Moneywise24 Personal Finance

For quite some time I was pretty obsessed with money; I wanted more, bigger salaries, huge cars, the list is endless. This obsession started when I moved to a larger city right after I graduated, and I felt really bad to be at the bottom of the ladder, just starting my career from scratch. I saw BMWs and Porches driving around, peope I met were bragging about their brand new penthouse in the city center, a Maserati comes by with a 20-year old blonde at the wheel. I got so caught up with what I thought had to be the average living standard, that in my very first application I sent out, I asked for an annual salary of 200 thousand Dollars (and this is not a joke).

Soon I discovered that everything I experienced was only a big fasade; all the successful people who had earned their money with hard work did all they could to show it off, and those with moderate jobs tried to hide what they didn’t have; the sales clerk at the counter of a department store would put on a suit for tonight’s after-work party and tell everyone in the club that he makes half a million at a large investment bank.

Many people are so preoccupied and virtually obsessed with their career and with becoming wealthy, that they often disregard the other vital areas of their lives. The results are usually depressions, burn outs, health deficits and a poor social life. What should we take into account if we want to lead a healthy and fulfilling life?

A few months ago I had the pleasure to meet a psychologist during a social gathering. As we started to get to know each other, we talked about our work, and as the conversation progressed she casually mentioned the disturbing increase of burnout cases and people with depressions. Whereas the majority of patients seemed to be men, the number of female patients was alarmingly increasing as well. With these words in the back of my head, I started noticing how money- and career oriented many people are: 60 working hours or more per week is not uncommon for many people, people are on unhealthy diets, continuously being on the move, and their social activities suffer. Even those people, who do have enough spare time, seem to be so much preoccupied with money, career building, and wealth.

But life has much more to offer than being wealthy. In fact, each and every person has three basic areas in his/her life, which needs to be satisfied in order for any person to be truly happy. If one area is neglected, the others will suffer. This might acutually often result in a viscious circle, during which the life of an individual starts to crumble down.

Health

Leading a healthy life means being on a healthy diet, eating fruits and vegetables as frequently as possible, avoiding unhealthy fat food, and doing sports on a regular basis in order to keep the body fit. Being healthy also means having a positive and confident state of mind; a healthy mind is just as important as a healthy body. 

If your body is not healthy and fit, it may result in an increased doctor’s and medication bill, impacting your wealth negatively. Additionally, you are prone to being sick more often, and therefore not being able to go to work or to socialize. It will be harder to bond with your friend and family, and to find or maintain a partner. Additionally, a person who is overweight will typically work for a lower wage than someone who is in good shape, doing the same kind of work.

Psychological disorders might be just as severe. This includes any form of depression, mistrust in people or society, insecurity, or anything which may impact a person’s life in a negative way. Many people do not even know that their state of mind is not as it should be. As a result, people with psychological disorder may have a difficult time finding friends, leading an active social life, or negotiating the salary they deserve. In the worst case, a bad state of mind may result in people losing their jobs due to increased sickness or their inability to concetrate over a long period of time, and the mental disorder may become physical, such as skin or heart disease.

Relationships

Each and every person needs to engage in relationships with other people. Humans are very social beings, be it with friends, family, or a sexual partner. If a person’s social life suffers for whatever reason, it is likely that depressions are on their way. A person with unhealthy relationships, or the inability to find new friends, may find himself/herself in isolation quickly, which is unlikely to contribute to his/her well-being.

In its turn, depressions are likely to lead to not being able to concetrate at work, and the start of chronic diseases (the skin, for example, is very sensitive to an individual’s well-being… cases of skin diseases such as psoriasys or neurodermitis are increasing). A bad state of mind may additionally cause a very unhealthy diet, and the start of addictions, which trigger that feeling of ‘happiness’.

Wealth

Money is an important instrument to obtaining a number of basic needs for survival: shelter, food, water and medical care if required. However, there is more to life than simply the basic needs. Humans have the need to develop hobbies, activities and social lives. They want to travel, explore the world, learn a new language, go to college, be mobile. If there is a severe lack of money (or time due to too much focus on a career), a person will not have the means to do all that. They will have a hard time to go out and perhaps meet new people; that person will not be able to pay for his/her doctor’s bills; that person might have very limited resources available to any type of sports, and he/she will be able to afford only the cheapest kind of food, in stead of the healthiest. All this may impact his health in a negative way, it may create a feeling of isolation, depressions, and the relationship with friends and family might suffer.

The first, and perhaps most important step, towards leading a fulfilling life is the recognition of the above mentioned areas, and a self-analysis of which area needs development. It might be extremely difficult to focus on all of the three areas simultaneously if they are not already in good shape. For myself, stepping back from the idea of wanting to be a millionnaire yesterday has helped me tremendously, and allowed me to focus on all areas of my life simultaneously. I still keep a certain focus on building wealth at the long term, but not being wealthy does not make me unhappy.

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I was thinking a few things over last night, amont others how my financial situation would look if everything crashed: stocks plummet and I would lose my job due to a financial crisis. In my case, this wouldn’t look good at all.

Currently I keep 3 different bank accounts:

• a checking account, where my employer transfers my monthly income, and which I use for day-to-day expenses.
• a short-term savings account, which I use to park money which I do not need immediately. I use this money for clothes, a new computer, furniture, etc.
• an investment account, which I use to buy shares and make other long-term investments.

I figured, one thing is missing. What happens when I would lose my job, and my investments would plummet? Or if my house is burnt down and I need money immediately in order to start up again with having nothing? It came to me, that having an emergency account is actually of great importance. For me, an emergency account would ideally be an account which has virtually no risk of the money being lost. Probably, the best solution is a savings account, with a potentially low interest, where the money is ‘parked’, but always readily available, for situations when I would need money fast.

The Bank

Different banks have different policies. We may assume, that each bank will invest our money and our savings into some form of investment, share, or fund, and in exchange we receive an interest. My biggest concern when selecting a bank, is the amount which I am guaranteed to have when things go heavily wrong with the economy. We have probably all heard about the Iceland banks and its account holders, who lost all its money since the bank did not have enough reserves available when shares plummeted with the financial crisis in 2008. Myself, I am Dutch, and I know that my bank guarantees reserves of at least 25,000 Euros per account holder; the governement is thinking about raising this amount to 100,000 by law. Surely for those having some million Euros on their bank accounts, it poses a great risk. But for my purposes, it will definitely do.

Availability

The second criteria is that my money is always readily available when I need it. Firstly, this means that the account type itself is not locked for a specific number of years, and I am allowed to transfer money from that account to my checking account when necessary. Second, it means that the bank should have an online banking system available, which operates in real-time, and that transfers are conducted immediately. I currently have accounts at two different banks; one of them, for example, would withdraw the transfer amount from my account but keep it for a couple of days before transfering it where I want it. This means that the money which I might need in an emergency situation is not available for a few days; not good.

Interest

I do not want my money to sit around without any interest being paid. Since I will not be investing this money anywhere, I will look at the best interest deals available, within the frame of the two previous points mentioned. As such, my money can grow over time.

Amount

The amount, which should sit on the account, should be enough to either be able to live off it for a period of 6 month in case I have no income, or it should be enough to build a new existence from nothing. The exact amount, which someone needs should be determined on a case-by-case basis, but below is the calculation I made for myself:

• My monthly living expenses are approximately 1,200 Euros per month. These are only necessary expenses, which I will have in any case, and does not include clothing, excursions, or anything which I do not need to get by. 1,200 Euros over a period of 6 months is 7,200 Euros.
• Looking at the 7,200 Euros above, this is also quite sufficient to build up something new; initial costs for renting a new apartments, costs for moving existing furniture to the new place, or buying new furniture.

The biggest trick, ofcourse, is not to touch this money whatever happens. If I do not badly need it, it should simply rest on my account. Should I not have needed the money until my retirement, I can then use it as a small retirement bonus.

By the way: if I leave this 7,200 Euros sit on the account for 30 years at an annual interest rate of 3.0%, it will be worth 17,476 Euros by the time I retire; that is a really nice trip around the world.

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In the past I could have lived an easy-going month, with little financial activity, and by the end of the month I would notice 150 Dollars is missing from my budget, without really knowing what I spent it on. I could not track this amount anywhere.

I have to admit, I did not have an efficient bookkeeping system at that time, and it is one of the main reasons I implemented it. I started to track all my finances on a day-to-day basis, and what I found quite quickly is that the money which mysteriously seemed missing was in fact spent on convenience items.

As the word says, convenience items are bought out of pure convenience. It might be the quick take-away coffee you buy when you walk past Starbucks on your way to work, or the pack of chewing gum you buy because you saw it lying around while you were waiting at the cash counter. I personally also count fast-food to convenience items.

I have to admit, some convenience items are fully justified; for example, I would sometimes buy a frappuchino after work on a hot late afternoon, or somethings else to reward myself for some achievement I did on that day. In most cases, however, I found that I bought many convenience items because I was simply being lazy or reluctant to say ‘no’ to myself.

I found one trick, which has helped me the most: before I went out the door, I would get prepared. In the morning, I would make sure that I had at least two cups of coffee before I went out the door, sometimes I would even take with me a small bottle of water. Moreover I would make sure that I would not leave home with a hungry feeling, especially not when I was going shopping for groceries; doing your groceries while you’re actully hungry will result in uncontrollable shopping and thus spending more money. Additionally, each time when I shop for groceries I will make a shopping list, and rarely deviate from it. This allows me to stick to the original plan.

Surely I still spend some money on convenience items, but the total amounts has dropped from 150 Dollars to around 50 Dollars per month; a very good result.

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As soon as you spend money, it is gone and you will never get it back. Surely you will earn some more money, but it is not the same money. You have lost the money, unavailable for investing it, unavailable for paying back debt. Looking at things differently, you may actually have spent much more on your purchase.

Look at money from a different perspective for a moment:

If I spend some money on some item now, it will not be able to generate interest.

The magic word in this statement is ‘interest’. If I buy some item at this point in time, I am litterally missing out on obtaining interest on it. Let’s taken an example of this, a men’s suit which I bought a few weeks ago. The suit costed me 220 Euros, which is not expensive. However, would I have not bought this suit, I would have had this money available to put on my savings account. Assuming that the savings account has a duration of 5 years with an annual interest rate of 4%, these 220 Euros would turn into 268 Euros over that 5-year period. This is an increase of 21%.

If you are currently paying back debt, and you are allowed to transfer additional one-off sums, the effect is the same; the interest rate for debt is much higher than it is for savings (for example 12%). Suppse you are paying back a 10,000 Euro loan at an interest rate of 12%, during the next 60 months. The monthly payback rate would usually be 219 Euro per month, during a period of 60 months. Now suppose, you would make a down payment of 220 Euros (what you would have otherwise spent on the suit). This leaves you with a monthly payment of 215 Euros per month. You are saving 60×4 Euros, making a total of 240 Euros.

The benefit of using such a calculation as the ones above, is to be contious of the future value of the money you are spending. For myself, it allows me to strictly determine whether I really, really need an item, and whether or not it will enrich my life. If it does not enrich my life significantly, or if it does not help me in some way to either reduce expenses or increase income, I will usually not buy it. I would rather put the money aside on a bank account, or perhaps invest it, so it can grow over time.

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I have a few questions for you: Do you know your monthly net wage? Do you know how much money you spent on groceries last week? If you consolidate all of your accounts, including checking accounts, credit cards, and investments, how did your assets and liabilities develop per month during the past 6 months?  

These may seem some tricky questions perhaps, but how can you maintain a grip on your finances if you are not able to see how your finances develop over time, or if you can’t match your budget with your actual expenses? Making your finances transparent and visible is perhaps one of the first essential steps in gaining financial control.

 Doing your very personal bookkeeping means making your finances transparent. Bookkeeping does not need to be as boring as many people imagine it to be. Actually, it can be great fun, since you are actually seeing how, for example, specific changes in purchasing behaviour have a direct impact on your financial strength. Generally, Bookkeeping requires nothing more than a piece of paper (or a pre-printed book of household accounts) and a pencil. You will require separate columns for the following information: 

• Date of the transaction
• Credit amount, or the amount you received
• Debit amount, or the amount you spent
• Transaction category (e.g. groceries, real estate, living, automotive. You can define your own categories as you see fit).
• Payee
• Description / further comments

Alternatively, you can use a programme such as Microsoft Excel. Microsoft Excel offers the benefit, that you are able to set filters easily and create statistics. For example, if you would like to gain an insight on how much money you spent on automotive last month, you can set the appropriate filters and Excel will calculate this information.

If you are looking for an all-round solution, which allows you not only to do your daily bookkeeping, but also assist you in evaluating the results, you may want to consider purchasing a product such as Microsoft Money or Quicken. These programmes are specifically designed for personal finance purposes. They allow you to create multiple accounts, categories, budgets, and to enter all your transactions. In the background the programme will evaluate the data, and the programme may supply you with all the information you need.  Additionally, such programmes often allow its users to do research on companies and shares, and to plan possible future scenarios.

 The benefit of using personal finance software is tremendous; if administered regularly and precisely, you will know exactly where your money is coming from and where it is going to. Once you have your finances visible, it will allow you to make changes to how you handle money and the success over time.

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