“It takes as much energy to wish as it does to plan.” — Eleanor Roosevelt
Advance warning! This is a long and dense post. Feel free to jump to the last section (“finally but most importantly”) to see if you want to read it all the way through.
I started the year vowing to get my finances in order. I felt bewildered, overwhelmed and not a little bit ashamed. I’m a producer, for heaven’s sake! I’ve made intricate 100-page film budgets for a living. Yet it was difficult to not feel that cold hard steel grip of terror wrapping around my internal organs at the thought of feeling ungrounded on my own financial front.
As I’ve said before, I wasn’t taught, informally or formally, anything about personal finance. I grew up vaguely hearing that property and gold were safe and reliable investments, and thought that’s all I needed to know.
There was no need for my shame, as I eventually saw. Nobody is born inherently understanding personal finance, which is a human construct, much like a car. It takes a bit of education and awareness. And much like driving a car, a few focused lessons at the start can help you on a lifelong journey of ease, comfort and independence.
Amusingly, many finance books use food/fitness analogies to explain money and wealth. There are some parallels, and perhaps it’s a coincidence but this was also the year I had similar clarity on the health front as well, prompting action to get things in order.
I like to do a deep dive into a subject, and would much rather learn one thing really well before moving onto the next. It’s partly my personality, though it’s also experience informing me that dabbling in multiple interests (and there are always a ton of subjects I get very animated about) doesn’t ultimately get me very far on any one of them.
For example, I’d really like to be more active in reducing my plastic consumption. I’ve been doing it in haphazard steps though I know I could do more. But this requires its own deep dive, and I have only so many free hours in the week to put towards it. So every time I see a book or a talk on the subject, I add it to a folder labelled “2020” as next year’s pet project. Right now, my focus is on getting a grip on this money business once and for all.
I think money – what we earn, how we spend it, how much debt we’re carrying – is really one of the last taboos. A lot of people would rather discuss problems with their sex life than talk about money (including with their own partners). I too grew up believing it was extremely gauche to talk about money in polite society; asking what someone earned was the epitome of rudeness.
This secrecy is one of the reasons women earn significantly less than men – sometimes we simply don’t know what others in similar positions are making and what we can rightly ask for. But while pay negotiations are now more openly discussed and championed, talking of one’s personal finance can still be off limits.
I first wrote these notes down for my own clarity into a cheat sheet of sorts – something I wish I’d had when I’d started. As I saw friends looking for the same answers, I decided to expand and share it. Partly to demystify what seems complex but actually isn’t. But really because this is IMPORTANT, probably the most important post I’ve written.
There are endless ways to tackle this vast subject, and this is just one of them. I’ve not an expert on this, so I pulled what made sense from various sources (it was a messy and very non-linear process). I believe this simple, streamlined list captures all that’s truly necessary.
Of course, “simple” doesn’t mean it’s easy (because it may not be). But having a few clear steps diminished the overwhelm and helped me actually make the changes. And that counts for a lot. Here they are:
- Know where you are (assets and liabilities)
- Understand your needs (budget)
- Peace of mind (savings)
- Freedom (get out of debt)
- Security (investing)
- Know where you’re going (retirement)
1. Know where you are (assets and liabilities)
This is from Emilie Bellet’s book You’re Not Broke You’re Pre-Rich (more books listed at the end of the post).
This exercise is to get a snapshot of your current financial position, something to be done perhaps once a year. It’s valuable to know your net worth, which is your assets less liabilities.
Using paper or an Excel sheet, make a chart of assets on one side, and liabilities on the other. Do it for every currency/country applicable (if you’re like me, moving between places and paying taxes in multiple countries).
Assets are items of value that you own:
- bank account balances (current/checking, savings, etc)
- pensions or retirement savings (which may be handled by your employer)
- cash in hand
- real estate
- anything else of value you own
Note: use the estimated current value of each item (such as your car or art collection) rather than its purchase price.
Liabilities are monies you owe:
- credit card debt
- student loans
- car loans
- other loans
- anything you’ve borrowed from friends and family
This chart does not include current income, which is cash flow (see next point).
2. Understand your needs (budget)
I think there is nothing quite as detestable as making a budget. It’s the worst. The thought of keeping track of every petty expense on top of that just shrinks my heart. Yet being without one is like not knowing where your feet touch the ground. Great quote by John Maxwell: “A budget is people telling their money where to go instead of wondering where it went.” So true (unfortunately).
The wisest solution I’ve found is from All Your Worth, an outstanding book by Elizabeth Warren (yes, that US Presidential candidate, Elizabeth Warren) and her daughter. They go into it with a great deal more detail in their book so this is a very brief (and slightly modified) summary:
Note your monthly income total (salary, dividends, etc). Deduct taxes from this amount.
Now break down your monthly expenditure into their 50-30-20 plan to fit your monthly income after taxes. You can use the last six months of bank and credit card statements to get your actual figures. If it varies month by month, use an average.
Fifty percent of your budget can go towards essentials, which is defined as the basics you need for living. Even if you lose your job, these expenses that would be pretty much unavoidable:
- rent or mortgage
- utility bills (electricity, gas, water)
- essential groceries
- travel and transport (gas/petrol, metro card, etc)
- health insurance
- other insurance
- any contractual commitments (such as tax-saving deposits or subscription you can’t cancel)
Anything that is paid on an annual basis can be divided by 12 and listed here.
Twenty percent goes to savings. More on this on Point 3 below.
The last 30% goes to “wants”. This is your fun money to spend as you wish, so there are no rules here, but as examples:
- streaming subscriptions
- yoga classes
- books, movies
- dining out, drinks
- travel, holiday
- clothes, shoes, bags (these can’t be considered “essential” unless you only own one pair of shoes and they fall apart…)
Warren’s book, published in 2005, mentions a mobile phone contract as being a “want” though I think it is now legitimately an essential to anyone reading this (if not, brava! I salute you) as it’s become pretty much the only way we can be reached; I haven’t owned a landline – or indeed a stable address – for many years.
But things like cable subscriptions and gym memberships are definitely non-essential wants (you can use a library or go for a walk if you lose your job). Likewise, please separate essential groceries (sustenance) from pleasure add-ons (drinks, eating out, chocolate).
What I found revealing about this exercise is that whenever money feels tight, the first thing I’d do is cut down on the fun stuff – no shopping, no eating out. But I discovered my wants list is miniscule compared to my essentials. I live in one of the most expensive cities in the world where rent is disproportionately high, and it’s the seemingly non-negotiable items that eat up the chunk of my expenditure.
The book give tips on how to cut down the essentials by shopping around for comparable contracts. It also gives examples of when the essentials (or “must-haves” as they call it) are in balance, but the wants are too high.
Everyone benefits balancing their budgets, but especially so if you’re bewildered where your money seems to disappear every month. Besides, living pay cheque to pay cheque can be hugely stressful. Do you have contractual payment obligations (locked gym memberships, or car leases) that you can’t get out of if your income unexpectedly drops? When a contract expires, really consider if you can live without it. Living simply can be its own reward.
Balancing your budget is mostly a one-off exercise, because once things are largely in balance, then you can actually forget about it as they’re pretty consistent month to month. This means you don’t need to keep a horrid track on your petty expenses. (If you do want to then try the free app, Spendee.)
If you increase your earnings after you’ve balanced your expenses, then you’ll want to maintain the same expenditure on essentials and wants (after all, you’ve proven you can live on this amount). Studies of middle-class millionaires show exactly this time and again: they live in the same house, drive the same old cars, they carry on spending the same. But what they are doing differently is increasing their savings. More on this on Point 5 below.
Likewise, if you are a high earner, then the 50-30-20 may not apply, because the bulk of your income will (or could) be going towards savings, but it’s still a helpful exercise to (a) see exactly where your money goes, and (b) ensure the essentials and wants don’t exceed their respective quotas.
Inflation is when purchasing power reduces and the cost of living increases. This happens for various reasons, such as when the government prints more money to add to the economy, diluting the existing circulating cash. So if $10 today buys you 20 bananas, but next year 20 bananas cost $12, the value of $10 today becomes less next year.
3. Peace of mind (savings)
This is in two parts.
a. Warren says this in her book, as does Dave Ramsey in his, Total Money Makeover: keep an emergency fund of $1,000 (or appropriate equivalent in your currency). Use this money to pay for unforeseen and genuine emergencies, such as a medical insurance deductible, unexpected and unavoidable house repair, etc. Then as soon as you can, top it back up.
Build this as you’re making minimum payments on your loans/debt.
b. The next goal, once you’ve completed Point 4 below, is to increase the emergency fund to cover your monthly essentials expenses for three months (if you’re a salaried employee) to six months (if you’re freelance or self-employed). You will have calculated this in Point 2 above.
Keep this emergency fund liquid, such as in a savings account, which you can access within a day if not hours. It’s likely to earn only a piddly amount of interest, which could be on par with inflation or slightly above it, but just as often below it, so that the value of your money in reality decreases year on year.
Obviously, try to find one that is on par or above inflation, but the point of this fund is not to earn you money, but to provide a buffer should the unforeseen happen. That’s why quick access is more important than anything else. It will help prevent sleepless nights.
4. Freedom (get out of debt)
This is one point virtually every financial writer agrees on: debt of any sort is a terrible idea (barring mortgages, which some classify somewhat separately and which I won’t get into here as it’s specialised depending on where you live). Debt is where you owe people money of any sorts – credit card balance, loan, monthly payments.
Debt is the junk food (to go with my own food analogy) of diets. It pretends to be real money (real food) but it’s not. It steals from you instead.
Suze Orman says: “Debt is bondage, and you will never have financial freedom while you’re in bondage.”
Because debt is so expensive, getting out of it is a priority. Other than the initial $1,000 to keep aside for emergencies (because if your pipe bursts, you don’t want to get into more debt to repair it), put all your resources into paying off your debt.
Ramsey advises using the “snowball” effect: list all your debts from the smallest to the largest. Continue to make the minimum payments on all of them, but put all your might into completely paying off the smallest one first. That accomplishment will fire you up for paying off the next, and the next, and on it goes.
The other, more traditional, option is to list your debts in order of the highest interest rates (i.e. which is costing you the most) and pay them off in order of highest to lowest, while you’re of course still paying off the minimum balance every month across the lot.
So, the 20% savings from your monthly expenditure will go here until all debt is paid off. Ramsey gives examples of people taking on second or even third jobs to pay off their debts, and the remarkable freedom they gain as a result of it.
Never using – or even cutting up – your credit card is widely recommended. Instead, use a debit card so you only spend money you already have. Or use cash. A lot of people use their credit cards to get air miles but most collected miles reportedly never get used. Unless you are a rarity like my sister who actually utilises her miles and pays off her bill every single month (so much so her card company complained she was of no value to them as she never racks up any fees or interest ever), avoid using one at all. And if you do, always pay it off every month. Getting out of debt and deciding to never ever get back into it is the one decision that can most dramatically change lives for the better.
There is of course a bigger issue at play here: capitalist societies promote easy credit that’s not just widely available but also entirely normalised, much like processed junk food. But it’s actually not normal. Ask your parents (or grandparents) – they never bought anything they couldn’t afford because it literally wasn’t an option in their time. They saved up for it first and then purchased it. And if they couldn’t afford it, they didn’t sit around feeling entitled to it. Food for thought indeed.
Despite its pervasiveness debt is not a casual matter, as our society can make it out to be. It’s not a joke. The shame and trapping nature of it can drive people to desperate measures, such as suicide. Debtors Anonymous is a real thing. Please take debt seriously and handle with extreme care.
Once you’re out of debt, it’s a wonderful time to top up your savings to cover three to six months’ of your “essentials” money (3b, above). Once that’s in place, you can put your 20% (or more) savings towards the next point.
It’s important to understand the power of compounding, which Albert Einstein famously called “the eighth wonder of the world”. If you make a one-time investment of $1,000 and let it sit for 30 years with a middling 7% interest rate and compound it (meaning that you don’t take out the interest but let it roll over and get re-invested) then it grows exponentially, so your original $1,000 becomes $7,612. If you added $100 every month to that 30-year investment, then the total capital you put in ($100 x 12 months x 30 years is $36,000 – plus the original $1,000) of $37,000 becomes $128,900. (Play with this calculator – it’s eye opening.) It’s critical to understand that compounding is a marvel when it’s earning you interest. But it’s a killer when it’s charging you interest, as it does on any/every loan. That’s why paying off debt is critical before doing anything else; the interest you’re charged is a bigger monster than the interest you earn on saving. Your car lease or credit card debt isn’t spread out over months and years to make it convenient for you, but to earn corporations huge amounts of money, sometimes triple of what it would have cost if you’d paid for the items in cash upfront.
5. Security (investing)
The goal is to not spend your capital, but to let your capital work for you. You have limited means to earn income, but your money doesn’t need holidays, it doesn’t get injured and it won’t need to retire. Earn now to feed your investment so that your investment can feed you when you need it. The point of investing is to get your money to pay you.
Unless you live in Scandinavia, where the countries have excellent welfare systems (because they collect from you via taxes while you’re earning), you can’t rely on the state to take care of you when you’re older. Most countries’ pensions have been diminished or upended in one financial crisis after another; what you may get is simply inadequate. Even if we’re earning a fat salary now, we all need to save for our own future.
For those of us with unstable incomes, having a cushion that covers the rent and essentials can also help quell that rising panic.
This is critical to understand: saving is not something to do only when you’re rich. You become rich by saving.
It’s important to do whatever you can, starting as early as possible, to build this investment pot. I’m beginning this relatively very late, but it truly is a “better late than never” situation. Once your debt is paid off and your emergency fund is secured, do everything to grow your nest egg.
Look for big wins – rent a cheaper place, put all windfalls (inheritance, salary bonus, etc) into your investments. Let this be the motivation to cut down on unnecessary day to day expenses usually filed under “I deserve it”. You deserve peace of mind, my love!
First a distinction: saving means keeping money in a savings account in your bank, or something very similar; you can always access it in its entirety. This is what to do with the emergency fund, Point 3 above.
Investing means putting money into a riskier venture – stocks, bonds, property – where the rewards are likewise potentially higher.
A simplified example: you put away $10,000 a year for 40 years (total $400,000) from age 20 to 60. If you put that money into a savings account with a 3% compounded interest, you’ll have $776,633. It sounds great, except if inflation is at 3.5%, then you’ve actually lost money as the value of it will have decreased (savings account interest rates generally hover around the inflation rate, and are often a tad lower).
Now, if you invested the $10,000 a year for 40 years (totalling the same $400,000) at a conservative 7% compounded interest, then when you’re 60, you no longer have $400,000. Nope, you now have $2,136,096. That’s the difference between saving and investing.
Women are notoriously good at saving, but wary of investing, while men more readily invest. This has given it an unnecessarily macho image that has a huge amount of bullshit and swagger. Seen Wall Street? Or Wolf of Wall Street? Yes, that kind of bullshit and swagger. I know, it can feel repellant.
Yet, women are actually better at investing. They’re a little cautious, which is good. They’re less likely to fall for hype, such as packaging of sub-prime mortgages. And they’re unlikely to panic and pull their money out when markets dip or crash.
Investing has its own lingo, and I want to stay away from as much of it as possible here, because I think it’s been designed to intimidate and appear more complicated than it is, so you’re compelled to hire “experts”.
I would advise: if you don’t understand it, don’t participate in it. But at the same time, don’t let the seeming opaqueness of investments put you off; it can be as simple as you need it to be.
This is again a vast topic that I can only very superficially touch on here:
A1. If you work for a company and/or live in a country that has a retirement or savings scheme that provides you with tax benefits and/or matching funds from your employer, absolutely max out on these first. Some countries have a ceiling, as well as some limitations on how much can be invested, and when they can be first withdrawn; please understand all of these.
A2. Property can be one of the investments, but can become high risk if it’s the only one. Please do your research if you’re keen on becoming a real estate mogul, keeping in mind it often involves time-consuming handling and being in constant debt (and therefore stress). I’m no expert but renting out my tiny property when I moved countries became more headache than I could bear, even though there was a management agency taking care of it. Plenty of people find property to be their sweet spot, but for me buying/selling it involved huge costs, major time suckage and massive headaches.
A3. I therefore became interested in something that had never appealed to me before: stocks and shares. I wanted something nimble. (Also worth considering: numerous studies report that, even during housing booms, the same money invested in the stock market (or indeed gold) yielded higher returns than property investments – and without the faff factor.) It’s been my biggest learning curve this year. Andrew Craig’s book How to Own the World was helpful here, as was Andrew Hallam’s outstanding book, Millionaire Expat.
I’m going to outline it in the simplest terms because this is all I ultimately needed to understand about the previously unfathomable universe of investing:
B1. Share prices can drop, sometimes dramatically, but overall the stock market is always on an upwards trajectory. These investments therefore work as a long term strategy and never a short term one. If you can put this money away for a minimum of five years but ideally 10+ years, it can be worth it.
B2. Stocks (or equity) is buying shares in a company, and therefore “owning” a bit of it. If the company does well, so do you, and if it doesn’t then you don’t. This is high risk and potentially high reward. You could get 12% interest one year, or you could get 3% (or even lose your money).
B3. Bonds (or debt) is when a government or a corporation needs to borrow money for its own expansion, so they issue bonds which guarantee a specific return within a specific time frame on it. It’s lower risk, and therefore lower reward. This will be above inflation but not a lot more, earning maybe 3-8% depending on where you live. If a company is in trouble, its debt will be paid off first, before shareholders. Reliable bonds are from the government and established companies; beware of junk bonds unless you’re a highly informed investor.
B4. Keeping both stocks and bonds is a sensible way to diversify your investments.
B5. The ratio of stocks to bonds in your portfolio is dependent on your age and appetite for risk. Generally, the younger you are, the more risks you can take, as markets have longer time to recover from crashes. Try this questionnaire to find your own risk tolerance.
B6. Investing in one company’s stock (even if it’s Apple) is extremely risky. Choosing individual company shares is for sophisticated, experienced investors, and not really required for most people. The same goes for investing in your friend’s amazing startup…
B7. By every measure (except luck, which rarely keeps delivering every time), it is just about impossible to “time the market”, i.e. buying when the market is low, selling when it’s high. Invest when you have the funds, however the market is doing at that moment.
B8. Mutual funds spread the risk by pooling many people’s monies and buying shares in many companies across the market. Some companies within that fund may do well one year, and others less so, but you won’t feel the volatility as much as if you had your money in one company.
B9. You can buy funds that invest in different markets. This is another way to spread the risk/reward potential: stable economies (USA, UK, Germany) generally give more reliable returns, while emerging markets (Brazil, Russia, India, China) can give significantly more but can also crash more rapidly. There are world funds as well with share percentages reflecting the existing world market (about 55% from the US, 20% from Europe, 15% from the Pacific, 10% from emerging markets).
B10. Active funds are handled by a financial manager. They choose specific shares to go into the fund, and switch them around based on market murmurings and so on.
B11. Passive funds are index funds (also called tracker funds), first created by American John Bogle in 1975 for his company, Vanguard (many companies now do this as well, but Vanguard has a special place in people’s hearts for multiple reasons). These are not managed by a person; they simply take a slice of every company in a country’s major indices, such as the S&P500 in the US, the FTSE100 in the UK and so on. Not all countries offer index funds, sadly.
B12. Just about every report shows that passive funds give better consistent returns than active funds. Passive funds are also cheaper to buy than active funds which come with management cost.
B13. The other time investments do well is when people literally forget they owned stocks in the first place, and discover them a decade or two later.
B14. There are expenses: the investment entity (such as an online platform) will charge a fee, often quarterly. And there are transactional charges every time you buy or sell. These should be transparent, simple and obvious to grasp.
B15. Options such as paying a higher percentage for the first 10 years and then nothing later, insurance/assurance wrappers, structured notes, etc, feel purposely and unnecessarily convoluted. I won’t invest in anything that I don’t understand or feel I need.
B16. An independent financial advisor’s fees may also be less obvious. Some will be actually independent and charge an annual fixed fee (rare) or a percentage of your investment (1-2%), which can add up to $250,000 over the years. Only you can decide if that’s worth it.
B17. Even if it seems as if an advisor is not charging you as they’re getting paid by the funds or platforms, make no mistake – the platforms will recover that cost from you (and that can be as high as 8%!). So always ask how much the advisor earns as a result of advising you, rather than what their fees/commissions are. This will also reveal any biases they have for pushing you towards one set-up over another.
So, can you see a pattern here? The less you do, the simpler you keep it, and the less “involvement” there is (whether from actively managed funds or financial advisors) the better off you may be.
For clarity: I am a huge fan of consulting experts; I do it all the time in every field. I’m happy to pay a financial advisor for a one-off (or as required) consultation to provide information and advice. But if the goal is to park my money and not touch it for many years, then I’d rather not continue to pay them an annual percentage, which is how their fees are widely structured. Once you deduct inflation and their charges from the annual interest, you may not have a whole lot left.
In the event of markets crashing, the sensible thing to do is to ride it out and not withdraw it because the market will recover – it always does. But if all your money is kept in investments and you need funds now, then you have no choice but to sell when the value is low. That’s why some experts recommend keeping about 5% in cash (this is separate from your emergency fund).
Please note that “cash” here doesn’t literally mean cash but in a liquid or easily accessible form, such as a savings account or a fixed deposit (paying a penalty to withdraw early may still be a cheaper solution here). Keeping cash cash is not that safe at all – just ask my mother’s aunt who kept her life savings in a pillow case stashed in her wardrobe, only to discover termites had turned it into a pile of dust.
So there’s no need to “meddle” with your investments or hover over them like an anxious mother hen. Other than perhaps rebalancing your portfolio once a year (you can look this up), just let them be until a year or two before retirement. Yes, it really can be that simple.
Now let’s look at the final critical point to consider:
6. Know where you’re going (retirement)
Note: I think fewer and fewer of us will have a traditional retirement where we cease work completely. I know I’d love to keep working for as long anyone will have me, but I want that to be a choice, and not because I can’t afford to retire. I may get health problems, I may want to travel around the world, I may want to devote my time to non-profit work. So when I say “retirement”, it just means having the option to slow down or stop work if you choose to.
This last exercise gives clarity to future needs. The idea is to build a retirement pot until you get to your retirement age and thereafter draw down from that pot. Trying to figure this out drove me a little nuts, but I finally found a workable formula in Hallam’s Millionaire Expat which is slightly modified here.
a. Your current age. (I’ll use an example of age 40.)
b. Number of years to expected retirement. (I’ll choose age 60, so that’s 20 years.)
c. Total your current living expenses; you won’t be saving when you’re withdrawing from the pot, so no need to include that. Add the total percentages of your essentials and wants, and use that percentage of your annual income. (In our example, we’d take 80% (as we’re excluding savings) of the annual income, which is $48,000.)
Using the moneychimp calculator again, plug in the numbers:
d. Current Principle: (current annual cost of living – Point 6.c. above, or $48,000 in our example)
e. Years to grow: (number of years between your current age and retirement age – 6.b. above, or 20)
f. Add the inflation rate of your resident country, which you can find on google. Currently the inflation rate for the US and UK is about 2%, but Hallam says it’s prudent to use the higher rate of 3.5% for developed-economy countries because even in recent years inflation has been higher. I’m using 3.5% in the example.
g. Press “calculate” to get the future value.
So if you currently spend $48,000 a year on expenses, then without any changes to your lifestyle or spending, this amount in 20 years’ time – thanks to inflation – will be $95,510.
Now, this figure is just for one year. And you may live 30 years from the time you retire. If it’s 30 or less years (say age 60 to 90) then the following formula will work fine:
This is based on the 4% rule based on a study by Trinity University researchers. It goes like this: when you retire, you want to restrict your draw down to be 4% (or slightly less) of the retirement pot.
Doing this means that the pot – thanks to compounding interest – will continue to generate enough income to last you at least 30 years (based, naturally, on various other factors, such as your stocks:bonds ratio, how much interest the investment itself is earning, and more). Therefore, it’s better to see this as a rough guide rather than a “rule” as such.
h. To calculate how big this retirement pot needs to be: divide your future value annual cost of living by 0.04.
In our example: $95,510 divided by 0.04 = $2,387,750.
So if you’re currently spending $48,000 a year (excluding savings) and you have 20 years to your retirement, then you have 20 years to build your retirement pot of $2,387,750 in order to continue living as you are now.
It’s sobering, isn’t it?
It’s important to not cheat this exercise by assuring yourself you’ll suddenly manage to live on a lot less when you retire. If anything, our tastes become more discerning as we get older. At age 20, decorating with grocery crates and a tie-dye bedspread, or eating pot noodles every night can suffice; it is less charming at age 60. Plus, you may need more medical assistance, which rarely comes cheap. You’ll also have more time on your hands, which is when we spend the most money. So it’s best to use current expenses plus inflation as a realistic estimate of your future needs.
Note that the 4% drawdown is designed to largely keep your capital intact for future inheritance. If you don’t have dependents, you can withdraw a little more, but do so cautiously.
i. In order to build this retirement fund, play with the compound calculator by plugging in current savings and how much you’re adding to it every month or year, and see what number you get. Or, indeed, work backwards to see how much you need to be putting away now in order to build this pot.
Finally but most importantly
Does this all seem too faffy? It did to me until very recently. And if you’re single with no dependents, as I am, then perhaps even more so. But if this is you, then there’s all the more reason to prepare for our future so that we live in dignity and with independence.
In EM Forster’s A Room with a View, there’s a spinster aunt (played by Maggie Smith in the excellent film adaptation) whom everyone calls “poor Charlotte”. From a young age, I vowed to never, ever become Poor Charlotte – that faintly ridiculed and martyred figure doomed to depend on others’ generosities because she’s not financially self-sufficient. If she were independently wealthy, they’d be running circles around her (as they do around the Maggie Smith character in Downton Abbey).
So, choose your fate: Poor Charlotte or owning your own life? Pot noodles or real food? Relying – if you’re lucky to have them – on generous relatives (who could no doubt find better use of their money) or an artist’s community on the beach (or however you want to live)?
Imagine having enough money put away to look after your and your family’s needs. Now imagine being content with just what you need, and sharing the rest with those who are less fortunate. Imagine being able to invest in sustainable farming, or education for girls, or whatever is your favoured cause. Being able to share what you have is even sweeter than building it for yourself.
Money is not necessarily happiness, but it is security. I’m all for trusting the Universe and our inner light to guide the way (I’m actually not being facetious), but denying material reality could mean your savings run out when you’re 75. Our world can feel unstable; choose to be empowered.
It’s also best to not distance yourself from understanding your own financial position because someone else – a spouse, a parent, a child, a business partner or, good lord, a tax advisor or financial manager – is looking after your affairs. Even if they are, it’s important to know exactly what you have, where it is, what it’s doing and how you can access it.
This is much like understanding and taking responsibility for your own body and wellbeing, rather than leaving the decisions to a doctor or relative, however well intentioned they are. Participate in your own health, and participate in your own wealth.
How much money we have is not the issue; it’s how we handle it. Some trust fund babies can inherit millions yet lose it all gambling or in crazy investments. Others can start with nothing yet build an enormous fortune through a series of sensible decisions.
The point at which your money earns more than you do is a handy definition of “wealthy”. It’s a wonderful goal to aim for.
“The price of inaction is far greater than the cost of making a mistake.” — Meister Eckhart
Although I am no longer active on social media, I’m more than thrilled if you choose to share this post on your end, thanks!
I’ve spent more time reading financial books this year than is probably healthy, but the good news is, you won’t have to. The following are the ones worth looking at for further details.
Tax advice (where there’s money, there’s inevitably tax implications) are country-specific, but as I’m in between lands, so to speak, I read books from all over the world. The ones listed below are American except where listed. However, most of the non-tax advice is relevant to everyone, so don’t let the origin of the book put you off.
I rate All Your Wealth one of the most helpful books on personal finance, despite its being published in 2005 (and extremely prescient about the 2008 crash). Its authors, Elizabeth Warren and Amelia Warren Tyagi, are compassionate, clear and concise. It covers everything from budgets (as shown above in Point 2) to investing, to what to do in financial crises. I liked what they said about home ownership not being the only goal and of the many benefits of renting instead.
The most useful investment book for me, given I’m an expat (the official name for my status) and don’t have access to various tax benefits of my home country, is Andrew Hallam’s Millionaire Expat. It’s VERY detailed and clear, and even gives specific options for most English-speaking countries’ citizens who are expats (Hallam, a Canadian, is a teacher so his community is largely English-language schools). This was a godsend. What he says about investing, index funds and financial advisors can be helpful to everyone beyond the expat community.
Dave Ramsey’s book, Total Money Makeover (first published in 2003; periodically updated as it continues to sell in the millions) is pretty bombastic and has a lot of unnecessary fillers, but the advice is solid. His debt snowball (point 4) has helped transform lives. This is a strategy book to reshape your attitude towards money, hence the line sometimes attributed to him: “Don’t buy things you can’t afford with money you don’t have to impress people you don’t like.” Perfect. He also gives a breakdown of how he invests in the market, earning him an average of 12% returns year after year.
Late entry: I read The Simple Path to Wealth by JL Collins after I finished writing this post, and as such, it didn’t give me a lot of information I didn’t get elsewhere, but it was such a good book, that I think readers (especially those US-based) will enjoy this easy read. The author wrote this to his daughter to encourage her to create a F-You money pot so she won’t spend a lifetime being beholden to bad bosses or bad jobs. He’s a proponent of the FIRE (Financial Independence Retire Early) movement which I find intriguing. He loves Vanguard index funds and gives simple, clear instructions on how to invest. Lots of lovely lines in the book, such as: “Avoid fiscally irresponsible people. Never marry one or otherwise give him or her access to your money.” And: “Avoid investment advisors. Too many have only their own interests at heart. By the time you know enough to pick a good one, you know enough to handle your finances yourself. It’s your money and no one will care for it better than you.” Also: “Money can buy many things, but nothing more valuable from your freedom.”
Emilie Bellet’s 2019 book You’re Not Broke You’re Pre-Rich is aimed more at UK-based millenials. There’s a handy list of recommended sites, books and resources at the end. My quibbles with this book is how she said about every five pages to only invest what you can afford to lose, which began to sound patronising after a point. She’s also one of the few who promote using a credit card to build a good “credit rating”. Hmmm, not what I’d do. I like the accompanying website Vestpod, which was set up to encourage women to invest.
You are a Badass at Making Money by Jen Sincero is a terrific, inspiring read. More on changing your mindset than the nuts and bolts of money, this helped loosen my grip on old beliefs that were keeping me stuck (though I wasn’t aware of it). Plus, she’s hilarious and I love her writing.
Suze Orman, Oprah’s go-to money person, whom I admire yet find irritating in equal measure, has a podcast Women & Money I dip into now and then. She focuses on getting women to take investing seriously. I appreciate her belief about how money is never just about money. As Tosha Silver (who also has a book out on money which I have not yet read) says: “The longing to be rich is the longing to be safe.”
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