We are the guardians and managers of our lives.
We don’t own our lives, the Lord does.
But we have some duties to perform, to take care of the gifts he gave us.
We are not supposed to worry about the future, but we must do our best to act with prudence and wisdom, making better choices regarding our personal responsibilities.
If you ask me if “it is spiritually safe to accumulate wealth in this world?”, I will answer it’s not safe to even think about it.
There is no justice in the things we do if we don’t search for the Glory of the Lord in all of them. Can you be grateful for your wealth as a gift from the Lord, independently of any idea of personal merit?
Can you live by pure Grace?
The thing, though, is to just do your best with what was given to you in all aspects of your life.
Many people, and actually most of them, don’t have really much to worry about producing and managing wealth, since they live paycheck to paycheck. And this is because the Lord, in His wisdom, decided to distribute gifts in a way that is incomprehensible for us.
But, that said, I believe that lots of people can be blessed with not only peace and joy but also with health and wealth, as they are blessed indeed. And to these people, I now want to talk about how to establish realistic and responsible goals for their financial life.
I will never mention actual figures here, for the reason that, for example, $10,000 for one person can be almost nothing, and for someone else can be wealthy enough to think about seriously.
If you think that you should build some wealth for the benefit of yourself and your loved ones, and to the Glory of the Lord, then here we go.
It’s all about the cost of living
The possession of wealth means nothing.
Money, assets, and goods serve only to be used. The purpose is the best living possible, for us and for the people around us.
That said, to live we need to use resources that are scarce in this current life. This limitation is about to be ended at any moment, but, as a certain character once said in a movie, “money is only something that we need in case we don’t die tomorrow“. As long as we stay here, we are going to need some resources to keep going on, and so we will need to think a little about managing it.
But our needs can be different from the needs of other people, very different, depending on a lot of circumstances. This is why discussing poverty and inequality is a stupid obsession of a stupid society. That makes no sense: what is poverty?
Misery is real, yes, being unable to live with the minimum conditions of survival.
But what is poverty? Being unable to buy the last smartphone model or a brand new car is poverty?
The feeling of being wealthy or poor is relative to circumstances. And this means that our first job in setting our personal financial goals is to make them personal.
You shouldn’t care about what your broad family, friends, colleagues, or neighbors, and much less what unknown people, think is necessary to have a good life. That just doesn’t matter. You will work to earn, save and invest your own money, not theirs. Only you, and your spouse if you are married, should be dictating how much money you want or need to live your life.
It doesn’t matter what “everyone” is doing. You are not “everyone”.
With this in mind, you will eventually find your very personal cost of living. And that is your base to the whole thing going forward.
The cost of your living will show you how much saving and investing you have to do to acquire financial independence, and that means the power to live independently of any active income. The purpose of this is not to retire and do nothing productive with your life (though, you can achieve just that if you want), but to be able to choose what you will do with your time, without any serious concern about how much money you are going to make.
I say “serious concern” because no wealth and no plan can guarantee 100% of anything. And this is why you should be conservative in your estimates, and this is why in the end you should trust that the Lord your God is your only real safe harbor in your life, in all matters.
Here is some good news, though: you can always review your lifestyle to a more cheap one, just in case the trouble to fund it becomes worst than the alternative of living cheaper. This is powerful. Actually, it’s what the Bible teaches: to learn to be content with what you have.
Look out for your fixed expenses
I can give my own example of how checking your lifestyle makes sense.
We don’t live to work, we work to live.
In the last five years, I have reduced my cost of living two times.
The first reduction was a big one: a radical 70% cut that provided me the chance to get out of my previous job in São Paulo, to move to a better and cheaper city only 1 hour away by car from São Paulo (where I can visit family and friends easily anytime).
The second one was done one year ago when I moved to a different neighborhood to live without my car. That made me save some 30% of my new reduced base cost. And I am living even better now.
Living better and saving much more money.
Being afraid of change is terrible. We are about to leave this world and meet the Lord in joy, why should be that hard to make simple changes? I know why: because of fear, that old friend of ours.
Look for your fixed expenses, these are the ones that are probably killing most of your financial potential. Real Estate, food, and transportation are the big ones to look for.
Rental or mortgage should not take more than 30% of your income.
You should be able to save at least 20% of your income.
That means that food, transportation, and everything else needs to be contained under 50% of your income. You can do this. And the more you try, the easier it gets because you will be forcing yourself to be creative.
The dream of earning big money to solve all your financial problems
What I am saying could look like a “misery mindset”. This idea is useless but prospers out there.
Especially the American culture has taught the world how to “go big or go broke”.
Well, I don’t want to go broke, and if the price for getting away from that is not going so big, what is the problem?
Again, you are the one that will work, earn, and pay for stuff, and save and invest. You should decide calmly what to do. Don’t follow cheap slogans. All of those propagandists couldn’t care less about you and your life. Usually, they are selling something, or they just want to feel happy about themselves. Forget them.
Ideally, you would invest in your career for the long term, especially if you are in the first half of life. But not even the youngest person should disregard the matter of the cost of living and the appreciation of the benefits of expending less money.
Even a big earner could collect big rewards by saving more.
It is common, on the other hand, to see people making lots of money and being broke in debt.
Look for sports stars and doctors for that, and of course, lottery winners.
All money in the world can be expended.
And you don’t even have all the money of the world, I guess.
Budgeting and operational margin
It’s good to think of your personal finances like if you were managing a business.
If you work hard to be professional and responsible in your job or business, why should you turn into an irresponsible maniac regarding your own financial life?
That helps to look at it more objectively, assuming a kind of professional responsibility for doing so.
The goal of a business is to make a profit, earning more in Revenues (your Income) than what is expended to run the operations (your lifestyle), and then using this profit to pay the owners (your perks and lifestyle growth) and expand the operation (invest to earn more passively).
The ideal margin of profit, or profitability, for any person, is around 30%, but we can live comfortably under a margin of 20%.
That means that if your income is $50,000 you should save at least from $10,000 to $15,000 of it.
Of course that if you can save more without damaging your “operations”, your lifestyle, you should. Sometimes we have this opportunity and it shouldn’t be missed. I did it before. For some 5 years, I saved around 50% of my Income. I could expend that surplus above the safe 30% margin, but I was living just ok, and that extra surplus made me create a substantial increase in my investments, that will pay off until I die.
But what do you do then with your savings?
Well, first and foremost, never forget that cash matters.
Cash means liquidity, the power to dispose of money and deploy it quickly at your discretion.
You need this for the unknowns of life, and they will happen in the long term, being extra expenses or unique opportunities. You just NEED to have some cash at all times.
But how much?
For starts, you can pile up some 3 to 6 months of your cost of living.
Don’t put it in fancy places to generate some returns. Returns don’t matter for this money, just availability and safety. Part of it, by the way, could be locked physically in currency notes, and gold or silver. Not too much, of course, but enough for a more volatile situation where you can’t immediately count on the financial/banking system.
You can expand your cash reserves if you think that is convenient. That’s on you.
“But cash is trash!”
Yes, cash is trash when there is a lot of it everywhere (the “largezza” situation, or monetary expansion).
But when it disappears (“strettezza“, or monetary restriction), cash becomes king again very quickly.
You must have some just in case.
Know your enemy: Debt
The main thing you are going to do with your savings is investing.
Investing is the most powerful way to multiply your wealth, because of the power of compound interest.
But before talking about that, you should know that there is a “reverse investment” that can employ the full power of the compound interest AGAINST you: Debt.
Debt is the investment that someone else is doing at your expense.
Debt is you paying for someone else to get wealthy in your place.
That all said, low interest rates make people confused about this. And since we live right now, worldwide, under the historically mostly ludicrous lowest rates that have ever existed, confusion only increases. But we must keep the concepts clear and simple.
Debt to fund expenses and consumable assets are the absolute worst thing you can do, independently of the interest rates.
Debt to fund investments can work out as leverage but is always riskier than doing without the booster. So, you must have a good professional and objective reason, to mess with that dangerous thing. If you don’t know what you are doing, don’t mess with leverage.
So much stuff is said about bubbles and financial markets being risky, but the real problem is excess of debt, always. Not going too far into the economical stuff, let’s just say that debt is fiat money, and because it can be created from thin air without restrictions, it can become a dangerous thing. When you have too much monetary expansion, soon or later you must have a restriction to correct it, and that is what generates panic and makes the “music stop”.
If you don’t ever engage in debt, not even to boost your investing strategy, you are away from lots of trouble. The more you increase your leverage, the more you increase your risk exposure. I think it’s enough to be exposed to the gamblers messing with the financial markets, making our life harder (look at the current asset prices), so I prefer to stay away from debt myself.
“Oh, but everyone is doing it!“
Again, you are not “everyone”.
When the shit hits the fan, “everyone” means literally nothing. You will find out very quickly that you are alone, that you were always alone. So, cut the bullshit now. It’s cheaper.
“Oh, but with inflation debt actually works in my favor!“
Really? Ok, so you are going to borrow for 20, 30 years knowing that inflation will for sure turn your debt to work in your favor? What if it suddenly turns around against you? Are you that sure you’re so smart and the lenders are so stupid?
“Oh, but this time is different!“
If you think so, I’m sorry for you.
To Americans, especially, I have to say this: the FED funding $40 billion in MBS every month will stop eventually. And all excess credit created (money supply vs. growth) will always, soon or later, be transferred to inflation, which will require some increase in the rates.
Play the game as you want, but my advice is to stay away from debt as much and as long as you can. If there is one economical advantage to live in a developing country like Brazil, it is that we know here what is really high inflation and high rates, and the dangers of debt. It’s not pretty.
Investing for the Long Term
After the building of your cash reserves, you can start investing.
To invest is to buy assets that generate cash flows in return.
The cash flows don’t need to be immediate, nor be paid in actual cash, but some return is necessary.
This is why gold, silver, cryptocurrencies, etc., are not investments. They can be bought as a reserve of value, hedging for a crisis, or as a commodity to make some income trading, but this is not investing.
Investing in a business that you own and operate can work very well, but that should be seen as a different type of investment, like funding your career. If you do pay for a college degree, for example, you expect some return from that in financial terms, but you actually will have to work for that. You are investing in yourself, but you have to produce something to make it pay off. If you create your business, the same thing happens. And since our objective here is to live independently of the need to work to fund our lifestyle, investments should be the ones that help us getting returns without the need for any work.
Don’t get me wrong: investing in your career and in your business is a great thing. But the ideal scenario should be one in which your career starts paying you a surplus to invest in something independent of your work, something that works in automatic mode and gives you real passive income, as well as the ideal scenario for your business is to grow up to a point where you can sell it for a profit and invest the money away, or to keep it as a non-working investor, away from operations, in which case you will become a passive income earner from the same business you created.
The instruments for investing to earn passive income are mainly Real Estate and Business.
The more you can own property directly without an intermediary, the more high returns you can make, and the more you would need to know about it.
The less you know, the more you pay to invest, and the least you earn in income from it.
This is why the best advice for the beginner investor is: invest only in what you know.
If you can’t understand it, don’t do it.
How can you know if you understand the idea of an investment? You have to be able to explain in a short and quick sentence how the money is made. The more complicated your explanation gets, the less is the like that you actually know what you are talking about.
Whatever you do, to your investment work properly it will require lots of time. Investing works properly when the economical cycles are absorbed in the long trend, and the compound effect can generate the highest return possible and viable for the length of human life.
Considering all, it’s very reasonable to think in 20 years as the minimum time to achieve good results in your investments.
Of course, you can push yourself to save much more quickly, like the people of the F.I.R.E. movement do.
This works only partially because the reduction of time compresses the compound effect. Time is factorial in the compound, which means it’s the most powerful thing in the investing machine. If you put more money in a shorter time, what you are actually doing is reducing exposure to time and increasing exposure to return rates, so, for an instance, the economical cycles can be far more dangerous for you, because you are more dependant on your current returns to keep the machine working.
Let’s be reasonable here: do you want a full stop in doing any work?
Isn’t reasonable, if you don’t absolutely hate your job, to keep doing it for 20 years?
And, if you hate your job, doesn’t make more sense to change it, or even your career path?
There are lots of things you can change to make your life more smooth going on, working, generating income, saving, and investing.
“Oh, but I am too old to wait 20 more years to retire, it’s too late for me!“
If you are under 50, that makes no sense at all.
If you are over 50, a case can be made that investing will not make the best long-term effect for you, but will that dismiss you from the need of saving money and investing to have a better future? No. Actually, the older you are, the more convenient it becomes to start saving and investing as soon as possible. A 20 years old person can waste 10 years. A 50 or 60 years old can’t.
The effects of investing come slowly.
But if you do save 20% of your income consistently, no matter what, and you invest it wisely, reinvesting all cashflow into new investments, never touching a single penny of that passive income, and do it all for 20 years straight, the whole thing just works very well.
The first 5 years are very slimy like all your effort has no results, and you just push it forward from raw stubbornness.
After 10 years, results start kicking in, but still looks like there is too much work and waiting, for little effects.
After 15 years, the explosion starts. This is, surprisingly, the riskier moment of investing, because the really big results will depend a lot on the reinvestment of the passive income earned in the last 5 years. That will make a huge, decisive difference.
The compound formula: contributions, return rates, and time
The formula of compound interest works like this: your contributions generate returns that become newly added contributions, all of that being factored by time.
The least important factor is the return rate. It will always make a difference, of course, but always less than the difference made by the contributions and especially by the time.
It’s just easier to get wealthy by adding more savings to the plan, or by making the plan longer, than trying to make greater returns in the selected investments.
And although the contributions are very important, time is of the essence. The sooner you start, the better. More time can compensate for fewer contributions.
It’s easier to have just 20 or 30 years investing with mediocre contributions than to need to have a high active income from your job or business. Lots of people age, but not so many people become high earners.
Be careful with pushing the return rates of your investments.
Young and low earners are especially vulnerable to looking for high returns, because they have little to no net worth to invest, and the long time ahead of them can look very depressing from their point of view.
But there is a more depressing thing, I guess, to look for: to lose the little you have in riskier things, like leveraged bets and low diversification. In the best of scenarios, it’s a waste of time. In the worst, can be the starting development of a gambling personality, which can be a pretty ugly problem to deal with for whole life.
What about fixed income?
Well, today less and less people care about bonds and treasuries, or even private debt, because of the low-interest rates. But as soon as the rates rise again, fixed income will get back to the table.
There are two problems, though, with fixed income. One is financial and economical, the other is spiritual.
Economically, interest rates exist to pay for inflation. That means that higher nominal returns don’t necessarily bring higher real returns. Actually, because governments are very interested in keeping the cost of their debts lower in their budgets, there is always some pressure to keep the official inflation numbers artificially lower. And that happens in a way that higher nominal rates usually mean lower real returns, under the necessary levels to payoff for inflation. In simple terms: the government is always stealing your money, even when he pays you interest to hold his debt.
In addition to that, public debt is not free from risk. There is no such thing as a free from risk usage of money, except for consumption. The only risk-free use of money is to exchange it for goods and services.
When interest rates pay more than real inflation, there is for sure additional risk that makes it more dangerous, like with private debt or CDs from smaller banks.
To quote that cheap quote, there is no free lunch. And since you can get the risk that provides really interesting returns with property naturally hedged against inflation, like Real Estate and Stocks, what is the benefit of funding governments that steals you or a business that can make a profit using your money?
Debt funds the economy.
If you are invested in the economy, debt pushes your investments.
If you buy debt, you are pushing the investments of other people.
For that reason, I don’t treat fixed income as an investment. It could serve to hold liquid cash, but then we have the other issue, a spiritual one.
Scripture tells that “the borrower is a slave to the lender.”
Sometimes we can do literal interpretations of the biblical text, and this is one of those cases. Lending money to earn interest in it is exploitation. You can give money without interest and expect to get it back later, but charging over it is predatory, and spiritually it’s rotten.
So, with money you can do this: consume it, give it away, or save it and invest in property.
Net Worth is vanity
A local billionaire here in Brazil says that “net worth is vanity”.
Being invested for the long term in variable income, he knows that the market volatility means nothing, so the marked prices of the moment can be totally ignored.
If your objective is to achieve financial independence of active income to fund your lifestyle, why your current net worth matter?
Understanding that makes you really strong to all weathers, and gets benefits from the crisis while most people panic about losing their net worths and their last pants to cover margins on leveraged bets.
Forget net worth: look for your passive income growth. More on that below.
The destroyers of wealth
By now we should be able to identify the main destroyers of wealth, and we can add some more:
- Interests: they destroy your wealth when you pay them, and also when you earn them, though in this last case the loss is more subtle (and so, actually more dangerous);
- Operational costs: banks and money managers suck part of your hard earn profits with investments, a harsh payment for your lack of education. Mutual funds can cut as much as 50% of your wealth in 20 years, under the 2/20 fees system. Index funds and ETFs charge less, but also make fewer returns that could be not so hardly be beaten;
- Inflation: being afraid of investing or risking less part of your wealth exposes you to the big dragon that will corrode your cash and fixed income. Big savers don’t realize this because the interests earned seems big enough for them, but tragically, they are the big losers;
- Taxes: having a stable and consistent plan for the long term to invest in property and hold it forever evades legally the payment of taxes on capital gains. This is another reason to not invest in Funds, because of the taxes paid from the turnover. It’s also important to remember to never do portfolio balancing, for the same reason. If you diversify enough, balancing is never necessary.
Passive income and your goals
The measure of success in the long term will be the ratio of your passive income against your expenses (PI/E).
The main goal, of course, is to achieve a 100% PI/E. That means that you could have lived the last year of your life entirely on passive income, without the need to work. But that is not the ideal goal.
The ideal goal should be something like a 200% PI/E loose margin.
And that for at least three reasons:
- Seasonality: if you are doing the right thing, i.e. investing in variable income for the long term, your cash flow will be irregular. Just as an example, my passive income this last April was almost 4 times greater than my February numbers. That means that you need some margin to accommodate the variation and live without worries;
- Changes in the returns: business can go broke or face a crisis, as well as your Real Estate properties can lose tenants. For a time it is possible to see the fall of profits, affecting your cash flow. The margin serves as a protection for these changes. For example: during the pandemic crisis in the last year, most companies made several cuts in the dividend payments to sustain the short-term cash holdings, especially in June and July. As an owner, I must be prepared for that, and the margin can give me that in the long term;
- Perennial reinvestment: if you have a continuous surplus with your passive income, you can reinvest to make your wealth go even further, keeping the effects of compounding working for your future.
Ultimately, you must be the drafter of your goals. From ground zero, I could suggest a list of a sequence of goals:
a) paying off all your debts as soon as possible;
b) building a cash reserve of at least 3-6 months of expenses;
c) starting your early investments in Real Estate and/or Stocks to learn slowly, as you search for education to qualify yourself as a good investor for the long term;
d) achieving 10% PI/E;
e) achieving 25% PI/E;
f) achieving 50% PI/E;
g) achieving 100% PI/E;
h) achieving 200% PI/E.
This is only a very simple suggestion. Nothing of that, of course, at the expense of the funding of your career growth or active business operation. The money for these things must come from your 70% to 80% total budget.
What I am going to do
In this blog, I will report some things on the subject of financial independence.
First, I will report my own PI/E ratio evolution. The advantage of this indicator is discretion since we can share and talk about it without exposing details of our lives. The idea is to keep tracking the evolution and performance as a habit to endure, especially in monitoring results after market crashes and economical recessions or depressions.
Second, I will report my operational margin, to keep myself in check for financial discipline.
Third, I will report a review of assets that I already invest in or want to begin investing, checking for winners and losers, and thinking about portfolio management.
Fourth, I will report on my experience as an amateur financial advisor and manager, a job that I am doing inside my family for years and that has grown recently after the pandemic crisis.
This is it.
The overall idea is to keep the issue under check, following the orders from the Lord, not giving too much attention and care, but not falling into omission and negligence.