I feel I can never answer a question about finance without a huge “disclaimer” sign attached to it, because it’s so easy to forget the most important point:
Money is just a tool and depending on what your goal is, you might need a whole lot less (or more) than you think. The best guidance I’ve ever gotten on this is from Derek Sivers. My goal is freedom:
The freedom to walk away from anything and anyone requires nothing more than $1–2 million in the bank with a low, single-digit interest rate on it, to keep the lifestyle I’m used to (which I’m happy with).
That immediately takes a lot of pressure off for me, because that’s much more doable than say, trying to make a billy for no good reason.
Your goal will be a lot different than mine, and that’s great, I just really want you to know what it is.
Then, you can get cracking on the two parts of this equation.
SAVING
Saving money is supposed to get you to a point where you spend less than you earn. Once you’re in that territory, you can of course try to maximize it, but being in this position in the first place already puts you on the right track.
When looking at where to cut costs, I can think of three ways, which, ordered in growing importance, are:
1. Save money on recurring purchases:
- Rent
- Utilities
- Insurance
- Transport
- Groceries
- Food
These are things you continuously have to spend money on, and while you sure can optimize the big ticket items here, like rent and utilities (for example by moving to a cheaper suburb), counting every penny on each coffee gets tiring fast and isn’t worth your time.
2. Save money on one-off purchases, that continue to cost money:
- Cars
- Houses
- Memberships (Spotify, the golf club)
- Large appliances (a fully automated coffee machine, lawnmower)
Of course you have to consider your ROI here, if a car is the cheapest way of getting around, including all payments, insurance and gas, then that’s the best option, but in most cases, anything that requires you to shell out more money over time, even if it’s just for maintenance and repairs, is a bad idea.
3. Save money on one-off purchases, that continue to cost time:
- TV
- Xbox
- Skiing gear
- Quad bike
This category is the most underrated, in my opinion, because people forget that buying item X means they will then be spending a lot of time using item X.
The worst kinds are those that keep costing you both time and money, like a jet ski – you have to take it somewhere (transport costs), fill it with gas, then use it for a few hours and transport it back.
That doesn’t mean you can’t have any hobbies (especially if you’re treating them like a side hustle and they might make you money one day), but don’t forget how much of a time and money suck an impulse purchase can be.
INVESTING
Out of all the investment tips and tricks, there really only is one that’s continually gotten me to follow through:
Take 10% off your (pre-tax) monthly income and automatically have it transferred to an investment account.
Start doing that right now. Set up the rule. It takes 5 minutes. I’ll wait.
…
Did you do it?
The percentage can increase over time, but I found that anyone, anyone, can afford to take away 10% of their income without going broke.
The biggest hurdle to investing is to decide how much to dedicate to it each month and actually take that money out of your account. This solves that problem.
Note: If you have debt, then funnel that money into paying it down until you have none (except for student loans, you won’t get rid of those with this).
What do you invest that money in?
Vanguard (the company whose founder invented them), has a great selection of them:
They model certain indexes, for example for bonds, small-cap stocks, or even the total, global stock market, giving you the same average return as these indexes, which is more than enough if you have time.
Depending on how old you are and how much money you want, you can then decide to additionally diversify your investments into these categories, ranked by growing risk:
- National bonds
- Municipal bonds
- Stocks
- Options
- Penny stocks
- Derivatives of options
A good rule of thumb is to have your age as percentage of your portfolio in bonds, and the rest in stocks and higher-risk investments.
That way, your money will get “safer” as you age. A 30-year old can afford to lose 70% of his portfolio and still make it all back. A 70-year old limits her risk by having only 30% stocks and the rest in bonds.
In general, patience pays. But even that only makes sense under one condition:
You have to know what the money’s for.
