Step 83: Invest in your Individual Capital

Step 83 of the 100 steps mission to financial independence: Invest in your Individual Capital
Step 83 : Invest in your Individual Capital

After all these steps on cutting expenses, building up savings and investing to build a pension, it can become easy to dismiss any investing in yourself at all, especially in your intellectual abilities as a professional.

You might have got to a point where you’ve got all your daily costs taken care of: you’ve got a good, solid budget that you are happy with and able to stick to, you have short-term savings goals set up that you contribute to monthly such as a holiday or a new laptop and you even have your long-term savings on track in the form of pensions, paying off  your mortgage and / or investing in the stock market.

When you get to this point it becomes easy to get completely taken up by this popular personal finance motto:

Earn more, reduce your spending, invest the difference.

And whilst there is nothing wrong on paper with the above guideline, it is easy to get a little too distracted by this, to become too frugal and forget what else is important in life. In  step 75 we looked at how spending a little on yourself every now and again is important to not forget the importance of “YOU” and to make space in your budget to reward or treat yourself.

But what about your intellectual or professional development? When you get too sucked up by financial independence, be careful not to overlook the importance of individual capital and the need to invest in this aspect of yourself, over putting the money into more investing or savings. Continue reading “Step 83: Invest in your Individual Capital”

Step 82: Pay Yourself First

Step 82 of the 100 Steps Mission to Financial Independence: Pay yourself first
Step 82: Pay yourself first

“Pay Yourself First”, one of the biggest motto’s in the personal finance world, is a hugely empowering and motivating concept that stimulates you to keep your savings goals at the top of your list. It’s origins are attributed to George Clason’s famous book The Richest Man in Babylon and although the book is nearly a century old, many of its lessons are still extremely valuable today.

I can hear objections already “But I am not a business owner, I can’t pay myself”, or maybe you do own your own company and think: “I need to pay my people first before I can pay myself”. Then yes you are totally right in both cases. But that is not what this concept is about.

Pay yourself first has nothing to do with your salary. It has all to do with priorities. You can be on a regular pay roll and get paid by your boss but still pay yourself first. Or you can be a business owner and pay your employees before anybody else, then pay all your creditors but still pay yourself first.

Pay yourself first has everything to do with setting priorities for your finances. Let’s complete a mental exercise about the road that your money takes every month. It of course starts with pay-day: you receive your paycheck. The first thing that happens even before you receive that money are the taxes taken out of it. Then you receive whatever is left over and probably one of the first things you need to pay are the rent or the mortgage. Then there’s the car your paying off, insurance to pay, utility and food bills and you’re in desperate need for a new coat and of course you’re joining your co-workers for a Friday afternoon drink after work. You likely have some more to add. So the list continues until there’s hardly anything left at the end, right?

So let’s see who’s being paid here then, as it certainly wasn’t you!

  • taxes of course are payments to the state;
  • rent – there’s your landlord getting paid;
  • mortgage – that will be your bank manager getting paid;
  • car payments – another one for your bank manager or car dealer;
  • insurance – the insurance company will have that, thank you very much!
  • water and electricity bills – your utilities companies cashing in
  • a new coat – that’s your shop assistant and retailer getting paid.
  • Friday afternoon drink – the bar owner will happily hold out his hand.

And the list of course goes on and on. So where’s your payment? How do you benefit from the money that you earned? Of course you’re able to buy yourself a shelter over your head with that income by paying off you mortgage or paying rent, but that money is being paid to somebody else. With your pay you are also able to buy food and clothes and security in the form of insurance, but whilst you are purchasing these items, somebody else is also benefiting from you buying these products: they are getting paid by you. The one person who doesn’t seem to be being paid is YOU.

Now it would be ridiculous to say that you shouldn’t buy these items and stop paying other people, as you probably wouldn’t survive very long or have a miserable life living at the margins. That’s why this step isn’t called “Stop paying others”. Our society and economy are based on exchanging goods and services for money and it is a key part to survival, happiness and life. Instead “Pay yourself First” encourages you to – before anything else – pay yourself first before you start giving away your money to others.

Although you might not be able to change so much about the fact that taxes are taken out of your pay first (although of course there are some pension funds that will let you invest tax-free and then you could always consider moving to a lower tax state or country), you can pretty much make sure that as soon as you receive your net pay, that you pay yourself first.

How to pay yourself first? By setting aside money for you – to build a secure financial future, to grow your capital and net worth, to reduce debt and to improve your general financial situation, so that you and your family little by little gain more financial security and freedom. By assigning an amount of money to go to you, you give your future self an income, instead of spending it all and giving it away to others, you make sure that some of it comes back to you later.

This means that instead of having to work indefinitely in order to keep up with all of your creditors every single month, you can at some point stop working and enjoy the money you have set aside for your future self. It means that you have paid yourself forward and secured yourself a future income.

Whenever you get paid, think about how to pay yourself first. Set aside money in a savings account, invest the money in a pension fund, or pay down your debt so that you free yourself of those monthly creditor payments. Don’t allow yourself to come up with excuses like: “I don’t make enough” or “my bills are too high”. Find ways to reduce your expenses, to increase your income and remember that starting small is always better than not starting at all. Even small contributions add up over time, and by starting small you build a habit that when you finally reduce those expenses or increase your income, you can instantly increase contributions.

Step 82 – Pay Yourself First – in detail:

  • Brainstorm a list of how you already pay yourself first. How do you use your money to improve your finances?
    • Pension contributions
    • Savings accounts
    • Investments
    • Debt reduction
    • Saving money for a specific goal to avoid future debt.
  • Look at your overview of your fixed, variable and discretionary expenses, go through the list and identify one by one who you are paying every time you make any of these payments. Go through the full exercise and write down the beneficiary for every single expense. See how many people are being paid over you!
  • Give yourself a score of how well you are doing on a monthly basis out of 10, with 10 being “excellent” and 1 “poor”.
  • Set yourself a target monthly contribution or grading on how much to pay yourself each month.
  • Refer to Step 12 which gives a further breakdown on how to set yourself specific savings goals on a practical level.

Once you become familiar with the “Pay yourself first” concept and start internalizing this more, you’ll discover the true power of this wisdom that will keep you focussed on your mission to financial independence.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

 

Step 81: Consider Hiring a Professional

Step 81 of the 100 steps to financial independence: Consider Hiring a Professional
Step 81: Consider Hiring a Professional

Despite all the information you read, the experience you have and maybe the relatively simple financial situation you feel you are in, there might be times when it is worth getting the help of a professional when it comes to your personal finances.

Advantages

Finding the right person to help you with your specific situation can help you in several ways:

  • They can save you money
  • They can save you time and energy
  • They can recommend better solutions for your situation

The first advantage – save you money – is a complicated one as apart from saving you money, when you hire a professional they will also cost you money. You’ll need to pay them for their work, time and expertise at the end of the day. So before you run out to find a certified financial planner or fiduciary, it is worth considering how much they would be able to save you, how much they’d cost you and what the net difference is between the two.

Apart from saving you money, a professional financial adviser can often also save you time and mental energy. If your financial situation is relatively complex or if you have a lot of paperwork to complete, for example for your tax returns, hiring the help of a financial planner can save you considerable amounts of time and energy, meaning you can spend that on something far more enjoyable!  Continue reading “Step 81: Consider Hiring a Professional”

Step 80: Your Savings Rate

Step 80 of the 100 steps mission to financial independence: Your Savings Rate
Step 80: Your Savings Rate

Now that you’ve got a bigger picture of your long-term financial goals, it is equally important to identify ways to achieve those goals. Hopefully by now you’ve set yourself some big financial goals to work towards to in the near future. These could range from earning some extra cash, becoming debt-free and paying off your mortgage, to reducing your work hours or retiring early.

Why exactly do so many people still have debt or no financial or pension plan for their future? Ask anybody in your environment and a vast majority will say that they just don’t have enough money to pay off their debt or to throw at their pension fund. They’ll tell you that they might plan to pay off their debt as soon as they get that promotion and accompanying pay raise. But by now you probably know that even when they get that increase in income, they still most likely won’t be using that money to pay off their debt, nor will they tuck it away and use it to invest in their pension. They’ll simply spend it on new things and without them even realizing it, their lifestyle will gradually inflate to a new level.

And are you maybe still telling yourself a version of this story as well?

Let’s think about how you can speed up your savings goals. Simply speaking and as we have already discussed in earlier steps, there are generally two ways to increase your savings:

  • increasing your income
  • decreasing your expenses

The disadvantages of looking at achieving your savings goals in this way however is that it is easy to focus on the finding excuses for not saving more: “I don’t make enough money”, “If only I earned another $1000 a month”, “It’s so much easier for my neighbor, he earns a lot more than me”, or: “I wish I didn’t have a mortgage for 30 years, it’s a big expense each month”, “It’s easy for you to say, I came out of university with a $50,000 debt”, “I have two young children, do you know how expensive they are?”…. And the list goes on and on and on. Continue reading “Step 80: Your Savings Rate”

Step 79: The 4% Rule

Ste 79 of the 100 steps mission to financial independence: The 4% Rule
Step 79: The 4% Rule

“This whole financial independence story might sound nice and dandy, but how will I ever get there?” I hear you think. “How much money do I need to retire?” and most importantly: “What can I do NOW to make sure I get (and stay) on track to reaching my financial goals?”. Well, I am glad you asked as it is about time that we start looking at putting together a lifetime plan for your financial journey that will make sure you reach your financial dreams and that will give you the motivation and blueprint towards achieving those goals.

In order to get that plan together we will first discuss the 4% rule, a hugely popular and helpful guideline to planning for retirement.

The Trinity Study

In the late 90s and then again in 2009, three professors from Trinity University conducted a now famous study on how different withdrawal percentages affected various retirement portfolios over a 30 year period.

What they calculated in particular was how the portfolios stood up against various withdrawal rates, i.e. whether the portfolios would stand the test of time and outlive the withdrawals. If a withdrawal rate succeeded it meant there was still money left over in the portfolio after the time period of withdrawals ended. Their studies included: Continue reading “Step 79: The 4% Rule”

Step 78: Set your Financial Independence Goal

Step 78 of the 100 steps mission to financial independence: Set your Financial Independence Goal
Step 78: Set your Financial Independence Goal

All along this mission we have been talking about financial independence and I’ve identified and described steps that will help you to get closer to your financial independence. But what exactly is Financial Independence to you? It is important to have a goal and to know what you are working towards to in order to once actually achieve that goal. Now that we are nearing the last part of our 100 steps and now that you know a lot more about finance and money management, you’ll want to dedicate some time to determine your long-term goal so you can kick things into next gear and align your mission with your ultimate financial goal.

Four goals of financial independence

Below are four common goals that people have for their financial independence. They are presented in a logical progression to go through and whereas getting to stage 1 should be easy if you follow this mission plan and even getting beyond that first step into the 2nd step might not be too difficult if you keep up well with the plan, getting into that 3rd stage depends completely on whether you push yourself beyond your current beliefs, habits and limitations and of course whether you ultimately really want to get there. Remember also that whilst the last stage of financial freedom might seem almost unattainable for most of us, it is not completely impossible. People like you and me have done it before and will do it again. But hey I admit that requires some SERIOUS hard work and dedication.

Let’s discuss the four common financial independence goals you might identify with and see which one corresponds most closely to your financial goal at the moment. Continue reading “Step 78: Set your Financial Independence Goal”

Step 77: Make a Year Budget

Step 77 of the 100 steps mission to financial independence: Make a Year Budget
Step 77 of the 100: Make a Year Budget

We’ve looked in detail at making a monthly budget where you carefully plan your expenses per category per month to ensure that you achieve your goals, both short-term as well as long-term, especially when it comes to savings, pension and investment goals. Without a budget it is easy to overspend and to lose the overview of where your money goes each month.

In addition to making a monthly budget it is wise to also draw up a yearly budget in which you make a yearlong plan for your expenses. We’ve already touched upon this a little when we discussed making a monthly budget, when we looked at the importance of bearing in mind certain yearly expenses that don’t come up every month but might come up just a few times or even just once a year.

A yearly budget doesn’t only ensure that you remember to budget for these expenses though. The added advantage of a yearly budget is that you can make a better and more accurate plan for your expenses by bridging the gap between your long-term financial goals with your day-to-day spending patterns. Of course, having a monthly budget already gives you the opportunity to plan expenses far better than if you just spend without being fully aware of your monthly total spending pattern. But it won’t give you as much insight into whether you are on your way to achieving your long-term financial goals or whether you are still quite a long way off. By making a budget for a full year you get a far better overview of this. Continue reading “Step 77: Make a Year Budget”

Step 76: Translate Expenses into Time-Costs

Step 76 of the 100 steps mission to financial independence: Translate expenses into Time-Costs
Step 76: Translate expenses into Time-Costs

Every time you spend money you spend time. It’s not the good old “time = money” adage you should worry about, but the exact opposite: “money = time”, which although might seem to mean the same, is much more pertinent and important to remember than the first one. If you are like most people, the bulk of the money you have to spend each month comes from your job in the form of income. Each month you start afresh with a new paycheck of money coming in on one hand and also new bills to pay on the other.

It’s a logical sequence of how things work: You have bills to pay therefore you need a job so you can generate an income to pay these bills. Your job provides you with money so you can pay your bills (and then spend some more). The next month it starts all over again when there are new bills to pay and another month to work to pay these bills.

You are working for an income and regardless of your profession, your job is designed to trade time for money. You put your skills and expertise to use and in exchange your company gives you a salary. Change from a full-time job to a part-time one and you’ll likely get less money (less time = less money) and vice versa. Continue reading “Step 76: Translate Expenses into Time-Costs”

Step 75: Budget and Spend on YOU

Step 75 of the 100 steps mission to financial independence: Budget and spend on YOU
Step 75: Budget and spend on YOU

Unlike the rest of the 100 steps mission, this step advocates a little spending and whilst some of the content might sound as if it takes you away from your ultimate goal of a secure financial future, it is indeed a very important step to financial independence. The habit of budgeting to spend on you continuously reminds you of what is important and why you are going through the hassle of all the other steps.

It can be very tempting once you get really into personal finance and see the advantages of building up savings and investing to try to cut down all of your expenses as much as possible, to skimp and save and live a lifestyle of extreme frugality. And although there is nothing wrong with being frugal and some people can indeed get real satisfaction out of this, some take it to a level that is a little too extreme to actually make them happy. Many of them end up giving up on their journey to financial independence as it is asking too much of them, or they become unhappy and disgruntled as they feel they can no longer enjoy life and instead are only thinking about “tomorrow”, “a secure financial future” and “being cheap”.

Of course you have embarked on this mission for your own reasons, but I truly hope that your ultimate goal is to achieve happiness and not actually having an X amount of money in the bank. There is of course nothing wrong with wanting to have that money in the bank, but never lose sight of your why: Why do you want that money? Wanting just for wanting’s sake is foolish and will not make you happy. But if you know why you want that money (to become a stay-at-home-parent to spend more time with your family, to travel, to live a more fulfilling life by volunteering or being able to set up your own company… ), whatever it is, you need to keep just that in mind. As that is what will bring you happiness, the money in itself won’t, it will only allow you to achieve your goals faster.

To make sure you keep happiness and enjoying life at the centre of our mission, you are going to do some spending on yourself! You need to keep this journey it fun, keep your motivation up, see short-term results and just simply reward yourself now and again. Budgeting something for you is a great way to achieve all of the above. You need to spend a little extra on yourself now and again, ideally on something you otherwise wouldn’t do. It should be something extra, maybe a little luxury.

Some examples of how you can spend a little extra on yourself:

  • Luxury bath or shower product or make-up;
  • A new magazine or book;
  • A new accessory for a gadget;
  • An item of clothing that is extra and maybe not something you need and outside of your clothing budget.
  • A new plant or some flowers.
  • A massage or beauty treatment

It can be anything that gives you some special joy and happiness and that feels like splurging a little. You’re looking for something that you would like to buy for yourself but that you don’t normally do. It should take you maybe two or three months to get that money together, so you really feel you’ve earned it and it built up anticipation of getting the money together so you start thinking what you can buy with it. It should be something relatively common and easy to acquire, it is not a savings goal in itself, it is just a kitty with some money you set aside each month so you can buy something with it every 2 – 3 months. We’re not talking about a new iPhone here as that is a bigger savings goal in itself, it should be something smaller that gives you the feeling of a reward.

Whatever you buy, it should be something for YOU. Maybe buying your daughter a new jumper makes you happy, but that isn’t YOU, that’s your daughter. Buying your partner an extra present for their birthday is not YOU.

Step 75 – Budget and Spend on YOU – in detail

  • Decide what would be the ideal reward for you that would give you pleasure and a sense of achievement every time you were able to use it or purchase it. Ideally it would be:
    • something that is not a long-term saving goal, as the whole point here is that you get more regular rewards and not a long term reward.
    • something that you can set relatively small amounts of money aside for each month (say $5 – $20) and that after 2 or 3 months gives you enough to buy the item.
  • Create a separate kitty or a nice jewelery box where you put the money in if in cash. Alternatively assign the money to this category in your new budget each month.
  • As soon as you have enough to buy something with it: go out and buy it! The whole point here is that you get to see the advantages of setting money aside, but without having to wait 20 years in order to collect your prize.

Don’t feel guilty for spending this money. Life is to be lived and the small pleasures of life form an important part in this. So don’t NOT spend this money just because it is an extra or luxury category. You have worked hard enough to earn save this money and are allowed something extra from all of this as well!

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.