A hungry man is not a free man

Most of the people spend all their life driven by others’ expectations or by extrinsic motivation, as Dan Pink very accurately described in his book Drive: The surprising truth about that motivated us. It basically means we spend our lives looking for approval in the society mostly through money and/or recognition at work. However, this only gives us a temporary boost of motivation/satisfaction/happiness. The permanent happiness is found in the intrinsic motivation which, according to Dan Pink, relies on three principles: Autonomy, Purpose and Mastery.

My personal journey to financial freedom is actually part of a bigger journey to autonomy, to finding purpose and to having time to master all the issues I have always been interested in. However, I have to admit that the short-term focus is extrinsic, that currently I am focused on making money, not for the purpose of consumption, which is used by mostly for people as a way to fell that they belong to a certain social status, but for the purpose of saving, of being free from every-day bills. As Adlai Stevenson very wisely said A hungry man is not a free man. Therefore, only when free from obligation we can be free to enjoy life at its fullest.

Your house is not an asset

It is crucial to end up with this non-sense idea that your house (primary residence) is an asset, probably the only one you will ever own and therefore all your savings shall go into that one asset. Work, ask for a mortgage, pay your house and then retire.

 

 

If a house is taking money out of your pocket (insurance, taxes, miscellaneous, etc.) then it is not an asset. Not only you are actually spending money but also you have to consider the opportunity costs of having our money invested into that house, which you wrongly perceive as an investment, whereas you could have invested the same amount of money in another house or investment that could actually yield at least 5%. In a hypothetical example of a 100k house with an average of 2000 per year on expenses, you are actually spending, per year, 7000 = 2000 + 5 000 (5% of 100k). You have to consider the money you actually spend plus the opportunity cost of not using the 100k in another more profitable investment. Here I have assumed that the other profitable investment would yield an average annual return of 5%, which is very conservative if we consider real estate investment.

In addition, there are also two (hidden) costs which I consider very relevant when you buy the house you live in:

1 – You loose flexibility. Either you assume it or not, it is more difficult to move into another city or country if you know you bought the house you are “supposed” to be living in, not only because you are emotionally attached to it and you probably end up more expensive things for your house, in particular furniture, but also because it is really not that simple to rent a house, get a property manager, etc. from one day to another.

2 – You end up of not making the most rational decisions when you invest in a house with the purpose of living in it. You take into account variables that are important to you and not to the market, like being near your family. Or you are willing to accept living in a area which is not as recognized by the market, like the fact that it is near a highway or a factory, because you prefer to pay a bit less. However, those decisions can make this house a very difficult one to sell or rent to a third party and therefore would not yield any cash flow, in case you decide to rent/sell. In sum, it is a very bad investment.

According to Frank Gallinelli there are 2 rules of real estate investing that we should follow: do not hold any sentimental attachment to any of the properties you invest in and if you think it will be difficult to sell/rent, then it is not worth buying.

 

Another sentence I loved in his book What Every Real Estate Investor Needs to Know About Cash Flow… And 36 Other Key Financial Measures which highly reflects my approach on real estate investing is the following:

You are not buying a properly, you are exchanging a fixed price for an income stream.

I create my own luck

Most of the people like to believe that external factors such as luck or being in the right place at the right time play a major role in other’s people successes. I believe those people, in general, are just lazy and it is just easier for them to continue being lazy and believing there is nothing you can do to improve your life than actually making efforts and having a plan.

You live next to your family and enjoy a perfect work-life balance. If I had that, I would also have kids right away. Have you ever thought that maybe the person though a lot before having kids and actually shaped his/her career based on where the grandparents live? That this decision actually required effort and it was not just a matter of luck but most likely the result of a well-thought plan?

You are so lucky, you have a high salary. If I had that salary I would also save more than 50% of my salary. This one actually applies to me. I have worked hard to be successful in the tests and interviews that have put me in this high paying salary. Not only I was rejected many times before and after going to interviews, but also I have spent weeks preparing for every interview, studying more than for an exam. Also, I have carefully planned, together with my husband, the places to live that could be more beneficial both in terms of salary, costs of living, safety, etc. and we have both focused our search in those countries. Plan + hard work + focus = success. Also, not many people would be willing to sell their car, like I did, to think thoroughly before spending your money, and rather focus on generating passive income consistently.

I believe some people just choose to be negative and unlucky. I strongly suggest reading this article from Richard Wiseman where he performed an experiment in two groups of people – lucky and unlucky – and where he shows that “lucky” people are not only more efficient in embracing new opportunities but also they pay more attention to the details that may help them thrive. Therefore, what is generally so-called luck is the result of personality factors, such as optimism, openness to new situations and less anxiety combined with the ability to notice and trust the unexpected. It is not an external factor that cannot be controlled by us.

All of us are lucky to some extent, we just need to work hard, take some risks and embrace the opportunities that come across our paths. Try to learn from the experiences of the lucky people that you meet instead of just assuming that they did nothing to achieve success. I am pretty sure that if you start changing your mindset and your behaviour you will also get lucky in the near future!

You are your biggest asset

When you have no assets that can generate passive income, think of yourself as your biggest asset. Generate the maximum possible income, have low expenses, with the minimum amount of time spent working.

Think of your time spent at work as an investment, i.e., try to get the most out of your work, not only in terms of cash-flow but also in terms of what you learn from it. I have realised that since I have assumed I will not work many more years and, therefore, I see my work as temporary, I take most advantage of it, I enrol in all kinds of interesting trainings, I put myself in challenging situations because I feel I can learn from them and I am not afraid of failure anymore, because I know I will also learn something from failure. I am also more confident to say what I think in meetings and more prone to apply to higher level positions. So, I guess I am better at work and this is due to the fact that I have decided I do not want to work forever and take it as a temporary situation. Ironic, right?

You are your biggest asset! At least until you have no other assets you can live from, think of yourself as an investment: you have to yield the maximum return to your shareholder, which is yourself!

The real cost of owning a car

Owning a car is more expensive than what it seems. Even a cheap car can turns out to be a very expensive deal. Additionally, cars require not only a one off big expected expense (mainly taxes and insurance) but they can also mean non-expected significant expenses. Also, in particular for new cars, the money that you “spend” on devaluation is very significant.

Check my calculator (the-real-cost-of-owning-a-car) with 2 examples and feel free to play with it. The values on the excel sheet are in Euros and they should be considered as pretty representative examples of the European reality. In the calculator I assume that the car will be sold after 5 years at a certain price that can be defined.

A new car with a price of 26k will cost, on average, 500 Euros per month and even a cheap used car with a price of 5k will cost more than 300 Euros per month. Are you sure you can’t find other options to travel around? I understand not everyone can walk to work or go by bike (luckily I can go by bike) but please analyse all public transportation options. Public transportation monthly tickets normally pay off, in particular in Europe, which is the reality I am most familiar with. In Frankfurt, the monthly pass is 85 Euros per month, but, if you pay annually, you get 2 months for free, which means that you are actually paying only 71 Euros per month. These discounts are quite common in other cities as well. What can you do?

  • Be aware of the costs associated with owning your car. Yes, even a cheap car is expensive!
  • Analyse public transportation options and discounts associated with it
  • Move closer to work. If you live together with your partner, try to move at least close to either your work or his/hers to avoid paying 2 monthly tickets. Another reason for renting instead of buying: flexibility in dealing with other costs
  • Check other options for when you really need a car, i.e., going somewhere without public transportation or if you want to travel for the weekend. You should be able to find cheap rental places. When we need a car for a few hours (hardly ever, only for very specific reasons like going to Ikea), there is an app that allows us to pick up some cars that are parked in the city for 3 Euros per hour + 0.26 per km. When we need a car for the weekend, we check only the cheapest car available and we book it, normally at around 30 Euros per day.

Another reason for renting a car when you need one instead of buying is that also you can take into account the costs associated with the car in the travelling you are going to made. When you own a car and you travel for one weekend, it may seem you are travelling for free, except the cost of gas, but actually you are not. When I rent, I know I have to spend additional 60 Euros, which I take into account in the total cost of travelling. I have no unexpected costs now which allow me to predict much easily how much I can spend and save.

Do you agree with this approach or think it is absolutely impossible to live without a car?

How did I save the money I currently own?

Most of the money I currently own was saved during the last 1.5 years. 2 years ago, me and my husband started looking for high(er) paying jobs outside our home country, which is a low-paying/low-opportunities country, and we actually found a job more or less at the same time but unfortunately in different countries. M went to Switzerland and I came to Germany. The good thing was that we actually were quite close, if you consider 5:30 hours by train or 1:30 flying close. At the end, we got used to it and we saw each other every weekend, either in one of the places or other places, as we took the opportunity to get to know other cities nearby and countries. I have realized what a beautiful country Switzerland is and I got to know many other cities in Germany, Austria and Poland. Yes, we could have saved more but your relationship is definitely more important than the savings rate, so I have decided to save on other things:

– Renting an unfurnished and cheap studio
Luckily my employer paid for all my furniture transportation from Portugal and therefore I could find a cheaper apartment as unfurnished apartments are generally cheaper. The studio was maybe a bit small for 2 but for 1 person it was more than enough.

– I bought a bike and I did not spend money on car/taxis/metro
I am lucky to live in Frankfurt, which is a very safe and relatively small city and that allows me to bike everywhere. I have saved not only 70 Euros a month, which normally people pay for monthly public transportation pass, but also I hardly ever took a cab. In addition, only in exceptional situations, i.e., if it is raining a lot, I take the metro. Currently, I am 4 months pregnant and I plan to bike everywhere until I feel good, hopefully till the end of my pregnancy! I did not and do not plan to buy a car, even though everyone tries to convince me cars are very cheap in Germany and I should do it. I did not fall into the trap of buying a car and having huge costs and worries every month. Not only you have to pay parking, taxes, insurance but also devaluation is a huge cost. If we need a car, which is very rarely, we can easily rent it for around 20/30 euros a day.

– I was always paying attention to cheap ways to get to Switzerland or other places to visit
I was always checking the cheapest way to travel, either by train or flying, not only to see my husband but also to visit my family back in Portugal. For Christmas and other high demand periods, I always bought the tickets at least 6 months in advance.

– I did not change my lifestyle
My salary increased by almost 4 times than what I was previously earning in Portugal. Germany is a relatively cheap country, only slightly more expensive than my home country. There is a huge temptation to change your lifestyle, i.e., buy expensive clothes, expensive furniture, go to fancy places and not to be careful about money in general. However, apart from travelling more often and buying a good bike (1 000 Euros), I did not change my habits. I still hardly ever buy clothes, I always have lunch in my canteen, go for dinner not more than once a week and hardly ever to expensive places. Most important of all, all the expensive things I bought/experienced I have regarded them as what they are – a luxury – and did not allow them to take any role in my habits. I did experience Michelin star restaurants but actually my favorite place to have dinner in Frankfurt is still the Moroccan place around the corner, where you pay 10 Euros per person and the food is amazing! I just did it for the experience, which is valuable for me, the same way I went skiing and did a biking competition of 110km, all of those are somehow expensive, but again, the most important thing is not to make them a part of your habits and regard it as an experience. On a normal weekend, we go biking around Frankfurt and we bring lunch and water with us, which makes it an almost free activity. And I love it!

Rules to follow

1 – Look for a high paying job and save at least 50% of your salary

Yes, you need to work. Especially if you have no money saved. Not only you need a stable influx of money to start saving but also it is important for you to understand how society works; focusing on improving your social and technical skills, which will be highly important once you reach financial independence. Try to find a good compromise between working hours and pay but, honestly, from my point of view, there is no way you can build financial freedom if you do not have a high paying job. Look for a job that pays well, preferably in a city that is not expensive. I had to leave my beautiful low salary country to start my journey to financial freedom in Germany. Even though I was not very excited about moving in to Frankfurt at first, I have actually been positively surprised by the city in many aspects. Not only it was easy for my husband to come here and to also find a high paying job, I have managed to visit many places around Europe and I have learnt how much I love biking.

2 – Do not discuss or try to justify your financial decisions to others

In general, people feel they are taking the best financial decisions that can possibly be taken. However, remember that 99% of those people will work their ass off until they are 65 or more. Everyone is trying to convince you to buy instead of renting your current house? Nobody understands how you are saving/investing money while at the same time renting a house? Do not waste your energy trying to explain because 1) they will not understand and 2) it takes a long time to explain people the hidden costs and the lack of flexibility in owning a house, so you will be wasting your time too. Focus on your plan and accept the fact that, while most of the people would love to be financial independent at the age of 40, nobody wants to think strategically on how to reach it and especially are not willing to make any effort. Yes, you are alone!

3 – Treat yourself and others with compassion

Do not aim for perfection. Have a rational plan and stick to it 90% of the time. If one month due to whatever circumstances you end up not saving what you had expected – or not saving at all – do not blame yourself. Those are sunk costs and, again, do not waste your time or energy with guilt. This lifestyle is like a diet, yes, you will reach your destination sooner or later and yes, cheat days are allowed from time to time.

We, humans, have this natural tendency to compare ourselves with others. Try to be as smart as your neighbor, as interesting as your friend, feeling envy in a positive way, and do not try to strive with material goods. Feel compassion for those who do it. Unless they are Warren Buffet, they will never be 100% fulfilled. All the latest studies on happiness show that wealth is irrelevant so feel compassion for those who feel they can only achieve happiness with material goods.

4 – Make 2 lists: one with all the things that are highly valuable to you and another one with all the things that you would have more time to do more if you didn’t have a full-time job (some overlap of course)

Here are my lists:

Highly valuable/make me happy

  • Biking
  • Spending time with my husband (and, in the very near future, my son)
  • Learning/reading about psychology and economics
  • Writing
  • Being there in important steps of my family/friend’s lives
  • Doing something for others
  • Have an experience on starting a start-up full time
  • Be an example for my son and show him that being free is more important than being super wealthy, that taking care of himself/his health and happiness are more important than working for others
  • Doing yoga and understanding its benefits for the human body
  • Feeling I own my time

This I would love to do more if I wold have time

  • Surprising my husband more often and write about my feelings
  • Cooking
  • Read and write more
  • Learn German
  • Volunteer
  • Do more yoga
  • Be more mindful