Posted in Budgeting, Investing, Personal finance, Savings

Who moved my cheese? How to deal with changes in financial plans

The title is taken from a famous book as below. Even though it is meant to be a management philosophy, it applies to the subject of personal finance as well. 

Financial Planning does not work? 

There is a proverb in the military – Plans are good till the first bullet is fired.

Some of us who are obsessed about managing or advising on personal finance can go really overboard with planning. Have you heard about those retirement numbers, college planning or even financial freedom number?

While long term planning is good, problem with personal finance is that it is a not a standalone aspect of your life. It impacts and gets impacted by life events – birth/death/marriage/divorce in the family, choice of career or college, changing goals and circumstances and finally your own priorities may change.

How my circumstances kept throwing my plan astray

Lets take an example in my case, as I transitioned from India to US.

Till 2005, I did not know a zilch about managing finances. In fact I was pretty bad at it, just enjoying my life and like many, used to blow up my entire paycheck in frivolous expenses, needless shopping and eating out. So in a nutshell there was no plan.

Then in 2005, I decided I can at least start investing some money out of my paycheck. Good plan but was it anything long term? No it was too flaky as I jumped from one hot fund (mutual fund) to another. This was the time when the Mutual Fund and Private Insurance industry was taking off in India in a big way. I also lost money investing in an insurance plan (actually a bad plan) that was masquerading as investment.

Beware of ripoffs

Eventually as I got better with finances, I actually created a long term plan complete with everything – retirement fund, children’s education fund, vacation fund and corresponding projections several years into the future. I built separate portfolios for each, and tracked them to utmost precision even calculating year after year growth.

However God had other plans for the family. In a series of unfavorable health and personal issues, we decided to move out of India at least for a few years and relocated to US.

This obviously altered my earlier plans completely, since my place of work and source of income changed. The retirement numbers started to look different, the college education fund seemed minuscule when compared to US college costs and all the plans are to be redone again.

Well what do I plan for now? I don’t even know whether I am going to move back to India again in few years or not.

In a global economy mobility is a part of life and no one stays in the same place or country throughout their working life. Moreover as you move, international taxation is another beast which can alter your long term investments (like tax sheltered) into immediately taxable entities. 

Plan to adapt, not adapt to a rigid plan

So finally you have to take into account an ever changing plan, moving from Plan A to Plan B and keep adjusting according to your circumstances.

When I read about estimating expenses at retirement, I wonder how can someone calculate that? Following factors and more can make it completely non-deterministic.

  1. Where will I retire? Different cities and countries have vastly different living and medical costs.
  2. Will it be only me and my wife? What if the children stay with us?
  3. What do I want to do in retirement? Will I work or travel more?
  4. What health condition will I be in?
  5. What other obligations (including social and family) will I have then?

So projecting your expenses at retirement based on today’s lifestyle is like predicting the weather 20 years from now, based on 20 years of past data.

Same goes for College funding. Even if you are saving in 529 or other accounts, do you have a goal or a number in mind? How do you arrive at a number for college costs, when the costs are going up every year? Isn’t that also as variable as retirement? The following factors come to my mind immediately.

  1. Do you know what career will your 5 year old choose when he/she turns 16-18?
  2. Do you know which college will she go to? Ivy Leagues, State or Community colleges? Are the costs not vastly different?
  3. Are you even going to stay in the same state or country when the time comes for college?

In today’s volatile world, planning too far away (more than 3-5 years) is futile.

Planning based on solid principles, not circumstances

The best way to plan your finances is to look at your current goals, aspirations and develop good money habits.

Below steps will help you be in control and act nimbly to adapt to changing situations.

  1. Live below your means – no matter which country or which circumstance you are in, you can always strive for this and become better. Living below your means is common sense, yet so uncommon. 
  2. Budget – Goal based budgeting – This is very important as it ensures you have control over the cash inflows and outflows. Again something which does not change with your place of work or future plans.
  3. Invest with simplicityFind investments that are easy to understand. Index funds, mutual funds, Real estate, CDs and savings accounts.
  4. Keep some portion of portfolio liquid – Sometimes this can be called an Emergency Fund or Contingency Fund. No matter what you call it, it is useful. When I moved from India, I kept a portion of my India portfolio into Fixed Deposits (similar to CDs here in US) and then built up an emergency fund in US too. This gives me option in both places if I decide to just leave work for some time or get laid off. 
  5. Remain consumer debt free – This is also related to freedom. Except for one mortgage in US, I am completely debt-free otherwise or rather bad-debt-free. Being debt free coupled with a portion of portfolio in cash, gives you plentiful of options to enjoy life at your own terms. 
  6. Keep investing for long term – Unless your investments are in countries with troublesome political climate, long term investments (a part of the portfolio) can be left to grow with time. Long term investments work on the principle – its not market timing, but time in the market that will reward your investments. 

To plan and execute above steps in the most efficient way, read the following posts.

Five components of a personal finance system

The SAFE plan – Simple, Automated, Flexible and Efficient

Finally do plan but let life change it

Money decisions should not dictate all your life’s decisions. Money is only a tool to live a good life.

Let your financial plan adapt to your own goals and aspirations, rather than rigidly follow personal finance gurus and templates. 

If someone screams in YouTube to pay off mortgage, it does not mean you have to follow as your plans may be completely different. Similarly you may not fall for all those high reward promising credit cards if you are not going to use those benefits.

A chess player does not know what the board will look like after the next few moves. 

person playing chess
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Posted in Personal finance

Financial Freedom : FIRE or WATER

F.I.R.E – Need I explain it? Everyone who is interested in reading about personal finance (and hence this blog) is already familiar with the term. In case you do not know, here it is:

Financial Independence Retire Early. 

The concept is very simple, where you accumulate a target amount (net worth) or cash flow, through which you can substitute your working income and retire earlier than usual. 

The main motivation of FIRE enthusiasts for retiring early is to stop working in a 9-5 routine and be able to do what you want, like travel or pursue your hobbies.

However like everything, there are two sides to the Financial Independence coin. One side is retire early as in F.I.R.E, the other is retire slow and enjoy working as long as you can. 

I decided to write this blog post to unravel my thoughts on this.

While the FIRE approach seems lucrative to achieve, there are some disadvantages to that approach.

Similarly the retire slow approach may work well for most people, but it needs to be done with discipline so that as you grow old, the work does not become a necessity to fund liabilities.

With disciplined and good personal finance habits, you can glide into retirement and enjoy the journey as well as the time in retirement. 

Since the first one is called FIRE, metaphorically lets call the second one WATER.

Let me first explain why the first one is more like a FIRE and may have disastrous consequences if not handled properly.

  1. One of the main strategies of achieving FIRE is to earn, save and invest aggressively. Most of the times it means extreme sacrifice (read minimalism) to save 50-70% of the income to reach that magical number.
    • For the family too, the pursuit of FIRE can mean unnecessary sacrifices to not being able to afford (at least artificially) a nice vacation, car, a restaurant meal or even a latte.
  2. I have read and watched some couples on YouTube who are pursuing FIRE. A few characteristics are:
    • They are always looking for deals and the cheapest way to get things done.
    • They are too focused on money, possibly ignoring more important aspects like career growth. For example, a young professional in his/her 20’s, if so focused on earning more will fail to build marketable skills, and will jump from one domain to another as soon as he/she smells more money.
    • Numbers are good, but if every daily action of theirs is dedicated towards achieving that magic number in a bank, I am not sure how enjoyable that journey is.
    • Finally ask yourself: Is that all I am excited about?
  3. Lets say a person reaches his/her number, and now retires early.
    • In the pursuit of money, he/she would not have done what he/she was naturally good at. Imagine if every artist, every scientist, every sportsman just obsessed about financial freedom and retiring early.
    • Once he/she retires, the person would have lost the age and opportunity to work on something really satisfying. In many 9-5 jobs, people are doing great things and achieving life changing experiences for themselves and for others. For example, people working in the high-tech industry who are changing the world everyday should not think about retiring soon.

On the contrary to F.I.R.E, if you work in your field with passion and make the money gradually (making it a secondary factor instead), you would have still achieved F.I.R.E but in the slow and steady way. Disciplined personal finance is neither about aggressively chasing a number nor indulging in unnecessary luxuries.

This slow, steady wealth building and never retire attitude can be compared to WATER. 

Like a body of water – it builds up from a small stream travelling through the river, and then into a mighty ocean, but nature does not let it stop there. The ocean can be considered the final destination, but an ocean never retires. It carries on its work day in and day out, sustaining a diverse form of life and occupying 70% of the earth, controlling huge natural consequences for the planet. That’s the freedom of the ocean.

In this WATER way, you work with all your talents and grow yourself bit by bit everyday. As your talent and experience grows, you achieve big things and gain pride in yourself when you look back. It makes you do more and achieve new goals and heights in your job and business. This is how most entrepreneurs (and intrapreneurs) live their life. They move from 9-5 jobs to opening businesses and do not intend to stop ever. 

There is no retirement in the WATER approach. You keep flowing always like a river, then get into an ocean and still carry on till death stops you.

Note that in this approach, there is no money number and no mention of how you can earn more, negotiate a higher salary and likes. Money will follow as you gain more experience and achievements. 

That does not mean though you should not save and invest. You can still lead a comfortable life and grow your net worth while indulging in meaningful luxuries. It makes the journey much more worthwhile and since there is no hard destination or number, you learn to enjoy the journey more.

The Net worth vs. Cash flow debate

For me, I don’t know if ever I will reach my magic number (I know mine though). Hurrying and worrying about it will not make my life better.

I will rather focus on working hard, learning, managing my money and writing about my experiences and thoughts in this blog. In the process I develop money systems and principles that I like to share. 

Five components of a personal finance system

The Starter Kit

I will hopefully never have to say “I have reached my number, and retired.”

I will keep flowing and see you in the next post. 

nature forest waves trees
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