MONEY/LIFE BALANCE: Managing Your Finances [Step 9]

SIMPLE LIVING GUIDE: Living your life at enough [Step 9]

Last updated: March 4th, 2019

[Read Step 7 of the Simple Living Guide or go to Step 1]

This is the ninth and final article in the Simple Living Guide, based on the Your Money Or Your Life program. In the last step we added a line to the wall chart showing our investment income each month. As we followed along that line and projected it out into the future, we were able to estimate the date when our investment income will exceed our monthly expenses, freeing us from the need to ever work for money again (by the way, I since discovered this cool calculator). We then recharacterized working for money as a life stage that will only continue for a finite period of time, and spent some time contemplating what that may mean for us. Now in Step 9, we’re looking at the next life stage, when we’re finally free of the need to work for money. How will we manage our finances for a lifetime of independence and freedom from a pay cheque?

It seems that any discussion of Your Money Or Your Life tends to get sidetracked into a discussion of investments, mixed with folks dismissing this program as being only about investing in government bonds. Consistently, the Financially Independent folks can be seen sitting off to the side, waiting for the digression to finish. That’s because they know firsthand that Step 9 isn’t about investments; it’s about self-empowerment, education, and a lifetime of financial freedom. After all, if we still have to think about our investments all the time, isn’t that just another job?

Help yourself

In his 2005 Letter to Shareholders (see page 18 for the section entitled “How to Minimize Investment Returns”), Warren Buffett illustrated how the costs of an army of brokers, mutual fund managers, financial planners, portfolio advisers, and so on “may well amount to 20 percent of the earnings of American business.” In the years since he wrote this letter, the financial services industry has grown robustly, meaning that Buffett’s estimates are now likely understated. If these financial “helpers” don’t have our best interests at heart, who does? We do!

The book introduces the idea of disintermediation. This is simply the process of taking out the intermediaries who offer to manage our capital for us. We do this for two reasons:

1) To keep our expenses low, as we discussed in Step 6

2) We are the only ones who fully understand our situations

Our way of achieving Financial Independence is profoundly different from the general idea of “retirement.” Many financial services professionals won’t truly understand our way of a Financially Independent life of “Enough.” We’re left with little choice but to manage our own finances.

This is a lot simpler than it may sound. We only need to educate ourselves enough to know which investments will serve our needs. We don’t need to learn about high-growth stocks, options, hedge funds, junk bonds, derivatives, variable annuities, etc. We only have to educate ourselves about safe, income-producing investments which we can forget about for at least a year at a time. A day spent in the local library reading about income investing should do the trick (The Bond Book is a good start).

Start now! If you’re worried about making mistakes and losing money, do that now, before you have a large nest egg invested.

Staying fiscally fit

So here we are, with a tidy nest egg we hope will last us a lifetime. How do we manage our cash flow now that we no longer receive pay cheques? As Step 9 is laid out in the book, we break down our savings into three categories: Capital, Cushion, and Cache. Capital is the invested money, which we won’t spend. Cushion is enough instantly-available money to cover six months of normal living expenses. Cache is the extra money we find ourselves with in the months we under-spend our income (after all, there are unusually-expensive months with those once-a-year bills and unexpected medical troubles, and there are unusually-inexpensive months where we just don’t seem to spend much at all).

Most Financially Independent folks do indeed maintain Capital as proposed, but our Cushions vary substantially. While some maintain large Cushions to cover as much as a year’s living expenses, others of us find a minimal Cushion does the trick. It depends on a lot of factors. The book seems to pick the “six months” number because that’s how often Treasury bonds pay interest. If you only get paid twice a year, you obviously need to make it last six months, right? But what if you choose investments that pay annually, or monthly? For example, in my case, I hold a mix of S&P 500 index funds (“Spiders”) and 30-year Treasury bonds. As such, I get paid February 1st & 15th, May 1st, August 1st & 15th, and November 1st, all in various amounts depending on what’s paying me. Given this, I maintain a minimal Cushion that covers perhaps three months’ expenses, and have instant cheque-writing ability on a line of credit that can handle emergencies. It sounds complex, but it’s not. Everyone’s situation is different—we do what works best for our own unique situations.

Likewise, everyone’s perspective on Cache is different. For me, it’s clear that Joe Dominguez and Vicki Robin were right when they wrote, “between the ingrained patterns of consciousness, the intellectual appreciation of how much more fulfilling your life is when lived at ‘enough,’ you may find that you are still spending less.” Even though I was reluctant to trust that inflation wouldn’t significantly affect me (so I waited and saved more before deciding to try FI life), I find that my core level of spending hasn’t significantly changed since I began keeping records 11 years ago. In the meantime, my FI income has increased as I’ve found myself with increasing Cache (savings), which I roll over into Capital (investments) on a regular basis.

Getting personal about inflation

While the discussion of inflation in Your Money Or Your Life was largely aimed at addressing our fears and dismissing inflation as an unnecessary worry, many followers of the program have been hesitant to assume inflation won’t affect us. Instead, we continue working and saving longer to build a larger nest egg to compensate for the possible effects of inflation. But how can we have any idea how much more capital would be required? What rate of inflation will we encounter?

Conveniently, we’ve been tracking our cash flow for a long time. Because of this, we don’t need to use some government-prescribed indicator like the Consumer Price Index to estimate how our expenses may change in the future. Instead, we can simply look at our expenses line on our Wall Charts, and project it into the future. We have a Personal Inflation Rate! A quick search on the Internet for “Personal Inflation Rate” or “Personal Rate of Inflation” shows that this isn’t a radical concept at all—many have already written about it. It’s a great way to dispel all those worries about outliving our capital.

Step nine revisited

In 2001, four members of the Speakers’ Bureau wrote a document entitled, “Step Nine Revisited.” This document focuses on investments. It was an effort to discuss various investments further, in light of developments in the economic climate since the book was written. The irony is that this effort to bring the investment ideas in Step 9 up-to-date is now starting to seem dated. Regardless, this is an important document to read when considering what Step 9 means to us.

The core advice of “Step Nine Revisited” remains the same, that we alone can decide the best way to invest our Capital, given our own unique circumstances. As the document expressly states at the outset, “Study! Choose! Caveat Emptor.” Again in closure it says, “Find the road to FI that’s right for you.”

The people who have reached FI vary widely in their own choices of how to invest their capital. While one member of the Speakers’ Bureau prefers local and state bonds, another prefers socially-responsible mutual funds. I use a mix of government bonds and index funds. Everybody’s goals and criteria will be different. Find the road to FI that’s right for you.

Conclusion

Step 9 concludes not only Your Money or Your Life, but it also concludes this series of articles I’ve written about the program over the past year and a half. While this process slowly takes us through to the freedom of Financial Intelligence, Financial Integrity, and Financial Independence, it ends there. With Financial Independence, we become free to pursue anything in life without needing a pay cheque ever again. While that sounds wonderful, it’s not as simple as it seems. As one person noted, the book needs a Step 10: quit your job! It’s difficult to let go of the edge of the pool and trust that we can indeed swim. The book leaves us there, discovering on our own where life takes us after we no longer need to work for money.

When I reached FI, a friend and member of the Speakers’ Bureau told me that it typically takes about five years for a person to adjust to FI life. At the time, I said to myself, “Hogwash! I’ll just settle right in, doing my own thing as I please!” Looking back, I see that he was absolutely right. Reaching FI is the beginning of a new stage in life. It’s been over six years now for me, and it’s only been in the last year or two that I’ve finally felt comfortable in how I live and what I’m doing. Be ready for it to take a long time. I wouldn’t trade it for anything.

Stick with the program. It works.

[su_panel background=”#f2f2f2″ color=”#000000″ border=”0px none #ffffff” shadow=”0px 0px 0px #ffffff”]Fred Ecks was the volunteer Newsletter Editor for The Simple Living Network. He’s a dedicated follower of the 9-step program detailed in Your Money Or Your Life. He uses the time freed up in his life for writing, volunteering, sailing, and trail running. He maintains a Web Log www.crazyguyonabike.com.