Thursday, 25 September 2014

My Financial Journey 2 - Saving for a "Goose" Account


In my last post, I promised to talk more about the second book which made a great impact on me.  Here's a picture of it, because I'm pretty sure not many may have heard of the author, Bodo Schafer.  The full title of the book is, "The Road to Financial Freedom - Your First Million in Seven Years"

At 26 years old, German Bodo Schafer became bankrupt, owed creditors 75 000 marks. After two and a half years, for the first time in his life earned 100,000 marks a month, and then his first million.  He was able to live off the interest of his capital at age 30.   As I am typing this, I googled and realized he is still a financial coach today and his book has apparently sold over 10 million copies (not the 1.5 million that you see on my book cover).  OK, he is still around and not some fly-by-night author. Phew. 

The first key takeaway I applied from his book was to set up a separate savings account, named the "Goose" Account.  Just as in the Aesop's fable, the moral of the story is to never kill the goose that lays the golden egg. Similarly, one is not allowed to touch the money in this account except for the sole purpose of investment.   This account was, as described in his words, one that "you should pay yourself first, before you pay anyone else"! The target he recommended was 10% of income but I decided to top that to 30% and challenged ourselves to do so.

(Having said that, please note too that he recommends having an emergency fund, which we already have by then.)

What is this Goose Account for?  It's money to invest according to the rules he has set out in his book, which convinced me that stocks was the mode of investment that has proven itself over long periods of time.  What was needed was an emotion-less buying at crises times (which come about in cycles) and holding on for at least 2-5 years.  To do that, I knew we had to build up our ammunition war-chest to take advantage of sell-downs in the stock market.  And to have holding power meant we needed to have our emergency fund as well as the Goose account, or money that we are willing to let go for a few years.

Very simply, Bodo said, the only way to increase savings was either to earn more or spend less (or both ideally).  And the way to go about it is with urgency.  

For the first method "earn more", I knew I wouldn't be getting bonuses or increments till year end. It was also not entirely up to me, given that we had just begun to climb the career ladder.  The second method "spend less" seemed more attainable, since it meant taking small but immediate actions everyday.  I knew too that I needed little wins each day to keep me going.

I chose to work immediately on the latter, knowing full well that the word "SAVE" was deemed by some to be a four-letter word and "cheapo" was the label associated with people who did that.  But I had a bigger goal, so these are but small problems. 

So, I went about setting up a spreadsheet using my rudimentary Excel skills,  I scrubbed through all our expenses, religiously recording every dollar we spent.  To remember my expenses, I saved every receipt in my wallet.  Even my husband would pass me his. Come to think of it, that's what he does even to this day.

For expenses that didn't come with receipts, I would scribble on a piece of paper kept in my wallet. I deliberately placed lesser cash in my wallet so as to put myself into what I later called a "self-imposed deprivation" mode.  It was akin to having a lower credit limit on your credit card, I suppose, although I never really had problems with credit card debts.  

I was not tempted to use credit cards simply because the places I frequented were coffeeshops, food courts and neighbourhood stores which don't accept credit cards anyway.  I taught or nagged everyone at home to switch off the lights, save water etc etc.  I was probably a pain to them. 

After a few months , I put them into broad categories and analysed them.  I was very serious about it. I was curious to see where our money was going to.  I questioned my expenses and asked if there was any way to cut down on some of my spending. I brainstormed and made a list of quick-wins:
-  ask for and get hand-me-downs for childrens' toys and clothes (they outgrow them quickly anyway), 
-  delay purchases until there was a sale 
-  not buy at all,
-  borrow things if it's just for a one-time use, 
-  less restaurant meals with colleagues,
-  switch to a cheaper telco plan,
-  cook simple meals at home more,
-  family outings to "free" or "cheap" places like parks, libraries, public pools,
-  make simple alterations to rarely-worn clothes to wear them often
-  self-drive hols to Malaysia instead of flight holidays
-  avoid taxi rides...
The list grew and grew as new ideas came.   It was a list to maintain a lifestyle I deemed fulfilling yet in  thrifty ways.  

It was like a game to me, but was it easy?  Not entirely.

The most difficult part was when it involved other people - two groups of people especially: my colleagues and my children, but for very different reasons.  My colleagues who loved to "reward" themselves because after all, we're already working so hard already, would often ask me along to shop or eat with them.  It was difficult to turn them down.  I would call this "external" pressure.

As for my children, they were too young to know better.  In fact, it was me the mother who was feeling guilty now and then when I "deprived" them of things that I knew other parents would give their children freely.  I call this: "internal pressure" and this is frankly, the harder to tackle for me. I often question if I was depriving them of a happy childhood because of my "selfish" goals. 

There were times I wanted to relent but I believed I didn't.  And the great thing was, because I didn't, the pressure became less and less, in ways I never imagined.  I shall touch on these in my next post but let me end with this little extract from Bodo's book on Warren Buffett, my long-time hero:

"Warren Buffett started as a newspaper boy - and saved.  He held on to every dollar he could hold on to.  He bought practically nothing, because he hardly ever saw the money that he should spend.  He always saw the balance that he would be worth in the future." 

Have fun building your Goose Account!

Tuesday, 23 September 2014

My Financial Journey 1 - Begin with Faith


This is a series of posts in response to a new and younger friend who is on the verge of signing up for a savings plan. I had told him earlier that I don't believe in savings plans because it is something which runs against my belief that I am my best money manager.  He of course then asked me how to go about investing.   

A straightforward question, isn't it? 

Truth be told, I was surprised I could not come up with a simple answer.  I mulled over it for a long time, wondering how I should sequence my reply.  Should I go straight to the technical aspects?  That wouldn't seem right because that alone would not be enough for one to stay on this path. I could teach him to budget, to look for good stocks etc. But why would he do it?  Shouldn't he leave it to the pros?

So, I decided.  I would have to put myself back in time, to the time when I was just like him, young and working full-time, with a little bit of savings stashed away but not knowing what to do about it.  It has been many years since the day I decided to take my financial future in my own hands.  More than 15 years, I believe.  I hope my memory serves me well, but if it doesn't and my facts seemed a bit muddled, please forgive me.  

It all started in dribs and drabs, no "eureka" or definitive moment per se.  But it definitely came about because of a new "belief" or I would even say, "faith" that was slowly taking shape over my long periods of reading.  I was asking myself questions like:"What if I didn't want to work till retirement?", "Was there a way to be financially free earlier, say around age 40?" or "Do you really have to be born rich to achieve financial freedom?".  All these questions nagged me and I began seeking answers through the method I knew best - reading.  I wanted to get out of the rat race.

The first books that left a huge impression on me were "Rich Dad, Poor Dad" and "The CashFlow Quadrant" by Robert Kiyosaki.  They seemed like crazily simple books and had their fair share of critics.  I even remembered feeling a little "embarrassed" reading them on the train.  But something in them made a lot of sense to me.  He gave me insights into another way of thinking about my financial situation.  We have all been told to study hard, get a job, and that everything would be fine if we did so.  Like him, something in me told me this is not the way.

"Rich Dad, Poor Dad" taught me to make money work for me, instead of me working for money.  The author opened my eyes to the fact that by being an employee, I was working partly for the government (in the form of taxes), for the banks (in the form of loan interest), for others (in the form of bills) and subjecting my financial future to the vagaries of retrenchment or job disillusionment. I was relieved to learn that it's ok to be a "coward" and to be afraid to lose money, because that was what I was. The trick was, he said, to "start young" -  a piece of advice often heard but seldom heeded.

I was deeply enamoured but equally bewildered by the concept of passive income - money that you earn even without you actually working!   It seemed like an incredulous concept at that point.  I also became convinced that wealth, not the type you flaunt with branded gadgets or flashy cars, is defined by "a person's ability to survive X number of days forward without work". 

I immediately went on to devour his second book, "The CashFlow Quadrant".

For those who haven't read this book, Robert Kiyosaki's CashFlow quadrant namely consists of: E (Employee), S (Self-employed), B (Business Owner) and I (Investor). Very simply put, most of us are E's but E's do not end up rich.  It's the B's and I's who do.  

I calculated how much I would earn as a civil servant, given the usual "government" raises I would get every year, assuming I stayed working for many years.  I also added what my husband potentially could earn.  I came to a rather disappointing figure after deducting projected expenses.  Being an employee (E) was not going to cut it for me in the long run. I do not relish working till the age of 62.  What was left to do was either to be a B (Business Owner) or I (Investor).  It was by simple elimination that I decided I needed somehow to be an Investor.  Property seemed too expensive for us and so what seemed plausible as investment vehicles were stocks.  

But there was a huge problem.  We didn't have the money and we didn't know how.  We both came from very modest backgrounds.  My husband is the son of a taxi driver and housewife and me, well, much worse.  Both my parents could not support themselves financially and my eldest sister had to start work earlier to help her younger siblings get through school. 

We also didn't have a very good track record.  Following the herd, my husband and I had bought into "penny stocks" based on stock tips or just gut feel.  And were also clobbered by CLOB (pun intended) when it was declared "illegal".  We were burnt in the stock market.  Thankfully though, there wasn't much to burn.  

Luckily, another book helped me see the light.  I chanced upon it during one of my regular lunchtime escapes to the bookstore near my workplace.  

Unlike the two books before, this was a relatively unknown book, "The Road to Financial Freedom" by Bodo Schafer.  Schafer is a German millionaire, author and "money coach", who was able to live off the interest from his capital by the time he was 30 years old, so says the book intro.  Frankly, I didn't check his credentials.  I was that "gullible", you may say.  Thankfully, his book taught me things that became really useful later.  I shall touch about his book in greater detail in my next post because it has a much greater impact on me, in terms of the actions I took. 

Let me end this post with one caveat: Only you are in charge of your own financial future.

I have deliberately written in a very candid manner to show three things: 1) my financial journey was not a linear learning curve - learning came from scattered sources. Mistakes were made, we learnt.  We make new mistakes, we learn again, 2) You do need a lot of faith if you choose this path and a very supportive partner/spouse to journey with you and lastly 3) Believe that the world is here to help you when you are ready. It's important to believe because if not, you will stop searching. 

In my next post, I will share on the book which literally changed my everyday actions.