Tuesday, June 15, 2010

Saving for the sunny day

In the spring of 2004 I was a man with plan. I had a purpose, I had a destination, and I was in a rush to get there. I figured I’d just need to buy some real estate – my first property – and then the rest would follow pretty much automatically!

I was spending tons of time trying to understand what kind of property exactly I should be buying and how to get the money to buy it. Pretty soon I concluded I’d need to be buying a multi-unit apartment building. While there were several reasons for this, the main one was the profitability: in my part of the world, managing a multi-unit property offered much better returns than what was available from individual houses or condos. I was glad I had figured this out, but it also gave me a real headache. This kind of properties required a much higher initial investment than houses or condos, and I didn’t have enough savings to get a reasonably priced mortgage to finance my purchase. In my area banks wouldn’t deal out a mortgage for the full purchase price of a property without adding a hefty premium to the interest rate. With the premiums they were asking, it would have made little sense to invest at all. I simply had no way around it: I was in an urgent need to save much more money to get my real estate business going.

I had never been a big spender, in my own opinion, and certainly didn’t feel there were many expenses I could have skipped or postponed in order to save more money. Yet, as I was dying to buy some real estate, I figured I’d have to find something. So I set about analyzing my income and expenses, in order to find some money to save.

First, I carefully detailed my – and my wife’s – sources of income. As for most people, this was a relatively simple and quickly done. Two salaries, and that was about it. Sure there were a few other minor pockets of income contributing to my household’s budget: a few hundred a month from a very minority interest in a family business, some regular dividends from the shares I owned, some occasional bonuses from my employer, and so forth. Yet the amount these things contributed seemed small and felt therefore almost negligible.

On the expense side, the story was more complex. First of all, it took a while to even understand where my money really went, on a monthly or annual basis. Tracking this down wasn’t difficult, but it sure was time-consuming. I found a few good hints and templates on the web and used them to come up with a comprehensive list of expense categories plus an exact or estimated amount for the monthly or annual spend in each category. I then compared the total spend to my bank account records, and as the two seemed to matching pretty closely, I decided my analysis was accurate enough for my purposes.

I had never before done proper budgeting in a holistic way, but still thought I had a pretty good idea of my income and expenses. While the results of my analyses mostly proved this correct, there were also some real surprises there. First, the total of my average monthly spend was a fair bit higher than I had thought. There were some items where I spent much more than I had expected. This had been masked by the fact that also my average income was higher than I had thought. In brief, I had never properly factored in the bonuses and other similar “extras”, and accordingly had also failed to notice where some (or much) of this money had gone.

With this, I saw that while my expenses were mostly reasonable, I was really spending away for traveling and vacations, and it had only gotten worse over the past few years. While I was far from being prepared to give up my traveling – I really enjoy seeing and experiencing new places near and far – I sure was ready to scale it back. In a similar way, I noticed some of my other favorite pastimes – mostly sports – were eating up a disproportionate part of my income. Again, I felt I could cut back in these without losing the essence of the pleasure I got out of them. With these and a few other smaller pockets of extra spend, I found much more money than I had ever expected. This felt fantastic!

So, having found all this “new money”, I only had one more challenge left, but this was the kind of one that could really stop my efforts unless properly addressed. If I wanted to save more money – or really proceed with any other parts of my plan either – my wife would have to be part of the picture. The problem was I wasn’t sure she would be really buy into my plans, especially to the the need-to-save-more-now part. Luckily, I felt she would agree – maybe a bit reluctantly, but still – if I just laid out the whole plan to her. So one evening I took the steps to explain to her what I had in my mind and where she’d need to help me out. As expected, she wasn’t excited about the need to save more, but agreed to give it a shot. However, more surprisingly, she had a lot of questions about my real estate business plan and really wondered if I these plans were realistic at all.

So, good news: my main stakeholder had signed up for the plan to considerably increase the level of our monthly savings! The bad news: while she subscribed to the purpose of my plan, she wasn’t convinced at all that my assumptions hadn’t been overly optimistic. After some discussion, I just decided to get going with the first part of the plan and not worry about the second part just yet, but tackle it a bit later, even if still very soon.

I made the necessary changes to my spending patterns and worked with my wife to tackle the parts that required her contribution. Actually, this turned out to be easier than expected, as our purpose was so clear and motivation strong. Also, the rewards came in very quickly: in just a few months’ time, our bank accounts started to show behavior and balances that had been rarely seen before, and this sure gave a further great boost for our motivation. Our feeling was that now – for the first time ever – we really had grip of our finances. While we didn’t really have a lot accumulated let, it felt it would be just a matter of time that this would dramatically change.

So far so good: the savings were now accumulating and my ability to get started with the real estate business seemed ascertained. However, my assumptions and knowledge concerning the planned business itself had been questioned, and to be honest I knew my wife had a point there. I had never owned any real estate other than our own house and certainly had no experience in putting together successful real estate deals, managing tenants, or doing many of the other things that this new business would require.

Starting a new business is always risky, especially if it’s the kind of one you’ve never managed before. However, I quickly found out there are many ways to mitigate this situation, and while you cannot take away all the risk, you sure can reduce it and make it manageable. My firm belief is now that owning a business is one of the best and least risky ways to make the journey to your first million, despite the challenges and requirements it brings. More than that, I am convinced it’s actually a necessity, an essential component for the vehicle you’ll need for your journey.

In my next posting in a few weeks from now I will explain why I think you too should set up your own shop. I will also discuss how to do this without having to quit your current job, and how to pull off starting your own business without a risk of killing yourself – or at least your finances – in the process.

Meanwhile, if you’ve read my first three postings – including this one just now – but haven’t done anything yet to get started on your journey, I’d say: GET STARTED NOW, DUDE! (Please note that in my vocabulary “dude” is a unisex word.) The goal is worthwhile, the journey isn’t that hard, your chances of success are high, and the results are rewarding. That’s why today is a better time to start than any other. Get a grasp of your finances now, start seriously saving for the sunny day (will also take away your need to save ever again for the rainy day!) and read the next posting to get going with your next steps too!


  1. For some reason, I see lot of similarities in the way we think except I haven't made a million yet. I am already working on setting up some businesses.. I am pretty confident I will get there in a few years.. Keep writing more DUDE..


  2. Thanks for your comment, Venki. No doubt your confidence rises from a plan and the fact you have started executing on that plan already. That's what makes all the difference: it's easy to dream up stuff, but turning these dreams into concrete plans and then acting on these plans is where the rubber meets the road. Luck and sucess on your journey! I'll sure keep sharing with the rest of you more on the journey I made - and on the fun I'm still having continuing it beyond the first stop!