Grow Your Money

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An asset or a liability?

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If you have read our articles on “Guide To The Ultimate Personal Balance Sheet” or “5 Things That Are Eating Your Money Away“, we keep talking about asset and liability. Understanding the aspect of asset and liability is the key for improving your personal finances. The path to building wealth is simply increasing assets and reducing liabilities. Often we tend to over-estimate the value of our assets. At the same time there are those type of possessions which at first glance look like a good idea but financially might not even be an asset rather a liability. At the same time there are those which you are unsure about. We have created this simple tool to help you find the truth and support you in choosing the correct allocation in the personal balance sheet.

What is an Asset or a Liability?

While there are accurate definition of assets and liabilities terms in the financial and accounting world. But when it comes to our personal finance, we have simply defined them as follows:

Asset

Object that stores financial value and ideally increases in value over time.

Liability

Anything that incurs costs for owning without generating or storing any financial value. They simple keep burning a hole in your pockets.

What do the results mean?

Appreciating Assets

Assets that have increased in value since the time of purchase. Such assets increase your net worth over time through their growth. They excellent store for value. Aim is to increase the amount of such assets in ones portfolio or possession.

Depreciating Assets

Assets that have decreased in value since the time of purchase. Such assets even though still store some value but will decrease your net worth over time and may even turn into liabilities. This can happen if the current price of this asset has decreased, if the incurred cost of keep an asset overweighs the appreciation in price in spite of price growth or both. If there are no reasons why the price dynamic shall change in the future, it is always a good idea to get rid of such assets in order to conserve the net worth.

Liability

Liabilities don’t add to you net worth but keep decreasing it constantly due to their non-existent and the constant costs they generate. You should get rid of such objects at the earliest chance as having possession of such objects will be a constant burden for you.

Did you come across any surprises, things which you perceived as assets but turned out to be liabilities or vice-versa? Let us know if this tool was helpful to you in the comments below. Also share this tool with others to help them have their own realisation moments.

Things eating away your money

5 Things that Are Eating Your Money Away

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There are so many things in life that you often overlook the silent culprits which are slowly eating away your hard earned money. This happens as sometimes the amount is simply so small that you don’t notice it in your regular bank statements. Over time these amounts take away significant part of your money.

We have developed our financial routine where we regularly look at our personal balance sheet trying to identify potentials for reducing our expenses. And these are 5 things that was eating away your money .

Without further delay let’s dive in and get rid of the 5 things eating our money away.

Contents

1. Subscriptions: The Slow But Steady Eater of Money

Even though you don’t have time to watch TV your are subscribed to AppleTV+, Amazon Prime, Netflix etc. Not going to the Gym but sincerely paying. You can listen one song at a time but still on Spotify, Apple Music, Youtube Music. Wanted to explore something new and signed up for the 7-day free trial 3 months back. Does it sound familiar.

In today’s world everything is a subscription, be it for health, entertainment, news, food or even softwares for work. You are asked to sign-up and subscribe. Luring you often with a free-trial and keeping the amounts so low that they stay under your radar. Before you know it you have been paying them for months if not years. And this adds up. For many it is the hassle of cancellation that they simply ignore the costs choosing a life of denial.

Subscription is not bad but we strongly advocate to keep subscribed to services that you regularly use and provide value to you. Go through your statements to make a list of all services you are currently subscribing for and get rid of the ones which are superfluous or not being used regularly. Add their respective renewal dates to your calendar so that you have a chance to cancel them or you can consciously choose to keep them.

There are some services out there which remind you based on your bank transactions and even provide you the option to cancel the services with a single-click.

2. Insurances: Making Money of Your Fear of Losing Money

Being insured against eventualities is a good idea. But sometimes we have the tendency of taking too far.

What do we mean by that? You do’t need insurance for risks which even if they occur can be paid off by your means. If you have valuables at home then insuring against theft is a good idea but you may not need a glass insurance for that one fruit bowl you got as a gift. As a rule of thumb, you should always insure yourself against risks and damages that can endanger your existence.

One more thing, read the fine prints extremely carefully when signing up for an insurance. People often overlook this part having full faith in their agents only to realise what all is not covered when the real damage happens.

We made a list of all insurances we were subscribing to, did a simple risk analysis based on the probability of occurrence versus the financial impact. And then got rid of many policies which we felt were not risks worth insuring. If you don’t want to go through this hassle, hire an independent financial advisor to help you. But please don’t go to an insurance salesman asking this question, you already know what the answer might be.

Lastly, track the premiums you are paying on an annual basis. They have a tendency of increasing stealthily, same as is case of subscription they will stay under the radar. Compare to see if you are still getting a competitive price.

3. Your Wardrobe: fast fashion burning fast holes in your Pockets

Now this quote below might not be one coming from a fashionista but today’s consume driven culture has definitely taken this quote to its limits. Fashion houses are introducing a new collection almost every fortnight. Then there is the convenience of browsing through all this new stuff from the comfort of your couch. Within two days your new wardrobe is at your doorstep. Even if you are not frequenting these shopping websites, influencers on social media are everywhere doing a fabulous promotion for the fashion houses.

„Fashion is a form of ugliness so intolerable that we have to alter it every six months.“

Oscar Wilde

Trying to look the current fashion and emulating the influencer on the web often drives us towards unnecessary purchases. We forget the fact that most of them have been paid to wear the clothes whereas we have to pay to wear them. We also are not free of sin, as a result do indulge in embracing the trends now and then, but we try to approach it in a very conscious manner. A good rule for this can be define the maximum number of pieces of clothing you want to own at a given time. Anytime you get something new, decide on what has to leave your wardrobe. Set certain rules like when will you treat yourself to something new. It will not only save you money but also allow you to cherish the new pieces.

4. Bad Investments: Buy Assets and Not Liabilities

One easy way of loosing money is buying bad things and then hanging on to them.

It is as true for financial instruments as for material possessions. This often happens when you are driven by impulse instead of need. Buying at impulse may lead to decisions which in retrospect could become regrettable.Simply try to suppress it. Always put some thought into what you really need, even if you are feeling impulsive just delay the purchase decision by a day or an hour or 5 mins. Take the time to reconsider then go for quality over quantity and function over brand.

For some purchases it may be worthwhile to wait in order to buy buy something better. Which will keep its value for longer and give you better feeling when in your possession. When I started wood-working as a hobby I bought many power tools, i wanted to quickly have the comfort and did not want to spend the money for the better ones. Now you can imagine what happened. Yes, I needed to replace most of them over time as either they did not perform well or didn’t perform at all after some time. I realised, I was buying liabilities and not assets.

5. Going Overboard: Cut Your Coat According to the Cloth

Lastly, we often end up committing to things which may be beyond our affordability. It happens when you are in group of people, when you want to look the part in place you may not belong to or just to impress your social circle. Everyone has their priorities, so do you. Spend where your priorities lie, for something that gives you value and an amount you won’t end up regretting later.

We don’t have much to say here, just know your abilities and limits. Keep your focus.

In Conclusion

  • Check your subscriptions regular and get rid one the ones that have lost their relevance for you.
  • Buy insurances for mitigating impacts of risk you cannot afford to pay for.
  • Limit your possessions by numbers. You only buy something new when you get rid of something old.
  • When feeling impulsive, hold back and take time to rethink. Invest in objects that store value.
  • Know your limits. Don’t succumb to social pressure.
Balancing is the Key

Guide to The Ultimate Personal Balance Sheet

4 Comments / Grow Your Money / By

Balance sheet is simple but powerful tool to improve your financial health and grow your net worth. It lies at the core of any enterprise. Balance sheets are used by managements and investors for making important financial decisions that lead growing the worth of organisations. Now, you also generate money through salaries and have expenses for living. Then why shouldn’t you have a personal balance sheet to know your financial health?

At least that’s what we wanted to know, hence we created our personal balance sheet. On its face value a balance sheet is just a collection of number. The secret lies in the ability to understand what they signify and acting on the insights they provide. We used it to reduce our expenses by 10% and put us on a path of increasing our net worth by more than 20%. And here is how we did it?

Contents

What is Personal Balance Sheet?

Let’s leave the complexities of enterprise balance sheets to the accounting experts and focus on you as a person. A personal balance sheet and for that matter any balance sheets essentially shows the balance between income, expenses, assets and liabilities. Hence it is an effective way to track a your financial health and net worth. It will help you understand your day-to-day spending and make better financial decisions.

Why you need a personal Balance Sheet?

Having a personal balance sheet can be an eye opener. This will surely help you to understand your financial situation and where you are spending your money, identify areas in which you are overspending or underspending, identify areas of your life in which you may need to make changes, track your progress and make necessary adjustments along the way.

And above all make smarter financial decisions when you are aiming for ambitious goals like financial freedom.

How to Create Your Personal Balance Sheet?

Step 1: Collect Information

We have modified a classic balance sheet which would typically represent the assets and liabilities part to add some information about your cashflow i.e. income and expenses. We also refer to it as our financial framework. To create this personal balance sheet, you need to define a timeframe such as annually or quarterly. Then gather all your financial information from bank statements, mortgage documents, credit card reports, insurances, brokerage accounts, retirement plans, loans etc. (Link to Checklist) Many banks allow you to download this information in editable formats like .csv or .xlsx.

For us this was the most tedious part. Especially when doing it for the first time. But trust us on this, it is worth the effort. And it is hard only the first time.

Step 2: Allocate the information

Allocate the collected information in each quadrant as follows:

Incomes: Sum of all incomes you have from salaries and/or other investments.

Expenses: Sum of all expenditures during the timeframe.

Assets: Any object generating revenue, stores or appreciates in value – ideally without you having to put in additional work.

Liabilities: Objects depreciating in value or committed expenses without contribution towards assets or income. For mortgages, though EMI is a liability, but the interest is the actual liability as it costs money without improving your equity on the underlying asset.

Ultimate Personal Balance Sheet

Once you have allocated the information you collected to the four quadrants, you have a snapshot of your current financial health. Essentially you have a personal balance sheet. Subsequently you can start analysing the information.

What is Your Balance Sheet Telling You?

From Income the cash flows into different transactions for fulfilling the commitments. For ease of understanding we put “any” expenditure in the expenses block. The remaining unused is your surplus but if this is negative i.e. your expenses are higher than income you have a deficit.

The difference between your assets and liabilities is your current net worth.

In the expenses block there are 3 kind of expenses i.e. expenses which flow out without any impact on assets primarily cost of living and discretionary expenses; expenses which go towards fulfilling liabilities and expenses which flow directly towards building assets we call them “Investments”.

We have divided liability costs into 2 categories – cash you loose through payments without improving the assets such as interests, depreciations etc. and the cash which contributes towards improving the equity in assets.

Ultimate Personal Balance Sheet

How to Grow Your Net Worth?

Since net worth is the difference between assets and liabilities hence growing it simply translates to growing you assets while reducing your liabilities. Easier said than done, right.

Here is how we achieved our results:

Boosting income: We looked at ways for boosting our income through better jobs (it worked out) and building sources to append our income. (Here are 5 ways of generating passive income.)

Reducing expenses: On careful consideration of our current expenses we identified many places where we could cut down on. Does it have to be the expensive vacation? Do you need so much stuff? Do you need Spotify, Apple Music and Amazon Music all at the same time? (Here are 5 things eating away your money)

Doing the above created additional surplus for us. This we simply diverted as investments towards our assets bucket.

Reduce Liabilities: Buy assets not liabilities. Invest in things which keep their value, they might be expensive to acquire but you will enjoy them for a much longer time and in the end they will also contribute to your net worth. For me, I am fond of watches and in the past i used to buy one which bought my eye. Two years later I was not wearing them and selling them would not get me any money. This changed 6 years back. I started to save up and buy watches which kept their value, some even appreciated. But you get the idea. Another things is to pay-off loans as soon as possible. Remember the interest you are paying, its money simply draining out without any returns.

In a nutshell, maximise the upper half and minimise the lower half of your Personal Balance Sheet.

In Conclusion

  • Since balance sheets are snapshots of your financial health they need to be updated at regular intervals to see the changes.
  • Understand the mechanics. Your net worth is simply the difference of the second column (Assets – Liabilities).
  • Idea is simple – Increasing the upper while decreasing the lower half.
  • Create assets which can generate cashflows.
  • Set yourself an achievable goal and stay committed. Have patience as you are in for a long haul.
Simple steps to retire or attain financial freedom. Enjoy the good life

5 Simple Steps To Financial Independence

1 Comment / Grow Your Money / By

What is Financial Independence?

Financial independence or freedom is your ability to leave the workforce while continuing to maintain your desired quality of life. You can achieve this through carefully created wealth and alternative income streams.

Why is Financial Independence important?

We often remain in jobs we don’t enjoy out of necessity. This often sucks the fun out of work. Imagine if you were not working out of compulsion but could choose the work you are passionate about or do absolutely nothing if chose to. Wouldn’t that be awesome? Achieving financial independence will enable you to do exactly this. This independence or freedom will change your entire approach to life and  will elevate your state of mind. At least is our case, this is true.

All it takes is a simple plan!

Why are we writing about it?

While there are thousands of articles out there on this topic, most of them are either from companies selling their products, generic advice, over simplified and too ambiguous or too complex to act upon.

When started to plan our financial independence, it seemed like a daunting task. We confronted overwhelming amounts of information, jargons, tons of advice, hundreds of financial products each promising us the best. In other words it was too much, complicated and got us all confused, we almost gave up! 

But the desire to achieve financial independence and retire early is so important to us that we decided to dive in, cut through the clutter, distill the facts and simplify it. 

Key Takeway for us – at the root of success lies a simple actionable plan. That is where we created our 5 simple steps to financial independence based on the idea of working backwards (Read more). 

Now having put our planning on cruise control, we want to share our 5 simple steps to financial independence that you can use for achieving the same.

To make it tangible we will walk you through the 5 simple steps with 3 Personas, each with a different target. This will show the impact of different factors in planning and lets you choose the one you can relate to. 

Taking it a step further we have created a simple online calculator for you to create your individual plan.

Let’s dive in!

Contents

Step 1/5: Define the Timeframe for Financial Independence

Divide the time from now until end-of-life into phases based on the key-activities, focus and financial situation for each. For planning we recommend the following 3 phases,

Preparation Phase: The only active phase in your planning, the effort you put in here will dictate your success. Key activities includes creating your wealth through savings, building sources for supplementary income and settling major liabilities like mortgages, car loans etc.

Bridging Phase: The 1st of 2 passive phases. Now you have stopped working but are under the legal age for availing retirement benefits such as pensions. This phase may require the most attention as you are relying completely on the wealth you created.

Pension Phase: The final phase. Here, you start receiving retirement benefits like pensions in addition to the wealth you built. In many countries you may also get other social or tax benefits.

Note: Be realistic. Choosing a realistic timeframe that allows you to prepare properly without  draining the fun out of your current life or jeopardising current obligations is crucial. You will see the impact of choosing phase durations in case of our Personas. Selection of the suitable timeframe is an iterative process play with different durations in the free calculator to see its impact. 

Step 2/5: Estimate The Needed Cashflows

Next step, let’s estimate the monthly cashflow you will need in your years of financial independence. Think about the money you need monthly to cover your bills, costs for living, insurances, leisure and for pursuing your passions. 

A simple way of doing it is by looking at your expenses from your previous bank statements and simply deducting the costs you will not have in the future such as payment for settled loans, cost of going to work etc. 

Even simpler way is taking 60-70% of your current gross income, statistically this should do the trick.  Surely this may vary depending on your desire of how you want to spend the passive years. You may want to read about our personal balance-sheet to gain insights into your current cashflows.

Since start of bridging and pension phases are in the future, you need to account for the little devil at play called inflation.  Long-term inflation for developed economies stands at 2% p.a. but you account for inflation in your country .

Don’t worry we have included the math in the free online calculator.

Note: Do not underestimate. Nothing would be worse than getting stuck in a life with loads of time but no money to spend.

Step 3/5: Define Your Status Quo

Moving on, let’s define your starting point i.e. the current situation of savings, investments and assets. Putting together this information will be easy if you maintain a personal balance sheet. For this you essentially need the following:

Current savings and corresponding annual returns generated through dividends or interests.

Any additional cashflows generated from other assets such as rentals, businesses etc.

Pension expected from state or employer at the time of its maturity i.e. in the pension phase.

Additional pensions from personal savings programs.

Note: The values of pension plans are often forecasted for certain maturity age assuming that you continue to contribute to them. Account for them accordingly if you stop paying into them at an earlier stage. Look at our Personas to see the impact of this factor. 

Step 4/5: Fill The Gaps to Financial Independence

You are almost there. Meanwhile you know the needed cashflows, the status quo that means – the difference is what stands between you and your financial independence. We call it the – The Gaps.

Idea is to build a simple financial framework in the preparation phase that can later fill these gaps through regular cashflows and/or withdrawals. It is interesting to note that the once complicated task is now down to just two numbers.

Filling the gap can be achieved through a combination of different ways such as:

Option 1: Creating an investment portfolio of highly diversified securities,

through regular recurring contributions and use the power of long-term compounding interests to work for you. You can choose a plan that has a stable appreciation and ideally generates annual returns through dividends.

Fun Fact: If the rate of appreciation is greater than the sum of your needed cashflow and inflation then you can live off it till the end of times without ever getting diminished.

Option 2: Invest in Cashflow generating Assets,

such as rental properties or acquire stakes in businesses that generate regular revenues. Most people consider residential properties for investing but often overlook the commercial property space. Depending on where you are located this can be a great option as well.

Option 3: Build additional sources of revenue,

through a business or side hustle. Depending on you chosen timeframe this could be simply monetising your hobby or passion which you want to pursue in the passive phases

Option 1 as this is the most passive way of building wealth. At the same time depending on the size of gaps to fill and the preparation time available it might require contributing a substantial part of the current income. Hence a combination of different options might be required to reach your financial independence. You can find out your gap and corresponding monthly contribution using our free online calculator.

Step 5/5: Stick To The Plan

If you followed the steps and used the calculator then you should know what needs to be done, you already have an idea of how you can achieve it. And yes, plans look enticing on paper but the only thing that will make a difference is – implementing it and sticking to the plan. 

The difficult part lies ahead. In order to keep going and giving yourself a pat on the back now and then – breakdown your goals into yearly targets. 

As you reach those milestones, you will feel the achievement. It will also remind you of the purpose and will motivate you to keep going.

In Conclusion

  • Time is your friend. Earlier you start planning, more time can work for you.
  • Be smart about your investments trying to build up as much as you can in the early days.
  • Create assets which can generate cashflows.
  • Stay consistent. Set yourself an achievable goal and stay committed.
  • Have patience as you are in for a long haul.
create your own plan

Journey of the Personas

Intro
PersonaAlexPersonaSamPersonaTaylor
Age354045
MindsetOptimistRealistConservative
Assuming legal age of retirement as 65 and life-expectancy 85.
Step 1: Timeframe
Wants to retire at505060
Preparation Phase151015
Bridging Phase15155
Pension Phase202020
Step 2: Needed Cashflow
Current Monthly Income10,000 $10,000 $10,000 $
Needs Monthly (Bridging)8,748 $7,923 $8,748 $
Needs Monthly (Pension)11,773 $10,664 $9,658 $
Assuming Needed Cashflow as 65% of current salary and Inflation 2%. Differing values show impact of inflation over time.
Step 3: Status Quo
Total Savings150,000 $50,000 $20,000 $
Cashflow from Assets1,200 $600 $0 $
Expected State/Employer Pensions2,250 $3,250 $4,500 $
Expected Additional Pension600 $250 $0 $
Available in Bridging Phase2,113 $893 $50 $
Available in Pensions Phase5,742 $4,737 $4,550 $
Step 4: Fill the Gaps
Gap in Bridging Phase6,635 $7,030 $8,698 $
Gaps inPensions Phase6,031 $5,926 $5,108 $
Using Option 1 to fill the gaps
Investment StrategyOptimisticModerateConservative
Initial Capital150,000 $50,000 $20,000 $
Growth7 %6 %5 %
Monthly Contribution2,310 $7,660 $4,290 $