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Happy New Year: 2021
All posts by Financial Independence Hub
A good resolution for 2021: Choose Financial Independence
By Michael J. Wiener
Special to the Financial Independence Hub
Many of us dream of financial independence. Chris Mamula, Brad Barrett, and Jonathan Mendonsa offer many practical ideas for achieving financial independence (FI) and enjoying the journey along the way in their book Choose FI: Your Blueprint to Financial Independence. They avoid many of the problems we see in the FIRE (Financial Independence Retire Early) book category.
The authors avoid the biggest problem with most FIRE books. It’s annoying to tell the story of a high-income earner deciding to live like a student his whole life and retire in his 30s, and then say “you can too!” Although I point out the bad parts of books, I can forgive a lot if my mind is opened to a good idea. For this reason, I’ve enjoyed FIRE books even if they have some bad parts. This book manages to avoid the worst parts of other FIRE books.
The authors don’t bother much with retirement. FI gives us choices so we can “scrap the idea of retirement completely and focus on building lives we don’t want to retire from.” The life you build can involve paid work, leisure, or any other pursuit you want.
Rather than focus on just one story, the authors draw from the experience of many people who have sought FI. A common theme is the importance of enjoying the journey. If you see your pursuit of FI as suffering for several years until you hit your magic number, you’re not doing it the right way.
FI’s benefits start even before you reach the target
You benefit from pursuing FI even before you reach your target. “If you have a mortgage, a couple car payments, a family to feed, and nothing in the bank, what choice do you have when your boss asks you to do something stupid?” I was able to push back somewhat with my boss in the late part of my career, and this got me more money and autonomy.
If reaching FI seems like an unattainable goal, it may help to break it down into milestones. The authors suggest “getting to zero” for those in debt, “fully funded emergency fund,” “hitting six figures” in your portfolio, “half FI,” “getting close,” “FI,” and “FI with cushion.” This last stage is defined as having a portfolio equal to 33 times your annual spending needs. This is a sensible target for a young person with a long remaining life who doesn’t really know how spending needs will change with age. Continue Reading…
A smart guide on how to invest in 2021
By Alex Barrow
Special to the Financial Independence Hub
2020 was a difficult year in markets and the economy. There remains a high level of uncertainty heading into the new year. Below we’re going to walk you through some time-tested practical steps on how to prepare for the coming year, in order to make sure you’re financially set for whatever may unfold.
1.) Assess your personal balance sheet
When planning your finances for the new year it is critically important to know and understand the strength of your current financial position. You can do this by running through the exercises below.
• Understand your financial obligations relative to your income:
Are you carrying high levels of debt relative to income? What is the composition of this debt: is it mostly in high-interest credit cards or a low fixed-rate mortgage? The 36% Rule states that your debt to income (DTI) should never surpass 36%. When your DTI rises above 36%, your personal balance sheet is fragile and you become more exposed to financial risk. In these difficult times of uncertainty, it’s important to keep your DTI low so as to maintain financial flexibility.
• Upcoming big-ticket expenses:
Do you plan to make any big purchases or financial outlays in the coming year? Perhaps you’re planning to buy a home and purchase a new car or pay the tuition for your child to attend their first year of college … These are big expenses that can stress the strongest of personal balance sheets if one doesn’t plan properly. That’s why it’s important to note these at the start of the year so you can start preparing for the expense.
- Nonessential spending:
Frequent dinners out and vacations at the beach are fun but if they come at the cost of putting a strain on your financial security, they can cause more stress than they’re worth. A good exercise for planning for the coming year is to look back at your expenses from the year before and see where you’re maybe spending a little more money than you’d like. Those $6 lattes every morning add up!
2.) Set your personal financial goals
To cite the oft-quoted baseball sage, Yogi Berra “If you don’t know where you’re going, you’ll end up someplace else.” Financial planning and goal setting are critically important to protecting your resources and securing the future you want. From a practical standpoint, this means doing a number of key things at the start of each year.
- Set a target retirement savings amount:
Retirement might be a ways off for you, or not. Regardless, it’s never too early or too late to start planning for it. The rule of thumb is that you should aim to stash 10%-15% of your pretax income into a retirement savings account each year. The earlier you can start doing this the better because that puts the power of compounding in your favor.
- Invest, invest, invest:
The best way to grow your wealth over time is to start investing early and often. This means putting a percentage of your income into low-cost stock and bond indices, on a consistent and regular basis.
- Take control of your debts:
Turning back to keeping your DTI below the key 36%, debt is a financial burden that has to be dealt with before it grows out of hand. This takes time and planning. Just like how the power of compounding works in your favor in investing, it works against you when you carry large amounts of debt if you’re just paying the minimum. Continue Reading…
How Travel prepares you for the unexpected
By Billy and Akaisha Kaderli
Special to the Financial Independence Hub
Even before we met, as individuals, Billy and I have always loved to travel.
I have written about my cross-country adventure on the back of a motorcycle when I was 19. Billy also traveled with his van to Guatemala in the 1970s and back again to his hometown of Cincinnati, Ohio.
As a couple we lived and journeyed through Europe for six months before we purchased our restaurant in Santa Cruz, California.
These trips were life-changing experiences and we just got hooked on adventure.
When we left the traditional work force in 1991, we sold everything and began to travel the world. These experiences forced us to be flexible even when we didn’t want to be.
Power outages
For instance, when we lived on the tiny island of Nevis, West Indies, every afternoon or early evening, the power in our home would go out. It could happen at 4pm or at 7:30, but it would happen. Lights would go out and the TV would click off (right as the plot thickened in the movie we were watching). The pump bringing water to the kitchen sink or toilets wouldn’t work without the electricity, so things like doing the dishes, taking a shower or using the restroom had to be prepared for in advance.
We read books by flashlight or had discussions on future travel plans.
No running water!
Speaking of taking a shower, in Nevis we shared the Governor of Nevis’s home with other housemates who were opening the Nevis Four Seasons Resort on the island.
Aside from us and Billy’s best friend who was the head chef, all the rest of the roomies were young twenty-somethings and used to First World Living. One young woman would start her hot shower, go to the kitchen, toast bread, smother it in peanut butter and jelly, eat the sandwich, then return to a steam-filled bathroom with the water still running and take her hot shower.
As natural water-savers ourselves, we thought this was over the top.
However, we had no idea how much so, until one day … we found out the cistern was empty. The only way the tank was filled was by rain that fell or by water trickling out of the city’s pipes from 10 am to 11 am daily. And by trickle, we mean drizzle by drop.
We were out of water, with all the conveniences that running water brings to living, so how were we going to take a shower?
Being in the tropics, rain came fairly regularly, like every other day or so. One morning around 9:30, it was a typical tropical downpour. Billy and I saw the flooding of water through the gutters and into our rain barrels and we both grabbed towels and soap. Moving a barrel and standing under the drainpipe of the gutter we lathered up and enjoyed this pleasure of a beautiful shower out in nature. The jungle and sugar cane fields pushed up against our house, and we had a straight shot of Nevis’ volcano. Spectacular.
Then … the rain stopped.
Oh Lord. There we were, soaped up, naked, and out in our back yard when the maid popped in for her thrice weekly cleaning. Continue Reading…
Merry Christmas!
