About emergency funds

This post is probably 12 months late. As we are in the middle of a global pandemic, people are losing jobs, lives. But even more are coming to realize that they miss something truly important: An emergency fund.

I got to admit, I am also not a great role-model here. Over the last 5 years, every penny I got was being invested right away. Therefore I have not built up a proper emergency fund. This is changing now.

How much is enough?

I read several surveys from Germany and the US last year. While I don’t remember exactly the numbers, they were overall pretty similar in their final assessment. A majority of citizens (of each of the countries) are not prepared to handle even smaller unexpected (emergency) expenses out of the pocket. How small? We are talking about 300 Euros or 350 USD.

I was honestly shocked by reading about it, because 300 Euros is very little, especially when we are talking about the US or Germany. For most people, it wouldn’t be enough to cover monthly rent, groceries, let alone a potential hospital bill or car repairs.

So obviously 300 Euros is not enough and wouldn’t qualify as an emergency fund. An emergency fund is meant to offer us protection in times of real need. When something happens that threatens our 3 basic needs (shelter, food, health), possibly over a prolonged period of time.

It needs to be therefore large enough to cover our regular monthly expenses for a specific timeframe. Most financial advisors recommend 3 to 6 months.

Therefore, to determine the size of your emergency fund all you need to know is about your monthly expenses and multiply this amount with a minimum of 3 months. If you are a cautious type or consider yourself for whatever reason to be more at risk, you might want to multiply it with 6 or even 12 months.

How to get there

Of course, you are not supposed to put this money aside right away. If your monthly expenses are around 1.500 Euros, it would mean that your emergency fund should be at a minimum of 4.500 Euros to cover expenses for 3 months. If people can’t get 300 Euros out of the pocket, how can they save up 4.500 Euros?

The solution to this is of course time, consistency, cautious choices, and the occasional sacrifice.

If you are saving monthly for a certain financial goal, a part of that monthly savings needs to be redirected towards your emergency fund. When you get a salary raise or a bonus payment, you might want to skip the celebrations and put the money into your emergency fund. If you are a coffee addict, how about skipping two cups of those soft lattes each week and putting 10 dollars each week in your emergency fund instead.

This step by step approach might take time, but unless you have an emergency every few months, you should be able to get to your goal within a reasonable timeframe.

The last option is to take on a side-gig. Sacrificing a little more time for a few months or a year might prove the right choice down the road. Having an emergency fund in place will protect you not only by covering any expenses that might unexpectedly pop-up. It will also protect your investments and other financial assets. Because you won’t get under pressure to sell them when money becomes an issue.

Keeping it liquid

An emergency fund needs to be liquid, which means that it must be easily accessible and not tied up to anything. Usually, you will, therefore, keep it in cash, on a simple savings account, or as a fixed deposit which can be easily withdrawn.

I have decided to split it. I keep one month of expenses in cash, and over the next 6 months I will set up a fixed deposit account with enough money in it to cover another 3 months of expenses.

No matter which way you chose, but having some money on the side for the next pandemic, the next wave of cost cuts in your industry (meaning when you get furloughed), or the next car accident, is surely worth the effort.

About multiple income streams

People all around the globe face unprecedented challenges. Well, at least it’s unprecedented for my generation (Gen X), and certainly for Millenials and anyone younger than them. Millions are losing jobs, are forced into quarantine. Many are in dire need of some kind of assistance, whether it’s cash, food, or both.

Here in Thailand, we just passed through the first month of the lockdown. When I drive through the streets of Bangkok or Pattaya where I am currently working, I see people lining up (with social distancing) for food support from the government and from some private institutions.

The Thai government is issuing cash support of THB 5.000 per month to those who need it most. It’s not much, but it’s enough to survive on a very low bar. Together with the support from private institutions, NGOs, and hundreds of those who are more fortunate and who are volunteering to support, I have no doubt that the country will get through the event.

I am also always astonished by the amount of support among Thais in times of crisis. My wife is getting postal packages from friends and family with food, face masks, and snacks. We pass on the favor by sending things to others who need it more than us. I am fortunate enough to still have my job and my monthly salary intact, albeit slightly reduced.

About income and unexpected situations

But not everyone is lucky. Similar to other places around the globe, unemployment in Thailand is on the rise on a massive scale. This is dire in a country with very limited governmental social protection in place, and where most people live paycheck to paycheck.

Which brings me to the main point: Unemployment means for many people to lose their only source of income. And we can see right now more clear than ever, how many people’s lives really depend on their job. Being without work and without an opportunity to find new employment within a short time has now turned into an existential threat for millions of people.

Also, only very few of them could have even imagined such a situation two or three months ago. Yes, some might have an emergency fund and savings to ride out bad times. But would they have expected that they can lose their job, their income, and their benefits within such a short period of time? Hardly.

Building up multiple income streams

This is where the lessons of FIRE become such a powerful reminder, because having multiple, passive income streams is what FIRE is all about! The whole point of becoming financially independent means not being dependent on your job.

Building up passive income streams is best done by investments. Sure, the stock market is crashing and we are sliding into a recession. But out of the 33 companies in my income portfolio, so far only one of them has canceled the dividend, and only two announced to reduce it for this year.

Thanks to this, I am never worried about losing my job. Sure, my monthly dividends can’t compare with my salary, but that’s not the point. The important part for me is that I won’t need to rely on government support and on charities. I will be able to fulfill my main responsibility of providing shelter, medical protection, and food to me and my family on my own.

Personally, this is a very important factor to me, as this defines my perception of freedom and independence.

Who gets the money

And just to add another layer of understanding of why investing is a safer bet than your job, let me explain here one thing. While our savings and jobs are being destroyed, a crisis like this also generates unimaginable amounts of money. While stock valuations may be nosediving right now, governments all across the globe are printing cash like there is no tomorrow.

And where does this cash go to?

In the US, every US national is receiving a one time check of USD 1.200. There are 328,8 Million people in the US, so this sums up to roughly 395 Billion USD. Yes, it’s a lot of money.

But you know who gets more? Companies. Especially the big ones. They get bailed out when they get in trouble, they receive grants, and the FED is reducing interest rates so they can borrow money almost for free. This may sound very negative, but I don’t mean it that way. That’s just how it works for plenty and a variety of reasons.

The important thing is that you have a choice to make. Do you stick to your job and when you lose it, wait for your one-time check of USD 1.200? Or do you invest, and build up multiple and passive sources of income?

Having the knowledge that governments across the globe will put significantly more effort into protecting your investments and your sources of passive income (in comparison with taking care of you directly), this shouldn’t be a complicated choice to make.

Get independent and stop dealing with CRAP

There are many reasons to strive for financial independence. For me, some of them are company politics and the never-ending dealing with CRAP. It’s one of my favourite acronyms:

  • Criticism
  • Rejection
  • Assholes
  • Pressure

You can’t become a leader in any organization without it. It’s part of the deal. No matter what you do, once you are in charge of others, CRAP will be part of your daily experience. It’s to a large part the reason why people in higher positions get higher salaries. It’s not really about their skillset, but more so about their ability to deal with CRAP.

And some might even enjoy it for a while. The constant competition, attention and the feeling of winning whenever you come out on the top. But in the long-run it is tiring. Exhausting. And you are not always winning, you will be losing frequently. In fact, the amount of times that you got to pull yourself together, to get up after you have been beaten down and to push through things that might not match your moral or ethic standards, your expectations and believes, it is so much higher compared to the few wins that you collect along the way.

Some just accept it for what it is. But for others, this might lead to depression, frustrations, the occasional loss of faith in humanity, and burn-out. On top of all that, it is really time-consuming and you might start asking yourself, why you are doing all the effort. What is the actual purpose of your journey?

Serving others is the true purpose of any company out there

Tim Cook said it once and he is absolutely right. Every company, every product and every service is meant to be for someone, to solve some problem, challenge or requirement. Solving problems creates value and pricing follows. So whatever we do when we work, we do it to serve.

When you recognize this to be the case, you have the best chances to really understand the purpose of what you are doing. Knowing your purpose gives you passion, and aligning with it leads to dedication. Dedication leads to success. Success doesn’t necessarily mean a monetary reward, but it often comes along with it.

But serving others is a never-ending task. There will always be a problem. A challenge. An obstacle. A restraint, limitation or a sudden turn of events. And there are always other people. Foes and friends. Competitors. Supervisors. Investors. Shareholders. Politicians.

The more success you have, the more lives you will affect. Whether you want it or not, your actions will have an influence on the lives of other people. On the dreams, which you might elevate or destroy for those who work under you, to the pressure and constant rejection by the supervisors who you work for. Shareholders and investors will always keep you under pressure to deliver the best possible financial results. Sometimes forcing you to action things that might go against your conscience or against what you might consider being the right thing to do.

Cut the CRAP

And I think it’s all actually OK. It’s important. Going this path for a while can help you to understand how human minds work, about group dynamics, all the different agendas out there that people follow. Personal and business-wise. It will give you a deeper understanding of different perspectives, sometimes unexpected connections, incentives and occasional shocks on what may seem like irrational behaviour or unforeseen turn of events. Pushing towards success helps us to develop, to learn and to understand the world around us a little more.

But I don’t think you need to do this your entire life. There is a point when the whole thing becomes overwhelming. A burden. Your mind will be dragged down, your physical condition will start to suffer, your personal relations will get affected and step by step you might start seeing only the problems around you. Depression may follow and with it a steep fall from your high ground at work, and possible medical repercussions.

We call this a burn-out. It doesn’t happen overnight, but when you climb the career ladder, it will slowly creep into your work-life. Usually, when you notice it it’s already too late. So knowing all this, how can you avoid it from happening? The answers are, firstly by becoming financially independent and secondly, by choosing when to stop.

Financial independence comes first, because it’s the tool that allows you to go for the second step. When you become financially independent, you can cut the CRAP at any given time without the need to worry about any repercussions on your life. Your shelter, food and healthcare can remain protected. If you really think about it, you will realize that this is quite a lot, more than most people on the planet have today.

Find your inspiration

For me, CRAP is one of the most important reasons for working even harder to reach FIRE. This doesn’t need to be the case for everyone. Some people might enjoy regular work. Having their 7 to 5, the daily soap operas at the office, the feeling of belonging somewhere. Those may find their inspiration for FIRE somewhere else. But for me, after independence and freedom, CRAP is the next immediate reason on my list of motivations to get out of the rat race.

Depending on work is not a smart long-term plan

I don’t remember whether my parents were asking me about my aspirations when I was young. I also don’t remember hearing them talking to neighbours, friends or family about what I am going to do when I grow up. They never really tried to push any particular profession on me. Maybe because they wanted me to discover the world on my own. Or maybe because as a kid I was not easy to talk to.

We went to school, learned all the basics that were considered important to find our passions, to figure out our talents, sharpen some skills, and to give us a hint of a direction towards some of the opportunities that were out there for us.

What nobody talked about were the things that would stand in our way. The things that would hinder us to develop, hinder us to grow, hinder us to follow our passions and hinder us to truly try to discover our full potential.

To some part, I understand. I wouldn’t believe anyone who would tell me that there was a very high probability to end up doing a job that I might not really care about, for people I might never get to know, to receive some money that will be just enough to cover my living expenses. Mundane tasks day in and out, without passion and without any true commitment, just to get through the day.

This is what we call the rat race and a reality for so many people in the world.

Everything has a price-tag

The grown-ups give us a lot of hope when we are young. They tell us that we can be anything we want. Do whatever we want. And achieve whatever is possible. In reality, it’s all not that simple.

Once we move out from home and leave the protective roof of our parents home and their care, reality quickly kicks in. We need money. Money to pay the rent, groceries, utilities, to go out, to travel. Everything in this world has a price tag on.

So whether you want it or not, you have to start to work. And the moment you get your first job, you enter the rat race. We all got to make a living and yes, living has a price to it. Shelter, food and health. These are the basics and to secure them one needs money.

The bad news is that as long as our financial system exists in its current form, these price-tags will never go away. They just grow larger. With inflation always present, you will experience that over your lifetime prices for everything around you double and triple.

It always starts with trading time for money

I started when I was 14 years old. My parents couldn’t pay me too much pocket money and sometimes cash would be short even for the simplest basics like new shoes or a jacket. So I just found a job to be able to afford what I wanted and needed. I started filling up shelves in a grocery store.

From there on, I would sacrifice every Saturday for it. 6-8 hours every Saturday morning, putting milk cartons into the shelves, sorting frozen pizzas, yoghurts, re-fill soda bottles and occasionally guiding some customers through the store. My salary was something around 6 EUR per hour if I remember correctly. I would earn 36-48 Euros for each Saturday, being paid-out in cash by the end of each week. A huge improvement to the 5-10 EUR that I would get from my parents per week.

This is how I learned to trade time for money. When I needed money, I went to work. When Saturdays earnings were not enough, I would free up an afternoon during the week and work one more day after school. Suddenly I could afford to buy new shoes, to get rid of my glasses and buy contact lenses. I had money to spend when hanging out with my friends. It seemed to be a great concept.

What I obviously didn’t think about at that time was that at some point in my life I would have to pay the rent on my own. Utilities, food, to have my own medical insurance. I didn’t think about how many hours I would need to spend in that grocery store to be able to afford all of it.

Depending on money is killing your opportunities to grow

When you grow up, before you even know it, you start trading most of your time for money. Regular work contracts in Europe have something around 35 working hours per week on them. In Asia, it’s around 48. And more than often, this one job is just enough to secure the previously mentioned basics: Shelter, food and health.

Those who want to be able to get a little more out of life start taking part-time jobs, freelance online and adding up hours of work. This is what they know, what they learned. To trade time for money. But as more and more of their time is being traded out for cash, their opportunities in other areas shrink with every traded minute. Learning new skills, discovering new passions, spending time with their loved ones. The time to do those things disappears with every traded hour. Minute by minute.

How long can you work

And the big question is, how long can you actually do this? What will happen when you get old? Will your social security be enough to live on? What if you get sick? Handicapped? When your mental ability goes down?

And how about all those things you always wanted to do in life? Going for a trip around the world, feel some wanderlust in the Swiss Alps, climbing in the Himalayas, snorkelling in Thailand, drinking Mojitos in Cuba or visiting the Empire State Building? Do you think that you will be able to pursue your dreams once you left the workforce?

We are not smart enough to consider all those things when we are young. I wasn’t smart enough then to think about the next logical step when I started to work in the grocery store. But as we get older and develop a deeper sense of logic, we certainly should be smart enough to put it into consideration, shouldn’t we?

Working is not bad – depending on work is

There is of course another way. A way to develop passive income and to stop being dependent on any job. This does not mean to stop working. Absolutely not. I can’t imagine a life without work. I want to do something. I want to work.

But I don’t want to worry about money.
I don’t want to have to work for money.
I don’t want to depend on work for money.

Those whose minds are trapped in the system won’t understand this idea. How could they? They never learned anything else. But, what if we could work for our passions, our beliefs, our aspirations and our dreams? Wouldn’t it just be something else entirely?

FIRE is all about that. About freeing up your time, your mind and your passions. Because once you reached financial independence, you can focus on things that will truly matter to you. Isn’t this a goal worth striving for?

Trading money for time

We all know what it means to trade time for money. We call it “work”. We spend our time to perform some kind of function and receive money for it. Daily, weekly, monthly. Year in and year out.

Most people get so used to it and take it that much for granted, that they seldom try to think the other way round. Trading money for time.

Trading money for time is not any new concept or idea. Most of us do it all the time without thinking about it. When we grab a coffee at Starbucks, it’s not that we just buy a coffee. In fact, we leave our money in the coffee shop for someone to take the time to prepare and serve us a coffee. When we buy a car, we pay money to save us time and effort for travelling around. When we buy groceries in a supermarket, we actually pay money not only for the goods but also for the supermarket to have arranged us a one-stop-place where we can conveniently pick up all we need in one shoot.

So if you understand the concept, you will realize and it will make sense to you that this system can be extended much further. It rationally explains, that the more money you have to trade, the more tasks you can allocate to it and get some time back.

It makes sense – especially if you got big plans

Wealthy people understand this concept perfectly, and those among us who have big plans, big ideas, and by far not enough time to tackle it all, those are the ones who should utilize it the most.

If you are an entrepreneur and want to build up a new company. If you are passionate, dedicated and can’t think of anything else but how to make your dreams come true. Wouldn’t it be a great help if you wouldn’t need to think about all those nasty daily things that one needs to do to get through the day?

Grocery shopping, cooking, cleaning the house, taking your car to the car-wash, mowing the lawn, taking care of your taxes, manage your investments, … if you could get the time back for all those routines and use it to focus on the things that matter most to you, wouldn’t that be great?

It’s not about prestige or being lazy 

People who don’t understand the concept and its value might misinterpret the idea of hiring people for those daily routines. They might think that “that rich guy is just too lazy to do the work”.

But having a housekeeper, a nanny, a gardener, a financial advisor, or a driver… for many wealthy people out there this is not about showing off to the world that they can afford it. It’s about getting back what they value the most. Time.

There is also a financial aspect to it. If you earn 100$ per hour, spending 2 hours to go grocery shopping and cooking is equal to 200$ lost. If you hire someone for 15$ per hours to do it for you, it would mean that you spend 30$ to get these tasks done, while in the meantime you have the opportunity to earn 200$. This comes down to a profit of 170$. If you see it from this point of view, then you stop thinking about why “the rich guy does it” and start thinking about why you don’t.

Time is our most precious asset

As the title of this blog goes, it’s not about money, but about time. Time is our most precious asset and the sooner this concept is understood, the sooner the concept of FIRE receives the understanding and appreciation that it deserves.

If you had your own business…

…how would you run it?

Many people dream of being their own boss. Making their own decisions. Dedicating their available time solely to their purpose, their passion and to their own, full benefit. But is this indeed the reality for an entrepreneur?

Well, as it is with everything, it depends. It depends on the type of business you want to run, on the size, reach, and scale, on your product or service, on your dependency of suppliers or contracted partners, on your team (or the lack of it), and on a thousand other points that may play a role once you decide to do your own thing. Most and of all, it will depend on your perspective and your definition of freedom.

Rule of a thumb is that the more people get involved, the more things get complicated. Whether it’s business partners, suppliers, contractors, your own team or your customers. With every person, every character who comes into play, you are losing some part of your independence.

Running a successful business means to serve others

I think it was Tim Cook who said it last year in a speech or an interview. “A truly successful product or service can only be realized by serving others.” However, serving others means, to a certain extent, to put yourself in the backseat, to figure out what those other people need and want, and to try to deliver it to them.

The thing is though that once you have a business, everyone becomes your customer.  The people who work for you. The people who work with you. And the people who buy from you. Those who work for and with you are called “internal” customers. Those who purchase your product and/or service are “external” customers. And your job as an entrepreneur is to serve them all.

Does this sound like freedom? It certainly is a step forward. By freeing yourself from a boss or a corporate structure, you will have definitely more freedom to make decisions. But at the same time, you will probably discover, that it is not what you might have originally imagined as freedom.

You will have more power when it comes to your decisions and it might feel like freedom in the beginning, when your company is small and easy to overview. But as your business grows and expands, your responsibilities grow with it. And with every percentage of growth, the percentage of your freedom starts to diminish.

The best of both worlds

Reaching financial independence means to me to stop trading time for money. Of course, I still need to have income, but I just don’t want to have to work for it. Not because I am lazy. I am a workaholic. But, as a great quote from Warren Buffett says: “If you don’t learn how to earn money while you sleep, you will have to work until you die.” And I definitely don’t want to end up that way.

There are several ways how this quote can be interpreted, but a realistic perspective is probably to assume that over your lifetime, your focus should shift from working yourself, to let others work for you. When you purchase stocks of companies and become therefore to a tiny part an owner of the respective company, you are doing just that.

As an investor and company owner, you start earning money by reaping the rewards of having other people working for you. And while you have to share these earnings with all the other shareholders, you are free from almost any responsibility towards both, internal and external customers. It is a pretty smooth way of becoming your own boss.

There are risks – but regular jobs bear risks as well

This is not to say that you wouldn’t have any risk. As a company owner, even to a small part, you carry the risk of realizing a loss if the company fails. Also, since your shares represent most probably only a tiny part of the company, you have hardly any vote in steering the companies politics or to contribute in any other way to its success – or failure.

But the degree of your freedom gets truly maximized. And the more different companies you invest in, the more your freedom is being manifested. As you diversify your portfolio, you automatically increase your risk protection and risk tolerance. Even if one company fails, if you have 20 others to support you, then your worries will be still limited.

This will become even more obvious if you draw a direct comparison with having a full-time job. When you invest, you can spread your investments over several companies and thus create multiple sources of income. If you have one full-time job, you are completely dependent on this single source of income. What happens if you lose it?

Food for thought

This is some serious food for thought. People who don’t invest will find a thousand reasons to tell you why investing is not something that regular people do. And they are right about that last part of that sentence. Especially in Europe, the amount of investors is surprisingly little compared to common folks who rely on their day-to-day jobs.

But those are the folks who get sleepless nights whenever companies start to talk about efficiencies, streamlining of processes, outsourcing, and globalization. Technological disruptions don’t excite them, because every disruption may put their livelihood in jeopardy. These are the people who constantly worry, and even more so as they get older.

And you can’t blame them, because these are the people who can’t come up with 500 Euros in cash even if any serious emergency appears in their life. I am not saying this to look down on anyone. I am saying this because people who never learned about how to handle money tend to end up in serious hardships. Despite having worked for 30 or 40 years, many fear that their retirement money won’t be enough to cover their rent and fill their fridge once they (have to) retire. We are not talking small numbers here. Surveys in Europe and the US show that the majority of our populations fall into this category.

This is in stark contrast to those who learned and understood that either having your own company or being a shareholder of another company, can significantly increase your chances for a worry-free retirement. There are no guarantees, but your chances are simply higher.

When it comes to human lives, things can easily and quickly get emotional. Investors, however, take the emotion out of the equation and simply calculate chances. Winning the lottery is not a valid form of retirement planning. Investing is. so when you get your next paycheck, put some part of it aside and start investing. Every single investment that you will do will put you a step closer to be a worry-free individual in the future.

When is the best time to retire?

If you are just about to enter (or new to) the workforce, thinking about retirement seems very far off. Not that it’s not somewhere in your head, it just seems very, very far away. But even if you already worked for a few years, you might still not be spending much time thinking about your future as a retiree.

When we are young, in school or university, nobody is really teaching us about retirement, about financial security. About the limited time that we have to prepare. And for sure, while your HR department might tell you about your options for provident fund support, they for sure won’t teach you how to prepare yourself financially in the best possible manner. It is even more sure that they won’t plant any ideas of early retirement in your head.

There are many reasons why this is a huge, missed opportunity. I would even argue that this hinders humanity on moving a giant step forward. It is a waste of resources, creativity and human potential on a scale that is impossible to estimate. Let me explain.

Asking the right question

So to start off, thinking about retirement, in general, is something that everyone should do. However, I would argue that instead of asking yourself the question about when and how to retire, it makes a lot of more sense to be asking another question: “When do you want to be financially independent?”

The idea of retirement is a very frustrating, de-motivational and overall just a negative thought structure, which clearly explains why we just don’t want to think about it unless we are forced to. Retirement is by most being perceived as one of the last check-points in your life. When, after working for 30 or 40 years, you reach that point in your life when either your body, your mind, or your countries legal structure forces you out of the workforce. Some, who thrived in their profession, might consider it a point when they draw a line to say “we had a good run, but it’s enough”. Some want to retire. Some don’t. But no matter where and in what state of mind you will find yourself, the core of every retirement is financial independence.

So if it all comes down to being financially independent, wouldn’t it make sense to reach this goal as soon as possible?

The benefits of aiming for financial independence instead of retirement

Thinking about financial independence instead of retirement changes the whole perspective, and takes out the negativity out of the equation.

For one, it doesn’t mark any specific point in your life in terms of not referring to you as being old, sick, or in any way considered to be useless by society. Because let’s face it, that is what happens at a certain age. Taking out all these negative thoughts that creep into our heads as soon as we think about the “golden age”, is turning the whole thought process around.

Secondly, financial independence can be a very motivating and encouraging tool that helps us not only to think about the last stage of our life, but that can greatly support us from a much earlier point on.

This is due to the fact that for many of us, challenges in relation to age start to show their ugly face very early on. Ask anyone who got laid off or who would like to pursue a career change and happens to be 45-50 years old. Finding a new job, a new venture at this age can be a very frustrating experience. You might suddenly realize that there are millions of younger, faster and smarter people out there who compete for the same positions. And like it or not, while you might have vast experience, your age will more than often be considered a hindrance rather than a benefit.

Being financially independent as early as possible will give you peace of mind. Knowing that you don’t need to worry about shelter, about food for you and your family and about medical support if needed, will give you the security and the opportunity to navigate through any hardship.

It will also give you opportunities to persevere in your quest for changes in your life. And, it will give you the self-confidence and advantage that you will need to outplay your younger competition.

Doing something else entirely

I hope to reach financial independence in a few years. In fact, I hope my current job to be my last, full-time-corporate assignment. I am 39 years old, the target is to be fully independent by 45, although I might stop working full-time earlier, let’s say at 42 or 43. The financial independence that I can reach by then will enable me to turn to some completely new ventures – and adventures.

I would like to pursue some opportunities that seem hard to reach for the moment. Like working for an NGO or a foundation and help to solve some problems in an area or field that require attention.

I would love to do some voluntary work in Africa or South America. I would definitely be interested in developing some startup companies that can help to shift some peoples lives in a better direction. I would also love to add a few more skills to my repertoire. A better understanding of electricity and potential products or solutions in that field. I want to learn more about renewable technologies, acquire basic coding skills and use that knowledge to find some new ideas and goals to strive for. I also like to learn to play the guitar and piano.

And I know that I am not the only one who would like to do something more with his life than just working for some company, following assignments that I might or might not agree with. Following orders just to meet the expectations of someone with an entirely different agenda… it just doesn’t feel fulfilling to me.

Just imagine, what humanity could reach if a majority of people could at some point in their life use their experience and knowledge, not for the good of some corporation, but to work on projects and ideas that are meant to solve problems and help others.

Our lives are so short and there are so many things to do, to learn and to experience. Staying all our lives in one job and waiting for that magic golden years to start just feels like a lot of missed opportunities. And I think, deep down, that is how most people feel. It may be one of the many reasons for us being reluctant on spending time to think about retirement.

Therefore, I would urge anyone to forget the idea of retirement and to replace that void with financial independence. Retirement is something to wait for, financial independence is something to strive for. After reading this article, which one would you consider making more sense?

The fastest way to get your first million

I like to keep my blog neat and simple. I like to write articles with text only, I seldom use pictures or videos. But every now and then I might encounter an interesting infographic that is worth sharing.

When it comes to the topic of money, the best place to find interesting graphics is in my humble opinion a website called Visual Capitalist. This is also the place where I encountered the following graphic:

infographic-time-to-first-million-dollarsNow the data for this graphic comes from a website that compares casinos. To be clear: I don’t endorse, recommend or promote anything that might be concerned with gambling in any way.

Having clarified that part, the data in this graphic is highly interesting. And kind of amazing. The vast majority of people who made it to the financial top gained their very first million in less than a decade from the moment of (really) trying. How did they do that? Mostly by setting up a business.

Having your own business

So evidently, the most effective way to gain financial independence is not real estate, stocks or gambling – but your own business.

This is actually not surprising. As we know, it takes money to make more money. When you start from zero, the fastest and only way to get some cash-flow started is to work for it. You might start with a regular job, but we all know that when you work for a company, even though you might get good benefits and salaries, the majority of the profits that result from your and from your teams’ actual work goes to your employer. Obviously, this is not the case when you got your own business. As you take on all related business responsibilities, you also reap the full benefits and cash-in the entire generated profits from your operation.

Shouldn’t we all strive for our own business then?

IF having your own business is granting the fastest way to riches, then this would be the right question to ask. And for many having their own business, being their own boss, it is something worth striving for.

Not to me. I invest in stocks for a simple reason. I don’t want to have to work at all. I want to reach FIRE. For me, escaping the rat race is all about reducing the amount of responsibility on my shoulders and to free up my time. When you have a business, you always take on additional responsibility and you always have to keep exchanging your time for money. I want to have the freedom to decide whether I work or not. As a business owner, you don’t really have that choice without accepting sacrifices on your income.

Furthermore, having your own business may be the fastest way to riches, but it’s probably also the hardest one. Of course, there are different types of business and you need to consider whether you just want to earn enough to get through the day, or whether you want to build wealth. Your workload might be mild if you have a small, self-sufficient thing going on. But if you strive for that million on your account, then you will have to work really, and I mean really hard, on a scale that will surpass the amount of stress and responsibility of most regular employees out there.

So it comes down to what you really want. There are many ways and opportunities to escape the rat race. But there are only a few ways that will truly align with your own expectations. For most people who become successful with their own business, the target is not FIRE. They want to work, just on their own terms. If that is your target, great. If not, then you got to find another way.

Dividend Stocks make your worries go away

Over the last couple of months, I have started to reduce my social media presence and to close many of my online accounts. My Facebook account has been deleted (I seriously didn’t miss it a single day), and the same thing happened to my Twitter account and AirBnB. As I move closer towards my goal of FIRE, I plan to reduce my social media presence to a bare minimum. In the end, this blog… and possibly also my LinkedIn account for business purposes shall remain. Most others will be got to go.

But speaking of LinkedIn, I have recently noted a larger amount of posts where people are actively and openly seeking jobs, while also publicly stating that they have been unemployed for a couple of months. Some of them even go as far as to explain that they can’t pay for their children’s schools anymore, or to pay rent and needed to sell their house or downsize their condos.

Some of those CVs out there that I took a look at are actually quite impressive. From experienced, well-traveled professionals who reached tremendous success over the years, to aspiring intellectuals who surely made an impact in their previous organizations. And yet it seems that while they grew older, their age outweighs their experience. It just gets tougher to get hired, especially when you reach your 50s.

Prepare yourself

There are tons of situations why and how you might lose your job. You could debate on what is right or wrong, whether something is fair or not, and who to blame for what happens. Or you can prepare yourself. I like to prepare myself because blaming and guessing or discussing the issue at hand will probably not solve my problem. At least not as fast as I need it to get solved.

For me, investing in dividend-paying stocks is one pillar that I use to build my protection on. Due to the nature of my job, I grew with this challenge in mind since the beginning of my career. Every year or two I have to find a new hotel to work for, or worry whether my contract gets extended. Working as an expat in Asia comes with tremendous benefits and financial advantages, but the price to pay is a huge lack of security. Because every contract is limited to only 1 or 2 years and most come without any retirement pre-cautions, one can never truly relax and consider things to go well forever.

This is why securing several independent streams of income is crucial, and why the idea of financial freedom has been engraved in my DNA. I got to prepare myself for the worst-case scenario. I am 39 years old now and just signed another 2-year contract. Looking at my colleagues and other professionals in my industry, I know that 45 is the magic number when things will start to get really tough for me. Therefore I need to be ready for that before this challenge kicks in.

Dividend-paying stocks are a great source of income

It takes some time to play out well, but dividend-paying stocks are an amazing opportunity to benefit from our financial system. Buying the right stocks can result in tremendous advantages and a strong, re-occurring source of income.

When I was significantly younger, I didn’t really understand the power of what appeared to me “small yields”. 2% or 3%… this means that when I put 1.000 Euros into some company shares, I will get only 20-30 Euros back every year? Laughable.

What I didn’t appreciate at that time, was that not only do these amounts compound over a long period but also that those well-run companies tend to increase their payouts year-on-year.

Why is this important? Let me give you an amazing example. Warren Buffett is invested in Coca-Cola for a very long period through his company, Berkshire Hathaway. Over the years, Coca-Cola kept increasing its dividend payout. Year on year. The result: The yield on cost for Warren Buffett is now a stunning 62%!

This means that every year the stock returns him 62% of his initial investment. Getting back to our investment thesis of 1.000 Euros, this means that every year now he gets 620 Euros back in dividend payments for every 1.000 Euros that have been invested.

There is no hocus-pocus there, it’s just very basic and simple mathematics. And coca-cola is not the only company out there with such stunning results. Look no further than the brands you know well: Apple, Starbucks, Microsoft, Daimler, Shell… the opportunities are endless.

Start investing and stop worrying

No matter what your job or your business is, setting up a solid stock portfolio with dividend-paying stocks is a smart thing to do. While you are still working, it will increase your income. When you have no job, it will secure your most urgent needs. And when you plan to retire, you might be able to do so without even touching your savings.

But even more importantly, having another stream of income will put your mind at ease. Because even if you should lose your job, you will still have cash coming in. You will be able to buy food, and if you invested enough even pay your rent or your children’s school.

What happens if there is a crash in the stock market? Keep your cool, lean back and wait. The most reliable dividend stocks continued paying dividends even during the worst time on the stock market. Shell i.e. never lowered their dividend since the II. World War! Of course, there is some risk to every company and every stock, but that is why you need to diversify and purchase several stocks of different companies.

Do this especially when times are good, so you worry less when times turn bad.

Disclosure: I own shares of Apple, Daimler, and Shell at the time of writing. This article doesn’t represent investment advice. Please ensure to do your own due diligence before making any investment decisions.

The Power of Cash-Flow

Conservative investors or people who believe that stocks are too risky often prefer to put their hard earned money in real estate. The usual arguments are always the same and go something along those lines:

  • It’s a “real” asset, meaning that you can touch it, you can see it, you can visit it or live in it
  • It’s a safe investment because real estate rarely loses value
  • It’s generating regular and re-occurring income on a predictable basis

I will get on all three points but the focus will be on the last one: Generating regular and re-occurring income on a predictable basis. This is what we call cash-flow, and I will tell you why it’s such a powerful tool.

A “real” asset

This is a very true point and among the main reasons why people like real estate. Probably most of us have this little dream, of having our own place that we call home. Where we don’t need to pay rent, where we can do what we want and how we want it. Where the only limitation to our creativity and our wish on how to shape it is only our own imagination and the available budget to follow through on it.

So let me tell you first that this is, and probably will remain a dream. The sheer amount of regulations imposed on house construction, building permits, safety requirements, and local rules & regulations will restrict how your house has to be shaped, what building material you are allowed to use, where the doors and windows need to be placed and much more. So, there will be many things to restrict you, and you won’t be able to decide on your own every single part of your dream. You still got to follow some rules.

Second, while it is a so-called “hard” or “physical” asset, it comes with a few flaws that are worth mentioning and required to think about. While you might save money on rent, there are tons of other considerable costs that will strongly diminish your return on investment and may even put you in financial trouble if you are not well prepared for them.

Broken toilets, pipes, roofs, and floors are just one part of it. But new legislation or state laws might come in at very unfortunate moments and force you to spend much more than you bargained for. For example, imagine that the government decided that all houses require to become more energy efficient and thus you will have to upgrade the entire house insulation. A toilet or a pipe might set you back only a few hundred Euros, but a broken roof or house insulation will quickly go to the thousands.

Ever-increasing value

This one doesn’t require too much explanation, I mean the last housing crisis is not that far back. So yes, there is a real risk that real estate also may lose value. But while this point might still be debatable, the more interesting challenge for real estate is about the trading of the asset itself.

Buying and selling real estate is just hard work. It’s not easy at all. It’s not easy to initiate the sales, not easy to find buyers, not easy to negotiate the price and certainly not easy to process the whole thing with banks and all involved parties. Because while for some areas it might be easy to find a place to buy, when it comes to selling the property things can turn really challenging. Finding a buyer takes time, negotiating the price takes time. And the result is everything but certain.

Therefore, and to sum it up, the promised or expected value increase might turn out very different once you deduct all the cost you had to cover over the years holding it, and on top of that, if your few potential buyers won’t be willing to pay your expected price.

It’s generating a steady cash-flow

Whether you save money on rent or cash in rent from your tenants, real estate generates solid and predictable cash-flows every single month. And depending on the size, location and attractiveness of the property, it may be some quite serious money.

Cash-flow is great for a few reasons. For one, it makes you feel to be in control over your asset, it feels safe and very predictable, and you see the result of your investment immediately on your bank account.

Furthermore, due to those regular payments, you are able to manage your cash more actively and spent or re-invest on a frequent and dependable basis. The greatest advantage of solid cash-flows is your control over the money and many real estate investors consider it therefore superior to owning stocks.

There is another way

I got to admit that cash-flow is probably one of THE arguments to bring to the table on any investment discussion. It simply represents everything we expect from an investment: Receiving cash back straight to your account.

However, I argue that you can reach this with stocks in a much better, smarter, faster and easier way, and you are still able to choose whether you invest in companies or real estate.

Dividends also generate cash-flow

To start off, most company stocks that I invest in pay dividends. That’s my cash-flow and it’s also very important to me. Not only does it feel good to receive cash regularly, but even more it allows me to re-invest my earnings. This means that I can take advantage of upcoming opportunities to either reduce my investment costs (cost-average-effect) or furthermore increase my earnings by adding more shares of the same or another company. No matter which of these 2 options I choose, the result will be the same: The number of my shares will increase and so will the amount of my next dividend payment(s). Albert Einstein called it the 8th world-wonder and we all know it from our school-days as the 2 magic words: Compound interest.

Dividend-paying companies have all different policies and they tend to be also very diverse, depending on the country and company profile. But even the very average investor can manage to buy stocks to receive dividends every single month. Hell, just take a look at one of my previous articles where I show you how to get paid dividends every 2nd week!

Mix the best of both worlds – with REITs

If you think that real estates are still the more secure option then you can do even a much smarter thing that will combine the benefits of regular shares with the advantage of the benefits of real-estate by investing in so-called REITs (Real Estate Investment Trusts). Not only do they distribute a large chunk of their profits in the form of dividends, but also you won’t need to bother with all the physical and hard work that always comes with any physical property that you own. Broken roofs or new regulations won’t be your headache and on top of that, your risk will be spread across a significant amount of properties, as most REITs tend to manage not just one or two, but hundreds of different objects.

Investing in REITs won’t give you the feeling of owning a “real” asset, but it will take away all the hard work, balance your risk, and finally also remove all the trading obstacles. Because REITs can be traded on the stock exchange, finding a buyer or seller is as easy as it possibly can be. Just place the order and watch it being processed in a blink of your eye. It’s so easy.

Last but not least and a very, very, VERY important point to me: You can invest with as little as your wallet lets you. There is no need to talk to banks, take on hefty loans and keep paying back for the next 20-30 years. Borrowing money is called leverage, and it’s a serious thing. As our mastermind Warren Buffett famously said, leverage is the single thing that can crush any investor and you got to be really smart how to use it.

I don’t consider myself smart enough for that, so I prefer to stay away from leverage and instead invest only the money that I have available at the time of my choice.

It’s all about passive income

My personal aim is FIRE – and it means to generate sufficient passive income at some point so I really don’t need to do ANYTHING – unless I want to. That’s what the word “passive” stands for.

Buying and managing hard assets is not matching my definition of passive income. Buying a house or condo requires a lot of work, dedication, and responsibility. All the things that I want to get rid off. Therefore, stocks and REITs are for me a much more desirable solution.

This is, by the way, the reason why financial advisors need to evaluate your character, risk factor and expectations before helping you on making an investing decision. So you might want to ask yourself now: What kind of investor are you?