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Your everyday behavioural choices will make a big difference to your ability to retire early and wealthy says Elizabeth Kerr

Personal Finance
Your everyday behavioural choices will make a big difference to your ability to retire early and wealthy says Elizabeth Kerr
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By Elizabeth Kerr

So what is this all about anyway and why do I care so much about how you spend your own money?

The answer is because I think that retirement need not be something you wait until you are in your 60s to achieve.

I think that if we drop all the financial drama, keep things simple and we talk honestly here together; then planning for an early retirement wont be just for the lotto winners and technology whiz kids.

Additionally I think that unless you are responsible for inventing a product or service that everyone needs in their lives then you don't have the right to rest on your financial laurels expecting to be continually employed until 65.

So I guess you could say my care is two-fold. I think having an income shouldn’t be taken for granted, so you should plan to retire as soon as possible just to be on the safe side.

It sounds harsh but your employment luck could run out at any time.

We assume that when we start our first job that it's going to pay a basic wage, and then we assume that if we work hard (or for some just keep showing up each day) that eventually that basic wage will grow, so we don't worry about saving too much because we will earn more eventually, so we defer saving until then.

But the problem is that by the time the more money starts coming in we have already increased our expectations of what we think we deserve to have and do with our money that the extra pay just gets swallowed up in gym membership fees, car loans, expensive coffees, pricey hair cuts, credit card interest, hire purchase or designer clothes.

It is this behaviour that separates the aspiring middle class from the wealthy in my opinion.

Let me make a typical example that I see all the time.

A student finishes their degree and gets an internship for a global firm based in the city.

The first thing that they need to acknowledge (but don’t) is that they are working with people who have been working for a few years or more so their earnings aren't going to allow them to spend like they do.

They are interns ... they are meant to look and behave differently ... no less diligently ... just differently.

But they forget that and in an effort to keep up they buy the designer branded suits and shoes to look the part and to show everyone how apparently successful they have become. Out of laziness they buy lunches out every day, take colleagues out for coffee and shout a few rounds on a Friday afternoon.

When they begin working longer hours they suddenly must have a car – it has to be a late model European car as no one of their decree now would be seen dead in anything older than 5 years. They drive this car into the city and pay handsomely to have it parked for at least 10 hours each day. To rub salt into their financial wounds they soon finds that this lifestyle is turning them into porky-pig so they pay a premium for the privilege of sweating in the nearest gym to their workplace.

When their monthly salary doesn't cover all of this they put it on credit cards and take to hire purchase like ducks to water thinking that soon they will be up for a promotion and can pay it all off then (besides they want to collect the Airpoints and hire purchase is interest free for 36 months ... right?).

But their luck is bound to run out well before their feelings of entitlement do.

All firms have ebbs and flows of business like any other and a companys’ projects come and go. Redundancies, restructures and time on the bench are as common as white bread.

If they were thinking before spending they might have realised how foolish it is to hedge bets on future income and might have done things a bit differently.

They could have moved to walking/bike distance closer to work thus negating the need for a car, car parking and an expensive gym membership fee.

They might have made lunches each day and been choosy about their attire going for clothes which made them look smart but not bankrupt their internship income.

I'm not saying they can't participate, but I'm suggesting they think first and put away more for the day when their luck runs out – for when their boss shouts "last on first off" from the corner office and they are jobless.

It doesn't just happen to those who are wearing suits or young and starting out. It happens to specially skilled and older employees as well. Every week there is a news report of a company closing/downsizing and/or sending manufacturing off shore. It’s no use whinging and moaning about this it’s just the ebbs and flows of business whether you personally like it or not.

The skills required in the workplace change so frequently that one can't be expected to keep up with the pace and the only protection anyone has is to prepare for when their luck runs out.

My husband started his career doing coding that no one even learns about now. He currently does a job that didn't even exist 8 years ago. He doubts it will exist in 10 years time either and instead will morph into another type of role for which he will be too old and seemingly fuddy-duddy to do.

Let's be honest, the drive and ambition of gen-y seems to be more attractive to employers than the cautious guidance of an older dude. (Again, no matter how much we want to argue the pros and cons of this ... It's just the way it is ... Not many grey haired interns about these days are there? ... Enough said!)

So my point in all this is that the young and the old can't afford to rest on their laurels because the time will come when luck does run out.

Our world now moves too quickly and the requirements of employees change with every year so it is plainly foolish to expect at you will a). be employed and b). that your earnings will continue to increase.

The only option you have is to gift yourself your own Golden Watch.

If you prepare as though you are going to be unemployed at any time then you will be just fine.

You can do this by paying close attention to your lifestyle and keeping your expenses low, investing what’s left responsibly and preparing for the day when you can live off the passive income from your personal money machine.

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31 Comments

Savings and investment has nothing to do with Luck .

Follow some comonsense and you cant go wrong .

Stay away from investing in  things that are purely specualtive unless you are using money you can afford to lose.

Stay away from things you dont understand , or cannot go and see , or which have never posted a profit ( Those are for people taking bsunes risks , not invesotrs saving fr retirement ).

Dont ever buy shares  that dont pay a dividend ( they normally fail or go out of fashion )

Make sure the shares you buy are in a business with real tangible assets and produce the things that  people need , like food , oil , minerals , banks , life  insurance , and the like .

Irrespective of who you are , you need to save a tithe (10% ) of what you earn and salt it away .

The investments should be spread equally between property (own home ) , equities / shares , and cash .

 

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Buy shares in companies that deal with water and rubbish (waste management). And stay way from those in the business of property investment; there are quite a few clones from Blue Chip

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Do not take advice from gurus.

CM Where did you get your expertise from?

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From some crazy website interest.co.nz

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Hi Boatman, thanks for your comment.  I'm going to share my view on most of what you have listed in the coming weeks so stay tuned and keep talking to me.    Towards the end there you said need to save a tithe and salt it away.   Then you went onto talking about investment diversity.  Just so I'm clear, are you referring to saving 10% for tithing (defined as giving to churches or taxes) or 10% for savings towards your personal money machine?

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Yep. If you have a strong interest in a particular sport or a hobby then the desire to "keep up with the Joneses" or the urge to spend money in order to be popular just isn't there.

 

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Elizabeth your last sentence says it all. Well done.

It's not a big secret yet so many avoid the obvious.

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Thanks Neili.   Are you using a 4% SWR method/mix of other approaches to fund your early retirement?

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I don't strictly follow any SWR but I probably end up at about 2% . I  thought that I would stop saving when I hit my FU number but it seems that I have a saving gene..

 I imagine that as I get older I will use a greater SWR.

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'"You can do this by paying close attention to your lifestyle and keeping your expenses low, investing what’s left responsibly and preparing for the day when you can live off the passive income from your personal money machine.''

Of course, you can take this to extremes. From my personal experience on being born pre-WW2 is that you can have difficulty breaking out the other side and now not being able to spend all of the retirement income. Yes, I do not want or need a Ferrari.

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I got a couple of Ferraris..  What's wrong with owning some fast cars?

OK.. I got them for $6.99 each from Shell station.. now that Ferrari has stopped their association with Shell, it's going to be worth a lot more, like $10 each..  not bad investment.

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Thank you Basel Brush.  Some people do take spending and savings to extremes.   I have a column in the pipeline about this very topic.   From your comment it sounds like you would have some valuable feedback to share on this then.

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Ah the BAU scenario...

regards

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Hi Steven, this is the third time you've written that.   What exactly are you trying to say?

 

 

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You are in dangerous territory,'stop feeding the animals'.  oh, and never mention housing.

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Ha ha ha thanks AndrewJ and NZCoolie.  Noted!   

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The "Micawber Strategy" applies.

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Yes.  I particularly like the part about there being consequences to financial decisions.

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I think it’s going to be a common theme in your posts, regarding sacrifice now for tomorrow but that sacrifice today doesn’t need to be large (in your terms) and the compounding effects will see that bring forward retirement and give overall security.

However, in an effort to make this choices sound simple and easy, you forgot a large piece of the equation. That being opportunity cost and utility gained in the present vs the future.

Those graduates you mention, a) You’ve exaggerated your point a bit and raised an example of the minority rather than the majority and b) Those who spend in line with their seniors and create no extra wealth as their incomes rise, what about the experiences they have spending that money? Those are irreplaceable, unique and can’t be bought back no matter your level of wealth at a later age. Simply put, “Would you prefer $5k extra money at age 21 or $15k at age 60?” I think a lot of 30, 40 and 50 year olds, where the spend is sunk, would still in hindsight take the $5k earlier and work harder to make up the extra $10k before reaching 60, or accept less knowing you lived when everything was available to you, compared to later in age when things narrow down.

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Secondly – how do you incentivise someone young to even get to graduate level through not changing their lifestyle and rewarding themselves? Where’s the incentive for a 20 year old to put in all those hours, challenge and exceed when there’s little to gain? What about a case where one see’s extra utility as an incentive to work harder, and continuously becomes smarter and happier. Where the world crashes down on them, you have someone who’s already moved up the ranks in the past, knows how to succeed and adapt and when markets change/new opportunities arise, their natural incentive to chase the rewards from that opportunities will move them towards it, i.e. the change in market is actually good. You propose we hunker down, gather what we can, expecting something bad will happen and we may not cope with it? It feels a very conservative/Kiwi type approach. It’s a One could say the same mind-set many have investing in housing rather than shares, i.e shares can expose you to situations where markets vanish, big losses but also have opportunities where markets surface, generating big opportunities. But instead, we cater for these future risks by not entering the market at all?

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People talk about 1987 for share market losses. As long as you are sensibly diversified across geography and industries, and kept your money in the market then you would have seen 1000% gains since 1987 with dividends re-invested.

 

With leveraged property investment, you can lose more than all of your money in a downturn.

 

What this country needs is some decent cheap ETFs that passively track local and global markets. In Australia, you can track the whole world share market for 0.1% annual fee. Here we can track the NZX50 for 0.75% fee.

 

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Yes Slim.  Many do take the $5. But it's the personality thing.  Which is the point Elizabeth is outlining.  People often don't change their spots.  The idea of them making up the $10 later is just a laugh.

Ever heard of "the income cliff"

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says the latest versions of 'Phil Jones', Blue Chip, and Richmastery. It's a view that plays to the naive. Get-rich-quick, undiversified leveraged property strategies end in tears. Just ask those who drank the Koolaid last time around.

 

It's a cynical point of view, promoted by fast-buck 'investment advice' firms. Don't fall for it.

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Im with David on this one too.   I like plans that involve some property..... but no matter what angle i look at it i cant see Auckland property alone will suffice for an early retirement plan.   Feel free to lay out a strategy for us with the detail .  Im always up for being enlightened :)

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David Chaston nails it.

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You have to take pleasure in saving and investing......and I think some people find saving and investing painful !!......and any investment has to provide a return from the get-go......it's about building passive income......so anyone relying on capital gains without the passive income is really relying on a one-way market....and the taxation system.....

 

Know when to borrow......does the borrowing give you a return???

 

Keep a very close eye on Government and their Agencies......they meddle constantly which creates distortions....know when to hang on the coat-tails and when to jump off the ride!!!

 

Every dollar you spend find on frivolous stuff.....make sure you find it painful.......BUT give yourself a wee treat...once a month.....a weekend away or something similar......it refreshes the mind and opens you up to new ideas and options etc.

 

Get rid of the free riders in your life!!!!......they get pleasure from your wallet......

 

And Kenny's advice still holds true today.

https://www.youtube.com/watch?v=MpGgCrcfWBg

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Retiring early and well off is absolutely a good goal, but there's a whole lot of life to get through before then. Sacrificing enjoyment or opportunities earlier in life just to have a big pot of gold in your dotage sounds extremely scroogie to me, and it’s putting all your eggs in your retirement basket, which health dependent, you may not even be able to enjoy anyway. 

I am certainly planning for a comfortable retirement but my travelling, holidays and other experiences (not material things) will be what made my life a happy and successful one, not crowing that I have 5 mill in the bank.

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Excellent, another wage slave to keep the companies I invest in making money for me while I am retired at 40

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Except for that fact that I love my career and find it mentally fulfilling.  I'm happy for you but I would be bored out of my brain if I retired at 40, which is not very far off at all....

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Agree, I have collegues who at around 70 still work, I reckon it keeps them alive.  Now if I could find something to take my time instead then yes.  Also, I have some friends who retired at 50 and they seem well mentally at a lose end.

regards

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