Personal Finance - Basics
Financial Planning: Can You Do it Yourself? [November 27, 2022]
Individuals often possess the drive and skillset to plan for themselves when it comes to personal finances. Here’s a quick list of five criteria that may mean you’ll be OK on your own:
1. You enjoy reading and learning about financial topics, including taxes, investing, loans and personal finance. There are scores of books, courses, and resources to educate the consumer about personal finance, investing and planning. If you like this topic and have the time to dig in, you may be well suited to managing your own money. In fact, We offers many tutorials on a variety of personal finance and financial planning topics.
2. You have the time to systematically review your present financial situation and plan for the future. If you are good at tracking your spending, saving and investing, there’s a strong likelihood you may be able to serve as your own financial planner. The first step in wise money management is the successful tracking of your money; the second is saving. And if you’re managing your debt well, you’re already making wise financial decisions. Finally, if you’re able to use financial software, you probably can learn to plan for future goals and retirement.
3. You are comfortable making financial decisions and confident about planning for retirement. You may not have a lot of money now, but if you have a job and are saving and investing, at some point your wealth will grow into the six figures and maybe even more. If you feel comfortable managing large sums of money, you may not need an advisor — and if the amount grows too big to handle, you can always switch gears and hire someone on a limited or long-term basis.
4. You don’t need financial hand-holding, are comfortable with market volatility, and can handle the ups and downs of the investment markets. When serving as your own financial advisor it’s important to be comfortable watching the value of your investment portfolio go down on occasion. If you can stomach market volatility on your own and won’t feel compelled to sell during regular market declines, you may not need an advisor.
5. You’re savvy enough to know that it’s important to max out retirement vehicles such as a 401(k) or 403(b) and even fund a Roth IRA if you can. As long as you’re on the path to saving and investing, you’re maintaining a diversified portfolio, and are confident you can remain invested through market peaks and valleys, you may be OK as your own financial planner.
The Bottom Line
Money management and investing isn’t rocket science. If you’re a disciplined spender, saver, planner, and investor, you may be competent to manage your own finances. By learning personal finance and investing basics and remaining level-headed and consistent in your money activities, you can accumulate wealth without paying for a financial advisor.
Short-Term Financial Goals
Establish a Budget
“You can’t know where you are going until you really know where you are right now. That means setting up a budget,” says Lauren Zangardi Haynes, a fiduciary and fee-only financial planner with Spark Financial Advisors in Richmond and Williamsburg, Virginia. “You might be shocked at how much money is slipping through the cracks each month.”
An easy way to track your spending is to use a free budgeting program like Mint (mint.com). It will combine the information from all your accounts into one place and let you label each expense by category. You can also create a budget the old-fashioned way by going through your bank statements and bills from the last few months and categorizing each expense with a spreadsheet or on paper.
You might discover that going out to eat with your coworkers every day is costing you $315 a month, at $15 a meal for 21 workdays. You might learn that you’re spending another $100 per weekend going out to eat with your significant other. Once you see how you are spending your money, you can make better decisions, guided by that information, about where you want your money to go in the future. Are the enjoyment and convenience of eating out worth $715 a month to you? If so, great, as long as you can afford it. If not, you’ve just discovered an easy way to save money every month. You can look for ways to spend less when you dine out, replace some restaurant meals with homemade ones or do a combination of the two.
Create an Emergency Fund
An emergency fund is a money you set aside specifically to pay for unexpected expenses. To get started, $500 to $1,000 is a good goal. Once you meet that goal, you’ll want to expand it so that your emergency fund can cover larger financial difficulties, like unemployment.
Ilene Davis, a certified financial planner™ with Financial Independence Services in Cocoa, Fla., recommends saving at least three months worth of expenses to cover your financial obligations and basic needs, but preferably six months worth, especially if you are married and work for the same company as your spouse or if you work in an area with limited job prospects. She says finding at least one thing in your budget to cut back on can help fund your emergency savings.
Another way to build emergency savings is through decluttering and organizing, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping and personal loans. You can make extra money by selling unneeded items on eBay or Craigslist or holding a yard sale. Consider turning a hobby into part-time work where you can devote that income to savings.
Zangardi Haynes recommends opening a savings account and setting up an automatic transfer for the amount you’ve determined you can save each month (using your budget) until you hit your emergency fund goal. “If you get a bonus, tax refund or even an ‘extra’ monthly paycheck—which happens two months out of the year if you are paid biweekly—save that money as soon as it comes into your checking account. If you wait until the end of the month to transfer that money, the odds are high that it will get spent instead of saved,” she says.
While you probably have other savings goals, too, like saving for retirement, creating an emergency fund should be a top priority. It’s the savings account that creates the financial stability you need to achieve your other goals.
Pay off Credit Cards
Experts disagree on whether to pay off credit card debt or create an emergency fund first. Some say that you should create an emergency fund even if you still have credit card debt because, without an emergency fund, any unexpected expense will send you further into credit card debt. Others say you should pay off credit card debt first because the interest is so costly that it makes achieving any other financial goal much more difficult. Pick the philosophy that makes the most sense to you, or do a little of both at the same time.
As a strategy for paying off credit card debt, Davis recommends listing all your debts by interest rate from lowest to highest, then paying only the minimum on all but your highest-rate debt. Use any additional funds you have to make extra payments on your highest-rate card.
The method Davis describes is called the debt avalanche. Another method to consider is called the debt snowball. With the snowball method, you pay off your debts in order of smallest to largest, regardless of the interest rate. The idea is that the sense of accomplishment you get from paying off the smallest debt will give you the momentum to tackle the next-smallest debt, and so on until you’re debt-free.
Gallegos says debt negotiation or settlement is an option for those with $10,000 or more in unsecured debt (such as credit card debt) who can’t afford the required minimum payments. Companies that offer these services are regulated by the Federal Trade Commission and work on the consumer’s behalf to cut debt by as much as 50% in exchange for a fee, typically a percentage of the total debt or a percentage of the amount of debt reduction, which the consumer should only pay after a successful negotiation. Consumers can get out of debt in two to four years this way, Gallegos says. The drawbacks are that debt settlement can hurt your credit score and creditors can take legal action against consumers for unpaid accounts.
Bankruptcy should be a last resort because it destroys your credit rating for up to 10 years.
Mid-Term Financial Goals
Once you’ve created a budget, established an emergency fund and paid off your credit card debt—or at least made a good dent in those three short-term goals—it’s time to start working toward mid-term financial goals. These goals will create a bridge between your short- and long-term financial goals.
Get Life Insurance and Disability Income Insurance
Do you have a spouse or children who depend on your income? If so, you need life insurance to provide for them in case you pass away prematurely. Term life insurance is the least complicated and least expensive type of life insurance and will meet most people’s insurance needs. An insurance broker can help you find the best price on a policy. Most term life insurance requires medical underwriting, and unless you are seriously ill, you can probably find at least one company that will offer you a policy.
Gallegos also says you should have disability insurance in place to protect your income while you are working. “Most employers provide this coverage,” he says. “If they don’t, individuals can obtain it themselves until retirement age.”
Disability insurance will replace a portion of your income if you become seriously ill or injured to the point where you can’t work. It can provide a larger benefit than Social Security disability income, allowing you (and your family, if you have one) to live more comfortably than you otherwise could if you lose your ability to earn an income. There will be a waiting period between the time you become unable to work and the time your insurance benefits will start to payout, which is another reason why having an emergency fund is so important.
Pay off Student Loans
Student loans are a major drag on many people’s monthly budgets. Lowering or getting rid of those payments can free up cash that will make it easier to save for retirement and meet your other goals. One strategy that can help you pay off your student loans is refinancing into a new loan with a lower interest rate. But beware: If you refinance federal student loans with a private lender, you may lose some of the benefits associated with federal student loans, such as income-based repayment, deferment, and forbearance, which can help if you fall on hard times.
If you have multiple student loans and won’t stand to benefit from consolidating or refinancing them, the debt avalanche or debt snowball methods can help you pay them off faster.
Consider Your Dreams
Mid-term goals can also include goals like buying a first home or, later on, a vacation home. Maybe you already have a home and want to upgrade it with a major renovation—or start saving for a larger place. College for your children or grandchildren—or even saving for when you do have children—are other examples of mid-term goals.
Once you’ve set one or more of these goals, start figuring out how much you need to save to make a dent in reaching it. Visualizing the type of future you want is the first step toward achieving it.
10 Personal Finance Strategies
1. Devise a Budget
A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:
50% of your take-home pay or net income (after taxes, that is) goes toward living essentials, such as rent, utilities, groceries, and transport
30% is allocated to lifestyle expenses, such as dining out and shopping for clothes.
20% goes towards the future: paying down debt and saving both for retirement and for emergencies
It’s never been easier to manage money, thanks to a growing number of personal budgeting apps for smartphones that put day-to-day finances in the palm of your hand. Here are just two examples: YNAB, aka You Need a Budget, helps you track and adjust your spending so that you are in control of every dollar you spend. Meanwhile, Mint streamlines cash flow, budgets, credit cards, bills, and investment tracking—all from one place. It automatically updates and categorizes your financial data as info comes in, so you always know where you stand financially. The app will even dish out custom tips and advice.
2. Create an Emergency Fund
It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses such as medical bills, a big car repair, rent if you get laid off, and more.
Between three and six months’ worth of living expenses is the ideal safety net. Financial experts generally recommend putting away 20% of each paycheck every month (which of course, you’ve already budgeted for!). Once you’ve filled up your “rainy day” fund (for emergencies or sudden unemployment), don’t stop. Continue funneling the monthly 20% towards other financial goals such as a retirement fund.
3. Limit Debt
It sounds simple enough: To keep debt from getting out of hand, don’t spend more than you earn. Of course, most people do have to borrow from time to time—and sometimes going into debt can be advantageous, if it leads to acquiring an asset. Taking out a mortgage to buy a house is one good example. But leasing can sometimes be more economical than buying outright, whether you’re renting a property, leasing a car, or even getting a subscription to computer software.
4. Use Credit Cards Wisely
Credit cards can be major debt traps. But it’s unrealistic not to own any in the contemporary world, and they have applications other than as a tool to buy things. Not only are they crucial to establishing your credit rating, but they’re also a great way to track spending, which can be a big budgeting aid.
Credit just needs to be managed correctly, which means the balance should ideally be paid off every month, or at least be kept at a credit utilization rate minimum (that is, keep your account balances below 30% of your total available credit). Given the extraordinary rewards incentives on offer these days (such as cash back), it makes sense to charge as many purchases as possible. Still, avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments. (See Tip No. 5.)
Using a debit card is another way to ensure you will not be paying for accumulated small purchases over an extended period—with interest.
5. Monitor Your Credit Score
Credit cards are the main vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, you’ll need a solid credit history behind you. Factors that determine your score include how long you’ve had credit, your payment history, and your credit-to-debt ratio.
Credit scores are calculated between 300 and 850. Here’s one rough way to look at it:
720 = good credit
650 = average credit
600 or less = poor credit
To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. By monitoring your report, you will be able to detect and address mistakes or fraudulent activity. Federal law allows you to obtain free credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport, a site sponsored by the Big Three; you can also get a free credit score from sites such as Credit Karma, Credit Sesame, or Wallet Hub. Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, too.
6. Consider Your Family
To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts. You also need to look into insurance: not just on your major possessions (auto, homeowners), but also on your life. And be sure to periodically review your policy to make sure it meets your family’s needs through life’s major milestones.
Other critical documents include a living will and healthcare power of attorney. While not all these documents directly affect you, all of them can save your next-of-kin considerable time and expense when you fall ill or become otherwise incapacitated.
And while they’re young, take the time to teach your children about the value of money and how to save, invest, and spend wisely.
7. Pay Off Student Loans
There are myriad of loan-repayment plans and payment reduction strategies available to graduates. If you’re stuck with a high-interest rate, paying off the principal faster can make sense. On the other hand, minimizing repayments (to interest only, for instance), can free up other income to invest elsewhere or to put into retirement savings while you’re young and will get the maximum benefit from compound interest (see Tip No. 8, below). Some federal and private loans are even eligible for a rate reduction if the borrower enrolls in auto pay. Flexible federal repayment programs worth checking out include:
Graduated repayment—progressively increases the monthly payment over 10 years
Extended repayment—stretches the loan out over a period that can be as long as 25 years
8. Plan (and Save) for Retirement
Retirement may seem like a lifetime away, but it arrives much sooner than you’d expect. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors like to call the magic of compounding interest—how small amounts grow over time. Setting aside money now for your retirement not only allows it to grow over the long term, but it can also reduce your current income taxes if funds are placed in a tax-advantaged plan fund like an Individual Retirement Account (IRA), a 401(k) or a 403(b). If your employer offers a 401(k) or 403(b) plan, start paying into it right away, especially if they match your contribution. By not doing so, you’re giving up free money! Take time to learn the difference between a Roth 401(k) and a traditional 401(k), if your company offers both.
Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people), and converting a term life insurance policy to a permanent life one.
9. Maximize Tax Breaks
Due to an overly complex tax code, many individuals leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you’ll free up money that can be invested in the reduction of past debts, your enjoyment of the present and your plans for the future.
You need to start each year saving receipts and tracking expenditures for all possible tax deductions and tax credits. Many business supply stores sell helpful “tax organizers” that have the main categories already pre-labeled. After you’re organized, you’ll then want to focus on taking advantage of every tax deduction and credit available, as well as for deciding between the two when necessary. In short, a tax deduction reduces the amount of income you are taxed on, whereas a tax credit actually reduces the amount of tax you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.
10. Give Yourself a Break
Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it’s a vacation, purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.
Last but not least, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage, spending a few hundred dollars on a certified public accountant (CPA) or a financial planner—at least once—might be a good way to jump-start your planning.
Financial Planning Basics
At the very basic level of personal finance, you should understand the need for, and value of, a budget. A budget or spending plan is a road map for telling your money what to do each month. At its simplest, a budget lists how much income you have coming in, compared to what’s going out each month.
Creating a detailed and written budget allows you to make smarter decisions
with your finances on a daily basis. When you’re faced with spending money on something, a budget requires you to stop and think about the purchase. You realize that by spending money in one area, you won’t have to spend–or save–elsewhere.
When you create a budget, you begin to see a clear picture of how much money you have, what you spend it on, and how much, if any is left over. Ideally, you’ll have a surplus left over which you can use to save for retirement, build up your emergency fund, pay down debt or apply to other financial goals.
The simplest way to create a budget is on paper, but you can also use a budgeting spreadsheet, software or budgeting app to get the job done. If it’s your first time budgeting, consider testing out different approaches each month to find the one that best fits your needs and style.
2. Cutting Expenses
After you’ve successfully created a basic budget, you’ll have a much better understanding of where your money goes and where you can possibly trim expenses. For many people, this is as simple as cutting back on some of the little things that can add up. For others, it may mean taking a closer look at spending to make deeper cuts in order to create a wider gap between monthly inflows and outflows.
For example, some of the smaller variable expenses you may consider
eliminating include unnecessary subscription services or recurring memberships you don’t use. Bigger cuts could result from refinancing your mortgage or wiping out an entire spending category, such as dining out.
Why is reducing expenses important? Three reasons. First, it can free up more money in your budget so you’re less inclined to rely on credit cards or loans to cover spending gaps. Second, if you have debt, adding extra money back into your budget can help you pay it off faster. And third, having extra money can help you boost your emergency fund or grow retirement savings.
3. Getting Out of Debt
Even after creating a sound budget and cutting unnecessary expenses, you may still find yourself with lingering debt to get rid of. Using credit and taking on some debt itself isn’t necessarily a bad thing, but when you can’t keep up with the payments or borrow more than you can afford to pay back, you could be in trouble.
Getting out debt becomes even more difficult when you’re facing a
high interest rate on credit cards or loans.One of the most important steps in getting out of debt is to pay more than the minimum amount due each month.
Even a modest credit card balance can take over a decade to pay off if you simply pay the minimum amount due because of interest and finance charges. That could end up costing you thousands of dollars that could be better used towards savings. Giving the snowball method a try, or looking into a credit card balance transfer, could help you get out of debt sooner.
4. Saving for Retirement
With fewer companies offering full pension plans and the uncertainty of Social Security, it’s become more important than ever to save and plan for your own retirement. Unfortunately, many people feel that they simply don’t have enough money left over each month to save. That, however, can be costly if you delay saving until later in life because it means missing out on the power of compound interest.
Retirement savings needs to become a priority instead of an afterthought. The Internal Revenue Service has made saving for retirement even more attractive with special tax-advantaged accounts such as employer 401(k) plans, individual retirement accounts and special retirement accounts for the self-employed. These accounts allow for tax deductions, credits and even tax-free earnings on some retirement savings. If you’re not saving for retirement yet, revisit your budget to see if you have room to include it.
You’ve created a budget, cut expenses, eliminated your credit card debt and have started saving for retirement, so you’re all set, right? While you’ve definitely come a long way, there is one more important aspect of your finances that you need to consider: insurance.
You’ve worked hard to build a solid financial footing for you and your family, so
it needs to be protected. Accidents and disasters can and do happen and if you aren’t
adequately insured it could leave you in financial ruin. You need insurance to protect your life, your ability to earn income, and to keep a roof over your head. Life insurance, disability insurance and homeowners’ insurance can help with those scenarios.
One question you may have is, what kind of life insurance do I need? Term life offers you for a set period of time; permanent insurance covers you for life, with some policies offering the benefit of cash value accumulation. Permanent life insurance, however, can be more expensive than term life. When choosing between the two, it’s important to consider which one is the best fit for your needs and goals.
How to Face the Dark Sides of FIRE [November 27, 2022]
The Dark Sides of FIRE
Contrary to popular belief, you don’t live happily ever after once you reach FIRE.
Yes, there is life (ups and downs) even after FIRE.
Realize that FIRE is not an endpoint, rather it’s a transition point. The reason why I know this is I’m heading into my 5th year of early retirement.
While there are many incredible benefits and advantages to FIRE, there are some dark sides to FIRE which need to be faced and navigated.
Here are a few which I’ve faced firsthand and how I’ve learned to deal with them.
Quitting Too Early
Sometimes you can’t time your exit from the workforce perfectly. In my case, I was working for the company that acquired our IT support company. Although I had a 3-year employment agreement, the parent company seriously misrepresented their values during the acquisition. So, I found myself hating my new “job” which I had inadvertently created. After negotiating a favorable severance agreement, I officially left (1.5 years post-acquisition).
It was a bit of a strange time because although I always intended on retiring early, I found myself wondering if it was too soon. I would have preferred to have saved up an asset base closer to $2M instead of the $1.2M we had accumulated at the time.
Quitting too early is certainly a problem because you need to continually manage your cash flow tightly in order to maintain your capital base. As an early retiree, I face more years of uncovered assets coupled with inflation than most.
Part of this solution was to create some side hustles. And luckily for me, my wife didn’t have any desire to follow suit. Supplemental income is important during FIRE to ensure you aren’t drawing down on your assets prematurely.
Oh, don’t discount timing luck. By taking an early retirement at the beginning of one of the strongest bull markets ever (2013 – ???) it’s allowed us to actually increase our net worth while I haven’t been working.
Finally, it’s helpful to become comfortable with a worst possible case scenario. What if we lost 50% of our assets or more? What if all of our supplemental income dried up?
The answer is that we’d be FINE. We’d still have enough to support our family. I could always go back to traditional work. And, there’s always geographical arbitrage (living somewhere else with a significantly lower cost of living)!
If you’re getting close to FIRE, embrace the fear of quitting too early. It can be helpful if you use it to plan and strategize, but don’t let it paralyze you. Sometimes you just need a little financial faith.
Deciphering the Relationship Between Net Worth and Cash Flow
Another dark side of FIRE is related to Quitting Too Early. You see, it’s hard to separate net worth and cash flow sometimes.
Net worth can give you an inflated sense of well-being. However, it’s crucial to also watch your cash flow simultaneously.
In our case, we had a smaller $1.2M net worth in 2013, but our cash flow was strong with my severance, unemployment, wife’s salary, real estate investments, dividends, etc. As such, we were able to save and invest the excess money for a good couple of years.
Fast forward to today and you’ll see that our net worth has increased healthily to past $2M. However, if you’ve been reading our monthly financials, you may have noticed our cash flow has been weaker and even negative some years.
Net worth and a healthy cash flow are both important metrics to watch during early retirement and critical to reaching a comfortable FI base (aka critical mass).
I’m certainly glad that I’ve been tracking online every month as it’s been keeping me honest to watch the dynamics of our finances in real-time.
Killing Your Momentum
darker sides of FIREChances are if you are in a position to FIRE, you have built up some pretty good momentum with your career. When you officially pull the plug on your traditional 9-5 to step into retirement early, all of that momentum of earnings, savings, and investing comes to a halt. There are opportunity costs on both sides of the equation.
If your former career was a large part of your identity, you’ll have to re-invent a new identity that maintains your internal values.
This part of FIRE and retiring early has been challenging for me. I fully transitioned to a SAHD (stay-at-home-dad) and love this role. However, a piece of me misses the thrill of building a business day-in, day-out.
To compensate for this momentum shift, I’ve had to learn to slow down and be okay with things taking longer than before. I had to learn to be okay with my new identity and stop beating myself up that I’m no longer performing a traditional male’s role.
Creating this blog has been a great way to re-create some of the lost momenta. It’s not only a site to help others, but a place for me to self-assess and also to grow. During the past few years, I realized that my number one priority is to be fully present for my family. This includes being a SAHD, a supportive husband, and a good friend. Secondly, comes all of my investing and entrepreneurial endeavors, including this blog, coaching, FBA, etc. Time is one of my most valuable assets these days, so it’s important for me to direct it and create momentum in the places which I will find the most fulfillment.
One thing that I did right, in the beginning, was to take time for myself to “figure things out”. I spent a lot of time self-reflecting on what was important to me and ultimately how I want to contribute moving forward. Thankfully I have had a supportive wife, in-laws, and friends which made this process that much easier.
I’m still evolving, but I’ve removed a lot of former stress I had by focusing on things I can control and who I can serve. This is where my momentum is building these days. 🙂
Having New Marital Problems
Being married can mean a lot of happiness. And, on the flip side, there will be inevitable downs to balance things out. You have to take the good with the bad if you want to make a marriage last.
Taking an early retirement out of turn with another spouse can bring special challenges, even if you both agree to it prior to pulling the trigger.
In our case, it was a strange transition when I had been the primary breadwinner in the family for over 15 years, and then suddenly I wasn’t. Next, I became the primary caregiver (SAHD) for our young children and this inevitably changes the parental dynamic.
Intellectually this new life could make sense, but when your 3-year-old cries out in the middle of the night and doesn’t want Mommy, but Daddy. Mommy can’t help but feel slighted. This isn’t anyone’s fault, but it can create tension and lead to resentment unless addressed head-on.
It’s taken us awhile to realize what’s been the underlying issues, but persistence and love are the cure.
We have to make it a priority to take time for ourselves alone. Thus, last year was riddled with alone time to travel different places and simply reconnect. (BTW, if you’re married, you should be doing this during your pursuit of FIRE as well!)
Facing FIRE Anxieties
dark sides to fireOnce you step into your FIRE life beyond a traditional career, there is a good chance that others around you will still be working. This throws you into a new realm of potential loneliness and social examination.
You may begin to miss socializing with your professional peers. After all, humans are social creatures by nature.
The key to facing these dark sides to FIRE is to get back out and network. Consider making a blog and joining the FIRE community of bloggers. I’ve met so many incredible people both online and sometimes in-person. Check out FinCon if you’ve never been. It’s a blast and super helpful at the same time.
One of our deepest human fears is not being enough. And, by entering into the realm of FIRE, you may face this fear head-on. Not everyone understands what FIRE is, or how it happens. So, you may even hear some of the ridicule about your current position in life.
Doesn’t that guy ever work? What a deadbeat.
Who does he think he is?
He’s so full of himself. All he cares about is money.
Must be nice to come from money.
He must be loaded if he doesn’t need to work, I wonder why he’s not more generous?
Here’s the thing to remember tho…
What you think of me is none of my business. – Dr. Wayne Dyer
Finding and cultivating the emotional intelligence to navigate these insults and avoiding the creation of self-limiting beliefs is so helpful to finding joy in FIRE.
Don’t get me wrong, it’s okay if you find these negative ideas floating around in your head every now and then. The trick is to recognize it and simply let it go away.
Isn’t it bizarre that we can have two completely opposing beliefs? I say choose the more empowering one and keep discarding the others.
The next step is to raise your standards. Chances are you are able to FIRE because you were willing to do things others were not. You naturally have higher standards than most of society, so it’s your job to associate with those who will help you to at least maintain and raise your own standards consistently. Find a new peer group that will support your current position and even enhance it.
Global Markets - Basics
Basics of the Stock Market
For people who don’t invest or even new investors, the stock market may look and feel more like a gamble than an investment. The market’s constant ups and downs can make every turn seem like it will bring large financial gains or damaging losses. While the world of investing can seem confusing, the more you understand about stocks and other investments the better you can manage your money in the market. Although it is always possible to lose money, investing in the stock market can be a great way to grow your wealth given enough time and proper planning.
It’s time to change your feeling of gambling in the stock market to instead be a feeling of smart investing.
So What Exactly Is the Stock Market?
The stock market is a market in which people can buy shares of publicly owned companies to participate in the financial achievements of the companies whose shares they hold. Investors make money through dividends that these companies pay out. When those companies are profitable they can sell stocks at a profit. However, if the investor holds stocks in companies that are losing money, the price and value of those stocks decrease. This would result in a loss of profit if the investor decides to sell.
There are several different factors that can affect stock prices such as interest rates, inflation, labor strikes, world events like natural disasters, changes in oil prices, and many more. These factors make it almost impossible to determine any future value of a company stock.
What Are Bear and Bull Markets?
To symbolize the constant ups and downs of the stock market, Wall Street has developed its own terminology. In a bull market, everything in the economy is going well. Stocks are rising, unemployment is low and the economy is growing. As stock prices rise, there tend to be more buyers than sellers in the market. A bull market can last for a few weeks, months or even years. The market is constantly changing so a bull market won’t last forever.
When stocks are falling and the economy is not doing well, this is called a bear market. A bear market also does not last for a set term as it can go on for years. During this period, investors have a hard time picking profitable stocks. Some investors use a trading strategy called short-selling to make a profit when stocks are declining. This is done when an investor sells securities that they have borrowed and prepared to buy back later at a lower price.
How Many Types of Stocks Are There?
There are two main types of stocks that investors can own: common stock and preferred stock. When people talk about stocks they are usually referring to common stocks because, well, they’re common and they are the majority of the stocks issued. Both of these stocks represent ownership in a company but preferred shares normally come with a fixed dividend unlike the common stock, which has variable dividends.
People may choose preferred stocks because, in the event of liquidation, preferred shareholders are paid off before the common shareholders.
Which Are Blue Chips Stocks?
Blue-chip stocks are stocks from the big guys in the market; huge, well-established companies with dependable earnings such as Walt Disney, General Electric, and Intel. For a stock to be considered ‘blue-chip’ they must be consistently profitable with a dividend payment.
What Is an “Illiquid Market”?
Illiquid defines an asset or security that is not able to sell quickly due to a lack of buyers and sellers in the market. Selling it quickly would result in a loss of profit. A market would be described as illiquid if there is a shortage of interested buyers and little is being traded.
What Is Book Value?
The book value refers to the hypothetical value of a company if all assets are liquidated or sold at prices shown on the balance sheet. This financial measure is used to calculate the amount of stockholders’ equity to the number of shares remaining.
What Does It Mean If an Investment Is Well Hedged?
An investment is well hedged if an investor limits losses on a certain stock by establishing an opposite position in the same stock and is protected against losses.
Keep in mind that investing is a long-term game. People who find success with their investments have developed a sound strategy that they still stick with even when the market swings.
Resisting the urge to react to short-term events could make all the difference in your portfolio and help you achieve your long-term goals. Remember that it’s all about time in the market, not timing the market that makes for successful investing. Consult with a financial advisor to learn more and set up an investment portfolio that’s right for you.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make.
Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
What is Fundamental Analysis?
Fundamental analysis is the study of how global economic news and other news events affect financial markets. Fundamental analysis encompasses any news event, social force, economic announcement, Federal policy change, company earnings and news, and perhaps the most important piece of Fundamental data applicable to the Forex market, which is a country’s interest rates and interest rate policy.
The idea behind fundamental analysis is that if a country’s current or future economic picture is strong, their currency should strengthen. A strong economy attracts foreign investment and businesses, and this means foreigners must purchase a country’s currency to invest or start a business there. So, essentially, it all boils down to supply and demand; a country with a strong and growing economy will experience stronger demand for their currency, which will work to lessen supply and drive up the value of the currency.
For example, if the Australian economy is gaining strength, the Australian dollar will increase in value relative to other currencies. One main reason a country’s currency becomes more valuable as its economy grows and strengthens is because a country will typically raise interest rates to control growth and inflation. Higher interest rates are attractive to foreign investors and as a result they will need to buy Aussie dollars in order to invest in Australia, this of course will drive up the demand and price of the currency and lessen the supply of it.
• Major economic events in Forex
Now, let’s quickly go over some of the most important economic events that drive Forex price movement. This is just to familiarize you with some more of the jargon that you will likely come across on your Forex journey, you don’t need to worry too much about these economic events besides being aware of the times they are released each month, which can be found each day in my Forex trade setups commentary.
Gross Domestic Product (GDP)
The GDP report is one of the most important of all economic indicators. It is the biggest measure of the overall state of the economy. The GDP number is released at 8:30 am EST on the last day of each quarter and it reflects the previous quarter’s activity. The GDP is the aggregate (total) monetary value of all the goods and services produced by the entire economy during the quarter being measured; this does not include international activity however. The growth rate of GDP is the important number to look for.
Trade balance is a measure of the difference between imports and exports of tangible goods and services. The level of a country’s trade balance and changes in exports vs. imports is widely followed and an important indicator of a country’s overall economic strength. It’s better to have more exports than imports, as exports help grow a country’s economy and reflect the overall health of its manufacturing sector.
Consumer Price Index (CPI)
The CPI report is the most widely used measure of inflation. This report is released at 8:30 am EST around the 15th of each month and it reflects the previous month’s data. CPI measures the change in the cost of a bundle of consumer goods and services from month to month.
The Producer Price Index (PPI)
Along with the CPI, the PPI is one of the two most important measures of inflation. This report is released at 8:30 am EST during the second full week of each month and it reflects the previous month’s data. The producer price index measures the price of goods at the wholesale level. So to contrast with CPI, the PPI measures how much producers are receiving for the goods while CPI measures the cost paid by consumers for goods.
The most important employment announcement occurs on the first Friday of every month at 8:30 am EST. This announcement includes the unemployment rate; which is the percentage of the work force that is unemployed, the number of new jobs created, the average hours worked per week, and average hourly earnings. This report often results in significant market movement. You will often hear traders and analysts talking about “NFP”, this means Non-Farm Employment report, and it is perhaps the one report each month that has the greatest power to move the markets.
Durable Goods Orders
The durable goods orders report gives a measurement of how much people are spending on longer-term purchases, these are defined as products that are expected to last more than three years. The report is released at 8:30 am EST around the 26th of each month and is believed to provide some insight into the future of the manufacturing industry.
Retail Sales Index
The Retail Sales Index measures goods sold within the retail industry, from large chains to smaller local stores, it takes a sampling of a set of retail stores across the country. The Retail Sales Index is released at 8:30 am EST around the 12th of the month; it reflects data from the previous month. This report is often revised fairly significantly after the final numbers come out.
Housing data includes the number of new homes that a country began building that month as well as existing home sales. Residential construction activity is a major cause of economic stimulus for a country and so it’s widely followed by Forex participants. Existing home sales are a good measure of economic strength of a country as well; low existing home sales and low new home starts are typically a sign of a sluggish or weak economy.
Interest rates are the main driver in Forex markets; all of the above mentioned economic indicators are closely watched by the Federal Open Market Committee in order to gauge the overall health of the economy. The Fed can use the tools at its disposable to lower, raise, or leave interest rates unchanged, depending on the evidence it has gathered on the health of the economy. So while interest rates are the main driver of Forex price action, all of the above economic indicators are also very important.
• Technical Analysis VS. Fundamental Analysis
Technical analysis and Fundamental analysis are the two main schools of thought in trading and investing in financial markets. Technical analysts look at the price movement of a market and use this information to make predictions about its future price direction. Fundamental analysts look at economic news, also known as fundamentals. Now, since nearly any global news event can have an impact on world financial markets, technically any news event can be economic news. This is an important point that I want to make which many fundamental analysts seem to ignore…
One of the main reasons why I and all of my members prefer to trade primarily with technical analysis is because there are literally millions of different variables in the world that can affect financial markets at any one time. Now, Forex is more affected by macro events like a country’s interest rate policy or GDP numbers, but other major news events like wars or natural disasters can also cause the Forex market to move. Thus, since I and many others believe that all of these world events are factored into price and readily visible by analyzing it, there is simply no reason to try and follow all the economic news events that occur each day, in order to trade the markets.
One of the main arguments that I have read that fundamental analysts have against technical analysts is that past price data cannot predict or help predict future price movement, and instead you must use future or impending news (fundamentals) to predict the price movement of a market. So, I thought it would be a good idea to give my response to these two arguments against technical analysis:
1) If fundamental analysts want to try and tell me that past price data is not important, then I would like them to explain to me why horizontal levels of support and resistance are clearly significant. I would also like to ask them how myself and many other price action traders can successfully trade the markets by learning to trade off of a handful of simple yet powerfully predictive price action signals:
Looking at the daily spot Gold chart above, we can clearly see that support and resistance levels are important to watch. Any Fundamental analyst, who wants to say that charts don’t matter, is simply wrong, and you will come to this conclusion on your own when you spend more time studying some price charts.
2) The next argument that Fundamental analysts use is that you can more accurately predict a market’s price movement by analyze impending forex news events. Well, anyone who has traded for any length of time knows that markets often and usually react opposite to what an impending news event implies. Are there times when the market moves in the direction implied by a news event? Yes, absolutely, but is it something you can build a trading strategy and trading plan around? No.
The reason is that markets operate on expectations of the future. This is actually an accepted fact of trading and investing, so it’s a little strange to me that some people still ignore technical analysis or don’t primarily focus on it when analyzing and trading the markets. Let me explain: if Non-farm payrolls is coming out (the most important economic report each month, released in the U.S.) and the market is expecting 100,000 more jobs added last month, the market will likely already have moved in anticipation of this number. So, if the actual number is 100,000 even, the market will probably move lower, instead of higher…since there were not MORE added jobs than expected. So, while 100,000 new jobs might be a good number, the fact that the actual report did not exceed expectations is bad for traders and investors (can you see how this junk gets confusing now? I almost confused myself writing this…).
AND NOW FOR MY FINAL POINT: Since all of the preceding expectations of a news release have already been carried out and are visible on the price chart, why not just analyze and learn to trade off the price action on the price chart?? What a novel idea! You see, even after the news is released we can still use technical analysis to trade the price movement, so really technical analysis is the clearest, most practical, and most useful way to analyze and trade the markets. Am I saying there is no room for Fundamental analysis in a Forex trader’s tool box? Absolutely not. But, what I am saying is that it should be viewed and used as a compliment to technical analysis and it should be used sparingly, when in doubt consult the charts and read the price action, only use Fundamentals to support your Technical view or out of pure curiosity, never rely solely on Fundamentals to predict or trade the markets.
How to Make a Forex Trading Plan
Having a Forex trading plan is one of the key elements to becoming a successful Forex trader. Many traders never even make a trading plan, let alone use one regularly. It’s very important that you do both; make a trading plan and use the one you make…don’t just make one and then never look at it like many traders do. Here are some important points to consider regarding Forex trading plans:
• Follow a plan, have a journal, log trades
You need to do three essential things to become and remain an organized and disciplined Forex trader. These things are the following: 1) Create a Forex trading plan, 2) Create (or use an existing) Forex trading journal, 3) ACTUALLY use BOTH of them.
The process of creating a Forex trading plan around an effective trading strategy like price action trading, will work to solidify your understanding of the trading strategy and will also provide you with a blueprint for what you need to do each time you interact with the market. Having this market blueprint is essential for developing the type of ice-cold discipline that it takes to succeed in the Forex currency market over the long-term.
Logging your trades in a trading journal is critical to your success because it allows you to have a visual representation of your ability (or lack thereof) to trade the markets, it also creates a track record for you that you can use which will show you how your trading edge plays out over time, this will allow you to ‘tweak’ and adjust your trading strategy as you see fit.
• Trading plans contain a routine and checklist
To put it simply, you NEED to have a routine in your trading activities; otherwise you will just end up running and gunning the seat of your pants. I have a trading philosophy that revolves around trading Forex like a sniper and not a machine gunner, if you want to trade like a sniper you have to have a routine that you follow, and you have to be disciplined…a sniper in the military is an extremely disciplined individual, and you need to think of the Forex market like it’s a war, and you are a sniper trying to take only the ‘easiest prey’; your ‘prey’ in the markets consists of only the most obvious trade setups.
Your trading plan should include a checklist that you follow; this will include things that you look for in the market and what you want to see before entering a trade. If you can tick all the boxes then you enter the trade, if not then you hold off until your trading edge appears again. You can actually formulate your whole trading plan as a checklist; this will make it a smooth format that allows you to quickly decide if any potential trade setup is worth taking.
• Trading plans contain written guidelines of what a trader will do and look for as well as images of trade setups
Your trading plan should contain a written description of what you will do in the markets. This includes things like what your trading edge is, how you trade it, when you trade it, what time frames you trade (I prefer daily Forex chart trading), your strategy for risk management and profit taking, and your overall goals as a trader. You should also include images of your trading edge setups, so that you are constantly reminded of what an “ideal” setup looks like. Eventually, after you follow your written guidelines and “ideal” trade setup images long enough, you will burn them into your brain to the point of knowing exactly what you are looking for in the market, which will work to build your confidence as a trader.
• Trades planned in advance and ‘anticipated’ work best
One of the main reasons to create a Forex trading plan is because pre-planning your trades and pre-determining what you are looking for in the markets is the best way to profit over the long-run. You will never be more objective and calm then when you are NOT in the market, so if you can plan out all your trades when you are not in the markets, you will be totally uninfluenced by market variables when you are in a trade, and this will work to protect you from becoming an emotional Forex trader.
• Be patient and wait for the conditions of a plan to unfold – don’t force the issue
Patience is perhaps the most important virtue that a Forex trader can possess. When you are a patient trader it means you know what you are looking for in the markets and you wait for your trading edge to appear before you execute a trade. Trading in this manner eliminates many losing trades that are the result of trading emotionally…or without patience. A large part of trading, and perhaps the largest part, is simply waiting for an “ideal” price action setup or another trade setup to form in the market. Traders who don’t wait for an ideal setup to form, end up losing their money quickly because they negate their trading edge and are simply gambling instead. Make sure you stress the importance of patience in your trading plan, this way you will be reminded every time you read it why being a patient trader is so important to making money in the Forex market.
Financial Tips For Investor
When it comes to investing, time is your best friend. It gives you the opportunity to ride out downturns in the market and build up your portfolio to have more invested when things are up again. But all too often, we see young adults put off saving for their retirement years. It’s hard to picture our lives 40 or 50 years into the future and a lack of knowledge or understanding of the stock market can make investing intimidating.
However, the earlier you begin, the more time your savings will have to grow in valueand the more likely you are to achieve your investing goals. That’s why we’ve put together a few essential investing tips those with little experience in the financial world should keep in mind when getting started.
1. Start Saving for Retirement With Your First Job
Opting in the 401(k) plan offered by your employer is an excellent way to boost your retirement savings for several reasons. First, contributions are pre-tax meaning they come out of your paycheck before taxes reducing your taxable income for the year. Your company may also offer a matching program for contributions to your 401(k) usually matching up to 6 percent of your salary. Finally, 401(k) plans typically offer a diverse array of investment options focused on retirement investing.
2. Avoid the Seven Layer Dip of Fees When Investing
If you’ve never dug into the world of stocks and bonds before, the volume of investment choices may seem overwhelming. The good news is your financial well-being could improve significantly with the guidance of a financial advisor or broker while keeping costs to a minimum. Paying excessive fees will not help your investment performance over time. So, as you build your investment portfolio, be sure to watch out for the following investment fees:
Mutual Fund Fees
Mutual Fund Surrender Penalties
Brokerage Trading Commissions
Internal Mutual Fund Operating Costs
Wrap Management Fees
Markups on Bonds and New Issue Securities
It’s always important to ask your advisor about their fees and be informed on all the ways you’re paying for their service.
3. Make Regular Contributions
Try to contribute a set percentage of your paycheck every month into your investment account. If you do this right away, you won’t miss the money. Contributing regularly to your account sets up a wonderful investment discipline for you, in addition to helping fund your post-career life.
4. Hold a Diversified Portfolio and Take Some Risks
Everything in life contains a certain amount of risk and this is especially true when it comes to investing. Although a savings account is a good way to hold wealth for the future it doesn’t grow substantially so invest in equities while you’re still young. This helps to grow your savings and allows you to take greater risks for a higher reward than only investing money in bonds.
Remember, don’t put all your eggs in one basket. Holding a diversified portfolio of stocks, bonds and other assets that are exposed to several sectors of the market lowers your odds of losing a ton of money.
5. Never Take Early Withdrawals Out of Your 401(k)
Keep in mind that the purpose of a 401(k) is to save for retirement. If you take money out of it now you risk running out of wealth during your post-career life. If that doesn’t convince you, consider the costs that come with early withdrawals. For example, if you have $10,000 in your account and you’re in the 25 percent tax bracket, you’ll lose $2,500 to taxes, plus pay another $1,000 penalty for breaking into the money before you reach age 55. (For IRAs, the early withdrawal penalty applies up to age 59 1/2, with certain exceptions.) Bottom line: Your $10,000 dwindles to $6,500.
To prepare for unexpected emergencies prepare by stashing money into an accessible emergency fund. To make things easier, automatically divert a portion of your paycheck into a savings account in addition to your 401(k) or IRA contributions.
With enough discipline and knowledge of your investing strategy, you are in good shape to build a significant nest egg for retirement. Keep an eye on your investment portfolio, rebalance when needed, and make sure your commissions and investment fees are low. Start investing as early as possible to give your investments time to build value and lastly, never stop learning more about investing. The more you know, the better chance you have to produce maximum earnings. Tie this all together by saving regularly, diversifying your investment portfolio, and accepting risk-taking as a part of the investing world and you’re on the right track to becoming a smart investor.