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Spendthrift Or Save Bore

By The Contender @The__Contender

Spendthrift Or Save Bore

Corfe Castle - A bad investment?

Bad advice on Spending, Saving and Investing

I have been reading a few posts recently going along the lines:
1. If you have a dividend stock portfolio you need 3 years in cash to cover the ups and downs - why?
2. The classic: draw down 4% a year of your portfolio and you will be fine - always?
3. Index funds have always done the job (Warren Buffet has just said so) - aren't they fairly new in the scheme of things?
4. Live in a trailer on the street next to your job (or work for Google and live in the car park) and save $$$$$$ - sounds cosy!
5. Invest in non ethical ventures such as ATM machines, pay day loans etc. - "If I don't provide the service someone else will" - what is the real cost?
Ideas and advice are easy to give out (yours included) however this practice can be either misplaced irresponsible or downright dangerous. Getting something that REALLY WORKS requires the individual to take control and responsibility for their decisions. Mindlessly following can be leading oneself straight off the cliff.
What if you follow the passive investing approach in a country with a collapsing financial system?
What if your money is tied up and you cant get hold of it when you really need it?
What if it is the wrong time to sell the investment? Have you REALLY diversified?

Just because certain investments have worked out well over the last 60 years why should they continue to do so? Yes they have opened door to early retirement to more people than ever but is this just an aberration? I believe it is worthwhile asking these difficult questions in order not to mislead FI seekers.
For instance just look at the financial repression we are under. Interest rates at 1% anyone? Who would have thought that and how much would you need in an annuity to live off at that rate of return? No wonder a record number of people are having to postpone retirement.
To be sure of early retirement what is really needed is a rock solid diversification - more saved at a lower return. secondly it needs to provide you a lot more income than you spend so you can continue to save.*

Spend and Save 

Today lets have a look at what really drives peoples ability to be FI - their self control over spending, saving, personal expectations and desires..
In particular what HAS to be spent and what NEEDS to be spent to be HAPPY. Why save everything to be FI and be miserable - absolutely pointless - have a re-think of your goals.
Likewise if you have a desire to spend, spend, spend to be happy :) this is not the blog for you check out the Hiltons and Beckhams.
Saving has been portrayed as boring, missing out, repressive.
Saving is generally hard to do in large amounts - consider the challenge to save $100 per month compared to how easy it is to spend $1000 on a credit card.
It really is a mind game - small amounts snowball, over time compound interest generates wealth. Unfortunately saving too slowly that happy time for (rest, personal pursuits and personal work choice) will be a long way off.
Something has to give.

How much should I spend to not be a misery guts?

It is easy to really hack your spending. Several posts on this site have covered the steps our TRiBe

Spendthrift Or Save Bore

Worth Visiting

has taken to annihilate our WASTEFUL spending in a way that did not detrimentally affect our comfort and happiness.
  1. Transport - Simple - buying a car that is too big or too fuel in-efficient does not make sense. You just need to get from A-B. Why do it expensively? At the end of they day you might as well take the notes from your pocket and set fire to them - a massive waste of resources for you and the nation.
  2. Heating - going freezing cold is probably a bad idea and likewise being too hot is a waste (see transport). Spending loads of money on a fossil fuel means you are reliant on someone else providing it. Perhaps you should invest your hard-earned money in changing the fossil-fuel heating to wood (or a heat pump for instance) and insulating your home. Again what is too much? 10% of your income spent on heating/ cooling is probably fine so forget about it and move on.
  3. Food - going cheap probably = poor diet and = future health costs > buy fresh food and don't waste food.
  4. Fun Pot - Upgrading a gadget, a coffee, beer or cake or visit to the zoo- make sure there is a % of your income to LIVE in THE.PReSeNT - that is our happy time - NOW.

How much should I save to gain my freedom?

  1. Too much - you will not have much of a life - scrimping and saving at a time when you are in the prime of your life. That proverbial bus with your name on it could be around the corner. What about finding that perfect partner, traveling and experiencing different cultures. Invest in expanding your knowledge and learning lots of new things who knows where it will take you (literally).
  2. Do not forgo Ambition - Don't be afraid to take financial risks when you are young. At a young age the amounts involved are likely to be trivial (put things in perspective what is $10K lost on a business compared to the opportunity of $$$$ when you are young and have nothing to really loose except face? Go on and take a risk on a better job, don't be afraid to move to a different country, have a go at starting your own business. Be fearless. Soon you will have a substantial income instead of a mediocre income to save substantial sums.
  3. Start Cash Flow Investing as soon as possible. Try starting with readily available assets such as rental / commercial property, REITS or dividend stocks where small amounts of money can be easily deployed. Alternatively invest in YOU perhaps some training or equipment that you can use to gain money e.g. an embossing machine, lawnmower for a gardening business, programming course etc.
  4. Saving can mean other things as well such as
    1. Reductions: always asking for a discounts and deals, surf the net for discount codes
    2. Choose not to incur an expense: can I walk,and have a meal and movie at home instead of cinema. Lots of little compromises really add up - think before you spend or sign up for any contract.

A reasonable budget for a FI enthusiast?

  • Food (10%)
  • Transport (5%)
  • Utilities (5%)
  • Mortgage (30%)
  • Other (5%) - fun stuff and unexpected costs
  • Savings (35%)
Why not pull together your spending and group them into categories and percentages. Do they seem reasonable to you? Are you missing out on something? If I moves some spending from A>B will i be happier or will i reach my goals earlier?

When have I saved enough?

In the TRiBeS experience what we thought we needed versus what we actually need are VERY difficult to reconcile. What will you new life look like and how much will it cost?
I guess the question for us was how much can we continue to save once we have stopped working. It would be idiotic to retire on just enough. Shit happens all the time in the world. A safety buffer is always needed and is very sensible.
For example we have seen some of our dividend income reduce due to the commodity crash. It will return in THE.FuTuRe but now we have less money coming in. Perhaps commodities could reverse and inflation will begin to outstrip our income for a while or taxes rise faster than our ability to pay them - who really knows?
Our pre-financial independence saving rate was North of 50% (of a large corporate salary). Now we are aiming at saving 20% of a substantially smaller income.
Additionally we are putting aside a further 20% of our income for "fun stuff". Our kids need experiences to grow, mindlessly penny pinching would be at the detriment to their futures. We need to arrange trips to interesting and fun places and plan challenging activities for them.

Making the right personal choices

So there you have it the pursuit of financial independence and happiness on the opinion of this author is REALLY about gaining personal wisdom. 
This mainly takes the form of financial (tracking your finances and making informed, thoughtful, good decisions) and emotional intelligence (growing up and learning to be being responsible, not panicking and jumping to conclusions).
Wisdom is knowing, not being told or shown, what makes you happy - are we there yet?
Peace, prosperity and happiness
*The alternative is becoming very good at following capital across the globe. You would need the ability to move capital from country to country and between asset classes - not easy to time or identify where it will go next and well beyond a person with average means.
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