate Clara for this comprehensive run-down of their finances. It’s not always easy to pull together disparate investments and expenses and I’m impressed with how thorough Clara was.
If you’re not tracking your money in an organized, formal method, I highly recommend you sign-up for the free expense tracker Personal Capital. It’s what I use and, without a concrete picture of your monthly expenditures, it’s impossible to set longterm goals as we’re doing today with Clara.
Clara And Ben Need To Earn More
I want to start with Ben and Clara’s income. I know that here on Tikhvinskoe we usually talk about the other end of the equation—saving and investing–but today I feel strongly that we need to start on the earnings side. Practicing frugality without enough money coming in doesn’t yield results. It’s a two-part equation and you’ve got to make money in order to save money.
We’ll get to Clara’s expenses in a moment, but the real work for Ben and Clara is honestly on the income side. As they’re not able to cover their monthly expenses–and they have no investments outside of their properties and a small emergency fund–what Clara and Ben need is more money coming in. There’s no other way to slice it.
Additionally, with their plans to move to Europe, it’s highly likely their cost of living will increase and they’ll be in an even tougher bind month to month. Although they’ll have cash from the sale of their properties, they’ll also need to live somewhere, which is going to entail an outlay of money in either rent, a mortgage, or an outright home purchase.
My chief recommendation is for Ben to increase his income. Since he’s already working remotely, his career seems ideally suited for their globe trotting plans. If he can work from home in South Africa, I assume he can continue this work on a new continent. I highly recommend he work to dramatically increase his client load in order to increase the amount he’s bringing in each month. His current income of $222.64 per month is barely making a dent in the family’s monthly expenditures.
Another option is for Clara to start charging for her online editing work and begin doing portrait commissions again. If both Ben and Clara would like to be working part-time, then perhaps Ben can take on more of the homeschooling and household responsibilities while Clara works from home as well. Clara and Ben are in a wonderful position to increase their monthly income as they both have professional skills that lend themselves beautifully to remote online work. Whichever configuration they decide will work best for their family, the bottom line is that they need to earn more money. Now.
Diversification Of Assets
Clara mentioned that she doesn’t want all of their longterm wealth tied up in property (as it is now) and I wholeheartedly, 100% agree with her. Diversification is a key element of longterm wealth and security and it makes me nervous to see almost all of their net worth tied up in properties located in the same country. I think they’re wise to sell their South African properties and move that money to a more stable investing environment.
Clara is spot on with her assessment that they should invest some of this capital as opposed to funneling it all into rental properties. I think rentals can be an excellent component of a diverse portfolio, but they should be just that: one component. I’m not an expert in investing outside of the US, but I agree with Clara that the family should take their money out of South Africa. Although the rates of return might be higher in South Africa at present, I wouldn’t feel comfortable investing in a currency as prone to inflation and instability as the Rand. I would invest in whichever country they decide to move to–France or the UK–and concentrate on investing in a diverse portfolio of assets.
I prefer and recommend investing in low-fee index funds because they are the most diverse way to invest, they typically yield the highest rate of return, you can DIY your investing, and they charge very low fees (high fees have the ability to absolutely cripple your net worth over a lifetime of investing).
Mortgages And Moving
I’m a proponent of carrying a fixed, low interest rate mortgage. I completely understand why Clara and Ben chose to buy their South African properties outright with how high mortgage interest rates are there, but, in Europe they should be able to find a more favorable rate. A challenge here is that it can be tough to qualify for a mortgage without a traditional W2 job. But without a mortgage, I’m not sure how they’re going to afford a home for themselves as well as a rental property. Here again, increasing their income will help ease this burden.
One option could be for Ben or Clara to get a traditional job in their new country before moving, then move, then secure a mortgage on a home and possibly also a rental property. I would be very, very hesitant to funnel all of their cash into buying a home without a mortgage because then they’d be in the same situation they are now: no money and not enough cash flow to cover their expenses, let alone start saving for retirement and investments.
If you’re able to secure a fixed, low interest rate on a mortgage, I do not recommend paying it down ahead of schedule, or buying a house with cash (unless you have considerable assets–we’re talking many, many millions of dollars), for a number of reasons:
- A paid-off house is a wonderful thing, but you can’t use a paid-off house to buy groceries or cover any other expenses. You might be able to get a Home Equity Line Of Credit, but that’s not a guarantee and certainly not if, for example, you’re in a catastrophic position of having lost your job. It’s a lot of money tied up in one asset.
- In addition to the fact that a paid-off house is an illiquid asset (unless you’re able to sell it quickly, which is an unknown), there are opportunity costs to paying off a mortgage early/buying a home outright. Namely, you’re missing out on the potential investment returns you’d enjoy if your money was instead invested in the stock market.
- Mr. FW and I choose to hold mortgages on both our primary residence and our rental property because, mathematically, our money is better deployed in the stock market thanks to the average annual rate of return (7%) that you can expect after many decades of remaining invested in low-fee index funds. Essentially, money is better leveraged in the stock market than in a paid-off house.
- If you have a low, fixed interest rate mortgage, then from a mathematical standpoint, there are better ways to utilize your cash to maximize longterm wealth growth than paying that mortgage off early. I view holding a mortgage–and having money properly invested in diversified assets (aka low-fee index funds)–to be a much less risky decision.
- A mortgage is an excellent hedge against inflation. Inflation is when money becomes less valuable and the neat thing about a mortgage is that it’s denominated in the dollars you originally paid for the house and so, over time, as inflation increases (which generally happens), the money you’re using to pay off your mortgage is “cheaper.”
- In conclusion, it’s not bad to hold a mortgage and it’s actually a fine component of a diversified portfolio of assets. Buying a house in cash to the detriment of investing is a lot like putting all of your eggs in one rather unstable basket.
It’s not that it’s a bad thing to pay off a house early or purchase a home with cash–it’s just that it comes at the expense of other opportunities to grow wealth. Many of us who are early retired/financially independent choose to hold mortgages–even though we could afford to pay them off tomorrow–for the above reasons. Bottom line: financial stability and wealth can happen with a mortgage; but it absolutely cannot happen without cash on hand and diversified investments.
HUGE CAVEAT: What I’m talking about here are fixed, low interest rate mortgages. My only experience is with mortgages in the US, where this type of mortgage is commonplace. It’s my understanding that fixed-rate mortgages aren’t as common in other countries, so you’ll have to do your own research on the country you end up choosing.
And now, let’s take our customary Tikhvinskoe stroll through Clara and Ben’s monthly expenses. I must preface this by saying that they are already quite frugal and the biggest impact on their net worth is not going to come from spending less, but from earning more. That being said, I think there are a few areas where Clara and Ben can save a tad more.
- Housecleaner. Unfortunately, this expense has got to go ASAP. $83.39 per month is pretty inexpensive for domestic help, but since Clara and Ben aren’t making ends meet, they desperately need this $1,000.68 per year back in their account.
- Kids. I’m not sure what all the $308.69 per month covers, but I wonder if there are any opportunities to frugalize here? Again, since we’re in a dire situation of Clara and Ben rapidly depleting their emergency fund in order to cover their expenses, I’d take a hard look at what can be eliminated from this category as it’s a whopping $3,704.28 per year.
- Pets. Same story as the kids. Are there any generic foods or products that could be used that would reap a few cost savings in this category?
In summary, I recommend that Clara and Ben do the following:
- Immediately increase their income, either through Ben taking on more clients or Clara building up her freelance editing business and Ben taking on more of the childcare and household duties. This is priority #1 and I would start working on this today in order to stop the bleeding.
- Rebuild their emergency fund. Every dollar they earn that doesn’t go towards their monthly expenses should be funneled into rebuilding their emergency fund. At their current rate of $2,169.54 in monthly expenses, I recommend they save $6,508.62 to $13,017.24, which represents three to six months’ worth of expenses. Three months is the bare minimum for an emergency fund and six months would give them a much more secure cushion. I would also consolidate all of their savings accounts into one high-interest savings account based in the country they move to. With this consolidation, they already have $6,860.12 saved up, so that’s a great starting point for building to that six month total.
- Decide where they want to move to and make it happen. I really like Ben and Clara’s idea of renting for a year in their new country before buying a house–I think that’s a wonderful way to get a sense of neighborhoods, home prices, school districts, lifestyle, and more. I recommend they research mortgage options and interest rates since paying in cash would decimate their net worth and they’d again have almost all of their assets tied up in real estate.
- After selling their home in South Africa, I’d invest a goodly portion in low-fee index funds based in the country they move to. I recommend removing all of their assets from South Africa. I’d also go ahead and invest the profits from the rental flat they recently sold in the market where they intend to move. If they plan to buy a home in the next five years or so, they could keep their downpayment as liquid cash in a high-interest savings account.
Clara and Ben are at an exciting juncture in their lives and they’re well positioned to gain greater stability over their finances. By increasing their income and diversifying their investments, they’ll be well on their way to a secure financial future. Many thanks to Clara for participating as today’s case study subject!
Ok Tikhvinskoe nation, what advice would you give to Clara? She and I will both reply to comments, so please feel free to ask any clarifying questions!
Would you like your own case study to appear here on Tikhvinskoe? Email me ([email protected]) your brief story and we’ll talk.
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