Hi Jeanne & Brock!
Question for you & Brock to think about, perhaps deeply. And congrats on your new baby, John Paul!
After teaching Personal Finance for a while, and meeting several multi-millionaires and hearing their story, I’ve decided I really need to revamp the class, and help people play for Financial Independence.
I love Dave Ramsey, and he will teach people to get rich slowly. People like my parents who do it his way retire with a net worth of $1 to $3 million. Dave Ramsey learned a ton from Dr. Thomas Stanley, a millionaire and university professor who taught marketing and other classes. Stanley wrote several books. The Millionaire Next Door profiled and surveyed 1,500 cops, firefighters, plumbers, teachers, accountants, librarians, and others who started off poor or middle-class and retired with $1 to $3.
But his next book, The Millionaire Mind, was about America’s top 10%. They are very different than the other 90% of millionaires. For example, they mostly stay away from stocks and mutual funds; their key investments are:
* Their own business;
* Real estate;
* Index Funds (like from Vanguard);
* Their relationships;
* Their minds. Your brain is your most valuable asset.
And lately, I’ve listened to a lot of podcasts from the FI Community (Financial Independence Community). And I have questions for you–and me.
The key thing is: if you want to be financially independent, you have to calculate your Number. For example, mine is $400,000 (although I’d like it to be higher, of course). What’s a Number?
It’s when your investments grow enough every year that you can live off of what they produce without touching the original amount.
In my case, I can live on $3,000 a month with total ease. That pays every last expense and gives me plenty left over for taxes, entertainment, etc.
So, the question becomes, how much do I need to make $3,000 a month? Well, $400,000 in index funds has historically grown 9.5% since 1895. (Maybe since 1776.) Thus, $400,000 can create over $36,000 per year, which is enough.
Granted, if the market goes down five years in a row, my plan won’t work, so maybe I need $800,000. Then I can get $72,000 a year, have $6,000 a month, live on half of that, and save/invest the rest for the long-term.
The point is: when you are FI, you can do what you want. You can a) keep working; b) retire; c) become a missionary in Thailand; d) maybe have more kids; e) travel frugally; f) volunteer; g to z) you decide.
To get to FI, a person could do all of the above listed (start a business; invest only in index funds; invest in yourself by developing your skills; etc.) but he or she must also look at expenses.
The typical Dave Ramsey (or middle-class, slow millionaire approach like my parents) basically advocates that we:
* Clean up our relationships so that others work with us and don’t wreck our plans;
* Follow the 7 Baby Steps (Google these if necessary) and develop an emergency fund and pay off all of our debts;
* Learn how to negotiate; and
* Give 10% to charity.
Dave will get people to be thrifty and stop wasting money. He’ll urge people who have never done a budget and owe $40,000 on consumer debt to pay off their debts with the “Debt Snowball.” He’ll get us to work harder and sacrifice more.
I agree with all of that, but it’s only a starting point.
Because here’s what I did, and maybe you did it, too. I budgeted, cleaned up my relationships (as far as I know), followed the 7 Baby Steps, developed The Four Keys of Negotiation (which I teach my teens with a role-playing Negotiation Boot Camp), and I give.
But here’s the problem: What are my largest four expenses? They are probably yours, too:
Dave Ramsey basically gets a person to sacrifice. You don’t go anywhere or do anything, and you take on 80 hours a week of work to get out of debt. Fine. Except what you quickly learn is: taxes, housing, and transportation often don’t get touched–and they are 50-60% of what you earn!
That means people do their best to squeeze the 40% that’s left over. They stop buying anything. They monitor everything. They figure out how many years they need to go.
In the meantime, the government takes federal, state, city, property, and sales tax. That probably totals about 30-40% for most middle class people. I bought a coffee at Panera last week for $1.89, which is already high priced compared to the organic, blended, chocolate, cinnamon, mint coffee I make at home. It’s an inferior product for a lot more money. And then the government added 10+% tax; my total was 21 cents higher. So, you can see what happens when you buy groceries (or anything).
A few years back, I realized fast that I couldn’t just sell frugality and thrift to 50 personal finance teenagers every week. It’s already tough for them to develop the habits of budgeting. So, I came up with “Fun vs. Happiness.” This is where I have them list every item on their budget, and then they must come up with something that is: a) cheaper or free; and b) more fun. If it isn’t both, I count it wrong.
For example, instead of going to see Avengers or I Feel Pretty–and pay $7 for tickets and $8 for treats–what if you threw a movie party and invited ten friends? Now you’re the social epicenter, and you only spent $1.64 at RedBox–and you know the movie is good because your friends already vetted it for you. You saved about 90% and had a lot more fun.
My recent encounters with the FI Community (like https://www.mrmoneymustache.com/, or the podcasts Bigger Pockets, Choose FI, or Financial Independence) made me realize: we all need Fun vs. Happiness for Adults.
So, here are my questions:
- What’s your number?
- Can you give me three or four ideas for either making taxes, housing, transportation, and food either: free, or much cheaper?
What you suggest also needs to be more fun.
- a) Taxes.
I personally contributed $18,000 to my 401K last year. That gave me somewhere between $2,000 and $4,500 off of taxes immediately.
- b) Housing.
I know several people who bought a house at age 21, and 24. What they did was: take on three or four renters, who paid about $400 each. Their monthly expenses (mortgage, escrow, insurance, repairs) were about $900. So, 4 * $400 = $1,600 in revenue. Take away $900 in expenses. Suddenly, they are making $700 a month on housing instead of spending 30% of their paycheck on it. Repeat this for 12 months and you make $7,200. More importantly, you don’t waste any money on mortgages, rents, property taxes, insurance, or repairs. GENIUS!!
I could also move back into my parents’ basement.
- c) Transportation.
- i) I know a man who sold his car because of Mr. Money Mustache. He bicycled for a year. He was already in great condition, but he got even stronger and faster. And he saved at least $400 a year in car tax; $1,200 to $2,400 in gas; unknown $ in wear-and-tear and having to replace a car; and much more.
He was already known as a cool guy, but now everyone reveres him. It helps that he’s really smart and generous.
- ii) And mechanically-minded people sometimes keep cars for 15 to 20 years. Wow!
iii) And the Dave Ramsey method of paying no interest ever–just pay for the whole car in full at the beginning–is what I do. But it still means I shell out $18,000+ every decade. How about you?
- d) Food
I would garden if I didn’t have four gigantic trees in my backyard. This would make me happier. I’m already 99% Paleo.
I get that most Americans haven’t considered any of these ideas. When times are hard for a lot of people, they just: move back home, drive ancient cars like I did, eat other people’s provided food, and mooch.
Or they buckle down and do it Dave Ramsey style. I admire the second group’s hard work a lot.
But the more you listen to FI podcasts, or read Mr. Money Mustache, the more you realize: these people see it all as a game. And they are very happy. Even the podcasters who in the early episodes admit that they aren’t there yet; they are just getting started.
I think this beats the rat race, and I think my class needs to change enormously. I need to teach people to play this game, to minimize their taxes, pay zero for mortgages or rents, and cut their car expenses way down.
I would like your help.
In the meantime, here is a fun calculator. It takes takes 90 seconds to play with. Try it!!
No more posts for awhile; I’m writing a novel.