I build cool stuff for a living and make money doing it. Why would I ever worry about running out of money?
This is usually the response I get when I talk about finances with people in the software development industry. By no means do I find anything wrong with that statement. We as developers are passionate individuals, proud of what we build and no one ever taught us how to manage our money along the way.
As a software developer myself, I was always bored by the financial aspects and it was just an earn and spend cycle of life for me. But then I stumbled upon one good book, which lead to a few other good books along the way that got me interested on the world of finance(I will mention a few of them at the end of the write-up).
If you think the retirement fund you have will be good enough to retire happily, you will be in for a very very big surprise. Try calculating the amount you need annually to cover your expenses and see how much a retirement fund will give you annually. What if you have money in the bank? Well, in a period of inflation do you know how much money in the bank is really worth? Not very much unfortunately.
Ok, so let us start with sometimes the only income source we have, the infamous SALARY. On average, how much of your salary do you save on a given month? Of course this varies depending on the idiosyncratic situations we are in. Some maybe single, others married or having to care for ageing parents. The wrong answer in this situation is if you said you save what ever is left after you had spent on various luxurious that the world has to offer us on a daily basis. The right answer was aptly put out by Warren Buffet and it goes like this;
“Don’t save what is left after spending; spend what is left after saving.”
– Warren Buffett
If you do not know who Warren Buffet is, you really should read more about him(A book on him is also mentioned at the end). As with life goals, having financial goals are important. If you do not have monthly, yearly financial goals, then you are aiming in the dark for some random amount that you would think is sufficient as part your retirement one day.
Now that you have a set amount saved from your salary, what next? Am I good? Not really. How much of interest does your bank pay for the salary account you have? This was my reaction when I found out the amount paid by my bank;
It is not much quite frankly. During times of inflation, money in the bank will not amount for much. Why? Because your buying power is now substantially reduced. Ok so what now?
Now you think about other financial vehicles available. You can start off with opening a savings account that banks offer which have a higher interest rate than your usual salary account and moving your money into it.
Next up, learn a bit about the stock market and what it is all about(Books I have read on this will be mentioned at the end of the article). Stocks? You crazy? Have you not watched Wolf of the wall street?….. Yea the stock market has its own risks associated with it. It is all about balancing out the risks with the benefits it offers. Unlike money in the bank, stocks appreciate in value over time. Between the Bull and Bear markets(for some reason they do use animal names to differentiate between good and bad times) although stock prices fluctuate, long term investors always reap the benefits.
I initially started off investing on individual stocks and found it to be very time consuming. We as software craftsmen have only so much time a day to devote to these things. And then I stumbled upon a book that taught me about mutual funds. Mutual funds are financial vehicles which invest in a diversified set of stocks in different domains. There are a plethora of mutual funds out there, but the one I use(Late disclaimer, I reside in Australia so this part might not be applicable to you) is offered by a company called Vanguard.
On Vanguard, I specifically invest in three different products they offer;
- Index fund
- Diversified bonds
- International shares
So why three? It is all about minimising your risks. The index fund tracks the S&P/ASX 300 which basically means when you own part of this fund, you are invested in almost all companies being traded in the Australian stock exchange.
Diversified bonds invest in government and other bonds that has a guaranteed return at the end of the bond period. Unlike stocks, you agree to a rate of return when you purchase a bond and you are protected of any defaults that would happen in the stock exchange for example when a company goes bankrupt.
The international shares are invested mostly in the US and a bit in the UK and Japan and a few other countries. Why international shares? Well the ASX goes through its own down periods and the international shares are a hedge against that if and when that happens.
This is just the strategy I use and by no way am I recommending you do exactly the same since it differs on many individual factors and how resistant you are to risk.
Real estate is another good financial investment to have in the long run as with basic laws of economics, with us running out of bare land, supply and demand kicks in and prices appreciate over time.
Saving is definitely hard, specially at first. I read on a paper article(yea so 1990) once which suggested you ask yourself three questions before you purchase anything which has served me well over time. They are;
- Do I need it?
- Can I afford it?
- Do I really need it?
These three questions act as gates that stop you making an impulsive purchase just because you like it. Most of the time, the impulsive purchases end up in your attic, rarely used. This is also in line with what the minimalism paradigm suggests. If you do not know what minimalism I strongly suggest you check out this YouTube video. Any purchase at the end of the is a missed opportunity to be invested which would have made you money.
I should probably stop there with this write-up. Last thing you need is to end up sounding like a preacher :).. Do note that everything mentioned here are things I practice on a daily basis and I hope it will help you one day.
Of course there are other faster ways to accumulate wealth such as getting into politics 😉
Thank you for reading and do leave your comments below if you feel like it.