Sunday, May 20, 2012

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.

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