When you are doing well don't tell your friends or family.

I've discovered that at least in Latin America, it is best to tell people how bad you're doing. I've been working hard at cutting expenses and minimizing others. I'm still spending too much on food, but much less than many people I know.

Even though I only just implemented my investment strategy this month (The strategy I've been working on for several months), I've already gotten comments that "I make more than them so I should be more generous." or that I'm very "cheap" because I am not sharing my new found wealth.

It is ridiculous because I have been struggling and making sacrifices to save and invest what I can of the very low (much less than minimum wage in the United States) income I have. I won't see income above a few dollars a month for at least a year and that is supposing that I have non-stop work for the next twelve months. That is pretty doubtful since most of my groups cancel most of December and half of January plus a week or two for holy week in the spring. Of course for those few dollar a month earnings I'm saving much more which is a net loss every month; sacrificing money today for money years from now. It isn't as if I had won the lottery or inherited a fortune.

I have:

• found roommates for the other rooms in the apartment.
• found a roommate to share my room.
• one roommate uses my closet and sleeps in the living room.
• refused to buy a car and I only take a taxi when necessary.
• limited myself to inexpensive food when at home and eating out. When I eat out I normally buy something very cheap on the street.
• started washing my clothes by hand when I have time to do so. 
• rented an apartment in a relatively poor area of the city with good public transportation.
• recycled and reused what I can.
• stopped buying magazines or newspapers except when they are for use in my English classes. I have been reading some newspapers and magazines at the university library where I teach a few days a week and I'll read news articles online.
• refused to buy more gadgets except as a replacement.
• paid my credit card in full every month. 
• refused any unjustified regular expenses. I have my cell phone and internet at home. I don't need anything else that isn't essential.

I have many more things to do like try cooking more of my food at home, but I feel good to know that I'm making progress. This doesn't make me "very cheap", it makes me responsible.  I don't have to ask friends for a loan. I don't have to take what doesn't belong to me since I am being responsible with my low income.  No, I don't have a huge bank account. I decided to keep no more than one month's income in cash except in the event that I take a much needed vacation.  No, I couldn't live for a year on my investments. I suppose if I could cash everything out I'd be able to survive for a little under a year, but it would be only survival. Of course, I would then have nothing for retirement nor for a house or condo to call home.

It seems that all the minor miracles I've been managing to have humble savings is considered to be a horrible thing to the general population. I should, according to them, spend all my money on stuff and on them and forget about being responsible or savings. Will they take care of me one day? Will they give me food, clothing, and shelter?  Of course they won't!  They are just jealous of what little someone else has been able to manage. They are jealous that I've made the commitment to prepare for my future. 

My advice to you is that if you have friends or family who are like them, tell them you are broke, that you have no savings and that you aren't sure if you'll be able to pay your rent next month. They'll be happy thinking you're just as bad off as they are and when you want to save money instead of spending a huge portion of your paycheck on a night at a bar or on a cruise ship vacation. Tell them you can't afford it because you need to buy a new television or other stuff that they would think is important. 

"Quality of life" and therefore happiness seems to be defined very differently by the early retirement or financial independence people and regular spend-what-they-earn people.

I've been trying to show by example to my new roommates the concepts I live by since one clearly doesn't understand but I didn't get it when I was 20 either.

We were talking about what we'd do when (or if) we find a high paying job. Many know that I haven't actually looked for a job for several years. I've been freelancing for several years. I did poorly when the economy was bad and relatively well in the last and first year. (although compared to most people in the USA, I'm dirt poor in income)

The roommate that just doesn't get my perspective said he'd rent an apartment in an expensive neighborhood and get a nice car when he gets a high paying job.

I commented how I wouldn't do that because I'd just be spending all the extra money I'd be earning (I wouldn't get ahead). He gave me a shocked look and said that I'd be living a better quality of life.  Obviously to him, living alone (or with his partner) in an expensive apartment paying for an expensive car is a better quality of life.   Personally I don't see how quality of life improves by living somewhere expensive. Sure, it might be prettier or closer to work, but is that really a better quality of life?

I have nothing against those things, I just would rather have my future covered and live simply. I still spend too much on food, but very little on everything else. I replied that if you change (increase) your expenses and later lose your job, you'd have no way to keep paying for those things.
He paused and said that it would be better to buy a house. I can agree on that.

What do you think? How do you define quality of life and happiness? Are you happier living in someplace expensive than someplace that is inexpensive? What about long term happiness?  Would you still be happy if you lost that high income and had to move to a small cheap place or live with your family because you didn't have enough savings? Does paying for an expensive car really make you happier than taking public transportation or having an affordable car?

Ten Lifestyle Rules for Financial Independence and Early Retirement.

Financial Independence and very early retirement seem almost impossible to people who are not used to budgeting and/or living simply.  Most people just believe the illusion that they can spend almost all of their money or 100% of it and that somehow their employer funded retirement account or the government will manage to take care of them while they pray they'll be healthy and have work to pay for their expenses from now until their official retirement date.

Unfortunately, that isn't true for most people. People lose their jobs and in short order they lose their extremely meager savings (perhaps enough to survive a month!)  and then they lose their home that they were making mortgage payments on or they get kicked out of their apartment (which they couldn't afford either!) because they stopped paying their rent.

We all need to budget our personal spending because there is no reason why we can't lose our income before the official retirement age or lose our ability to work before that age.

Most importantly, one needs to change his or her attitudes toward money.  Money isn't a right and we aren't entitled to any specific lifestyle or spending. Those who have the money can spend it as they can see fit.

Rule #1:

Live BELOW your means.

If you take home $1000 a month, NEVER spend 100% of it. Make a point of keeping your regular expenses at or below 60% or $600.  You probably won't make early retirement with only 40% for irregular expenses, debt repayment, and savings, but it at least your savings will cover real irregular expenses and you should be able to grow a decent emergency fund between personal finance disasters.

If you want to retire early and truly be financially independent you need to save  and invest at least half of your after-tax income. The greater the percentage that you save and invest every month, the faster you'll see the benefits. 
At first you'll see that in an emergency you can pay your bills without using a credit card or having to ask for a loan. 
Your money needs to make you more money. Eventually your investments will be large enough to pay your bills then you will be able to quit your job, retire, change jobs, go from full-time to part-time, or make your hobby your new profession. 

Rule #2

KNOW where your money goes.

It is great to believe your regular expenses are less than 60% of your take home pay, but you need to either track all expenses or periodically track them and be pretty consistent with your spending.  An easy way to verify is to add up money put in savings and investments and debt reduction (monthly credit card and mortgage payments are not debt reduction) If the total is at least 30% of your take home that leaves about 10% spending for irregular and entertainment. if it is less than you need to be more careful at planning and tracking your expenses.
Be specially careful with bank and credit card fees. Below minimum balance, late payment, and missed payment fees can be huge! There are also account maintenance fees on some bank accounts. Credit cards often have annual fees.  These should be covered in your REGULAR expenses until you get rid of them.


Rule #3

Don't give up after making a mistake.

Ok, you spent a lot of money at a night out with friends. Accept that it happened and it was a mistake if it was over budget. Just don't give up your budget. Track your expenses better and stay home some other night you normally go out so it balances out to an acceptable level.  Making a mistake doesn't mean it is time to throw in the towel. This month you had a setback. Next month you'll make progress!

Rule #4

Make lifestyle changes

If you are used to living beyond your means, you will have to reevaluate what is really important to you. Do those expensive nights out at the disco and the daily taxi drives or the expensive SUV really make you happy?  I really doubt it makes you happy beyond a few days.
Reduce or eliminate expenses that don't make you happier or healthier.  Downsize your lifestyle. Cook at home more, eat out less. Rent or own a home that is big enough for you and your family. Share your apartment or rent out extra rooms.  Make coffee at home instead of going to an expensive coffee shop every day.  Don't buy new trendy clothing every season if conservative timeless styles will do. Buy used clothing and shop at garage sales or online for used goods in good condition.
Not everything good will cost you money. Libraries have books, museums often have a free day, parks are generally free.
Limit your consumption when you go to expensive places. Buy one drink instead of 4. Buy the daily special instead of a regular menu item at the restaurant when you go out on a date or with friends.

Rule #5

Focus on big expenses, subscriptions, and simplicity.

A simple lifestyle gives you freedom. Cutting from your budget services you never or rarely use makes sense.  If you only watch one movie per month, why pay more than the cost of a visit to a movie theater for those movie channels?  If you don't use internet on your cell phone, why pay for the service?  If you don't use it or rarely use it, reduce it then cancel it.  For example start with your cable and internet bill. Start by reducing from the full package to a package without movie channels and wait a month.  Did you miss them? Probably not if you are like most people. The next month go to a more basic package or go to just what you actually used the previous month.  Do you always watch TV online? Cancel the television service and just pay for internet. Do you always use the internet on your breaks at the office, cancel your internet service at home.  The same goes for magazine and newspaper subscriptions.  If you don't read half of the magazines, then it makes more sense to just buy one at the news stand when an issue has an article you want to keep.  Better yet, go to the local library to read magazines and newspapers!
Can you walk, ride your bike, or take a bus to work instead of driving your car?
The biggest expenses are normally rent, transportation, food, and utilities.  Reducing those will make the biggest dent in your monthly expenses.

Rule #6

Record your income, savings, and investing in a spreadsheet.

You need to make a budget, but recording your general spending or every single expense will keep you honest and on track.  Personally I don't record every expense, but I do make a point of saving 40-50% of my income as much as possible. Yes that means sharing the apartment, not using a car, etc.  You need to decide what you value until you have substantial investments paying your bills.
Today, tracking your expenses compared to your budget is easier than ever since you can use Google Docs spreadsheets and update your figures anywhere you can find a safe internet connection.

Rule #7

Learn the difference between an asset and a liability and start investing your savings in a variety of assets.

What you don't spend once you are living below your means, can go to your emergency fund and investments. Start investing right away. Inflation eats the buying power of cash savings, so it is important to take some risk by investing.  Certificates of Deposit are probably the safest, but they generate little income. Stocks are high risk, but they'll normally grow faster than inflation or pay dividends. Rental property can make regular income for minimal effort, but you need a big up-front investment as a down payment and there are of course property taxes, mortgage payments, and home owner fees.  Find a balance that is right for you, but invest in assets instead of spending money on liabilities.  Assets generate income and/or grow in value.  Liabilities cost you money.

Rule #8

Pay yourself first.

Every time you get your paycheck or get paid for a service you provide or a product you sell,  put a % of the payment in your savings and investments. It should be equal to or greater than the % you decided in your budget. No, 10-15%  is NOT sufficient. That won't cover real emergencies nor your retirement unless you started saving when you were 20.
If you have a regular salaried job, you know how much money you make every paycheck so you can regularly have money transferred to your savings and brokerage accounts. A freelancer should just deposit a % with each payment received.
Why pay yourself first?  It is too easy to see money unspent and buy something that you want (but probably don't need). Once the money is invested, it isn't so easy to spend it on something trendy, or cool. Once you have time to think about it you probably will decide that you didn't really want it that much or it can wait another month or two until the price drops.

Although a 10-15% savings rate is not enough for financial independence or even a decent retirement if you are new to budgeting and saving, it is a very good start if you aren't used to living on less than 100% of their paycheck.

Rule #9

Buy basic goods more than processed goods at the supermarket.

When you go shopping you see most things at the supermarket are processed ready to heat and eat. Unfortunately most have added sugar, salt, and fat. If you are busy it is nice to have something to eat quick, but eating mostly processed food will increase your food expenses. Natural oatmeal is easy to prepare and much cheaper than processed cereals. Potatoes can easily be sliced on a cutting board (carefully!) and fried in canola oil for much less than a bag of precooked french fries. Fried rice is extremely easy to cook and of course it is much cheaper than precooked fried rice.  Tea is cheaper than soda and much healthier too.

Rule #10

Only buy deals for things that you'll actually use before they go bad.

Couponing is one example. Yeah, you'll save money with coupons, but you'll notice that coupons are not available for unprocessed natural goods. Eggs, oatmeal, fresh fruit and vegetables, are already cheap. Processing adds costs and makes them expensive therefore the coupons. If you buy basic goods then coupons don't make sense.   If there is a promotion on your shampoo then you're probably safe, but if you live alone you probably won't eat 2 kilograms of tomatoes before they spoil.  It is hard to guess how much you'll consume, but if you know you don't eat more than 500 grams of something every week and normally less, then don't buy more if it will spoil. I know I never eat more than 2 kilograms of carrots in a week. Sometimes I eat only one so I try to plan according to my average consumption.

Having Roommates makes a big difference! Reduce your housing costs for Financial Independence.

The last 7 month's have been a little crazy for me.  Before mid-December of 2011 I was in a stable roommate situation in a very cheap and very tiny town home very far out in the suburbs.  I wasn't happy with my roommate due to his financial decisions (always broke do to poor judgement)  and due to his occasional tantrums (even though he is one year older than me, he seemed more like a grade school student when he didn't get his way).  Obviously, I wanted to change my situation because happiness is more important than money and if you are not happy at home, you won't be truly happy elsewhere.

I was offered the opportunity to share a 3 bedroom apartment in a slightly poor area 30 minutes in transportation north of downtown just a few minutes walk from a subway station.  My cut of the expenses was much more than I was paying  way out in the suburbs, but I had poor neighbors and I knew that I didn't want to rent alone due to the expense and of course rents are much higher in the city proper than on the outskirts of the metropolitan area.   I accepted and the drama quickly started.  I discovered I replaced one bad roommate with two.  These were very dishonest and noisy. They loved having loud parties every holiday and all night.  I tried again to find a room to rent in a decent place for a good price, but I didn't find one.

As luck would have it one bad roommate moved out in March about half way through a month he didn't pay. He owed me some money too. I paid more to cover half of his room's cost that month. I was happy that he left because I learned to despise him during the few months we shared the apartment.

In May, I discovered that the OTHER roommate, who did find someone to rent the other room the next month, had lied to me and the new (better roommate) about needing to pay an extra month of deposit. It wasn't true.  Last month (May) that roommate left leaving his stuff and owing money for the electricty and water bill which he said he'd pay but never did. He of course owed money to the landlady and to me for the last month's rent and the "extra deposit" money I had given him.   Thankfully a mutual friend was able to pressure him to give money for (most of ) his outstanding bills at the apartment.

Now starting July, I discover that I'm the one in charge of the roommate situation here but also in charge of paying the rent and the basic bills (internet, water, gas, electricity).  I didn't imagine it would turn out like this, but life does that to you.  You think everything will be just right and then everything changes!

What's different?  Well I'll be signing a one year contract for renting here. It doesn't bother me because it isn't expensive and it is a good location.  There was one problem.  for June, I still hadn't found a roommate for the extra room so I paid 2 of the 3 rooms here.  I got 1 month back from the money they got from the roommate who left in May, but that money went from my pocket back out as rent.

How does it feel to pay 2/3 of the apartment instead of 1/3? It felt horrible because my housing cost doubled.  Double rent means 1267 pesos less in savings or for other expenses like clothing or whatever else I could use.

In an ideal world I'd be able to find good honest and responsible roommates from the start, but it seems you don't really know what someone's like until you live with them for a few months!

What if I had rented this apartment by myself from the start like many people?  I would have saved 2533 pesos less each month for the months I have had paying roommates. That is a huge amount! People who rent a house or an apartment with more than one bedroom and don't rent out the other room are wasting money every single month.  Yes, you can have bad roommates, but you can also find good ones eventually.  Every month you share the cost of your home, you can save money for other things you need or for your retirement.

Lets say you don't care about retirement, but you are renting a 2 bedroom apartment alone.  If you can find someone to pay 50% of your rent to stay in the other room, you could save the other half for emergencies, for a vacation (instead of using the credit card), to buy your own place in cash eventually, or perhaps for that large screen 3D LED/LCD TV you've been drooling over. Sure it might take a few months or more to pay for that television in savings, but the point is that sharing makes financial sense.

I am happy to report that two days ago after a month of asking friends in Facebook, MSN, etc. if they know of anyone who wants to share, a friend let me know of two best friends needing a place to stay. They'd prefer separate rooms, but for the moment they can share.   I gave a price of rent plus general expenses to cover bills plus cleaning supplies, toilet paper, and stuff like that.  NO, I won't make any profit on this. Any extra money after paying bills and other general apartment expenses I'll set aside for things requested.

Last night after their first night here, one suggested getting a washing machine. That really wouldn't be a bad expense since I hate washing by hand and a washing machine would pay for its self in 12-15 months including the extra cost of electricity, water and detergent. I didn't want to get one because I didn't know if I'd even still be living here in 2-3 months, but since I'll be signing a contract for a year and finally have people in the other room, I might just go for it if I can find a machine that isn't more than 4000 pesos.  It would eat my extra savings the first month, but I'd save about 350 pesos each month by not dropping of my clothes to be washed every week. How much would I save with a full house of roommates using a washer? Probably not much, but if each pays 100 pesos more in their rent, that would cover the extra utilities and everyone would be happy. They'd save money and so would I.  

What's next for me?  I know I spend too much on food, but what I'd really like right now is to find a roommate to share my bedroom with. I'd probably spend 1 or two month's in savings just getting my essential stuff organized to make room for someone else, but later I'd have an extra 633 pesos each month for saving or again for whatever I want.  Plus, I really like sharing with others as long as they are not noisy and are responsible. I'm really not sure if I'll put up an advertisement for sharing my room, but if anyone asks I'll be sure to mention the opportunity!

How is my financial freedom situation different from others online? I make very little money compared to most I see in forums online. I'm not an engineer or physicist or any other high paying occupation. I work freelance so my income is irregular, I just need to sacrifice more in spending. What someone in USA considers bare-essentials seems very luxurious to me with their car, whole apartment and budget that includes clothing and other extras. I'm a shy extrovert. I like being with good people so even sharing my own room would be good.  If you are introverted, find another introvert for your OTHER bedrooms. Since both of you will need more alone time, you'll discover you'll chat for a few minutes and be in your bedrooms most of the time you're at home!

If you are lucky enough to have a good steady income, take advantage of the opportunity to have roommates and save money for your future.  If your extra rooms and garage are full of stuff you haven't touched for at least a year, plan a garage sale, sell it on E-bay, or just donate that stuff to Goodwill!

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!)

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.

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.

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.

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!

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.