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My blog introduces powerful concepts on personal finances to make dealing with money easier for you. Start the journey to financial freedom today! I have reached financial independence after 10 years of building my career up the corporate ladder. Today I hold a senior management position in a large corporation because I want to, not because I need. this blog is a personal getaway, where I write about my true passion which is personal finances. In my articles, you will find original content based on my own experiences and studies. My posts cover topics such as financial literacy, family budgeting, risk management, financial wellbeing and more. Invest in yourself, start building on your financial knowledge and get in control of your money. Check out my blog, subscribe to my newsletter

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Risk tolerance and financial literacy

Risk tolerance is the level of risk exposure with which an individual is comfortable; an estimate of the level of risk an investor is willing to accept in his or her investment portfolio. Aversion to risk is what makes the study of capital markets interesting. Without risk aversion, all capital assets would be priced based… Read More »Risk tolerance and financial...

Risk tolerance is the level of risk exposure with which an individual is comfortable; an estimate of the level of risk an investor is willing to accept in his or her investment portfolio.

Aversion to risk is what makes the study of capital markets interesting. Without risk aversion, all capital assets would be priced based on their expected payout and duration. Bonds would have the same yield over time as stocks and portfolio construction would simply be an exercise in organizing the timing of expected asset payoffs.

Underlying the preference for reduced variation in returns is the notion that each additional dollar earned provides a little less happiness than the last. As our incomes increase, the satisfaction gained from consuming each additional $100 declines.

When faced with an investment whose payout is variable, a risk-averse investor will require some added compensation for accepting uncertainty.

During our lives we experience circumstances that impact our willingness to accept investment uncertainty. A young family may see the loss of $5,000 as a serious event that requires sacrifices to meet a budget and compromises financial security. The same family later in life may have built up an investment portfolio large enough that the loss of $5,000 has little impact on their lifestyle.

The perceived consequences of a loss may also vary among investors of the same means. Some have the ability to shrug off a loss to their portfolio while others fret during a bear market and become stressed after reading a negative quarterly statement. Every financial planner who adheres to standard financial planning practices must assess the risk tolerance of a client in order to make informed portfolio recommendations. The process of risk tolerance assessment is in its infancy.

Households in the United States have substantial levels of noninvestment wealth, and investment portfolios typically amount to small proportions of total wealth. For over 80% of U.S. households in 1998, investment assets amounted to less than 20% of total wealth. The median proportion of investment assets to wealth increased with age, but was small even for those aged 65 and over.

Consumers lack the financial literacy necessary to make important financial decisions in their own best interests. However, questions exist concerning the effectiveness of financial education in improving financial literacy.

Therefore, a paradox exists between the efficacy of education in improving financial literacy and the impact of education on short-and long-term
financial behavior. How can education, which is correlated to financial literacy, improve financial behavior without first improving financial literacy?

Deregulation of the U.S. financial service industry since the 1970’s has created both opportunities and problems for American consumers. On the positive side, those with assets can obtain higher interest rates on their investments and lower fees for services. Individuals have enhanced choices for virtually every financial product. On the negative side, consumers are faced with increased costs. Banks have eliminated interest rate ceilings on debt and charge greater fees on low-balance accounts. Over the years, the financial services industry has become more complex.

Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment.

Are individuals well-equipped to make financial decisions? Do they possess adequate financial literacy and knowledge?

About the author:

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

Sources:

THE CONCEPT OF RISK TOLERANCE IN PERSONAL FINANCIAL PLANNING, Journal of Personal Finance. Sherman D. Hanna, Professor, Consumer Sciences Department, The Ohio State University

The Impact of Financial Literacy Education on Subsequent Financial Behavior. Lewis Mandell and Linda Schmid Klein.

FINANCIAL LITERACY AND STOCK MARKET PARTICIPATION. Maarten van Rooij, Annamaria Lusardi, Rob Alessie. WORKING PAPER 13565.

How to spend your money wisely

When asked about personal finances, few have set improving their spending habits as a priority. For most, a hefty paycheck might seem to be the solution for most financial struggles. The truth is that knowing how to spend your money wisely can take you further into the journey to financial freedom than you imagine Reality… Read More »How to spend your money...

When asked about personal finances, few have set improving their spending habits as a priority. For most, a hefty paycheck might seem to be the solution for most financial struggles.

The truth is that knowing how to spend your money wisely can take you further into the journey to financial freedom than you imagine

Reality shows that personal finances are not that simple. The solution to your financial struggles might take a bit more than just getting a raise. Take, for instance, lottery winners, most of them are back to square one after a couple of years from winning the big prize.

The first step is to reach a basic level of income that can accommodate a reasonable living standard. Once this is done, more can be achieved by spending your money wisely than getting a pay raise.

In this article, I will list the key actions you can take to start spending your money wisely. Reaching your financial goals is not only about cutting costs but also about understanding your needs.

At the end of the day, no matter how much cash you have, to spend your money wisely is always a good idea. Most importantly, frugal living does not mean a life without fun. With a little planning and discipline, you will find ways of trimming your expenses without impacting much of your lifestyle.

In the long run, you will find that having long term goals brings peace of mind. It is much easier to cut expenses and save money when you have a clear picture of what you are aiming for. Paying your debt, going on a luxurious vacation, building an emergency fund, a college education for your kids. Your goals will change with time, but they must always be there to keep you moving.

The actions I will present here will be a mix of ways to be savvy with money with ways to focus your capital to where it will have the most significant impact in your life.

1 – Create a family budget.

Save more by understanding your income, expenses, investments, and debt balances. Reach financial freedom by setting personal budget goals for you and your family.

Your family budget is a list of your income and expenses, together with your savings and debt balances. That means taking note and understanding at every end of the month what was your:

Income, or how much you earn,
Debt, or how much you own,
Expenses, or how much you spend,
Saving, or how much you save.

Creating a budget is a common tool for debt management to practice discretionary spending. Organizing your bank statements by using budgeting tools or a budget worksheet can make it much easier to set your financial goals.

Bonus tip: Check this article on how to do your family budget: 6 easy steps to reach financial freedom

2 – Plan your spendings. Only purchase what you have planned for.

Buying on impulse can spiral your expenses out of control.

Make a plan of what you need to buy while you are calm at home. Review your purchase list multiple times and let it mature for some time.

Make a survey trip before your real shopping trip. Take note of the prices of several brands and alternative products for what you are looking for, do not stick to only one store.

Return home without buying anything. Give the results of your survey trip some time to sink in before you go out on your shopping trip.

Be careful with exclusive sales and free samples. They are aimed to convince you to make an impulse decision instead of being thoughtful about how you spend your money.

Having the discipline to treat each purchase as a crucial decision will make you spend less money. Over time, the more focused you are, the wiser your spending habits will get.

3 – Do not shop for fun.

Your money is to spend money wisely, not to have fun spending money.

If you are only buying something for the thrill of spending money, you will end up buying a lot of stuff you do not actually need.

Only spend on what has been included in your spending plan. Always do price research before buying it.

Avoid factors that can impair your judgment while shopping. Alcohol, sleep deprivation, loud music, and hunger can all make you act on impulse and spend money where you do not need to.

4 – Focus on the Long-Term Benefits of Purchases.

Before buying something, reflect on how it will affect you in the future. Try to determine if what you are buying is really worth by asking yourself:

How long is it going to last?
Is it going to put you in debt?
Is the value you will get out of it over its lifetime worth the cost?

These questions will help you to determine if something is really worth buying.

5 – Shop alone.

Sticking to your spending plan and being conscious about your spending can be hard if you are being bombarded by external opinions and advice.

Consider your family and friends’ opinions when making your purchases plan, but once you go out shopping, go alone.

While at the store, be careful when taking advice from the store employees, their main target is to make you spend more, and that is precisely what you are trying to avoid.

6 – Pay in full and in cash.

As shown in several surveys and studies, credit cards and debit cards increase spending. Because no real money is changing hands, your brain does not register it as a “real” purchase.

Furthermore, credit gives you the false impression that you can spend more than you usually would.

Those are the same reasons why many businesses propose delayed payment schemes such as bar tabs and alike.

The trick to avoiding such pitfalls is simple. Don’t bring more cash with you than you need. If you don’t have the extra money, you can’t spend it.

At the same time, withdraw your weekly budget once a week instead of filling up your wallet whenever you run out.

Have your credit card and debit cards as emergency measures for extraordinary expenditures mapped on your spending plan.

7 – Don’t spend your money based on ads and marketing speech.

Outside influences are a considerable factor affecting what we spend our money on.

Don’t buy something based on an advertisement. Be vigilant and aware of all the reasons you’re drawn to a product.

Whether on television, insider stores, or on the product’s packaging, treat ads with skepticism. Advertisements are designed to encourage you to spend more money. They will not provide an accurate portrayal of your needs and options.

Don’t buy something just because of a sale or a reduced price. Coupons and deals are great for products you were already planning to buy. Purchasing something you don’t need just because it’s 25% off does not save money!

Be aware of pricing tricks. Translate that “$9.99” price into “$10”. Judge the cost of an item on its own merits, not because it’s a “better deal” than another option by the same company.

A common trick by marketers is to make a “worse deal” with an atrocious value. As a result, you buy the “better deal”, which is in itself costly or not fit for your needs. Take buying popcorn at the theater, for instance. You end up almost always buying the large pack because its a better deal than the smaller ones, although a medium pack most times is enough.

At the same time, don’t automatically buy the mid-priced product within a product category. Marketers can influence your decision by adding an outrageously expensive product to make the high-priced product looks reasonable in comparison.

About the author:

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

How to teach your child the value of money

Understanding how to teach your child the value of money has become a critical step of parenthood. As financial independence gets harder to be achieved, teaching your kids about money has become as important as ever. Our kids will need more money than we did and will have less to rely on. Teaching your kids… Read More »How to teach your child the value of...

Understanding how to teach your child the value of money has become a critical step of parenthood. As financial independence gets harder to be achieved, teaching your kids about money has become as important as ever. Our kids will need more money than we did and will have less to rely on.
Teaching your kids about money is the key to their survival. In this article, I will set out the first two critical steps all parents should take to teach their kids the value of money.

Teaching your kids about money has so many benefits. It can help build their confidence and self-esteem. It also reduces their future worries about money, which can have positive impacts in terms of mental health.

Just these points alone should help encourage parents to talk to their kids about money, but there are more pressing needs for parents to start this conversation.

If parents don’t start talking to their kids about money, then there is a fear that they could struggle to face the increasing financial challenges that lay ahead of them.

Money is already the number 1 stress factor for young adults today, and these stress points are not going away anytime soon. That is why it is so important to understand how to teach your child the value of money.

In this article, I’ll set out the reasons why these stress points aren’t going away and two simple actions that parents can take to ensure they are on the right path to being ready to face their future financial challenges with confidence.

Why you need to teach your kids about money:

Essentially, our kids’ generation will require more money than generations before them but have less money to rely on. This is not a promising scenario for them to be in! Let’s look at these two statements in more detail:

Our kids will require more money than generations before them

Homeownership in America is declining significantly in younger generations as housing costs skyrocket. It’s extremely difficult for young adults to get on the property ladder. Many are still living with their parents into their mid-20’s and early 30’s to save up for their own property. This problem is unlikely to go away any time soon.

The cost of tuition is also increasing at an alarming rate. Many of us will, however, continue to encourage our kids to go to university to access higher education and a more lucrative job. This means that when our kids reach adulthood, they could be starting with a higher level of debt compared to any other generation. Our kids will have fewer pools of money to rely on than generations before them.

There are several approaches you can go on how to teach your child the value of money. As you and your family progress on your financial literacy, your role as money coach will develop and so will your kids. The two strategies presented in this article are the foundations for several other steps that you can build on.

To set the scene, let’s consider our parents’ generation (those that are now grandparents to our kids). When they retire (or retired) they can typically rely on three pots of money to help them financially:

Basic pension from the government (in most developed countries)

Company retirement schemes (in most cases a generous benefit)

Savings (their own plus any inheritance they may have received)

With these three pots of money, their “baby boomer” generation can enjoy retirement.

Now let’s look at our generation. We have the same three pots of money but with significant changes:

Basic pension from the government – but we have to wait until we are older to receive it

Company pension – but less generous as these companies are still having to fork out large amounts to cover the pension pots already committed to our parents

Savings – but there will be less coming from inheritance as our parents and grandparents live longer and therefore spend more during their lifetime.

The above means that, all else being equal, we’ll have more financial challenges than our parents. You can probably see where this is going if we then consider the next generation, our precious kids. Therefore, teaching children about personal finance is something that must be done.

The financial security of our kids will be much more fragile than ours. Firstly they will likely still get retirement savings from a government pension, but no doubt they will be over 70 before they can access it.

Secondly, companies will continue to reduce retirement benefits as they look to control costs. I should know, I worked with many large corporate retirement funds. Truth is that seeing the reality of corporate retirement funds made me realize how important teaching our children the value of money is.

Thirdly there are ‘savings.’ Our kids are unlikely to be able to rely on receiving an inheritance from us as we’ll need all our money (and money from our parents) to ensure we survive through our long retirement and to fund old-age care costs. As our life expectancy rises so does the importance of financial planning and of having long term financial goals. At the end of the day, you can help your child by investing in your own financial wellbeing.

We are already seeing our parent’s generation releasing money from their houses via equity release schemes so that they can maintain their financial health, so even our family home may be gone.

Our kids will have to have their savings to survive. They will have less money than previous generations but yet need more than them. They need to be prepared, and with your help, they will be ready!

Let´s now jump to the two simple actions you can take to teach your child the value of money, and prepare them for a lucrative financial future with confidence.

Action 1 – Start saving for them now – and I mean right now!

It doesn’t matter what form of savings you make initially, just start saving. It can be by opening a bank account, savings account, or investment account.

People say they “haven’t got around to doing the admin of setting up an account” for their kids. If that’s you, then just get a money box and start putting cash in it or create an “I owe you” (“IOU”) on a piece of paper or in a spreadsheet for them.

We can discuss the best ways of saving later, but right now, please commit to saving for your kids.

At this stage, it also doesn’t matter how much you are saving for them. Anything is better than nothing. Only save what you can afford but look to save something once a month.

Over time this money can grow, and you can top it up with any gift money they get from friends and family. The key is to start with something, regardless of the amount. Over time, this will form a habit that your kid will learn from.

To give you a flavor of the financial impact this could have on your kids, let’s look at an example. If you saved $20 per month (roughly the cost of buying a coffee a week) for your kid from birth until they were 18 they could have:

$4,320 if you just put the money in a box, or

$5,700 if you saved the money in a bank account getting 3% pa, or

$8,400 if you invested in a simple investment fund (assuming 7% pa return).

These are material amounts to help start adulthood. It also doesn’t account for any money they save themselves or get as gifts from friends and family over time. If you increase the savings from $20 per month to $150, you will have $63,000 at the end of 18 years with 7% returns per year.

Small amounts of savings can lead to a large amount when they become adults. We are using time and compound interest to build the value of money for our children. It will provide them with a fantastic start from a financial perspective.

How many of you reading this would have benefited from such amounts when you reached 18 years old?

OK. Let’s take a pause here. I want you to state out loud that you are going to commit to action one and start saving for your kids now.

Do whatever is quickest and most comfortable for you right now – no excuses. Take out some money from your wallet/purse and say that’s for your kid(s) – put it in a box or write it down.

As I said earlier, you can refine how you save later on.

Right, that’s done! Well done – you are doing more than most parents out there. Feels good, right?

Now on to action 2!

How to teach your child the value of money - Lead by example — How to teach your child the value of money – Lead by example

Action 2 – Commit to telling your kids about saving.

The next action is equally as easy and quick but much more critical.

Tell your kids that you are saving for them and commit to giving them updates on their savings over time.

Clearly, there is a lot more you can do to educate them, but just committing to updating them is already a big step.

By witnessing you are saving money for them, your kids will learn an essential life lesson about self-regulation and the time value of money. Most adults who are good with money will refer back to what their parents did.

Children learn by example. You should, therefore, make sure you let them know what you are doing to manage your money. As your children get older, share your financial success cases, as well as your financial issues. By doing so you will be going improving your financial wellness awareness and teaching your kids about money at the same time.

A piggy bank is a good way to teach children how to save. Kids learn from practical actions. You can give your children some coins as gratification for small chores to incentive them to save money. Alternatively, help them to set up a lemonade stand and challenge them to run it responsibly.

If you have set up a bank account for them with automatic payments, put in a reminder each year to tell them how much is in there. Keep in mind that your utmost objective is to teach your kids the value of money, try and be creative to make it fun.

For our kids, we don’t refer to money but replace money with trees. We tell them we are helping build a ‘forest’, and each year we tell them how many trees they have in their forest. They can then visualize what this looks like.

Saving for your kids in secret doesn’t teach them anything. They will get one lesson on the day you hand the savings over. At this point, it will be like winning the lottery for them, and we know those lottery winners don’t always keep their money!

If your kids see their money (or ‘forest’) has grown over a long time, they are less likely to chop it down and more inclined to nurture it and just take some seeds.

Telling your kids about their savings also makes you accountable for looking after their money. I’ve heard stories of parents who have dipped into their kids’ savings or piggy banks. Once they know you’re less likely to see this as an option (after all, it’s far easier to take something from someone who doesn’t know they have it in the first place).

Lastly, by them witnessing you saving, it will hopefully trigger them to take an interest in money, ask what they could do with it, and how they can grow it and take ownership of it.

OK – have you now committed to action 2, to tell your kids what you are doing? You might be thinking that a lot of parents must already be doing this, but in fact, that is not the case at all.

It’s not clear how many parents are saving for their kids (action 1), but of the minority of savers, only 1 in 5 tell their kids about it (action 2).

So if you do take both actions, then you are ahead of the vast majority and having given your kid a definite advantage.

Well done! Tell your friends and have a party. Let’s increase the percentage of parents saving!

You’ve done it!

That’s two super simple actions that will make a massive difference to your kids’ life. Please don’t underestimate what you’ve just done. Small steps, yes, but which will result in a powerful outcome. Just watch those savings grow and the knowledge your kids gain.

Don’t let this be the end of your journey.

Now that you understand how to teach your children the value of money, you need to consider some next steps:

It is important to ensure that you get the most of the savings you are making for them.
Continue teaching your kids about money management whenever there are opportunities; this can be done by playing shopkeeper at home or getting them to save and spend their pocket money (allowance).
Financial education is a long term goal, steady small steps will take you and your family a long way.
As your kid grows, start introducing more advanced topics, like budgeting, setting financial goals and using credit cards.

Last but not least, teaching kids about money is also about how you manage money. Invest in your finance education as this will open up other ways to teach the skills your beloved ones need to make informed decisions about money. It takes time to understand how money works, but it’s your responsibility to help your kids to do so.

About the author:

This article has been written in partnership with Will Rainey, from Blue Tree Savings.

After 17 years of working as an investment advisor to some of the largest asset owners in the world (retirement schemes, central banks, insurances), Will Rainey is now the Founder of Blue Tree Savings. The Blue Tree Savings Blog provides articles and guides to help parents teach their kids about money. Blue Tree also provides a tool to help parents use their existing investment account to save for their kids, with their savings being shown as Blue Trees so they can watch their forest grow as they save. Will’s mission is to help as many parents as possible to teach their kids to become Financial Superheroes! You can reach will by e-mail, on Linkedin and Facebook.

Should I buy a house? Liberating myself from the house fetish

Should I buy a house? Is it better to buy a house or to rent one? Common knowledge says renting is just like throwing money down the drain. A closer look shows that the issue is not that simple. The million-dollar answer to this question puzzles many of us. When questioning yourself if you should… Read More »Should I buy a house? Liberating myself from the house...

Should I buy a house? Is it better to buy a house or to rent one? Common knowledge says renting is just like throwing money down the drain. A closer look shows that the issue is not that simple.

The million-dollar answer to this question puzzles many of us. When questioning yourself if you should buy a house, you might think that anything is better than to waste money with rent payments. The reality is that the answer is a bit more complicated than that.

The costs of buying and owning a house are much higher than the property value itself. It is common for home buyers to focus too much on the new home price, and forget to consider if they can afford the associated costs. Mortgage interest, transactional fees, maintenance, and opportunity costs are just a few of the additional burdens for the homeowner.

On the other hand, not owning a home may constrain you of a feeling of belonging, security, and pride. Moreover, there is always a risk that over time your neighboorhood can thrive. With that, real state prices soar, and house owners end up with a significant gain of capital.

Am I buying a home or investing my money?

There are many cases where people decide buying a home after hearing about a home buyer that made money after home prices went up. The big question here is, were these people lucky or conscious investors?

My first advice: make up your mind if you are looking for an investment or a sentimental safety net. Do you want to buy a house to make money or to your first home and feel good about yourself and your family?

To truly understand the cost of the home purchase, you must go through the home buying process a couple of times. Put your homebuyer cap on and go for the chase, start understanding how the housing prices evolve in your area.

Go through the process of getting a mortgage, visit houses for sale, do your research. At the final step, retreat, and revise the pros and cons of the deal against the rental option.

Homeownership is probably one of the most significant financial commitments you will make in your entire life. Be sure not to rush the process and to only commit to a decision once you are 100% sure it is the right choice for you and your family.

Mortgage

Home mortgage comes in a variety of ways, and you must make sure to understand the fine print. There is much more to it than the loan amount and payment terms.

Lender and estate agent

First and foremost, only deal with trusted lenders. You are potentially starting a long term payment commitment, make sure the institution has a solid track record.

Keep in mind that your loan officer does not work for you. You are just another client, his main priority is to defend the interest of the institution he works for.

It is impressive the amount of manual labor that goes around the home-buying process. People make mistakes. Always double check your mortgage rate with an independent mortgage calculator to ensure the numbers match.

Mortgage interest rate

When analyzing if it is best to buy or to rent a house, you must understand the mortgage interest costs.

Renters, many times, spend a smaller portion of their income on renting than owners pay as mortgage interest. In both cases, you will lose the rent and interest money forever — therefore, the need to watch how much interest you will pay when buying a house.

Transactional costs

When buying a house, you usually incur high transactional costs, much higher in fact than when renting. When thinking if you should buy a home, make sure to factor all transactional fees and taxes.

Maintenance costs

Each year in American pay as maintenance costs about 1% of the value of the houses in their possession. Make sure to factor in repairs and maintenance on your costs of the homeowner.

Renters, on the other hand, can get away paying much less as all the high costs are covered by the landlord.

Opportunity costs

Homeownership also carries opportunity costs. Just think about it, instead of buying your first time home, you could invest the same money somewhere else.

In recent decades housing has proven to be a good investment; that may well continue – or it may not. Capital locked up in a house could have made an even higher return if invested elsewhere.

Real estate brings a feeling of comfort for many people because it is more palpable than other assets you can only see on the computer screen. Furthermore, even if housing markets are not stable and your house price devaluates, that will not affect your purchasing power or quality of life.

Nevertheless, real estate is still an investment like bonds, stocks, or mutual funds. Put your money where you believe it is going to grow faster.

Mobility

Modern society is mobile. Opportunities shift across the globe, and you are willing to make the best of your career, chances are that you will need to relocate at some point in life.

To commit for long term mortgage payments only makes sense if you are going to be living in the property during that time. The exception is if you are buying the house as a real estate investment.

Be careful if you are not sure that you will be living in the property for at least some time after the mortgage payment period is over. In this case, my advice is to look for an investment with more liquidity than real estate.

Final take

What happens when you factor all this in? Take the example of the British housing market. In the run-up to the financial crisis of 2008-10, rapid increases in house prices and rising interest rates meant the user cost of owning rose well above rents. But over the long run, the two tenures have cost about as much as each other. This is as economic theory would predict. Renting a home, and buying the right not to have to rent a home, are economically equivalent actions.

About the author:

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

How to conquer genuine financial freedom

Financial freedom is the status of having enough income to pay for your living expenses for the rest of your life, without having to be employed or dependent on others. You do not need to stop working to be financially free. Having the choice to stop, if you want, is what makes you free. Genuine financial freedom should be conquered one day… Read More »How to conquer genuine financial...

Financial freedom is the status of having enough income to pay for your living expenses for the rest of your life, without having to be employed or dependent on others.
You do not need to stop working to be financially free. Having the choice to stop, if you want, is what makes you free.

Genuine financial freedom should be conquered one day at a time. The key to achieving it is to start early.

I know I’m one of the lucky ones, as I’ve been able to buy my own home, travel extensively, and develop a successful career. I’ve even met people I’ve grown to love online and in real life. I have saved enough to cover more than ten years of my corporate net income. But I can’t help but wonder what should be achieved so I can fell genuinely financially free.

How many of us live in perpetual fear of financial ruin? How many of us are stuck in jobs we hate, because we can’t get over the fear of being stuck without an income? How many of us are just looking to get out of a job we hate simply because we’re afraid of not enjoying enough of life.

Choosing the path to be financially free

How many of us will give up on “sitting at our desk” for a moment, and start to get outside our comfort zone?

The question I’m asking is this: How many of us are willing to change?

How many of us will take steps to become financially independent, and take control of our financial lives? If you’re able to do this, you’ll not only be able to save money, invest it wisely, and retire on your own terms. You’ll also be able to have more freedom, be more independent, and be more fulfilled.

But the key to conquering genuine financial freedom is that you have to plan for it. You can’t just jump in, grab your credit card, and start spending. This is hard work, and it requires discipline. If you don’t make the tough decisions first, you’ll never know if you’re even capable of being free.

You have to ask yourself, “do I have the discipline to understand and control my costs?” If you really want to make changes, you have to ask yourself, “do I have the discipline to spend one extra minute each day, and go to bed on time?” If you still have doubts, then I encourage you to take action immediately.

If you don’t have the discipline, I encourage you to spend less time on the internet, check Facebook less often, and do what really matters to you. If you don’t have the discipline to make that change now, you might never catch up with all the amazing things you’ve missed. And that’s OK. You’re young. You have time to make changes.

All you have to do is start making the necessary changes now. How will you know if it’s really time to take action? By seeing how you spend your money, and how you treat your relationships. Start by looking at where you spend your money. Are you comfortable with the amount you are spending, and are you willing to spend more? It is time for you to get in control of your family budget and reach financial freedom.

What financial freedom is all about

Genuine financial freedom is about a sense of security and feeling as though you have enough money to meet your needs. It’s about being in control of your day-to-day finances and having the financial freedom to make choices that allow you to enjoy life.

For me, financial freedom comes from saving for the future and having a passive income financial plan. For example, I have saved for retirement. I also have a passive income financial plan in place. While I am still working on a corporate job, I will continue to invest in both fronts, especially in the near future.

The passive income generation gives me the peace of mind of knowing that I don’t depend on my corporate job to survive. The retirement plan ensures that I will live a comfortable life when I grow old.

Ideas for maintaining financial wellbeing

Financial freedom is about being in control of your finances and having the freedom to make choices that allow you to enjoy life. There are a million different ways to approach this concept. Here are some ideas on how to start:

Write down your budget

Knowing your income, expenditure and disposable income once your day-to-day expenses are covered, will give you confidence in your decisions. If your partner or spouse usually looks after the finances, be sure to talk the budget through with them, so that you both understand your financial situation. To understand more about budgeting, read my post about the family budget: 6 easy steps to reach financial freedom.

Avoid income comparisons

Research indicates that comparing ourselves to our friends or colleagues reduces life satisfaction. We all have different priorities and find pleasure and enjoyment in different things. You may love to travel and invest in experiences, rather than having a big car or house.

Over a lifetime, income is not linear. You might earn more than a friend now, and the opposite can happen in 5 years’ time.

Worry about your finances, respect the choice of your peers and avoid making comparisons. If money is a topic that interests you and your colleagues, talk about it, but don’t waste your time on fruitless competitions or scorekeeping.

Look for the positives

Recent research on neuroscience has shown that practicing gratitude contributes to rewire your brain structure. Feeling grateful stimulates the production of natural ‘antidepressants’ like serotonin and dopamine, giving you a feeling of contentment and wellbeing.

Looking at the small day to day gains and successes of life with gratitude and you certainly feel the result.

About the author:

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

How to choose a mutual fund benchmark index

In this article, I am going to explain what is a benchmark index, how to use it to make investment decisions, and evaluate the performance of index funds. I will also give examples of relevant benchmark indexes and of corresponding mutual funds and ETFs that track them. Choosing the right fund for your investment portfolio… Read More »How to choose a mutual fund benchmark...

In this article, I am going to explain what is a benchmark index, how to use it to make investment decisions, and evaluate the performance of index funds. I will also give examples of relevant benchmark indexes and of corresponding mutual funds and ETFs that track them.

Choosing the right fund for your investment portfolio can be a daunting task. With dozens of investment options available, most investors end up lost when demanded to make a choice. As a result, ETFs and mutual funds end up being selected by a combination of poor factors like:

Past performance benchmark: “if it has performed well in the past, then it should do in the future.”
Family and friends: “if they are investing in it, it can’t be a bad choice,” or “if I lose money, at least it won’t be alone.”
Bank or broker staff: “he knows what he is doing,” or “I better trust the bank, they know more than me.”

Unfortunately, the hard truth is that:

Past performance is not a guarantee of future performance.
Most times, family and friends know as much or less about money as we do.
Bank and brokers are looking at their interests, not yours.

Therefore, to make a strong investment strategy, we must educate ourselves and understand how to use benchmark indexes in our favor.

In fact, a key deciding factor to use when choosing a mutual fund, or any other investment, is the benchmark it uses. In this article, I will show how to choose a mutual fund or an exchange traded fund.

Investment benchmark

You might already have seen the word benchmark when reading a mutual fund fact sheet. Most people don’t give a second thought to it, but in reality, it is the first thing you should assess.

A benchmark is a standard against which the performance of the investment will be measured. In other words, the benchmark index represents the standard investment for that asset class. As such, it is a critical piece of information that must be used when choosing your mutual fund.

For example, let’s say you have your retirement savings money invested in a fund of bonds in the U.S. After one year, you want to know if the fund returns were good. One way of doing so is to compare it with the S&P U.S. Treasury Bond Index, which is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.

Think off the investment benchmark index as the minimum return you should expect for that particular investment.

Choosing the right benchmark

When you have cash available to make an investment, a good exercise is first to choose the index that represents the market that you want to invest in. Once you have done that, then look for investments that use that index as a benchmark.

When deciding how to choose a mutual fund benchmark index, you must think in a broad sense. Instead of thinking about specific companies, start considering industry types, countries, company sizes, and market classifications.

Try to match these thoughts with the objective of your investment. You probably don’t want to invest your emergency funds into volatile developing world stocks. But to do so with a portion of your retirement savings might be ok.

Whenever I have money sitting idle in my savings account, here are the questions I ask myself to choose a mutual fund benchmark index:

What kind of asset classes do I want to invest in? Stocks and bonds, funds and ETFs, real state, inflation tickers, commodities.
Where do I want to invest? U.S. market, my home town, developed countries, Asia, small companies.

Once I have these questions answered, it is time to select the benchmark that best reflects my choices.

For the purpose of this exercise, let ‘s the following scenario:

What kind of asset classes do I want to invest in?
- Stocks
Where do I want to invest?
- 70% on the U.S. market, and
- 30% in global markets or international stocks.

U.S. Stocks Benchmark Index

There are several U.S. stocks benchmark indexes. The main ones are the NASDAQ Composite (IXIC), the Dow Jones Industrial Average (DJI), and the S&P 500 (GSPC).

If we look at the past five years, we can see that all three indexes are well correlated, although the NASDAQ Composite has performed significantly better in recent years.

The NASDAQ outstanding performance over the past five years is due to the high weight given to tech companies such as Facebook, Alphabet, Amazon, Apple, and Microsoft are traded here.

The correlation between the three indexes means that even if we invest in all three of them, we will not be diversifying our investment. During a crisis period, all of them will fall together, as can be seen in the graph.

Graphic showing the NASDAQ Composite (IXIC), the Dow Jones Industrial Average (DJI), and the S&P 500 (GSPC). If we look at the past five years, we can see that all three indexes are well correlated, although the NASDAQ Composite has performed significantly better in recent years. — NASDAQ Composite (IXIC) in blue with 94.74%, the Dow Jones Industrial Average (DJI) in yellow with 63.52%, and the S&P 500 (GSPC) in green with 60.19%.

Looking at 5YR returns alone, one would choose the NASDAQ Composite as the index to represent the U.S. stock market. Would that be an appropriate choice? Maybe, let ‘s have a closer look at each one of the benchmark indexes.

Down Jones Industrial Average (DJI)

The Dow Jones Industrial Average measures the stock performance of the 30 largest companies listed in the United States.

The value of the index is the sum of the price of one share of stock for each company divided by a factor that changes whenever one of the component stocks has a stock split or stock dividend.

As it only includes 30 companies and is not weighted by market capitalization and is not a weighted arithmetic mean, many consider the Dow not to be a good representation of the U.S. stock market

It is the second-oldest U.S. market index, and the Industrial portion of the name is mostly historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry.

NASDAQ Composite (IXIC)

The NASDAQ Composite is a stock index that includes more than 3.000 common stocks and securities listed on the Nasdaq stock market.

The NASDAQ Composite is calculated using a market capitalization weighting method. This means that the largest companies listed on this exchange have the most significant impact on the final value of the index.

Due to the nature of companies that trade in here, the composition of the NASDAQ Composite is heavily weighted towards information technology companies.

The heavyweight on tech companies is what brought the NASDAQ Composite to outperform the S&P 500 and the Down Jones Industrial average on the 5YR plot.

On the other hand, this tendency also contributed to the crash of the NASDAQ Composite with the tech bubble in the 2000s, bringing several investors to bankruptcy. As you can see in the picture below, it took 15 years for the index to recover from the crash.

NASDAQ Composite IXIC - DOT COM Bubble — The crash of the NASDAQ Composite with the tech bubble in the 2000s, brought several investors to bankruptcy. As you can see in the picture below, it took 16 years for the index to recover from the crash.

S&P500

The S&P 500 is a stock market index that measures the stock performance of the 500 largest U.S. companies.

The average annual total return of the index, including dividends, since its inception in 1926, has been 9.8%. The index has posted annual increases 70% of the time. However, there were several years where the index declined over 30%.

The S&P 500 is a capitalization-weighted index, and the performance of the 10 largest companies in the index account for 21.8% of its performance.

It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market.

The best U.S. Stocks Benchmark Index

Let’s go back to our investment objective. At the start of this article, we have decided to invest in the U.S. Stock Market.

Our objective is, therefore, to choose the index that best represents the U.S. Stock Market as a whole.

When we looked at the details of each of the indexes, we saw that the NASDAQ Composite is heavily dependant on tech firms. Similarly, the Down Jones Industrial Index covers only 30 companies and does not take market capitalization into account.

The S&P 500, on the other hand, covers a wide range of sectors, has a consistent track record, and is widely recognized as the best picture of the U.S. stock market.

Therefore our choice of the best mutual fund benchmark index to reflect the U.S. stock market will be the S&P 500.

Global stocks benchmark index

Global stock market indexes track stock prices from all around the world. The top three providers of Global Indexes are:

FTSE Rusell
Standard & Poor’s
Morgan Stanley Capital International

Let’s have a look in detail at the Global Equity Index Series, which is one of my favorite benchmark indexes.

FTSE Global Equity Index Series (GEIS)

FTSE Russell is the trading name of London Stock Exchange Group (LSEG) subsidiaries. They are responsible for several well spread indexes, including the FTSE 100 Index and Russell 2000 Index.

As we are interested in Global Markets, let’s have a look at the FTSE Global Equity Index Series or GEIS.

FTSE GEIS it a group of several indexes. The series provides a robust global equity index framework with the versatility to tailor to our investment view.

It includes over 16,000 large cap, mid cap, small cap, and micro cap securities across 49 developed and emerging markets globally, with a wide range of modular indexes available to target specific markets and market segments. Several mutual funds and index funds use one of the GEIS subsets as their benchmark.

Below you can see how the different indexes are structured. Notice how comprehensive are the options, you can choose a diversified portfolio like the FTSE All-World or a more targeted approach like the emerging market option or the small cap index fund.

FTSE GEIS it a group of several indexes. The series provides a robust global equity index framework with the versatility to tailor to our investment view. It includes over 16,000 large, mid, small, and micro-cap securities across 49 developed and emerging markets globally, with a wide range of modular indexes available to target specific markets and market segments.

We will stick with the FTSE All-World Index. It covers a $45.7 trillion net market cap on 3,243 large and mid-cap stocks on the developed and emerging markets.

FTSE All-World Index

The FTSE All-World Index is a market-capitalization-weighted index representing the performance of the large and mid-cap stocks from the FTSE Global Equity Index Series.

It covers 90-95% of the global investable market capitalization, meaning that by investing in it, you are basically following the trend of the worldwide capital market.

The index covers Developed and Emerging markets and is used as a benchmark in several investment products, such as funds, derivatives, and exchange-traded funds.

Selecting your funds

Excellent, we have selected two renowned benchmark indexes! As per the asset allocation strategy we chose at the beginning of this post, we will diversify and split our capital in two:

70% U.S. Stock Markets – Following the S&P 500
30% Global Stock Markets – Following the FTSE All-World Index

Now it is time to select an investment that uses these indexes as a benchmark.

There are several options we can choose from, and they will change depending on the country you are located in. Overall, they can be divided into two categories:

Actively managed funds – active management aims to generate more returns than the index. Mutual funds usually fall into this category.
Passively managed funds – passive management will try to follow the index. ETFs usually fall into this category.

Trying to beat the market by choosing an actively managed fund might bring extra returns, but will also bear more risks. Active funds generally have a combination of less liquidity and higher fees than passively managed funds.

Good actively managed mutual funds usually have a high entry cost and typically are not open for investment all the time. The performance of the best mutual funds will be heavily dependant on the mutual fund manager ability to beat the market.

Another key difference between passively and actively managed funds is that ETFs can be traded like stocks, while mutual funds only can be purchased at the end of each trading day based on a calculated price. Usually, ETFs have lower management fees and mutual funds.

Depending on the country and bank you are operating with, you might have access to good mutual funds that will track the indexes we have chosen with a premium return over it.

For our case, let’s stick with passively managed options. Our objective here is to follow the market, and of course, pay as little as possible to do so. Therefore we will choose one ETF for each of our indexes.

iShares Core S&P 500 ETF

The iShares Core S&P 500 ETF USD Acc is an index fund managed by Black Rock, an American global investment management corporation based in New York City. Choosing a strong fund manager is important to ensure indexing is properly done and fees are low, in this aspect Blackrock is the leading investment company.

The investment objective of the fund is to deliver the net total return performance of the Benchmark Index (being the S&P 500 Index), less the fees and expenses of the fund.

As an ETF, the iShares Core S&P 500 is traded in the stock market. There are several codes for it, depending on the stock exchange you work with.

The investment policy of the fund is to invest in a portfolio of equity securities that match the S&P 500 Index. That means that by investing in it, you will be, in reality, buying a fraction of each of the 500 stocks that makes up the index.

Vanguard FTSE All-World ETF

The Vanguard FTSE All-World UCITS ETF is another ETF. Vanguard Group is a fund management company. It is ranked as the largest provider of mutual funds and the second-largest provider of exchange-traded funds in the world, after BlackRock’s iShares.

The fund aims to provide long term growth, by tracking the performance of the FTSE All-World Index.

To achieve its investment objective, the fund will invest directly in shares of companies that make up the FTSE All-World Index.

Our final portfolio return

We have invested 70% of our investment capital into S&P 500 and the remaining 30% into FTSE All World Index.

Looking back on the past 5YR, our ETFs had the following performance;

iShares Core S&P 500 ETF: 5YR return of 68,05%
Vanguard FTSE All-World ETF: 5YR return of 74,36%

Therefore our portfolio will have a 5YR return of: 70% * 68,05% + 30% * 74,36% = 69,94%.

The returns from both funds were quite similar. That is because, over the period we analyzed, the US has dominated the global market. As you can see in the graph below, both funds were well correlated over the past 5 years.

As we are envisioning a buy and hold long term investment (10+ years), the 30% portion on FTSE All-World is designed to shield us from a shift of performance from the US to international markets. We have diversified our investment portfolio to ensure robust capital gains in the long term.

iShares Core S&P 500 ETF vs Vanguard FTSE All-World ETF — Five years returns comparison between iShares Core S&P 500 ETF and Vanguard FTSE All-World ETF

BONUS TIP: When choosing any investment fund, keep an eye on the applicable management fee and expense ratio.

The expense ratio of a fund is the total percentage of fund assets used for administrative, management, advertising, and all other expenses. In order words, the expense ratio is the annual fee that all funds or exchange-traded funds charge their shareholders. Expense ratios of 1% per annum mean that each year 1% of the fund’s total assets will be used to cover expenses. You can find the expense ratio, net asset and asset value on the fund prospectus.

About the author:

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

Disclaimer:

I personally own shares on both SP500 and FTSE All-World indexed mutual funds / ETFs. All my investments are long term. I did not perform any trade with these securities in the two days before/after writing this article. The content of Leblonblue is meant for informational and educational purposes only and should not be understood as professional investment advice. Please review our terms of use for more details.

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