Using money as a tool to design your life

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Today I have a guest post from Jennifer Kempson, who blogs over at Mamafurfur.  

Over to her......... My passion is helping others create financial and time freedom in their own life, and I believe it can be achieved on any budget just by following a few simple principles. 

The freedom to know that you have more than enough resources such as money to design life on your terms and do everything you want to do truly can change your world forever. When you have time on your side, there is no better time to learn the fundamental money budgeting principles that when applied consistently over time will allow you to become financially free and choose to work, retiring much sooner than the age of 65.

We all want to have enough money for our needs and to do exactly what we would love to do each day, and with using our money smarter we can absolutely design life on our terms.

The simple starting point for funding that dream life you want to create in front of you is, of course, knowing exactly how much money will allow us to live that life and then finding as many ways to create it.


Use money as the tool it should be to design your life

Your life is your own to create and design to bring as much joy as possible, and even if we are not sure exactly what that will look like right now – we have to start sending our money out each month to our goals.  The only way to achieve anything great with our money is to know how we want to use it.

There really is only one basic concept that could change your money relationship forever, and that is committing to spending no more than 80% of your income on living life right now with any holidays/experiences/luxuries you wish and then saving or investing 20% in your future. 

Your future could be a pension; it could be investments, and we will cover why these are important later, and even could be a business opportunity you feel passionate about. 

This 80/20 split can be found throughout history where it is known that a small percentage of your actions will lead to 80% of your results later in life.  We can show that with our time and absolutely our money as a prime example.

The first step in any plan could be painful but it is time to get honest with yourself on your current spending.  We have to know where we are so we can know how to get where we want to be i.e. in control of our finances and with a plan for how to spend and save. 

A wise man once said that you can tell someone’s priorities by how they spend their money, and often when we look at our spending habits truly for the first time it can be eye-opening.

Where are you now?

Open up your Bank accounts and credit cards and list all your Incomes (including Benefits/Tax Credits/Child support etc) and do the same with everything you spent (Outgoings) in the past month at least.

On my blog, I talk about having an electronic spreadsheet for my budget making this super easy to keep track and update each month.  If you live on a monthly paycheck, look over the past three months of Bills and spending and take the average amounts.  So if you spend £40 a week roughly on food, write down £160 as an average monthly food cost. Do this with everything you have spent money on from your account, even the fun items that you probably shouldn’t have purchased.

jennifer kempson

Is it worth it?

Now you have a complete list of your spending habits, it’s now time to be honest if you are receiving joy from everything you exchange for your hard-earned money.

  • Do you really use that Gym membership enough to warrant the expense?
  • Could you consider working out at home in the morning instead to test and see if you would rather use the money for something else?
  • Do you really read those magazines delivered each month cover to cover and enjoy them?
  • Have you tried a cheaper brand of cereal or non-branded version recently?

Might be time to give it a go.

Remember even on those contracted commitments such as your Gas, Electricity and TV bill – now is the time to haggle and ask for a better deal if you haven’t recently.

Attack every penny you are committed to paying right now and make sure you are receiving the full value of joy from it.  If you have any debt in your spending, it is time to get rid of it forever! The habit of avoiding debt and instead saving in cash for what you need will be the greatest gift with your money you can give your future self. 

When we are in debt, we are committing to giving someone else our money for months or years ahead, and we want all our money to be under our control.  If you have any debt right now, time to commit to throwing as much money as you can at it until it is completely gone. 

I use the Snowball method personally, where you attack the smallest debt first until it is cleared then move the money to throw at the next largest and so on. 

The sense of pride from getting rid of these financial restrictions on your available money right now burdens’ will stand you in a great position in the future when you might want the option to work or not.

Understand the power of compound interest and invest in your future

One principle that I love to teach others is the power of compound interest and your money, allowing it to work for you, rather than you having to work for money.

We can use the power of compound interest whenever we store our money in Investments or savings accounts allowing it to continue to multiply even when you are sleeping. 

Absolutely everyone can and should use the stock market and investments to grow their wealth long term to help achieve their financial goals.  In fact, when you have a savings account with the bank or even a pension you are using the stock market for returns – just the bank doesn’t share that with you!

If the most successful people in the world invest, there might just be something in it!

money to invest

What is Investing?

Often when I say I invest in the stock market, as a normal working mother from Glasgow, I get the same few responses. It is “too scary”, or “you could lose it all“, or “it’s too complicated and only for wealthy people to understand”.

I promise you after reading this article you will be one step closer to trusting the process of investing that has been followed by the most financially successful people in the world, and continues to be used to give you interest on your bank accounts and pensions.

Essentially when you set up a savings or trading account with an investment company or a Pension through an investment company, you deposit your money so that is then used to purchase individual stocks, funds, bonds or hold the cash for you.

The type of investment you purchase with your deposited money will ultimately then return back further profit (interest) or make a decrease based on the asset you choose to buy with your money.  You can purchase stocks within a range of companies, individual companies or bonds and for that trust with our money they return us back a portion of their profits.

With any investment, this is NOT a short term quick money scheme and we are not guaranteed to see a return right away from investing our money. 

It is not similar to a normal bank account as the money is effectively used to buy a part of a company or loan for the length of time you choose to leave it. You need to invest your money for the long term in whatever method you choose and ideally 5+yrs to allow for the natural dips and increases to smooth out your growth over time.

Most people invest and sell using their emotions – they sell when low and purchase when high – we need to detach ourselves as much as possible from any current trend reports and trust that the markets will continue to increase overall as they have for 100+yrs as an average.

Cash – and why it is NOT an investment

By default, we believe that having cash in a normal savings account might be seen as the safest option, but it is not the best use of your money. On average you might receive 0.02-0.05% return each year on your investment, which will not keep up with the cost of living increase of around 2% inflation each year.

That effectively means your money is losing buying power each year you leave it there untouched.

Personally, outside of having emergency fund money of roughly 3-6 months of living expenses in an easy access account, we need to look at using our money to make more money to really define our financial security independent of anyone else.

financial freedom

How do we become financially free with our money?

Hands down any budget and anyone can achieve and work towards financial freedom (living off the interest of your investment for life) or even retiring early with some simple money strategies.

At the later part of your life, if you are hoping to use the power of compound interest and the stock market to gain higher returns than a normal savings account, then I strongly advise doing as much research as you can into the funds you decide to pick.

With investments, we need to assume we are leaving them a minimum of 5-10 years before withdrawing the money, and must not let the ups and downs of the stock market test our emotions. The value of the stocks once we purchase them is only relevant once we need to sell them, so best mindset practices say to ignore the current day value until you absolutely need them.

Another benefit of using an investment ISA is that you will have access within a few days to your money should your circumstances change and you find you need the money sooner. I strongly recommend every adult has an investment ISA, as it is currently one of the few ways to get high-interest returns on your long-term savings. It could even allow you to build a substantial ‘pot’ that allows you to achieve complete financial freedom for you and your family in future.

I call an investment ISA a passive income source, as the money generated is created by companies returning some of their profits in dividends, and/or the value of the stocks and shares purchased going up. We do not have to exchange our time for this income, therefore it is completely passive and grows without any effort from ourselves.

The beauty of the stock market is that our money will remain active until we choose to sell our stocks, so it will continue to create more income for us in the background. We can simply withdraw a small portion of it each year to live off, and some of the increase will still remain, adding to our wealth total despite the withdrawn money.

money as a tool

How could it help?

Let’s look at some examples of what we could potentially end up with if we took out an investment ISA even with a short-term goal of accessing the money within 10 years. I will use a withdrawal rate (how much we draw from our account every year as a source of income) of 3.75%.

This is regarded as a good average by most financial advisors and institutions.  

Starting with no savings at all at age 50, if we contributed the maximum of £20k a year to an Investment ISA with a withdrawal rate of 3.75% a year on average and saw only a 4% return on investment, then using the power of compound interest and reinvesting any dividends or growth, we would have at age 60 a total investment pot of around £246k.

If we withdraw 3.75% of this a year, as stated above, after 10 years we could withdraw £9.2k a year of interest (tax-free). That would mean an extra £800+ in your pocket every month through your investment ISA savings alone.

Leave the amount until you are officially retiring at age 65, after 15 years of consistent effort and contributions, we could see approximately £411k with an income of £15k a year or £1200 in our pocket every month.

If we were to see a 10% return on investment each year, the total fund within 15 years of maxing out our contributions would be approximately £696k and an income of £65k a year tax-free!

That is probably more than any retirement could use up, and of course, this is purely using our investments as a source of income and not including a state or employer pension. That means you could end up being able to use the interest generated from your investments each year to live off indefinitely!

Another great point to remember is that an ISA is per individual, so if you are a couple you can open one each and double your achievements together. What better gift than your time and freedom back to use as you wish could you give yourself and your loved ones?!

How do we maximize our profits from Investing?

Modern Portfolio Theory is the practice of spreading the risk and reward of any investment, and spreading the investment over a range of companies to limit any potential losses and called Diversification.

Ideally, we want to buy our stocks low and sell when they are high; and the whole stock market globally will go up when we balance this efficiency balance of our choices. That means making sure we don’t “have all our eggs in one basket” and analyse our choices regularly, or allow someone else to do it for you using a Mutual fund.

Ideally, we would want only 5% of our total investments in individual companies if you wish to choose that route, and 1% in Cash. This would allow our portfolios to remain balanced using the overall market for our growth rather than one company and the risky nature of that.

As simple as opening a bank account

Personally, in the UK, I think there is no easier or simpler way to invest than through an Investment ISA (Individual Savings Account) which allows up to £20k per person to be saved tax-free.  It is a special form of savings account offered by many banks and investment companies (such as Vanguard) that allows you to purchase stocks and shares with your money, and use the power of compound interest to see it grow dramatically. 

For example, if you were to invest in an Investment ISA from age 18 to 30 years consistently £200 a month, seeing a 4% average year on year growth, you could see roughly £38k in your savings at the end of those 12 years. Keep saving at the same rate until the age of 55 when you can retire, and you could have over £200k to your name with that small saving every month consistently.

I am a huge fan of holding an Investment ISA account in your name and contributing to it regularly as well as any pension through your workplace.  The benefit of an ISA is that your savings and interest received is tax free up to £20k but also you have access to it at any time, as long as you sell your shares and are able to wait the few days for that to happen.  Your pension, however, is locked down until the age of 55 years minimum and no way to gain access outside of this until the time.

Using an Investment ISA, once you are confident with the terms and the funds or stocks you wish to buy based on your risk threshold and tolerance, you can even use this type of high-interest return to provide a passive income in future years where the investment will return back to you enough money every year to live off indefinitely.  That truly is when financial and time freedom comes into your own hands, particularly when we will be unsure whether such benefits as State pensions will be an option to support our living expenses when our time comes.

mindset coach

Invest in your future as much as you can There really is no better time to commit to a regular savings habit that will allow you to create income for your future in a straight forward way.  We achieve this by learning the habit of “earning more than we spend” but also sending our money out on autopilot every month without fail towards our goals such as financial freedom or security through investing or business ideas.

If you are new to the concept of money management, aim to live within 80% of your income right now, become debt-free as quickly as possible, and then look to save or invest 20% of your income in your future. 

These principles alone will ensure you are secure and set for whatever life you wish to create ahead, and what greater gift could you give to your loved ones and the world that your time to have fun and be happy!

Know that absolutely any financial situation right now can be turned around completely by starting afresh and using money as the tool it is designed to be, rather than being a slave to it. 

Start with the goal in mind to use your money with intention, either for future financial freedom or simply to use it to design the life you know you truly want to live.

Wow.  What a fantastic post from Jennifer, packed with useful information about how we can all make decisions that can change our lives, and allow us to retire earlier! 

Who is up for it?

  If you would like to be supported to your own journey to financial freedom, then come along and join my Facebook group, where I run free challenges throughout the year, all designed to help you to be happier, healthier and wealthier.  

eileen adamson

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