financial freedom – Passive income

The “secret” to reaching the first 1000, 10000 and 100000 EUR / USD

By MPI9th August 2020Smart moneycompound interest, financial freedom, invest, money, secret, smart money

Compound-interest

Most people get stuck until they reach the first 1, followed by a few zeros of earned /saved/invested money, and they stay in the “start” area for the rest of their lives, taking it over and over again from the beginning.

This is why most people do not become financially independent and do not truly achieve financial prosperity.

The first 1000 EUR invoiced from the new business;
The first 10,000 EUR invested on the stock exchange;
The first EUR 100,000 in the personal portfolio;
The first studio for rent;
First salary / bonus etc. of EUR 3000 (the example is relevant, even if it does not start with 1)

The effort to reach the first 1, followed by a few zeros, is enormous and many give up along the way. What they don’t know is that after you hit a 1 followed by a few zeros (2,3,4 etc.), the rest of the zeros are much easier to reach.

After 10 years of struggling to reach a portfolio of 100,000 EUR, most likely up to 200,000 EUR could take you much less, up to 300,000 EUR less and so on.

The same applies to investments. You can constantly invest 200 EUR per month, without seeing a big difference in the portfolio, until, at a certain moment, the compound interest intervenes and your portfolio grows rapidly.

The graphic result is more than clear:

Calculator_initial

200 EUR invested monthly for 20 years at 10% interest

The result is:

Result after 20 years

The graph “speaks” for itself:

Balance after 20 years

So don’t get lost on the road, but continue at maximum acceleration, until you reach that goal of 1 followed by a few zeros.

After that point, things will become easier, automated, routine.

So the “secret” is that there is no secret: all that is needed is discipline, patience and time.

6 tips for improving your family budget

By MPI26th March 2018Smart moneybudget, expenses, family, financial education, financial freedom, financial goals, investment, needs, savings, wishes

In order to be able to draw up a budget of incomes and expenses as accurately as possible, it is best to keep our daily records of spendings so we don’t omit anything. That’s why we can use more tools, either to write daily spending on an agenda at the end of each day, or to use an app on your mobile phone that you have at your fingertips at any time, and we can write down the expenses as we perform them, either use an excel file, so we can personalize it to fit our needs better.

A great deal of daily spendings goes on various occasions, such as snacks during the day or city walks to a coffee. Do not omit to keep track of these costs because at the end of the month you will realize that they will weigh heavily in the budget and you will wonder where the difference is.
For a better financial discipline, it is a good idea first to achieve a forecasted revenue and expenditure budget and then to draw up the budget actually made to figure out what is the difference between estimates and reality, and so you can improve your financial behavior. The forecasted budget can also be considered a target for your budget and try to fit into it.
Every month, the first expenses we have to make are the ones for our future, this are the sums allocated to savings and investments. After making sure that we first saved the amounts proposed, we can only then make the fixed costs that if we omit them in a month they will attract interest and penalties. Finally, we can allocate the difference for variable expenses.
As with fixed costs, to ensure that we do not postpone savings by the end of the month to see if we still have resources available for them, we can set automatic payments to our savings or investment accounts and so we will have better and better financial results.
To ensure that unforeseen expenses do not affect your monthly budget, it is advisable to have an emergency fund of at least 3-6 salaries that you can use only in emergency situations. This way, you will surely know that no matter if your car breaks down or you have an urgent medical problem, you will be able to resolve it without borrowing or delaying until you have the financial resources to solve the problem.
To improve spendings, try to divide them into expenditures that represent needs and expenses that are wishes. Start budgeting all the time by analyzing your wishes and see which ones can be eliminated for better long-term results.

Ultimately, the purpose of our revenue and expenditure budget is to manage our financial resources more efficiently. It is important, after realizing the family budget over a period of several months, to analyze its evolution in order to improve our financial behavior in terms of cost reduction in order to save more and ultimately invest in order to reach our established financial goals more quickly.

What is Cash Flow? Find out how you can use it to your advantage

By MPI23rd March 2018Peer-to-Peer Lending, Smart moneyaccumulation, Bondora, cash flow, financial freedom, investing, investor, money, p2p investing

Cash, and more so the lack of it, can be a determining factor in whether you will achieve your goal of financial freedom. In short, cash flow is the net amount of cash that is flowing in and out of your accounts each month. Traditionally, this has been an important measure for business owners as they can keep track of how much money they are generating from customers that they offer their services to. It’s also important for them to know how much they are paying out each month for things like business loans, office rental and many other expenses.

However, the same cash flow measures can be used by individuals like you and me. Let’s say that each month you earn €2,000 net per month from your employment, €500 from your side hustle and €200 from your investments. But you need to live, so you can deduct your mortgage payments, car costs and any other expenses you have. The result of this will be either a positive or negative cash flow.

Cash Flow from P2P, Real Estate and Income vs Accumulation Funds

One of the most popular asset classes today is Peer-to-Peer (P2P) lending, notably for the opportunities it gives investors to become the bank and receive a monthly cash flow. Let’s say you invested €10,000 across thousands of loans from a range of risk ratings, loan durations and countries. Every month, the borrowers will make their loan repayments which consists of principal and interest, you then have the option to withdraw this cash flow or reinvest your profits to compound your interest and maximize your overall returns.

Quite similarly, real estate investments work in a comparable fashion. If you buy a rental property for €100,000, each month you will receive a payment from the tenants (e.g. €600 per month). You might use some of that to pay the remaining mortgage on the property or add it to a growth account to save a deposit for another property. An important difference between this and P2P is risk, as previously mentioned you can spread your risks across thousands of loans where as you rely on the payment from a tenant in a single property – if they default then there is no other cash flow. Protect your cash flow by diversifying within your chosen asset class.

If you are familiar with investing in equity funds, it’s likely you have come across the accumulation vs income conundrum. Simply put, an accumulation class fund will reinvest any cash generated from the investments within back in to the fund, over time this can significantly increase the size of your total pot. On the other hand, an income class fund will pay any cash generated from the investments back to you to use as you wish. This is for those who are looking to increase their total monthly cash flow amount and are not necessarily focused on the long-term growth of their investments. Almost always, the accumulation fund will be the most profitable in the long run.

Take a look at the graph below:

The same principle can be applied to your investments with Bondora, as the only difference is the underlying asset (consumer loans rather than equities). In the graph above, we have compared the growth of a portfolio with the same interest rate, starting capital and duration, the only difference being reinvesting your monthly cash flow compared to withdrawing it each month. Using our Portfolio Manager, starting with €10,000, an outlook of 5 years and a respectable interest rate of 10% per annum, there’s a stark differential in performance.

In fact, by simply allowing the Portfolio Manager to reinvest your monthly cash flow, your account value at the end of the 5 year duration would be 33.9%, or €4,462 larger (€17,623.42) than if you did not (€13,161.42). This is literally how you can “Make your money work for you” with minimal effort.

Cash for thought

Do you recognize the quadrant above? If you do then you are most likely well accustomed to the benefits of having a positive cash flow, congrats! For those who are still puzzled, this peculiar yet simple diagram is the brainchild of Robert Kiyosaki, the king of cash flow. As the creator of the Cash Flow Quadrant, Kiyosaki divides the general population and their mindset in to 4 separate categories:

E: Employee – This person values job safety and security over everything.
S: Small business owner/Self-employed – An independent person who wants to do everything related to their business by themselves.
B: Big business owners – People who create a large business run by intelligent people.
I: Investor – Those who make money work for them.

His main theory is that people should learn how to become big business owners and learn how to become investors, as the people on the left side of the quadrant only have active income compared to those on the right earning passive income. Creating a viable and sustainable source of passive income is seen as a core principle of achieving financial freedom.

Source: www.bondora.com