Hi! Welcome to Keep Investing Simple, Stupid!
If you’re new to the blog, and especially if you’re new to taking charge of your finances, I recommend you start with the info on this page. I am developing systematic blog posts (see the blog page) that progress from basic personal finance to investing, and everything in-between! I assume that you’re here because you want to learn more about how you can take charge of your own financial situation. However, I also know that everyone has doubts and fears as to whether they actually CAN take charge of their finances. I’m here to tell you; you can do it! This site is here to help educate, empower, and guide you through the process of becoming financially independent!
If we think of financial independence as a lifelong journey that we’re all on, and the advice you find on this and other solid blogs as a road map, then the first thing you need to know is exactly where you currently are on the map. The only way to get to where you want to go is to know where you currently stand. Answer the following questions honestly to yourself and/or with your spouse:
- Do you find that you have extra money left over at the end of the month?
- Do you have a spending plan (AKA “budget”)?
- Do you have any money saved for retirement?
- Do you have any money saved for an emergency?
- Do you have any money saved for future purchases, such as for a house, cars, furniture, vacations, etc.?
- Do you have any specific financial goals for your future life in retirement?
If you answered “No” to any of those questions, this is your starting place.
First, develop a Statement of Financial Position (below), which is actually pretty easy and tells you exactly where you stand financially. Then, I recommend you start reading the Budgeting 101, 102, 103, and Emergency Fund posts as these form the foundation of any solid, consistent financial plans. Once your financial plan is in order you will be ready to confidently start saving towards your goals and investing for your future! Best of luck!
Find the Statement of Financial Position in the excel spreadsheet below (download it). The Statement of Financial Position is a snapshot in time of your overall financial position. This is where you begin to find out how well you have been doing with your finances… this can be pretty eye-opening, so be ready! Next, there is a key ratio to calculate (it’s easy, no worries!) that will give you a pretty good indication as to how you’re doing as far as saving for retirement is concerned. Keep track of these statements and see how your financial position improves over time. I recommend doing this every January so you know how your financial situation changed over the previous year. This is how you’ll truly know if your spending plan, savings/investing plan, and lifestyle are working for you… or not. This is where we have to be honest with ourselves. So, before you do anything else, find out your financial position as of today. We build from here!
The ratio to calculate is the “Net-Investment-Assets-to-Net-Worth Ratio,” which tells you how much of your net worth is in investments. This is important, because if most of your net worth is tied up in other areas, even if they’re assets, it is not as helpful for retirement as you might think it is if you just look at your pure net worth. Also, if most of your net worth is in your house this ratio will tell you that. The difficulty with most of your net worth being the house you live in is that, while it’s good to own a home, you cannot retire off of your house’s value. The reason being, if you sold your house you would have to use a good portion of that money to live somewhere else, even if you down-sized in home. So, you want to work towards most of your net worth being in investments, both tax-preferred retirement investments and taxable investment accounts that you can use prior to the age of 59.5 years old.
Here’s the ratio: Take the “Total Investments” amount from the excel spreadsheet and divide it by the “Net Worth” amount from the spreadsheet.
(Total Investments / Net Worth = Net Investment Assets to Net Worth Ratio)
Your goal is to be over 50% on this ratio, which means that over half of your net worth is in investments. You want this ratio to get higher as you near retirement age.
For younger people (e.g. 20s-30s) this ratio may be closer to 20%, but that’s okay because you are starting out. You just want to see it go higher each year. Ask yourself what decisions you can make that will drive up this ratio? What decisions can you make that will tie up your money in other places? How can you optimize decisions such as purchasing that first home in light of this ratio that won’t put you under, but will also provide you with a good place to start your professional life? These are the types of things you need to have in mind as you make bigger financial decisions down the road. As you’ll read on this blog, buying too expensive of houses and cars are the two main barriers to building true wealth, and this ratio shows why. It doesn’t do us much good to have most of our money tied up in things that depreciate (cars) or that barely keep up with inflation (houses/real estate, although it does depend on where you live to some degree). Keep this in mind…
Now, if you’re in your mid-upper thirties or older and your ratio is in the 20%-35% range, you’re not doing too well – but don’t worry too badly… all is not lost! You just need to get on a plan and start telling your money where to go – today! Believe me, I’ve talked to so many people who are in their late forties and fifties that are concerned about retirement. They realize they cannot work forever and that they didn’t save enough, so now they’re scrambling to save as much as possible.
One of the greatest financial regrets that people who are retirement age have is having not saved early enough or aggressively enough for their retirement days during their younger, working years. If you’re young and reading this, good for you, now go do it! Don’t wait 30 years so you too can have this same regret; learn from those who are already there! Be wise about this, it’s YOUR life we’re talking about! Now, if you’re not so young, and you don’t have much in saving, you’ll need to save more aggressively. But, even if you’re late to the game, it is still very possible and realistic to drastically improve your financial position before retirement, even if it means working a few extra years to ensure you’re on solid ground.
Look over this list of regrets. How many of these are preventable if we take the right steps today? Let’s get started!