Risk should be assumed as a means to solving a life problem. You
should only assume financial risk to improve your financial situation
Is personality driven, people fall into one of two groups in all
aspects of their personal finance lives, risk of doing something or the risk of
not doing something.
Risk is relative to you and only you – someone else’s moderate risk
could be your extreme risk. Some factors that would influence your specific
risk level are:
Level of income
Debt level
Net worth
Age
Example:
Action: Buying a house comes
with the added risk of assuming the largest debt you will ever have and the
risk that you lose your ability to earn income to repay that debt.
In-action: The risk of not
buying the incredible wealth building tool that a house is, is that the housing
market will continue to inflate and you won’t be able to qualify for the
largest debt you will ever have.
When faced with important financial decisions, ask yourself the
following (Forbes):
What is the worst-case scenario?
How will my life change and who is impacted by the wrong decision?
What potential remedies are available?
What would have to happen to bring me to a difference decision? In other words, to recognize that the risk is too great for the potential reward.
Who can provide me with more information before I make my decision?
Can I live with the regret regardless of my decision?
Managing risk is really about managing emotion – you are really
trying to manage your reaction to possible outcomes:
Perform arisk assessment when faced with a decision
Risk should be calculated and absent of emotion whenever possible.
Risk should be offset with potential rewards
Risk is minimized by not being married to very specific outcomes
Risks you should take:
Getting an education – student debt vs increase in income
Relocating to a city – higher cost of living vs more opportunities
Buying a house – risk of not being able to repay your mortgage as well, the housing market
Investing – risk of losing money vs building wealth
Sacrifices are choices we make not circumstances that are imposed on
us.
There is a difference between being in a bad situation from a series
of unforeseen and unfortunate events and being in a bad situation from a series
of bad decisions and poor planning.
Noun – destruction or surrender of something for the sake of
something else
Verb – to suffer loss of, give up, renounce, injure, or destroy
especially for an ideal, belief, or end
What is financial sacrifice?
Give up or
forego something you want – not need something you need
Doing something you choose to
do – not something you have to do
Short-term discomfort for
long-term gain – it should be hard and uncomfortable
Necessity is the mother of
invention – they are not obvious and have many layers
Sacrifice is not something
you do when things goes wrong (that is called crisis management)it’s
something you do to insure things in the future will go right.
Why you should make financial
sacrifices:
You believe
tomorrow will be better than today
If you have lived too much
for today and not enough for tomorrow
You want something nobody
else has so you have to do something nobody else does
You want more control in your
life – independence requires being independent
Three Sacrifices We Must Embrace to
Achieve Financial Freedom – Medium.com
Sacrifice
#1 – Spending
The first sacrifice we have to do is to
limit ourselves to a budget and avoid spending all our income. There is
no way around it. If your spending habits cannot be controlled, then forget how
much you earn. You are going to spend it all anyway.
Sacrifice
#2 – Income
Financial freedom will for most us come out of 3 vectors: income, savings, and investments. If we want
a raise, we will likely have to do a harder job or work more hours.
Sacrifice
#3 – Risk
This next sacrifice comes from getting out of a comfort zone. Most
of us are happy with the 1% rate on a savings account because we feel the money
is safe and will never reduce in value. In other words, we have to take more
risks and embrace volatility as part of the journey.
We all need work that is out contribution to society. At points in
our lives we also need jobs, this is how most of us support our
lifestyles.
Victory lap retirement – is
a book that everybody should read regardless of your age.
Some people are fortunate enough to have their job be their work
Financial independence is when you can transition from a full time
job to full time work
Job – A job is a regular and
official activity that you do, and receive money (a salary) for your activity.
It is also called a profession or an occupation.
You can have a full-time job (40 hours per week) or a part-time job
(around 25 hours per week).
Career – Your career is the total progression of your professional
life. It can include many different jobs over the years.
Work – The word work is more
general than “job” – whereas “job” is a specific occupation/profession, “work”
refers to general efforts and activities done to accomplish a goal. “Work” can
be done both inside an official job and outside a job!
Uncharted
territory – lots of risk and struggles, it’s uncomfortable
Education or Training – this
will require time & money (a good reason to live below your means)
Compensation – you will
definitely earn less money when you start a new career
When the perceived pain of
continuing is greater than the perceived pain of changing
Courage to try something
different – the longer you wait the hard it will be to overcome
Reasons to change careers
This shit
will get old – you won’t be able to do it for 30 years
You create a backup plan – if
your second career does not work out
You build a social network –
if your second career crosses paths with your first
You choose your first career
when you were 17 – what are the chances you were right
Life is not a straight line
Words of wisdom:
When your father and
I decided to have kids, we felt it very important to educate each of you with
the hopes of NOT putting you on a specific path in life but to give you
options, lay a foundation to give you the ability, courage and confidence to
explore, to discover who you are and to find your own passion. Don’t let the
title of your degree (something you choose when still a teen) keep you in a box
or trap you in a mindset of where you “should be”. View it as the
appetizer of life, with the main feature to yet to come.
Just because your house appreciates in value does
not mean it meets all of the criteria of an investment.
I am not saying real-estate is a bad investment,
real-estate that you are not emotionally invested in can be a good investment.
The house you live in, by its very nature, is an emotional investment.
Investopedia:
What Is an Investment?
An investment is an asset or item acquired with the
goal of generating income or appreciation. In
an economic sense, an investment is the purchase of goods that are not consumed
today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the
idea that the asset will provide income in the future or will later
be sold at a higher price for a profit.
Why your house is not a true
investment:
You are too emotionally invested – can’t make rational investment decisions
No cash flow mechanism – an investment that never pays out is not much of an investment, HELOC creates debt
High carrying costs – far too high to be considered a good investment (interest, insurance, taxes, maintenance)
Highly leverages – this incorporates too much risk
Transactions costs – lower cost options exist, too many hands in the purse
The opportunity costs – lack of diversification, there are better returns on investments
What your house does represent:
A place to live – you can’t live in an index fund
Provides stable living environment for raising a family
A great wealth building tool through forced savings
An opportunity to leverage a purchase that will usually increase in value
Home Repair vs Home
Improvement
Home Repair – if it’s broken fix
it
Home Improvement – Everyone likes to refer to
their home as an investment. If you investment additional money into your house
“investment” you should expect and have some reasonable expectation of the
return on that additional investment.
When pursing financial independence it’s really hard, you need to
have a really big why so when it get hard and you want to quite you will have
the reason why to push through.
With a really big why the how-to’s of life get really easy and
obvious.
To get to your why you have to ask why 3 times to get to the real
answer
What is my big why? I want
early financial independence (not because I hate work)
Why do I
want financial independence – to have choice and control in my life
Why do I want choice and
control – to work at a cause I believe in
Why do I want to work at a
cause I believe in – to work at something bigger than myself to help
people
Reasons to have a really strong why:
Your battle
plan will not survive first contact with the enemy
Life is not a straight line
Your plan is unique to you
with an unknown solution
Life can be really hard and
at times unfair, don’t be a victim – don’t ask Why me? Ask Why not me?
Strategies for developing a strong
why:
Seek out
new experiences – doing the same thing hoping for different outcomes is
bad idea
Abandon your expectations –
this is where disappointment lives
Treat everyone you meet with
respect – even if you do not share the same life philosophy
Give Back – don’t be
transactional you will repel everybody in your life, you will receive more
in life by helping others than helping yourself
Celebrate milestones –
celebrate your past accomplishments and your future hope
Let go of the past – this can
be your undoing only of you let it, “what-ifs” are about your past,
“why-to” is about the future
What’s your BIG WHY?
1. What have you done in the past that felt incredibly fulfilling?
2. When have you been at your
absolute best?
3. When have you been at your absolute worst?
4. What anger’s you? or What breaks your heart?
5. Why, why and why?
Reddit Post 1 User: m
yTwelfAccount:
I finally
realized my “why”
Many
posts here urge the community to really consider their “why.” Why are you pursuing financial
independence? For so long, it’s been
easy for me to say, “I hate working.”
But when I shared that with people in real life, I was met with confused
looks. “It doesn’t seem like you
hate working,” many people would respond.
And it didn’t feel all the way right to me. I don’t really hate working. In my jobs, I have had opportunities to
directly help people and improve their lives.
I have changed systems and operations for the better. I don’t hate that.
What I
hate is the performance required. I hate
the charade of working 8.5 hours even when it’s not necessary. I hate that half hour that has to be unpaid
because of lunch. I hate having to
consider the optics of your decision to work a different schedule, take a three
week vacation, or having a long lunch. I
hate the endless meetings and documentation required to assure everyone you
are, in fact, working. I hate the
contests people have with one another on who is skipping lunch, who is coming
in early and staying late, and who can’t take vacation.
It’s
bullsh*it. It’s inefficient. It’s unnecessary. And so that is why I want financial
independence. To free myself from bullshit.
Reddit Post 2 User: myTwelfAccount:
Funny
side note – I ended up in a conversation where I had to explain this to an
older woman the other day and you’d have thought I was telling her about
Bigfoot or ghosts and aliens. Apparently making good money and living a fancy
lifestyle is totally normal but saving the money instead so you don’t have to
work- that’s just a f**king fairytale.
On the podcast we always talk about change and moving forward and to
do that it usually required change and to get from where you are to where you
want to be there is always a transition and its usually uncomfortable and that
ok.
Transition can be a very fragile but is very critical to getting to
where you want to be in life. This usually requires some kind of behavior
modification that will require some form of self-discipline and new habits.
Discipline – the ability to give up immediate pleasures for
long-term goals.
Habit – an acquired mode of behavior that becomes involuntary.
You use your discipline to develop habits and you develop your
discipline through forced repetition.
You have a limited amounts of discipline to spend each day, so spend
it wisely on the things that are important.
The Dip – you start out with
enthusiasm and energy, then thigs get hard, this is the dip. You need to expect
the dip anticipate it and have a solution ready to push through the dip to
achieve success.
How to master Self Discipline:
Know your
weakness – we all have them
Remove temptation – you are
not as strong as you think you are
Set goals – realistic and
measureable
Measure progress – record
keeping is the key, don’t try to do this in your head
Celebrate wins – winning is
contagious
Why Transition is so hard:
Uncharted
territory – learning is the key, the older you get the harder this becomes
Fear of failure – you are
already failing small at something you are trying to correct
Follow a
proven plan – such as a book, youtube, podcast
Bridge the gap – small
incremental steps will keep you motivated
Measure your progress – you
need to know you are making progress in the right direction
Expect setbacks – failure is
your friend, you learn more from your mistakes, and you are probably
failing at something already that’s why you are trying to make a change.
Expect it to be hard – if
it’s not hard it’s probably not worth doing.