The other day a reader asked me for some ideas as to how I go about selecting companies in which to invest. He had read other blogs which make extensive use of technical indicators and oscillators (Williams%R, MACD, Bollinger Bands, Stochastic Oscillator, etc.) and relied to a great extent on charting tools (SharpCharts, Point & Figure Charts, Candle Glance Charts, etc.). While he recognized these tools might work well for some investors, he acknowledged that his personality was such that he did not want to perform an indordinate amount of technical anlysis.
After reading my blog, he came away with the feeling the process I follow might be more in sync with his personality. His words were:
“I have an easier time conceptualizing that Nike will very likely be selling more products 5 years from now than I do trying to figure out the direction of Nike’s stock price by looking at some charts.”
Bingo! That’s me.
I thought the best place to start would be for him to provide me with the following background information:
- goals and objectives;
- level of investment knowledge;
- his current financial status.
I forewarned this individual that I am not a licensed financial advisor. I am merely an individual who has been investing for years with relatively reasonable success; my wife and I were able to retire at the ages of 52 and 56.
In addition, given that we were total strangers I was not expecting him to disclose highly confidential information. All I wanted was very high level information which would allow me to tailor some investment suggestions for his review.
After some exchange of correspondence, my suggestion was to hold off on investing.
This reader had:
- credit card and charge card debt;
- two car loans;
- a line of credit secured by a collateral second mortgage on his principal residence;
- a conventional mortgage on the principal residence.
While investing in equities can certainly be one method to achieve financial freedom, the road to financial ruin is paved with debt used to acquire depreciable assets.
My suggestion was to focus on the elimination of all credit and charge cards debt, the two car loans, and the full amount outstanding on the line of credit. That, from my perspective, was a priority.
The elimination of all this debt would certainly enhance this reader's cashflow. Once this debt was eliminated, this “found” money could be redirected toward:
- the elimination of the mortgage;
- building up an emergency fund;
- investing for retirement purposes.
My recommendation was that the reader take all credit cards and charge cards, stick them in a plastic baggie, fill the baggie with water, and place the baggie in the freezer. Going forward, all purchases were to be made with the use of a debit card. I was okay with all recurring payments automatically applied to the credit cards (ie. various utility payments) remaining in place.
I suggested a good place to start would be to track the inflows and outflows. In this regard, I suggested having a look at my Reduce Stress. End the More Month than Money Dilemma. post wherein I include a “monthly cashflow spreadsheet”. The spreadsheet has a worksheet where you record your historical monthly spend; you need to pull out your old credit card and bank statements. You also need to determine how you spent all that “cash”! After all, if you don’t know where your money is going, how do you know where you should cut back?
This Excel file also contains another worksheet in which you record your monthly spend projections.
Finally, there is a worksheet which calculates the variance between your historical spend and your projections. You might notice right away that there are some expenses in life that are really not that necessary (ie. is all that coffee consumption necessary and do you need to smoke?). If you want some quick results, flag these non-essential expenditures and immediately start cutting back.
I asked whether financial freedom was more important than the ownership of material items. He responded that financial freedom was very near the top of his priority list. The proof of his commitment was when he proposed that he sell his motorbike, his trailer, and his fishing boat.
While February is not the greatest time to be selling these items, the fact he was prepared to take immediate action to rid himself of depreciable assets confirmed to me he was extremely serious about becoming financially free.
So, while only a week has elapsed since our last conversation I am confident this individual WILL become financially free. Why?
This person is focused on WHY he wants to be financially free. HOW he plans to become financially free is secondary.
When you identify your WHY, you have taken the first step on the road to achieving financial freedom.