The Joy of using cash for spending

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

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

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

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

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

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

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

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

Get excited over small improvements for Financial Independence

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

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

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

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.

Where to put your emergency fund

Determine where to keep your emergency fund.

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

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

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

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

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

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

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


Where do you keep your emergency fund?

Determining how much to put in Emergency Savings Fund

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

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

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

How much should you save in your emergency fund?

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

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

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

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

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

Emergency Saving Fund

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

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

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

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

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

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

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

Background for early retirement journey

Getting started for very early retirement or financial independence

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

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

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

Issues:

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

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

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

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

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

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

Goals:

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

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

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

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

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