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 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 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 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 32: Multiple income streams

Step 32 of the 100 steps mission to financial independence: Multiple Income Streams
Step 32 of the 100 steps mission: Multiple Income Streams

Up until now we have made great progress in the areas of our savings, debt and reducing our spending in order to increase our cashflow on our way to financial independence by putting extra money towards a secure financial future. We are now going to move away from these areas for a little while and start with a new theme as there is another way to increase your cash flow: by increasing your income.

The vast majority of people see income as the money that they get from their job, and we have already touched upon income increases such as a bonus or pay rise in previous steps as a way to increase your money. Whilst income from a job is normally not only a very decent provider of money as well as a financially secure way to guarantee a steady and satisfactory income, it doesn’t have to be your only way of bringing in money. Continue reading

Step 30: Invest 50% of a payrise

Step 30 of the 100 steps mission to financial independence: Invest 50% of any pay rise
Step 30: Invest 50% of any pay rise

In step 28 we’ve looked at how to put away extra money that you might get at a certain moment in time, such as a bonus or as a gift, in order to find a balance between rewarding yourself in the moment, whilst at the same time making the most of the extra payment in the long-term by saving a part of it.

From now on, you are going to do exactly the same when you get a pay rise. In this case you should interpret “pay rise” in a broad sense and think of it of an increase in your monthly cashflow, which can come about for many different reasons. This could indeed be a higher pay from your employer, but it could also be a little side income you might be getting from doing extra work, or even a lower mortgage pay or some other favourable reduction in your expenses on a structural basis, resulting in a little extra money left over at the end of each month. Continue reading

Step 27: Build a 3 months living fund

Step 27 of the 100 steps mission to financial independence: Build a 3 Months Living Fund
Step 27: Build a 3 Months Living Fund

Once you have built your emergency fund of $1000 (or the equivalent in yourn own currency) for unexpected or emergency expenses, you are going to continue with the new savings goal in line with our mission to reaching financial independence. In this step we look at the ins and outs of a 3 months living fund and you are going to start working towards putting together this fund.

The rationale behind a 3 months living fund is that it would cover your basic living expenses if for whatever reason you no longer receive an income. This might be because you lose your job, are unable to work or voluntarily decide to take time out of work, for example to care for an elderly parent or sick relative or because you want to take time to focus on something else. It a safety net that ties you over for at least three months that will at least cover your basic living expenses for some months, leaving you time to find a new job, an alternative income or just allowing you to take those three months off before returning back to work. Continue reading