Step 72: Rebalance your Portfolio

Step 72 of the 100 Steps Mission to Financial Independence: Rebalancing your Portfolio
Step 72: Rebalancing your Portfolio

This and the next step look at managing your assets in your portfolio on a long-term basis to ensure they remain aligned with your goals. With time some assets might grow faster than others, goals might change or you might want to change the risk level of your portfolio the closer you get to your goals. In all cases this can be dealt with by rebalancing your portfolio and re-allocation your assets. Similar to the investing principle of “buy when everybody else is selling”, which we discussed in step 54, the rebalancing of your portfolio is another investing concept which is easy to understand and execute logically, but can be difficult to implement psychologically.

Yearly rebalancing

The yearly rebalancing of your portfolio ensures that if one area of your portfolio does really well in one particular year, you don’t deviate too much from the original asset allocation that you had in mind for your portfolio. If one assets grows much more than another, it might make your portfolio too volatile or too safe for your goals and risk tolerance.

Let’s look at an example and assume that you want a 70% shares and 30% bonds allocation in your portfolio. You put in $10.000 and the moment you enter the market both bonds and shares happen to be $100 per unit. Ignoring costs for the sake of this example, that means you’d have $7.000 in shares and $3.000 in bonds. A year later the shares have far outperformed the bonds, and even though both have gone up in prices, your bonds are now worth $3150 (a 5% increase), whereas your shares are now worth $8050 (an increase of 15%). The stocks and bonds allocation is now no longer 70/30 but 72/28. Not a huge difference you might think but if the shares keep outperforming bonds by that much for a few years, you might end up with an 80/20 portfolio in just a few years. Continue reading

Step 69: Teach your Children about Finances

Step 69 of the 100 steps mission to financial independence: Teach your Children about Finances
Step 69: Teach your Children about Finances

In the previous step we looked at how setting aside even small amounts of money can give your (grand)child(ren) a very nice mini-fortune by the time they turn 18 if invested well. Of course you (or they) might be unlucky and the market might just hit a bad year when they turn 18 (or 21 or 25) but who’s to stop you from waiting another year or 2 until the market has recovered again before you hand over the investment account?

But then what’s to stop them from spending all of the money – the money that you set aside deligently for years, making the most of that compounding interest – in one weekend, on one holiday or on a (in your view) stupid purchase?

Of course the problem with this is that you might be skimping and saving to get this money together, but once you give it to your child, remember it is their money. Whether they splurge on a luxury vacation, use it to fund their college or as a first downpayment for their house is ultimately their own choice..

That said, as a parent or grandparent you have a responsibility in educating your children about finances. Funnily enough we are totally cool and understanding of having to teach our children social skills in order to make friends and to respect others, help them with any maths or French homework and teach them basic personal care skills like cooking and the importance of having showers, but the financial education is often neglected. Whether people don’t want to bother innocent children with grown up matters, think that school will teach them this stuff or just generally feel uncomfortable about discussing money with their children I don’t know, but teaching children about money is an important role any parent has. And if you do your job well and teach them the real value of money, your children might be less likely to spend all of that money you gift them when they turn 18 in one go.

So let’s look at some ideas on how to teach children the real value of money from an early age on:

  • On a day out, or weekend away or even a holiday, give children a mini budget for themselves or tell them that as a family you have a total budget of say $40 that together you need to decide on how to spend. They get to vote (or decide) whether to have a simple sandwich and some money for an ice cream and a small souvenir or whether to go for that slightly fancier meal but not have any extra money for an ice cream nor souvenir. This helps them develop skills in budgetting.
  • Make them aware of bills that need to be paid, such as utilities and get them to play their part in turning off lights, closing doors and not letting the tap run when brushing their teeth.
  • Turn grocery shopping into a competition by finding offers, 3-for-2 deals etc.
  • Give them a small amount of pocket money from an early age on to get them to save up for a bigger purchase they want. It teaches them the value of saving, planning and prioritizing.
  • Open a savings account and get your child to deposit money in it, even if it is small amounts. Explain interest and compound interest to them and get them to see their money grow.
  • When your child is a little older, explain the concept of the stock market and investing and mention the investing account that you have opened in their name so they can also see how their investments are growing. Show them to sit tight when the market falls and the importance of patience on the long run.
  • Teach children about debt and how this is expensive in the long run. The best way for them to learn this is by giving them a small loan and charging interest on it. A tough lesson to learn but it will be a very valuable lesson. Even if they end up paying $5 on a loan of $10, those $5 will teach them a life long lesson on how interest and compounding interest on a loan will ultimately be a killer to their personal finances.
  • Go through credit card statements together with children or spend your weekly administration and filing system together with your “personal assistant” to teach them the importance of checking financial statements regularly for errors and to stay up to date on how (un)healthy your finances are.
  • Consider some type of “savings match” or interest you give children for every dollar they save if they haven’t yet got a savings account. This could be done monthly by showing you how much they have saved and after you count it together you give them a certain amount of interest or match their monthly contribution.
  • Explain to children how we are constantly tempted to spend money by adds and peer pressure. Teach them how these adds work and get them to evaluate whether they really need that new gadget or toy and whether it will add new value to their life.
  • Get children involved in sharing their wealth through donating to charities or fund raising for charities so they get to appreciate that there are many others who are far less lucky than they are and that that they can make a difference to the world by giving some of their money away or by getting involved in deciding which charity you should donate to.

Step 69 – Involve your Children – in detail:

  • Discuss with your partner the importance of teaching your children about the value of money and agree on a basic approach to this. It is important to discuss this and be aware of each other’s involvement and ideas so that you don’t clash over this.
  • Consider a set time a week, maybe at the weekend, which is dedicated to finances. This could be 30 minutes in which you discuss something new, go through a new target for the week or count savings and update financial statements. Depending on your child’s age these activities might evolve into more complex activities and the 30 minutes might become longer.
  • Find a balance between teaching your children the value of money, saving and investing without taking away from the fun. Make sure not to turn ALL of your fun family days into skimping or budgeting days – kids should also be able to enjoy these days! Don’t overload your children with information but see it as a step-by-step progression that takes time, skills and awareness to develop (a bit like compounding interest come to think of it!).

If done well, these finance lessons can become a great headstart for your children in life as it gives them so many skills that others might take years to discover by themselves when they are in their 20s and 30s. Just make sure to make it appropriate to your child’s age and awareness. Happy teaching!

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 55: Discuss Finances with your Partner

Step 55 of the 100 steps to financial independence: Discuss Finances with your Partner
Step 55: Discuss Finances with your Partner

I admit that this step should have probably been way earlier on in the list, since if you share your household and finances with your partner, then discussing money matters and making sure you have the same short-term and long-term goals in mind is essential to not only achieving your financial goals but also keeping your relationship healthy and happy. At the end of the day if you are trying to save, invest or grow your capital whilst your partner is more of the “let’s spend it all now” school, you likely both wind up frustrated with each other, meaning both your financial goals and your relationship happiness will take a hit and suffer at some point.

Sad but true: finances and a lack of shared financial goals or financial compatibility are not uncommon reasons for people to end a relationship, so let’s get this sorted once and for all and make sure that you and your partner discuss your individual and joint financial beliefs and goals. You might not have exactly the same ideas about how to spend or save your money, but discussing will at least create more understanding and hopefully pave the way to an agreement that satisfies both and leaves some (financial) room for both to do your own thing.

Of course it might be that your partner is not into finances at all and is happy for you to take control of the (majority) of the money decisions and responsibilities. If that is the case, it might sound easier in the short-term to simply assume that role not inform or even consult your partner, but remember that long-term this might not be in the interest of neither your relationship nor of your finances. Continue reading

Step 25: Start a Monthly Finance Review

Step 25 of the #100stepsmission to financial independence: Start a Monthly Finance Review
Step 25: Start a Monthly Finance Review

In step 18 we looked at starting a weekly finance review and what to focus on during that weekly half an hour, to ensure you stay on track for that month’s spending, bills and goals.

Today we are going to take this one step further, by starting a monthly finance review, in addition to your weekly review. Whereas the weekly review is incredibly useful to ensure you achieve your monthly goals, the monthly review helps you to achieve your longer term goals that you set out to achieve, such as becoming debt free, getting to a certain net worth or saving a specific amount of money. It is the moment to plan and look ahead a little further and to readjust your goals and spending patterns.

During most months you can probably combine every fourth weekly review with your monthly review, although for your monthly analysis you will need to set aside more time, as you are analysing the entire past month and also looking further ahead. I recommend scheduling in roughly 2 hours every month to complete this step.
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Step 24: Become debt free

Step 24 of the 100 steps mission to financial independence: Become debt free
Step 24: Become debt free

Becoming debt free might or might not have been a goal you identified when you put together your principal financial goals in step 2. Whether this was the case or not, you hopefully have realized that becoming debt free is possible with some extra effort and money, and in your interest (no pun intended) if you want to avoid paying the extra costs of oustanding loans. It might take you three years, 10 years or 20 years, but being able to say you have finally paid down all your debts is a huge achievement. And as we saw in the last few steps, the time it takes to pay off a debt can be sped up incredibly by making extra payments.

The next part of your mission and the main focus of this current step is for you to set yourself goals to pay off your debts. You will set yourself a target date to pay off the first debt that you have already started working on, then for each and every other debt you will do the very same, all the way to the very last debt you will be attacking. That will be your target date to becoming completely debt free. Continue reading

Step 18: Start a Weekly Finance Review

Step 18 of the 100 steps mission to financial independence: Start a weekly finance review
Step 18: Start a Weekly Finance Review

Step 18 is all about starting a new and incredibly powerful habit, one that will allow you to focus on your mission, realign your spending and savings patterns to your goals and get closer each time until little by little one day you tick off your first goal, then your second one, your third, until you realize you are able to hit your goals one after the other.

This new super habit is starting a weekly finance review, during which you will go through your goals and some of the main steps we have covered up til now, and when you work your way through the next 82 steps that are still to come, you will add some of those steps to your weekly review too. In that way you consistently hold yourself accountable for your success as you review whether you are on track (or not) for the rest of the month, and what adjustments need to be made in order to make sure you will achieve your goals for the month, and with that ultimately those much desired long-term goals.

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Step 12: Identify your Savings Expenses

Step 12 of the 100 steps mission to financial independe: Identify your Savings Expenses
Step 12: Identify your Savings Expenses
So one last one to go: your savings expenses. Saving expenses are any expenses that you have that are related to improving your financial situation now or in the future. They are payments that you make towards your financial goals and include debt payments that you are making to pay off a loan, savings plans that you are paying into, investments that you are making and any emergency or rainy day funds that you have.

When you were looking at your fixed expenses you might have been wondering what to do with these savings payments already, or you might have even included them, as many of these can look like fixed expenses that you have monthly. The reason why we want to take these out and identify them as a different category however is that they are generally very different in nature to a fixed, variable or discretionary expense, as they are focussed on achieving a financial goal, as opposed to the other categories. Continue reading