When circumstances change, we must change with them.
A traditional emergency fund is enough cash to survive for three to six months. Being very risk-averse, in The Poor Man’s Guide to Financial Freedom I recommend holding enough cash to get you by for six to twelve months.
However, I’ve noticed that some in the ‘sphere are concerned about cancellation, rolling lockdowns, vaccine mandates and whatever may hit us next. They are saving for an emergency much greater than being downsized and spending a year or so out of work.
They want a fund sufficient to last several years – enough to get them established somewhere else, perhaps overseas, with a new career and a new life.
This is fair enough. I had the same idea and ended up having sufficient resources to survive two years (and counting) out of work during the Great Coof.
He tells the story of the time he was driving home from a job in a distant suburb and noticed he was very low on fuel. The dial was a little under the ‘E’ line. Nevertheless, he chose to drive past several inferior servos until he reached his favourite BP another 10km down the road. As he pulled in, the engine died and he had just enough momentum to roll to a vacant bowser, coming to a halt exactly in the right place without having to apply the brakes.
The story’s funny because, while he had a win, he might not have. It was a silly thing to do.
Retirement strategies are similar.
Imagine a ‘perfect’ outcome of a given strategy: You are 98 years old. You have 7 yuan remaining in your nest egg. You hobble down to the 7-11 and spend your last 7 yuan on a Mars Bar.
You eat the Mars Bar on the way home, enjoying the full utility of the saved value of your much earlier labour. Then you get home, lie down for a nap and peacefully pass away.
Good morning or evening wherever you are and Happy New Year!
Let me guess. You had a big night, woke up and had an epiphany. You need to get your life back on track.
If the thing you need to fix is money-related and you don’t know where to start, here are the ten steps you need to follow in order to go from debt-addled stressburger to solvent, chillaxed man-with-a plan:
1. Don’t get into (more) debt
Stop living on credit. Cut your cards if you must. Avoid fintech products that are glorified credit cards.
From now on, don’t buy anything until you can afford cash up front.
You must fix this or you will not get anywhere because those interest payments are dragging you backwards.
We already learned about some of the stock markets around the world. An ‘index’ is something that measures the change in such a market. An ‘index fund’ invests broadly in order to match the performance of that index.
I previously listed some good books for those wanting to learn more about finance.
There are some I don’t generally recommend, not because they’re bad but because they are unsuitable for my target audience. Essays by Warren Buffett, that sort of thing. There are a small minority of investors who are able to do better than the index by picking their owns stocks, speculating on currencies and that sort of thing, and there are good books available on these topics.
However, as I showed in my book, research repeatedly demonstrates that these are losing strategies for the average person. My book is aimed at total beginners who should probably stay away from such advanced strategies. The kind of people who might pull them off are the kind of people who would not have read my book in the first place it is far too basic for their needs.
There is another kind of book that is no good for anyone. It is aimed at the novice, not the advanced investor, and focuses on feel-good, get-rich-quick nonsense rather than concrete advice on how to save and invest.
I’ve got a mate. He’s married with a kid. He’s okay with money but his wife is atrocious.
Each month he hands over all the money she’ll need for household expenses. Each month she ends up asking for more, saying she’s run out, even though he’s done the budget, gone over it with her a million times and figured how how much they ought to be spending on each item.
I do not necessarily endorse the content of these websites and books. It’s good to get another point of view.
[Edit: I’ve removed some of these links as they’ve become over-commercialized, feminized and/or pozzed. One was mostly about vaccines and climate change! They’ll be gone from the second edition of the book.]
Let’s finish by recapping each step and figuring out where you are and what you still need to do.
Review of the Introduction
Many people lack any level of financial freedom, even if they have a relatively high income, because they are unable to manage their money. They live paycheck to paycheck, borrow heavily, and an unforeseen incident can cause disaster. They feel that they are on a treadmill that they can’t get off, even for a moment. Many wealthy people have had to file for bankruptcy because they could not get their finances in order.
By following the steps in this book, you can achieve a much greater degree of independence and financial freedom.
How often should you review your investments and consider whether you need to make alterations?
Once a year, or when your circumstances change, i.e. you have quintuplets or you lose both your legs in a lion-taming accident. Fiddling with it any more frequently than that will probably be a waste of time and effort, and might be counterproductive. A watched pot and all that. Feel free to examine your investments frequently, but if you change them more than once or twice a year, you’re playing with them. Hands off!
While it’s cute to imagine a robo-advisor as an actual, 1970s sci-fi style robot sitting in an office, wearing an adorable tie around its thick, metallic neck, and giving you financial advice in a camp C-3PO voice, disappointingly it is just a glorified financial calculator. You plug in your data through a survey and an algorithm spits out suggestions based on your circumstances. These are sometimes called ‘automated investment advisors’ or ‘digital advice platforms’, but ‘robo-advisor’ sounds much cooler, so let’s stick with that.
The easiest way to spot a scam is to understand what returns are reasonable, and what returns are not. Here is a quick recap:
Cash: A term deposit or high interest account might provide a safe return of about 2-3% return in normal times, or 6% in special cases such as shortly after the Great Recession began. [Edit: cash rates now extremely low, often less than 1%.]
I’ve hopefully convinced you that it is not a good idea to wander into the office of your nearest financial advisor, turn your brain off and do whatever they say, any more than you would tell a new barber, ‘Do whatever you like!’ But now you may instead be thinking, financial planners are scary! They’ll take all my money! I’d better stay as far away from them as possible!
Relax. Some financial advisors are excellent, most are satisfactory and only a few are downright dodgy. Here is a step-by-step guide for finding a good advisor and for getting the most from their services:
These are the common problems you are likely to encounter:
1. Some advisors get a commission (basically a kickback) for referring investors to specific funds. That was probably why the advisor I described above was recommending me inappropriate margin loans. For example, if your advisor recommends that you put $100,000 into the high-fee, hypothetical Adamantine Investment Fund, he might score a 1% commission if you go ahead with it. That’s $1,000. Worse, this might be a trailing commission. That means he gets 1% for every year that you’re in the fund. Five years later you may have increased your AIF investment to $200,000 and that advisor from ages ago who you’ve totally forgotten about is still helping himself to $2,000 every year!
No man is so wise that he can afford to wholly ignore the advice of others.
James Lendall Basford
By now you should have approximately worked out where you’d like to invest your money for the long term, based on your individual preferences and risk profile. You’ll need to consult a financial advisor to ensure that the plan best suits your individual circumstances. Advisors sometimes have access to financial products that you can’t access as an individual, and they can guide you on tax and other issues. Most importantly, a good advisor will be much more expert than I am. They have actual qualifications, you see. So get advice.
Developed countries generally have a retirement scheme, or multiple schemes, in order to provide incentives for individual retirement saving and to reduce the burden upon the state pension system.
These vary widely by country, and include the 401(k) and IRA, both Roth and traditional versions (in the US),[i] personal pensions (the UK),[ii] the RRSP (Canada),[iii] or superannuation (Australia[iv] and New Zealand[v]).