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!)

Food expenses can bloat a budget too

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

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

Eat less meat

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

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

Forget the coupons and cook staple foods

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

Pack a lunch

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

Batch Cook

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

Pack your water

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

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