The first post was very popular, and sparked debate all over the Internet. I’ve read many of the discussions, and would like to add a few points.
Firstly I don’t feel I did a very good job of building my assets – plenty of my friends have done much better in terms of net worth and/or early retirement. Many have done the Altruism thing better than I. Sites like Mr. Money Moustache do a better job at explaining the values I hold around money. I’ve lost interest in more accumulation, but my lifestyle seems interesting to people, hence these posts.
The Magical 10%
The spreadsheet I put up was not for you. It was just a simple example, showing how compound interest, savings and time can work for you. Or against you, if you like easy credit and debt. A lot of people seem hung up on the 10% figure I used.
I didn’t spell out exactly what my financial strategy is for good reason.
You need to figure out how to achieve your goals. Maybe its saving, maybe it’s getting educated to secure a high income, or maybe it’s nailing debt early. Some of my peers like real estate. I like shares, a good education, professional experience, and small business. I am mediocre at most of them. I looked at other peoples stories, then found something that worked for me.
But you need to work this out. It’s part of the deal. You are not going to get the magic formula from a blog post by some guy sitting on a couch with too much spare time on his hands and an Internet connection.
The common threads are spending less than your earn, investment, and time. And yes, this is rocket science. The majority of the human race just can’t do it. Compound interest is based on exponential growth – which is completely under-appreciated by the human race. We just don’t get exponential growth.
Another issue around the 10% figure is risk. People want guarantees, zero risk, a cook book formula. Life doesn’t work like that. I had to deal with shares tumbling after 9/11 and the GFC, and a divorce. No one on a forum in the year 2000 told me about those future events when I was getting serious about saving and investing. Risk and return are a part of life. The risk is there anyway – you might lose your job tomorrow or get sick or divorced or have triplets. It’s up to you if you want to put that risk to work or shy away from it.
Risk can be managed, plan for it. For example you can say “what happens if my partner loses his job for 12 months”, or “what happens if the housing market dips 35% overnight”. Then plug those numbers in and come up with a strategy to manage that risk.
Lets look at the down side. If the magical 10% is not achieved, or even if a financial catastrophe strikes, who is going to be in a better position? Someone who is frugal and can save, or someone maxed out on debt who can’t live without the next pay cheque?
There is a hell of lot more risk in doing nothing.
Make a Plan and Know Thy Expenditure
Make your own plan. There is something really valuable in simply having a plan. Putting some serious thought into it. Curiously, I think this is more valuable than following the plan. I’m not sure why, but the process of planning has been more important to me than the actual plan. It can be a couple of pages of dot points and a single page spreadsheet. But write it down.
Some people commented that they know what they spend, for example they have a simple spreadsheet listing their expenses or a budget. Just the fact that they know their expenditure tells me they have their financial future sorted. There is something fundamental about this simple step. The converse is also true. If you can’t measure it, you can’t manage it.
No Magic Formula – It’s Hard Work
If parts of my experience don’t work for you, go and find something that does. Anything of value is 1% inspiration and 99% perspiration. Creating your own financial plan is part of the 99%. You need to provide that. Develop the habit of saving. Research investment options that work for you. Talk to your successful friends. Learn to stop wasting money on stuff you don’t need. Understand compound interest in your saving and in your debt. Whatever it takes to achieve your goals. These things are hard. No magic formula. This is what I’m teaching my kids.
Work your System
There is nothing unique about Australia, e.g. middle class welfare, socialised medicine, or high priced housing. Well it is quite nice here but we do speak funny and the drop bears are murderous. And don’t get me started on Tony Abbott. The point is that all countries have their risks and opportunities. Your system will be different to mine. Health care may suck where you live but maybe house prices are still reasonable, or the average wage in your profession is awesome, or the cost of living really low, or you are young without dependents and have time in front of you. Whatever your conditions are, learn to make them work for you.
BTW why did so few people comment on the Altruism section? And why so many on strategies for retiring early?