Category: financial freedom

How a lesser paying job makes sense to me

This may seem like a strange blog post. Why on earth would a finance blogger even consider a lesser paying job, and let alone be pleased about it?

Before you start thinking that I have lost my mind you better keep reading. Firstly, note that the new job that I have accepted is only at a 7% lower salary than my current position. This is not too bad although it does certainly impact on my day-to-day savings and financial goals. I did obviously negotiate and discuss things with the company, but in the end I am very happy with the offering and that is what this post is all about.

There are two ideas that I would like to share and hopefully you’ll understand that my decision isn’t as crazy as it sounds.

The Concept of “Zig-Zagging”

Have you ever climbed a really steep mountain and noticed how the path zig-zags up? You obviously want to get to the top, and the zig-zagging path is longer and seems more tiring. Sometimes you even seem to go the wrong way, but in the end you will actually reach the top. Unless you are a super-fit athlete, the zig-zag path is probably very helpful as it allows you to reach your goal at a slightly more manageable pace; sometimes it’s even quicker than the direct route!

Another example is using a GPS to find the quickest route through traffic to reach your destination. It may literally take you in the opposite direction in order to catch a back-road which will then quickly lead you to your destination.

The concept I am trying to bring across is that the most direct and obvious route is not the only route, and sometimes a slight detour can actually help you reach your destination quicker. As long as you know where you are headed of course!

In my case, the lower salary seems like a move in the wrong direction, but the experience, environment and opportunity is something that I feel confident will help me reach my ultimate goal a lot quicker. So for right now I just need keep focussed on my end goal and use this as a means to get there.

Money doesn’t always have to be the focus of everything, we need to look at the experience and work environment too. As well as the future growth opportunities.

The Happiness Factor

I don’t think that people pay enough attention to their happiness when it comes to their work. So many people are unhappy at work and simply plod along through the day doing what they need to whilst yearning to be somewhere else.

Being happy in ones job is seriously important as the consequences spill over to all spheres of life. Family, relationships, home environment and health are just some of the areas that will be negatively affected if you’re unhappy at work.

Wasting years of your life by being unhappy is really not worth the money – not at all!

I do however need to be honest and say that my current job is really not that bad, but I know that I can be happier with a few changes in the environment and setup and thus I am willing to sacrifice some money in order to increase my happiness.

On the positive side, when you’re feeling happy and motivated at work it also spills over to other areas of life. When you are positive, confident, motivated and happy you will find amazing opportunities that you previously just couldn’t see.

In summary

I may be sacrificing some income which should be going straight towards my investment goals, but I am excited about the new opportunity and environment. There is a lot of room for growth and development which will soon turn into money and place me in a better position.

When looking at a job don’t simply look at the salary, think bout the opportunities and work environment too. It’s a scary thought, but you probably spend more time at work than anywhere else! You better be enjoying it!

Know where you want to get to and enjoy the ride.

Start small

“A journey of a thousand miles begins with a single step” – Lao-Tzu

Financial Independence may seem like such a hard thing to achieve, and to many it seems impossible. However, as the famous saying goes, the journey begins with a single step.

As with all challenges, you have to start somewhere, practice daily and build on your experience to eventually reach your goals. It is really easy to start and although the daily decisions may not always be easy, working towards Financial Independence can be a reality.

If the thought of Financial Independence is too daunting and you think that you cannot achieve it, start with these 4 easy steps and enjoy the journey.

Decide to be in control of your money

The first step to any financial goal is to decide to be in control of your money. Being in control of your money has nothing to do with how much your have or earn, and all to do with how you spend it and invest it. It is knowing what every cent is going towards and understanding how different spending decisions can impact your goals.

All it takes in one simple decision saying “I’m gonna take control of my money”.

Right now you don’t need to know much about finances as you can learn it all; just make that decision!

Set a realistic goal to start with

The best way to motivate yourself is set a small goal which you can achieve relatively easily. Focus on achieving it and you will see how your perspective of finances changes as you see yourself reaching the goal.

When setting a goal though be sure that it is measurable and achievable. Instead of being vague and stating that you want to save “some” money, specify the exact amount and the date by when you want to have done it.

Start off with something that won’t be too hard, goals should be motivating and not depressing or something that makes you feel guilty.

Create a budget and vague path to your goal

If you don’t yet have a personal budget, then you need to create one as a matter of urgency! There are many resources online about this but the basic concept is simple:

  • List your income (stable and reliable income)
  • List your expenses (if you’re unsure if where to start have a look at the 30-day challenge to keep track of expenses)
  • Make sure that you earn more than you spend!

Have a look at this to get you started.

Reassess often

This is a very important step and something people don’t do often enough. You need to reassess your current situation, spending pattern, budget, goals, etc on a regular basis. Circumstances change and your own experience and confidence levels change. Embrace these changes in your journey to financial independence.

Allow yourself to embrace change and keep a journal of your experiences along the way.

Take Charge of Your Money

Taking charge of your money has nothing to do with how much you earn or spend, but rather how and where you spend it. And knowing why! It’s being concious of all your financial decisions and realizing that everytime you spend money, you are actually making a decision to do so.

Looking at your spending pattern can show you what you prioritize in life. You may not even know how much you spend on what, but where your money goes is a good indication of what you value. If you find that your money is going to things that you don’t value then it’s a sure sign that you need to take charge and re-align your spending habits!

Taking charge of your money is all about knowing what you are doing with your money, and understanding the consequences of each transaction.

Consider how hard you work for your money, isn’t it silly to just spend it so frivolously?

Paydays till retirement

How many paydays do you have left until you reach retirement age? Have you ever calculated this?

Perhaps you plan to retire early which means you have even less paydays left, you better work out exactly how many.

Let’s assume you work in a standard job where you get paid monthly. That would mean 12 paydays each year. If you are 35 now and plan to retire at age 65, that would work out to 360 paydays.

So what exactly does this mean?

This is simply a number to help you with your retirement planning and goal setting. You cannot simply have a goal to “save as much as I can”, or “save enough” as these goals are hard to quantify. In fact, you will never know if you have reached your goals.

Your retirement plan needs to include specific amounts. You will most probably want a large pension fund, perhaps you aim to have other income such as rental, and maybe you have assets which you specifically plan to sell when you reach retirement age. These are all great, but they need to be realistic and you need to reassess them often.

Using your “paydays ’til retirement” number you can easily plan and track how you are doing wth regards your retirement plan. You have a set time period and set amount and can use various methods to plan, predict and assess your situation.

Let’s assume you have 360 paydays left, and your goal is to have 2 million in a retirement fund at retirement age. You can simply create a spreadsheet with 360 rows. Show your current fund balance, your current contributions, assumed growth (rather assume a lower growth and plan accordingly) and assumed salary (and contribution) increase (again, take a lower assumption).

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This will then show you whether you’re on track or not.

This kind of planning doesn’t take into account major life changes that could happen, and we cannot predict the country and global economy. In fact, don’t try to make things too complicated. Just do some basic calculations and see where you stand.

If you have a financial advisor they can of course assist you greatly with this as they have wonderful software and tools to take into account all sorts of scenarios. It’s definitely worth contacting someone if you feel you need help.

If you’re wondering how to decide what your goal amount should be, that is more complicated and we’ll cover that in some articles soon. In the meantime though, it’s best to read up as much as you can and to consult a financial planner who can assist.

Your number of paydays until retirement will slowly count down. Think of it as a ticking time-bomb… are you ready?

Is it better to Save or to Pay Off Debt?

Screen Shot 2017-06-17 at 1.51.16 PMIt’s easy to feel pressured to have a savings account or some type of investment. Is it better though to be saving or to be paying off debt?

Let’s have a look at some ways to calculate the answer…

Interest Rate

Generally speaking (and almost always) the interest that you earn on savings is far less than what you would pay on debt. Let’s look at an example…

You bank account may give you 4 – 6% (as an example) and fixed-term savings accounts may give you a bit more. Unit Trusts or other investments will probably be even more although they vary each month but you can get a general idea of the growth by looking at an investment summary sheet.

Debt – whether on store accounts or credit card is often charged a much higher interest rate. Add to that “fees” and penalties and all sorts of made up costs. Store accounts are designed to trick you because they often offer 3 or 6 months interest free debt, but remember that they charge you other fees each month (club fees or Special Member fees). And, if your debt is not paid within the interest-free period, they hit you with very high rates.

Thus; find out the interest that you would earn if you save your money and find the interest that you are charged (look for your account where you are charged the highest interest). That should give you your answer. Most of the time it is better to pay off debt!

Tip: If you have a home loan that you can access (pay extra into and withdraw when you need it) then you can save money by paying off your loan. If you pay extra into your loan account you will earn interest at the rate of your loan (currently in South Africa home loans are offered at around 12% interest). This is a good way to save for emergencies but at the same time you are paying off debt.

The Cost of Debt

Let’s look at a simple example of how much debt can cost you. If you have 1000 and you put in in a savings account for 1 month with an interest rate of 4.5% you would earn 3.75 interest. If you owe 1000 on a loan and the monthly interest rate is 20% you would pay 16.66 in interest.

Thus, if you “save” your 1000 for the month it is actually costing you money! You will have to pay 16.66 interest on your loan and yet you only earn 3.75 on your savings. You have to pay 12.92.

In this example, if you choose to save the extra money, it is actually costing you money and not saving at al!

Risk

Did you know that is most cases (if not all) the creditor (person or company you owe money to) can call up your debt at any time and insist that you pay it immediately. This is especially true for banks who can call up your home loan. This would put you in a terrible situation and could be disastrous to you and your family.

Debt always comes with a risk and therefore it is better to pay your debt as quickly as possible! Being in charge of your money means that you minimize risk by knowing and understanding the consequences of what you do.

Peace of Mind

Having debt causes stress. It’s not nice knowing that you owe someone money and especially if you are struggling to pay it. The consequence of not paying your debt can be dire and this all adds to your stress levels.

If you have the choice of saving 500 in your bank or paying debt off you should consider the peace of mind that you could “buy” yourself. Having no debt would be a wonderful feeling so if you can get to that state by slowly planning, budgeting and working towards being debt-free this would bring great relief to life.

Summary

It is probably a good idea to have a small amount of savings that can be used for emergencies; but generally speaking it is far better to pay off debt rather than save. If you have any spare money at the end of the month work towards paying off your debt!

Have a look at this article on paying off your store cards and apply that principle to any forms of debt that you may have.