Oh go on, one more investment related step before we end the series on investing… Despite its very boring name, dollar cost averaging is a powerful investment strategy that actually makes market volatility work in your advantage.
This is achieved in two ways:
When the market is up you buy less shares, thereby avoiding investing a lot of money when shares are overpriced and when a crash might be just around the corner;
When the market is down, you benefit by buying more shares, thereby making the most of the shares being “on sale”.
Let’s look at how dollar cost averaging works.There are generally two ways to invest: investing a lump sum or investing a set monthly amount. As we know markets go up and downs all the time and although most markets go up over time, they still experience periods when prices drop.
Lump sum investing
Imagine you have a windfall of say $10,000 that you want to invest. If you invest it all in one go at a time when the market is climbing, this might be a very poor moment to invest this money. Wait a few months and the market might well experience a downturn:
Say the average price of shares at the moment is $100 then (costs excluding) you’d get 100 shares for your $10,000.
Imagine the prices drop to $80 on average in the next 6 months. If you had held off investing for 6 months, you would have been able to buy 125 shares, i.e. 25% more!
Now let’s say that another 6 months later the price of shares is back up to $100 a share again. If you entered the market today, you would have gained nor lost anything in a year’s time. Had you entered the market when shares were only $80 a piece, your portfolio would be worth $12,500 in a year’s time.
Today we’ll step away from the numbers and figures and logical planning for a moment and instead focus on a fun step towards financial independence: visualizing your dreams. This step is the ultimate step to all of the following:
keeping up your motivation
setting goals
not forgetting to live in the “now”
We’ve discussed the first two points in detail in several of the previous steps, but the third one we haven’t yet looked at so much. Let’s discuss the importance of that third point through an example: imagine a couple who gets really inspired to become financially independent. They make a budget, cut expenses, start a side hustle to earn some more money to invest and they see their efforts paying off as their bank account increases. So they hustle a little more, cut another few expenses and speed up the process. But with time they become so absorbed by this process that other things are being cut too. Even though they have a fair amount of money, family holidays are “too expensive”, clothes are recycled well past their “best before” date (which makes the children an easy target to laugh at at school) and any real family time is disappearing quickly as the side hustle takes up any valuable time the family might have had together. After many years of dedication and hard work their bank account finally reaches that milestone of $1,000,000 that they had set themselves. The couple gets ready to celebrate this moment and loosen the reins a little – not wanting to retire completely but at least to work less – only to find that their children have gone off to college, friends from the past are have ceased to be friends as they have hardly seen each other in recent years as the couple had either no time or no money to attend get-togethers. They are not longer members of their sport clubs and realize they don’t know that many people anymore. There are no photo albums on the shelves with photos of happy family holidays, no memories of fun days down at the beach or up in the mountains at the weekends and they can’t really remember having taken the children on any visits to the theatre, a museum or even the cinema. The couple never had time for fun activities and only ever thought of making money and then some more.
And what for? What is the point of having $1,000,000 in your bank account if you can’t enjoy it? What is the value of money if not to use it and enjoy the little things in life? Spending time with the people we love? More than those $1,000,000 isn’t it important to have time to do what you want to do and to make a difference in the world? Continue reading “Step 95: Visualize your Dreams”→
Your credit score is important when you want to qualify for a loan, such as a mortgage or a car loan, or many other financial products including insurance policies. Only with a high credit score will money lenders want to give you a loan. If your credit score isn’t high enough they won’t want to give you a loan, meaning you either won’t be able to buy your house, or you might only be able to get loans with high interest rates. Nowadays some employers even check credit scores of job applicants so maintaining a positive score is truly important not just in order to get a loan but potentially also when it comes to applying for a new job.
The importance of having a high credit score:
It gives you lower interest rates on loans and mortgages. As you know by now, even small differences in percentages can make a huge difference over time.
Landlords usually evaluate rental applications on credit scores as with a higher credit score they believe you are less likely to default on your payment of the rent.
Other financial products such as insurance policies as well as investment opportunities are sometimes only granted to those who have a sufficiently high credit score.
Certain companies and employers don’t hire people with low credit scores as they believe these people have less self-control and are less goal-oriented.
Higher credit scores increase your chances of getting a higher credit limit. This in turn helps you decrease your credit utilization rate (see further below)
Tips to improve and maintain a credit score:
Don’t ever default on a credit card payment. At the end of each month make sure that you pay the minimum you are required to pay.
Start paying off your debt, this shows that you are a responsible person looking to reduce your debt instead of constantly living with outstanding amounts.
Once you’ve paid off all outstanding credit card debt, make sure to pay off your credit card in full at the end of each month from now on.
Maintain a low credit utilization ratio, i.e. the percentage of your credit limit you use. Try and keep it below 30%. For example if you have 3 credit cards with a $1,000 limit, aim to use no more than $900.
Don’t apply for credit too often or for too long. A credit company will keep track of any inquiries they receive and if somebody has been marked with having made lots of enquiries or over an extended period of time, your score again goes down.
Close cards you are no longer using. This might reduce your credit utilization percentage, but having many different cards also imposes a risk of fraud, theft and temptation to use more than you need.
You usually get a better rating for cards that you’ve had for a while, so avoid closing long-term cards.
Keep track of your credit score regularly, e.g. monthly. You can easily check your credit score online.
Start build your score early on. The longer you give it time, the better your score.
Step 93 of the 100 steps mission: Celebrate your Victories
As we’ve discussed a few times, setting goals is one thing but achieving them is a whole different thing. Goals are usually easy to set and difficult to achieve (and require some real commitment and dedication) and this can be especially true for such radical goals as “quit smoking” or “exercise daily” that require an almost “all or nothing” attitude in which you either succeed or not.
Yet these type of goals have one big advantage over many long-term financial goals: it is easy to see how successful you are. Every hour you don’t smoke a cigarette is an immediate success: your goal is to stop smoking and your success is easily measured with a simple yes or no at the end of each hour: did I achieve it or not. The same is true for a goal such as “exercise more”: at the end of each day you can simply ask yourself: did I achieve this today? A yes will make you feel good, and a no will hopefully give you a kick up the bum to try again tomorrow.
Many financial goals don’t have this luxury: many are probably long-term goals and if you don’t see a lot of progress it might be difficult at times to keep your motivation up. Say your goals is to save together your $1,000 emergency fund. At the end of the day you can’t ask yourself: “did I save $1,000 today?”. Or imagine you’ve decided that you need to get $20,000 together for a down payment, that again will probably take you a fairly long time. What about “saving up for retirement”? How much are we talking about here? And how long will it take you to get that money together? With none of these goals you can say: I achieved this today!
As you continue on your journey to financial independence, your goals might become bigger and more abstract but let’s not forget that goals aren’t just for the future, they are also for the now. Focus on them now and you’ll achieve your future goals, forget about them now and nothing will come of them ever – not even in a million years. Continue reading “Step 93: Celebrate your Victories”→
Step 92 of the 100 steps mission: Track your Progress
One of the most fun parts of setting goals is seeing yourself getting closer to it with each step that you take. By tracking your progress (and celebrating your victories – something we’ll look at in the next step), becoming financially independent isn’t just a fun end goal, it should can also become a fun journey.
Regardless of your financial goal, whether it is big or small and whether it is a goal for the distant or for the near future, keeping track of how you are doing isn’t just stimulating and motivating. If you track your progress and keep your tracking somewhere easily accessible and visible, you are also reminded of your goals regularly, which in turn helps you stick to your goal.
Compare the following situations:
Situation 1: You decide you want to save $10,000 for a specific goal. The first few days or weeks you feel very motivated and eager to get the money together and you cut out some expenses so you can assign some extra money to your goal. Yet little by little with time you start forgetting about your goal, you stop cutting some of those expenses and within a few weeks you stop putting money aside all together.
Situation 2: You decide you want to save $10,000 for a specific goal. You get out a big piece of paper, at the top write: $10,000 for (insert your goal). You decide that for every $10 or $25 you’ll draw a dollar note. You stick the paper in your agenda, on the inside of your bathroom cabinet door or on the fridge. Every time you see the paper you are reminded of your goal and how much you have left to save, which motivates you to take another small step so you can contribute just a little more and draw another dollar note. The more you save, the more motivated you become as you keep seeing the number of dollar note pictures increasing on the paper.
See how different tracking your progress can be in order to actually progress even more and keep up your goal? Tracking isn’t just to see how much you have saved. You can also use this strategy to track how much you have paid off a specific debt. Continue reading “Step 92: Track you progress”→
It is unfortunately quite common for many people to avoid checking their money accounts regularly to monitor balances. This can be because they haven’t made their finances a priority or because they are too scared of what they might find. It is a bit like going to the dentist: the longer you leave it, the more scared you get as the more likely it seems that you might have a problem that’s been left for too long.
When you ask these people whether they have enough money in their account to go for a meal out, some of them truly don’t know. They might be down to $10 or might still have $400 left over at the end of the month..
Checking your balances regularly – and ideally daily – has the following benefits:
You instantly know how you are doing financially and how much money you have at that moment;
Although you have a budget and most expenses shouldn’t come as a surprise, some bills that are automated might come in earlier or later than expected or can be substantially higher than expected (think energy bill for example), so you can update your expenses accordingly;
It makes it easier to stick to your budget and to avoid overspending, this is especially true if you are accostumed to paying by credit card regularly.
You can check for any dubious payments that are wrong – an incorrect amount or even an expense that isn’t yours.
On your way to financial independence, you’ll want to become aware of what is happening to your bank accounts to make any necessary adjustments as soon as possible and also to stay in control of your budget and making sure you are sticking to it.
If you wait until the end of each month to update your spending, I’m sure you’ll find you no longer remember whether that supermarket bill for the 6th was correct or whether you even went to the supermarket on that day in the first place.
Checking your balances really is just checking what’s happened since the last time you logged in. It is not about making payments or working on administration items, which you should do during your weekly finance review or during a different specific time you have set aside for this.
Step 91 – Check your balances daily – in summary
Decide on how often you can commit to checking your bank accounts. I strongly advocate a daily check, but decide what works best for you. Don’t leave it to “I’ll see how often I can do it” as that just gives you a cop out to forget about it after a short while.
Think of a good moment / time when to check your accounts that will allow you to do it everyday. Maybe whilst brushing your teeth each morning, just after your lunch break or just before going to bed.
Mark this in your calendar, add it to your journal, set an alarm or put up a post-it to remind you to execute this new habit. It takes a while to make a new habit an automatic one, so don’t make it too easy for yourself by allowing yourself to come up with the excuse “you forgot”. Find out the best way to remind yourself of this new habit.
Decide what balances you should check and which ones you maybe don’t need to. You’ll want to check your regular checkings account, but maybe you don’t need to check your savings or investment account. Do you have more than one checkings account you should check? Be clear on the balances that you should be aware of daily.
When you log in, check for the following:
Are all the movements correct? Check both outtakes as well as any money that might have come in.
If you have any receipts from any purchases, make sure to check these against your account and insert any expenses for cash payments. If you no longer need the receipt then you can now get rid of it at the same time. If you might still need it for declaration, tax or warrantee purpuses however, put it away to be filed later.
Are you not sure a bill is correct? Make a note of it and check it as soon as you can.
Update your budget or spending tracker.
Take note of anything that you see that you’d need to check, or anything you would like to change. Are you still paying a monthly subscription fee for a service that you are no longer using? This is a good moment to cancel the subscription.
Stick to your habit, even if at first what you see is not very pleasant, with time you will feel more on top of your money flow, you will become more and more motivated to take control over your finances and will gradually see things improve. Don’t just give up if you see something unpleasant.
Checking your balances daily is one of the most powerful habits on your way to financial independence: it makes everything much more “real” if you see it every day, instead of waiting til the end of the month. You’ll start to see things coming together quickly, you just need to get through the initial unpleasant feeling of building a new habit and looking at your money disappearing left, right and centre.
Good luck!
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.
In the previous step we looked at how investing in Real Estate can be an interesting addition to your portfolio in order to spread your risk more and generate another new income field. In this step we will look at another way to diversify your investment portfolio which is through commodities and gold.
Investing in commodities
Commodities (or natural resources) are important for the stock market in two ways: firstly many companies rely on commodities. If you have any Coca Cola shares then of course sugar prices at some point affect Coca Cola profit and therefore share and dividend prices. For any shares you might have in big retail or fashion stores wool prices will affect these share prices at some point in the chain and many other companies might rely on such commodities as oil, copper, grains and aluminum.
Apart from their importance to the companies that trade on the market, commodities play another part on the market as they too can be invested in directly, just like shares and bonds!
There are generally two commodity classes:
Soft commodities – cocoa, wool, cotton, wheat, rice, coffee etc. These prices can fluctuate a lot, especially when a shortage exists (think about a bad harvest for grains, rice, potatoes or coffee for example and how this can drive up prices). Apart from the weather, also a growing population as well as people’s eating patterns effect these prices.
Metals – zinc, aluminum, copper. Prices are less volatile as their time takes much longer: a new mine takes much longer to open and operate. It’s easier to predict how prices are affected, also if new technologies such as microchips are developed that require more or different metals.
Step 89 of the 100 Steps Mission: Investing in Real Estate
We’ve looked at investing in the stock market in detail and how stocks and bonds offer the opportunity to create and maintain wealth over time (but remember that investing in the market always has the risk of losing a lot of your money too…). In order to spread risk when investing in the market, creating a balanced portfolio is generally the recommended way to go, in which your money is divided over many different companies, industries and markets and investing opportunities.
Whereas many investors have big chunks of their money (if not all) invested in a mix of bonds and shares, there are also other investment options to consider in addition to stocks and bonds that offer an extra diversification to your portfolio. In this step we’ll discuss one common alternative or addition: real estate, whereas the next step looks at investing in gold (and precious metals) as well as commodities to complement investment portfolios.
Investing in Real Estate
We have of course already discussed the option of buying another property and renting it out to a tenant as a way to invest your money in order to generate an additional income stream as well as the possibility of a capital gain on the estate itself in the long-term. This is one way of investing in real estate, but there are other market options to invest in real estate, including:
REITs – Real Estate Investment Trusts – similar to a mutual fund, REITs trade on the market. A trust pools together investors’ money in order to purchase real estate and rent it out to generate income. The advantage of REITs is that they must pay out a big chuck of their profits as dividend in order to keep their status as a REIT, meaning that returns can be very interesting. You of course don’t own the property but own a part (like a share) in the trusts’ property portfolio. Like stocks and bonds you can sell your part to other investors and REITs go up and down in price similar to the rest of the market.
Real Estate Investment Group – This option is ideal if you want to actually own another property to rent out but don’t want to deal with the hassle that comes with it: finding tenants, collecting rent, dealing with maintenance issues etc. As an investor in a real estate investment group you buy one or more units or flats of a bigger apartment complex owned by an investing company. By buying a unit, you become part of the Real Estate Investment Group and become the owner of the flat, but the investing company will deal with all the day-to-day issues and operating of the units on a collective basis. They will take a part of the rent you generate so you still profit from renting out your property, but you have very little to do with the day-to-day operating.
Real estate trading – Also known as Flipping, this is a practice in which somebody buys a property, hold it for just a short amount of time, usually only a few months and then sell it again at a higher price. This is especially effective if one is able to buy a property in a hot spot or if one acquires a building that is highly undervalued and therefore a bargain to buy and then sell again. This is a different way of investing in real estate and contrary to capital gains over a long period of time, real estate trading is focused on capital gains made in just a few months. Bear in mind that taxes on short-term capital gains can be significantly higher though.
Investing in real estate can be housing, but can also include other types of real estate such as commercial property (think about offices and factories) as well as old age pensioner’s homes for which demands are increasing all the time due to aging populations.
Let’s look at one more pension option before we round off the pension series: Annuities. Sounds like something complex (and they certainly can be when they want to be!) but this step will break down their characteristics and benefits, as well as some of their disadvantages.
What are annuities?
Annuities are a financial product somewhere between an insurance and an investment option. Like any insurance, you buy annuities – in this case it insures you against living too long. Yes, you read that right. Whereas a life insurance insures against dying too early, an annuity insures you against living too long. An annuity provides a set monthly income that you get for the rest of your life after a certain age. If you are fearful that you might outlive your pension, i.e. that you might withdraw too much from your investment and / or pension fund and end up without any money at some point in your retirement, an annuity is a good solution as it gives you a guaranteed monthly income.
How do annuities work?
There are many different types of annuities with many different characteristics. First of you normally buy an annuity from an insurance company, pension provider or broker who then reinvests your money. It very much works like a mutual fund and the company you buy the annuity from will add in a profit margin of course so your money won’t grow very much over time due to the fees you pay. You can buy an annuity with all of your pension savings just before you retire or you can buy several smaller annuities over time. Annuities differ in the way that they are set up and some of the key variables include: Continue reading “Step 88: Annuities”→
Being prepared for adverse financial situations is an important step to take on your way to financial freedom. Without wanting to sound demotivating (or even morbid), the “what if..” game forces you to think of unwanted but possible situations that might happen and that would set you back on your journey to financial freedom and in some cases would have far bigger consequences than just the financial effects.
We’ve already established the importance of an emergency fund for those times you have a big unexpected one-off expense you need to pay and you should also be well on your way to getting together a 3-6 month living fund in case you (or your partner) lose your main source of income and need to make ends meet until you find another job or income.
Whereas the emergency and living funds prepare you to financially deal with the consequences of a financial setback quickly and efficiently, the “what if…” game prepares you psychologically for any behavioural changes you might need to make to adjust to smaller or bigger changes in your life that might require you to adapt on a longer term.
100 Steps Mission 