How to Not become penny wise and pound foolish!
Mastering the game of money is truly like walking through in uncharted jungle and there are lots of things that are trying to kill you.
Climb the mountain of financial freedom
Picture your financial journey as a mountain climb much like climbing mountain, there are two different faces in acquiring wealth. The accumulation phase during which we are putting away money and investing it in order to build a critical mass, and a deaccumulation phase during which we are withdrawing money.
There are five levels of financial freedom. Imagine the peak of the mountain as the absolute pinnacle of wealth. For instance, financial security is achieved when you’ve built a critical mass, which can support and pay for all the necessities in your life such as food, housing and utilities. Financial independence is reached when your passive income can support your current lifestyle. Passing the pinnacle of absolute financial freedom is reached when your ultimate dream life style is supported by investment income. I encourage you to calculate how much you need to accumulate in order to reach financial independence.
Clarity is power, when your brain knows a real number the conscious mind will find a way to take you there. Multiply your current monthly expenses by 12 and then multiply that number by 20 and you’ll get a rough estimate of how much money you need to reach financial independence.
Now, we need a plan!
Reaching this number won’t happen by accident the man on top of the mountain didn’t fall there. It takes courage, dedication and perseverance to reach there.
Speeding it up, reaching the peak faster
To start your financial journey, you must make the decision to no longer be only a consumer. You must also be an owner or investor; this is how anyone with the right guidance can climb that mountain.
Here are four advice on how to speed up your climb:
1. Save more — we’ve heard it all before, the most important part to reach financial freedom is to pay yourself first.
It is not about what you earn, it’s about what you keep, the best way to save this is when you don’t see the money in the first place. With every increasing earning you get, save a predefined slice of that. This way you’ll never get accustomed or tempted to spend the additional income.
2. Earn More — on the other hand there’s always a presumed limit to how much you can save but the upside, it is limitless. The secret to earning more is to do more for others than anyone else is doing, in other words — Hustle! A Bhatbhateni store crew member in Nepal is paid approximately Rs. 650 per hour while one of the most well-paid in Nepal last year, Binod Chaudhary got an estimated more than Rs. 16000 per hour through the dividends of his group of companies alone.
3. Reduce fees and taxes — Fees and taxes are like taking a trip to the top with a huge and heavy backpack. You think that small percentage don’t make much of a difference, but overtime they really do. To reduce fees, invest in products that are passively managed unlike cars and your taekwondo trainer, you can learn it on Youtube common mate! You are obliged to pay your taxes but no one says that you’ve got to leave a tip, so minimize this expense.
4. Get better returns
Four principles are dominant to get better results with money:
· Don’t lose
· Risk a little to make a lot
· Diversify
· Never stop learning / Learning is Earning!
All season portfolio in stock market investments
Complexity is the enemy of execution, and execution trumps knowledge every day of the week. Therefore, most investors need an asset allocation in their portfolio, but also it is simple to understand as well as simple to implement. Ray Dalio’s (Billionaire Investor) concept of all seasons portfolio not only protect you from any potential economic environment but it also protects you from yourself. A team of analysts back tested Ray Dalio’s (Billionaire investor) portfolio between 1984 and 2013 they got the following results, 9.72% annual returns net of fees, made money in 86% of them, the worst draw down in 2008 crisis was -3.93%. I think most people can stick to an asset allocation strategy that lost only 3.93% maximum during one year. Now how does it work?
According to Ray Dalio, there are four different types of economic climate depending on the growth of the economy and the current inflation. Different assets perform relatively better during different conditions. We can’t anticipate what will happen in the future in the market but if we invest so that’s 25% of the risk of our portfolio belongs in various quadrant by diversifying, we don’t really care what the future holds for us because we will thrive no matter what. The current Covid-19 crisis is an unusual condition for the market, but if we have made the correct financial decisions in the past, there is nothing to worry about.
Income is the outcome
“All -in Amun” has been investing 100% of his savings into stocks during the last decade and he has now reached the age of 65 he’s about to retire. He’s been able to save Rs.50,00,000 which is a little bit more than you need to retire comfortably especially if the market keeps advancing in his favor. Unfortunately for “All in Amun” it’s the year 2020, year of the deadly corona virus and a lot of uncertainties. Just two years and a half into retirement, “All in Amun” has already lost more than half of the value of his retirement portfolio that he had invested in the stock market and withdrawing money while the market is down has increased the damage done. Unfortunately the bills of “All in Amun” don’t seem to respect that because he has already spent money on building farm house in Nagarkot relying on his retirement stock market portfolio.
Here is an issue that most people will face when retirement is closing in. They’ve advance to a certain level on the mountain of freedom, probably financial independence. But when it’s time to put on the skis and enjoy the slow on the way back down, market fluctuations will have a significant impact on their ride. On the way back down it’s not assets but income that is of the greatest importance. Therefore, if you want a smooth ride you may want to consider a product such as an “annuity”. Annuity is a risk management tool not any mismatch, it’s simply an agreement between an insurance company (or a bank or other financial service provider) and yourself that you paid them a lump sum, in Amun’s case it would be the Rs. 50,00,000 and in return they’ll pay you an income every month. Often until you die. This method is most common in western countries, we need to make this a trend in Nepal as well, as it is one of the best retirement tools to manage your personal finance.
What are the pros of an annuity? It pays a steady income stream and it’s higher than you can expect from any fixed income security. You will retire comfortably with a known and guaranteed income. It lasts until you die, you can’t outlive this income. It will beat Corona as well!
What are the cons? A guarantee is never better than the guarantor, you may want to diversify across several banks or insurance companies. If you die early you’ve made a bad deal sorry, as any payments that you miss out on will go to the insurance company or the service provider. This is also the reason why the income stream can be so high. The insurance company or the bank is pooling your annuity together with others and betting on an average mortality rate.
Three ways to buy happiness
Well, there is no such way to “buy happiness” :D
Here are three ways to spend money that are scientifically proven that can bring happiness according to the book “Happy money, the science of smarter spending”, to improve well being.
1. Investing in experiences — rather than acquiring more possessions go travel or learn a new skill.
2. Buying time for yourself — money can transform how we spend our time from doing tasks we may dread to pursuing our passions
3. Investing in others — giving money away actually makes us happy and more over it creates a feeling of abundance which may ironically have a net positive affect on how much money that you will accumulate in the end. Note that it’s not necessarily the amount of money that you spend that matters here, rather how you decide to spend it.
So calculate your numbers and start climbing towards your financial freedom goals. Speed up the ascent among other things saving a part of every salary increase, creating more value and managing fees and taxes. The all seasons portfolio will give you a smooch climb. Annuities will give you a smooth ride.
Money can buy happiness but it’s a matter of how you spend it, not necessary how much of it that you spend.
Cheers!