Hey guys, welcome to Compare Return. In today’s video we’re going to bring you a retirement game changer.
What this video is about is how to set a budget and save for your first hundred thousand dollars – which is a key milestone.
If you’ve already got a hundred thousand dollars in the bank or in the savings account, congratulations. Don’t go clicking on the next video just yet, because I can guarantee you this video is going to be jam packed with tips and pointers to take you from a hundred thousand dollars right up to the million-dollar benchmark.
Before we get started – as always – remember that this is simply for educational purposes. It’s not to be taken as financial advice. Please seek a professional if you are looking to get started.
Let me ask you a question. Have you heard people say, “I’m planning on retiring at 65 when I can start to take my pension”?
It’s something which has been said so often that everyone just tends to assume that it’s true without questioning it.
It’s a bit like saying you can’t have an electric car (without some compromises) that’s going to be as good as a combustion engine car. Twenty years ago, buying an electric car was a compromise but today times have changed. Obviously, we’ve got things like Tesla’s and Neo’s on the road which are totally different. We’re living in a new world and the old mantra of slow and steady and let the government help support you for retirement is no longer as black and white as what it used to be. That’s especially true if you’re an expat.
Budgeting for your first hundred thousand dollars is a bit like a road trip. The destination is always a set distance away. How late you leave will determine how fast you need to drive. If your retirement is a hundred kilometres away and you’ve got a hundred kilometre an hour trip, then you’re going to make it in 60 minutes. But if you don’t leave until half an hour later, you still have to cover the hundred kilometres but now you’re going to have to drive it at 200 kilometres an hour.
When you start going too fast is obviously when accidents start to happen. In financial terms you might start making silly mistakes You might be enticed into investing in scams or things that seem too good to be true, simply because you don’t think there’s any other choices.
Right now, I’m going to talk to you about one of my favourite investors, Charlie Munger, who is Warren Buffett’s business partner.
He famously says about the first hundred thousand dollars…
“The first hundred thousand dollars is a bitch, but you’ve got to do it. I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased without a coupon, find a way to get your hands on that first hundred thousand dollars. After that you can ease off the gas a little bit.”
That’s what this video is about today. Compounding is one of those magic mysteries of finance. Why it matters in this regard is if we take the S & P 500 as your benchmark at seven percent return per annum. If you’re investing ten thousand dollars a year, it’s going to take you 7.84 years (at that seven percent return) to get your hundred thousand dollars.
It might seem like a long time, but your next hundred thousand dollars only takes you five years. Then, from two hundred thousand to three hundred thousand, it only takes you 3.7 years. By the time you’re going all the way up from nine hundred thousand dollars to one million dollars, it only takes 1.5 years. To get the first hundred thousand dollars, it takes you 7.8 years. To get the last hundred thousand, it’s only 1.5.
That’s the magic of compounding and that’s why it’s so important to get that first hundred thousand dollars under your belt.
How do you get there? Everyone needs a budget. There are three kinds of people:
- The first kind are those that go to the mall, or Lazada, or Amazon – they might go to their favourite bar or pub – and they’ll buy something that makes them feel happy.
- The second kind of people are those who think they already know exactly where all their money is going, and they think they don’t need a budget.
- The third kind of people just don’t know where to start, how to budget, and what budgeting really means.
There are four golden rules of budgeting.
The first rule is to give every dollar a job – things like your electricity bills or even things like spending to go to the pub. That way your income is working for you. Then when it’s time to spoil yourself, you’ve already got a budget for that.
The second rule is to save for a rainy day. Can you imagine never being surprised by a bill ever again? Imagine you puncture a tire on the freeway. You’ve got a budget for that. You have annual insurance costs that pop up. You’ve got a budget for that. Emergency hospital trips, or trips back to see your family. You’ve already budgeted for all these things because your budget is comprehensive, and you’ve saved for a rainy day.
A lot of budgets fail because these things pop up and people just quit but if you prepare, you’ll never have to sweat it.
Your annual Christmas holiday is a great example you can use right now. How much did you spend on last year’s annual Christmas holiday? Think about it – or think about how much you might want to spend. Take that amount, divide it by 12, and all of a sudden, you’ve got your Christmas budget. Off you go! It’s really that easy.
The third rule (which is my favourite rule) is to fail. Everyone fails at budgeting and nobody has a perfect month in budgeting. Roll with the punches, forgive yourself, move on, and move money around in your budget if you need to – but everyone fails. Don’t just give up at the first sign. You’re never going to have a perfect month in budgeting.
What’s the next best thing? Just to stick at it. That’s one of my favourite ones and that’s something that a lot of people won’t tell you. I want you to fail at your budget because that way you’re prepared for it and you know exactly what to do.
The fourth rule (and this is when you become a true budget master – a budget bender) is to age your money.
What that means is – get yourself one month ahead in your budget. That way every time your wage comes in, say if you’re earning a thousand dollars a month and only spending 900 (and that’s for everything), that extra 100 is aged. It goes ahead so after a while you’re going to be able to be totally financially free. If anything pops up like that busted tire or that medical bill or that emergency trip – you’ve already budgeted for that. Even if things get truly dire, like COVID, you’ve aged your money so you’ve got some extra room up your sleeve.
These are the four rules of budgeting I want you to stick to.
I’m about to give you a free giveaway. We’re going to have links in the description below so make sure that at the end of this video you go down there and click on these. These are two secret weapons that I’ve got in my budgeting – these are the ones that I use myself.
The first one is YNAB – youneedabudget.com. It’s a fantastic program for getting holistic ideas about your budget, seeing all the different categories and things you might not have thought of. It’s a great one for getting the framework of your budgeting together. They’ve also got motivational articles and tips and tricks so think of that as your kind of “grand design”.
The second one is an Android application called Wallet (I’m not sure about Apple) and I’ve sent you a little image there. That’s what it looks like in the play store. Hopefully Apple has it too. This one’s good for manually tracking what you spend. At the end of every week, I have all my bank balances in there and I reconcile the account with these applications. I can see my outgoings and my spending and make sure I’m keeping track of every single dollar.
Those are the two tips and tricks for today’s video so keep them in your back pocket.
If this all seems too hard for you and you’ve tried budgeting (and you’ve tried and tried again), I’ve got another budget for you which is really simple. It comes from the man himself Warren Buffett, “Do not save what is left after spending, but spend what is left after saving.”
You’ve probably heard people say this one before, but what this means is, figure out what you need to be saving for first. Get rid of all your debt. Make sure you’re hitting that investment goal (remember the hundred thousand dollars?) and then save for a rainy day.
Once you’ve got all those things together – anything that’s left in your account – you can go off and spend it. That’s a much simpler budget that people can stick to.
For the above benchmark, I want you to aim for 50 percent of your income .
That might sound impossible to be putting away or saving 50 percent of your income. If it does, start small and work your way up. Start at 10 percent a month and then add an additional 5 percent every month until you get to your benchmark.
This way you can make sure that you’re really getting yourself ready to retire and you can hit that hundred thousand, the 200, the 500, the million… and you can really get to your retirement goals.
That’s it for today’s video. We’ve covered off the hundred thousand dollars and why it’s so important. We’ve covered off some budgeting tips and tricks with a couple tools in the tool bag, and we’ve also covered off why you need to bring all this plan together to make sure you can get your retirement on rails.
I hope you enjoyed, and we’ll see you for our next video. Thanks for watching Compare Return. As always like and subscribe (or don’t – you know I’m not your father – so whatever).
Have a good day guys! See ya!