Step 87: Play the What If.. game

Step 87 of the 100 steps mission to financial independence: Play the What If... Game
Step 87: Play the What If… Game

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.

So let’s get playing… Continue reading

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 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 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 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 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.

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.