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"

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:

... JUST START NOW!

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

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.

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

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.

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?

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?

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.

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?

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?

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

Photo: shallowend24401

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.

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

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.

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'

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?

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

Photo: clearlyambiguous

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?

"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"

Photo: kim_scarborough

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.