Take some small risks to increase income for financial independence

Life seems to like to pass us by.  Things change. The job market changes, and demand for our services can sometimes drop down to almost zero, but you still need to pay the bills and have a roof over your head and somehow keep saving a high percent of your income for financial independence and of course it would be nice to retire early too, right?

Have you diversified your job and income?  It may sound strange to some who was taught to be specialized through university degrees and get a good job to diversify income, but it is important if the only company that needs your specialization closes and you don't want to move to another city.  If they downsize or outsource you, what will your options be?

Diversifying your income could mean for a self-employed person (like myself) and increase in one area while the demand for another service goes down since things seem to go in cycles.

Currently I have two activities. I teach English classes (and sometimes do translations), and I sell prints of my digital artwork (and photographed traditional artwork) on the internet. The second income is semi-passive since once I upload and make images available they'll stay available as long as I have an account on a Print on Demand website. However the initial time investment is huge so unless you sell hundreds of copies of something you'll be making less than minimum wage.  Still It is something I love and it helps pay the bills. I also like it because I can do it whenever I want to and not do it when I have some other activity.
Classes are more complicated. I make more money teaching, but schedules are more or less set and there are many cancellations and other problems. The biggest problems are that I can't have a fixed schedule from say 8 to 11 am. Instead it is before my students work and later during the lunch hour and sometimes after they finish work. In other words I lose a lot of time between classes and in transportation going to and from classes.

I'm not saying that you should do either of these activities. Instead I think you should take some small risks to try different activities to generate a side income that you could invest or save for other new income streams. It doesn't have to be anything complicated. If you're a woman you might be asked to babysit after work or on your day off. Perhaps you could help with weekly cleaning or doing laundry for a friend who works all day.You could sell something you make or grow. Really there is always something you could do.

This month I'm taking a small risk. I decided to take my potential savings for the second half of the month and spend it on professional photos for my "book" for a modeling agency.  I know there is some demand since I have been contacted by two agencies and one was quite insistent in seeing me. They would send my info to potential third parties for commercials, advertisements and perhaps as extras and send me information about casting evernts when my profile might match.  If I get used for the project they'll take 10% of the income each time.  It sounds quite fair for me and it isn't exclusive.
Of course spending my second half of the month savings plus a little more is a risk. Perhaps I'm not attractive enough to get selected. I am not very fit. I'm a little flabby mostly because I'm not very motivated to exercise alone so the photos that were taken yesterday won't be as good as some guy who works out in the gym, but I decided to give it a try.   The worst case scenario is that I'll have a set of nice photos to upload to Facebook for friends to laugh about the poses.  The best case scenario would be getting regular work and increasing my income significantly.

Why do I consider this a small risk?  First of all, I'm not taking out a loan or borrowing money for the photos or anything related to this.  I did buy a new shirt and some exercise clothes since if I go through with this I need to be in better shape for castings, but these are normal clothes which I can still wear whether or not this generates income. Additionally, this is a small risk since the investment is minimal. including the clothes, it was about 50% of this month's income (I bought  cheap clothes not name brand).  Finally it is a small risk since further investment would be in things to improve my health and I suppose if I do get off my rear and exercise regularly I'll want to have new photos taken in 6-9 months.  Compare that cost with starting a workshop, building a greenhouse or a lot of other income generating hobbies and it isn't bad.  Yeah I might join a gym, but if I do it will be a cheap one. I will most likely buy a set of dumbbells and go to 10 peso Zumba classes a neighbor gives. In any case, health is always a good investment.

What you should not do is spend all or most of your savings or take out a loan for something that you might make money from.  If you know there is demand for something you make or do and it requires an investment in machinery or other equipment, see if you can rent or borrow at first and calculate how many paid projects you'd have to do to pay for it.  If people are asking for something that requires an investment in expensive equipment, ask to be paid at least half in advance and/or have a contract signed.  Once you have one regular stable client or multiple repeat customers, the investment will be less risky.

What if you cannot even accept the small risk of half a month's savings for something that might make you money?  Don't bother, just buy Certificates of Deposit in your bank. :-)

Saving and Investing are essential for a volatile future

I wrote in previous posts about saving money for emergencies and for financial independence which could eventually become early retirement, but today I want to share some thoughts about change.

It is important to think beyond monthly expenses and just think about all the what-ifs. What if you lose your job tomorrow?  What if there is a disaster and your home is damaged?  What if there is a plague or severe drought and food prices double for a few months?

How adaptable are you? If one of the above occurred today, would you survive?

If you depend on your job for survival, it is essential that you start your emergency fund (cash) right away.   If you lost your job today, you'd need money for food, rent, and essential bills for as long as it takes you to find a new job.  You might need to take a course to learn new skills or get a new certification first. If you know where the market is going, have enough savings to cover those expenses and time. You want to have at least 3 months of expenses covered in your emergency fund. See my earlier post on that topic to estimate how many month's you'll probably need to set aside (typically 3-12 months) Once you go beyond 6 months, it makes more sense to put the money in Certificates of Deposit or other investments since if you have an emergency you'd first spend your cash savings and then you could plan to convert investments to cash with little penalty (as the CDs expire, etc.)

Of course if you don't have very expensive things the second scenario isn't terribly important if you have savings available to replace your stuff. However if your savings is limited or you have a priceless collection, it is time to investigate the cost of having home owner or renter insurance. If you can replace what you have with the money you'd have spent in 1-3 years of premium payments, it would make more sense to me to just save more money for emergencies. If your house is made of wood then I'd understand the need for insurance for fire damage. If your house is built on a flood plain then you should either sell it or get flood insurance since a flood could destroy everything very easily.

In the case of plague or drought, there are several things you could do.  First, if you have the space you could always have one or two months of long lasting food which you actually normally cook and eat.  Lentils, beans, rice, pasta, oats, and canned goods are normally good for months to years. Be sure to only buy what you eat though. It is also nice to have extra staple food in case you have a financial emergency. You could just eat the extra food and spend less on food until the emergency is over. If you eat one kilogram of rice a month, buy a couple extra bags, use the oldest bag and buy another bag when you go shopping.
This could also work for other basic things you use like shampoo, deodorant, toothpaste and soap. Buy more basic goods that you use when on sale, but don't buy more than you'll use before the expiration date, and don't buy more than you have space to keep them (and keep them organized)

The typical suggestion of saving 10% of your income is not realistic unless you spend a high % on insurance which is of course money you'll never get back. 10% of your net income probably will only cover retirement at age 65 if you start in your 20s and you never have an emergency or lose your job in all that time. That is NOT very likely. Most people will have many jobs in their lifetime and company paid pensions are a think of your grandparents' generation.

Don't forget that most things especially electronics and appliances don't last forever. All those things that make life easier could break down. Repairs and replacements are not free! It wouldn't be a bad idea to set aside 10% of your income for a repair and replacement fund.  If you don't use it by the end of the year, you could put the money into your retirement fund investments or use it to save for a house or use it to pay down your mortgage loan early.

It is essential to be prepared for what you can't anticipate. Save at least 30% of your net income (take come money) and you'll have at least some level of safety.Save 50% for a year and you'll have enough money to live off of for another year, but don't stop there. Life is about more than an emergency. Keep it up and you'll eventually be prepared for almost anything including early retirement. (many people have to stop working long before 65 due to health reasons so don't just plan on working until you die!)

The Joy of using cash for spending

When I look back on the last 12 years of my life I see that many things I didn't need were bought with a debit card and some where bought with a credit card.  You might not find that to be significant, but it really is.

Everytime I wanted something and had a debit or credit card available, I could purchase without thinking and then I'd have something that would make me happy for a few days to a few weeks or perhaps it was something I consumed in the moment otherwise it would end up in the clutter with all the other stuff I had accumulated.

I wouldn't want to get rid of it right away because I just spent money on it.  That's how it usually works for most of us. It made us happy in the moment, but now we need to find a space to put it, something to put it in, or we have to take time to clean or maintain it.

Yeah, it seems the more stuff we have, the less money we have and the more money we spend.  That's why living on cash is easier when you have a budget.

How do I do it?  First you have to keep a budget. I recommend following something like the 60% solution on MSN (basically no more than 60% regular expenses, 10% entertainment, and 30% savings (10% short term, 10% long term, 10% retirement).   Once that gets easy you can start increasing your savings to a decent level. 50% savings would be good for most people, but if you haven't kept and followed a budget before, 30% will seem huge and impossible at first.  I lived on the 60% budget for almost a year before deciding to start my extreme retirement or financial independence journey.

Once you have your budget and cash your check, separate into envelops or piles the money for that month's rent (or better yet the next month's rent), entertainment, and daily spending money for that period.  If you are paid weekly then separate daily expenses and entertainment for that week only.  Before you leave work or the night before separate the money you need to survive that day and put it in your billfold.  If you spend less, you can keep it for another day. If you spend less everyday, adjust your daily expenses down a little in the budget and put the rest back into savings. Don't spend more than you budgeted + left over funds from other days. If your budget is $10 a day in transportation, food, and misc. don't spend more. In fact, don't put more than your daily allowance in your pocket.  Keep the rest locked away in a safe place where it won't get stolen.

Don't make a point of spending it all either.  When you make a purchase ask yourself if you really need it or if there is an alternative.  Could you cook at home today instead of going to the restaurant? Could you cook one day and bring the left overs to work the next day or two for lunch?

Once you get used to using cash for every day expenses using this method, you'll break the debit & credit hard habit, you'll spend less on things, food, and bank fees!

Get excited over small improvements for Financial Independence

On the road to early retirement or financial independence, it is easy to lose motivation due to the fact that it takes time to save and invest enough money (especially for someone with a low income)  Unless you plan on dumpster diving and camping in the woods, you will always have some basic costs which require at least 300 times your monthly expenses in investments to be considered safe (4% annual withdrawal)

So what can you do?  To stay motivated enough to make a difference?

• First realize that every month that you live frugally by not buying things you don't need, packing lunches for work, drinking water or tea instead of soft drinks, and sharing your home (and therefore rent or mortgage and utilities) IS an improvement.  That's one month you didn't dig yourself deeper in debt or that is one month more in your emergency fund or investments.  Even if you stop next month, it did make a difference.
• Second, look back on your progress since you started to take actions. (Thinking about it doesn't count) When did you start making large payments to your emergency fund?  When did you get the new roommate? When did you start seeing your bank account balance grow even though your income didn't go up?  Start from that point. Either compare bank, credit card, and investment (including retirement) statements from then and now or check your personal finance spreadsheet if you have it there in a net-worth spreadsheet. I always enjoy seeing my AFORE account grow when I get the statements every four months. It isn't a lot, but I know that I don't need the retirement funds yet (almost 36 years old), and even if I stop saving now that money will grow. Also the AFOREs have INFONAVIT funds for purchasing an urban lot or buying a home. The loan they could offer me right now would be for a really tiny townhouse at the edge of the suburbs without a yard and limited in services.  While I might not mind that for retirement, I can't do that while working since I'd have at least a two hour perhaps even 3 hour commute. I can't justify doubling my commute right now. However if I regularly save a large percent of my money every month I should be able to either buy a large house on the edge of the suburbs or a tiny condominium close to the city center. Both have advantages and disadvantages, but through each month's saving and investing, I know I'm a little closer to the goal even if it is just 1% of what I need to pay in cash.
• Keep a progress report:  You could use a tab in your spreadsheet for an informal report on how  you're doing. Make a rough net-worth page dividing your assets and liabilities. Make one row for each. Each column can be a month. As you get your statements for each account make an entry for that month. Make a field for totals for both assets and liabilities and finally one for the net worth which is the difference.  Celebrate going from debt to zero and celebrate short term goals like saving at least 50% of your income consistently. 
• Don't feel bad when you make a mistake or can't save one month due to an emergency or other setback.  It happens. Learn from it and move on. I probably will only be able to save money 9 months of the year because I normally only teach half of April, December, and January. Half the income means I just lost my 50% savings. I still have to live the entire month! Instead of feeling bad about those three months I should feel good about the nine months I worked on paying off the credit card and saving my 4 month emergency fund.  The next 9 out of 12 months should make a big difference in investments. 
• Get excited about firsts. What do I mean?  The first time you have something good for your financial health, take a moment to feel good about it. Knowing that your financial future (independence or retirement) is good should be just as exciting as the new purse or 3-D LCD television.  I just got a first yesterday when I finally got access to check my AFORE statements online (including current balances).  Instead of having to wait every four months, I can log in and get a report showing how each sub-account is doing.  I was excited to see that my voluntary deposits earned 14.50 pesos in the last month and a half. Yeah I know that's the cost of a sandwich, but over half of the savings were deposited 14 days ago. 
• Take time to dream about your future.  I see 14.50 pesos in growth of my voluntary deposits and I can imagine 25 next month, and 40 the next as I double the amount and later increase it by a third then a fourth. (as the balance increases my monthly deposits increase the total by a lower percent, but every pesos I add helps earn that month and the following until I spend it on one of my goals or need it for an emergency.
• Imagine what you could buy using the interest from your investments to motivate you to keep investing (sacrifice the short term to enjoy the long term)  No, you didn't buy the TV this month, but that $1000 USD should earn you at least 4% or $40 USD a year. Don't buy the TV and instead invest it and eventually you'll have enough interest to pay your electricity bill or your vacation once a year even if you don't reach early retirement or financial independence even a few months of effort will make a big difference.

What to do with all your excess stuff when getting rid of the clutter

In the last post, I wrote about my thoughts on organizing and the importance of getting rid of what you don't need, want nor use.

What should you do with your huge pile of stuff?

Sort it out into new piles and put what can't be recycled in trash bags. Make one pile for things you want to sell. Books, CDs, working electronics, furniture, DVDs, etc could be sold at a garage sale.  Make another pile for things that are usable, but you don't want to bother with them that's your donate pile.

Have a couple garage/yard/sidewalk sales and/or put items for sale online. Whatever doesn't sell in a couple months can be donated. Keep those items away from your organized things. Don't let them back in. You separated them for a reason!

Also consider going to garage and yard sales when you need something, buying used is normally 1/4 of what you'll pay new for something.

Decluttering can save you time and money

I have always been a collector. I remember in elementary school I collected stickers, In junior high, I had my cassette tape collection (yeah I'm showing my age. CDs were expensive when I was in high school! and my first CD Player was stolen at school though I never reported it).  Anyway, although not an extreme pack rat, I know that I've always had the tendency to collect and keep stuff.

I'd always justify keeping something when I'd do my spring cleaning. I'd say, "but I 'm sure I'll use it later." and surprise the next year I'd say the same think even though I never used it all that year.  

I'm trying to improve, but it is hard to go against nature. I really believe that the collecting tendency or desire is genetic like so many other behaviors.  I remember my Mom still had her old record collection in her bedroom.  I can't remember her ever playing them when growing up.

Unfortunately if you have a lot of stuff, you need a house or room big enough to store it all. You also need the storage supplies (shelving, book cases, boxes, etc.) to put everything in. Additionally you need some kind of organizational system and labeling so when you actually need something you know where to find it or your spend hours or even days looking for it. How many middle class family garages are full of storage while the cars are parked on the street? That's serious clutter!

Another thing I've learned about myself over the years is that I'm very much out-of-sight, out-of-mind.  What I mean is that if something is stored in a box or some other container I can't look into without opening, I forget I have it. Perhaps I would have used it sometime during the year, but I didn't because at the time I had forgotten I had it. 

Since I share an apartment, I try to keep most of my stuff in my bedroom. That means that I have my large plastic containers stacked and on top of other things. One container is on top of my file cabinet. Another box is on top of my armoire/wardrobe, and I have two stacks (3 and 2) along the back wall of my room. 

I have my desk, a tall book case, and another piece of furniture (about the size of a dresser but with shelves instead of drawers) for storing stuff.  Most, but not all of my clothes fit in my wardrobe when folded correctly.  My wardrobe isn't very big. I have quite a few small boxes with CDs (games and backups)

When I moved in December 2011, I stared my efforts to remove the clutter. I realized that in just the last few years my collection of stuff had expanded out of control.  I got rid of half my clothes (mostly worn out stuff) and at least half of my books. 

I was quite proud of myself to have gotten rid of all that, but I still needed to rent a moving truck mostly for boxes of stuff. I really don't have that much furniture.

Now, only a few months later, I got the bug to remove more clutter. I guess you'd say that my clutter is pretty normal, but I'm in a small space so my room always looks like a mess.  

This weekend I went through my file cabinet and got rid of some papers and at least one small box worth (probably 2) of stuff. There was an old wireless router, a bunch of cables, wires and adapters for only God knows what, and misc. stuff that I'll never use again like two checkbook holders. I haven't had checks for at least 5 years, but I brought the holders with me on the last two moves. No, they don't take up much room, but you could say that about a lot of stuff. Believe me, I've used that same excuse many times.

I then went on to boxes of stuff. In my CD boxes I found many old software application install CDs for some very old versions. I'll never use those again. The shoe box I keep them in was almost full. Now it is half empty!

One of my large plastic containers had my extra hanging folders for my file cabinet.  With the extra room I got by throwing out the junk from the file cabinet, I found the space to keep the extra folder boxes in one of the drawers. Now that large plastic container is empty.

I found quite a few books that were out-of-date or warn out. They'll go in the trash if I can't find a way to recycle them.  I decided to keep almost half of my books and now they are all on ONE shelf of my book case.  Just last year they would have taken almost the entire bookcase. 

I later went through my other boxes and shelves. I didn't do a 100% job, perhaps next weekend I'll finish, but I was able to put some tote bags of stuff that were on the floor on a shelf that was completely packed and disorganized. 

I've rediscovered a few binders and notebooks that were almost unused or had stuff I don't want anymore so I got rid of what they contained. I just need to decide if I want to keep or give away the binders. Just a year or two ago I went to the store to buy a binder because I thought I didn't have any! 

How does this incredibly long post relate to early retirement and financial independence?  Well, if I had remembered that I had binders with junk in a box I could have saved the time and money I had spent on a new one. 

Additionally, things that are improperly stored are more likely to wear out or break. Of course if things are packed away you lose time trying to find them if you even remember you had them at all. Time is money. If you are efficient, you get more done!

Most importantly, the less stuff you have, the less space you require to live. That means you could live in a smaller house or smaller apartment or share an apartment before all your clutter took up the extra room.  If you want to go really extreme, share your bedroom with a friend that you can trust.  The cost of bunk beds or a loft for one or both beds will probably be less than what you save in two months. Rent is the largest fixed monthly expense for most people. Save a lot of money by downsizing to a smaller home and put that money toward saving and debt reduction.

Even if you prefer living alone in a one bedroom apartment, you'll save more on moving costs (smaller truck), and you'll save time packing and unpacking.  

Sometimes you need to increase income to reach very early retirement

Being frugal is sometimes not enough for extremely early retirement (or financial independence) 

Extremely early retirement is possible through frugal living, but it is also important to have a decent come to let you save up fast. If you only make what counts for minimum wage in your country, even a high percentage isn't much money and who wants to live on a completely bare-bones depression budget?  We should live off of the basics, but not suffer to get by.

To me frugal is to only spend on what you need to be healthy, happy, and comfortable over the long term. I don't need to have a night at the cinema to be happy. At least I don't need that more than once a month (or perhaps once every two months.

I do however need to eat a variety of vegetables on a regular basis. If I don't eat my veggies, I feel bad and lethargic. I know that if I only ate the cheapest vegetables I'd spent a little less on food, but it would cause a large decrease in happiness compared to the savings of perhaps 30-40 pesos per week.

Being frugal is also not buying on impulse or getting something just because it is cool, trendy, or what all your friends have. It is living without spending a lot of money on entertainment.

Having said that, we all have to eat, pay for a place to live, and clothes to wear. Unless you have a several thousand dollar a month income or live for free with your parents, it will be difficult for you to save the 80% of income needed to retire in about 6 years.  saving 80% spending 20% withdrawing 4% annually 6.25 =25/(0.8/0.2).


The less you save the longer it will take you to reach your very early retirement savings goal. I was a little disappointed to see that at my current 50% savings  (about 40% more than your typical earthling), It will take me about 25 years according to the formula. 25 =25/(0.5/0.5) If I were in my early 20s that would be fine, but I'm almost 36 years old and I want to retire in my mid 40s so I need to make a plan to increase that percent!


If I go from 50% to 60% (which would either mean packing my sandwich or rice with vegetables or eating at home everyday and perhaps washing my clothes by hand), It will take me about 17 years. That's still too long for me.


The only solution is to live frugally and increase income. The more I make while maintaining my expenses at the current (frugal, but no suffering) level, the more I will save (the higher the percent for savings).


At 70% savings, I can retire at almost 11 years. That's not bad. It is one year more than I'd like, but I am actually planning on working on my artwork so I could sell a few paintings and digital artwork and sell some graphic design. I very much doubt that Print-on-Demand websites will go away so I won't have to live 100% off my savings. I might go into semi-retirement after 8 years if I can build a small or tiny house in the country and have a garden, internet, and a solar water heater. It is hard to say since I only recently thought of the idea. It would be fun to have a couple years dedicated to creating art and design to survive on and live simply. Sometimes being a teacher with a full schedule can be stressful.


Now that I know I need to increase my income and live simply to reach my retirement goal, the next step is to find ways to increase that income. Do I want to find another job? Perhaps I could blog for someone else or write a book? I could put extra time into creating great graphic design. I could try to find more translation work. It is stressful, but a long translation could mean a lot of income if I could find someone who needs that help. I could also raise prices for English classes, but that also will increase the possibility that people will cancel when they have unplanned expenses.

I want to retire in 10 years when I'm almost 46

Last Thursday, I was talking to a student who owns a small accounting firm. I've had conversation classes with him off and on for probably 7 years. We typically meet once a week.
I'm not sure how exactly, but we got into a conversation about the future.  His plan is to have his big house to enjoy with his family in a good neighborhood and live well. He loves his work, but he plans on stopping around the age of 60 or perhaps late 50s or at 65 depending on how things go. I think he has a great plan since he loves his work. I don't think there is a right or wrong as long as you have a plan that will meet what you need and want out of life.

I told him something that surprised him. He shouldn't have been surprised. You'd think he wouldn't be that surprised, but I saw a shocked look on his face for a few seconds.  I told him that I want to retire in 10 years.

We started to discuss the numbers since accountants need to see the numbers to fully relate to the concept.  We decided that saving an average of 8000 pesos a month would probably be enough to get by with minimal expenses since I'd make interest which would compound and of course I don't have any children to take care of or a mortgage to pay for.

The next question was what I would do if I retired in ten years.  He understood my answer although he couldn't really relate.  I told him that I'd travel off and on. I'd love backpacking and staying at hostels and meeting people and trying new things and taking photos and all that.   I don't want to wait until I'm old to experience that. If you wait until you're 65 to enjoy your retirement, you'll probably only have a few more years of good health to actually travel and do all that.  You'll probably live into your 80s if you don't get sick, but most people die in their 80s and have not-so-great health in their 70s.  I want to be able to enjoy a few decades of travel, discovery, trying new things, and spending time with friends and loved ones BEFORE I get that old.

If I had the same awareness 10 years ago, I would have planned to retire sooner, but I wasn't mature enough in my 20s to take the decision to save a high percent of my income skipping some immediate pleasure to have it years from now. I suppose most of us think that we have decades more before we should even think about it. I think that after reading the typical advice of working and saving 10% and retiring when you are too old to fully enjoy it wasn't very motivating to me. To retire early, you need to save a very high percent of your income and invest it, but I NEVER saw any popular personal finance adviser recommend it. I always read to save 10% and have an emergency fund and just keep working until you're old and hopefully have paid off your huge mortgage on the big house.

Yet, I think the problem is really how I define retirement. Retirement for me is NOT sitting on the balcony bored watching people walk by and watching some television.  To me retirement will be living simply, gardening if I can find the space, learning and growing as a person, and getting inspired and helping others when I can without being taken advantage of.

I don't plan on not working at all. I plan on working part time when I feel like it not working because I have to because I need to pay the rent and bills. Perhaps I'll teach one group or become a writer. I might decide to study in a study from home using the internet for a university degree. I might take some painting or drawing courses or learn something completely new.

Retirement for me is financial independence. The ability to choose what you want to do or not do on your own terms.

Personal expenses Spring 2012

Here is a glimpse at my current expenses while working and my thoughts regarding current spending levels in each area. It will vary a lot, but you'll notice that compared to the typical person from the USA, I live in extreme poverty, yet for here, I'd probably be considered lower middle class. If I only lived with a working significant other I'd live better. Single without children living is more expensive than married without children because of having to find a roommate and you can't expect them to share all the costs only rent and basic utilities. You also never know when they'll move out and you'll have to pay more and find someone else or move to another place. Remember everything is in pesos!

I can adapt pretty easily and when I make nothing I'm good at cooking at home and walking everywhere and washing clothes by hand.  When I work a lot my expenses go up a lot, but at least I can save money when I work.

 I've saved 20,000 in the bank for emergency living expenses and put half in a certificate of deposit to get some interest for 90 days. Interest bearing accounts have really high minimum balances here. So now I'm starting my investing phase. I'm depositing money to my AFORE which is an independent retirement account that invests mostly in bonds and gets around 6-7%. I can't select investments the bank decides based on age groups. I can only withdraw money (any voluntary contributions) once every 6 months so it is good place to put medium to long term investments.

Rent 1267

 (sharing 3 bedroom cheap apartment with 2 others) I don't think I could find cheaper near a subway station without moving to a neighborhood known for armed robbery.

Food 3000

This is one I'm working on because when I don't work this drops down to 1000 pesos. (when I don't work I cook and people think I'm vegetarian since I cut back on meat then too.)
I'm trying to get it down to 2000 while working a lot.  3000 a month is basically 100 a day (9 dollars a day +/- goes by so fast even buying food sold on the street and a soda.) I'm going home to eat between classes now twice a week and other days perhaps I can pack sandwiches or something)

Transport 1500
I teach in 3 different places right now. Atizapan (Northwest), Polanco (west-central), and Roma Norte. (almost central) I can't move near classes because 1. those areas have MUCH higer rent (perhaps 8,000 in Roma Norte, perhaps 16,000 in Polanco, and 3,500 in Atizapan) and in anycase if I lived near one I'd be far from the others and who knows when someone will ask for classes in some other part of the city.)
I take the metro (subway) and buses everywhere. It averages out to about 50 pesos a day mostly bus cost since the subway is partially funded by the state and the bus to Atizapan where I currently teach most classes is full price. If I stopped working I probably would not go there very often.

Internet 210

It is a good connection and I use it everyday when at home. I use it to communicate with family and friends and of course to check the sites where I upload artwork and designs.
When I'm financially independent I plan on just doing art and graphic design.

Cell 300
I'm on a two year contract. It is one of the cheapest plans I could find that would give me enough text messages and internet. I only get one hour call time, but I normally use its internet to send messages on facebook or whatapp. I had canceled the telephone service here since the roommates didn't want to help with the bill like they had agreed.

Laundry 400
I could wash by hand. I was working on decluttering this weekend, but we'll see. I notice that clothes wear out faster when I wash by hand even though I save on cleaning cost.

Supplies 500

stuff for creating artwork, personal care products, DVDs for backing up artwork, etc. normally 300-600 pesos.

Electricity 100
approx. it is actually a bill that comes every other month and split three ways. Electricity costs vary by usage and neighborhood. Poor areas pay less. Expensive areas like Polanco pay full cost. One of my roommates has the bill and he hasn't shown it too me and he's been at his parents' house all week. I'm worried that he's going to move back home.

Natural Gas 100
Here you buy tanks of gas of different sizes and it depends on how often you cook and if you keep your water heater on hot, warm, or off between baths.
We actually don't have a tank connected to the water heater so I've been showering in cold water. I've done that off and on for years. It isn't enjoyable at all, but it is tolerable.
If I had my own house I'd install a solar water heater and panels, but you can't do that when you rent.

In total I am currently spending about 7,500 pesos a month on the basics + laundry, cell, and internet.

Since I want to retire or be financially independent, saving 10-20% of my income isn't enough. It is essential that I reduce costs as much as possible while working. Ideally, I'd save at least 50% every month.

Food expenses can bloat a budget too

The last of the big expenses in modern life is food. 

I know you're busy. I'm busy too, but to save as much as possible you should reduce this too.  Here are some ideas.

Eat less meat

Vegetables especially in season are cheaper than meat probably by half. If you don't like vegetarian dishes, go for smaller portions of meat.  Instead of eating a steak with a baked potato, cook slices of steak with vegetables as a stir-fry.

That steak could be eaten in 2 or 3 meals instead of one. It will also be more delicious. 

Forget the coupons and cook staple foods

Basic ingredients don't have coupons because they already are cheap. Processed foods are high in fat, salt, or sugar, often with added soy or other fillers. Processed food is much more expensive than simple foods so they have coupons so you'll feed good about them when you waste money on them. If you have a craving for something premade, sure go for it, but you aren't really saving money if you compare it to real homemade cooking.

Pack a lunch

If you have a few minutes in the morning before work, prepare a sandwich and add a piece of fruit or some carrots and celery sticks. 

Batch Cook

Cook something that can be frozen on Sunday and put it in portion sized containers in your freezer. Grab one container and a piece of fruit when you leave home.

Pack your water

How much money do you spend on coffee and soft-drinks every day? Why not refill your water-bottle every night before bed and have it ready in the fridge to take with you.

Following these tips could easily cut food expenses by half for most people. That money could be saved or invested!  In a few years, your investment income could pay for your food. 

Reduce Transport Costs and Invest more money

The next important expense to reduce so you'll have more money to save is transportation. Transportation like housing and food is very important, but there are several things you can do.

You could move close to your office. If you are only a kilometer or two away from the office you could walk to and from work. Not only will you save money, you'll increase your fitness and probably lose a little weight.

If you are not quite that close you might be able to go to work by bicycle. Biking to work is also great exercise.

If you have a car, consider carpooling with those you work with. Either take turns driving or give gas money.

If you don't have children sell your car. If you are married just have one car for both of you to use. One car per person is a very recent concept that you don't have to follow.

Living in a large city often means long commutes however it also means the option of taking a bus or taking the subway.  Do a cost comparison between driving, carpooling, and taking public transportation when it is too cold to walk or bike to work.

Reduce Housing Expenses to save money

Since your goal should be to save as much as possible every month so you can get financial independence, early retirement, or buy your own home, perhaps you could start with those pesky large fixed expenses.

The three largest expenses for most people are food, transportation, and housing.

Your housing expenses could be mortgage payments, property taxes, maintenance, and home owner association fees. It could also be rent payments or perhaps you live with your parents for free!

Assuming you can't or don't want to live with your parents consider one of the following:

Move to a smaller apartment. Go from three bedrooms to two bedrooms or two bedrooms to one. If you are in a one bedroom apartment consider an efficiency apartment. from there perhaps rent a bedroom with kitchen access near where you work.

Do you have a two bedroom apartment? Instead of downsizing you could rent the room to a friend or post an advertisement. Increase what you want by a little to cover utilities and don't forget to ask for half of the deposit.  If you rent to a stranger ask for references and be sure your bedroom has a lock on its door.

Many people don't move to a smaller and cheaper apartment or share because they have too much stuff. The extra room is full of boxes of stuff. You may not even remember what's in the boxes, but they're there taking up space and costing you money.

If that's your situation, then you need to urgently go one box at a time and make piles of things to sell, things to toss, and things to donate. Whatever doesn't sell gets donated.

An excellent rule is to get rid of whatever you haven't used for one year.

Where does the money to save come from?

Saving money for your emergency fund or to invest comes from the same sources:

1. Your regular salary and commissions
2. Gifts from family for birthdays and Christmas
3. If you have a regular job, you might get a Christmas bonus or profit sharing money.

Perhaps you can think of others sources of income.  Take your income and subtract your average expenses and save the difference.  The rule is extremely simple.  Spend less than you earn. In fact, if you want to retire early one day or be financially independent and do what you love instead of working for the paycheck, spend much less than you earn.

Do you spend the same or more than you earn? You are probably miserable and either regularly borrowing from family and friends or you are making payments on one or more credit cards.

Sure you might be able to afford the payments right now, but you are also paying a lot of interest. That's money that you could have invested and could have been working for you. Instead you are working for the bank or credit card company!

Perhaps you don't make much money and even though you don't owe the bank you don't have savings. In this case, it is time to cut back your spending at least for 6 months while to build up your savings fund.  

Identify daily or near daily small expenses and also look for ways to spend less on housing, food, and transportation. Can you walk or bike to work?  Could you sell the car and take the bus or subway instead? Could you cook on Sunday and keep portions in the freezer to take with you for the week or just pack a couple sandwiches?  Even small amounts add up!  Don't forget to cancel any services you don't use and magazine subscriptions that you rarely read.  Downgrade to basic your telephone and cell phone. Better yet, cancel the one you use less.  If your boss lets you surf the net at work perhaps you could cancel your internet service at home. Cancel or downgrade your cable television service. 

A good savings goal would be 30% if you have children and 50% if you don't. Later you can try to save more. The higher your income, the easier it is to increase that %.  It doesn't really matter though. If you work you can save if you follow a plan that limits you to the basics for a while. Yes, I know most personal finance people say to save 10% of your income, but do you really want to wait 10 months to have one month of money for your emergency savings or for investing?  That's extremely slow and discouraging. At that rate you'll be lucky to retire at 65 depending on the market and when you started saving/investing.

As you build up your savings, make extra payments to your credit card(s). The interest you save next month can be applied as increased payments.  As you pay off your credit card debt don't buy more luxuries! Don't dig yourself any deeper in debt!

Finally lets say you already have a bare bones income and you already share your apartment and don't have any special bills. Every time you get extra income like gifts, profit sharing, or a Christmas bonus, put all of it into your fund and/or against your credit card debt. Don't give up! You can do it!

When your emergency fund is complete and your credit cards are paid off you'll be ready to invest what you don't spend every month including all the money that used to pay interest you owed.   You could alternatively invest a little while paying off debts, but in that case you are guessing that your investments will earn more than you pay in interest and you really don't know!

Where to put your emergency fund

Determine where to keep your emergency fund.

In my case, I decided on simplicity. I decided to keep my emergency fund in my normal bank account which uses a debit card. I then put half of it into a 90 day Certificate of Deposit so it will earn some interest. Since I keep 4 month's living expenses in my account I wouldn't have much difficulty in an emergency unless the emergency happens right after renewing the CD.  In any case 2 months should be enough time to liquidate some investments to cover the third.

For most people, the best option would be to keep the money in an interest bearing savings account however in today's barely growing economy, most earn less than 1% or they require a high minimum balance. If there is a minimum average balance and you go below that, you'll have to pay a fee. Instead of earning money you'll lose it.

Depending on the country where you live, you might have the option of transferring funds from your checking account to an online bank account that pays better. Just find out about possible fees and delays for transfers back to an account from which you can withdrawal funds.

Once I get used to the routine and see if I can increase it or at least maintain my savings, I'll decide whether or not a minimum balance account that earns interest is worth it. Unfortunately I'd need to increase my emergency savings by at least 50%. In that case, it might be better to just add another Certificate of Deposit for 90 days and just have it start a month after the first one is renewed.

What is important (at least for people with little self control), is to keep savings in an account that isn't a checking account. Perhaps not even have a way to access it by ATM card so you'd have to transfer funds from savings to checking before spending it on something that isn't an emergency.

In Mexico, inflation is at about 5% so keeping more than one month's cash in a no-interest savings account is not a good choice. After doing a lot of research I found a website run by the government called CetesDirecto. If you are a resident of Mexico, you can open an account. Cetes (Mexican equivalent of T-Bills) at 28 days is a good alternative to buying Certificates of Deposits (pagares) for short term savings.  Cetesdirecto started around the end of 2010 or beginning of 2011 so I didn't know about it. In fact none of my friends knew about it when I mentioned it to them the last few weeks. That website also lets you buy bondes (5yr), bonos, and udibonos (3,10, 20 and 30 year), but none of those would be a good choice for an emergency fund.

 If you lose your job you could spend the cash in your account and cancel the renewal of your CETES and then have the money available at the end of the month. You should find out what short term and low risk alternatives are available in the country that you live in. Your country might have a similar program!


Where do you keep your emergency fund?

Determining how much to put in Emergency Savings Fund

Before determining how much money to put in the emergency fund, I had to determine how much money I normally spend since it is best to base it on expenses instead of normal income.  

Thankfully I had created a Google Docs spreadsheet where I had made a simple calculation of approx. income and approx expenses. I discovered that my estimate was pretty correct and that the more classes I taught, the more I spent since I would have to spend more on transportation and food unless I wanted to carry a packed lunch with all my other stuff. 

I also would go to restaurants and stands in the street since it was faster or more comfortable for me. There is also a social aspect involved. It is nice to have a quick chat with someone who isn't a student or roommate.

How much should you save in your emergency fund?

The first thing you'd want to consider is your dependents.  Do you have any children or do you take care of your spouse or parents?  If you do I'd suggest having twice as much money in your emergency fund perhaps to to even a year of expenses (including expenses you pay for them). If you have dependents who cannot work, you should consider getting a life/disability insurance policy in case the worst thing happens.

Next consider pets. Your dog or cat might need to go to the vet. In some places, a veterinarian could get very expensive. If you have a pet, add a couple months more to emergency fund.

Now consider health insurance. Do you have health insurance? If not add a couple more month's to the fund. If you have health insurance, make sure your emergency fund has much more money than your health insurance plan's deductible.

Finally think about your mortgage. If you have big mortgage payments and you don't want to consider selling your home in an emergency, be sure you have enough to cover several months of mortgage payments. You don't want to pay late or missed payment fees nor do you want to have foreclosure proceedings start.

As you invest, you'll need less money in cash since you could sell stocks, bonds, or mutual funds to pay your bills, but until you have large investments, it is best to be ready for problems. 

Emergency Saving Fund

As a private teacher you can imagine that my income is extremely irregular, but there are not that many things I could legally do on my own schedule and still be able to pay the bills. Don't get me wrong, I love teaching, but it isn't exactly easy. I have to know the grammar rules, be able to explain things and of course be willing to teach before my students start work, during the 2pm lunch, after they finish work, and of course be willing to carry a bag with 3-5 kilograms of stuff that I need for teaching since I don't have an office desk to lock things in or a company fridge to store my lunch.

Since I don't think that teaching English classes is something that I'll be able to enjoy or physically do for perhaps the next ten years, I need an exit strategy. Before I started my first investments this April (2012), I had to first fund an emergency fund in cash.  I did that in January and February before I even thought of trying to retire early or become financially independent years earlier than what is considered proper by most financial advice websites. At the time I thought, If I am going to invest as much as possible for my own condo or income fund, I need to have cash for anything unexpected since liquidating investments usually causes special fees. Liquidating investments may cause a loss. Also early liquidation of investments often means having to wait several days or months to get cash.

One final simple reason why an emergency fund is essential:
If I invest every extra peso for investments and I get sick or need money I'll have to borrow from that fund to get by until the next half of the month when I charge my students again. At that point I can put the money back into savings. Without special cash savings, I would either save less or eventually have a problem and need to borrow or put expenses on my credit card.

What isn't an emergency fund?  
An emergency fund isn't an investment that would require waiting a day or more to have the cash. If it is an emergency you need the money today!
An emergency fund isn't a credit card or other line of credit with a financial institution. You don't owe money on it since it is your savings in cash.

How much did I decide to save in my emergency fund?
there are many things to consider for how much money to keep in cash for emergencies. I decided to keep living expenses for 2 months in cash and 2 months expenses in a Certificate of Deposit for 90 days.  Four months of living expenses isn't a lot of money, but it should get me by until I'm able to liquidate future investments if I need it.

Lets say that I lose my classes so my income drops near zero. I'll have 2 months cash expenses to use while I look for more work or blog or do artwork or whatever. By the time that's gone, the CD should expire and I'll have that money available in cash.

If I don't have an emergency, I'll renew the CD for another 30 days. At least this way I'll earn some interest on the cash and still be covered for a few months.

Background for early retirement journey

Getting started for very early retirement or financial independence

Hello everyone! I'm almost 36 and I've lived in the Greater Mexico City area including one of the cheaper suburbs (big mistake)for almost 11 and a half years working as an English teacher. I went independent several years ago. I was saving money slowly and spent it all during the big 2009-2011 recession and thankfully have recovered.

First of all, I talk about numbers in Mexican Pesos. I probably make less than 1/5 the money than most of you do at your jobs even though I'm doing better right now than ever before in the last 11 years. Of course everything could change next month since I'm working on my own and my only "marketing" is asking students and friends to recommend me.

I also sell artwork online. I started at the end of 2007 and slowly growing, but that really doesn't pay for more than my internet connection most months.

Issues:

Rent is a big issue. I share a 3 bedroom apartment in a poor neighborhood 5 minute walk to the nearest subway station, but my roommates are not very stable and they could move out any month.

Transportation is a big problem. Mexico City has a lot of opportunities, but since it is one of the largest cities and metropolitan areas in the world it is very normal to spend an hour or more to go from one place to another. I don't give classes near home, but not very far either.

It takes me typically between 1 and 1.5 hours between classes or classes to home ( I teach at the student's residence typically their office)

I take the bus and/or subway to get around.

Food cost is a big issue when I have a busy schedule (3 classes a day is a lot when you consider distances and travel time). I don't have an office fridge to store food and since I don't have a car either I really don't have the desire to carry packed food along with my books, DVDs, and other teaching supplies.

I've been lurking for about a week since I found the site and many of the ideas clicked. I could never get excited about retiring when I'm too old to enjoy it (How many 60+ are really in excellent health? perhaps half?)

Goals:

I'd like to own a tiny condo near central mexico city so I can't get around well on the subway. A tiny apartment in a poor area starts at 600,000 pesos so by the time I've saved up it will probably cost at least 700,000. By tiny condo, I mean approx. 45 square meters in a building with dozens of poor neighbors.

Goal 2 is to alternatively buy a relatively large property near one of the smaller cites for country living (I miss gardening). It would probably be cheaper to start, but I'd spend more on transportation since I'd need a car to go to the closest city.

I've been thinking about getting 800 square meters near Cuautla which is about 3 hours away by bus. I'm guessing it would cost me about one million pesos for a property of that size and build a decent house and a small pool on it although it could be done in stages. (1 buy a property and get a wall around it. 2. get the pool hole dug. 3. get house foundation poured. 4. build the minimal house and get solar power and solar water heater installed. 4. expand enough to be comfortable.) If I go with this option I'd keep renting and working a room here and go there on the weekends at least until I'm financially independent.

Meanwhile I keep saving and waiting for the shoe to drop. I figure one day my students will get laid off or something else will occur so in any case I need to save for when there isn't demand for classes.

Right now I'm trying to figure out how much money I need to save to be able to take a withdrawal rate of 4% or be able to pay for either land or the tiny apartment. Do any readers have suggestions?  I've been modifying my Google Docs budget spreadsheet and including a page for net worth and trying to figure out how to get it to tell me how much I need based on average expenses and current savings. I think It would keep me motivated to see the numbers improve with a definite goal.