Category Archives: Uncategorized

Your Money or Your Life, Step 8: Capital and the Crossover Point

[This is part 8 of a 9 part series on the book Your Money or Your Life. See my original post about the book.]

You’re automatically saving away money each month, right? It might not be much, but the act of saving is more important than the amount. If you’re not saving, stop reading this and go set up an “Automatic Savings Plan” between your checking account and a savings account. Even if it’s $1, just go do it.

OK, now that we’re all saving, let’s get down to my favorite step of this entire book: visually tracking your path to a day when you no longer need paid employment*.

Remember that chart we made in Step 5? If not, it’s my fault for not posting this book review quickly enough. But if so, pull it off the wall or load it up on your computer, because we’re about to add an AWESOME new line to it.

This new line is your monthly “investment income,” the money you’d live off if you didn’t have paid employment. Sounds like something only filthy-rich people can do, but I’m about to show you how everyone can have investment income, and how eventually it will be enough to sustain you.

The book gives the following equasion to figure out how much investment income you have:

(capital x long-term interest rate) / 12 = monthly investment income

Where “capital” is a fancy word for “how much money you’ve saved,” and long-term interest rate can be found here.

Having bored you with that math, a short-cut to finding your “investment income” is to replace the long-term interest rate with a flat rate of 4%, generally considered a “safe” amount to draw from one’s capital while still preserving the capital itself.

So each month when you plot the new points for “income” and “expenses”, add a 3rd point for “investment income” using one of the two formulas described above.

After doing the previous steps for a few months, your total monthly expense line should be a little lower and your income line should be a little higher. And when you start plotting the third line, it’ll be a little blip down at the bottom, for now. But eventually, thanks to your diligence and compound interest, you’ll reach a crossover point where your investment income is more than your monthly expenses.

It might take a while, but it’ll happen. It’s inspiring to literally see that you only need to work for pay for a finite period of time. At the Crossover Point you will be financially independent.

How long will it take? Depends on what percentage of your take-home pay goes into savings. Also known as your “savings rate”. At the bottom of this blog post by Mr. Money Mustache is a little chart that should help you estimate when you’ll hit the crossover point. Depressing Spoiler Alert: if you’re saving less than 25% of your take-home pay, it’s gonna be a while. But don’t let that deter you from saving what you can. If you follow the steps of this book, you’ll find some extra change under the proverbial couch cushions of your life more frequently then you think. Maybe it’s only 1% or even only $1 this month, but if you consciously work towards a goal of increasing your savings rate, while reducing spending, I guarantee you’ll see that “monthly investment income” line soaring up towards the crossover point.

* Many people call that “retirement” but I think the term is too confining. It really means you have a choice whether or not you have paid employment, and I’m sure it’s awesome. I’ll let you know when I find out about it first-hand.

Personal Finance Lessons from Benjamin Franklin

Personal Finance Lessons from Benjamin Franklin

Benjamin Franklin rose from 17-year-old runaway to successful printer, newspaperman, author, inventor, diplomat, and statesman. His great success came from living the virtues of frugality and industry, and his life offers us many personal finance lessons that apply to modern men just as much as they did to those living in colonial America.

Check out 8 money lessons from Benny-F.

It never hurts to ask, Episode 23

Maybe I should rename this blog “Adventures in Asking.” Today, I got another lesson in the benefits of asking for stuff. The Missus and I are taking a trip to Vancouver, BC (frugally of course*) and I realized that I don’t have a credit card that charges no foreign transaction fees. (RIP Schwab cash-back card…pour out some of my tap water for you)

I applied for a Chase card with no foreign transaction fees, and some other cool sign-up bonuses [that’s not an affiliate link]. I got rejected because I also happened to sign up for a credit card last month.

I read about someone who wrote a “reconsideration letter” to his credit card company after getting rejected, so I figured “it can’t hurt to ask.” I copy/pasted that guy’s email pretty much word-for-word into Chase’s “online messaging” system, and what do you know!

We have reconsidered your original request for the Chase
Sapphire Credit Card and are pleased to inform you that
your request has been approved. You should receive your
welcome package in about 2 weeks.

Didn’t even need an envelope or stamp.

So there you go, another episode of “It Never Hurts To Ask.”

PS: I hate credit card companies and I hate big banks. All the more reason to responsibly take advantage of their credit card sign-up bonuses. And then pay them off in full every month or throw them away!

* Taking the train (for which we used a coupon) and staying in a hostel

Replace the “buyer’s high” an “investor’s high”

Replace the “buyer’s high” an “investor’s high”

“The next time you want to buy something, instead consider buying stock in the company that makes it. Rather than buy a Coke, buy a share of Coke stock.”

Of course it’s not exactly that simple (they don’t carry stock shares at the mini-mart), but it’s the sentiment I agree with. Once you realize you have enough, extra income can be put towards investments instead of buying more stuff.

Update on Cost of Food

In my last (non-auto-generated) post, I wrote about the disparity between two different methods of tracking grocery costs, one from the USDA and one from the Consumer Expenditure Survey.

I heard back from Mark Lino, Senior Economist at the USDA, and he cleared things up. The difference is simple:

USDA assumes all meals are eaten at home, while the CE survey tracks actual spending habits (I’m guessing every American eats out at least one time per month). I’m not trying to fault Lino or the USDA, since their job is to figure out the most thrifty way to put an optimal amount of nutritious food in your body for a month. After all, their data are what the Food Stamps program is based on.

So to compare apples-to-apples, take a look at the actual food spending of the 2.5 person “unit” in the CE survey, compared to the USDA monthly food budget (adjusted to 2.5 people):

CE Survey: $510.75
USDA: $435.63

The data would suggest that the average person could save only $30 a month if they never went out to eat. Is that worth it? As the husband of a “foodie” who loves trying new and adventurous dishes, it’s definitely not worth the savings.

This gets to the heart of what being frugal is all about. As The Simple Dollar put it so succinctly last week, frugality isn’t about squeezing every penny out of everything. It’s about maximizing the value of the things you’re doing, and “value” doesn’t always mean “money.”

Your Money or Your Life, Step 4: The Three Questions

[This is part 4 of a 9 part series on the book Your Money or Your Life. See my original post about the book.]

In the last step, we started a Monthly Tabulation, where you figure out how much you spend in various categories.

Now we’re going to add three more columns to the tabulation. Each column represents the answer to one of the following three questions you’ll ask yourself about money/time spent in that category:

  1. Did I receive fulfillment, satisfaction and value in proportion to 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?

For shorthand you can use a +/- system. The + sign means spending more in this category would increase fulfillment, would demonstrate greater personal alignment, or would increase after Financial Independence, respectively. Conversely, use the – sign if you didn’t receive fulfillment proportional to the hours of life energy you spent in that category, or if that expenditure was not in alignment with your values and purpose, or if you could see expenses in that category decreasing after Financial Independence, respectively. Leave the box blank if that category is just fine where it is.

For example, every month when I see how much we’re spending on car-related expenses (fuel, parking, insurance, maintenance), I put a – sign in “alignment with my values” since I value exercise and public transit over driving, and another – sign in “change if I didn’t have to work” since if I didn’t have to work I’d have more free time to get places slower. It took a while, but these costs have started to go down, like magic. I’m choosing to walk and/or ride the bus more often when we go on family outings. We’re saving money and also enjoying the ride.

Finally, this is the core of the 9 steps (and not only because we’re half way through). Taking a look at whether or not you’re spending what you want on the items/services you want to spend it on is the single best way to change your spending. Budgets don’t work, they’re like diets. Being honest with yourself about your values and the sense of fulfillment that your dollar buys is the only way to make changes.

This step takes about an hour a month. It also helps you figure out what is enough for you, which we’ll talk more about in a later step.

The voice that says “no”

It was July of this year. I was contemplating starting a blog about simple living, frugality, and other money/lifestyle topics. I floated the idea by my friend Mike (whose blog and lifestyle I admire), and he essentially wrote back “go for it!”

Fast forward to yesterday. I hung out with Mike and thought to myself, “I still haven’t started the blog. What’s holding me back?” My inner voice answered, “everything’s already been written before, we’re all reading the same books & blogs, and you can’t go head-to-head with the established Big Guys, so what value can you add to the discussion?”

Hold on a second. If I’m going to let The Voice that says “no” overrule me on the insignificant decision of whether or not to start a blog, what power will that voice have over my important decisions!?

The moral here is that even if you have no argument that will overrule the The Voice in a debate, that voice is just a little gnat and you’re a big person, so stop listening to it and start doing the things you want to do.

So even if I have nothing to add and nobody ever reads this, starting this blog is a my personal “up yours” to the voice that says “no”.