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. :-)
Showing posts with label retire early. Show all posts
Showing posts with label retire early. Show all posts
Friday, May 25, 2012
Tuesday, May 22, 2012
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!)
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!)
Thursday, May 17, 2012
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.
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.
Wednesday, May 16, 2012
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.
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.
Saturday, May 12, 2012
Reduce Housing Expenses to save money
Since your goal should be to save as much as possible every month so you can get financial independence, early retirement, or buy your own home, perhaps you could start with those pesky large fixed expenses.
The three largest expenses for most people are food, transportation, and housing.
Your housing expenses could be mortgage payments, property taxes, maintenance, and home owner association fees. It could also be rent payments or perhaps you live with your parents for free!
Assuming you can't or don't want to live with your parents consider one of the following:
Move to a smaller apartment. Go from three bedrooms to two bedrooms or two bedrooms to one. If you are in a one bedroom apartment consider an efficiency apartment. from there perhaps rent a bedroom with kitchen access near where you work.
Do you have a two bedroom apartment? Instead of downsizing you could rent the room to a friend or post an advertisement. Increase what you want by a little to cover utilities and don't forget to ask for half of the deposit. If you rent to a stranger ask for references and be sure your bedroom has a lock on its door.
Many people don't move to a smaller and cheaper apartment or share because they have too much stuff. The extra room is full of boxes of stuff. You may not even remember what's in the boxes, but they're there taking up space and costing you money.
If that's your situation, then you need to urgently go one box at a time and make piles of things to sell, things to toss, and things to donate. Whatever doesn't sell gets donated.
An excellent rule is to get rid of whatever you haven't used for one year.
The three largest expenses for most people are food, transportation, and housing.
Your housing expenses could be mortgage payments, property taxes, maintenance, and home owner association fees. It could also be rent payments or perhaps you live with your parents for free!
Assuming you can't or don't want to live with your parents consider one of the following:
Move to a smaller apartment. Go from three bedrooms to two bedrooms or two bedrooms to one. If you are in a one bedroom apartment consider an efficiency apartment. from there perhaps rent a bedroom with kitchen access near where you work.
Do you have a two bedroom apartment? Instead of downsizing you could rent the room to a friend or post an advertisement. Increase what you want by a little to cover utilities and don't forget to ask for half of the deposit. If you rent to a stranger ask for references and be sure your bedroom has a lock on its door.
Many people don't move to a smaller and cheaper apartment or share because they have too much stuff. The extra room is full of boxes of stuff. You may not even remember what's in the boxes, but they're there taking up space and costing you money.
If that's your situation, then you need to urgently go one box at a time and make piles of things to sell, things to toss, and things to donate. Whatever doesn't sell gets donated.
An excellent rule is to get rid of whatever you haven't used for one year.
Wednesday, May 9, 2012
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.
Tuesday, May 8, 2012
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.
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.
Monday, May 7, 2012
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.
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