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. 

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.

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!)

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.