Today’s post is by my awesome staff writer Jordann. Enjoy!
One of the best things about personal finance is that it’s so personal. Everyone has their own strategy, tailored to their own specific personality. I think this is why there can be so many personal finance blogs out there, yet somehow we all still manage to come up with unique and interesting content day in and day out.
If you’re anything like me, it’s the personal stories that keep me coming back, not the generic posts about maintaining a reasonably sized emergency fund.
One of the things I love reading about is risk tolerance. It’s so interesting how this personal threshold is so different for each individual. Myself, I’m not a risk taker. Instead of investing my income, I’m choosing to take a guaranteed but modest 5.5% return by paying off my student loans. After that, I’ll be paying off my low-interest car loan, and beefing up my emergency fund until it reaches 3-6 months of expenses, and saving for a 20% house down payment.
I don’t like being in debt, and I’d rather spend my money limiting my vulnerability than investing for a much higher potential return. Heck, even the idea of buying a house, and tied to such a huge mountain of debt, makes me squirm, even though it would be an asset.
I’m one end of the spectrum. At the other end, you’ll find people who are much more daring than me, and who, as a result will probably end up a lot more wealthy than me. These people are comfortable with maintaining debt in favour of investing their cash flow for higher returns. These people carry multiple mortgages for rental income, and are willing to take risks with their capital for the possibility of higher returns. Lots of these people are entrepreneurs, which in my opinion, is one of the biggest risks a person can take.
Neither end of this spectrum is necessarily the best place to be, and there is a ton of grey space in between. Knowing where you fall on the risk tolerance scale is important, and can influence your financial habits in a huge way. From the size of your mortgage to the expected rate of return on your retirement savings, determining your risk tolerance level when it comes to your finances should govern almost every financial choice you make.
I won’t go into how to figure out what your risk tolerance level is, a quick google search yields a bunch of great articles and quizzes on figuring that out. I will say that it’s important to take your risk tolerance into consideration when making financial choices.
Imagine if I suddenly decided that I was going to follow a formula for how to make my financial decisions, without giving any thought to my personal preferences for risk. According to conventional wisdom, I might still pay off my student loans, but I might not bother to pay down my car loan and instead start saving more aggressively retirement. I might also put down 5-10% on a house instead of 20% in order to take advantage of historically low-interest rates.
While this might sound like a perfectly reasonable plan for someone in the middle of the risk tolerance spectrum and positively boring to the world’s risk takers, to me, this plan is a recipe for sleepless nights and worry. By not factoring in my risk tolerance, I’d be setting myself up for failure from the start.
Personal finance is personal. This has got to be one of the favourite sayings in the personal finance community, usually to justify a bad purchase of some kind. In this case, however, it’s true.
Know your risk tolerance level, own it, don’t feel guilty about it if you’re like me and hate risk, and DEFINITELY don’t ignore your risk tolerance level when it comes to making financial decisions!
I talk about retirement a lot on my blog, there is definitely no doubt about that. Lately, I’ve explored how much I want to save, possibilities of what I’d be doing in retirement, and so on. Now I’m going to explore where we could possibly live when we do decide to retire.
I’ve thought about retiring abroad, mainly because I love traveling so much, but for me, I don’t think I would/could. I know I don’t have children now, but I don’t think I could willingly move away from any future family that I may have.
However, I do know that I would love to do some extended traveling. Living in a place for even a couple of months would be great, and the experience would last a lifetime.
I do want to travel after I retire, but not permanently live somewhere. I would love to have somewhere permanent to live near family. Retirement isn’t for a long time for me, so some of you might think this is weird to think about. But I do like to somewhat dream of what my retirement will be like!
I get incredibly homesick. Even when I just leave for a couple of days, I miss my dogs. Yes, some of you are probably laughing, but I do miss them. So I can’t even imagine what that would be like when I have children and grandchildren and then I have to leave them.
If I lived in another country, I’m sure I’d get bored of it eventually. I’d want to be near my friends, or to be constantly moving to other countries. Just staying in one place with no friends or families wouldn’t be for me.
This one isn’t really a negative, but it can be a big culture shock. They always say that it’s very difficult to learn a new language when you’re older. When moving to a new country, there are many things that you will have to learn. Cultures will be new, languages will need to be learnt and so on. This is something that wouldn’t really prevent me from moving though, so maybe this shouldn’t be here
Of course not all abroad places have high crime rates, but this is something to think about. If you are in an unknown place, then you should especially be careful until you learn the ways and behaviors or the place you are in.
Yes, I realize that I don’t have many negatives of moving away, and they mostly involve around having to leave my future family.
If I were to retire abroad, I wouldn’t choose a place strictly on cost. I would choose somewhere that had a nice beach, friendly environment, etc. and that is the best value. While I do love the Midwest, one thing we are missing of course is the ocean, and the oceans’ nice beaches! There are so many places that are very pretty and nice, so moving closer to an exotic beach would be a no brainer for me.
Not all places will have lower expenses than where you currently live, but many countries do offer that. There are a lot of countries in South America and other places where you can live comfortably for around $1,000. This is something that would definitely entice me as well.
Things that you couldn’t afford where you live now can also be much cheaper if you retire abroad. You might be able to afford household help and relaxing things such as going to the spa.
In many places abroad, there are many retirement communities full of people just like you, so you don’t always feel left out or alone.
One thing that many people in the U.S. complain about is extremely high medical care. In other countries that you could possibly retire to, the medical cost can be MUCH much less (such as 50% less).
Last night, Lance was asking me about my possible retirement plans. He first wanted me to write a post about how I became so awesome, but I thought that post would be way too long (just kidding of course, it would be an empty post).
Anyways, the retirement question really made me think. I definitely think about retiring and save for it a lot. But my plan for what I want to do is still up in the air. I plan on making a post about that soon, but I want to think about it a little more and the possibilities.
I’m not going to lie, it is of course hard to think about retirement since I am only 23. There are many things that we are doing to get ahead though.
Our plan right now is to pay off my student loans. I have around $35,000 total and most of it is at what I think is a high rate of 6.8% and some is at a variable rate. I really want it paid off since they are at a fairly high rate. I haven’t really started paying these yet, mainly because most are still in deferment and are not gaining anything from interest until next year. One is a private loan (the variable rate) and I am paying on that.
I plan on completely paying them off before they come out of deferment, and they will be paid off in March of 2013! I plan on just throwing the whole emergency fund towards it and then also saving for 3-4 months for the rest. Being so close to the payoff is crazy to think about. Especially since I have hardly paid anything on them.
Then after that, we plan on knocking out the mortgage a couple of years later, and then we will work on the Jeep, it’s only at 0.9% so we are not too worried.
For the mortgage and the Jeep, we are honestly not as worried. These are at low rates and we would definitely be able to gain more by investing our money and working on our investments.
I know not everyone agrees with our debt payment strategies. 6.8% does not seem high to everyone, and I know some of you rather gain a higher rate back in the market. Tell me in the comments why you chose this and how it’s working for you! I am very interested. I wish we were doing this, but I just hate my student loans (but then I don’t mind my mortgage or car loan, which makes no sense).
Anyways, on that note, we are of course working on saving and investing currently as well. Right now we are extremely lucky with our money situation. I hate to brag, but I am just very happy. Our bills, debt payments, fun money and everything else only consist of around 30% of our after-tax monthly income.
We have come a long way from when our monthly income was only a couple hundred dollars more than what we spent. I know we don’t make as much as others out there, but for the Midwest, I am pretty happy since it’s fairly good!
This is the main reason why we are able to pay down our debts so fast and why I ramped up our goals.
We would like to retire young. We plan on achieving this in many ways.
1. Eliminating debt.
Don’t get me wrong, I don’t always think debt is bad. If you can earn a higher rate on your money elsewhere, then go for it. This is the exact reason for why we took out a car loan for the Jeep instead of just paying for the whole thing with cash.
2. Increasing our income.
This is something that we are always working on. Just 2 years ago, our income was less than a third of what we make now. Crazy! There are many things that we would like to do to ramp it up even more. The boy’s new job definitely helps as well.
3. Avoiding lifestyle inflation.
We will of course buy things that we want, and we will of course eventually buy bigger things (such as a bigger house), but I also don’t want us to get too ahead of ourselves to a point where it wouldn’t be manageable anymore.
4. Having passive income.
We haven’t really thought about what our passive income will be, but there will be something. Maybe real estate, getting involved in some sort of partnership, or something else.