Personal finance, it’s very personal.

I read a lot on personal finance, just too learn from people and their approach. It’s not just the financial independence part I’m interested in. Mostly I am more interested in how people go about the decision making process. A always pick something useful out of that. One thing I have learned it’s an incredible personal journey. The math is different for everybody, as well as time span, risk adversity and all other factors one might take in consideration.

There are some basics , most people start off by paying off consumer debt, student loans and mortgages. The variation starts from that point on, one might want to pursue a world trip , others want a better retirement or really early. All of these goals have different metrics. So there is not one right way , generally speaking the basic and key metric is spent less than you make.

One thing I have learned along the way is , make sure you know what your end goal is. And make sure this is really what you want. This is generally the hardest part to figure out. It’s has partly to do with the amount of time it takes achieving these life changing goals.

Also goals can change over time. And that’s ok, nothing wrong with that. Just don’t change them every month week or year. The journey in itself is rewarding as well, focussing and maintaining an outlook with a better and more secure future will pay off sooner than you think.

As it being personal one key thing will change for most. Your stress levels will decrease once your debt decreases and your net worth increases. Your mindset will change for the better. More mind space is available for things other than worrying. In my experience things will get better fast, more relaxed and your mind sharper. The main thing is getting better not just financially but also mentally and physically.

As with all long term goals you will get lost on the way, it helps defining and keeping an eye on the main prize at the end of it , but setting intermediate smaller goals in sync with the end goal keeps you enthused on the journey. Find those small goals and make a list. Once you get one , mark it as done. Celebrate it ! Share it with people that are important to you. Once the list is done, make a new one and save the old one. It’s a nice reminder of where you came from. It has worked for me in every part of life, not just finance. With my recovery as well. It keeps you grounded and thankful for progress made. It’s not an easy task getting in (financial) shape, but the ups and down will make you stronger !

While goals and time lines may vary wildly , the benefits and rewards that come with more financial stability are around the corner. The beginning might seen hard but your persistence will pay off. Find your first goal and stick to it.

Mortgage free ?

Mortgage free , a goal a lot of people aspire nowadays. It’s how I got started viewing my finances differently and more specifically my take on risk. I went on paying off as much as I could as fast as I could. The math was extremely simple, I had an interest rate on my mortgage of 5,35 % and was getting 0,25% or thereabouts on my savings acount.

This turned out to be a smart move , especially when bying a new house, there was some money left after selling the old house and clearing the old mortgage. This made the proces easier , there was no need for stretching towards the maximum lending capacity. We carried on paying off the mortgage at the same pace. The math was still in out favor, despite getting a significant lower interest rate of 2,7%. In the mean time the savings account produced only 0,05%. Full disclosure , I do not take into account any tax reductions or other tax advantages because they differ for everyone.

At some point I became aware of the fact that nothing in terms of housing was cheaper than any of the alternatives. Including a maintenance provision. All other alternatives like renting or buying a smaller house are more expensive. Even social housing is costs more , which I do not qualify for.

So all other alternatives are pricier. I started wondering if my extra mortgage payments still made sense. Isn’t it better investing these sums in other more liquid investments ? The mortgage will take care of itself in the remaining time the mortgage still has too run.

For me the answer was yes, simple math with a return of 5% gets me more money at the end of the line and the money is available, it’s more liquid.

Isn’t this simply hedging the mortgage against more riskier investments ? Yes it is , I am using the time and the debt in the house too take on more riskier investments. Brings us back too risk, what is the risk ? I live in the house and in the current market there are no opportunities in finding something cheaper. The biggest risk is I can’t afford the mortgage payments anymore. And this would mean finding cheaper housing when that happens, which isn’t available.

It’s now time for kicking my habit of extra monthly payments and the little voice in my head saying , just get rid of the mortgage ! So I am taking these monthly extra payments and putting them in my ETF portfolio. Then at some point , likely faster I will simply have the remaining mortgage sum in liquid investments , which means I could at that point pay it off in full.

A very reasonable risk if you ask me.

Debt reduction, it’s not easy.

A lot of people are writing about debt reduction as an easy way of getting the monthly costs down. Which in theory it is.The math is pretty straightforward and if you make a simple spreadsheet the reduction of debt and all it’s benefits become pretty clear. It’s a no brainer really. So you start with a lot of renewed optimism and energy and the first few months fly by. But them the promised big dent in the costs doesn’t happen as fast as you would like , you hang in there but the lure of your wish list , bucket list or some other short term gratification is looming. You start questioning if it’s worth it.

Congrats ! You just arrived at the hard part, sticking with it regardless. This is hard, and it’s not happening at the end it’s when you just got started , and it’s going too happen again. Psychologically all these small steps and keeping the enthusiasm alive is the most difficult part. Because it’s becoming boring. The numbers don’t change magically , the time and effort stay the same no matter how hard you look and your spreadsheet.

But sticking with it really pays off, make a game out of it. Every time you want too spend money on something you don’t really need , step back think again and….

take that amount and pay off some more debt. You get too adjust your spreadsheet and the numbers change. Excitement has returned ! All kidding aside, debt reduction is more of a mind game than a numbers game. Most hard things take a long time , remember your original goal and reason for doing it!

By all means paying off large sums of money is never easy, it is however one of the best decisions you can make in your life. It reduces your financial vulnerability , reduces your monthly cash flow needs, and reduces stress. All very cool benefits. Just hang in there !

Control your finances, but why?

Nice oneliner, isn’t it? But having control over your finances, what’s that exactly ? It’s knowing exactly whats coming in and going out each month, for starters. It leaves you with an exact number you have left each month. And you can go figure out what you can or must do with it.

In the Netherlands, where I live the national budget institute, which advises people on responsible finances has a lot of different data on budgets, savings etc. It says only 27% of all Dutch people keep a monthly cash flow report. And 25% has savings less then 2200 euros. Which is roughly 1,5 months of expenses if you don’t a lot of those. A lot more numbers are available but you get the idea.

It’s simply a fact most people don’t know their financial status from one month to the next. Which doesn’t have to be a problem if you simply spent less than you make. Which leaves a buffer automatically. Which in most cases end up in savings accounts.

But it pays dividends knowing how the numbers look and taking it as a starting point in thinking about your financial future. Best case scenario is thinking about how your surplus can make you money, worst case if you come up short each month how too fix that issue.

Let’s start easy, by making a simple monthly balance in a spreadsheet or on a piece of paper, doesn’t matter. You first write down your income, for most your salary. Then deduct your mortgage or rent, your utilities bill, all your taxes etc. Then if applicable monthly tax breaks and or subsidies. (which vary per country.)

Which leaves an amount of money which you can spend, but we’re not there yet. You need too eat. If you haven’t got an exact number on your groceries make an estimate. Deduct that and you have your free spending money for that month. Well most sensible thing you can do is make a fixed reserve and deposit in a savings account. Anyway now you know more or less what comes in and goes out each month. Easy enough right ? Your monthly budget is alive !

With what you have left , you can start doing stuff, spending it , or saving it, or reducing debt. It doesn’t matter really. You now now a figure which you can safely allocate or spend for this month. Start saving for future calamity’s is smart, replacing broken washing machines, unexpected car repairs and so on. You name it, it will happen and an nest egg will help you overcome such things.

Looking up all your monthly costs will take some time when doing it for the first time. Most don’t really changes a lot during the year and once you have 1 month mapped out, the rest will be less work. For inspirational purposes I added an example, a very basic spreadsheet as a start, click here Monthly budget . Most months after the first initial set up it will take about 5 minutes making a new one for the coming month. Maybe 10, but 5 is an amount people tend to want too spend on not so fun stuff, so just stick with 5.

But why ? Well stress which comes directly from financial issues is one of the most recurring causes of stress. A nagging feeling not knowing if you come up short or have enough money in reserve or when having have debt is a large amount of stress people experience on a daily basis. Im my experience starting out with a budget will make things a lot clearer and is a good starting point in solving financial problems one might have. Your feelings get to be facts and facts make solutions possible. You can now start improving your financial situation.

Simple steps towards financial stability, pay your bills per year

Well, a new simple step towards more financial stability, It’s only a bit harder getting started. It needs some money upfront. Let me explain. Most insurance, utility, communal taxes and so on we pay per month, but as with all businesses people like to get their money upfront. And usually they give out a discount because of that. First figure out which ones gives discounts.

Discounts vary , generally between 1 and 2 percent of the total amount. It isn’t that much, but as with all little savings, they add up quickly. As long as interest rates on savings accounts are as low as they currently are , this pays off.

All it takes is a start. So most of us have a bit of a nest egg somewhere, so you can start by picking one that you can take out of your savings without making too big of a dent and paying it at once. Then you save the amount for next year every month. In the meantime you can try and save up some more and start paying an extra bill per year the next year. As long as the interest is below the discount this pays off.

It might take a year or two but once you get the ball rolling the savings can add up. And as with all savings you can use them paying off debt and or invest the money.

Simple steps towards financial stability, paying off the mortgage.

A new series, aimed at achieving financial stability with rather simple steps. The first is aimed at one of the larger monthly costs for most people, putting a roof over your head. A lot of people at some point buy a house and get a mortgage. A long road of monthly payments lies ahead, there is however a easy way in getting the mortgage paid off a little faster, or a lot faster.

It only takes a periodic extra payment and persistence. Most mortgage lenders allow an extra amount of money being paid off per calendar year , or unlimited in some cases. Let’s look at an example, we start out without any extra payments.

Let’s take a few easy numbers, say I buy a house of 200000 , and get a mortgage for the same amount , 30 years until the mortgage ends and an interest rate of 3%, fixed at 30 years. There are variations with fixed interest running for 1, 7, 10, 20 years. But I keep it simple. So with these metrics the monthly payments will be around:

Mortgage 200000
Interest 3%
Monthly interest500
Monthly repayment555,55
Total monthly1055,55

So this is the example for the first year, depending on the type of mortgage the numbers can vary a bit, but it’s the about the principle, not so much the exact calculations of the numbers.

So if you pay an extra 100 dollar a month, each month in the first year this will lead to the following :

Your outstanding debt will be 100 less , divided by the remaining months left it will lead to a slightly lower monthly repayment. Combined with the lesser amount in interest payment you will save a small sum, around 0,52 cents for the first month.

As you can see , because of the monthly payments the mortgage costs gets recalculated each month, leading to a slightly larger decrease in the amount of interest you pay. Now a little trick, the amount you save in the first month you add up too the extra payment in the next month, so instead of 100 you will pay off 100,52 , then the recalculation will be a bit more and you will add it up again for the next month. And so on. Creating a snowball effect on the monthly payments while not having to shell out extra money. This is the power of compounding , even if it’s debt we are talking about.

So a set of very simple steps will decrease your mortgage debt while not increasing your monthly payments too much, and at the same time more stable in the finance department. It’s just a matter of getting started and hanging on.

Why buying a home is not an investment, but still a good idea

With the housing market being at pre crisis levels again and people desperately trying too buy a house the euphoria is back again. The sort of euphoria were people count there paper profits as actual profits and fantasize what they can buy with it.

A strange phenomena which returns every time housing price rise, so I have been thinking a bit about and the only logical conclusion for me is, stop looking at the house you live in as an investment. But it’s still a good idea to own your home.

There are only 2 options when it comes too getting a roof over your head, renting or buying. Basically renting is paying for the use of the house and the owner taking the risks, which in return you will pay a premium for the owner too cover his expenses, inflation and profit. Too keep up with inflation rents are raised with a certain percentage every year. Fortunately in most country’s rents are regulated. And in higher segments during crisis you can get nice discounts. But for the most part rents tend too rise.

When buying a property , you carry all the costs , maintenance insurance taxes and so on. You can simply buy a house with cash savings but most people will have to take out a mortgage on the property. This is a different risk landscape, the bank will loan you the money and will ask a certain interest percentage for risk covering and profit. But the house is yours, and here is where the fun starts.

At a certain point in time when you buy the house, a large part of your living expenses is set for the duration of the mortgage , mostly 10, 20 or 30 years. So your monthly payments are the same. When renting you will see a raise every year.

The monthly mortgage payments consists of interest and a part of the initial loan the principal (the part of the loan you pay back to the bank and thus lowering the outstanding debt). Now the fun bit, most banks permit paying back extra on the principal , so your monthly expenses will go down, you will pay less interest on the remaining loan and the amount you are obligated in paying back each month also drops. What you can do with this extra money is food for another post.

You have a certain control on what the roof over your head will costs you each month, the most significant is the absence of the yearly rise in rent. But buy paying back extra you will own your house faster and save paying future interest. This can add up quickly.

So why is owning your house not an investment ? Well simply because it doesn’t yield any income. No interest will come your way, like when you have a savings account with a bank, nor will there be dividend payments like when you own shares in a dividend paying company.

The only way in cashing in is selling the house. You should not consider yourself richer because of the paper profit which at some point wil be there. Your house is simply an expense which your are obligated inlaying each month , but you need too live somewhere.

Why it’s still a good idea? First you own the house and you can control your monthly expenses more easily.
Second, buy simply having the option repaying the mortgage faster you can get your costs down. Instead of the sure rise in living costs you have when renting. And historically housing always been following inflation (minus the bust and bubbles in the meantime) So after you are done living in your house and downsize start renting after retirement there wil always be a sum of money left over after the sale. You simply gain an asset by doing something you need , having a roof over your head.

Why not rent ? Renting can be cheaper in some cases, when you need the excess money after retirement and downsize. When you move a lot for work. But most people live in a house for years, making buying almost always cheaper than renting. It’s also the easiest way to control a large part of your monthly expense.

But just remember a house you live in is first and foremost a roof over your head and not an fictional ETM machine which you can use for your daily groceries. So no investment but still a good idea.

Debt reduction versus Cash flow and future risk

It’s something I have been thinking about a lot lately, since borrowing money is cheap at the moment and it’s getting easier to refinance existing debt to lower rates this has me puzzling.

Mostly because I have always had a view of getting rid of it as soon as possible. Now that I have reduced most of my debt it’s been tempting to add a bit of debt in order to generate a bigger passive cash flow. Basically to invest more and get a bigger overall return on my investments. Now that brings a new factor to the table. My one and only debt at the moment is a mortgage on my house. The value of the house exceeds the outstanding debt by a fair sum, the interest is low and secure for the coming 22 years. After 22 years I will be mortgage free anyway. The risk is that I can’t generate enough income to pay the monthly cost.

Since I have been sick this is a risk, I now receive a goverment pay out which is not guaranteed , 2 scenario’s can happen. My condition stays as it is today and I will not be able to return to work , which gives me a stable income from the government. Which is lower than that I can make working in my old profession.

The second is that I return to a job , which will hopefully be possible. The people I work with already prepared me for the fact I can’t return full time and working in my old profession. So again a lower income. By reducing my monthly mortgage payment and interest burden even more agressivly I can minimize risk further.

On the other hand I can probably have I higher rate of return by investing the money in other asset categories, and thus create a cash flow that in the future will pay me much of my monthly costs. Meaning the mortgage and including food, insurance, etc.

For some reason I can’t really figure out a course of action where I feel absolutely comfortable. I know that when I would have been working the risks are much the same but my confidence is somewhat less since I have been sick and progress is going as slow. Maybe this is something to worry about later on in the proces. Well Just wanted to write about this little bit of doubt in my mind. If anyone has some useful advice please feel free to contact me.

Strange China markets and debt

It has been a strange beginning of the new year in the financial markets. China crashed a bit, and then the trading was suspended. And it happened again. Then as quick as the rule was implemented. It was withdrawn again.

The worries about the Chinese economy, and with that the rest of the world maybe justified. I don’t know. What I do know is a lot of the trading in China is more gambling than anything else. A lot of people borrow money to speculate rather then invest. And if the market doesn’t go your way the need to sell fast is much higher with borrowed money. So it may not even be a problem of the ‘real’ economy but more a problem of gambling with borrowed money. But it could mean a debt problem in the near future. Which will slow the ‘real’ economy.

Debt in all forms is bad, in my opinion. If you can’t afford something, simply don’t buy it. The only exception being to buy a house. And even then it’s very much advisable not to overspend on a house.

A lot of people are always talking about the beauty of compounding interest. Well buy simply paying off all your debt , you will save a lot of money on interest payments which you can then save or allocate to other useful goals. It creates space in your monthly budget. If you have debt and are thinking about investing in any shape way or form. Just keep it simple and start by paying off your debt. It might sound boring but it works like nothing else.

The Mortgage, paying off and how to begin.

Well, it’s getting less, and is making a significant impact on our monthly expenses . so far it saves about 115 Euro a month. Most people will say that’s not all that much.

It’s a nice dinner for two every month for example. Some money you can spend on something else than interest.
It gets more interesting if you save that money and pay your mortgage off some more. Let’s take an example.

For instance you have a 200.000 mortgage. Let’s take 5% interest. I know it’s lower nowadays but a lot of people are still around 5% from before the 2008 crisis.
In the Netherlands it was all the rage to have a mortgage where you only paid the interest and didn’t pay off the debt every month.

This works well if the market keeps going up and when you sell the house is worth more than the original price you paid.
Not so much now , and a lot of people are either waiting it out or some start to pay off. the latter being a very wise decision.

Back to the example , Let’s say you pay 20.000 which saves you about 1000 per year in interest. (not taking into account any tax benefits etc.)
Save that 1000 and pay off again at the end of the year or better monthly (if possible). Saves another 50. And next year you can pay off 1050 , saves 52,50.

Etc etc, well you get the drift. This goes pretty fast without costing any extra money per month except for the initial payment. You simply start. It’s that easy.