Decorative illustration of diminishing returns

Diminishing Returns in Personal Finance

Some people are never able to satisfy their need for more money and will sacrifice everything else as they continuously increase the speed of the hedonic treadmill on which they spend their days. If we are to avoid this trap, it is important to ask ourselves what is enough. But, can we ever really get enough? Of course, we can. But, to get there, we need to liberate ourselves from the shackles of consumption, and the mindset that happiness is a function of how much money you spend.

Learning From Those Who Came Before Us

You don’t have to take my word for it, however. Instead, let us look at what those who already allocated the precious little time we get on this planet, and learn from their professed mistakes. Palliative nurse Bronnie Ware chronicled the most common regrets of dying people and recounted the top five regrets in this article by The Guardian. Do you think not working enough appears on the list?

It doesn’t. In fact, the second most common regret among the dying people Ware encountered, was “I wish I hadn’t worked so hard.” Every single male patient Ware met, that was close to death, had this regret. Here’s what she had to say regarding that particular regret:

This came from every male patient that I nursed. They missed their children’s youth and their partner’s companionship. Women also spoke of this regret, but as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence.

In fact, we can interpret all five most common regrets as people wishing they had been more conscious about what truly impacted their lives in a positive direction, and less time living up to the expectations of a consumer-centric society. I previously shared some thoughts on why more money in exchange for less time is a losing proposition for me. Although the inflexion point may differ from person to person, I believe this is phenomenon holds true for everyone, and that we can use a concept from economic theory to explain it.

The Law of Diminishing Returns

A fundamental concept in economic theory, the law of diminishing returns, relates to production processes and states that at some point the marginal increase in output will go down if we keep adding more of one production factor while maintaining all others constant. In other words, let’s say you produce small trinkets and sell them on Etsy for a living. Put simply, your one and only factor of production are the hours of labour you put in. Starting out, you improve your precision and efficiency as you put in more hours, and you can produce more and more trinkets per hour you work. Your marginal output is increasing.

Poorly drawn chart illustrating decreasing marginal output.
Marginal output, represented on the Y-axis, decreases as you apply more of a single production factor, here labour, represented on the X-axis, while keeping all others constant.

Eventually, you reach your maximum efficiency, and you are not able to improve the effectiveness with which you produce your trinkets any further. Conversely, you instead find that by adding more working hours, you produce fewer gadgets per extra hour worked because you become tired, and make more frequent mistakes. You may want to object and say that you can circumvent the law of diminishing returns by adding another pair of hands to your operation, and scale it up while at the same time avoiding the problems of fatigue. And, sure, you could, but how much space do you have? At some point, the “factory space” in the back of your garage will get cramped, and your subordinates will get in the way of each other, and marginal output will decrease. The law of diminishing returns will impose itself on your operation, sooner or later.

Does The Law of Diminishing Returns Apply to Personal Finances?

It may seem arbitrary to pick a concept from economics and apply it to personal finance. However, there is research indicating what looks like the law of diminishing returns imposing itself in personal finance. Before presenting what constitutes evidence in support, let us investigate the logical argument to see if it even makes sense to ask the question.

Consider our lives an operation, with the objective of producing a particular output. It is not up to me to tell you what your output should be because every person has different goals and objectives. For some, it may be happiness or contentedness, while others target wisdom or enlightenment. One of the very few wrong answers to what your output should be is the one that so many of us spend our lives chasing: Money. Coin only has value as long as it helps us achieve what we pursue. Or, put another way, if our lives are a factory producing an output, money is not the output, but rather a factor of production. One part of the many factors we use to “produce” happiness, wisdom, or whatever it is we pursue.

Starting out with no money, acquiring just a little of it gives tremendous results. We can purchase food and shelter, and if we get enough, we can cover all our base needs. Sorting out our core needs is of course extremely beneficial to our roles as factories trying to produce contentedness because it allows us to focus on the task at hand, rather than worrying about food and shelter. Our marginal output increase with every bit of money we acquire.

As we reach the point where comfortably cover our base needs, we will quickly find that throwing extra money into the production no longer yields incredible marginal increases in output. Yes, buying more stuff is awesome, and going for a swim in your cash pile every morning, Uncle Scrooge-style is pretty awesome. But it rarely adds lasting increases in our production of whatever we have defined as our purpose because money is just a factor of production with limited marginal returns in the long run. And, in most cases, there is a double effect to this, because money often comes at the expense of another of our production factors: Time.

As mentioned, several studies have uncovered results that seem to indicate the law of diminishing returns at play in personal finance. A study from 2010 by Nobel Prize winners Angus Deaton and Daniel Kahneman, as recounted in this Business Insider article, found that “everyday contentment” starts to level off after your income surpasses $75,000 per year. Other studies have found different numbers, while Financial Samurai has made a case for $200,000 being the optimal yearly income for happiness. Regardless of the number, all of these findings point to the fact that the law of diminishing returns is at play in our personal lives as well.

The Implication of Diminishing Returns

Two paragraphs back, I casually mentioned time as another production factor of what producing what it is we want from our life. In fact, I would argue, it is the most important factor of all. Unlike money, time is the one thing of which we only get a finite supply. While nobody can tell you exactly how much you will get, the only certainty of life is that at one point your time is up.

Realising, and internalising, this is important, especially when we consider the relationship between time and money, the perhaps two most important factors of production. One often comes at the expense of the other. With this in mind, consider the inverse implication of The Law of Diminishing Returns. If adding something you already have a lot of will result in decreased marginal output, the value of something you are in short supply of will be that much higher. Said in other words: If your life is a factory producing happiness, and time and money are the two factors of production, earning more money if you are already busy will not result in more happiness.

Illustration of relationship between the marginal utility of time and money
Money and time are inversely correlated, and as you increase the amount of money, the value of each extra dollar declines, while the value of time increases.

I have tried to draw the results of the above realisation in the illustration above. (I’m sure you’re wondering why I didn’t pursue a career as a graphic illustrator at this point. The short and long of it is I find numbers more interesting!) On the horizontal axis, we have money and time at our disposal. The further to the right, the more money, and less time. The vertical axis represents the marginal value of acquiring one more unit of money or time.

As we can see, and agreed upon earlier, as you are strapped for cash, it makes sense to sacrifice time for money. The marginal utility of acquiring more money to cover your base needs is higher than that of having extra time at your disposal. However, before long, the curves intersect, and it becomes clear that past this point, it is more beneficial to your purpose to take control of your own time, rather than focus on accumulating more money. We have seen that research results support this thesis. Unfortunately, as we know, most people fail to change their mindset at this point and continue to prioritise money over time.

Where Do The Curves Intersect, or: What Amount Of Money Is Enough?

Despite the best efforts of media and academics alike, nobody but yourself can answer this question for you in any meaningful way. Some people value resources and money higher relative to time than others, and that is fine. What is important, is to maintain a conscious relation to why you prioritise as you do, and never forget that, while covering your vital needs is pivotal, time is the only truly scarce resource in the production mix of your life.

Person jumping with joy in sunset.
Focus on discovering what truly impacts your life, instead of accumulating stuff.

Define your own purpose, and from there on do your best to balance between prioritising time and money. And don’t forget that by figuring out what really affects your happiness or contentedness (it is not more stuff!), you can increase your savings rates, and put more money to work for you, giving you more freedom to allocate your time as you see fit. If you haven’t already, be sure to read The Basic Principles of Personal Finance to learn more about this.

Header photo by Rabelais.

Rainbow in Iceland

Running on Treadmills, Chasing After Rainbows

If you were anything like me when growing up, you probably went looking for the end of the rainbow at some point. Yes, you did pick up the addendum of it only being a myth after hearing about the pot of gold, not to mention the fact that it’s quite difficult to find the end of the rainbow. But, still, no smoke without fire and nobody else probably bothered to try to find all that gold, because they readily dismissed it as fairy tales. But you knew better, and off you went when the rainbow showed its colours.

Flash forward a couple of decades, and most of us would be remiss to admit that we went chasing rainbows with the hoping unearthing treasure. Now, we think, we are older and know much more about the world, and wouldn’t even contemplate wasting our precious time chasing a mirage, a mere pipe dream. Despite all the wisdom we’ve acquired through the years, so many of us never stop and take a step back, and realise that the difference between our current selves and the young version chasing rainbows is negligent. The only real difference is that now that we are grownups, we don’t put drop our hopeless dreams when the next distraction comes along, but instead we dedicate our entire life in pursuit of the pot of gold at the end of the rainbow, which none of us will ever find.

The Hedonic Treadmill

Even if you don’t know the concept by name, I am confident that you will be intimately familiar with what it describes. Remember back to a time when you had less, and you told yourself that if you just got that one pay bump you would be able to afford all you need, and you could finally be happy and content. Or once you were able to upgrade to that big house with the beautiful backyard, everything would change, and you would finally allow yourself to enjoy life without longing for more.

How did that work out for you? Unless you are very different to most people, you probably overestimated the effect that raise or that newer and bigger house would have on your happiness. And if you are like most people, it probably had little lasting impact on your happiness at all. Sure, it felt great when you got the first pay cheque or the day you moved in, but after a while, you were probably back to thinking about if you just made a little bit more, you would be set. Or if you were just able to afford a similar house in a slightly better neighbourhood, with an ocean view, everything would be perfect.

That is life on the hedonic treadmill for you. It is brutal, and there’s but little room for rest. Why is it that so many of us spend our lives chasing arbitrary artefacts, thinking that they are the pots of gold at the end of the rainbow that will bring us happiness and contentedness? The theory of hedonic adaption, also known as the hedonic treadmill, states that major positive, or negative life events, have little lasting effect on our levels of happiness because we adjust our expectations and desires as soon as the changes occur. Or, put another way, we believe that we will get off the treadmill once we can run a little bit faster, but instead, our minds adjust the speed of the treadmill according to the pace we run at.

The concept is not a novel one. In Discourse on Inequality, which was published nearly three centuries ago, the Swiss-French philosopher, author and musician Jean Jacques Rosseau wrote:

Since these conveniences by becoming habitual had almost entirely ceased to be enjoyable, and at the same time degenerated into true needs, it became much more cruel to be deprived of them than to possess them was sweet, and men were unhappy to lose them without being happy to possess them.

For most people this will not be a new concept, and, as mentioned before, nearly everyone will recognise what it describes. “Life on the hampster wheel” is a familiar trope in popular culture as well. So, why am I writing about the concept, if is familiar to most already, and I have no new revelations to add? Simply to state that we are all destined to spend our lives in futile pursuit of happiness we can never achieve, pots of gold we can never reach?

Jump Off The Treadmill and Take a Run Outside

It so happens that despite most people being vaguely familiar with the concept, very few take it in, process this knowledge and try to figure out what it means for the lives they have and continue to work so hard to build. Instead, we think to themselves “well ain’t that the truth!” before going to bed a little too late, feeling a bit of guilt because we know we won’t be able to perform to our full potential at work on too little sleep. And that’s a crying shame because our boss has indicated that if we just go the extra mile a couple of more times, we’ll be a shoo-in for that promotion. And the extra money from that promotion would go a long way in covering the bump in our car loan payments from a slightly more expensive car, which we desperately need despite our current car doing the job just fine. Because if you don’t drive the right car, you’re unlikely to get that next promotion after that because, as we all know, appearances do count for something. But, at least we realised the folly of it all and felt enlightened, if only for a brief moment, after skimming the headlines of one of the long reads articles we saved to Instapaper a couple of months back.

A row of treadmills
Will you ditch the treadmill, and go for a run outside instead? Photo by Jeff Blackler.

The point of writing this is to tell you that there is another way of life. Knowledge, and a conscious approach to the choices we make and how they will affect our mental, and physical, well-being gives us another way. Regularly reminding ourselves to take a step back, and examine why we make the choices we do, and if they truly will provide the happiness we are looking for, means that we can combat the effects of the hedonic treadmill, and make actual progress towards a more fulfilling life.

The added side effect of liberating ourselves from the hedonic treadmill is, usually, a better grip on your finances. Because, while not many people are consciously aware of how the concept of hedonic adaption shapes and influences their decision making, consumer-facing companies base their business model on hedonic adaption. Apple is counting on being able to appeal to your need for just a little more pace on the treadmill by marketing an only slightly upgraded iPhone for a seemingly fair price. Automakers are utterly reliant on you reaching the decision that getting from A to B just isn’t the same unless you do it in style. Couple that business model with a population that isn’t conscious with regards to why they feel the need for an upgrade, and lo’ and behold, you get an entire society built around rampant, unchecked consumerism. A world where nothing is valued higher than the next high that comes from acquiring something to adds no discernible value to our lives.

Adopting a more conscious lifestyle does not need to entail moving to a cabin in the woods and embracing the life of a hermit. All we need to do is remind ourselves now and then that particular psychological aspects influence us, and large enterprises are relying on us to let those aspects guide our decision making. But by being conscious about what truly adds value to our lives, we can spend our time, our energy, and our money in the areas that truly add to the life we want to lead.

Try it, and I promise you your wallet will thank you for it. And don’t forget to subscribe to our mailing list, so that you can read the upcoming articles about how to put all that extra money to work for you.

Header photo by Sindre Skrede.

The Royal Exchange Manchester - Last day of trading

An Introduction to Investing in the Stock Market

The best and most feasible way of increasing your financial freedom is by putting your money to work on your behalf, and putting money in the stock market is a core component of a well-constructed investment portfolio. Everyone who has read our primer on improving your personal finances, The Basic Principles of Personal Finance, are well aware. However, if we look at the number of people who invest in the market, it is clear that there are far too many individuals who are still cautious, and don’t realise what they are missing out on by not investing in the market.

Too Many People Are Not Investing

A report by Gallup from April of 2016 showed that the percentage of Americans who own stocks was at a record low, with just 52% stating that they invest in stocks. This number has more or less been shrinking since 2007 when it peaked at 65%, which means that an increasing part of the American population has been missing out on significant returns over that period. We can illustrate this by plotting the development of the percentage of Americans invested in the stock market against the growth of the US market, as represented by the S&P 500:

Chart Americans Invested vs S&P 500 2007 - 2016
Percentage of Americans with investments in the stock market versus development of the S&P 500 from 2007 to 2016. Data sources: Gallup and Yahoo! Finance.

Sure, those that got out throughout 2007 and 2008 escaped a significant value drop. But they also missed out on a fantastic growth period in the years that followed. In fact, had they held firm through the dip of 2007-2009 and until 2016, they would have seen their money double, despite the significant decline at the start of the period. If we look at the number of young people who invest in the market, the numbers are even worse. A Bankrate Money Pulse survey from July of 2016 uncovered that less than a third of millennials (ages 18-35) have investments in the stock market.

The poll also asked the subjects on why they stayed on the outside of the financial markets, and 34% of all millennials picked “don’t know about stocks” as their reason for not investing. Knowing that time in the market matters, and that getting in early increases your chances of seeing significant returns, these numbers are worrying. It is clear that a large part of the population doesn’t know enough about investing in stocks, and as a result are too scared to invest. The reasoning is sound because as Warren Buffet once advised, you should only invest in what you understand. The problem is not having a basic understanding of the financial markets, and that is what I want to address with the series of articles, of which this post is the first. My hope is that anyone who takes the time to read through these articles will finish feeling comfortable enough with their knowledge of stocks and the market to start investing.

What Is Investing, Anyways?

In this first article, we will start at the very beginning, and look at what means to invest in the stock market. To understand that, we need to start with the fundamentals. Every single adult in the western world has an intuitive understanding of the concept of a company, so we will use that as our starting point. Everyone doing business are, with few exceptions, representing a company. The place you buy your coffee? That’s a company, and if you are part of the majority that company is Starbucks. Your local barber shop? That’s also a company, but probably not one that is as big as Starbucks.

Every company has a unique vision, mission and goals, but in a capitalistic society, all of them aspire to make money. The why will differ from company to company, but all of them need to make money or inevitably face insolvency, and in turn, bankruptcy.

Pencil pointing at the word investing
What does investing in stocks mean, anyways? Photo by CafeCredit (Flickr).

If a company succeeds and makes money, who is it that ultimately profits from the good fortunes of the company? Employees may have performance related compensation agreements, but those rarely form the entirety of a company’s profits. No, the real benefactors of a company’s success are the owners of the company. They are the ones who ultimately control the company by setting the strategy, hiring and firing the management, and deciding how to handle the company’s assets. If the company earns a profit, the owners can choose to reward themselves by returning money to themselves in the form of dividends, or they can keep the money in the company with the aim of generating even higher yields.

In addition to dividends, owners of a company can also make money from selling the company, either their entire holding or parts of what they own. If someone is willing to buy it for more than they first paid for the part they own, they will have made a return on their investment.

Where Can You Buy A Company?

Imagine a big mall where you can go shopping. However, instead of shopping for clothes and gadgets, it is different companies that are on display and available for you to purchase. That big mall is an actual thing, and it is called a stock exchange! A stock exchange is simply a marketplace where you can buy and sell shares of stock of the listed companies. Examples of stock exchanges are NYSE (New York Stock Exchange) and NASDAQ.

When someone refers to “the market” or some other variation of the term, they are in reality referring to all the different companies listed on all the various stock exchanges, either in a geographic area such as the US (the US market) or the entire world (the global market). If you start looking, you will find that not every company you know of is listed on an exchange. We differentiate between listed and unlisted companies by referring to them as public and private companies, respectively. The next article in the series will look at why some companies are private, and some are public, but for now knowing the distinction will suffice.

In years gone by, buying a share company stock could be a bit of hassle. You had to have a broker, with whom you placed your order over the phone. After that, it was waiting, hoping that your bid got accepted before your broker came back to you with the verdict. These days, anyone can buy easily through online brokerages, which means that the bar for getting started with investing in stocks is no higher than opening up another bank account.

The More You Know, The Better You Can Invest

When you break it down, the general principle of the stock market isn’t very complicated. As long as you understand what I have laid out in this article, you have a basic understanding of what the stock market is. You know that there are, at the most basic level, two ways to make money from investing in shares of stock of a particular company, and that is either by receiving dividends distributed to shareholders or by selling at a higher price than you bought.

There are, naturally, layers upon layers of complexity that form together to determine how the markets function. No single person can claim to have an all-encompassing knowledge of every aspect of it, but as a starting point, just knowing the basics will serve just fine. The next post of this series looks at the company. How is a company born, which factors determine whether or not it is successful, and how does it evolve from being an operation out of your parents garage to the most valuable business in the world.

An understanding of such fundamentals will help you make more informed investing decisions. To make sure that you never miss a post from Abovare, be sure to sign up for our mailing list. Alternatively, you can follow us on Twitter or Facebook, or subscribe to our RSS feed.

Wall art of a t-shirt with the text failure is cool

The Path to Financial Freedom is Full of Failures

A few months into my first real job after graduating, I was flying high. The early onset imposter syndrome was starting to recede after a flurry of positive feedback, and I was starting to get comfortable in my position. That feeling didn’t last particularly long before I, in horrible screw-up, managed to publish our entire customer list to every single one of our customers. My world came crashing down, and I was inconsolable.

After a while, people forget all about that mistake, and while I’m sure my bosses had to smooth talk and cajole to avoid any fall outs, my mistake ended up not being anywhere near as bad as I thought. When it comes to personal finances, the reality is much the same. While you can structure your life, and your habits, in a way that lets you minimise splurges and unnecessary spending, you will end up spending money you didn’t plan to spend. And you can read page up and page down regarding the risks and rewards associated with every single investment opportunity that comes along, but you will end up making bad investments.

When each of those things happens, and they will, along with a whole host of other mishaps that impacts your path to wealth, that in hindsight could have been avoided, you will feel terrible. And it is fine to do so, but only for a little while. Because, and I am going to dig deep into the vault of cliches here, we have only failed if we fail to learn from our failures.

We have only failed if we fail to learn from our failures.

I recently finished reading the book Creativity, Inc. by Pixar head honcho Ed Catmull. In the book, Catmull lays out his approach to leading in a creative environment and highlights the methods that he believes have helped Pixar grow from being a division of Lucasarts into the most successful maker of animation movies. A recurring theme throughout the book and Catmull’s career is the importance of failing, and handling failure in a productive manner.

Catmull states that there are two meanings of failure: One that we screw up, learn and grow, and, two, we are idiots because we failed. The key to handling failure in a productive manner is to “recognise both the reality of the pain and the benefit of the resulting growth,” says Catmull. He frequently puts forth the example of Pixar director Andrew Stanton’s philosophy and catchphrases to exemplify their company philosophy towards failure, like “fail early, and fail fast” and “be wrong as fast as you can.”

Funny plan for life by kid, which includes failure
A good plan should account for failure, like this one. Photo by Beth Kanter.

I am highlighting the way they approach failure at Pixar because I want to illustrate that even big, successful corporations not only fail, the rely on failures to discover the path to success. And I believe that unless we consciously prepare ourselves to handle failure in a productive manner, we are likely to let our failures weigh too heavily on us. Another adverse effect of failure, unless we process it in a productive matter, is the tendency to overcompensate to avoid making the same mistake over again. As the old saying goes, once bitten, twice shy. Sometimes we fail because circumstances weren’t right, and avoiding similar opportunities because we failed once before can be both irrational and costly.

Another adverse effect of failure, unless we process it in a productive matter, is the tendency to overcompensate to avoid making the same mistake over again.

One of my favourite stories about failing in the context of personal finance is Miss Mazuma’s brutally honest recollection of the rise and fall of her real estate empire. It is a fascinating read, and the important takeaway here is that Miss Mazuma didn’t let her ill-fated decisions decide her fate. She got back up, did what she had to do, and rebuilt her wealth to the extent that she is now enjoying financial freedom beyond what most people ever get to experience.

So, in-between making all your plans for how you are going to build your wealth, I want you to take some time to plan your approach to failure. Because, as mentioned before, you will fail. But, like Pixar, one of the most revered creative companies in the world, you should incorporate your failures into your solution.

Header photo by Nicolas Nova.

Picture of Swedish statistician Hans Rosling

Remembering the Number Magician Hans Rosling

A few days back, the news broke that statistician, and epidemiologist Hans Rosling had passed away, far too soon, aged only 68.  While Rosling gained a fair bit of fame in his later years, after, among other things, appearing on the BBC show “The Joy of Stats,” there are still far too many people out there who are not familiar with his charismatic style of communication and ideas.

Rosling was a pioneer when it came to illustrating and communicating with data in a way that is concise, accurate and to the point, while at the same time entirely understandable for absolutely everyone. As someone who works with data, and attempts to incorporate it into presentations both professionally and otherwise, I consider him to be the one who set the bar. Just take a look at this video, a 2009 clip from the above mentioned BBC show “The Joy of Stats” in which Rosling explores the relationship between wealth and life expectancy, and how it developed over the past 200 years:

If you are currently thinking that anyone can present numbers representing five different dimensions in a clear and intuitive fashion, as long as they have the technological know-how of the BBC to help them out, I want you to take a look at this next video. As a true master of his trade, he gets his point across in the same understandable fashion using the high-tech aid of… boxes:

Understanding numbers and how to use them to support your arguments is certainly relevant for those of us looking to build wealth and freedom, that is not the primary reason I want to share with you the legacy of the Swede. Rosling was, in my mind, first and foremost a proponent of independent thinking. He frequently argued against letting media headlines dictate your worldview, and he used numbers as an aid to understanding the world.

As we look to manage our personal finances in a way to lets us build wealth and give ourselves more freedom of choice to live our lives the way we want, we must continually question the established. We must go against the prevailing narrative in a number of ways when it comes to what you need to live a full life, and what defines to be successful. Very few experiences have given me more confidence regarding challenging the general perception as perpetuated by the media, as seeing Rosling disprove one myth after the other. That is why he was a role model, and one of my heroes.

I leave you with a final video clip, from Danish TV, in which Rosling is explaining over the course of two minutes why you should not use media to understand the world. He is speaking Danish, but there are subtitles, and I hope that you take the time to watch it. If you want to see more from Hans Rosling, I recommend starting with the TED talk he held with his son in 2014 aptly titled “How not to be ignorant about the world.

Chunks of dollar bills

What is Extra Money Worth to You?

The past couple of weeks, I have been putting in a bit of extra work, and it has made me reconsider the value of earning extra money in addition to my ordinary income. It is easy to fall into the trap of thinking that extra money equals more freedom in the future, and is worth grabbing with both hands no matter the sacrifice. I fell into that trap.

A New Offer From an Old Acquaintance

Over the new year, I started a new job. On account of the close relationship between my old and my new employer, I have been able to help the former with their transition after my leaving by dedicating some of my working time there. Not long into the deal, it became evident that my old employer wanted me to contribute a bit more than their agreement my with new company allowed. Their solution was to propose an after-hours consulting deal, which would see me handsomely rewarded for my extra effort.

Given that my spouse and I are expecting our first child come summer I didn’t have to think too long about the offer before I accepted. Financing all that baby equipment, like strollers, car seats and whatnot, without having to touch my savings or interrupt my normal cash flow just seemed like an offer too good to turn down.

The True Cost of More Money

My mistake here was setting my sight firmly on the prize, without giving much thought at all to the sacrifice. At a glance, a few weeks of extra effort doesn’t seem like much when the reward is sizeable. A closer look at the realities, however, reveals that the sacrifices are real and felt. Here are some examples of what putting in the extra hours for a few weeks at the beginning of the year at my old place of employment resulted in:

Cross-country skiing tracks
Would you prefer the blue hue of a computer screen, or the blue open sky?

Missed out on the best skiing weekends of the year

Cross-country skiing is one of my hobbies. There is nothing quite like gliding through the beautiful, white and picturesque winter forest landscape, working out and achieving Zen simultaneously. I missed what will likely be the best couple of weekends of the year for skiing because I had to sit in front of a screen crunching numbers.

Underperformed in my new position

When I say underperformed, I mean in comparison to my very best. I believe I have started adequately, but it would be foolish to dismiss the effect of working additional hours elsewhere. Only superhumans would remain unaffected, and in retrospect, I feel I could have gotten off to an even better start in my new job had I put all my focus into it. The next couple of months I have to put in extra effort just to make sure that the impression I give in my first half year at the company is as good as I know.

Wasted precious “just the two of us”-time

While both my spouse and I are very much looking forward to becoming parents, the day it happens will mark the end of an era. For the next eighteen years, at the very least, someone else will be the primary focus of our lives. There will be much less time for the just the two of us to hang out. Instead of making the most of our final few months as commitment-free young adults, I spent some of those hours in an office.

Those are just three examples of direct sacrifices I made by working extra hours over a period, for a bit of extra cash. Digging deeper, I could list out many more things I would rather have been doing than sitting at a desk. Hanging out with friends, reading books, working out, playing the guitar, and much more. And that’s before even mentioning the lack of energy when I finally got home, and less able to put my remaining free time to good use. My depleted energy levels affected all you Abovare-readers, as I wasn’t able to publish a new post last week, despite my goal of publishing a new post weekly.

Snowy winter landscape
This is where I want to spend my winter days

More Money Is Not Worth Less Living

I have come to the conclusion that extra money is not worth pursuing if it involves trading the free time I have left after already putting in the hours of a full-time job. The obvious exception to that is if the time I put in has added benefits in addition to just earning me extra money. If writing about personal finance online, developing my knowledge of several fields I’m interested in (online marketing and personal finance) will result in another income stream at some point, then great.

With this in mind, the only reasonable conclusion is that I should only pursue money making opportunities that are interesting enough that I would dedicate time to them regardless of the monetary reward. It is important to point out that this is a result of already being financially stable, and having enough resources to finance the needs and the wants that are important for my quality of life.

The point of this post is not to tell you to stop working or to stop putting in the extra effort to maximise your earnings. I want you to be conscious about the assessments you make when it comes to working, money and what is important in life.

It is easy to get caught up in your financial goals and to do whatever it takes to realise them as soon as possible. But don’t forget that today is the only day we are guaranteed to do with as we choose. We have no guarantees for the future. Finding a balance between prioritising your future, and enjoy life now is important. If you are already on track to reach your financial goals within a timeframe you are comfortable with, is it worth sacrificing guaranteed time to spend as you please to reach those goals faster?

I have made my choice, and now I want to hear your opinion. Leave a comment below, or drop me a line on Twitter @Abovare or the Abovare Facebook Page.

Sign at demonstration

Seven Charts to Challenge the Popular Middle Class Money Narrative

The concentration of wealth is a societal problem that society as a whole cannot afford to ignore, and it is not getting better. It recently emerged that the eight richest persons in the world possess as much wealth as the poorest half of the world’s population. Eight men hold as much of the world’s resources as 3.6 billion people.

Unfortunately, traditional media tend to conflate this increase of wealth among the very few at the very top with the demise of the western world’s middle class. The middle class, as the consumer, and product, of traditional media, generally tend to accept such tales of their demise. Doomsday prophecies, particularly those that affect your very own readership, are simply good business.

Here, I will present seven charts based on income, savings and consumption data from the United States over the past thirty years. My hope is that these charts will make you think twice before unconditionally accepting the narrative that the richest few are stealing the wealth of the majority, the middle class. Or at the very least, show you that you have a choice in whether or not you want to give your money to those at the very top.

Americans Save Less Money Than Before

Chart displaying average saving as a percentage of income from 1984 to 2015
Data source: Bureau of Economic Analysis

The average rate of saving as a percentage of income in the United States has dropped from around 11% in 1984 to around 6% in 2015, after bottoming out at less than 3% in 2005. Surely this should be used as an argument for a grand scale deprivation of the middle class, as declining saving rates can only be a result of decreasing real wages for the general population?

Chart showing US Real Median Income from 1984 to 2015
Data source: United States Census Bureau

Average income, as measured by the median, adjusted for inflation dropped since peaking at around $58,000 in 1999. The trend has however reversed in recent years, and for the period measured, from 1984 to 2015, it has increased by around 16%. The average American is, in other words, earning more and saving less.

Servicing Loans Is Not The Problem

One reason often cited for the reduction in saving rates is the increase in housing prices, supposedly far outpacing real wage growth (it is, in some areas, but not by much for the whole country on average) resulting in higher mortgage payments that in turn reduce the average American’s ability to save.

Mortgage debt service as a percentage of average income
Data source: The Federal Reserve Board

That claim does not have a base in reality. As the chart above shows, the average mortgage debt service payments as a percentage of disposable personal income were lower in 2015 than it was in 1984. Unsurprisingly, it did peak at just above 7% in 2006, but the trend for the whole period is more or less flat.

If mortgage payments aren’t to blame for the reduced rates of saving, then surely the increase in student debt and the cost of servicing those debts are the reason? At least, that what you would believe if you drew your conclusions from looking at headlines. The actual numbers, however, tell a different story.

Consumer debt service as a percentage of household income
Data source: The Federal Reserve Board

The trend for consumer debt service payments, which includes student loans, as a percentage of disposable income, is near identical to the one we saw for mortgages. In fact, over the observed thirty year period, the rate has indeed decreased.

The Real Reason Why Americans Save Less

I promised you seven charts. From the first five, we have established that average real income has increased over the past thirty years. We have seen the decrease of average saving rates, but the cost of servicing debt does not offer an explanation. The final two charts make it abundantly clear what is the actual cause behind the average American’s reduced rates of saving is.

Personal Consumption as a Percentage of Income
Data source: Bureau of Economic Analysis

Increased personal consumption is the reason why the average American saves less money than they did 30 years back. And before you jump in with “well, of course, that is because everything is much more expensive than it was back then” remember that we saw above that the average person has more money to spend today than back then. In real terms, after inflation. Logically, the conclusion that follows is that the average American is consuming more than they did 30 years back.

Chart showing Real Median Income development vs Personal Consumption
Data source: Bureau of Economic Analysis

I want you to study the above chart carefully, and observe and take in the point it conveys. It shows two graphs we’ve seen before plotted against each other: The development of the real median wage against the ratio of consumption as a percentage of income, and the trend of these two graphs are nearly identical over the observed period.

What this means is that every increase in real income is being spent entirely on consumption, thus increasing consumption ratio. While saving some of that extra income might sound like a good idea, in principle, the data shows that the average American ends up spending it on personal consumption instead. Thus, the average rate of saving decreases.

Chart comparing Saving Rates vs Personal Consumption Rates
Data source: Bureau of Economic Analysis

Our seventh and final chart shows that the saving rate and the personal consumption rate are near perfectly inversely correlated. And, as we saw above, consumption increases with increases real wages. If the middle class is being robbed, it is of their own accord. Or rather, they are, consciously or subconsciously, willingly spending their increased purchasing power.

Are you looking for a different way? Start with reading How I Learned to Stop Worrying and Love Saving Money because it all begins with taking charge of your personal finances.

Header photo by Tim Pierce.

Worried man talking on phone

How I Learned to Stop Worrying and Love Saving Money

Have you ever lied awake at night, too caught up in worrying about money to fall asleep? Thinking about how those dollars you spent on that thing was entirely unnecessary, a complete waste of money that plunged you deeper into that pit of poorness? Have you ever planned to take control of your spending, only to slip up because whatever trick you tried to stash away some cash always ended with you raiding your savings account?

I have. Which one, you ask? All of the above. And if you answered yes to any of the questions, and you are still facing these struggles, I have good news for you: There is a way out. As hopeless as it might feel right now, do not despair, because if I could turn it around, then you absolutely can, too. I am going to share with you how I did it and give you every detail you need to implement the same system in your life.

As everyone who has read The Basic Principles of Personal Finance is well aware of, the fundamental axiom of building wealth is to spend less than you earn, and invest the difference. I am mindful of the fact that for many, getting to that point is the obstacle, rendering every advice on what to do after moot. In fact, as already mentioned, I know it well because I used to have that problem myself.

A few years back I was living from paycheck to paycheck, always worried about whether or not I would be able to afford whatever it was that involved spending money. I knew I had a decent income compared to many of my peers, but I just didn’t know where it all went. I still don’t know for sure, but I remember that as soon as money came in, I rationalised spending most of it before it got any time to feel at home in my bank account. And, when my bank account was emptied out, it felt wrong to deny myself any pleasures or purchases I was inclined to enjoy or consume. Enter expensive credit cards, and going down a road nobody with any hopes of financial stability should even contemplate venturing.

Turning Around Your Personal Finances

I am sharing this story with you to show you that there is a way out. Back then I knew little about personal finances and even less about the methods and vernacular employed throughout the online personal finance community. Despite this, with a little help in the shape of motivation and some concrete tips on how to do it from a girl, the girl, I turned my situation around. These days, I am in control of my finances. My money works for me, and I enjoy a financial stability I could only dream of a few years back. The road here from there has been long and filled with missteps, but the “how” of it is simple and entirely possible for you to implement as well.

Step 1: Know What Comes In

The first step to taking control of your finances is knowing how much money you have coming in each month. This number is your absolute upper limit for how much money you can spend in a month, and without knowing it, you will never get control of your finances. So, if you are not sure what your number is, sit down and go through every payslip you’ve received over the past few months. And for good measure, check your bank statements to see if you have any other money coming in on a regular basis that you should include in your calculations.

Image of dollar bills
You need to know how much money comes in every month.

If your income fluctuates from month to month, your number is the least amount of money you feel reasonably confident that you will bring in even in the worst of months. You want to be realistic, but not too cautious to the point of pessimism.

Now that you have your number write it down. If you are familiar with a spreadsheet, use that. If you don’t feel comfortable with spreadsheets, write it down in a text document, or on a piece of paper. We are going to do some calculations eventually, but it’s nothing more complicated than addition and subtraction. In fact, I will let you in on a little secret: When it comes to math in personal finance, just knowing how to add and subtract is pretty much all you need to do the important things.

Step 2: Know What Must Go Out

I want you do divide the process of figuring out what must go out every month into two discrete steps. Start with listing out everything you must spend money on every month and how much, simply from memory. Write down each of these expenses, and your best estimate of their sizes.

The next step is the most boring and tedious of all of them, but if you want to gain control of your finances, it is essential: Go through your bank and credit card statements for the past year and write down every necessary expense. I am not talking about what you spent on buying a new TV, a pair of skis, or a nice vacation. You should note down only the indisputably necessary expenses you have incurred over the past year. Rent or mortgage, insurance, utilities, loan payments. Only the essentials to survive and necessary, minimum loan payments. Oh, and also, don’t think about the cost of food and eating out here. We will look at that a bit later.

Some bills arrive on a different schedule than monthly, and that is why it is important to go through a full year of statements to make sure that you don’t miss out on any essentials. You will likely find that you forgot some of these when just writing down your expenses from memory, and you have undoubtedly felt the pain of an unexpected yearly bill arriving just after thinking you had a bit of control.

… you have undoubtedly felt the pain of an unexpected yearly bill arriving just after thinking you had a bit of control.

With our system, those bills are not a problem. We just need to know they exist and account for them in our monthly budget. In our document, whether a spreadsheet or a piece of paper, we will note the monthly sum necessary to pay these expenses when they are due. You will need a bit of division to do this, but feel free to use a calculator! If the bill comes yearly, divide by twelve to find how much it costs you every month. Divide by six if it comes twice per year, and so forth, and note down the number.

At this point, you should have a list of everything you need to spend money on, and how much you need to set aside every month to cover that expense, regardless of whether the bill arrives monthly or yearly. As of now, only one expense should be missing from this being a complete overview of what you need to live, and that is your food costs. The reason I told you to leave these out when looking through your statements is that what you have spent before on food doesn’t matter here.

What is important is how much you should be spending on food. To estimate that number, I want to you to do a simple google search for “standard food cost for a single/two/three person household in your country/state” and find your number. If other people in your area can live on spending that amount of money on food, so can you. Eating out is a luxury, and an expensive on at that, and not a necessary cost for anyone. Taking the time to learn how to shop economically, and make good, healthy food is, in this day and age, completely free. In other words, there is no excuse for spending more than the average on food every month, unless you are swimming around in dollars, and can afford it without even thinking about it.

Step 3: Evaluate Your Monthly Cash Flow

At this point, you have control over the two most critical numbers of your finances: How much goes in, and how much goes out every month. Take the first number and subtract the last. What is the result? If the number is positive, you are in the clear. At the very minimum, you should have 10% of your monthly salary left. That is the bare minimum necessary to have any wiggle room within your finances, and the ability to build a cash buffer to prepare for all those unexpected expenses.

If on the other hand, you end up with a negative cash flow after deducting your bare minimum living costs from your monthly incoming money, all alarms should be going off. You are living a life that is financially unsustainable, and you need to take action immediately. Realistically that will entail looking for a higher paying job, adding a second job to cover expenses in the short term, or moving to somewhere cheaper. I cannot stress how important it is that you take action at this point. Do not close your eyes and hope that everything will sort itself out because you are currently the sole pilot of a plane that is going down, and fast.

If your monthly income is insufficient to cover your minimum cost of existing, as you have now calculated, there is nothing anyone else can do to help you take control over your finances. You need to look at every single option: Cut back on any expense that can be slashed, reduce costs of living by downsizing your living space and reducing your food costs to the minimum. And, of course, look at how you can increase your income.

Going forward, the rest of this article assumes that your monthly incomings exceed your minimum monthly spending and that you have at least 10% left over each month.

Step 4: Categorise Your Money

Now that you have control over what comes in, and what should be going out, it is time to implement the system that will allow us to stay in control. What we want is a foolproof way of stating which dollar is reserved for what purpose. The way to do that is by categorising our money as soon at is comes into our possession.

You can divide your spending into as many categories as makes sense to you, but at the very minimum you should have these four categories:

  • Bills and other necessities
  • Food
  • Savings
  • Fun

The next step is to log on to your online bank and create a new account for each category. Your primary or checking account will serve nicely as your “Fun” account, but you need at least three more accounts or however many categories you defined.

With full control over how much money you need for bills and other necessities and food, you know exactly how much money must be deposited into these two accounts every month when you get paid. And the magic of the system is, of course, that you are utterly and entirely aware of that the money deposited into these accounts have a job, a purpose. “Stealing” money from one of the accounts to spend on something else means that you won’t be able to pay your bills when they come due. You have assigned a purpose to your money, and for all intents and purposes, these dollars have already been spent. Thus you cannot touch them.

Laptop and phone on desk
Take advantage of technology to automate your money management.

Once you have your system in place, I recommend that you automate the process as much as possible. Set up an auto transfer from your checking account to your bills and food accounts on your payday, and use autopay on all bills where it is possible. That way you can rest well at night, knowing that you have covered your base living expenses without needing to spend any time pondering the hows and the whys. As for the food account, get a debit card attached to that account and don’t use that card for anything but necessary food. I shouldn’t have to remind you that eating out is a luxury, and you should not be using your food card on luxuries!

Step 5: Save and Spend

With all your expenses covered, and a system in place to safeguard that the money is always there to cover food and other expenses, what is left can be saved or spent on luxuries. The key to being able to save money is to employ the same system we use for food and other expenses, and that is why we have a separate savings account.

You now know exactly how much you have left each money after covering every upcoming bill, and I want you to determine right now how much of that money you want to save each month. I don’t care if that is $50, or 50% of your salary. You are reading this because, like me, a few years back, find yourself unable to save any significant money. What matters at this point is that you get into the habit of saving money. Once you conquer that habit, adding more money on top of the amount you set for yourself right now is easy.

Have you decided how much you should be saving each month? Great, now log into your online bank and set up another auto transfer on your payday. This one is, of course, the amount of money you decided to save each month, from your checkings account to your savings account. And once that money is in the savings account, it is as untouchable as the money in the bills account, and the money in the food account. Because just as you need money to pay bills and money to pay for food, you need savings to be in control of your personal finances. You need savings to handle unexpected expenses, and you need savings because eventually, you want to start letting money work for you. Building your savings account is the very first step.

You need savings to handle unexpected expenses, and you need savings because eventually, you want to start letting money work for you.

Now, then, on payday, you have assigned a particular job for all of your money, whether it is to pay bills, buy food or sit in your savings, jumps straight to where it should sit. That means that whatever is left in your checking account is the money you have left to spend. And that is the real beauty of this system. When you stash all your money in your checkings account, you have to mentally account for future expenses every time you make a decision on whether to spend money or not. Most people, myself included, are not very good at doing accounting on the fly, and what’s more, we want that new gadget, so we end up estimating that we probably can afford to purchase it.

With this system, you just need to look at your checking account and see how much is there. If you want to buy those cool sneakers that cost $250, and you have $260 in your checking account, you know right then and there that it means you have $50 to spend until your next payday. And what’s even better, you know that even if you fall for the temptation, and spend every single cent on your checking account, you can still afford to pay every bill, buy food, and save money!

Persistence is Key in Personal Finance

The process and method of money management described here is, almost to the letter, the way I managed, and still do manage my money, to get out of debt, start saving and eventually investing money. I maintain that it is an entirely foolproof way for everyone to take control of their finances, and a method to go from being financially disorganised to being in complete control.

That said, I would be lying if I claimed that the process above is the hard part. Getting control over what you need to spend money on, on setting up the system described here is the easy part. The hard truth is that if you don’t have control over your finances, you are probably spending more than you should, and will have to change your habits. My system is only a guide and a framework for obtaining and maintaining control over your finances. But, as soon as you abandon the system, and start thinking that borrowing a little money from this account to treat yourself to a vacation, or from that account to buy those new sunglasses, the system can’t help you.

Stay true to the system, and prioritise living within your means. I promise it is not something you will ever regret. And also, when you eventually slip up, because you will (and yes, I did, and I continue to do far too often), don’t be too hard on yourself.

If you have any questions or comments regarding this post, don’t hesitate to use the comments field below. You can also reach out to me over on Twitter, or Facebook if that’s what you prefer.

Header photo by Alon.

Photo of a graph

The Right Way to Calculate Your Net Worth

A subject I frequently see discussed online when it comes to personal finances is what is the correct way to calculate your net worth. In fact, heated arguments often follow this question, in which people will fervently argue that their way of doing the calculation is the only way that makes any sense.

As someone who works with numbers and trying to make sense of them on a daily basis, I can confirm that this is not something that is unique to discussions which revolve around personal finance topics. People all too often get hung up on absolute numbers, without giving much thought to the context from which the numbers come. Numbers have no meaning without proper context.

Consider the following anecdote:

Person A:My net worth is ten.

Person B:Ten what?

Person A:Ten thousand dollars.

Person B:Nice, but you are a long way off quitting your day job.

Person A:Actually, I plan on retiring in just two years.

Person B:With that little money? You will be going bust within a couple of months.

Person A:I don’t think so. I have quite a bit of equity in my house, which I plan to liquidate, and I have a 70% guaranteed pension, too.

Sure, the anecdote is very simple, but hopefully it gets the point across. When we first hear the number ten, we have no idea what it means. Most people will then try to understand the number in some way, by unearthing some context. In this example, the first layer of context is the currency and denomination of the number, which is good to know. We now know the absolute number.

Unfortunately, many people consider that sufficient context to start evaluating the number and assign meaning to it. What happens at that point, is that our minds, magical as they are, start filling in the missing pieces of the picture. Lacking the required nuance to understand what is presented, our brain uses our previous experiences to fill in the blank spaces, in an attempt to make sense of the whole. And instead of trying to understand the meaning of $10,000 in the context of which it originated, we give it meaning based on our prior experiences with numbers in that range. Some may be thoroughly impressed, while others again with entirely different perspectives, will be underwhelmed.

The point of this exercise is to hammer home the notion that numbers are meaningless without specific context. This realisation, then, has implications for how you should calculate your net worth. Or, rather, it means that the how you calculate your net worth is less important than the fact that you are clear about why you choose to do it one way or another.

Calculating Your Net Worth

Circling back to the actual exercise of calculating our net worth, doing it in its simplest form is extremely straightforward: Add up the value of all of your financial and material possessions, subtract all your liabilities, and the result is your net worth. The disagreements mentioned in the opening paragraph stem from what is relevant to include in your net worth calculations. As I have now attempted to illustrate, those discussions matter little: What is important is that you calculate your net worth in a way that makes sense and gives meaning to you.

The idea behind the concept of net worth is to show how much money, or rather, purchasing power, you would have if you sold all your assets and fulfilled all your debts. The higher your net worth, the freer you are to live your life the way you want unless you subscribe to the philosophy of the late, great thinker Biggie Smalls, who coined the phrase “Mo money mo problems.

For most people, the actual value of their net worth number comes from observing how it develops over time. If you can increase net worth reliably and over time, it means you are managing your finances well, and are on the path to greater freedom. If your net worth keeps sinking, you are going down the wrong path and need to make adjustments.

Points of Consideration

Knowing that the aim is to calculate a number that makes gives you information about the state of your personal finances, and to what degree you have the freedom of choice to live the life you want, we can make some assumptions about how to calculate your net worth.

Do I include my house in my net worth calculation?
There are two schools of thought when it comes to whether or not your house should be included in your net worth calculation or not: One that says you should include your home in the estimation, and one that says you should omit it. The idea behind leaving it out is that your house is not an investment that will yield returns, but instead a covered necessity that incurs further expenses in the form of maintenance, taxes and so forth.

I take issue with this point of view. A somewhat non-conventional, but pervasive perspective these days within the online personal finance community is that renting is better than owning. Whether or not that is the case, I do not intend to discuss here. But, it does stand to reason that as long as you accept renting as a viable alternative to owning your home, the equity in your home should naturally be considered a part of your net worth. Liquidating to rent will always be an option, just as downsizing or moving to lower cost to extract partial equity is another.

Abandoned house
If your house looks like this, you may want to exclude it from your net worth calculation. Photo by el-toro.

Whether or not your house will be a sound investment is a different discussion altogether, and it is that question that is at the root of the rent versus own debate. However, if you are a homeowner, it makes sense to include the value of your home in your net worth calculation. That said, if you plan to live there for the foreseeable future, and have no plans of cashing it, it doesn’t particularly matter, as you should adjust you target net worth according to what you choose.

What about my car, do I include that when I calculate net worth?
Same considerations as above, with regards to your house. I stand firm on the perspective that you should include all assets which can be liquidated for a reasonable value in the calculation.

I have a pension, does that add to my net worth?
Well done on securing a pension, and boy does it! Calculating the real value of a pension to add it to your net worth can be complicated, and it is a topic I intend to tackle in a future article. In the meantime, I suggest you take a look at this article from Financial Samurai that looks at how to determine the value of a pension.

Other assets?
My general idea is that if you own it, you include it. There are many other tangible and less tangible assets out there that can be difficult to decide whether or not they belong on your personal balance sheet. If you have a specific question that you need help with, whether it is whether or not to include something, or how to calculate its value, feel free to use the comments below to ask it. I am also open to questions over at Twitter @Abovare, and our Facebook Page.

Header photo by Hermann Kaser.

Football goal covered in snow

Better Goals for A Better Year

It is the season for setting goals, and if you frequent the various corners of the online personal finance community, you should be well aware. While it is important to evaluate your goals, and performance, continually, a new year is a good an opportunity as any to assess and reset your goals. Circumstances or preferences may have changed to the extent that you need to revise all your personal goals.

But, before you finalise your goals, have you thought about whether your goals are good? An often overlooked fact, is that all goals are not equal. Some will help you improve, by motivating you, while others will steal away any inspiration before it even reaches your mind. So, if you haven’t set your goals for the coming year just yet, make sure to read on for some valuable advice. And, if you already formulated goals, well, there is no reason not to refine and improve them.

The Characteristics of Good Goals

There have been quite a few profiled writers, especially within what could be characterised as the “self-help” scene, that have focused on goals in recent years. James Clear famously tells you to ditch goals for what he calls systems. However, if we boil it all down, this is just a roundabout way of saying that you shouldn’t set goals without having a clear idea of how you are going to achieve them. It seems entirely evident on contemplation, yet so many fall into the trap of setting vague goals without any thought to how they will realise the goals.

Consider the following goals, of which I am certain you have seen examples in the recent weeks:

  • “In 2017 I am going to save money.”
  • “Next year I am going to get into shape.”
  • “I will spend more time with my family the coming year.”

All of these are terrible goals for a multitude of reasons, and will in all likelihood serve to make you feel worse about yourself regardless of what you achieve in the coming year. And, as mentioned, goals of this variety are often set without any regard for how they will be realised. Approaching goals without considering the how is particularly destructive because it reduces setting goals to a vague state similar to dreaming. In fact, while goals have other advantages, the planning and contemplation associated with defining the goals are perhaps the most critical values of all goals.

With that in mind, as well as the aspect covered in the previous post, Start With The Why , which is highly relevant to goal-setting, you already have a good framework for setting goals that are helpful. Be clear about why you want to achieve something, and give proper thought to the how. In fact, you should document both of these aspects in written form.

Tagged wall with text
By making sure your goals are SMART, you can optimise your chances of actually realising them

We can use the “SMART” acronym to validate further that the goals we have set for the coming year are good enough. Each letter signifies a property our goal should have:

  • Specific: Our goals should be specific, and describe a particular future state, as opposed to vague depictions that have more in common with dreams than well-formulated goals.
  • Measurable: If you cannot measure whether or not you have reached your goal, and quantify your progress, you need to rephrase it. Instead of saying that you will save money next year, state exactly how much money you want to save.
  • Ambitious: While reaching your goals is good, there is little value in getting there without adversity and sacrifice. Make sure that your goals are ambitious enough that getting there actually contributes to your why. If you wish to reduce mindless consumption and increase your freedom by saving money, setting aside a couple of percentage points of your salary probably won’t contribute.
  • Realistic: Conversely, setting a goal that is beyond your reach is a sure-fire way of making sure that you will lose motivation before long. Aiming to save a million dollars is good and well, but having that as a goal unless you have a real chance of reaching it will only be detrimental with regards to your why.
  • Time-specified: Actually, pretty much everyone can save a million dollars with a conscious approach to how they manage their finances. So if that’s what you want to achieve, consider how you are going to do it, and set a deadline for when you want it done.

My Personal Goals for 2017

The overarching theme of what I want to change in 2017 is to be more conscious about how I spend my time and my money, which can be summed up as read more, write more, play more, and save more. While I am financially far more responsible than I was just a couple of years back, I have yet to reach that same consciousness with regards to how I spend my time. I spend far too much time loitering around on the web without any purpose, and I probably still watch a bit too much TV.

I have decided to split my goals into three categories: Personal, health and fitness, and finances. Before I present my goals, it feels important to throw in an apropos: These goals are set from the perspective of my life as it is today. If all goes as planned, however, a tiny human will be joining our household the coming summer. My experience with tiny humans is very limited currently, but I do have a hunch that the arrival of one might spell some changes in my life. We will see, come the end of the year.


When it comes to personal goals, it is all about expanding my horizons, acquiring new knowledge, and expressing my goals. I want to live life fully, but on my personal terms. What those terms are, however, should always be questioned, examined and put to the test. I value freedom and the ability to choose how I wish to spend my life, but those things have little meaning at all unless I am exploring the world as well as the insides of my own mind.

Read at least 20 books from cover to cover: I never read as many books as I’d like. While I read a lot, especially online, both long and short form articles, tweets, comments and what not, books offer a coherence and immersion that you simply don’t get from anything else. That is why I want to switch out some of my randomly-surfing-the-web time for reading books and increase my total books read to at least 20 during 2017, up from a measly 12 in 2016.

Write at least 50 new posts for Abovare: If reading takes you inside new and strange worlds, writing is a way of sharing the world inside your head with the other people. It improves communication, language skills and understanding, and writing, sharing and, in turn, teaching is probably the ultimate step in increasing your knowledge of a particular subject. By writing here at Abovare, I hope to make new connections and share my expertise, but, ultimately, it is a learning process for me as well: I want to master the field of personal finance, and everything that surrounds it. And what better way to do that than putting my knowledge to the scariest test of all, that is sharing it?

Practice the guitar four days of the week: Music is an important aspect of my life, and I spend a lot of time listening to music. While I believe we have the ability to express ourselves creatively through everything we do, playing the guitar is perhaps my most important creative outlet. My skill set is just not good enough to do all that I want to do, and that is something I strive to improve. Formulating a decent goal in this regard is difficult, which is part of the problem I suppose, but as it stands the aim is to practice on the guitar at least four days of the week.

Health and Fitness

Knowing what you want, and having the financial means to do it, means nothing if you lack the health to do it. I like to stay in shape by running and, during winters, going cross-country-skiing. There is simply little that compares to pushing your body to your limits, outside and as a part of nature. To properly govern my health, I need to exercise and improve my body strength in addition to doing cardiovascular exercise, so that is something I must look to incorporate into my training program for 2017.

Complete at least 120 workout-sessions: I was right on track to achieve my goal of 100 sessions in 2016, but falling ill for the two final weeks of the year made me come up just short. For the coming year, the goal is to increase the number of sessions slightly, as I will try to incorporate body strength sessions, as mentioned, in addition to the running and skiing.

Run at least 1000 kilometres: The exact distance I ran in 2016 is a bit unclear, as the tracking software I used doesn’t differentiate very well between running and other activities. 1000 kilometres is a reasonable goal, however, as it is both a step up from last year but at the same time entirely achievable within my current workout programme.

Bonus goals: Finish a 10K in less than 40 minutes and finish a half-marathon in less than 1 hour and 40 minutes. These aren’t goals I am working actively towards achieving, but reaching them would be signs that the training I am putting in is yielding results.


Oddly enough, given that Abovare is a website focused on personal finance, these are the goals that need the least attention. Years of establishing routines, budgeting and tracking incomings and outgoings have given me a reasonable level of control. That said, there are changes on the horizon with a little one on the way, making it more important than ever to maintain control. I have therefore defined goals that I believe will further solidify my financial situation, and increase my freedom and ability to lead the life I want for my family and me.

Increase year-over-year net worth growth with 50%: I am still very much in the accumulation phase when it comes to building wealth, and 2016 was a good year in that regard as I was able to increase my net worth significantly. I hope to expand further that growth in the coming year and have positioned myself to do that by, among other things, starting a new job at the turn of the year. One factor that could affect my ability to reach this goal is the (ridiculous) local real-estate market. As that is entirely outside of my control, and doesn’t change my short to medium term financial outlook, I am excluding the value change of my primary residence when it comes to calculating my performance. (Interjection: Yes, I do include the value of my primary residence when calculating net worth, and I believe it is the only sensible thing to do. I will be writing an article on this subject soon.)

Invest 10% of my take-home pay in the stock market: While 2016 was very much about reaching my minimum liquidity threshold (Unsure what this means, exactly? Just read The Basic Principles of Personal Finance), I need to increase my exposure to the market in 2017. I am not confident enough to direct my entire free cash flow towards investing, but 10% of my take-home for the year should be the absolute minimum.

Establish a concrete plan for building a new source of income: 2017 will be an exciting year, as I am starting a new job, will be sinking some time into Abovare, and am starting a family together with my spouse. Between this, and trying to fulfil my other goals, I don’t foresee having an excess of free time. That is no excuse for not working on one of the staples of financial safety, which is diversifying your cash flow. I am currently painfully dependent on that one job that brings in the money necessary to live the life I have constructed, and that is not a very safe position to be in. It is, therefore, imperative that I start building other streams of income as well, and the goal for 2017 is to lay out a concrete plan for establishing another revenue stream in 2018. Landlording, Amazon affiliate sales through niche websites, or trying to get in near the top of the next MLM-pyramid? That is for me to decide during 2017, and 2018 will be the year of execution.

Those are my goals for the coming year. Have you formulated yours yet, or are you still working on them? Feel free to share your goals in the comments below, or join the discussion by tweeting @Abovare, or leaving a comment on the Facebook page.

Header photo by Thomas Leth-Olsen.