YMOYL Chapter 8: The Crossover Point

For new readers: This is an in-depth, chapter by chapter review and analysis of the book Your Money Or Your Life that we're running throughout the month of January. Join us! You can buy YMOYL here, and you can find the first post in the series here.

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We've got just two more chapters to go, and just a few transitions left to make in our thinking about money. And the key mental shift readers make in Chapter 8 is to change how we think about savings:

"Before FI thinking takes over, a 'normal' person might regard savings as earmarked for a splurge in the future--a down payment on a bigger house or a whizbang vacation towards the ends of the earth." (p. 236)

This quote is only partly right. Most "normal" people don't save any money at all, so when they "regard savings" it's an exercise in pure fantasy.

Your case, however, is different. Now that you're executing the steps of YMOYL, you're consistently saving excess cash every month. It's a regular habit for you.

But even people who have built a habit saving money can slip into being what I call vague savers: people who save money inconsistently, who periodically vaporize their savings on big splurges, or who save in an undirected way without clear and concrete goals. Don't get me wrong: vague saving beats not saving at all, but it's still a wage-slave based approach to handling your wealth. I want you to aim higher.

And that's why YMOYL uses a different word for that money you're socking away every month. They call it capital.

"Savings are funds put aside from time to time and kept unexpended. Capital, however, is money that makes you more money. Capital is money that keeps working for you, that produces an income as surely as your job produces income." (p. 237)

You're probably already nodding your head at the concept, so let's go over an example: Let's say that after months of patiently applying the YMOYL steps, you amass a savings cache of $20,000. Again, the proverbial "normal person" might see that money as a kickass family trip to New Zealand, or (slightly more responsibly) as a big step towards a down payment on a big new house.

As a financially savvy YMOYL reader, you might also choose either of those options--but only if that choice provided fulfillment and value in proportion to life energy spent. Furthermore, you grasp instinctively that neither a big new house nor an overpriced trip to New Zealand gets you any closer to freedom from work-spend.

However--and this is the important part--if you invested that $20,000 at a hypothetical 4% yield, you'd create $800 a year (or $67 a month) in brand new income. Forever.

In other words, YMOYL readers instinctively view sums of money using this formula:

Money   x   Yield   =   Potential Passive Income

Thus in our example of $20,000, we'd have:

$20,000   x   4%   =   $800 per year, or $67 per month.

One more important insight: when you piss away your capital on some splurge-related expense, you don't just bear the direct cost of the thing you splurged on. You also bear the opportunity cost of forgoing all future income you could have earned on that money. You lose out twice: you lose the twenty grand, and you also lose that yearly $800 in future passive income.

Train yourself to think about money this way. If you can make spending decisions with an eye to the opportunity cost of your capital, it is merely a matter of time before you become wealthy.

Problems and Pitfalls With The Long Term Interest Rate
Now, let's spend a moment addressing how Chapter 8 lays out the concept of "Monthly Investment Income." Remember, in this chapter you're adding an extra element to your Wall Chart: income from your investments. And to start off tracking this number, the authors give readers a shortcut: just take the capital you've currently saved, multiply it by 4%, and put that number on your chart. Next month, add in any new money you've saved, and apply 4% to that number. And so on.

If you've only just begun saving money, feel free to use this shortcut. But please recognize that this 4% is hypothetical. To paraphrase a Wall Street saying: you can't eat a hypothetical yield. At some point--soon, I hope--you'll want to begin making income-generating investments and earning actual income.

If you're a more advanced reader who's already earning investment income in the form of dividends, interest and so on, skip this step and just plot your actual earnings.

One other point. Some readers may consider the "4% shortcut" misleading. After all, there's no real explanation anywhere in the chapter about how to generate this hypothetical 4%--and worse, now that we're in a bizarre low interest rate environment, risk-free investments like bank CDs and long-term government bonds pay way less than 4%.

All true. Frankly, this is a flaw in the book's investment strategy: it simply isn't designed for periods of ultra-low interest rates. Fortunately, this flaw--which we'll discuss in much more depth next chapter--isn't fatal. It's still reasonable to earn a 4%-ish yield (or perhaps even better) with a diversified, conservative portfolio of dividend-paying stocks, preferred stocks, municipal bonds and bond funds. You'll have to take on some risk, but not a terrible amount of risk. More on this next week.

For now, just remember that interest rates fluctuate, and eventually, we will return to a more "normal" interest rate environment. Most importantly, don't let worries about interest rates sidetrack you from the central point of Chapter 8: Think of your swiftly-growing pile of savings as capital, and use it to generate income. This is the key step that will eventually free you from dependency on work.

The Crossover Point
Okay. The final concept of Chapter 8 is the Crossover Point.

You've already wrapped your mind around the strategy of making money from your money. Now, simply let the months go by while you patiently and relentlessly execute the YMOYL process.

What you'll start to see is rapid and accelerating growth of your capital as you steadily add savings each and every month. Start putting that money to work, and you'll begin to see similarly accelerating growth in income from your investments. With a combination of investment compounding and disciplined execution of the steps, your "Income from Investments" line on your Wall Chart will gradually and inexorably rise, until it approaches your "Total Monthly Expenses" line.

This process will unfold over time and, at first, things will move slowly. But you never know what the future may bring. You're highly likely to increase your job-related income. You might also drive your expenses far lower as you seek creative ways to align your spending with your values. Combine both, and this process may move more quickly than you ever imagined.

"The Crossover Point provides us with our final definition of Financial Independence. At the crossover point, where monthly investment income crosses above monthly expenses, you will be financially independent in the traditional sense of the term. You will have a safe, steady income for life from a source other than a job." (p. 241)

Do you see what you've been building towards? Can you now visualize your progression towards financial independence as you stay patient and continue to follow the steps?

If I know my readers, I'm betting there are some very bright lightbulbs going on and off in your brains right now as the reality of The Crossover Point sinks in. You don't necessarily have to start laughing and crying at the same time like "Steve" the carpenter (p. 245!), but be sure to take some time to enjoy the insights and implications of this process. You will be working for a finite time. Remember this, and remember how far you've come in your journey to take back your power over money.

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Appendix/Side Thoughts:
1) "I'll never get to the Crossover Point. This is just too depressing to think about." Some readers might feel like they're so far away from the Crossover Point that they dread even getting started. I empathize.

But indulge me for a moment and consider another perspective: You've allowed yourself to become pre-emptively depressed about something that you're too defeatist even to try. Reread that sentence and think about its hideous circularity.

Forget what's in the distance, and just start earning some money from your money. Just start. Don't worry that it's a small amount. Don't worry that your "Income from Investments" line is literally a mile below your "Total Monthly Expenses" line. And don't worry that the process might take a long time. That's all fear and ego. Forget all that. Keep it simple, keep doing the YMOYL steps, and keep plotting numbers on your Wall Chart. It all will happen in time. Don't get ahead of yourself.

One final thought: if you're still seriously getting depressed thinking about the Crossover Point, consider the possibility that you either haven't paid close enough attention while reading the book or you haven't sincerely done the exercises. Read the book again--and this time do the exercises. Commit to it.

And if I may offer a prediction: you'll be astonished at how much faster the process goes than you currently think it will.

2) On subjective reality and money: This point is related to Side Thought #1. Reality can be surprisingly subjective. If you believe you won't ever save up enough money to become independent from work, you're correct: you won't. However, if you believe you will reach this goal--and if you take steady and concrete steps to accomplish it, you'll also be correct: you will. Never permit pre-emptive defeat.

3) Scale benefits of passive income: The best part about passive income is its near-frictionless scalability. Consider two FI-ers, one with $10,000 in capital saved and another with $20,000. Both will do exactly the same amount of "work" investing their capital--yet the investor with twenty grand earns double the investment income from her capital.

This scalability exists at nearly every level of personal net worth: it takes about the same amount of effort to manage a diversified portfolio of stocks whether you have a million dollars or tens of millions of dollars. And this concept holds true in the institutional investment world too: oddly enough, it's actually somewhat easier to manage a multi-billion dollar stock portfolio than a stock portfolio in the $10-100 million dollar range. (Extra credit for readers who can reason through why this is true.)

Here's the point: Once you start saving aggressively and putting your money to work for you, you can earn surprisingly meaningful amounts of passive income for very little incremental effort. Get going, so you can take advantage of it.

4) "For those wishing to go all the way to Financial Independence" Note the nuance in this quote, which appears in the middle of page 245. Just because financial independence seems preposterously far into the future doesn't mean you can't use this process to achieve other important goals. You can use YMOYL to get on top of your debts, to find more breathing room between your income and your spending, to rethink your work and your life, and to put your spending and consumption in alignment with your values. And so on. It doesn't all have to be geared toward financial independence alone.

Moreover, as the book says, "financial independence is the by-product of following the steps. You don't need to have financial self-sufficiency as your goal in order to arrive there." (p. 247).

Most importantly, don't throw the book across the room and miss out on all the value in it just because financial independence seems too far off to bother with. That's no different from our acquaintance who threw the book away after some blurb about cutting her own hair set her off.

5) "This doesn't mean you must stop working for money." (p. 251): Yet another nuance: just because you earn enough money from investments to quit work doesn't mean you have to. In fact, you might keep right on working--and enjoy your work far more. After all, you're there by choice.

6) A personal note on re-reading YMOYL: I've mentioned before that when Laura and I first read YMOYL ten years ago [Edit: make that 15 years ago], the book had an enormous impact on us. But it's been an even bigger surprise to experience this book's impact on us now that we're reading it a second time.

I wonder if we got a little bit financially overconfident, and allowed some of the principles of this book to "wear off" and slip away over time. Certainly our spending slipped out of alignment with our values over the past few years, and--no coincidence--we've had more disputes and disagreements about money in the past few years than is normal for us.

But this re-reading of YMOYL is helping bring things back into focus. Our spending is now in far better alignment with our values. Laura and I have successfully hashed out quite a few money issues as we've re-read the book together. And we're back to saving money each month, nearly effortlessly--despite the fact that I'm now retired, and Laura's only working part time.

There are a couple of major takeaways here. One big one: YMOYL works over a vast range of income levels. It worked when I was making medium-sized money on Wall Street, and it works just as well now at a fraction of our prior peak income. Another key takeaway, at least for me: it pays to stay humble about maintaining a lifestyle that's consistent with your principles. Things can slip out of alignment more easily than you might think, especially since we're all literally surrounded by a culture of consumerism. It's all too easy to slip back into old, unconscious patterns and habits.

Hmmm. Something tells me we may want to re-read it again--in ten more years.


Next: The Fatal Problem with Chapter 9






How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!

YMOYL Chapter 7: Redefining Work

For new readers: This is an in-depth, chapter by chapter review and analysis of the book Your Money Or Your Life that we're running throughout the month of January. Join us! You can buy YMOYL here, and you can find the first post in the series here.

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It's time to put work in its proper place in our lives, and break the connection between our jobs, our income and our identities.

Like every other chapter in Your Money Or Your Life, Chapter 7 builds on the steps before it, so let's quickly put this chapter in context. First, YMOYL makes you far more conscious of the money you spend, and it annihilates your ignorance about where your money goes. Second, it helps you escape consumerism when you align your spending with your values and principles. Third, thanks to the maxim what gets measured gets controlled, your expenses fall materially as you follow the steps.

In other words, after two or three months of carefully following this book, you'll be saving significantly more money. Every single month.

This sets off an important virtuous circle, because once you're regularly saving meaningful amounts of money, and once it starts piling up in your bank account, you'll find yourself less and less dependent on your paycheck. And as you complete more and more months of your Wall Chart, your near-term financial needs will become less and less pressing--until they're simply no longer a source of stress in your life. If you're doing each of the steps, this will just happen. Trust the process.

For many readers, this will be their first real taste of freedom from the cycle of work-spend. And with this taste of freedom, you can start to take a longer view about the work you do. What is your work really for? Is it satisfying? Should it meet more than just your financial needs? How much primacy does work really deserve in your life?

The way I see it, Chapter 7's purpose is to help us transition from a necessity-based definition of work to a self-actualization-based definition of work. In other words, now that we have greater financial resources, we can move away from other-centered reasons for work (I work for the money, to put food on the table, to pay off my debts, to become CEO, to impress others, etc.), and we can begin to consider inner reasons for work (I work to make a difference in the world, to help others, to acquire specific skills, to be challenged).

Here's the insight: you simply cannot make this psychological transition while you're under financial pressure. And that's why so many people feel like they're locked into jobs that suck. (It's also why people lash out in the comments of many personal finance blogs.) But once you're no longer in a position of financial weakness, you can start to live life on your terms rather than on your employer's or anyone else's terms.

The Two Year Buffer
Now for some practical advice. Instead of getting overwhelmed by a huge long-term goal like financial independence or permanent freedom from work, I encourage readers to focus on an aggressive, interim goal like saving up enough money for two full years' worth of expenses. If you've already passed the two year milestone, feel free to pick the next largest increment that feels right to you--five years of expenses saved, seven years, ten years, whatever.

In time, you will come to consider a two year buffer a mere steppingstone on your journey towards financial independence. For now, though, this should be a highly motivating and extremely effective financial goal for many readers.

"Two years of expenses saved" is also a big psychological benchmark. It's enough dough to protect you over an extraordinarily long period of unemployment. It's plenty of money to support you through a significant career change, a long sabbatical, or a major rethinking of your professional goals. It could be enough capital to start a business, or at the least enough money to fund your expenses during your startup period.

For me, the two year buffer was an enormously important hurdle. Once I reached it, it completely transformed how I thought about work. I felt liberated to take more chances in the workplace. And I was far less bothered by objectively petty things like office politics or dickhead coworkers. Hey, once work is in its proper place, work-related stress falls into its proper place too.

Finally, and most importantly, hitting two years helped me begin to believe that I could take it much further, and it laid the groundwork for me to hit a three year buffer, a five year buffer, a ten year buffer and so on. [For more on this, see my controversial posts Extreme Savings and How Much Money Do I Need to Retire?]

Where are you in your process of redefining work? What are the concrete steps you intend to take to put work in its proper place in your life? Keep using this powerful book, and in a surprisingly short time, you'll begin putting a healthy mental and financial distance between you and the work you do.

One last word of caution: Life can be quite a bit easier, existentially speaking, when there's a boss telling you what to do and a job taking up the majority of your time. And it can also be easier to blow off your own goals, and instead adopt the default-option goals imposed upon you by your boss, your company, or by the socially conditioned people around you.

After all, once you remove work as the centerpiece of your identity, and once you stop acquiring stuff and striving after other peoples' goals, then what do you do? Once you've realized that those goals were illusory and false, what's left?

You've got to find your own goals. You've got to find your own purpose. In other words, there's a benefit and a drawback to putting work in its proper place. The benefit: it gives you the empowering opportunity to choose your own life path. The drawback: it can be lonely--even frightening--to think for yourself like this.

Which is why some people may decide it's easier to avoid thinking for yourself. It's easier to go back to being in the crowd: working, spending, and living out the goals everyone else seems to have. Those people will scurry back to their cubicles and their old way of life, and they'll try to forget they ever laid eyes on this dumb book.

But not my readers.

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Appendix/Side Thoughts:
1) Did we win the Industrial Revolution? A fascinating question from page 203. On one level, duh, of course we won it. Look at life expectancy data, look at diseases conquered, look at literacy rates, look at wealth and poverty statistics. Look at the long list of basic amenities that everyone in the developed world now has that were beyond the reach of the richest kings and queens two hundred years ago.

On the other hand, look at what we're doing with these miraculous blessings. Are we happier? Less materialistic? Less shallow as a culture? Are we living life on "our terms" any more now than we did then? Think about this for a few minutes and you can easily conclude we lost the Industrial Revolution. Badly.

2) Confusing consciousness with worry: Recall the anecdote on page 210 about the two doctors who were so "busy" that they couldn't imagine keeping track of their spending. Worse, they rationalized not keeping track because they didn't want to "worry" about where their money went. Confusing consciousness with worry is classic ego defense. Classic.

Remember, it takes laughably little time to execute the steps of YMOYL, and the process actually creates time--not to mention it also creates money, via the what gets measured gets controlled principle. Using a false rationalizations like "I don't want to worry about my money" actually costs you.

3) "Retirement security is no longer secure." There's a fallacy baked into this statement (on page 204), because it incorrectly assumes that retirement security ever was secure. Many workers today hearken back to the good old days when a company (supposedly) took care of them and gave them a pension and a gold watch after 30 years of service. My father, who was born in 1930, actually worked for a company that literally did give him a gold watch after 33 years. Well, it was a gold colored watch.

A couple of thoughts. Even back in the supposed good old days of our parents (or, depending on your generation, grandparents), when everybody walked uphill to school both ways, a surprisingly small percent of workers got traditional pensions. Sure, they were somewhat more common than they are now, but they were never that common. Second, how do you think those pension plans provided for those workers' retirement? They had to do the same thing you're doing now: invest in a conservative mix of stocks, bonds and cash-based investments [Edit: we'll have much more on this later]. Also, plenty of pension plans failed, had crappy investment performance, and so on. Third, you had to stay at the same company your whole working career. And fourth, you would have had no protection from the worst risk of all: That you'd work till you were 60-something, retire, and then die before you could enjoy your years of freedom.

Today, we're basically all treated like grownups. There are great ways to save for retirement (IRAs, 401(k) and 403(b) plans, and of course our own aggressive savings plans using YMOYL), but at the end of the day, the truth is the truth: we have to figure out a way to look after ourselves. There's no company that's going to play the "parent" role and take care of us.

4) How to get a high paying, high integrity job: This section, which starts on page 228, might be the weakest part of the entire book. Granted, the authors include a caveat saying "This chapter isn't designed to be a job-hunting manual." That's for darn sure. The advice is vague, with statements like "Finally you must be able to recognize when you have been successful in achieving your goal." This entire section should have been nuked.

5) Don't confuse reading this series with actually reading the book and doing the exercises: I've talked about this already, but it bears repeating. And repeating, and repeating. I do not want dilettantes reading this series. In fact that's one of the reasons why the first few posts in this series were so long: I wanted to scare away the lightweights! What I want here are readers who take action, not people who read the series, talk about it, and mistake that for taking action. This book will make a difference in your life, trust me. But you've actually got to put it into practice.

6) More books to add to the reading list: One of the pleasures of reading is how any given book can give you a ton of great ideas for your next book. This chapter contains a good list of titles I'll probably be reading in the coming months:

Amy Saltzman: Downshifting
Studs Terkel: Working
Arlie Russel Hochschild: The Time Bind
Michael Phillips: The Seven Laws of Money


Next Up: Chapter 8: The Crossover Point






How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!

YMOYL Chapter 6: Valuing Your Life Energy By Minimizing Spending

Reminder for new readers: This is an in-depth, chapter by chapter review and analysis of the book Your Money Or Your Life that we're running throughout the month of January. Join us! You can buy YMOYL here, and you can find the first post in the series here.

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Meet your needs differently.

This is the central idea of Chapter 6 and one of the most important ideas in the entire book.

Are you the kind of person who's interested in truly creative solutions for managing your expenses? Can you determine honestly and objectively whether a purchase is a real need, or if that "need" is based on mere social conditioning or status seeking?

Can you look beyond that thing you think you want, and instead seek to satisfy the core need beneath that want? Do you even have to buy something to satisfy that core need? Very few of our needs are material.

Sincere YMOYL readers will systematically ask these questions about all of their expenses with one goal in mind: to get your costs down--way down--so you can accelerate your progress toward financial independence.

If at this point you're asking "How? How do I get my costs down?" that's for you to decide, and it depends on how creatively you choose to address this challenge. Are you the kind of person who demands money-saving tips to come to you, but then shoots most of them down? Or do you actively choose to seek out ideas to save money--and actually apply them? After all, tips and ideas are everywhere: the internet is filled with personal finance blogs offering advice and solutions on how to save more.

I think that might be one of the reasons the authors radically revised this chapter in the current edition. In older editions, Chapter 6 contained a huge 23-page section called "101 Sure Ways To Save Money" that was loaded with all kinds of specific money-saving tips. In the 2008 edition, they cut out that section and refocused the chapter on more thematic savings advice. After all, YMOYL is less about offering specific individualized advice and more about helping readers think differently. I'm guessing the authors would prefer to create enterprising, solution-minded readers who will seek out their own answers to getting their costs down. Teach a man to fish, in other words. It's implied that readers must seek out their own solutions for their own specific needs.

That one tip that sets you off
Of course, any list of ideas for saving money--it doesn't matter whether they're in "specific tip" form or "general theme" form--will have both hits and misses for any given reader. Some will resonate with you, some won't. Some will sound smart, some will sound stupid.

And some ideas will make some readers so angry that they'll literally give up on the book.

Laura and I have an acquaintance who literally quit reading YMOYL right here, in this chapter. Why? Because she stumbled onto a tip to cut your own hair, and for whatever reason, that tip literally set her off. She even wrote an angry email to me about it, saying she couldn't believe this book would suggest this--and no WAY was she ever, ever going to cut her own hair.

So she put the book down and stopped reading.

There are two layers of tragedy here. First (and worst) is how her reaction to a tiny (and irrelevant) part of the book caused her to reject the entire body of work. It shouldn't surprise readers that this acquaintance has made zero financial progress since. Which raises a personal question I'd like to ask readers: Do you really seek solutions as you work on your financial situation? Or are you waiting, just waiting, for the first sentence that pisses you off and gives you a "reason" to throw the book across the room?

The second layer of tragedy was that our acquaintance never attempted to explore her visceral reaction. Why did she put down the book? What was it about this specific tip that made her throw the baby out with the bathwater, that triggered her to spontaneously reject an entire ecology of insights on how to improve one's financial situation?

When you read something that makes you out-of-proportion mad (and money-related topics tend to do this to lots of us) it usually means you're scratching at some important inner truths. That trigger, that feeling, that emotion... there's almost always something there, if you're willing to explore it. There might be an insight into a problem, or a solution to a mental block, or you might have uncovered an unconscious mental script in your mind that's somehow holding you back. Dig, and find out what's going on there. I'm betting that mental script impacts other areas of your life too, and you'll be glad you uncovered it.

On impressing others: Let's spend a moment on the theme of impressing people, because it also has two layers: an obvious layer and a not-so-obvious layer.

As the book says, if you stop trying to impress other people, you will save thousands, perhaps millions, of dollars. Obvious. And yet when I look back on my Wall Street career, I can think of many, many well-educated, thoughtful and extremely bright people who spent enormous amounts of money impressing others.

Why? Well, in most cases they somehow managed to convince themselves they weren't trying to impress other people--while they bought stuff to impress other people.

Which takes us to the not-so-obvious part. Your ego will always try to convince you that you never try to impress people. After all, that's something only an insecure person would do. You (it will reassuringly tell you) being the confident and highly self-aware person that you are, would never do anything that shallow. Right? Right?? Yep, that's your ego talking.

Self-aware Porsche owner (photo by Michael Goldsman).

Your ego, which understandably wants you to have a good self-image, will therefore work very hard to convince you that you need that gazingus pin. Or Lamborghini. Remember this the next time you try and tell yourself you're not trying to impress others.

A final word before we get to the Appendix/Side Thoughts. I'd love to hear your creative and unusual ideas to save money as you work through this book. I'm looking for all kinds of ideas, because you never know what might help--or set off!--another reader who reads this series in the future. It could be anything: how you eliminated your car and started using Zipcar, ways you've creatively reduced your housing costs, creative bartering or job-exchanging arrangements with friends or neighbors, how you rethought family entertainment, baby-sitting, how you used Couchsurfing on your last vacation, and so on.

If you've got a creative idea from your life that's lowered your expenses and helped you meet your needs differently, share it in the comments!

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Appendix/Side Thoughts:
1) Finding "quick wins" for saving money: There's no reason getting your costs down has to be unnecessarily difficult, so start by looking for steps you can take quickly and efficiently. Better yet, look for steps that serve you in multiple ways. A few examples: reducing the amount of meat in your diet, and you'll improve your health and save money on food. Using an inexpensive bicycle can help you save on gas, commuting costs, gym memberships and future medical bills. Buying a smaller home will save you tens (or hey, hundreds) of thousands of dollars on mortgage costs, energy costs and taxes. And so on.

2) On insurance: I could easily write a full post on insurance [Edit: hey, I did write a full post on insurance!], but for now, let me just make this point: As you get out of debt and on your way towards financial independence, you will find you don't need the insurance you thought you did. Once you have several thousand--or even tens of thousands--of dollars sitting in the bank, you will be able to significantly increase your deductibles on things like auto and health insurance. This saves you hundreds or even thousands of dollars of per year in insurance premiums.

You'll also increasingly realize you don't even need to insure for many types of losses. Now that you're flush with liquidity--thanks to all the money you're regularly saving--what used to be a "catastrophic" loss simply isn't that catastrophic anymore. (PS: For more on this, I recommend Charles Givens' excellent books Wealth Without Risk and More Wealth Without Risk.)

3) Apply the "wear it out" concept to big-ticket items and save boatloads of money: Wearing a shirt for 30% longer might save you a few bucks, which is nice but not meaningful. But driving a car 30% longer (or heck, 100% longer) can drive gigantic financial results. Get your big ticket decisions done right and the smaller expenses don't matter so much.

4) Impulse purchases: According to the book, half of our purchases are spur of the moment (PS: I've found this clearly holds true with grocery shopping). This is awesome, because it opens up an enormous savings opportunity: by applying just a few minor techniques to minimize impulse-related purchases, you can slash your spending in half. This tip is a lot less obvious than it sounds.

5) Cost of children: There's a consensus out there that child-rearing simply has to be insanely expensive, which is one of the reasons behind this well-known joke about kids:

Q: How much money does it take to raise children?
A: All of it.

And yet if there's one thing my years on Wall Street taught me, it's that the consensus is often wrong. Often grievously wrong. With that in mind, I found it particularly interesting to read (on page 189) about how one couple applied the Fulfillment Curve to save tons of money on gift-giving for their children. Granted, Laura and I don't have kids, so I'm clearly out of my depth here--but I'd love to hear readers' views and ideas on creative ways to save money when raising children. And don't tell me there's no solutions out there.

6) Gift-giving: One more thought on gifts: one of the greatest days of my life was when my family changed our holiday gift-giving routine from "everybody buys everybody a gift" to "we put all our names in a hat and each person draws one name."

Instantly, Christmas became one tenth as expensive and a million times less stressful. Recently, we took it one step further and dispensed with gifts altogether. Hey, the holidays aren't about gifts, they're about getting together with loved ones. Why not focus on that? What does your family do about gift-giving during holiday time?

7) On environmental stewardship and saving money: It goes without saying that the less you can consume, the better it is for the environment. From page 193:

Anything you buy and don't use, anything you throw away, anything you consume and don't enjoy is money down the drain, wasting your life energy and wasting the finite resources of the planet.

That said, don't let your concern for the environment make you into an easy mark for marketers. Keep in mind that "green" is slowly but surely being twisted into another aspirational market segment designed to persuade you to spend more money. Don't be deceived: Should I buy a new one? is the wrong question. Do I need to buy this at all? is the correct question to ask.

8) "I'm enoughing" I love this expression and I'm going to start using it. Honey, I'm not going to buy that Fabergé Egg after all. I'm enoughing.

9) Lateral Thinking: One more book recommendation: Lateral Thinking: Creativity Step by Step by Edward De Bono. This book has heavily influenced my thinking on brainstorming, idea generation and looking at problems in different ways. Most of the ideas I've dreamed up on how to "meet my needs differently" have come from using principles in De Bono's book.


Next Week: Chapter 7: Redefining Work











How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!

YMOYL Chapter 5: Your Wall Chart

Reminder for new readers: This is an in-depth, chapter by chapter review and analysis of the book Your Money Or Your Life that we're running throughout the month of January. Join us! You can buy YMOYL here, and you can find the first post in the series here.

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Chapter 5 gives us yet another easy exercise that backdoors readers into a state of higher financial consciousness: the Wall Chart. Or the Closet Chart, depending on how much of a financial exhibitionist you are.

The Wall Chart is just a simple, graphical representation of your financial status. And mark my words: if you maintain it religiously, it will be a representation of stunning improvement in your financial status. Just wait a couple of years. You'll see.

The thing is, a weird things happens when you maintain a Wall Chart. Your expenses just... decline. From the book:

Those who get past the three-month hump will find their expenses leveling out at about 20 percent less than where they started--painlessly. These people report no feelings of deprivation, no struggling to keep a budget, just a natural decline. Knowing that you are not getting satisfaction proportional to the expenditure of life energy in a given subcategory of spending generates an automatic, self-protective reversal of your spending habits.

When you consciously consider your spending decisions--and when you know you're going to record them on a chart--all of your pointless, valueless spending simply goes out the window. You may see occasional spikes and month-to-month noise in your spending, but the overall trend of your expenses will be in one direction. Down.

What happens next, though, is far more powerful. All of that saved money can now go towards paying down debt (which lowers your expenses still more, see below) or towards funding income-generating investments (which raises your income, enabling still more savings). We'll cover this in future chapters, but for now, just trust the process and watch it work.

Imagine if you could transport yourself two or three years into the future. Imagine if you could know now what your Wall Chart will look like then. This is why you shouldn't laugh incredulously when our authors make the following statement:

As outrageous as this may sound at the moment, you should probably allow enough space at the top [of your chart] for your income to double.

Yes, it will take time to transform your relationship with money, and it won't be easy. But it will happen. Just keep recording the information on your Wall Chart and stay patient.

Your wall chart as regular reminder, feedback system and source of inspiration: Don't underestimate the value of having your chart visible to you every day. That's why it's an effective tool. It's not like you can cover your eyes and pretend it's not there.

Once again, this is how YMOYL makes ignorance of your now-improving financial situation literally impossible. It gives you consistent feedback so you can make adjustments. You'll see the impact of your actions right there in black and white (or whatever colors you're using on your chart). And it's hard to cheat the process when you're constantly facing such a visible and tangible reminder of your current (and improving) fiscal status.

On unusual expenses: The book gives you the option to take large, one-time expenses and pro-rate them over the course of a year. We don't do this. When an expense occurs, we pay it and book it. We don't prorate anything. It seems like every month has an unusual expense anyway, so this is the cleanest, simplest process for us. Readers, what are your key unusual expenses and how do you account for them?

Regarding different types of income: We're building our wall chart as I write this post, and we are planning to break out our income into two categories: active income (Laura's paycheck from part time work and my writing income) and passive income (our dividend and interest income from investments). [Edit: Obviously I originally wrote this in 2012. Today, after nearly five years of tracking our numbers this way I can confidently say this way of categorizing income works, and it works well.] We'll go much deeper into the discussion of investment income later in YMOYL.

Revealing your wall chart to others? Readers, would you ever show your personal wall chart to others? Would you leave it on your wall where friends and neighbors could see it? Would you share it as part of a YMOYL support group? The quote from the book about "Ivy" is instructive:

Her income was just her income. She could tell it to someone as easily as she could tell someone the color of her living room couch.

I mean, can you imagine having that wall chart out in your living room the next time you have a dinner party? Laura and I--well, we just couldn't. And this is in spite of the fact that I'm relatively open and candid about money. Part of the problem is when you bring your money situation out into the open, it's not just about the baggage you have about money, it's about the baggage others have about money. Readers, where do you stand on this?

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Appendix/Side Thoughts:
1) On feelings of deprivation: Recall this quote from above:

Those who get past the three-month hump will find their expenses leveling out at about 20 percent less than where they started--painlessly. These people report no feelings of deprivation, no struggling to keep a budget, just a natural decline.

Okay. You can save 20% of your expenses at the pitifully small cost of a minute or two of observation and thought per day--and even better, you won't feel deprived. But just think for a minute. What about those feelings of deprivation you used to feel when you attempted to cut your spending in years past? Why did you experience them then--but not now? What was the basis for those feelings, really?

2) "That gap has a name. It's called savings." This quote, on the middle of page 152, literally made us laugh out loud. We live in a culture where so few people know what it's like to save money--where so few people know what savings actually is--that the authors felt it necessary to define the word for readers.

3) The value of getting out of debt and accumulating savings: One significant source of savings for many readers will be debt costs. The expense reductions you'll achieve simply by embracing YMOYL's process will free up significant cash, and you can use that cash to aggressively pay down all debts. Obviously, paying down your debts drives your costs down still further, and that merely frees up still more excess cash flow.

The critical insight here is that most people just obediently make their payments when they're told, and they have no idea how much their various debts actually cost them. If they did know, they'd instantly recognize that those debts are misaligned with their goals and principles. Do you obediently do what you're told? Or do you do what's aligned with your goals?

4) On rethinking fulfillment: Haven't you always wanted to be less materialistic? Less shallow? Less caught up in owning stuff and advertising your superiority through the things you own? Pages 143-147 contain a ton of insights on these concepts, including this gem of a quote:

Now that the link between spending money and getting fulfillment is in place, a gazingus pin no longer automatically means satisfaction--quite the opposite.

Many of us used to define "giving up your gazingus pins" as denying yourself, being cheap, or as a form of punishment for wayward financial behavior. Now you know differently: there's nothing to give up. You're actually avoiding a waste of time and life energy. After reframing gazingus pin-like purchases, it's a lot easier to realize what they really are: an exchange of future hours of work and life energy for a brief flash of faux-fulfillment now. That's a crappy trade.

Not buying a gazingus pin now becomes a source of fulfillment because you yourself have determined that gazingus pins don't bring you fulfillment.

Now, you can see more clearly how you can both increase your fulfillment and spend less money. Now, you've broken the last of your robotic consumption patterns, and your spending is now in alignment with your true goals. Congratulations.


Next: Chapter 6: Valuing Your Life Energy By Minimizing Spending





How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!

YMOYL: Interlude: What We've Done So Far

Reminder for new readers: This is an in-depth, chapter by chapter review and analysis of the book Your Money Or Your Life that we're running throughout the month of January. Join us! You can buy YMOYL here, and you can find the first post in the series here.

Finally, if you're enjoying and getting value from this series, spread the word! Share your thoughts on YMOYL on your site, or link back to the various posts here. As always, I'm grateful for your support.

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In this week's installment of our in-depth review of Your Money Or Your Life, we're going to take a quick look back. We may have read only four chapters and 136 pages, but believe it or not, we've covered a ton of ground.

At this point, I wonder if readers see the same thing I see: this innocent little book is way sneakier than it appears.

Here's how it ropes you in. First, in the Prologue, it asks all sorts of provocative questions about modern consumerist life. Of course, anybody picking up the book will drawn in by that. Then, in Chapter 1, the book has you do the easy task of calculating your lifetime income--a sneakily encouraging exercise that shows readers they've actually earned quite a bit more money than they thought.

Next, in Chapter 2, you do another easy and seemingly innocent task: calculating your true hourly wage. The thing is, once you arrive at your number, you have little choice but to accept that your workaday life--in terms of both money and time--is far more costly than you thought.

What's next? In the second half of Chapter 2, you're assigned the job of tracking every penny you spend. This is the first exercise that sounds suspiciously like real work, and some readers may bump up against internal resistance (or even an intransigent spouse) at this point. But in reality, this step is just as easy as any of the others. Fast forward a few weeks, and you've tracked a month's worth of expenses before you know what hit you.

Hmmm. Now that all your spending information is sitting right there in front of you, it's no big deal to categorize it and organize it a little, right? Well, that's Chapter 3. And then, you take just one more teensy incremental step in Chapter 4 and put a few plus signs and minus signs next to your categories. Easy.

It was at this exact point of the book that Laura and I realized we'd been back-doored into a state of higher financial consciousness. In four chapters and a few simple exercises, this book literally vaporizes your ignorance about what's happening with your money. Four chapters.

Even more importantly, you're now entirely steeped in both the language and the perceptual framework of YMOYL. The dumb things that you used to waste money on are now "gazingus pins." Money isn't money anymore: it's now "life energy." You're now carefully measuring your expenses--and more importantly, objectively considering the value those expenses bring you.

By the time you've hit Chapter 4, you've had several irreversible flashes of financial insight. You simply can't go back. Whether you intended it or not, you now have a sophisticated awareness about your spending and your income--and how both fit in with your values.

Sometimes I think about what this book helps readers do in a mere 136 pages and I simply can't believe it.

One final thought: People pay thousands of dollars for debt counseling, financial consulting, therapy, classes and workshops to learn the things that you now know. And you're not even halfway through the book. Well done.


Next in the series: Chapter 5: Your Wall Chart





How can I support Casual Kitchen?
If you enjoy reading Casual Kitchen, tell a friend and spread the word! You can also support me by purchasing items from Amazon.com via links on this site, or by linking to me or subscribing to my RSS feed. Finally, you can consider submitting this article, or any other article you particularly enjoyed here, to bookmarking sites like del.icio.us, digg or stumbleupon. Thank you for your support!