Oct 30, 2008

Sorting Out your Finances in Stages

When was the last time you jumped from your house to work, and then at the end of the day, jumped right back in one massive leap back to your front door.

What? You've never done that before?

Maybe if you work from home you have managed to do that but for the rest of us, work is usually further away than just a large leap. Usually, to get to work we do something like the following: walk, wait, step up, sit down, step down, walk and finally rest when we get in the lift. We do it in stages, one after the other, each building on what went before.

The Journey to Financial Independence is also like that. We do it in stages and each one builds on the one before.

"I'm Not Ready to Switch Over Right Now"

newborn fawn just 2 minutes after birth
Photo: slopjop

Over the past couple of months, I have had many conversations with many of my friends about finances. I'm not sure why they come and talk to me (ok, I can guess a little) but mostly it works out for both sides in which we each learn something more. Some conversations have been small and to the point, others larger and covering many bases.

I have, however, figured out a slight pattern to what a lot of people are telling me. They say things like "Maybe I don't do it now but I'll do it later" or "I'm not quite there yet but soon, I promise" or "I'm not ready to switch over right now, I have a few things I want to sort out first".

So it seems that people want to change things but don't really want to commit to it yet. It is definitely a recurring theme.

My advice to any and all of you thinking about doing something about your finances, whether it's opening a freedom fund, starting your savings or even planning your retirement:


Sorry I screamed but take my advice, if you don't start today, you probably won't start tomorrow either and as we all know, tomorrow never comes. You'll wake up one day and say "I wish I started saving 10 years ago".

It turns out that I wish I'd started sorting out my financial future about 5 years ago but I'm just happy that I'm now on the right road. To those younger than I am, just go and re-read your high-school maths books about compound interest and you'll be glad you started when you did (and I wouldn't mind some credit when you're old and rich). If you still don't believe me and you didn't click that previous link, go and do it now since it has already said everything I could have said (and more).

Do It In Stages

stone steps
Photo: nakae

The other thing you have to remember is that this particular area of your life, your financial matters, are pretty complex. There are strategies to make it simpler but in all honesty no matter how you look at it, it's fairly complex. Because of which, it also means there are a number of different ways you can do things. There are also a number of different things you can do and a number of different things you can consider.

All this adds up to an extremely rich set of paths you can take from here (now) to there (retirement or any other goal of yours).

With all those paths open to you, you can choose which direction you want to go, hopefully choosing one which takes you forward and therefore you can choose exactly what you want to do.

As you would get to work in the morning, you don't just take a big leap at the start of your journey and arrive there, you do it in stages. At first you might start off your emergency fund, you might decide to spend less or you might decide to earn more. You can of course choose everything at the same time but it's much easier to break it down into little steps and just start wherever you feel comfortable.

And that is the key, that you have to start somewhere! Starting earlier rather than later is better so why not choose to start today? Something, anything, whatever you like. Start today and maybe tomorrow, do something more. You surely won't regret it.

Call for you to pledge below to start RIGHT NOW. It doesn't have to be much but just start. Leave a comment and we'll all cheer you on your merry way to financial independence.

Oct 29, 2008

The Key to the Future: Zero Dollar Days

Here's a simple question for you. Can you get through a normal day without spending any money at all?

How about 2 days on the run, or even 3 or 4 days a week without spending anything? If you baulked at the first question, I'm sure the answer for the second is just laughter.

Does it seem too hard to do? Maybe it even seems alien. No matter what you think of these questions, I'm here to tell you that Zero Dollar Days are the key to your future.

A Day Without Spending

I do not need money
Photo: diamondjoe

When I first wrote in 10 Little Sacrifices that I'd had three Zero Dollar Days, I was absolutely shocked and stunned that I had even had one. For me, my previous daily routine was to spend money, maybe a little, maybe a lot, but essentially I would spend something every day. Now I try to have three Zero Dollar Days every week.

You should try the same. You mightn't think you can do it, like I couldn't, but it's actually easier than what you think. Your habits will have to change, but if you follow those 10 Little Sacrifices (and maybe some of your own), you'll find that you've already eliminated most of your daily spending - which at the end of the day are non-essentials anyway.

It's harder to create those Zero Dollar Days when you have essentials to buy; like breakfast, lunch and tea, or maybe journeying to and from work. In those cases, giving up isn't feasible so you have to do it another way. Yet again though, it is relatively easy since all it takes is planning.

For travel, all you need to do is pre-pay your train or bus ticket or fill up the car at the start of the week. Of course, if you walk or bicycle to work, you're already on to a winner.

For food, you just need to figure out what you're having and when. Breakfast is usually at home so that's already been paid for when you last went grocery shopping. Evening meal is also similar and as usual lunch is the hardest thing to figure out. Being able to get home for lunch (like I do) is a little privilege but brown-bagging it surely is the cheapest option though it requires the most planning.

Other than those two things, you can probably get through a work day without spending anything. Weekends are hardest but even they can be Zero Dollar days too. Work on the weekdays first and move onto the weekends later.

For the Future

All of those savings you're making to get those spend-free days should be whipped straight out of your account and put into your debt repayment or into your savings. Just get it out of your current account so you can't spend it on anything else.

You'll find that these savings really start to add up and once you start earning interest on the amount saved, you'll be happy with the results.

My Progress

In the past two months, I haven't kept a complete check of my Zero Dollar Days but I will do from now on. Sometimes it's hard to figure out if you had a Zero Dollar Day - for example what if your utility bill came out of your bank account but you didn't spend anything else. I'd still consider that a Zero Dollar Day since that payment was pre-planned and didn't come out of your wallet (either cash, debit or credit). I'd also say the same for a grocery shop of essentials, especially if it's pre-planning all your food for the next while (but not if it contains any of the non-essentials you promised to give up)!

At a guess though, I think I've been doing either 3 or 4 Zero Dollar Days a week during the past two months. I definitely think it has made a big difference to how much I'm spending. I'm going to the supermarket a lot more but that's because I'm making and eating much more of my food at home. The cost of the supermarket (or Sunday Market) is still much cheaper than paying for someone's labour making it when you buy those take-aways, deli sandwiches or cafe food.

As I mentioned at the start, if the idea of going through a day without spending doesn't fit with you, then just try it for one day and one day only. Once you've done that, you'll be able to do it again and again and again. Good luck with your new spending habit and enjoy your new increasing balance in your savings account.

Do you have any tips on how to attain more Zero Dollar Days? What do you call them? Let me know below.

Oct 27, 2008

The Power of Snowflaking

Let me tell you the story about a snowflake. Jimmy was it's name and it was very small. One day it decided to snow and Jimmy came into existence along with many other snowflakes formed around the same time. They looked at one another and thought "My, aren't you a nice snowflake" however some of them looked at each other and thought "Wow, you're bigger than I am". Jimmy looked at everyone and thought that they were all bigger than him.

The larger snowflakes tended to keep to themselves, since they were bigger than the others. They weren't very nice either. So in the end, the smaller snowflakes - including Jimmy - decided to gather together so they could become larger and more powerful than the bigger ones.

After a short while, they all fell to the floor only to be gathered up together by the children playing. Jimmy got swept off his feet by a young child with huge mittens. Firstly, they were gathered into a snowball, then rolled into a head and finally into a huge torso. Right in the middle, next to the middle button, Jimmy lay looking out and feeling safe. This snowman was eventually so big, the relative size of all the individual snowflakes didn't matter and the snowman itself was greater than it's individual parts. Jimmy knew that those bigger snowflakes wouldn't worry him now., safe in the knowledge of being with all the other snowflakes.

And that is what the power of snowflaking is.

So, yes, thanks, but what is it?

just a moment!  Snow Crystal
Photo: elifayse

Snowflaking is a term used in the personal finance field. It is pretty easy to understand and also very powerful. It's also very easy to do.

It is a technique to help you pay down debt or increase your savings. Essentially what you do is, at every opportunity you have for scraping aside money into a separate savings account or a current debt, you do it. It doesn't matter how big or small the snowflake is, it all adds up to that snowball effect and before you know it, you're looking at a whole heap of snowflakes. Once these start adding up, these snowflakes become snowballs and by then the momentum has started.

You can start in a variety of ways but as always, the most important thing is to start. That's the hardest step. Once you've started you'll find more reasons to snowflake.

Many people clip coupons to save money at the supermarket. If they receive $1 off a tube of toothpaste, then they will snowflake that dollar into whichever debt or fund they choose. Others will see that cycling to work one day a week is a bus fare saving which also gets siphoned off somewhere else (not into other expenses of course). If you manage to get a bonus from work, that gets scraped elsewhere and yet others see a pay-rise as a permanent snowflake (but then you're more into savings schemes).

Any Excuse Will Do

I have noticed something about snowflaking and it is this. If you practice the technique then no matter what you do throughout each month, you'll find any excuse to snowflake that money off elsewhere. Take these examples as interesting reasons to snowflake rather than as a guide. Yes, I have actually seen people use these so you can see, it really is for whatever reason you decide:

  • shift over the cost of that coffee you didn't have
  • move aside what you saved in the supermarket
  • was your lunch ultimately frugal, siphon off what you didn't spend
  • did you find a dollar in the street, put it in your savings
  • pay off some more debt with that money you were given in your garage sale
  • transfer the extra you received in your paycheck this month
  • cast aside what you used to spend before you gave up your bad habits!

My example this month is that I have been online selling some of my old DVDs that I no longer watch. Every time I get a sale, I've been shifting that money over into my emergency fund. The thing is, instead of moving the sale amount minus the commission, I have moved the whole thing and considered the commission an expense for the month.

And I have another confession. Over the years I have gathered a number of booklets of stamps which I always lose and then end up buying another booklet, only to lose that and never use the all. Whilst simplifying my life I have found all of these booklets again and stashed them in an envelope near to where my jiffy bags are. So instead of taking off the cost of postage (which is added on at each auction) I have also been moving that over to my Emergency Fund.

And finally, just so it didn't feel left out, I have done the same for the jiffy bags I had to buy and consider that a monthly expense too.

It turns out that within a month, I am now about $118 richer in my Emergency Fund due to the addition of those four things (DVD, commission, stamp, packaging) all being siphoned off. If I had only shifted the profit, I'd be looking at a much lower $90 (but still better than just spending it).

Compound Interest Strikes Again

And that is when the magic happens. Okay, that $118 isn't going to make a big difference now but in the future, with all the other snowflakes I cast aside from my expenses, that'll start to begin growing exponentially making my money work even harder for me. Once you start, you won't be able to stop and your debt or savings will move in the right directions faster than you thought possible.

So come on. Help Jimmy out and make sure he finds his rightful home amongst all the other snowflakes. After all, if you don't, he'll just end up melting and then you won't know where he's gone. Put him aside safely and watch as he helps build your snowflakes into your snowballs.

Why not give it a go and let me know how you get on. What other things will you snowflake?

Oct 26, 2008

The Search for Happiness

When you're walking down the street, have you ever played that game where each foot has to take it in turns to step over a 'line'? Whether that line is a flagstone, a drain, a curb or even where the pavement has been dug up and re-laid in a different coloured tarmac.

Occasionally one foot gets stronger since it manages adjacent wins but the other soon catches up - either you alter your stride so it steps over the next two lines, or you change the rules in your head so that the next line the losing foot crosses is worth twice the points.

If you've never played that game then I wholeheartedly recommend you try it. It's kinda silly I know. I still do it to be honest and as an adult it usually happens due to the habit of doing it as a child rather than because I think it actually means anything. The best thing about it however is that it reminds me of being a kid. A big kid, yes, but a kid all the same.

Harking Back

Photo: aidanmorgan

Looking back on me as a child, I remember many things but one thought seems to stick out more than any other. It is that of fun, enjoyment and happiness. We would spend the whole of the weekends on our bikes, pedaling around country lanes. We'd while away summer evenings on the local school field playing football until it was so dark, we couldn't see what was happening. Climbing trees at the height of the conker season was always fun and getting into trouble with some security guards here and there was always a possibility. Arriving home late for tea was a regular occurrence and was enough to be expected.

But that was a long time ago. Since then, I have grown up, become all responsible and ... yes, you guessed it ... finally became an adult.

Sometimes I wonder where those heady days went. When time didn't mean much, pocket money was never enough (so what's changed?) and responsibility wasn't a word in our vocabularies.

Amazingly however, my recent start on the journey towards financial independence has helped me renew and revisit a number of those happy thoughts and experiences from childhood. I am currently happier and more fulfilled in life than I have been for a good while and I know this to be true because a number of people I have spoken to recently have told me that I sound happier, look fitter and healthier and I am smiling more. (I think people who already know me would probably say is actually hard to do already.)

Recent Changes Leading to a Better Lifestyle

One recent change I made was that I finally bought myself a bicycle. The last bike I had was when I was 12 so that's a good 20 years ago and therefore 20 years in the meantime without having one at all. (Interesting fact: I still consider that old bike to be the world's first mountain bike but that's a story for another time.) Back then, we'd cycle all the country lanes and the old railway by my house but this newer one of mine has two other uses. Firstly as a means to get from A to B (and will eventually help me get rid of my car). The other use is to get a thrill by doing some off-road mountain biking. Up until a couple weeks ago, I'd never tried it before and I can tell you, it was an exhilarating experience. I suspect I'll be doing it twice a week from now on.

Over the past few years I have also started to go swimming again. Playing indoor football is always fun and I even pulled my old roller blades out the other week. My body feels fitter, my diet is healthier and my mind is happier for all of it.

My diet is an interesting subject since it has vastly improved in the past two months yet during the same time, the cost of my food has substantially gone down. Add in the fact that I am going to the market on Sundays, buying fresh produce and not buying take-aways and you can see how one thing goes up (nutrition) and another goes down (cost). Isn't it amazing when you think about it?

And the final thing I'd like to touch on is the one that this blog is all about - taking my financial situation into my own hands, molding it into what I want it to be and determining my own future based on cold hard facts about my income, my expenditure, my savings and my retirement. Just the mere fact of having more control over my future leads me to worry less about money and gain infinitely more peace of mind.

Oh, and did I mention that a 4-day working week was just the best thing ever! Yes, I thought I said that before so I don't need to mention it again now. Well okay, a 4-day working week is just the best thing ever!

You Should Try it Too

Now it's over to you. I have painted a couple of pictures above. One of my former self, either in or out of school, enjoying pastimes which didn't cost the earth, not a care in the world and basically being able to do whatever I liked (within the confines of the law of course). The next picture I painted was of my current self, a picture which has moved on over time, which had lost some of those previous experiences but also now isn't too different from the one I had before. Yes, I have to work, pay taxes, pay mortgage/rent, bills and a myriad of other things but in reality, I have managed to confine those things to a part of my mind which doesn't interfere with the rest of it.

Instead, I have been filling the other parts of my brain up with good things, enjoyable experiences, miscellaneous thoughts and sometimes random games just for the sake of it. Take control of your finances, work less, worry less, live more, play more, spend less, eat better, experiment with recipes, watch less TV, learn a new skill, take up a hobby, save willingly, exercise longer, exercise more often, read things, chill out for a while but most of all, be happy.

And the next time you're walking down the street, keep a count (an inexact one is okay) of the number of lines your left foot crosses compared to your right foot. Smile to yourself when you have to change your stride when one foot is becoming too strong and look up to see if anyone is looking at you in a funny way. Hark back to your youth, gain back some of your time and go out and enjoy yourself for the sake of it and for no other reason.

You'll be amazed at how free you feel and hopefully you'll be one step closer in the search for happiness.

I'd love to hear your experiences, your ways of de-stressing, chilling out, exercising, enjoying yourself and generally becoming a big kid all over again.

Oct 24, 2008

Who do you Consider Rich?

When you were a child, who did you think was rich? Was it those movie or pop stars who had earned millions and had their own private planes? Was it those people who'd inherited their wealth, owned a mansion and had their own swimming pools? Or was it those people who could afford to go abroad for their holidays every year?

For me, it was all of the above. I used to look at a lot of people and figure that they were rich. And for some reason, I wanted to be rich too. At that stage of my life, it all equated to material wealth, personal possessions and the ability to spend money on whatever I pleased.

Nowadays though, my view of people who are rich is not exclusively based on money. I view people as rich if they are financially independent, keeping as busy as they like (maybe even working for themselves of course) and are happy in their lives. I also rate very highly those people who can spend time doing the things they love, whether it's volunteer work, a hobby or two, being with their families or even making a little money doing something of their own choosing.

The funny thing is most of the people I now consider rich, defined by the categories above, are either semi-retired or fully retired.

Who are these People?

Little yellow beauty
Photo: thinkscape

It is mainly understood, but mistaken, that the people who retire early are wealthy. However, there are a number of factors which goes against this viewpoint. For a start, to be retired doesn't mean you have to have a whole heap of money in your account. Nor does it mean you have earned millions and millions over a long and prosperous career.

All it means is that you can live on the amount of money you passively earn.

Or put it another way, you have reached that crossover point whereby your expenses are lower than your passive income. This means that, without lifting a finger and being careful with your expenditure, you no longer have to work.

Of course if you are only semi-retired and you still work a little, that income also adds up to offset your expenses so you can probably reach this point earlier than complete retirement. Yes, you might have quit working for someone else but at least you get to work on your own terms.

Getting There Faster

When you look at what I said earlier - live on the amount of money you passively earn - you can see that it is an easy equation.

Passive Income > Expenses

Whilst it is fairly simple to understand it is a lot harder to put into practice. Writing this blog, for example, helps me to put more things into place so that it becomes easier and easier and hopefully, I can reach that crossover point sooner rather than later.

As you can see, you can attain this point by increasing your passive income. But you can also attain this point earlier if you reduce your expenses. You'll start to realise that this is also exactly what you should be doing now and not just in retirement. You life should be organised so that your lifestyle in retirement is similar to your lifestyle now. There's no point scrimping and saving now to then splurge in retirement.

Similarly, there's no point spending like crazy now hoping that you'll be more frugal in your retirement.

By actively setting out your stand, how much you earn, how much you spend, you'll also be setting up what you need to get past that crossover point and into retirement. In fact, you might even be able to plan it years in advance, like me!

Everyday People

You mightn't have realised, that many people who are already retired, look exactly the same as you. They never had a hit record, they didn't inherit large amounts of money nor did they win the lottery. Instead, they seem to go for the bargains, don't buy designer clothes and clip coupons when they can.

They don't buy new cars, they don't need a huge house nor do they try and keep up with the Jones. In fact, they look just like regular people next door. You might even think that they don't have a whole lot of money at all, after all, their car isn't as big nor shiny as all the others in the local driveways.

But the truth of the matter is that they are richer than many of the people living in the same street. Probably richer in monetary value yes, but even more importantly, they are also richer in time too.

The reason?

Because they are retired.

They have been through the cost-cutting exercises, paid off their debts, own their houses outright, saved up an emergency fund, invested in the stock market or property and increased their income. Because they've done all of this previously, they now have the time to do whatever it is they please.

It is these people I now consider rich. They have the time to enjoy a great many things in life. After all, time is the one thing we can't earn more of.

Let me know who you consider to be rich?

Oct 21, 2008

The Satisfaction of Paying off Debt

Everyone has had debts at one time or other in their lives. Some more than others, others less so. Whether it was for a high interest credit card, a low interest student loan, a friend lending you some change or the bank lending you enough to buy a house.

No matter what the amount, what the interest charge and however long it took to pay back, there's nothing better to put a smile on your face than finally repaying that last amount back.

Help with My Mortgage

A few years ago when I bought my house, my Mum lent me just over 5% of the total house price. I had just over 5% myself so I topped over 10% for the deposit. Luckily for me, she said I didn't have to pay interest on it. Even though I got it at what was probably the worst GBP->NZD exchange rate there had been for years and ever since then I've been paying it back on a pretty bad NZD->GBP rate too (today being the worst since I first visited here in 1998) it still means that I have come out on top by not having to pay 7.85% on it for the duration of the home loan.

Over 25 years, that would work out at a lot of money, so even though I lost out in the exchange rates, I'm still up at the end of the day.

The Facts and Figures vs the Emotion

Many people say that you should pay back the highest interest debt first. Others say that you should pay back the smallest. Of course, it's never as black and white as either of those tactics and you have to choose which one (or a combination of both) is right for you.

For example, if I paid back the highest interest loan first, it means my Mum would be waiting a very long time before she sees that money back. Of course, I don't want her to wait that long so in the end, even though it's interest free, I wanted to pay her back first. Not only does she need it more than my bank does but I never like being in debt to people I know (hehe, yes, the bank is a faceless company).

I know a few people with 4 or 5 different loans and in each of those cases, there are reasons for picking neither the highest interest debt nor the smallest loan as the one to pay back first. Everybody's situation is different and you need to figure out what tactic is right for you.

The Emotional Tactic

There is another way you can pay back debt which isn't as technical as either of the above two but gleans you the most satisfaction. It's all about goals and what makes you happy. Yes, by employing one technique over another you may pay back a loan one month quicker but there's nothing better than a happy state of mind to help pay things back faster and create an even happier outlook.

Now that I've paid my Mum back, one chunk per year for the past three years, I can now get a real start on my revolving mortgage. Once that's done, the fixed-term mortgage will be in my sights.

It makes me so happy to have now removed that additional debt (no matter how small or how low the interest rate) that I'm on something of a natural high at the moment. And if you bump into me in the next few days and see that I'm grinning like a Cheshire Cat, you'll understand why.

Tell us about your debt repayment stories below.

Oct 18, 2008

New Meme: Paying Yourself Last

There has been a bit of a flurry in the PF blogosphere about a new phrase: Paying Yourself Last.

Recently, I described how Paying Yourself First was a good thing to do and that I had started practicing this to make sure I can get ahead on my retirement plan. The funny thing is though I had been Paying Myself Last for a number of years though I guess it never really had a name back then.

"Pay Yourself Last" and What It Means

Moon, Mars, Mercury and Venus at Sunset 09.01.2008
Photo: bossco

As stated in the earlier article, paying yourself first is a fully automated process. You get paid, you siphon off some money, maybe a percentage of your salary, and you forget about it. Nice and simple, easy to do and low levels of mental investment needed.

Paying yourself last however requires a bit more effort. It also relies of having a few things in place so that you can actually keep a track of how much you should pay yourself at the end of the month.

Tutorial for Mars Colonists

You get your pay on the 1st of every earth month. Let's say for the sake of argument, you get 1,000 Klicks (imaginary space money) take-home. Your split scheme kicks in and those automatic transfers you've set up take action. You send 100 Klicks to your Emergency Fund sitting in a high interest savings account on Earth, 50 Klicks to your Freedom Fund on Mars and you have to pay rent of $450 Klicks for your bedsit on the space station above the Red Planet's surface. Luckily for you, all your bills are included in your rent (solar power is extraordinarily cheap here anyway).

Budget Required Before you Can Pay Yourself

You have 400 Klicks left for which you need to budget. You've budgeted for food, clothes, TV (or the high-tech equivalent) and you also have some 'fun' money to play with. Unfortunately for you, that's your 400 Klicks accounted for for this month, as it is every month.

You know this since you've been keeping a budget for an Earth year or so and you know about how much you spend on each of these categories. Very rarely do you go over.

But sometimes you come under. Unfortunately, in the past you decided to spend what was left on the last day of the month - mainly because it would make you feel happy - but also just because you could.

Change Your Ways - Pay Yourself Last

This month however, you decide to give yourself a break from that end of month splurge. You've come in about 75 Kicks under budget this month, mainly because you didn't buy any clothes but also because you got some bargains at the Light-Speed grocery store and didn't go out as much as other months (the Inter-Galactic Olympics were on so you sat in and watched a lot of TV).

You decide that, instead of heading to the shops to spend it and make yourself feel good, you Pay Yourself Last and make yourself feel even better. You duly transfer your 75 Klicks into your retirement/savings fund. After all, a Klick saved is a Klick-and-a-half earned before tax. Also, a Klick saved now is worth quite a few Klicks in your retirement fund by the time you want to head to Europa and settle down 20 Earth Years from now.

The Present and Not the Future

Yes, I know, that story is set a little in the future but the funny thing is, that's where you need to be looking when you decide what you're going to do with that left-over money at the end of the month.

If you only take one sentence away from this post, let this be it. "... a Klick saved now is worth quite a few Klicks in your retirement fund ...". Substitute Klicks for your own currency and away you go to a more prosperous future, whatever planet you decide to retire on.

Please comment and let us know some of your other tactics for saving more before each month is out.

Oct 15, 2008

What is Passive Income and Why You Need It?

Passive income is the holy grail of personal finance. Passive income gives you more freedom than ever before. Passive income is what you should be striving for.

But what is it and where do you find it?

First thing's first. Let's look at some history.

'Swapping Hours for Money'

Sleeping like a baby
Photo: chris_gin

Whether you're in a full-time job, part-time job, temping or contracting you're essentially doing one thing and that one thing is what has been happening for centuries. You're swapping hours worked for money. Yes, call it 'compensation' or something else fancy but essentially you're swapping one for the other and that's it. It's that simple.

Income = Hours worked * Your rate per hour

Of course, what you get in return - your rate - is generally based on your skills and experience. The more skill and the more experience you have, the more you're likely to be paid per hour worked. Hopefully over the years, we get better at what we do and we are rewarded with a pay-rise.

The Problem with this System

Even though the majority of people go through their entire working lives doing this exact thing there is one huge drawback to this system. Consider the fact that the market conditions mean that what you can charge per hour is limited by what someone will pay. Even if you're lucky and you get into the top 10% or even the top 1% of earners the amount you can charge per hour is limited.

Therefore, if you want to increase the left hand side you have to increase the time component. No! I didn't think so either, you already work enough. This essentially means we've got a problem. You can't change your rate (much) and there are only so many hours in the day.

24 to be exact.

And you don't even want to be working a third of those either (if you include the weekends).

Can you see the problem now? Yes, you might get lucky and earn $1,000/hour which would be pretty sweet but in reality that's not going to happen. So what can you do to ensure you can get an increased income?

Change the Equation!

As stated earlier, both of the elements on the right-hand side of the equation are problematic. Your rate is a problem and the amount of time is a problem. What's the lowest common denominator of both of these elements? That's right. You.

Your time and your skills and experience.

The answer therefore is to remove yourself from the equation. This leaves the equation we stated earlier in tatters so we have to look at it through a fresh pair of eyes and change the equation. We're starting from scratch and what we have now is something like this:

Income = ?

So what we really want is something whereby we (most probably) have to do a little work up front but we can reap the rewards for that work for a long time to come. At regular intervals.

Essentially what we're doing here is making sure that this new income - Passive Income - is money given to you but for which you're not a part of it. i.e. you don't even have to lift a finger and if you do, it's only very slight.

How Can I Get My Hands on Passive Income?

There are a number of options. The main ones you'd traditionally see are:

  • interest earned from your bank accounts
  • rental money from real estate
  • stocks and shares which pay dividends
  • royalties from music, a book or other published work

Of course, we also live in an electronic world now and one in which there are many more ways to generate passive income. Think about some of these (usually placed onto a site you own):

  • selling your photos
  • affiliate programs, like AdSense, Amazon
  • creating and selling eBooks
  • selling user-generated works, like CafePress
  • having 3rd party adverts on your site
  • selling adverts directly

The list goes on and as you can see, there are some things which look a little complicated. Rest assured though, once you start generating this income without having to do much work towards it, you'll start to see how it can really help.

My Plan

Currently I own a house and am renting it out. This generates passive income for me though I must admit to having to do bits and pieces here and there. Another advantage is that I can also claim tax back on various aspects of owning it but renting it out.

At the moment, the house is definitely something which gives me an advantage, though I will certainly be playing with some of the new electronic ways of generating passive income. At the moment, I have a job so as well as swapping my time, skills and experience for money I can also go to bed safe in the knowledge that whilst I am sleeping, I am still earning money.

What are your Passive Income strategies? Are you looking at starting, or expanding, what you currently get?

Oct 13, 2008

3 Simple Schemes to Split up Your Paycheck

How much should you use to pay off debt? How much should you save? What other categories should you consider?

As with everything related to Personal Finance, there are many ways of doing it and many much more complicated than any of these three. We're going for simple maths here, simple life, simple savings. And the best thing is, they're all likely to work for you, you just need to decide how complicated you want to get.

In my previous article I mentioned that you should Pay Yourself First. I'm currently putting away 10% of my paycheck into my Emergency Fund. Luckily for me, I have no other debt other than my mortgage so my plan is to increase this 10% over the coming years to 20% or more ... and that's exactly what this first scheme is.

The Simplest of Them All

Put 20% of your take-home pay in Savings

That's it, it's pretty simple. Savings in this case, means anything from an Emergency Fund, your retirement fund, maybe stocks or even an added payment on your house. Of course, if you have any debt (other than your mortgage) you should put this against your debt first. Savings can come later once those high interest debts are gone.

The Next Level

Spend 50% on Needs, 30% on Wants and put 20% into Savings

Not much different to the one above is it? It's just splitting up the rest of your pay a little bit. Of course, everyone's circumstances differ so it would just be a case of fine-tuning the percentage amount for each category until you find the one that's right for you. I personally think that 30% Wants is a bit too high but again, it's all dependent on your other categories.

The Final Simple Scheme

60% Needs, 10% Retirement, 10% Irregular Expenses, 10% Savings, 10% Fun

Yet again, we're splitting up the categories but if you look closely, you're not too far off either of the previous two anyway. For example 10% Retirement + 10% Savings is almost equivalent to the 20% from the first scheme. Currently I'm putting 5% into my Freedom Fund (Irregular Expenses) but I hope to increase that. I will also soon start socking away more cash into my house too. I hope that in 2 months time when I make my first real budget that my Needs are lower than 60%.

Which One is Right for Me?

All of them are right and they'll all do the job to one degree or another. Doing your sums makes all the difference and luckily the maths are fairly straightforward here. I'd say if your savings scheme is remotely like any of these then you're doing okay.

On the other hand, if your savings scheme is a lot less than these, or is even non-existent, then you'll have to start seriously looking at paying yourself first and starting those savings.

Anyone have any other schemes they are using? Any that they are planning to try?

Oct 12, 2008

"Pay Yourself First" and other Ideals we have Recently Lost

Over the years, we have forgotten a number of things that our parents did, more things our grandparents did and even more so what our great-grandparents did. One of my favourite phrases of recent times is "It's the way of the future" but in a lot of circumstances, we really can learn from the past on how to best to get along in life.

Here I'll name a few ideals we seem to have lost over the years and hopefully we can start to bring back into life to make it better, easier, more fruitful and also make us financially better off.

"Pay Yourself First"

When was the last time you heard that phrase? A while ago maybe. Certainly for me, it's not something that has crossed my mind since I first heard it when I was in school. My parents didn't use it a lot though I fully expect my grandparents did.

In Personal Finance circles, it's a very well known phrase and one which seems to be the staple of better financial management from which all other tips and techniques arise from. Obviously paying off high-interest debt is the first thing that should be done but that gets you into the swing of paying yourself first. Then it's just a case of switching from paying off someone else to paying yourself.

I'm sure there are many different ways to do this but siphoning off 10% of your salary is the first place to start. Currently, that's exactly what I'm doing but I plan to increase it to 15% and finally 20% at a later date. If you add that to my KiwiSaver contributions (plus my employers on top), in a few years time I hope to be shifting the equivalent of 28% of my salary aside. This is in addition to making extra payments on my mortgage.

Growing your own Veggies, Get a Vegetable Plot

A few years ago, I had a vegetable plot. I lived next door to an old couple of 80ish years old. Once my garden was in harvest I had far too many carrots, beetroot and onions for me to make use of. I wanted to can some things - especially the beetroot - but at the time I didn't have the equipment. Instead, I gave some to my next door neighbours.

Without asking, something magical happened. They came around the next day with a 'harvest' of their very own. Silverbeet, lettuce, potatoes and parsnips! I was shocked but at the same time, very happy and very thankful.

It got me thinking that, in their day and age, that swapping would have been commonplace. They were originally British so I suspect in the years after WWII, having a part of a communal vegetable plot (something still very British) would have been commonplace.

Currently I don't have land I can (or want) to grow veggies on but my yearning to get back to the good old days is growing ever larger. Being able to pick a fresh carrot for breakfast, some tomatoes for lunch and maybe an apple at tea creates a very satisfying moment. I can't wait to get a veggie friendly place again so I can again reap the rewards - both nutritionally and monetary - by growing my own veggies.

Building to Last and Fixing the Things that Break

In our throwaway society, two things have changed. The first is that consumables are now built to be thrown away and replaced. "No user serviceable parts inside". Not only that but we have also lost our ability to fix other things too, things which are user serviceable.

Take my car for instance. It's not very complex but at the same time, I have no idea, none whatsoever, how to fix it if something goes wrong. Yes, I can learn about it - and I should - but hopefully I'll be getting rid of the thing soon anyway (heh, that's one way to remove a problem). Then again, knowing how to darn a sock or patch a pair of jeans is something we can and should all do.

Obviously you can't keep repairing things forever but you can sustain them for a while. Also consider giving them to charity to be given or sold on since there may still be some use in them yet.

Creating our Own Entertainment

Long before the days of games consoles, kids used to keep themselves entertained. The amount of time I used to spend in the street kicking a footy against the kerb was huge in relation to kids nowadays. TV, computers, games consoles, music players, portable entertainment all seem to keep kids occupied but whether their imaginations are getting a run-out is speculative.

When was the last time you saw kids on the street playing for hours with a spinning top or hitting marbles against each other? Me neither. Whilst I don't expect that form of entertainment will go down these days I do think they still have a place especially to encourage imagination which is something which will certainly help in later life.

Having recently bought a pedal bike, I'm already yearning back to my younger days when we would ride around for hours, getting in to all sorts of situations but thoroughly enjoying it too. Not only that, but it also gives me more exercise and is yet another activity that doesn't have an ongoing cost once the initial payment is made.

Going back further, when we were hunter-gatherers, our bodies expected a certain amount of exercise and they still do. Whilst we are still evolving, we're not nearly evolving as much as the technology we introduce into our lives and they just can't keep up. Give our bodies what they deserve and get out there running, biking, roller-blading, swimming or playing games. It's also great for the mind.

The Way Things Were

Looking even further back into history reminds us of even more things we no longer think about. On a recent TV program I saw it reminded us that the more basic an activity is, the more our bodies and our minds respond to it. Exercise and cooking our own meals - as opposed to watching TV and eating take-outs - not only make our bodies and minds feel better but are also helping save money at the same time.

It's no coincidence that the things that make us happier and feel better, are the things that actually cost us less.

Any other activities you can think of that our ancestors did, we don't but should still consider to make a part of our lives? Leave your comments below.

Oct 11, 2008

5 ways to De-Clutter and Simplify Your Life

Stuff, junk, clutter, mess. Call it what you will but it's all the same. It is those things you've had lying around the house for ages and ages. Things you really should get rid of but haven't done anything about, sitting there idly like a cat in the sun. It's about the stuff you think to yourself "... but I might need it later".

Well, here's a bit of truth for you.

You won't need it later. You won't need it next week or next month, or even next year! In fact, you just won't need it at all! Ever. Full stop.

The Idea of Having

stuff like that
Photo: debaird

So what is it that stops you from getting rid of it all. It's the Idea of Having. All those things that you've carried around with you for years you somehow have an attachment to are just baggage. You think that because it was something that defined who you were at one stage of your life you feel the need to keep it to remind yourself of this long forgotten time. But the problem is, every other aspect of your life has moved on and you're no longer defined by the things you had. You're now defined by who you are and the use of these ancient items is nil. In which case, get rid!

I should know about this since I have been a master at slavishly shifting my stuff around - house after house has seen boxes come and go without so much as an unpacking. I think there might be some dinosaur bones at the bottom of one box, I've had it that long. Consequently I have completely forgotten what's even in there. How sad.

also, I still have things that I had at university! I left university 14 years ago for goodness sake. Occasionally I look at it and smile to myself, remembering some of those happy times but times that are now from a bygone era of young adulthood far removed from the person I am now.

My Achilles Heal

For ages (and ages and ages), through a number of moves, including one half way around the world, I have always just packed up my stuff and shifted it to the next place. I think my tendency to hoard things stems from my Mother since she's always got a houseful of stuff though I can hardly blame her for my failings now. Hoarding is certainly something that was inbuilt into me at an early age and a problem I'm only just tackling now - yes, I'm imagining I'm lying down talking to a softly spoken person sitting on the couch next to me.

But finally I can feel the recovery process is starting and my Achilles heal is getting better and not holding me back. One step was to just stop buying more things and the beginnings of a budget meant that I was already on the right track, spending less and refraining from adding to the problem. (Not that I'd spent much on 'stuff' recently anyhow but it all helps.)

And finally, over the past year or so, I have been tidying, de-cluttering and organising all of the things I shall be annexing from my life. Usually I have done this ad-hoc and so far it's been working. There are plenty of other ways to do it too, but here are five to help you on your way.

5 Ways to De-Clutter and Simplify Your Life

There are a number of different ways you can get rid of your stuff. Over the past year, I have done four of these and am about to start on the fifth.

1) Give It

Giving it to a friend is a great way to get rid of stuff but also give to someone who'll use it. I've had a number of conversations recently whereby a friend of mine said "I wish I had ..." and I told them they can have mine. Sometimes I see it as a long term loan though I suspect in some cases I'll never see it back. That's okay with me though, better someone is using it than not at all.

2) Donate It

There have been a number of occasions in the past year when I have filled up a plastic bag or two and put them out for collection by one of the charities. Over the years I have also donated my fair share of goods to the Salvation Army, sometimes to re-sell things I'd originally bought from them!

This gives you two great feelings. The first of helping others and the second of removing your bond to some of your material possessions. Win-win for all concerned.

3) Pass It

FreeCycle is something I haven't yet tried but am planning on sending a few emails to the Wellington FreeCycle group this week. I have a number of fiction books that I'm sure are quite popular and therefore, I wouldn't get much for them anywhere else, so giving them away seems like a good idea to me.

Also, wouldn't it make you feel good that some random stranger will get some happiness from that book you really enjoyed too.

4) Sell It

Selling your stuff via a garage sale, taking to a second hand shop or selling on-line is something which can actually give you a slight return for your sunk cost. Yes, I know it can be hard to get only a few dollars for something you paid so much more for but if it's something you never use yet can net you an increase in your balance then why not.

I took some books to the second-hand bookstore last week and the (small) amount of dollars I received, I put straight into my Emergency Fund. It's money I've never seen before so instead of spending it on something else I don't need, I pretended it didn't exist. Now I'm also helping my future self if something goes horribly badly wrong, something you probably can't do with an old book or DVD.

5) Dump It

Obviously, this should be your last port of call since it's better to keep things out of landfill. Re-use via any of the above means should be considered first, especially if the thing is still functioning for it's intended purpose.

If not, dump it and be free in the knowledge that you have a tidier and neater house.

Reasons to be Cheerful

As in my use of my Credit Card, de-cluttering actually makes my life simpler. I have less things to worry about. I always seem to have something going through my brain, whether it's my latest idea, a website or two which needs doing or some volunteer work I have on. To help concentrate on some of these things a bit better, the less I have to worry about money, possessions and other such things, the better it is for me.

Why don't you try it and let us know in the comments below how it's going.

I suspect that you'll then have more reasons to be cheerful and less reasons to be worried. After all, it's just stuff and you ain't going to need it anyway.

Oct 9, 2008

The Freedom Fund - How it Can Work for You

Do you know what a Freedom Fund is? Have you heard of it before? Any ideas what it might be?


Well, you're not alone. I hadn't heard of one either until the other day. After a bit of poking around, I present a short article on what a Freedom Fund is and how you can use one.

Covering your Backside

Photo: izarbeltza

Every month you get paid (maybe every two weeks, but just go with me for a while). Every month you have regular expenses. Your mortgage/rent, your electricity, your phone and maybe you pay your insurance and a few other things monthly too.

Then you have some of those irregular expenses. Maybe your car tax is a once or twice a year thing. How about other insurance which is once a year. What about a magazine subscription or even an on-line service you use which is due this month.

These irregular payments are a complete pain in the backside. I know this. You know this. Everybody knows this but not everybody knows how to deal with them.

This technique enables you to deal with these expenses effortlessly and hopefully in the future, you won't think twice about an extra large outlay in any particular month.

Fund your Freedom

What you need is a Freedom Fund and it's no more complicated than just another bank account. I used to have a bills account but in all honesty, I don't have a need for it now since I know (roughly) what goes out of my main account each month. It's those payments that are irregular which hurt me, usually more than I expect.

All you need to do is stash away a certain amount of money each month so that when those irregular payments come in, you already have the money to pay them. Immediate access to enough dosh to get them paid and not worry about it. No searching for extra money in any of your other accounts, no shifting money around to make it happen, just immediate knowledge that you're already covered.

Worrying stops. Mental freedom starts here.

How Much is Enough?

Only you can tell. You have a good idea of what comes in every so often so you need to decide how much to move aside. It's worth over-estimating so that if your car needs extra repairs this year, your Freedom Fund covers it. I suspect you should roughly tot up the totals you expect to come in over the whole year, divide by 12 months and maybe add 20-25%.

For example, and these are very rough figures (off the top of my head), I have:

  • car registration - 1/yr @ ~$200
  • car insurance - 1/yr @ ~$350
  • car Warrant of Fitness - 2/yr @ ~$50 (not including repairs)
  • council rates - 4/yr @ ~$350
  • on-line subscription fees (Flickr etc) - 1/yr @ ~$40
  • ... and others

So my initial stab at the cherry says I'll be taking out about $250 per month to cover all of these irregular items (I'm sure I've missed some off the list though) and give me a bit of leeway into the bargain. Of course, after a short while, you should review where you're at and see how much you are under or over the amount you expected.

Again, the best way to build this up is exactly the same as for your Emergency Fund and yank this money straight out of your account on the day you get paid.

What about my Emergency Fund, isn't that for stuff like this?

Yes and No.

Generally you don't want to touch your Emergency Fund but every now and again it makes sense. You noticed in my list above that I ignored the fact that I might have to make repairs to my car after it had been for inspection. In that case, it would be considered an expense that I wasn't expecting ... whereas all of the other things I've mentioned are expenses that are expected but just happen to be irregular.

In general then, leave your Emergency Fund alone and just plan that little bit ahead with your new and fresh Freedom Fund. Dip into it if you have to but at least think twice about doing it.

The Leftover Stash

Once you've been putting into your Freedom Fund for a while, you'll be able to determine if your original monthly amount was about right. If you're lucky that you have been doing double-entry accounting for years then you already have good figures to base this fund on. The rest of us however, will have to guestimate what we expect and re-adjust when necessary.

If you're really lucky, you overestimated and your Freedom Fund is now growing a surplus. If I were you, I wouldn't be too worried - just keep topping it up each month - after all, it's in a high interest savings account. Isn't it?

What are your thoughts on a Freedom Fund?

Oct 8, 2008

One Technique on How to Start Saving

The hardest part of any road, is starting it. Do you think to yourself that you're not the saving type of person? If I told you I'd be retired in just a matter of years, would you think it was impossible?

Then I challenge you to challenge yourself.

If you took some time out to re-assess an area of your life then you will find something which you can change to help in the art of saving. There's no point saying "I can't do it" and not doing anything about it - that's obviously not going to work. But if you say "I can do something" and actually do it, I'm sure you'll find subsequent changes much easier.

The Type of People We Are

Five cents from New Zealand
Photo: stinkypeter

I've always said that I'm not a morning person. I tend to stay up late. I sleep in. Does that mean I'm not a morning person? No, of course not. It just means I'm someone who stays up later and therefore gets up later. My day is shifted, I just prefer staying up later at night.

But I'm going to change that. I want to get up earlier. So how do I change? Easy. I simply go to bed earlier. There's no magical process to change from an evening person to a morning person, you just change one simple part of your life. How hard can it possibly be?

That's exactly how it is for saving money too. By just changing one small part of your life, you can start along that Long, Slow Road to Financial Independence.

The Little Things

I have spoken before about 10 Little Sacrifices which make a Big Difference and also in that post, I floated the idea of Zero Dollar Days. These are days when you literally spend no money. No cash purchases, no debit card use and no credit card use. Of course, you might have an automatic bill payment coming out that day, but you'd already planned for that!

It might take a while to get to the point where you can have one, two or many consecutive days in which you don't spend any money but you need to start somewhere and day 1 is always the best place to start.

Once you've done one day, the next becomes easier, then you'll have a few together and once that starts happening, you'll notice a huge drop in your monthly expenses.

One Technique on How to Start Saving

You've tried before to start saving but failed. You've tried again, stuck at it for a while but then completely lost interest. Well, here's a really easy and small way to start you off saving again but actually keep you saving.

1) Identify Something to Give Up

We've seen before that giving up your daily takeaway coffee can make a big difference, but it's not just coffee. Cigarettes and alcohol are also on this list. How about chewing gum, snacks or a daily scratch card.

Everyone has something in their life that they don't need. Sometimes it is also something they don't want but can't give it up. Either way, you need to do something about it and I hope this process will help stop you from buying it but also start you on the road to saving.

2) Budget for it

Let's take the old favourite, that daily takeaway coffee. Let's also say it costs NZ$4. For weekdays, that's $20 a week and over $1000 a year. That'd be nice if it was in your savings account earning 8% interest.

The only way to get it into your savings account, is to budget for it. Give yourself a budget of $4 per weekday (or every day to make things even better) of $4 for that takeaway coffee. Whether you spend it or not is irrelevant at the moment. At the end of the day, you have either spent it or you haven't. Just make sure you can remember! Note it down. Get into the habit of knowing where your money is going.

3) Snowflake the Difference

At the end of the day, log on to your online banking. Here, you do one of two things. Either (i) you spent the coffee budget on your unnecessary coffee, or (ii) you didn't spend it and saved yourself $4. If you spent it, do nothing, it's gone. If you're in the latter category though, transfer your allotted budget of $4 from your current account into your savings account.

If you don't log on every day, keep 7 fridge magnets in a column and each day move one into either the 'Spent' or 'Saved' group. At the end of the week, transfer the 'Saved' x $4 from your current account into your savings account.

By doing this, you've budgeted for a $4 coffee every single day. On the days you didn't buy one, you've essentially still spent it but instead of going into someone else's pocket you put it into another one of yours.

I feel that with this system by the time you've noticed how much you're saving, you won't want that non-essential item again. It not only helps you give it up but helps you on the road to saving too. Best of all, it's quite painless.

4) Never Decrease the Snowflake

Now that's you've budgeted for that coffee, keep it that way. Yes, you might have to odd one here or there but you'll probably be snowflaking well over 90% of your coffee budget. One trick though is to never decrease this budget and keep on going.

If you could survive by spending it before you can certainly survive by saving it now.

5) Repeat all Steps Again for Something Else

Of course, not everyone drinks coffee. And some people drink coffee, chew gum, smoke something, drink alcohol, buy magazines, snack on chocolate, get takeaways and a myriad of other things designed to take your money away from you. If that's the case, start on one and then move onto the next non-essential item.

After a short while, you'll be amazed at how quickly your savings are building up. All from money you used to spend you now save. Yes, you're allowed to buy some bits and bobs infrequently since you don't want to cut everything out of your life but soon you'll prefer saving it to spending it which will keep you on the straight and narrow.


Now that your savings have started you'll also start to notice something else too. That particular account will start growing of it's own accord and you don't even have to lift a finger. Once that interest starts coming in, you'll then start to realise that the money itself is making money for you too! It's like a double bonus.

What other tips do you have for other people who want to start saving but can't?

Oct 6, 2008

The Long Slow Road to Financial Independence

As I've stated before, "it seems more likely that you can become financially independent by literally spending less than you earn than you can by winning the lottery".

And that is exactly how I'd like to introduce myself.

About Me

Signpost on the Wrekin
Photo: 14337663@N06

As it says in my footer: Retire-at-40 is a personal finance journey of a regular guy, with a regular job doing regular things. I earn well though I've never been a saver. Then I started getting serious at the start of September 2008 and in just over a month I know my life has drastically changed.

I can see myself spending less. I can see myself saving more. I can see myself working less. And I can see myself enjoying my life more. In fact, all of these things are already happening. Why? Because they lead me to my goals and they make me worry less.

The Long Slow Road to Financial Independence

It didn't take me long to figure out that it was a long road from starting work to stopping it completely. My initial problem though was that I never did anything about it. Until now. My journey on the road to Financial Independence has well and truly started with a bang. The changes in my life are already great and I have a nice shiny new blog to boot.

You'll notice along the way that I use certain phrases over others. Take for example the phrase "The Road to Financial Independence". I like it, it makes sense to me so I use it. Now consider the phrase "The Road to Wealth" or "The Road to Riches". I don't use these because I don't like them. They promise too much and deliver almost nothing. "The Long Slow Road to Financial Independence" may seem a lot less razzmatazz (almost boring) than those other phrases but then, if you know me, you'll understand that I like to be realistic and I like to understate things. And I also like to be sensible too.

Which leads me on to another phrase "sensible spending and saving". I like it. It makes me happy.

Both of these phrase describe how I'm undertaking this journey. There are no quick solutions. There is no point hanging out for a lottery win. Just a plain and simple way of life, of decluttering, of making things last, of creating things and of being sensible.

Promise less, deliver more!

Even though I'm still new to this game, I've already realised that anyone can do what I'm doing. I know this because I used to spend up every month. I wasn't living paycheck to paycheck but I would usually spend what I earnt.

By promising myself that I can be a saver, I can be frugal and I can invest wisely, I have realised that my future looks a lot more rosy now than it did just a month ago.

I've always been sensible with my money and sometimes clever but now I'm learning even more tricks of the trade. For example, the way the Simple Dollar is creating a Savings Ladder (with fixed term investments) is pretty intelligent. It's almost one of the best posts I've read since reading a number of Personal Finance blogs.

I just wish I were that clever. Except, I don't have to be. You see, I'm just a regular guy. Instead, I just inform myself of the things other people are doing and in doing so I hope that I can make my money work for me rather than me having to work for my money. Makes sense doesn't it?

Signing Off

I realise this post has been a slightly roundabout way of an introduction but I wanted to give you illustrations rather than just plain facts. Illustrations how you can also do the same as I am. Even today, I was told by a friend that they "were not that type of person" to do what I shall be doing.

I just asked "Well, have you tried?"

The answer was "No".

All I can say to that is to take your first step on the long slow road to financial independence. I promise you, it will interesting, fulfilling, happy and hopefully rewarding.

Oct 5, 2008

Employer Contributions to Retirement - Like Free Money

Would you throw away free money? Would you decline if someone said "Here, have this" and shoved a whole wad of cash into your hand? Would you say no if your employer decided "to hell with it, we're giving extra money to all our employees"?

Of course you wouldn't. Saying no to free money isn't something many of us would do.

But that's what a lot of people are doing if they are not using Employer Contributions in one of their retirement plans.

Tossing Away Free Money

love kiwi
Photo: frischmilch

MighyBargainHunter says it better than I could: these people are Tossing Away Free Money. Granted, it's not money you will see for a long time but that's probably why people don't think of it as real. I'll tell you what though, when I reach retirement age, it'll definitely feel real in comparison to people who did say no.

After all, you're working anyway so why wouldn't you want to make the most of it.

Should I Join?

As always, that depends, and as always, you need to look into it yourself. You need to figure out (along with your financial planner) what kind of money you need for retirement, what age you want to retire and what standard of living you want to have. All of these choices must be factored in. Of course, you don't know what the future brings but you can only plan on what you know rather than what you think might happen.

One thing you do know is that if you're saving 4% of your salary and your employer is giving you 4% of your salary on top of that, you're basically doubling your chances of coming out on top in the long run, if not more.

Regarding KiwiSaver

Note: New Zealand specific section.

I have heard a number of detractors of KiwiSaver and I'm sure they are all valid concerns. Yes, I know it's not guaranteed by the Government but then what is? Your house? No. Your shares? No. Your savings? No. How is this any different? (Yes I know that certain bank accounts in the States are insured by FDIC but that doesn't affect us in New Zealand.) 2008-10-07 Interesting Update: There are now calls for a bank insurance.

Call me simple if you like but the way I see it is:

  • you give 4% or 8%
  • your employer gives (currently) 1%, rising to 4% by 2011
  • you get an initial $1,000 from the Government
  • you get tax-breaks paid in as well

That's a lot of free money any way you look at it.

Of course, if your KiwiSaver plan invests in stocks and property, you may end up losing a lot of money. However even before you've chosen your plan, you've more than doubled-your-money so hopefully the plan won't go down as much as that.

Looking at it like that, you're still ahead and you also have the option of more conservative funds which also takes out a lot of the risks (though for a possibly lower return). Overall, the fact that your employer takes out your contributions before your salary has hit your bank account, makes it the easiest and simplest ways to save for retirement in New Zealand.

Let me put it another way. I joined KiwiSaver a year ago and already I have a few thousand dollars more than I would otherwise have. All I did was fill in the form and that took about 10 minutes. Not a bad return already.

Have you started a retirement plan yet? Are you getting free contributions from your employer? Do you get any tax breaks from your Government (please state your country)? Or are you doing none of these things and why? Let us know.

Oct 3, 2008

Five Ways the Internet Saves You Money

The worlds network
Photo: saschaaa

Having just read 5 Ways the Internet Saves Me Money, I decided to do my own list since mine would be very different from hers. Hers predominantly focused on shopping, either online or acquiring vouchers for use in real life. I'll not be talking about shopping at all (though I might mention something about selling) :-)

By doing just one of these things, you can save some money. By doing all of them, your savings really start to add up.

Five Ways the Internet Saves You Money

1) Reading News Online - In the past, I have bought either newspapers or magazines for my news. Daily newspapers were a staple of my house when growing up but since university I haven't regularly bought a newspaper. In the past, I also used to buy technical magazines (computing, photography, woodwork) but now I find that there are many more articles online and you just have to search for the quality ones. Also, especially in computing, the news in the magazines is about 2 months late compared to reading it on the web.

2) Online Banking - I had a meeting with my bank the other day and he tried to explain why their mortgages were at a higher rate than the online banks (a subject of another post). Predominantly it came down to the fact that they had branches and the other bank didn't. By using the internet themselves, the bank saves money and therefore passes those savings on to you. You'd also be using the internet in that arrangement too.

3) Keeping up with Friends and Family - Using email, instant messaging, VOIP phones and other forms of communication online, you'll save on postage, phone calls and all those other forms of communication which cost money.

4) Not Buying Books - Think of a hobby you do and think how much money you have spent on books for it. Unless you started the hobby in recent years, you've probably spent a fair bit. Now, try searching for information on that hobby on the internet. I'm sure you already have and I'm sure you found a lot of information. In some cases, enough that you wouldn't have needed to buy those books in the first place.

5) Selling Your Stuff Online - Whilst this seems a little bit of a cheat, selling stuff really can save you money (as well as gain some too). Just one example is the charges you have for throwing things away; save by selling stuff instead. Not to mention the fact that you'll also be getting money in return for those things.


Before I finish, I'd just like to say that using the internet can be a bit of a compromise. I use it a lot, therefore, I want it to be fast. I pay for a medium internet plan with my cable company so whilst I do pay more than I could for a lower end plan the savings via all these other avenues trade off what I pay extra.

I decided to focus on just five ways the internet can save you money and I will write a follow-up post with more ideas later on. Let me know in the comments any other ways the internet can save you money too.

Oct 2, 2008

Fatso, MovieShack and DVD Unlimited Merging

Data Dump
Photo: swanksalot

News in today (thanks Chris), Fatso, MovieShack and DVD Unlimited are merging. He's at Fatso and has already been notified of it but us guys who use MovieShack haven't been told anything yet.

Once I read about it all, I sent a message to the MovieShack guys asking a few questions. One thing I wanted to know was whether they were going to keep the price points the same since, in my eyes, there was now a lack of competition in the all you can eat DVD market in New Zealand.

A few hours later, I received a reply.

What does this mean for us?

Of course, they said that "it wasn't a monopoly since you can rent DVDs, buy them, watch TV or go to the movies". Absolutely, I agree. But ... there is now a complete lack of competition in the send to my home as many DVDs as I can consume in a month type companies. Before this announcement there were three companies that did this, now there is just one (and please let me know in the comments if there are any others in NZ I don't know about).

The good news is that they said "the price points will be lowering." By how much, I don't know but hopefully they'll stick to their word. I'm sure that whatever they lower the prices too, it won't be as low as the special offer they gave me earlier this year.

I was a member last year for the 3 DVDs for $40 thing. I decided to stop since that's a lot of money. Earlier this year they then sent me a "come back" offer of 3 DVDs for $24 which is an absolute bargain. I suspect the regular prices won't go as low as that though I also expect mine not to go up. If it does, I shall complain and if that doesn't work, I'll quit. Not to be difficult but it'd be hard to justify anything more than that per month. I couldn't justify it last year, I wouldn't be able to justify it this year either. $24 is about okay though and I know I'm getting my money's worth.

Will it be really any better?

Who's to know and it's up to the future to tell us as it happens. There are a few things to consider here though:

  • Price - which would be better if they stick to what they told me today.
  • Service - hopefully synergies between the companies can help
  • Selection - the catalog will grow bigger I'm sure
  • Website - luckily for me, they'll be using the MovieShack system (I didn't like Fatso that much and the DVD Unlimited site is basically unusable since there is flash everywhere)

So yes some things will improve but I now consider it a monopoly so I'll be watching with keen eyes over the next few months when it all comes together.

Why I use a DVD-at-home system

There's no doubt that the level of service from MovieShack has been fantastic both times I have been in it. I love the convenience of just popping the DVDs back in the envelopes. It also works out reasonably priced in comparison to some video stores. Granted, you can get 5 DVDs for $5 for a week from a shop but I'd never watch them all, have a smaller selection and would have to take them back before I knew what day it was. With postal DVDs, you can take your time as well as getting documentaries, TV series as well as films.

It's no wonder my TV hasn't been plugged in to the aerial since April.

Before I go, I should say thanks to James at MovieShack who answered my email earlier on today. It was very much appreciated to learn a little more about the whole thing. I hope it all goes well (I know how data migrations can be painful) but I also hope it does end up being a better deal for us consumers :-)

Edit: It would happen, just as I posted this, I got an email from MovieShack telling us about it. I guess this post is more about the merger than the announcement anyway.

Oct 1, 2008

The Gift of Giving

Over the years, I have somehow reached the stage that no matter who gave me what, for Christmas or Birthday, I either already had it, didn't need it or didn't want it. In the past 3 years or so it has become ridiculous in that people are still buying things, sending them over large distances, and almost immediately after opening they are unwanted.

Yes, this sounds like I'm ungrateful of these gifts but it's not true. What I would prefer is that someone who actually needs something should get something. I have told my family and friends that, instead of buying me anything (anything at all) that they should give something to charity. This could be food gifts, old clothes, spare time volunteering and of course, cash will work too. All I ask is that I am told which charity they gave to - I don't care about the amount - just my curiosity at work wondering who people enjoy giving to.

Pretty wrapping
Photo: judson

I also be happy if they just kept the money for themselves too. That's a personal choice. What I'm saying is, I'm doing okay, don't worry about me.

Lately, I have also been giving charity gifts to family (with one exception). The past couple of Christmases, I have bought a number of gifts from World Vision and sent the family the card saying so. It's a charity that I like and I feel the cause is good. There have been chickens, school uniform, school desks, garden equipment and other things given to families on my behalf to those that need it. I'm not sure my family approved but they shall be getting a similar gift card this year too.

I mentioned an exception and that is for children in my close family group. Birthdays and Christmas is for children so I shall probably get them something until they are 18.

I also sponsor a child in Malawi and each month a certain amount of money is taken from my account. Again, I'm sure a number of you would wonder if that is the right thing to do, especially since I have plans to Retire at 40. Well, that's just something I see as an actual expense and it is (and has been) a part of the budget that I just can't see myself stopping it. Granted, it does add up over the space of a year, but remember, charity donations are tax deductible (in New Zealand) and at the end of the year you can claim back the tax you'd have originally paid on the donations. In fact, I got a healthy figure back from the government just last week.

In conclusion, I prefer not receiving anything to receiving something that is unwanted. I also prefer giving charitable donations as gifts to those that are not in need themselves. I make an exception for kids.

And yes, all my gifts are now accounted for in GnuCash so I know exactly how much I've given to family, friends or charities over the space of a year.

What do you do? What do you like giving, what would you like to receive? Any exceptions?

(This post was inspired by Frugal Dad's talk of Why Cash Offers More Flexibilty Than Gift Cards.)