- I don’t have enough money to invest…. Get ACORNS -it’s a micro-investing platform where you can invest in the sharemarket for as little as $5 a month!
- I don’t know how to save… You don’t need to! Splash out on the future you by spending on yourself first and put your cash into difficult to access high-interest savings or investment accounts.
- I spend all my money shopping… Cut up your credit cards and store cards. Only carry cash. How easy is it to spend now?
- I don’t have time to sort out my finances… Start small – 5 minutes a day writing down your expenses. Consciousness is a key. A few hours now tracking expenses, writing up a budget and automating your investing is like paying yourself thousands of dollars per hour in future gains. Not doing it means your pissing that money away.
- I don’t know where to start… Start with taking lunch and a refillable bottle of water. Put the money you would have spent into a HISA or old-school piggy bank.
- But the market will crash… It will. Take a breath. Then stick to your plan. Sharemarket dips are an opportunity to buy in at lower prices, and they have invariably recovered. No one retires early from the interest on CD/savings accounts.
Are there any other big financial roadblocks you have simple answers to? Let me know!
It’s been about 18 months since I jumped on the FIRE bandwagon and realised I wasn’t all that keen on gorging myself on debt and plasma screens till I collapsed. These are the 10 changes I made that have set me up for the future:
- Figuring out where all the money went – tracking all of my expenses for a month gave me a really powerfully insight into where it was all going, and just how much I was tossing away on crap that brought very little value. Getting into the economics-trained mindset, there was very little gain from a significant amount of financial outlay at a massive opportunity cost (ie. an early retirement!). Now I use a detailed FIRE spreadsheet to track how I’m progressing towards my financial goals.
- Taking lunch – $10-20 bucks a day on lunch and coffee adds up to an awful lot of future relaxing lost. Getting some decent tupperware and spending an hour or two during the week prepping a week of decent lunches is one of the best investments you can make. Not only is the food likely to be healthier, it means you can avoid lots of other frivolous spending opportunities by not having to visit food courts and malls, and free up some cash for investing. Plus you can instead take your lunch to a sunny park or chill on a bench chatting to a friend – cheaper, healthier, happier.
- Telling people I was going to retire after 15 years of work – making it public firstly gives you a great justification for adjusting your lifestyle and people have a way to comprehend the changes be it suggesting what people perceive as cheaper alternative options, bringing lunch, drinking cheap beer, ditching the car, not constantly updating the waredrobe, and secondly publisicing is a massive motivation to stick to the challenge, especially with so many naysayers!
- Fixing everything – youtube has an insane amount of videos on how to fix so many things, and whilst it is a small time investment initially, it works out incredibly cheap in money and time to repair most things yourself rather than replace.
- Working with my after-save pay – when I first started saving with a full-time paycheck, I tried to think of my pay in post-savings terms. If I wanted to save $300 a fortnight, then I didn’t earn $1800, instead I earned $1500. Then I had to figure out how I could work around this figure. In my mind I was able to subsist on less than a $800 a fortnight at uni, so it was possible, and made saving the priority.
- Scrutinising the car – when I first got a car it was fantastic, I could go anywhere, it was generally quicker for longer trips and could carry much more than a bike! Then the costs started piling up, and the belly fat. When I got all the costs down on a paper I realised I really needed to investigate other options. Now I use a combo of cycling and public transport to get the work. It takes about 20 minutes longer than driving, but instead of sitting in traffic, I’m exercising and reading. And saving a bucket load of pineapples.
- Getting to grips with index and managed funds – despite doing an economics and business degree, I didn’t fully understand the ins and outs of these investment options, particularly in terms of long-run returns, fees, investment types and the best way to get into them. I ‘m not expert, but I figured out that getting in with the minimum investment into a broad-based sharemarket tracking (index) fund with low fees is not a bad start. Then adding to it on a very regular basis to smooth out the highs and lows (known as average cost investing) is a pretty low-risk way to build them. Currently I have an international hedged index fund, ethical ASX managed fund and a bond fund which I contribute to each week via automatic transfers. Slow and steady wins the race (hopefully!).
Why would someone on $250,000 a year never be able to retire? Because they’re spending $260,000. They’re always chasing debt.
At a certain level of income, your basic needs are met – food, housing, clothes, utilities,
public transport. If you earn beyond this level of basic needs, it’s up to you as to how soon you reach financial independence. Every dollar you earn above your basic needs is a choice between spending the dollars today, and investing the dollars in your future. It is a careful balance, requiring some planning and a little bit of willpower. The truth is that most people on an average income can reach financial independence or retirement a lot earlier than they may assume and it all comes down to expenses.
Here are some very basic calculations I did to see how my expenses would impact my
financial independence. For these, assume a withdrawal rate of 4% (ie. how much you withdraw from your wealth each year post-retirement) and a real interest rate about 3% (ie. how much return you receive on investments above inflation). These are true for all levels of income after you first begin saving:
- If you spend 100% and save/invest 0% of your earnings, you will never retire!
- If you spend 90% and save/invest 10% of your earnings, you will reach financial independence in 70 years
- If you spend 75% and save/invest 25% of your earnings, you will reach financial independence in 40 years
- If you spend 50% and save/invest 50% of your earnings, you will reach financial independence in 19 years
- If you spend 25% and save/invest 75% of your earnings, you will reach financial independence in 7.5 years
- If you spend 10% and save/invest 90% of your earnings, you will reach financial independence in 2.7 years
After seeing these numbers and adjusting for different incomes and expense levels, I realised two key things:
- Your savings rate is key to financial independence. Depending on your situation, improving your savings rate (% of income not spent) may be more easily achieved by either earning more and maintaining expenses or by spending less and maintaining earnings. My current income as a full-time teacher allows me to easily meet my basic needs and more, so I have found that cutting $100 from my regular expenses is more easily achieved than regularly earning an extra $100 (up to a point!). For an extreme example of expense minimisation and achieving early retirement, check out http://earlyretirementextreme.com/ . This level of cost-cutting is not achievable or desirable for everyone, but it does give some insights into the importance or the savings rate and how to find ways to significantly reduce expenses.
- An additional dollar saved is more powerful than an additional dollar earned, in
the quest for early retirement. To understand this requires a little maths. Lets say you’re saving 0% and then you cancel your unnecessary, expensive cable and gym memberships and now you’re only spending 80% of your income, your savings rate is 20%. But your mate who also saves 0% thinks that’s a terrible idea and instead takes on additional work which increases their income by 20%, and they don’t increase any expenses, their savings rate is only 16.5%. Looking at the calculations above, its clear to see you will be retiring before your mate, even though they’re on an income 20% higher than yours.
What is best for you will depend both on your current level of income and expenses, and which approach to increasing the savings rate is most easily attainable whilst maintaining a sufficiently good quality of life. Though for many people, myself included, there are ample opportunities to reduce expenses and improve our savings rate to achieve our wealth and retirement goals sooner.
A simple calculator play around with to understand the impact of savings and expenses can be found here – http://mustachecalc.com/#/calcs/time-to-fi and I have a bunch of other useful tools described on my page: 10 great tools for crunching the numbers.