Want to Retire Sooner Rather Than Later? Do These 3 Things

retire sooner“Sooner rather than later” is a concept that resonates with impatient people. Meaning, get your task done or reach your goal sometime in the near future instead of a long time from now.

Talking to people and even (especially) reading personal finance blogs, many want to accelerate the timeframe of when they will be able to retire. Retiring sooner rather than later is enticing, isn’t it? Sure, maybe we really love working and clearly need to work now. But wouldn’t be great to work because you wanted to, instead of because you had to?

To get to that point, there are a number of things we can do to put the odds more in our favor. One could probably come up with a long list, but let’s focus on 3 for now. Here they are, 3 things we can do to help us retire when we choose to do so:

1) Never forget that the day will come when we’re either physically incapable of working, or that employers will lose interest in us because we’re old.

Yes, this can happen. Rather, it will happen at some point. I’ve read comments by people on blogs where they say things such as (paraphrased)

  • “I’ll probably be working for the rest of my life”
  • “I’m in good health now, I’m sure I’ll be fine later”
  • “If you stay current, there is no reason you can’t work until 70+”
  • “My grandfather worked until he was 82, and was as sharp as a tack until he chose to retire”

That’s all great, but I’m trying hard not to fall into that trap. I realize that we can’t predict the future, but clearly in the game of life, father time has never been defeated – as a friend of mine likes to say. By keeping in mind that we need to plan and save for retirement, it puts the requisite pressure on us to make it a priority.

By doing so, we can take some control of the situation, rather than let the situation control us entirely. When we have some control, we can take positive steps to work toward retiring sooner rather than later in life.

2) Always Make Sure You Have Marketable Skills

This is really a bigger picture issue of making sure that you protect and grow income. Where I’m going with this is that without income, we simply won’t be able to save money. Using all the coupons in the world isn’t going to get us too far if there isn’t adequate cash inflow. Or worse yet, none at all.

I’ve seen people go through protracted periods of unemployment, and in some cases give up and do something different. These transitions can be hard on people. Instead of dealing with rough patches like that, it’s better to stay on top of things and make sure we know what skills the market wants. I’ve seen the flipside too, and noticed a few people of my parents’ generation be able to stay current and essentially reinvent themselves as middle-aged people and end up living quite well.

After all, if a person operates as an employee, then he or she is the product and the employer is the customer. If the customer’s needs change over time, then you have to be aware of it.

3) Aggressively save as much as possible, as early in life as possible

Take advantage of things when the going is good, that’s really what this comes down to. The more we can save when younger, the more thankful we’ll be when older.

It’s all about compounding. And, in some cases, avoiding temptations of spending on silly things when younger. Yes, I did spend on a few unnecessary things when younger – and don’t necessarily regret them to be honest. Traveling to some nice places out of the country, when I didn’t quite have the funds to do so, brought me some amazing life experiences that I still remember and cherish.

That being said, a few things is different than having an entire lifestyle that’s either living totally in the moment without worrying about the future, or living for today and paying for it tomorrow – which is even worse.

Avoid consumer debt, try to avoid car loans, and don’t get trapped into buying a “dream home”. We can all enjoy life to the fullest without some of these extras that are wants rather than needs. The payoff is that as we save money and let compounding work its magic, we’ll put ourselves in a situation to retire earlier rather than later.

My Questions for You

Do you think about trying to retire sooner rather than later?

What are your thoughts on these 3 things we discussed?

Do you have any other tips to add?

Small Financial Victories are Fun, Big Financial Victories Mean More

financial victorySize matters. Sure it does, when it comes to the personal finance issues we should be focusing on.

Sometimes we can get caught up in the emotion and excitement surrounding those small victories in life, that we can lose sight of the bigger picture things that are more important. I really think that this happens a lot when it comes to our money, and how we spend our time trying to save or make it.

Someone I know, a great person and otherwise very smart, is a good example of this. Here are two things this individual does that I think we can learn from in terms of opportunities to reprioritize our focus:

Focusing on Side Income to the Detriment of Primary Income

The whole concept of side income is one that I actually endorse.  Multiple streams of income are a good thing, and often our hobbies and skills can help us make extra money. In the best of cases, this could even mean a sustainable income stream that could evolve into a new lifestyle altogether!

That being said, I wonder if the idea of side income can sometimes be so tempting that many folks take their eyes off the ball? Side income has been all the rage in some personal finance blogging circles, and to be sure, some have succeeded wildly. At the same time, many others are simply chasing a dream.

A more concrete example is someone I know who is always selling things via eBay or craigslist, and talking about it quite a bit. Now, as I mentioned above, I think extra income is great! However in this case, he’s really into it and gets quite excited over selling something he didn’t need for $20.

I’m not at all knocking that part of it, but it’s the time and energy spent on it that I would like him to consider. Let’s say it takes 3 hours to take pictures of an item, place the advertisement, respond to inquiries, and then actually complete the transaction via shipping or meeting the buyer. What is the effective hourly wage in this case? Less than minimum wage.

Perhaps if a lot of that time was reallocated to one’s career, financial goals could be achieved quicker? Then we can focus on side income for what it is: extra money that’s nice to have and fun to earn. Seems like a win-win!

Spending Excess Time on Saving While Forgetting the Value of Time

This concept is similar to the one discussed above, in terms of where to invest our time.   The idea is that our time has value, and we should always respect ourselves by remembering this! It’s something that I’ve had to learn over time.

Here’s where I’m going with this: sometimes the time spent trying to save money makes the whole endeavor not worth it.

Let’s say that you spend 15 minutes searching for coupons online, or clipping coupons, so you can save $1.50 on some purchase. Time adds up. So, in this case, it’s like an effective hourly rate of $6.00, which is not quite minimum wage.

Similarly, driving somewhere further to save money is also an example of this. Driving an extra 10 minutes to go to a cheaper grocery store might save some money, but how much? Let’s say you’ll save $3 on your total bill. Well, for 20 minutes of driving, this means that the effective rate is $9.00.

However, then we can factor in the cost of gas. If that 20-minute round trip costs us ½ gallon of gas, that might be another $1.75 gone. Then, your effective hourly rate goes down to $7.25.

Bottom Line: Sometimes it helps to remind ourselves that while the little victories are fun (and low-hanging fruit should certainly be taken advantage of), it’s the bigger victories that matter more for our lives!

My Questions for You

What do you think about the idea of focusing on the big wins, and not sweating the smaller things as much?

Do you ever do any such calculations on the value of your time, in terms of whether or not some course of action is worth it to you?

Do you have any other examples to share?

 

More Money Can Lead to More Happiness!

money and happinessOkay, up front I know that a lot of people will strongly disagree with that statement in the title.

Taken at face value, it might be misinterpreted to say that money itself can make someone happy. This is something that some people might believe, and many others might not. Hopefully, we can all agree that there is much more to life than money!

So, can more money lead to more happiness? It seems popular or at least commonplace to downplay money’s influence on happiness. It’s an oft-discussed topic, but I haven’t really talked about my thoughts on this too much here. So let’s do it now.

Depending on how one views this topic, I say YES. More money can lead to more happiness. There might be studies out there saying at a certain income level, the impact of more money levels off. While that may be true, I wonder how things would look if you controlled for all variables when making such an assessment. Does more money cause people to voluntarily bring on additional stressors into their lives, thus decreasing the extra enjoyment that should have accrued from more money?

Let’s say that a person is making $50,000 per year. Based on that income, it allows for a certain lifestyle which includes aspects such as home, car, entertainment, and so on. Plus, of course, a certain level of potential savings.

Then, let’s pretend that this person got a sudden raise which doubled his salary. Now, he is making $100,000. Wouldn’t this make him happier?

I would think so. With more money, you have more options and more of a buffer in case something goes wrong. You can also, potentially, do more than obtain the basics in life. Rather, you can start living with some nice things. Not just material, but also health care and other things.

Now, let’s say that this person double his income again, going up to $200,000. Assuming the same purchasing power of the dollar, this person has a lot more at his disposal now. I would think life would become less stressful at this point.

So, with more money, a person would have the opportunity to:

  • Save more money, which allows him to :
    • Save more for retirement
    • Have more of a buffer/emergency fund
    • Feel less stressed about expenses
    • Be closer to financial independence
  • Spend more money on improving his life, including:
    • Having money for procedures, and not bypassing them due to lack of money
    • Investing in better (healthier) food and gyms/fitness equipment
    • Invest in better – or additional – education and other learning opportunities
  • Provide more help to others
    • Assist kids with their college education expenses
    • Provide their kids with better enrichment and extracurricular activities
    • Help aging parents who might truly been in need, and lacking resources
    • Give money to help others in need, or perhaps give to their religious affiliation

And yes, there are other fun things people can do as well. Perhaps take some nicer vacations, live in a more comfortable/geographically convenient home, and so one.

Ultimately, I think the key is not taking on additional liabilities, or expanding one’s perception of needs vs. wants. If someone can keep a good head on his or her shoulder, and be mature, it stands to reason that money can make one’s life better.  Wouldn’t better educational opportunities, better health, and more ability to help others lead to some increased happiness for a lot of people?  I think health, wealth, and relationships can all influence one another.

Of course one does not need to be rich to be happy. We are often as happy as we choose to be in any given moment; at least I see it that way. Nevertheless, it could only help to have more money than less for the aforementioned reasons.

My Questions for You

What do you think?

All things being equal, do you think more money can lead to more happiness?

4 Key Personal Finance Questions

personal finance questionsObviously, being a personal finance blogger, I enjoy helping others think about their money.  Sometimes this involves sharing stories, and other times it might involve some analysis.

It can also involve asking questions.  Or, maybe more accurately, suggesting some questions for everyone to ask about their own finances.  Keeping an open mind and really inquiring about one’s own finances could be helpful.  A fresh perspective can be a good thing!

Here are four key personal finance questions to ask:

Are we making the most of our earning potential?

It stands to reason that income is a key part of the foundation of personal finance success.  If we don’t make money, we can’t save any.  Makes sense, right?

So, we want to make sure that we are making full use of our earning potential.  Income is important, and your career is like the engine that drives your finances.  Beyond that, side income seems to be more and more popular, as people try to monetize just about anything.  Money doesn’t grow on trees, so we need to work to bring in cash flow today and in the future (from our savings).

Are we saving enough of our income?

So, let’s say we have the first part covered and are making money.  That’s good! But if we aren’t saving any of it, we’ll be running in the proverbial hamster wheel until we get old.  That’s not good!

The more we can save, the better off our future can be.  When it comes to savings rates, every percentage point matters.  I know it’s often easier said than done for a lot of us, and to some degree it’s easier to save more money the more we make.  But really focusing on saving more of our hard-earned income will allow us to avoid working hard when in our later years.

Are we earning a solid rate of return on investments?

Now, we each have our own risk tolerance, investment timeline, and personal goals.  This impacts how we allocate our assets to different investment classes.

That being said, rate of return can have a big impact on net worth.  So, a portfolio that’s all cash and held for the long-term isn’t likely to outperform one that’s balanced between different investment classes.  There can even be diversification within a given class, such as funds instead of individual stocks, help keep returns from being extreme either way.

Are we managing our risks?

The last point, keeping returns from being extreme either way (especially to the downside), is important.  Just doing the math, it’s clear that rule number one is don’t lose money!  The basic example is that if you have $100 and lose 20%, you now have $80.  If you then want to get back to $100, you have to gain 25%.

Managing risks goes beyond investing of course, and could involve buying the right type of insurance.  This might even mean considering overlooked insurance policies, depending on your situation.  It could also involve preventing job loss, being smart when buying a home, watching our health, and so on.

Bottom Line:  If we stop periodically to ask ourselves these four questions, we can make sure we’re on track to do our best to grow our net worth and achieve financial success.

My Questions for You

Do you ever stop to ask yourself these questions from time to time?

Any other key personal finance questions to add?

How to Determine the Value of Anything

Valuation is an interesting topic.

something is worth what someone else will pay for itIn terms of companies, there are academic approaches to valuation that people learn in business school.  Of course, that doesn’t stop the stock market from reflecting a different value to a company each trading day.  Ultimately, no matter what theories a person applies, or what subjective opinions might be present, the market has its own assessment.

Therein lies the lesson:  something is worth what someone else will pay for it.

It’s a concept that’s so simple, yet so easy to lose sight of.  I know that I need to remind myself of this reality, and suspect that some others need a reminder too.  Here are a few examples of this concept.

Value of Your Work

First of all, the definition of value we’re talking about is financial in nature, not one’s value as a human being.  Additionally, there are some types of work that are more noble than others – for example, I find teachers and nurses to be doing more valuable work for society than someone in a corporate job.  However, the financial value of the latter might actually be higher – much higher in many cases.  Fair or not, it’s the way it is.

So in terms of how much your work is worth, or applied in everyday terms what type of salary do you deserve, I’d say it’s simply based on how much you can get on the open market.  Simple as that.

Now, this has been something that I’ve needed to remind myself of.  While I generally don’t like to compare or compete with friends, I’ve noticed that a few people I know have taken their careers to higher levels than me.   I think I’m just as capable, intelligent, driven, etc.  What gives?

Well, the reality is that we’re worth what the market will pay us.  Maybe there are certain skills, accomplishments, etc. that are needed to drive up our market value.  If we want our time to be worth more to employers or clients, we need to make ourselves worth more.  Yes, this applies to me.

Sure, sometimes it’s a matter of asking for more.  But often times it’s a matter of remembering that others have alternatives, and to command higher value we have to provide value back in return.  When the market talks, it’s up to us to listen.  And then, take action!

Value of a Home

So many people bought homes a decade ago when real estate was booming, and they paid a premium price for their purchases.  While it’s hard to predict the future and avoid getting caught up investment bubbles, it can happen.

Let’s say somebody bought a home for $300,000 and then wanted to sell her home 3 years later.  She then discovers that comparable homes in the same neighborhood are selling for $250,000. If she were to sell her home for that price, much of her equity would be wiped out.

Many people would hold out, or would simply price the home closer to that original $300,000 purchase price.   After all, that’s what was paid for the home, so that’s it’s real worth.  Right?  Or, at least we can expect that it will go back to that market price soon enough, right?

No, not really.  Sadly, the market value would just be what it is now, and we don’t know about the future.  The past is a sunk cost, and the current value means the homeowner would not recover much of the initial investment.  The market speaks, whether or not we like what its saying.

Of course, this can also work in our favor, as many people also discovered as prices bounced back in some places.  Sometimes it’s all about timing and maybe some luck.  Valuations change, but they are what they are at the moment!

Value of Collectibles

I was talking to one of my long-time friends recently, and we were reminiscing a bit about how when we were kids WAY back in the 1980’s (yes I’m old now), baseball cards were all the rage.   Popular rookies had cards for sale at incredible prices, some as much as $50 per card.  Keep in mind there were tons of these printed.

Today, cards from that same exact era could be purchased for a fraction of that.  As in, a whole year’s set of cards (500+) for $20.  The friend I mentioned looked at a few sites for prices, and found that all those cards are just worth what they were back then.

That’s the way it is.  An over-inflated market one day, and nothing the next day.

It could work in reverse too, you never know.  That old antique item you or a family member might own could be something that you might not care for, but someone out there might really be willing to pay some bucks for it.

Bottom line:  Things aren’t worth what we want them to be worth, what we paid for them, or what we emotionally wish for them to be worth.  Their values are determined by the market, based on what others will pay.  This can change over time, and if keep this in mind at all times, we can use this insight to our advantage!

My Questions for You

What are your thoughts on this approach to value?

Do you ever think about this, or occasionally lose sight of the concept?

Do you have any other examples to share?

Money in Your 20′s: Take Big Risks, or Focus on Saving?

Break the bank and take risks, or just focus on saving?

Break the bank and take risks, or just focus on saving?

One of the interesting things about getting older is that we tend to have opinions about what would be good decisions for people younger than us.   It seems like this is especially pronounced the further removed we get from the age bracket we’re talking about.  At least that’s how it is for me.

It can be easy to look back and consider what we could have done differently, and many people seem to do that with money decisions.  Now that I’m a parent of two young kids, I also look at moves people can make when younger.  While my kids are small, I look to the future and think about what would be good for them and others when reaching their 20’s years from now.

I had a conversation recently with a friend of mine, the same age as me and also a parent of young kids, about money moves that would be smart for a 20-something out of college.  We both went to school together, and had similar beginnings to our career.  Much that we do is in parallel, with the difference being that he ended up really being a star in his field and has achieved a measurably higher level of financial success as well.   Thus, we have developed a different view of what people in their 20’s might consider doing upon graduating.

His View – Take Risks and Swing for the Fences

Now, keep in mind that he really didn’t do this himself.  He didn’t take big risks, and never started an entrepreneurial venture.

That being said, his life experience to date has given him the opinion that while he’s been quite successful to date – and he’s justifiably proud of it – a smart person with high upside should take risks when younger.  More than that, he thinks that a risk-taking mindset can be applied to different areas of life.

For example, he would suggest trying to learn as much as possible in a short amount of time after graduation in an entry-level position.  Ideally, this would be in an area of passion.  Then, start your own business and put 100% of your effort into truly making it work.  If it doesn’t, accept the failure and learn from it before moving on to the next venture.  Eventually, your cumulative failures will teach you lessons that will allow you reach big success with one of your ventures.

He also advocates traveling as much as possible when younger, dating as much as possible and not getting hitched in your 20’s so you can hold out for the optimal person.  This is just a side note not directly related to money and career, but adds context to this viewpoint.

Again, he didn’t to this – worked a corporate job, got an MBA, got married in his late 20’s, etc.  However, it’s what he thinks would be smart for someone in his or her 20’s now that he’s older  Go for broke when younger and try for the best with everything, knowing that you run the risk of striking out too.

My View – Focus on Saving and Investing as Early as Possible

Let me preface this by saying that if there is a time to take risks, it’s probably in one’s 20’s.

Nevertheless, there is also something to be said for getting off to a strong start and building a strong foundation.  To me, excessive risk-taking can have negative consequences that don’t manifest themselves until people are much older.

I’d say it’s smart to invest in your career when younger, and focus on that as your primary source of income instead of getting obsessed with going for broke or handling a collection of side hustles as the main way to make money.  Build your career, nurture it, and then you can have the cash flow and foundation to take on side hustles or bigger risks later.

I know people have that have taken different paths and approaches with money, a few at extremes and most in the middle.  At the extremes – and I say that based on society’s view of what is “extreme” – are people who have lived for the moment and those who really tried hard to save.  The latter included a few people who did well in school, got advanced degrees, and also lived at home for a few years after college to save money.  They also avoided expensive cars and other traps, while working hard to grow income through their careers.  Basically, these people saved early and often while avoiding debt like the plague.

Ultimately, these are the people that seem to be really flourishing and living with the least stress once they’re well past their 20’s.  Their investment in their career, and serious focus on saving money right after graduation, put them in a good position down the line after the money compounded.

That’s what I think works, and makes the most sense.  Eventually, with a foundation in place, you can take more chances later on with less downside.  Delayed gratification would seem to provide a better lifetime value, as long as someone can avoid temptations and peer pressure when starting out.

What do you think?

There is a middle ground of course, but I’m curious which point of view you lean toward:

  1. “Take risks, fail and fail more until you succeed when young, while being unafraid to spend on life experiences”
  2. “Focus on building a career, avoiding debt, saving as much as possible by delaying gratification”

15 Steps on the Path to Financial Freedom

financial freedomHow can you reach financial freedom?

There are many different factors in having a successful financial situation.  In some cases it might be a matter of doing the right things, while other times it’s a matter of avoiding mistakes.

I have been targeting financial freedom in the future - and have been taking some actions to help get there.  Based on these actions as well as observing others, discussions with a few folks who have done it, and reading about the journey, I’ve compiled a list of things we can do that can clearly help.

Here goes:

Invest Wisely in Education

I know some people will immediately disagree, saying:

a) Formal education is overrated these days

b) Education has become way too expensive

c) Both of the above

Okay, fair enough.  I can agree to some extent with the notion that education has become extremely expensive, and that too many people have taken out student loans that could cripple them.  In this case, it’s a matter of avoiding mistakes as we discussed above.

But education is not overrated.  I’d say that in a shrinking world, education has become even more important.  Here in the U.S., simply having a college degree a generation ago pretty much assured most people at least a modest middle class income.  Not the case today.  Now I think it’s more of an entry ticket than anything else, to have an undergraduate degree.

So while no education can be limiting, and an overly expensive education can inhibit wealth creation and create debt burden, it’s different for the right degree from the right school.  In those cases, education and net worth go hand in hand.

Keep on Learning

Okay, a formal education is important.  We already talked about it! But I’ve come to believe that it’s more important than ever to keep on learning.

When I came out of undergrad some years ago, I didn’t quite get this right away. My approach was along the lines of thinking that education was done, and that the rest of my learning would be “on the job”.

The reality is that I ended up going back to graduate school, so the formal education didn’t end.  More importantly, I came to learn that we have to do more than learn in the office.  We need to constantly keep current and aware of trends, changes in technology, shifting markets, etc.  The rate of change seems to be higher than ever, so we have no choice but to keep learning!

Cultivate Marketable Skills

I think the foundation of this might be one’s education, and a big part of it would also be the notion of continual learning.  That said, even if we know how to learn, we have to translate it into something that generates value.  Making sure that we have actual skills that are marketable is a way to ensure that we have income.

After all, we can’t save much money if we aren’t making money!

Build Your Network

It’s pretty hard to be a lone ranger, unless a person has absolutely extraordinary talent.  My observations have been that connecting with others and getting to know people at some level can really help with one’s career or entrepreneurial ventures.

People are often inclined to help those who they like, and also who might be able to help them someday.  Whether at work, in your industry, or with people in general, it’s good to build your network.  Not just with volume, but with quality relationships with people where each person values the other.

Overdeliver

Doing what’s expected of us in a given role is often enough for us to stay employed or keep customers.  For a while.

To insulate oneself and actually thrive, it’s great to go beyond what’s expected.  I’ve noticed that people who do that tend to not only survive but also have a reach chance to see accelerated growth.

Generate Multiple Streams of Income

This is all the rage in personal finance circles, and I tend to agree.  Getting several avenues of cash inflow can be a great way to avoid losses (as in Buffett Rule No. 1 don’t lose money) due to the loss of a single income stream.  Moreover, it can be a great way to add on to the primary source of income.  All this being said, we need to be careful to prioritize our time to focus on what’s most important.  The Pareto Principle and money go together, and applying 80/20 to our income efforts is key.

Persevere

Being a sports fan, I’ve seen so many examples of players that had all the talent in the world, but just couldn’t put it all together.  There are innumerable instances of players who were actually overlooked or underrated, but ended up being all-star or hall of fame players.  These guys just wanted it more.  They outworked the others.

It seems like this is the case with many careers.  While this guarantees nothing, it can be said that pushing past frustrations and really working hard and smart can often be enough to put someone over the top.  It can be a differentiator.

Differentiate Needs and Wants

In my suburban locale, I need a car.  However, I don’t need a really nice car.  I want one, but I don’t need one.  A roof over my head is needed, but buying a dream home is an example of focusing on something that is simply wanted but not needed.

Keeping this in mind, we can save that cost difference between the wants and needs.  It helps to think of opportunity cost, and consider that saving $1 today could really mean saving $5 down the line.  After all, if we take our savings and invest it, we would hopefully see it grow to much more in the future.

Save a High Percentage of Income

When younger, I saved money regularly.  However, I was never one of those super savers who pocketed 50% of my pay.  If I had been, financial freedom might have been much, much closer.

You know, it just makes sense.  The more you save, the more you will have for retirement.  Simple, right?  But so many people don’t save at all, and many just save 5% or 10% of income.  While it’s not so easy all the time to get out of decisions that might have already been made, it’s good to always strive to improve.

Start to Save Early in Life

The more money we can save when younger, the better off we are.  I know a lot of people advocate living it up and taking risks when young, but I think it can really pay off later in life if you save as much as possible as early as possible.  How many people, when older, wish they were more careful with their money when younger?

Focus on Rate of Return

This doesn’t mean obsessing over getting the best rate of return at all costs.  Rather, we should at least make sure not to ignore the importance of it.  An asset allocation that’s overweighted in “safe” investments such as cash or savings accounts

Manage Risks

Sometimes it just takes one or two mistakes to wreak havoc with one’s finances.  When it comes to investments, competitively chasing high returns while ignoring risks (as noted above) can be dangerous.  However, there can be other risks.  Some are personal, such as driving safely, marrying the right person (not divorcing), and the like.

Other risks can be mitigated to a large degree by insurance.  This is an area that many people just check the box and move on, but it can really pay to review your coverage and make sure that you have made the right choices.  Thinking in detail about your financial risks, based on your life activities and structure, can serve as a starting point for a personal audit of your insurance needs.

Be Goal-Oriented

Just doing all these things noted above can put someone on the right track.  But like anything else, it helps to know where we want to go.  At least for me, it helps to set goals.

I like SMART goals.  These are specific, measurable, attainable, relevant, and timely.

Help Others

I know someone who sees things as a zero-sum game.  He’s quite successful professionally, and even in some ways personally.  A good guy, but always skeptical if anyone wants anything from him.

If he just saw that helping others proactively is not a waste of time, the sky would be the limit for him.   Often times, it doesn’t really hurt us to give and try to help others.  There are instances when it just might be the right thing to do.  Anyway, good deeds and a positive approach can result in that clichéd “good karma” that can benefit us in the future.

Stay Healthy

If we don’t keep ourselves healthy, it can impact our ability to get wealthy.  If we aren’t healthy enough to work, we’ll have difficulty making money.  Even if work isn’t directly impaired, having health issues can cause our focus to be diverted and priorities refocused from making money to simply dealing with problems.  Not the way to reach financial freedom!

Best to eat well, exercise, manage stress, and sleep regularly.  I was actually pretty good at all of this when younger, but got away from it as I entered my 30′s and became a parent.  It happens.  But lately I’ve been refocusing on health and looking at life as a system, with health, wealth, and relationships all intertwined.

My Questions for You

Which of these steps do you follow?

Are there any that you think are particularly important, more so than the others?

Do you have any others to add?

Taking a Pension or Lump Sum: What Would You Do?

lump sum or pensionCash now, or regular payments later?  Would you rather take a lump sum up front, or take periodic payments over time that seem to add up to more money overall?

A lot of people like the latter, and prefer to take money over time.  That is, if they’re fortunate enough to have such a pension or similar arrangement.   I suspect that the idea of getting a lot of money all at once is also scary to some people, and they’d prefer to be on some type of payment schedule instead.  You know, kind of like a paycheck system where your life is based on your income.

That’s all great, but do you see any risks here?  This may or may not apply to you – it doesn’t actually apply to me – but it’s still fascinating how some of these decisions are made.   Personally, I would go for taking money up front instead of a promise to be paid later.  There is something about removing future risk, and maintaining control, that seems appealing.

I’ve read enough lately about pensions that are being impacted by change, and retirees potentially losing out on some benefits that they thought they were getting.   While much of this might not have been executed just yet, there have been discussions in the news surrounding pensions in Detroit, the state of Illinois, as well as people who have served their country.

Can you imagine being older and in a position of needing money, thinking that you had an solid arrangement in place that you had earned with prior work, only to have the terms of it changed?  Meaning, you weren’t getting more than you thought, but will see things get cut in some way, shape, or form.  While it seems flat out wrong to me, the reality is that “right or wrong” doesn’t always matter in the real world.  Sometimes it is what it is, and we just have to successfully navigate the landscape.

While pensions aren’t exactly common with younger workers, I think there are some lessons we can learn from the whole experience.   The big thing, to me, is that there is something to be said about actually having control over money up front.   In any situation, whether you’re asking if it’s better to take a lump sum or a pension, or just really any other situation of money now vs. promise later, this should be considered.

You just never know what could happen.  Actually, even if you have the money in your possession, anything could happen.  There was talk about a tax on bank deposits in Cyprus within the past year, so clearly there are reasons money in hand may not be risk-free either.  The bigger point is that the more control we have, and the more we can anticipate what might go wrong, the better prepared we can be to protect our hard-earned assets.  And, better yet, be in position to grow and prosper!

My Questions for You

Would you be naturally inclined to take a lump sum instead of a pension, or would you go for the opposite?

Are you risk-averse like me when it comes to future promises to be paid, or are you less concerned about promises being compromised or simply not kept?

Patience vs. Urgency with Personal Finance

patience_or_sense_of_urgencyThere are many people, including myself, that have the belief that life truly is a journey.  To put a running spin on it, this would mean life is a more like a long marathon than one big sprint.

Going gangbusters every day burning both ends of the candle isn’t a sustainable approach, and there are sacrifices to be made along the way.  Its possible working long hours can be bad for your health too.  Sometimes, it’s all about balance, at least from my experience.

That being said, I’ve come to look at things another way too.  While I still buy into the approach I just mentioned, I also think that there are times where it can be beneficial to move fast without any haste.  Taken in that context, maybe life isn’t a marathon, but maybe a series of sprints along with periods of walking.  Okay, maybe these are too many metaphors to handle:)  But what I’m getting at is that sometimes it’s smart to be patient and take our time, while other times it’s good to hustle and get things done as quickly as possible.

When it comes to money and our finances, I think it’s important to figure out when we need to take the right approach.  Here are a couple of examples that have come to mind for me, for each.

Being Patient with Money

Panicking With Stocks

For some reason, there are many people that get scared when stocks decline.  As in, fearful that they will lose everything.  If the market declines 20% over a couple of years, that’s no fun for most of us.  But some folks panic and get scared that their entire investment portfolio will be reduced to ashes.  Thus, they sell when things are headed downward.

Tell me, when have stocks as a whole declined to zero?  Now, individual stocks have the possibility of declining to low levels permanently, and destroying wealth.  But this is why we focus on diversification and investing in large baskets of stocks or even index funds.  When tracking the market, you’re highly unlikely to permanently lose wealth based on historical data.

For example, do you remember the fear regarding stocks and the U.S. credit downgrade in 2011?  There was fear that stocks would plummet, and they did in fact decline for a short period of time.  The sky was falling!  Except, it really wasn’t.  It actually turned out to be a money-making opportunity, as prices rebounded and the market went back up.  Those that sold in a panic lost out.

The same could be said for those selling at the market depths of 2008 and 2009.  Things recovered.  Even when looking at the financial impact of the Japan tsunami of 2011, we can see that this terrible tragedy did not cause a long-term impact on the NIKKEI.  After an initial decline, it bounced back in a matter of a few weeks.

Bottom line:  think long-term with stocks, and realize that with the broader market there will be ups and downs.  We don’t want to get caught selling on the downswing.

Buying Expensive Things

I think this is a trap that many people very easily fall into.  There is a desire to feel like we have made it, to live the good life we see others living.  The reality is that many of these are big hat, no cattle people.  Meaning, they have material things that convey an image of wealth that is misleading considering how modest the savings or income they have actually is.

I have several friends that bought highly expensive cars when younger.  One I’ve known forever since childhood, and he has always liked nice cars and driving very fast.  He bought a car right after graduating college that was probably 3/4 of his annual income in terms of its purchase price.  Another friend bought an expensive new SUV within a year of graduating, in order to “feel like I’ve arrived”.

Thankfully, both people rebounded and are now doing really well for themselves.  They’re smart guys.  But if they had just driven modest cars at that time and invested that incremental money that they had spent, think about what that could grow to in the future after investing?

This same concept can be applied to many other things, such as vacations, clothes, and homes.  With respect to the latter, I think that buying a “dream home” before having the means to buy it can be a dicey proposition.  Look at the people that stretched to buy a home before the housing bubble, only to see their mortgages go underwater?  Better to buy a home based on what you need, and within pre-defined financial parameters.  Sometimes emotions and money getting mixed up can lead to some unintended consequences!

Bottom line:  If we don’t have the money to buy expensive things, then we shouldn’t.  Being impatient with the desire for upgraded purchases can only hurt one’s long-term finances.

Having a Sense of Urgency With Money

Saving Money for Retirement

When someone is 30 to 40 years from an age that is generally considered with the “retirement” age bracket, it seems like a long time in the future.  I know, as I have felt the exact same way.

The thing is, time really moves fast, and seems to accelerate even more with each passing year.  Putting off saving and investing can really be harmful in the long run.  Conversely, the better we are at putting money away when young, the better our finances will be in the future.  There is something to be said for the time value of money, as barring deflation a dollar today is worth more than a dollar tomorrow.

For example, let’s say two people, John and Jane, are both 25 and want to ultimately retire at 55.  John enjoyed traveling, buying a nice car, and all the latest gadgets from ages 25 to 30.  Meanwhile, Jane cuts out those and similar extras and instead focused on saving more money during those years, to the tune of $5,000 per year.  Then John gets serious at age 30 and starts to save and invest at the same rate as Jane.

What does that $5,00o per year for those 5 years get Jane?  Reinvested and compounded at 8% annually, she would have greater than $200,000 more than John by age 55.  Just for setting aside that modest amount of extra money each year and investing it in her 20s.   By taking his time and not worrying about the future, John would lose out on a big opportunity.

Bottom line: understand that time is a powerful factor in growing net worth, and the earlier we save and invest our money, the better.  Start ASAP!

Paying Off Debt

When in debt, we are impacting our net worth in a negative way.  Even if someone owns a home worth $300,000 for example, if there is a $250,000 mortgage on it, the net ownership comes down to $50,000.  When we start adding student loan debt, car loans, and – worst of all – consumer debt, the picture can get murkier.   How can we build wealth if we carry such non-valued added liabilities on our personal balance sheet?

I’d say the best thing to do is avoid debt, and try to work toward a goal of debt-free living.  It may not be an overnight process, but eventually we can get there.  The sooner the better, as interest charges make debt balances grow.  It’s almost like a spiral with a gravitational pull downward; debt can get more onerous if not addressed quickly.   Effectively managing it and paying it off can help us move back in the right direction faster.

Bottom line:  have a sense of urgency in staying out of debt and paying off existing debt quickly, in order to help you build long-term financial stability and prosperity.

My Questions for You

Do you balance patience and a sense of urgency with your finances?

How do you approach each of the 4 examples noted above?

Are there any other areas of personal finance in which you think its important to demonstrate either patience or a sense of urgency?