What’s in It for Me?
The majority of people believe financial independence is only achieved after a long 40+ year career of diligent work. But what if there was another way? The purpose of Your Money Or Your Life is to teach the concepts that will allow you to achieve financial independence (FI) much sooner than the traditional retirement age. FI encompasses more than just having a secure income. It is also freedom from crippling financial beliefs such as debt or inefficient spending habits that are trapping you from achieving a life where working for money becomes optional.
The Big Idea
For many working people, there seems to be no real choice between their money or their lives. What you do to earn money likely dominates your waking hours, and life is what can be fit into the scarce remaining time. The book creates a nine step roadmap to achieving financial independence:
Step 1: Making Peace with the Past
Find out how much money you have earned in your life by obtaining copies of your federal or state income tax returns. This exercise will give you a clear picture of how powerful you are in bringing money into your life and instill confidence. After all, this is a very basic fundamental practice of any business, and you are a business.
Step 2: Being in the Present-Tracking Your Life Energy
Determine how much you are trading your life energy for by establishing the actual costs in time and money required to maintain your job, and compute your real hourly wage. Since you are selling your most valuable resource-your life energy, it is important to understand how much you are selling it for.
Step 3: Where Is It All Going?
Each month, create a table of all income and expenses within categories generated by your spending pattern. Convert dollars spent in each category to hours of life energy using your real hourly wage in Step 2.
Step 4: Fulfillment and Satisfaction
Analyze your spending categories and determine if you received fulfillment and satisfaction in proportion to the hours of life energy spent. This process will help discover what is enough for you and uncover if you are spending on categories consistent with your values.
Step 5: Making Life Energy Visible
Create a large wall chart plotting your total monthly income and total monthly expenses and put it in a place you can see everyday. This will give you a picture of your progress towards FI and will provide a sense of motivation.
Step 6: Valuing Your Life Energy-Minimizing Spending
Practice intelligent use of your life energy (money), resulting in lowering your expenses and increasing your savings. This will create greater fulfillment and alignment in your life. Master the techniques of wise purchasing by researching value and quality.
Step 7: Valuing Your Life Energy-Maximizing Income
Since money is simply something you trade your life energy for, make sure you are being compensated fairly at your job. Break the link between work and wages to open up your options for increased earnings.
Step 8: Capital and the Crossover Point
Each month apply the following equation to your total accumulated capital:
Capital X Current Long-Term Interest Rate/12 Months = monthly investment income
Since the book was written during a period when long-term interest rates were 8%, you may consider substituting a lower interest rate you could expect to earn on other cash flow producing assets (stocks, bonds, real estate). When your monthly income generated from investments exceeds your monthly expenses, FI has been achieved!
Step 9: Managing Your Finances
Become knowledgeable about long-term income producing investments. Invest your capital to provide safe income, sufficient to meet your basic spending needs for the rest of your life.
Key Concept #1
Making a Dying
“We have come to take our identity and our self-worth from our jobs.” Your Money Or Your Life p.5
What is your typical workday routine? This could sound familiar to many employees: Alarm clock rings at 6:30am. Shower, eat a quick breakfast, and hustle out the door for the daily punishment of rush hour. On the job by eight. Deal with the boss and many different co-worker personalities. Deal with customers/clients/patients. Act busy. Hide mistakes. Smile when impossible deadlines are handed to you. Five o’clock rolls around and you are back on the freeway for the evening commute. Try to de-stress and act human once arrived at home with spouse, kids or roommates. Eat Dinner. Watch TV. Go to bed. Rinse. Recycle. Repeat. Now ask yourself, does that sound like making a living? For many of us, the truth is closer to “making a dying.” We are killing our health, relationships, and sense of joy for our jobs. We are sacrificing our lives for money. Even people that like their jobs and feel they are making a contribution can recognize that there is a larger arena of life that could be enjoyed.
It is difficult to change spending habits or your relationship with money if there is not a strong motivating factor to change. Understanding that working is trading your valuable life energy for money, and more importantly that there is another path, can be that motivating factor that allows you to begin the journey to FI.
Key Concept #2
Track Your Spending
The authors suggest two important steps to tracking your life energy:
1. Establish the actual cost in time and money required to maintain your job, and compute your real hourly wage.
2. Keep track of every cent that comes into or goes out of your life.
For Step 1, the conclusion many people reach is that after factoring in commuting, professional business attire, and work related stress, your real hourly wage is significantly lower. This can be especially true for employees that travel frequently for their jobs. After all, many salaried employees put in significantly more than 40 hours per week on the job, but long commutes or nights spent in hotels for business travel may leave many feeling like their lives are consumed by work, which is sadly true.
Step 2 can be accomplished with Mint or other various spending tracking programs, but the purpose is to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes. The purpose is not to use that data to create a budget, but rather to get the full picture on what you are spending money on. The exercise may reveal habits that are costing you much more than you realized. Additionally, understanding how much your annual living expenses are is a key input into knowing how much money you will need to achieve FI. Although not specifically mentioned in the book, many in the FI community consider 25 times your annual spending amount to be the figure necessary to reach FI.
Key Concept #3
The Nature of Fulfillment
“What brings you the most fulfillment-and how is that related to money?” Your Money Or Your Life p. 110
The next time you make a big purchase, wait a few months and ask yourself the following three questions:
1. Did I receive fulfillment, satisfaction and value in proportion to the life energy spent?
2. Is this expenditure of life energy in alignment with my values and life purpose?
3. How might this expenditure change if I didn’t have to work for a living?
The first question can help identify spending weaknesses. Maybe you buy a new pair of shoes more frequently than they are actually needed, simply because you enjoy collecting shoes. Over time, seeing the number of hours of your life you spent in order to reward yourself with yet another pair of shoes may cause you to rethink this addiction. The second question may help you reflect on the principles that are important to you and if the way you spend money is in alignment with those principles. The last question is used to evaluate how much your job costs you and to focus on your life apart from work. For instance, if you are putting 20,000 miles on your car every year to commute to work, this is a significant expense in time, gas, car insurance and maintenance.
How much money is “enough” to feel fulfilled? The authors suggest that “enough” is based on four components:
Accountability: Knowing how much money is flowing into and out of your life. This is basic financial intelligence.
An internal yardstick for fulfillment: You can never have enough if you are constantly measuring yourself to other people.
A purpose in life: It is important to have a purpose in life higher than satisfying your own wants and desires because you can never have enough if every desire becomes a need that must be filled. Beyond the point of enough, fulfillment is achieved by giving to others, whether it is in time, money, or both.
Responsibility: Having a sense of how your life fits with your community and with the needs of the world is important. If we only focus on ourselves, we can never have enough until we have it all.
Key Concept #4
The Crossover Point
We will all achieve FI sometime between now and the day we die; the only thing under debate is when. Once you understand where your money is going and how valuable life energy is being depleted to earn money, you will likely make some changes to your spending habits and perhaps be motivated to increase your earnings potential. However, all that hard work will take you a very long time to achieve FI if you are simply putting your money in a checking account. The key to growing wealth is compound interest, or investing your money so that it works to earn more money. Since the book was written at a time when interest rates were significantly higher than they are today, the authors suggest investing in long-term US treasury bonds given the safety of the investment and ease in projecting monthly interest payments. That is not likely the best approach in today’s low interest rate environment, but the concept of investing savings in a combination of stocks, bonds, real estate, or other cash flow producing investments is essential to achieving FI. The crossover point occurs when the monthly income generated from your investments exceeds your monthly expenses, and at that point you will have achieved FI.
The realization of a crossover point can have a powerful impact on your life. If you see your life as bigger than your job and can envision working for money only for a finite period of time, then you are likely to be an even more highly motivated, high integrity worker. What dispels many people from saving and investing in the first place is retirement seems like a destination far off in the future, but by rearranging your life priorities, living significantly below your means, and investing the excess savings, it is possible to achieve FI much earlier. The added benefit of reducing your lifestyle expenses is it requires less money to be accumulated in order to reach FI.
Key Concept #5
Empowerment
“By and large you should manage your own money. No one is going to care about it as much as you.” Your Money Or Your Life p. 295
The natural strategy most newcomers to the world of investing adopt is go to the “experts.” Unfortunately, as the authors suggest, many financial advisers are simply sales people, often without regard for your best interest. Therefore, investing the time to learn about basic investment principles will likely be well worth it. As mentioned earlier, the book does date itself somewhat by suggesting simply investing in long term US Treasury bonds, which would have been an attractive strategy when interest rates were 8% or higher. Today, strategies such as low cost index funds can be an excellent place to invest your savings for the long-term. No special skill is required since you are simply buying a basket of stocks that over long periods of time will likely earn a return that exceeds US Treasury bonds.
The concern of running out of money is a natural fear, and one of the culprits that is commonly mentioned related to this fear is inflation. Although inflation is a legitimate threat, the authors suggest it is grossly over-blown. The book lists the cost of various food and household items from the 1970s and 1990s and illustrates that many items have actually decreased in value thanks to technological advances. Additionally, consumers have a choice when it comes to spending decisions. For instance, one could live closer to work or even bike to work to save on commuting costs. The bottom line is no investment product or program is a guaranteed hedge against inflation, but consciousness is.
The books mentions three pillars of FI:
Capital: The nest egg that is invested in the safest possible long-term interest bearing vehicles, ultimately producing more income than your expenses (i.e. the crossover point). Again, it today’s low interest rate environment, this could include dividend paying stocks, bonds, real estate or other cash flow producing assets.
Cushion: This is a cash reserve set aside in a checking or savings account that will cover at least 6 months of living expenses. The purpose of this cushion is to handle emergency expenses that are an inevitable part of life.
Cache: In pioneer days, a cache was a hole in the ground where travelers buried provisions that were too heavy to carry. In your FI program, your cache is the extra money (beyond your capital and cushion) that builds for future use. Since most people who reach FI discover that their expenses actually go down and they typically pick-up some freelance or part time income earning opportunities, the extra money can be used to further build up your financial position. By reinvesting the money in the same income-producing vehicles where you put your FI capital, it will allow you to create an informal endowed foundation. It is from your cache fund that you can replace major items necessary to your chosen lifestyle when they do wear out or splurge on that two week trip to Hawaii.
Apply It
- How would your life change if you no longer had to work for money? Instead of just thinking of this statement as a fantasy, realize that by following the 9 steps in Your Money Or Your Life, this in fact can become a reality. What is preventing you from taking that first step today?
- What areas of your life is your spending misaligned with your values? Take small steps each day to reduce unnecessary spending that is wasting your valuable life energy.
- Although it may sound extreme, try creating the wall chart from Step 5 that measures your monthly spending and income. Having this as a visible reminder can be extremely motivating, particularly when you get home from a rough day at work and realize that there is an end in sight. For a more modern version of the wall chart, try using Personal Capital to track your spending and investments.