When it comes to your finances, one size does NOT fit all

The problem with personal finance - be it blogs, books, or bullshitters - is that there is always a prescription …

“save 10% of your salary”

“automate your finances”

“pay off all your debt”

… do this one thing, follow this one strategy, and, everything will be juusssttt fine.

Of course, that’s BS. And, you know it, that’s why you’re (probably) not doing it.

You are unique: your hopes, dreams, aspirations, challenges, health, career, family, stage of life.

So, your financial situation is unique: income, expenses, assets, liabilities.

Clearly, ‘one size fits all’ financial advice simply won’t cut it.

No. No. No.

That won’t do at all …

You see, there’s just THREE personal finance strategies that fit all.

That’s it. That’s all. Just three.

One of these will work for you. You just have to truly grok what I’m about to share with you, put these simple - really simple - financial strategies to work, and you will be truly financially free … much, much sooner than you ever believed possible.

Let’s get started …

Stage 1 - Saving (Or, Not)

You don’t have to be single for this stage to apply (you see, the whole family thing is just a metaphor); you just need to empathise with this person on Quora:

I’m 21 and I make 43,000 dollars a year. Would you consider this to be a decent income?

I have no kids, and I’m living in my own apartment. I also have no student loans or any type of debt. I work as an Activities Assistant at a nursing home 7 days per week. I’m also still working on my associates degree at my local community college.

Change the ‘21’ to your age and change the ‘43,000’ to your income & if you still don’t financially identify, then move on to the next stage; otherwise, if this is you:

This is a great start, but I’m going to let you in on a secret that very few people truly understand:

It’s not about what you make, it’s about what you keep.

The second secret, one that ties into the first, is:

It’s easier to move forward than backward.

So, let me explain by starting with the second ‘secret’, first:

For a young person like this person, living in a country like the USA or Australia, with few financial ties or obligations, $43k is a relatively high disposable income (so’s $200k, but that’s hardly the point).

The problem, though, is two-fold:

1. You may not keep this income forever; you might be made redundant, you might become sick, or somebody may take financial advantage of you.
2. You may not always be financially unencumbered; you may take on a mortgage; you may get married; you may have children.

In both cases (the first negative, the second positive) your personal standard of living will shrink as your finances drop and/or your financial obligations increase.

This really sucks … it’s much harder to go down the standard of living totem pole than it was to go up:

It hurts far worse to reduce your standard of living later than it does not to increase your standard of living now … even if you can easily afford to.

Which neatly brings us back to the first ‘secret’:

What you earn and spend increases your standard of living now but leaves you open to the risk of going financially backwards later.

What you earn and save increases your standard of living a little less now but leaves you much more protected against the risk of going financially backwards later.

So, yes, may currently be in a pleasant bubble where you have more income than you really need right now, and one that probably also affords you some luxuries.

But, the greatest luxury that you should be taking advantage of now is the luxury of saving & learning to invest your savings wisely.

But - and, I didn't share this (most important) bit on Quora, so props to you for sticking around - you need to start saving!

D’uh.

But, here’s the bad news, and why almost all of the boiler-plate financial advice you’ve been reading until now absolutely sucks:

You need to start saving fully half of your salary, and keep doing that (including cpi pay rises) until you can quit work … in 20 years!

Inflation of just 4% means: in 20 years, your pay will have doubled, but so will your expenses.

So, if you can accept the fact that you will live off the equivalent of 50% of your current salary for the rest of your life, this is all you need to do.

Of course, if you’re prepared to work full-time for 40 years, you only need to save 25% of your salary, starting today.

Oh, and we haven’t even talked about your debt …

Ouch!

Stage 2 - Earning (Not Enough)

It’s no wonder that virtually nobody buys into all this personal finance guru BS.

[Well, they do; somebody buys all their books and courses … so, at least the gurus have no financial issues.]

Then, it gets worse …

You start living: you partner up, have children, accumulate liabilities (e.g. the children … and their bedrooms).

Of course, now you’re not going to be able to save 50% of your salary; probably not even 25%; heck, maybe, not even 10%.

So, screw it …

Don’t save any of it.

Just do this, instead:

Earn more money, but don’t spend it all.

What’s left over is what you save … automatically … without trying.

If you put all of your effort into the earning, the savings will look after themselves.

[After all, earning is what you trained for; what you’re passionate about, isn’t it? If not, just go back to the first strategy.]

Simple, huh?

This earn/save thing is so simple, it’s just a three-part step-by-step strategy:

1. Earn More - chase opportunities at work &/or outside work: get those -way-above-inflation pay-rises; start a business part-time (eBay; blogging; drop-shipping; a startup or three); or, jump ship and go into business for yourself. Sure, it’s all risky, stressful, work/life unbalancing … but, go and reread the “20 year” and “40 year” bits above, and see if you you prefer the alternative?
2. Save More - save 50% of each after-tax increase: sure, this is the easy part; but, why not save it all? Why not save 90% or 75%? Why save ‘just’ 50%. Because, money is for spending … it has no other utility other than spending it now, or later. I want you to find that balance, and reward yourself … regularly … for doing what others won’t do (they’ll say, can’t, but it’s won’t).
3. Invest More - invest for highest ‘safe’ return: this is important; my numbers don’t work unless you earn at least 8% on your money (fortunately, I found that the US stock market’s 10+ year returns exceed 9%, so just go and regularly stick your savings in a super-low-cost S&P500 Index Fund and you’ll be just fine … easiest way to invest in living history). Oh, and if you have debts that exceed, say, 6% to 7% (i.e. close to our 8% benchmark), go ahead and pay those off, first … after all interest saved (barring tax) is exactly the same as interest earned.

Stage 3 - Spending (Too Much)

No matter which strategy you employ: the tortoise’s scrimp & save or the hare’s earn & invest approach …

You get to finish the race when:

You have 20 x your annual standard of living expenses (assumes no debt) in your investment account/s.

For example, if you happily spend $50k per year (I have no idea what you earn, nor do I care), when your investment account reaches $1 million …

Stop!

It doesn’t matter if you’re 20 or 80, don’t kill yourself chasing more … you’re done. You can retire. Or, keep working. Or, do a bit of both.

The key thing is, you’re now wealthy enough (regardless of the raw dollar amount) to call your own shots.

That’s why they call it Financial Freedom … and, for me, it couldn’t come soon enough.

BTW for the mathematically inclined, this ‘20x Rule’ seems to assume a 5% ‘withdrawal rate’.

But, a financial planner will tell you that you can only ‘safely’ withdraw 4% from your retirement accounts. Of course, other highly regarded financial advisors will tell you that you can only safely withdraw 2.5%, whilst others (with their own radio shows) will tell you it’s 12%.

But, when you switch from being an earner to a spender, the answer is zero:

There is no safe withdrawal rate.

You can’t leave your money in the stock market, because you don’t have 20 or 30 years of working life left (worst case) to see if it recovers.

You can’t leave it in the bank because, in today’s market, you won’t even make 2% … and, in almost any market, you won’t beat inflation.

And, believe me, your heart won’t be able to take any fluctuations.

So, you’re a little stuck.

I solved that problem by selling down all of my risky assets when I reached the 20 x my required standard of living point and put it all into 100% owned cash, no borrowings, real-estate.

I put it all under management, and I live off 75% of the net rent (after, management fees, outgoings, and holding taxes).

[Full Disclosure: I’m about 75% of the way through this process, as of this week, which is why I’ve waited so long to write this post. I’ll do a ‘what I screwed up along the way’ post, soon.]

If that’s too hard for you, then you’re going to need to get closer to 40x than 20x and (preferable) put 95% of your money into inflation-protected bonds (in the US, these are called TIPS and yields are really crappy right now; you can’t get them in Australia, so you need to buy stocks and ladder your bonds, instead). Put the other 5% into something really risky (e.g. a handful of small-cap high-growth stocks, or a series of call options over the entire market).

But, I like real-estate:

Over the period that I care about (my lifetime) the capital is inflation-protected (goes up with inflation; if it doesn’t, it’s my children’s problem because I’m never selling).

More importantly, so is the income (not including my house, which is why I don’t include it in my 20x calculation).

Whatever you do, be wary of financial planners, wealth managers, and anybody who is offering you ‘product’ (they always underperform the market, because of their fees) &/or ‘statistics’, you are not a statistic:

You can’t afford any downturns in income.

Why is this a stage (or, a strategy)?

Because, whenever you have 20x (or, 40x if you’re scared of real-estate) your desired annual expenditure … well, ‘work’ is entirely optional isn’t it?

Oh, and to all those who say you only need 70% of your previous income, or expenses (or, some number less than your current/pre-retirement expenses), in retirement just remember this:

When you’re not out there earning, you’re out there spending.

… and, loving it :)

Image credits: Speedlancer