Ethical Decisions: Avoiding the Fool's Choice

We recently stumbled across a website called Made in a Free World. This is about sourcing ethical products, ones which don't make use of what is essentially modern slave labour. They have an alarming survey called Slavery Footprint.

You fill in data about your lifestyle (in great detail, like how many rooms your house has, and how many pairs of pants you have!), and they work out how many slaves/indentured labourers work somewhere in the world to make that lifestyle possible. Obviously things like cotton, coffee, cosmetics and so on are really problematic. Electronic devices also seem to be a real problem.

The two of us got 26 and 35 slaves respectively.

This was scary.

This is the number of people - including children - who work in conditions that I'm sure all of us would consider unacceptable in order to provide us with our insanely luxurious lifestyles.

The economic chains which keep people in slavery are just as real as these ones.
Photo credit:Trevor Leyenhorst (CC-BY 2.0)

I recommend everyone does this survey. Rethink your life choices. It's a humbling exercise, and one which we should all do once in a while.

Avoiding the Fool's Choice

Now I know that often ethical consumer choices are prohibitively expensive. So how can we save money but still consume ethically?

This can be an example of a Fool's Choice or false dichotomy. You feel like you have to choose between two bad options. Actually, there is often a third option.

False dichotomy: forgetting the third option.
Photo credit: Dan Moyle (CC-BY 2.0)

Neither.

Don't buy the dodgy product. And if you can't afford the good product, then buy nothing.

Mostly, you don't actually need either of them.

Consuming less is a good idea anyway. Buying less saves money, cuts down on slaves and is also better for the environment.

When there isn't a third option...

Even food, the obvious exception to just not buying anything ever, can be part of the false dichotomy. Maybe the third option there isn't so much "neither" as "something else altogether", such local, in season fresh products.

But nonetheless, we have to accept that sometimes there is a genuine payoff here, and we have to make a genuine choice between cheapest and ethically acceptable.

This is a complicated, entangled issue. In each of these situations we need to make a moral choice as best we can. All I ask - and I am asking myself as much as I am asking you - is that we really think about the choice, rather than just grabbing the quickest, easiest, or even just cheapest option.

Think first. Consume later.
Photo credit: Taymaz Valley  (CC-BY 2.0)

Yours, in a most challenged frame of mine,
jjdaydream

Why Budgeting can be Dangerous

Over this weekend, we went down a Youtube rabbit hole: The One Rand Family. This was a Sanlam initiative (advertisement) during the month of July which was National Savings Month. The original version was The One Rand Man, which ran during July 2014. 

The big idea was that the participants got their whole salaries for the month in the form of one rand coins, and locked away their plastic money for the duration. This not only gave them a very visual sense of what was going on with their money (stacking up piles of coin-filled plastic containers makes you aware of the size of your car repayments on a very visceral level) but also made them think twice before spending. When you've actually got to dole out your last few piles of one rands, it makes you think more carefully about whether you really need whatever it is. And when you've only got a couple of hundred rands and 9 days left in the month... well, then you really start changing your spending behaviour, at least temporarily.

Watching all of their episodes, as well as some other interviews with the participants, it seems that the biggest challenge for them was not making use of overdraft/credit card facilities when the cash flow got tight at the end of the month. 

Even for those of us who aren't quite as extreme as the One Rand Tribe, using credit as an escape route when our money has vanished is a very bad idea, short of a once off emergency. Because unless we have saved a lot already, this means that we are spending next month's money this month, with no particularly wonderful prospect of making up for it next month. Borrowing for lifestyle expenses means that a month's salary is not enough for a month's lifestyle; and it definitely won't be enough for a month's lifestyle plus debt repayments. Ask yourself: what will be different next month? The sad truth is that next month we'll have the exact same problem except probably worse: after all, your salary won't be any bigger; it still won't be enough to pay for your lifestyle. 

If you aren't careful, you'll end up getting further and further behind, unable to pay the full credit card bill every month and therefore creeping further and further into debt.  As soon as you start paying the minimum payments rather than the full balance it is scarily easy to end up in a situation where you are constantly a month or more behind: and then half your income is going to disappear into repayments that hardly even touch the capital of your debt but instead scrabble around in the foothills of a massive interest rate. 

A truly alarming number of South Africans seem to be in this predicament.

The beast of the night called DEBT makes a guest appearance...
Photo credit: GotCredit at  www.gotcredit.com (CC-BY 2.0)

This got me thinking about BUDGETING: the process of trying to fit your lifestyle into your monthly income.

Here is the usual idea behind budgeting, one to which I have unfortunately subscribed for many years: 

1. List all the expenses you can't avoid, such as rent and utilities, tax, medical insurance and so on. These are usually the ones that bounce straight out of your bank account as soon as your salary arrives. You should know what they are. You probably can't do anything much about them. The exceptions to this are debt repayments, which also come off at this stage, and which you can definitely do something about (pay them off quicker!).
2. See how much money you have left. This is usually a lot less than any of us would like. Now allocate as much as  you think you will need for other essentials like food, petrol and school fees.
3. Whatever is left is for spending however you like. This is where you "budget" for eating out, clothing, movies and holidays: all the things you'd actually like to spend your money on.
4. If by exerting colossal effort you have managed to ensure that there is some money left at the end of the month, save it.

Now, budgeting like this is definitely better than not budgeting. At least you know where your money is going, and you have a reasonable expectation of not going into credit for the essentials of life. Depending on your self-control on step 3, this process will even prevent you from going into credit on the non-essentials: yay!

BUT

BUT 

BUT

Why Budgeting is Dangerous:

Step 1 shouldn't have any debt in it whatsoever. Making debt repayment come off like a normal expense makes it feel like it's okay. It is not okay to be in debt. Half of the reason South Africans are in such a debt hole is because of the perception that debt is like an awkward uncle: not ideal to have around, but everyone has one, so it's fine. If you have a debt, then budgeting should involve Step 1, Step 2 and NOTHING ELSE until the debt is paid.

Step 2 is open to (mis)interpretation. It is too easy to make yourself believe that something is essential, when it is actually a discretionary item. Here is an example: for the first three years after we got married, we had yoghurt with our breakfast muesli every morning. Once in a while we would look at the price and wince - because yoghurt is a lot more expensive than milk - but we convinced ourselves that it was good for us, and therefore necessary. In fact, once you look at the sugar involved in most yoghurt, the "good for us" premise is unlikely. And unless you have a very specific medical situation no-one would say that the yoghurt cultures (or whatever they are) are necessary for health. The main thing healthwise for ordinary people is the calcium: and that is available much more cheaply in milk. It takes a huge amount of self-control to be totally honest with yourself about the true essentials of life, particularly when it comes to food. A similar process often happens with petrol - we use too much of it, because we drive too much. "Allowing" this expense in our budgeting can make us feel like this is an acceptable situation.

Step 3 is a disaster waiting to happen. We all know that the "I want" section is where budgets fall apart. When I was a student I budgeted to buy one soft drink per week, on my way to tutoring. This was my discretionary spend. But guess what? When I walked past the shop on other days, sometimes I brought myself a soft drink anyway, because what's one extra soft drink? Yet if I did this once per week, my discretionary spend would have doubled. Yes, this is a silly example, and probably made no difference to my financial health. But when you're earning more than a student pittance, the tendency is to repeat this pattern in an increasingly unhealthy volume. R400 becomes R600, because I've worked hard and deserve it. R300 becomes R450 because it was a special deal and worth every cent. R200 becomes R370 because I don't want to look stingy in front of my friends. Making it okay to spend some unnecessary money often opens the door to making it kind of okay to overspend - and even to use credit to fund your lavish lifestyle. 

Putting discretionary spend before savings is a major catastrophe: but it is a catastrophe that too many of us overlook in our monthly budgets. If your budgeting process looks like the one I outlined above, you are treading water. And yes, that is better than drowning. But at the very best, you are probably making a small contribution to your pension fund as required by your employer, and perhaps perhaps saving something at the end of the month. But over all, you are (hopefully) breaking even, and making little to no provision for the future. Yet you probably feel as if you are doing quite well. But if a wave comes along... you could too easily go under. News flash: your financial position may not be as awful as other people's. That doesn't mean you're in a good place.

Budgeting is the process of fitting lifestyle into cash flow, not the other way round!
Photo Credit: Tax Credits at taxcredits.net (CC-BY 2.0)

What does healthy budgeting look like?

Don't get me wrong, budgeting is a really important and helpful part of living a frugal lifestyle, fueling the independence engine and (hopefully) reaching financial independence. But we need to budget in a productive way. Here are some ideas for healthy budgeting:

1. Budget descriptively, not prescriptively. Budgeting should be a process of observing your own spending habits. This means that you can plan cash flow effectively, and work out if and when you will be able to afford those unavoidable large expenses. It also means that you can safely save your maximum without being afraid of accidentally running out of grocery money.
2. Save first. I've said this time and time again, but looking towards the future cannot be an afterthought to your month. Use your descriptive budgeting to work out how much it is possible to save, and get that amount out of your bank account ASAP, before you accidentally spend it.
3. Budget with a critical eye. When you look at your spending for last month, look out for danger areas. Perhaps when you look back you notice a gradual creep in expenditure on clothing. This enables you to cut back in those areas next month.
4. Don't budget for wants. If a "want" spending opportunity comes up, either do it or don't do it, based on careful consideration of that situation. Don't have a general rule like "up to R200 is okay for discretionary items", because the truth is that sometimes it is and sometimes it isn't. Make each choice deliberately, not automatically. (Imagine paying for it in one rand coins if you think it will help!)
5. Budget long term. Create a spreadsheet or plan for the next ten years. Where would you like to be? This helps you to keep an eye on the bigger picture, without getting too bogged down in month to month expenses.
6. Whatever you do, don't create a series of ineffectual and unrealistic budgets which you know you'll never be able to follow. This will just make you feel bad about yourself OR make you feel unhelpfully good about yourself while making no actual change to your financial health.

Overall, your budget should be a means of you (and your spouse/family) planning financial choices sensibly. It isn't a magic spell which will make all your financial problems go away. As with all financial tools, if a budget is used badly, it will have a negative impact on your financial situation. But used with caution, it can be enormously powerful.

Postscript/PostInvasion from Mr Cent(ri)frugal Force:

You may find some of these tools helpful for putting together a healthy budget:

Picking the right tool can make all the difference.
Photo Credit: Lachlan Donald (CC-BY 2.0)

• Google Sheets - an online spreadsheet tool. I like to keep my descriptive budget in the cloud so that I have access to it anytime and anywhere - it's also easy to share it with others (once I've made a more user-friendly version of my spreadsheet I'll share it on the blog).
• 22Seven - this really cool company (now owned by Old Mutual) has an app (and a web version) that pulls in all your account balances from all your online accounts that you choose to link to your 22Seven account. You'll need to do your own research and choose how comfortable you are putting your passwords into their service, but their security appears to be pretty solid. Their software tracks your spending and categorises it for you - this is a very good way to see exactly where your money is going. Personally, I prefer to micromanage things so I like my spreadsheets and accounting software (see below). But I've been making use of 22Seven as well (mainly to decide if I'd like to recommend it on the blog) and I've been pretty impressed with them. They also have a blog which is pretty good - you should go check it out. One word of caution - the service is free, but they're probably hoping that you'll make use of them to save in a Tax Free Savings Account. The signup process looks ridiculously easy and the fees are not too bad (0,68%). But you can definitely find lower fees elsewhere - this 0,68% is a fee over and above the fees paid on whatever unit trusts you'll be investing in. Fees really matter so you'll want to do your research on this one. I'll try to do a blog post about fees soon.
• You could also make use of some accounting software. Back in the day I used to make use of Microsoft Money, but I found the "category approach" for income and expenses not as helpful or powerful as a proper "account approach" that one would use in accounting. This is when I switched to gnuCash which is free and cross-platform. You can even turn off words like "debit" and "credit" and make them display something like "money in" and "money out" if that helps you ;-)
• Other than the above I haven't dabbled in any other budgeting tools, apps or services. If you have had a particularly good experience with other apps let us know in the comments!

Happy budgeting!

jjdaydream & Mr Cent(ri)frugal Force

Investing Basics I: Asset Allocation

At this stage we've established the importance of saving money in order to invest it. The Financial Independence Engine is most potent when powered by the stock market, but there are many ways to access the stock market so we'll explore some of these as we go along. Non-stock investments should not be overlooked - they add value at any stage of your financial independence journey and the role they play will change as your needs change.

This mini-series will be about where your money is (or will be!):

1. what form it's in (cash, bonds or stocks), and in what proportions
2. which companies and parts of the economy you've invested in
3. what type of financial product you invest in (fixed deposit, money market, retirement annuity, unit trust, ETF, tax free savings account etc.)
4. which financial institution you use as a platform

Let's start by understanding the different forms in which you are able to invest, why you would choose each form, and how you should decide on the approximate proportions of each.

Different forms of investments are called different asset classes
Photo credit: GotCredit at www.gotcredit.com (CC-BY 2.0)

Asset allocation
There are three main asset classes: cash, bonds and stocks/equities. In the investing world you might come across the idea of asset allocation. This is simply the ratio in which your assets are spread across these asset classes.

Cash
Essentially anything that earns interest counts as cash. Money placed in a savings account, fixed deposit, money market fund or similar are all examples of cash. In a previous post we established that cash is not the investment we are looking for because anything invested in cash typically only just about keeps up with inflation (sometimes not even). 

What cash investments offer that the other asset classes do not offer is accessibility. If you need money in an emergency or for day to day expenses the last thing you want to do is to be forced to sell off some of your longer term investments at a bad time - for example when the markets have taken a large (but temporary) dip. 

We have about 4,5% of our investments in cash form (Capitec bank accounts and Allan Gray Money Market Unit Trusts) and the rest is in as aggressive a form as we can make it. The cash component of our investment represents more than six months worth of expenses which is available in case of emergency and for cash flow. Building a buffer like this is important so that you never need go into debt. The cash component of our investments enables us to be more aggressive with the rest of our investments.

Bonds
When you lend money to an institution (or even the country itself) for a fixed period of time for either a fixed or variable interest rate you have yourself a bond. It's the exact opposite of the bond you might have on a house. Governments and companies make use of bonds to raise funds for pretty much anything - but since they're getting money they don't actually have yet they need to pay you interest for the privilege of having access to your money. 

Bonds are typically considered more risky than cash, but less risky than stocks. We haven't invested in bonds directly, but we definitely have exposure to bonds through the various unit trusts we've invested in.

The stock market... scary, or not really?
Photo credit: Andreas Poike (CC-BY 2.0)

Stocks / Equities
When you buy stocks or equities, you are essentially buying a small part of a business or group of businesses. You then share in the profits or losses of that business, either in the form of dividends or growth. Your shares in the company grow as the business grows.

The stock market is where you will make returns well above inflation if you're investing for the long term. However, in the short term, it is very possible for your stocks to decrease in value, which makes this seem like the most "risky" form of investment. Actually, the risk isn't as bad as it sounds: the risk isn't really that you will lose all your money (short of a catastrophe) but that at the moment you want to sell your shares they won't be at their most valuable. If you are able to wait for the correct moment to sell (either because you have time on your side because of youth, or because you have a good cash buffer) then this risk is minimised.

The real risk is losing out to inflation in the long term. Not the stock market. But it can definitely feel like it at times!
Photo credit epSos.de (CC-BY 2.0)

If you're investing over a long time horizon (30 years and more) then the risk of losing in the stock market is virtually zero. The real risk is not being in the stock market and losing the race against inflation. The longer you are invested for, the lower your risk.

Instead of working with the traditional asset allocation of "cash:bonds:stocks" we think of our asset allocation as as "things that roughly keep up with inflation : medium growth investments : high growth investments". The medium growth investments are more balanced, are typically Regulation 28 compliant (retirement annuity regulation that allows maximum 75% exposure to equities within the retirement annuity) and we're aiming to get about 5% above inflation on these. The high growth investments are pure equities and we're aiming for about 7% above inflation in the long term on these investments. 

We're very young so we've maximised our exposure to the stock market through unit trusts and more recently passive exchange traded funds (ETFs). These are simply mechanisms by which you can diversify (invest in lots of different businesses so that the risk of your chosen business failing is minimized) and reduce investment costs - more of that in the next Investment Basics post!

Stuff Minimisation and Financial Freedom

Over the past two years, we have been on an EPIC QUEST please tell me we’re not the only people for whom thinking of things as quests makes the admin feel more bearable… One of the parts of this quest, as you know, has been reduction of expenses. Another part has been self-education regarding personal finances, and a resulting increase in investment income. A third branch of the quest, one that has been essential to the financial freedom frame of mind, has been the process of STUFF MINIMISATION. 

Does your life feel like this? Time for STUFF MINIMISATION!
Photo Credit: Nathan Jongewaard (CC-BY 2.0)

Minimisation and Financial Freedom

What does STUFF MINIMISATION have to do with financial freedom? 

1.  It is about reducing our dependence on a consumer mindset, and retraining our brains to understand that STUFF does not make us happy.
2. It is about (re)discovering useful and awesome STUFF that otherwise gets buried in all the other STUFF, and therefore getting the best use/most enjoyment out of the STUFF we have instead of constantly needing new STUFF -  otherwise known as expenses!
3. It is about reducing the amount of time spent maintaining, cleaning and repairing all your STUFF, thereby increasing the amount of time available for everything else.
4. It is about creating a calm environment (minimizing stress right alongside that STUFF) from which we are better able to cope with life. We are therefore better able to make tough, long-term decisions instead of lurching from choice to choice in the sometimes inexorable grip of what feels good now.

However, STUFF MINIMISATION is a process, not a destination. We, for example, still own far too much STUFF, despite all our efforts. We live a lavish lifestyle, if you get down to the basic needs, surrounded by sentimental and useful possessions.

The fact is, that although we may admire the homes furnished entirely by two blocks of concrete and a pot plant, we have no real desire to be minimalists. Some STUFF is handy to have around, and the premise of chucking everything not currently in use seems wasteful: after all, I will need that brand new extra beater at some point when my current one fizzles, as it inevitably will. But do I need ten microscopically different baking dishes, all of which fulfill the same essential function? Nope. Might I need the work trousers in one size up some day? Yeah, let’s be honest, I might. And why buy a new pair just because I didn’t want to keep one extra folded pair of trousers in the back of my cupboard? Do I need to keep the skirt which I’ve worn once in the three years since I bought it? Well… probably not. There is a balance here, and probably a balance which comes out differently for every family.

So I can't give you a date by which we will only have the optimal STUFF left in our home. I can't show you a picture of the ideal STUFF-free home, or tell you which of your STUFF you should get rid of.

But I can tell you that embarking on a process of STUFF MINIMISATION definitely makes you think twice before acquiring: for that reason alone, it is worth considering in our consumer-mad world. 

Fill your life with freedom, not STUFF.

Photo Credit: brett jordan (CC-BY 2.0)

Making Minimisation Practical

Most of us wouldn't mind a bit of a spring clean, and most of us would probably agree that we could stand to get rid of some STUFF. The difficulty is that, well, it's... difficult. Whether because of inertia or sentimentality, the STUFF MINIMISATION process is tough to start and tougher to make significant progress in. The choices are personal, and often emotional.

How do I make myself actually make those choices on a fairly regular basis?

1. Give almost everything away. This is usually quicker and easier than selling, and it will probably give you a happy glow. Plus, (almost) everything can be given away, and not everything is saleable if you aren't going to do the massive garage sale thing. And I certainly do not have the energy for that. Most charity shops will take boxes and bags of unsorted junk with wide-embracing er, charity, and do all the sorting and  pricing themselves. Some will even collect. If they can make a bit of money out of my pursuit of freedom, awesome. 
2. Sell the big stuff. Some STUFF is worth a lot of money: you know what that might be in your home. Double financial freedom whammy: less STUFF + more money. In South Africa, Gumtree is your friend, though you need to be careful (obviously). But if you don't have the bandwidth even for this... see #1! Don't get stressed about making a small amount of extra cash here: the main goal is getting the STUFF out of your life as efficiently as possible. Keep your prices low but fair in exchange for quick, easy sales.
3. Keep a secret STUFF stash in between dumping trips. We have a big cardboard box in the garage. Whenever we decide that an item can go, we put it in there, straight away. No backsies. Then, when the box is full, we can take a trip to our favourite charity shop.
4. One step at a time. Whether you work room by room, or have a special decluttering time in the week/month, or cope with one type of STUFF at a time, don't try to do everything in one go. That's just demoralising. Rather celebrate each item of STUFF that you manage to toss. And of course enjoy using the good STUFF unearthed!
5. Embrace the process... and remember it. The pain has significant gain: if you can hold on to your irritation as you throw out another half used moisturizer, and bring it out at the right moment, you are way less likely to buy more useless STUFF next time you're at the mall.

Lastly, keep your eyes on the purpose of all your hard work: instead of gradually accumulating more STUFF, you are gradually accumulating more freedom. Instead of buying the latest and greatest, you are getting rid of the white elephants, the not-really-our-favourites and the no-longer-useful. Instead of filling your home with possessions, you are emptying it, to make space for possibility.

Make space for possibility!
Photo credit: Archana Jarajapu (CC-BY 2.0)

To freedom!
jjdaydream