Why Conventional Wisdom On Following A Budget Is Wrong And How To Manage Your Money Better

The Case Against Following A Budget
Following A Budget Is Not The Path To Financial Independence

The conventional financial advice you get from mainstream sources is to keep a strict budget of your monthly income. That advice is wrong. This can actually hinder you from achieving financial independence. If you look at how large companies manage budgets, you will see how flawed the idea really is.

 

Budgets In Large Companies:

Large companies have many departments and determine what the operating budgets of these departments should be for the year.

Where I worked, in the Engineering Department, we might have had a budget of $100 million for the year. This was a publicly traded company so the people who were responsible for the budget in our department weren’t actually spending their own money. They were spending the company’s money. Their only concern was that they didn’t go over the budget because it will affect their yearly bonus. But what happens to them if they are significantly under budget at the end of the year? Does the company give them a bigger bonus or a cut of the money they saved? No, of course not. In fact, if they are under budget at the end of the year, the company will give them less money for their budget next year figuring they gave them too much last year. So what does the budget manager do if he knows that he will come in under budget? He goes on a spending spree in the last few days of the year.

In our case that usually meant buying equipment for jobs that we might have next year or even just buying rooms full of laptops or anything else that we may need next year or down the road. After all, it’s free money right? Use it or lose it. It’s actually worse than that because if he doesn’t use it all, he gets less to use next year. Now, does this sound logical to you? It doesn’t to me but, based on the consequences of coming under budget, that is what it leads the budget manager to do. It’s not his money so it’s like having a bunch of money that expires on December 31.

Now think about what would happen to the extra budget money if this was a small company privately owned by the founder. Would he blow that extra money just so that he doesn’t under spend the budget? No, because it’s his money, and anything he saves by under spending the budget goes right into his pocket! This is how you should think of your own finances.

 

Personal Budgets:

The mainstream financial advice is that you allocate your  monthly income into a budget. If this advice is so good though, how come most people live paycheck to paycheck and are nowhere near being financially independent? It’s because keeping a budget is artificial and causes you to spend money you would not normally spend just like the manager in a large company that buys things he doesn’t need just because he is under budget.

Most people budget for categories that they think they need or are told they should budget for like restaurants, clothes, entertainment, car payment etc. When they are finished with their budget, they come out with $0 at the end of the month. Now, they may budget some money for savings but it is usually a small amount. So with a budget like this, if you allocate $300 a month for restaurants, but at the end of the month you only spent $100 on restaurants, what are you going to do? You will most likely go out and make sure you spend that other $200 at a restaurant right?

You see how keeping a budget makes you spend some artificial  predetermined amount? It also keeps you in the mindset that you need to spend money on these things every month. What you should do is start from the idea that you will try to save as much as you can every month and only spend on things you actually need or want within reason. If you need some new clothes this month then buy it, but if you don’t need any next month there is no reason you should have a budget item that forces you to buy more clothes. Save that money instead. This gets you into the mindset that saving and investing the money you worked for is more important than some of the things that you would normally buy. It makes you think twice about if you really need it. If you do this, you will eventually find that some of the things you thought you needed are not really that important.

Try to think like the owner of a private business. Every dollar you don’t spend adds to your wealth. Remember, for every year of expenses you save, you can stop working one year earlier.

The Law Of Diminishing Returns In Your Life

The Law Of Diminishing Returns is not just some term economy professors use in boring classes. It actually affects everyone in their everyday life. If you learn to recognize where it applies in your life and how you can optimize it to work for you, you can maximize your freedom.

What is the Law Of Diminishing Returns?

It is the idea when you add more resources (workers, factories, money, time etc) to produce something, at some point you start getting less of the desired product for each addition of resource. I’m paraphrasing here so if you are a stuffy economist, there is no need to send me a five page description using big fancy words. I always like examples to understand and idea, so here are some:

 

Building Cars:

Your goal is to produce as many cars as you can using the least amount of workers per car. Assume a car factory has 100 workers and produces 100 cars a day. That is one car produced for each worker. If you add 10 workers, you might get to produce 10 more cars per day, but at some point adding more workers doesn’t produce more cars. In fact it might produce far less. Imagine if you added 1000 workers to the same factory that was designed to accommodate 100 workers. Nothing would get done because everyone would be in each others way.

Here is what it might look like:

100 workers -> 100 cars produced per day

110 workers -> 110 cars produced per day

200 workers -> 140 cars produced per day

1000 workers -> 5 cars produced per day & 17 fistfights

Painting Your New House:

Your goal is to get your house painted in one day with decent quality while paying less in pizza and beer than you would have spent if you had to hire professional painters. Assume you need to paint the inside of your house and you want to have your friends come over to help you paint it quicker. Well, you are probably going to pick the most industrious friends first. But if three relatively motivated friends are good, then the more the merrier right? Well what happens when you try to get everyone you know and their friends to come over and paint? If you have thirty people show up you will not get 30 times the production of your first friend. You might just find the house worse off than before they came.

Here is what it might look like:

3 friends painting -> house painted in 8 hours

6 friends painting -> house painted in 6 hours

10 friends painting -> house painted in 5 hours

30 friends painting -> more paint on floors than on the walls, a fortune spent on pizza and beer, and your new neighbors call the police on your friends for making too much noise

School:

Your goal is to pass the class and get as good a grade as you can get with the amount of time you are willing to spend learning the material. Assume the final is your whole grade in the class. If you study for 2 hours, you might squeek by with a 60. If you spent 4 hours, you might get a 75. Well no matter how many hours you spend studying, you can not get higher than 100, so what is the optimum amount of time to spend studying without getting diminishing returns for the hours you are investing in studying?

Here is what it might look like:

2 hours studying -> result 60

4 hours studying -> result 75

5 hours studying -> result 83

10 hours studying -> result 91

15 hours studying -> result between 97 and 100

20 hours studying -> result is that you have no life outside of studying

 

So how does this affect you every day and what can you do about it?

Most of the usual things you do in your life are like an engineering problem that has many solutions. What I’m talking about are things like food, housing, cars, clothes, and other things that you have to use everyday while you go on with the business of what you want to do with your time.

Usually the extreme solutions are the most costly as we will see. There is a sweet spot that gives you the most of what you need for the least amount. Money is not the only thing I’m talking about when I talk of a cost. People have varying amounts of money, but everyone only has the same 24 hours in a day. You can make more money, but you can’t make more time. Money and time are things you spend in your day to day life to get the things you need. Let’s see how going to extremes diminishes your returns.

 

How To Find The Sweet Spot In Your Life
The Law of Diminishing Returns In Your Life. Comparing time and money spent in getting what you need in life.

 

Looking at the chart for food, we can see that you can spend a lot of time and little money on food or you can spend a lot of money and little time on getting the nutrition that everyone needs every day. The sweet spot of course, is somewhere in the middle. Now you may ask, isn’t it much better if you can get your food free by just hunting or growing a garden or picking wild berries?

To answer that I will tell you about one of those shows about people living in the wilderness off the land. In the episode I saw, they hunted, gathered berries, chopped firewood, and built some kind of wilderness shack. You know the type of show.

The crazy thing was that when they needed to get salt to salt their meat so it doesn’t spoil, they didn’t go down to the local supermarket and buy five pounds of salt for $2. Instead, they drove a pickup truck a number of miles to the beach, built a fire and boiled sea water for many hours to get their five pounds of salt. Now in their mind they are being true to “living off the land” and not paying for food. But, they did not build that Ford pick up truck and they did not push the truck to the beach. They used gas. That is not exactly living off the land so would it go against their principles to just buy the salt from the supermarket? I guarantee you they used way more in gas than the 5 pounds of salt would have cost at the supermarket. That is the small part of what they spent. The large part is that the two of them spent the better part of a day boiling water to get salt. They will never get that day back. Granted, they might have done that for the show, but they are really getting diminishing returns for their time. If the minimum wage is $8 where they live, one of them could have worked for 15 minutes to make the $2 to buy their salt.

Just because your food doesn’t cost you money, does not mean that you are optimizing your time and money for the best result. Those people that call themselves Freegans who dumpster dive to get food thrown away by stores are not optimizing their time and money. How many garbage cans do you have to go through before you find eatible food that you want to eat? They are definitely not in the sweet spot, unless you consider the sweet spot to be in the middle of a dumpster surrounded by rotting food.

To a lesser extent, even having a garden may not be the best use of your time. If you calculate how much time you spend on your garden and how much vegetables you get from it, I think you will find it is cheaper to buy it from the supermarket. If gardening is your hobby, that is a different story.

So, if spending my whole day finding and preparing enough food to survive the day is not optimal, then what about doing the opposite? So what is the opposite?

I would say that would be to hire a cook to shop for your food and cook it for you. Maybe even hire a butler to cut your steak and feed it to you so that you don’t have to suffer the indignity of lifting your own fork. In reality, I would say that this is better than spending your time hunting for food. Of course, this is only if you have so much money that hiring these people is not going to make a difference to you financially. Most people are not in that position. A little less, extravagant than that is to eat out every day. Although you are saving time by not having to shop and cook the food, you are still spending a good amount of time going there and you are paying about three times what the food would cost you if you cooked it yourself (not to mention tax, tip and drinks).

By now you see where I’m going with this. The sweet spot in getting the nutrition you require every day is using some time and some money to shop and cook for yourself.You also get to control the quality of what you eat as opposed to restaurants that might use worse quality food.

Finding the sweet spot works for a lot of things in your life. Here are some examples:

Housing:

One extreme: Buying a $20 Walmart tent and living in the middle of the wilderness spending your day gathering firewood and berries and trying not to get mauled by bears while you sleep.

The other extreme: Building a custom 20 bedroom house in the middle of Manhattan with a staff of 10 people for just you and your cat.

The Sweet Spot: Buying an existing home in a low cost area that is not too big that will not make you have to work an extra 10 years just to pay for it. The time you don’t spend working to pay for or maintain it can be spent on what you really want to do with your time.

Cars:

One extreme: Buying a old $500 car that you have to keep spending time and money repairing

The Other Extreme: Buying a new $500,000 car that you have to keep spending time (at the dealership) and money repairing

The Sweet Spot: Buy a mass produced used car with good reliability rating so you don’t have to worry every time you turn the key like you do on the cars in the two extremes.

Clothes:

One Extreme: Spending hours at the thrift store trying to find the shirt you want in your size without bedbugs on it.

The Other Extreme: Spending money getting custom tailored clothes that may or may not be in fashion next month

The Sweet Spot: Find a good quality clothing manufacturer you like (For men: Gap, Banana Republic, Brooks Brothers, Ralph Lauren etc) and just buy simple classic clothes when they have their yearly sale. Spend your time on things that matter to you instead of fashion.

The lesson here is that cheap or free isn’t always better. Spending obscene amounts of money isn’t the answer either because the bigger, or more expensive something is, the more time you need to maintain it or get someone to maintain it for you. The sweet spot is the thing that satisfies your need with the minimum amount of time,and to a lesser extent, money. Minimizing those things maximizes your freedom to do what you want with your time.

How To Buy A Reliable Car For About $100 A Month

How to buy a reliable car for about $100 a month
You can buy many reliable cars for about $100 a month, but probably not this world’s only miniature Lamborghini Countach built in Italy by Lamborghini. This was on display in Adelaide Australia.

One of the biggest expenses for people is a car. For people who live in a big city, they might get away with not owning one and just using public transportation, a bike, or ride sharing. I’m guessing that most people who are financially independent live in a lower cost, less dense area where a car is still a must. You may not drive it a lot, but you still need it. There is no good reason, unless you are really rich, to spend a lot of money on a car especially if you don’t need it to commute to work. There is even less reason to buy a car and pay interest on a loan for it. Think about that, when you buy a car with a loan, your purchase price increases (purchase price, plus interest) while the value of your car decreases. The difference between those two numbers is what your car is really costing you. A large monthly car payment is just another expense that keeps people on the work treadmill. You can have a reliable car without the large monthly payments and possibly, less insurance costs as well.

Before you get too excited thinking that this is an article about some “secret government auction” that sells 1-year-old luxury cars for $100, let me just say that there is no such thing. The most cost-effective car to buy is still a reliable used Toyota or Honda or something similar and keep it for a decent amount of time. It is the combination of what car to buy, how old should it be, how many miles should it have, and who do I buy it from, that will give you the result of having the car cost you about $100 a month over the time that you own it.

Before I get started, let me tell you about my car mistakes over the years. You probably couldn’t tell from my bland 4 cylinder 2008 Toyota Camry that I love cars. I have had 23 cars over the years if I didn’t forget any. I have owned German, American, and Japanese cars. I have never bought a new car and every car that I bought was bought off of a private seller except for 3 of them. Those were all mistakes. I have also sold all of my cars myself as well as for friends and co-workers. My obvious mistake is that I keep cars for such a short time. That was mostly when I was younger and I have gotten much better about that. I have had my current car for 5 years. My biggest mistake was buying a 3-year-old BMW around 2000 for about $30,000. My payments (only car loan ever) were about $500 a month. When my car got stolen about 2 years later, the insurance money exactly paid for what was still owed to BMW Financial. That means that every $500 payment that I thought was going to pay off my car was actually just going to the depreciation.

Let’s start with depreciation

Most financially aware people know that a car loses about half of its value in the first 5 years. Here is a chart I made from the depreciation calculator from Chartprice.com assuming a purchase price of $25,000 and a 15 year ownership:

value-of-a-new-25000-car-over-15-years-data-from-carprice
This is the value of a new $25,000 car over a 15 year period.

 

Here is what the yearly depreciation looks like. Notice that depreciation is the most in the first few years:

yearly-depreciation-on-a-25000-car-over-15-yearsdata-from-carprice
The yearly depreciation on a $25,000 car over a 15 year period.

 

Here is the actual data:

 

value-of-a-new-25000-car-over-15-years-carprice
Yearly depreciation and cumulative depreciation of a $25,000 car over 15 years.

 

Notice that the red cell shows that the cumulative depreciation in year 4 is more than the next 11 years of depreciation combined. That means that if you buy a 4 or 5-year-old car, it will cost you as much for the next 10 years as it did the person who owned it for the first 4 or 5 years. Obviously this does not include maintenance or repairs so you better buy something with a track record of reliability.

So what car should you buy?

Buy the car that will do the job for your needs. I am 6’2″ so I prefer a larger car like a Toyota Camry or Honda Accord rather than a Honda Civic or Toyota Corolla or similar. I’m flexible on the car if I can get a good deal on the price for the condition. I love the look and drive of German cars, but I don’t like the stress of knowing every time I turn on the ignition I may be getting a $1000 repair bill for some fancy electronics that are malfunctioning. Don’t get me wrong, I like nice cars, but not at the expense of being afraid to drive it long distances because of the worry of it leaving you stranded. As for American cars, I think they are more reliable than German cars but less reliable than Japanese cars. I would stick to Japanese cars if you could.

As for the miles, most advice people hear is that they should buy a low mile 3-year-old car and keep it for 7 to 10 years. That may be good advice for people who drive 60 miles a day to work or 15,000 miles a year, but if you are retired or financially independent you save all those commuting miles. I have only driven about 6,000 miles since I have moved to FL two years ago. If you expect, like me, that you will only be putting a few thousand miles a year on your car, it makes sense to buy a higher mile car since you can get a better price on it. By the time you are ready to get rid of it, it will have below average miles if you don’t drive a lot.

Now that we have an idea of what to buy, let’s see some data from Kelly Blue Book and Edmunds on what these types of cars cost. I will use the example of a Toyota Camry LE with a 4 cylinder engine. I want to show real world prices for this car from 1-year-old to 10 years old. I did this by getting the current values for cars from the 2016 model down to 2007 model. This is not exactly the same as being able to say what a 2016 Toyota Camry will be worth each year for the next 10 years. It is a close approximation but not exact because the 10 year span I am looking at will include 3 different model upgrades on the Camry but all the same trim level and engine size.

 

value-of-a-toyota-camry-le-4-cylinder-from-2016-to-2007-kelly-blue-book
This the Kelly Blue Book (www.kbb.com) values for the Toyota Camry LE 4 cylinder engine from 2016 to 2007. It assumes 15,000 miles a year usage.

The chart above Shows the Kelly Blue Book (www.KBB.com) estimation of the Trade In Value and the Private Party Value of a Toyota Camry LE 4 cylinder engine from the years 2016 to 2007. These values reflect 15,000 miles a year on the cars. So the 2016 data point on the chart reflects a 1-year-old Camry with 15,000 miles. The 2015 data point on the chart reflects a 2-year-old Camry with 30,000 miles and so on all the way out to the 2007 Camry that reflects a 10-year-old car with 150,000 miles.

Below is the data table for this chart:

car-value-of-a-toyota-camry-le-2016-kelly-blue-book
Data Table for the Kelly Blue Book values for the Toyota Camry LE 4 cylinder engine from 2016 to 2007. It assumes 15,000 miles a year usage.

Notice in the table above that the difference in price between the Trade In Value and the Private Party Value is about $2000.

 

Here is a second set of data from Edmunds (www.Edmunds.com) using the same assumptions about car type and mileage:

 

value-of-a-toyota-camry-le-2016-to-2007-edmunds
This the Edmunds (www.Edmunds.com) values for the Toyota Camry LE 4 cylinder engine from 2016 to 2007. It assumes 15,000 miles a year usage.

And here is the data table:

car-value-of-a-toyota-camry-le-over-10-different-model-yearsdata-from-edmunds
Data table for the Edmunds (www.Edmunds.com) values for the Toyota Camry LE 4 cylinder engine from 2016 to 2007. It assumes 15,000 miles a year usage.

 

The Edmunds data includes the Retail Value as well as the Trade In Value and the Private Party Value. Notice that the difference between Trade in Value and Retail Value is about $3000. In case you are not sure what these terms mean, here is a quick breakdown:

Trade In Value: What a dealer gives you for your car when you trade it in, usually when you are buying a new car. A lot of times they offer a lot less than what the Kelly Blue Book and Edmunds suggest.

Private Party Value: This is the price you would expect to get for your car if you sold it by yourself on Cars.com or Craigslist.

Retail Value: This is the price a used car dealer would sell this car on his lot for. People are willing to pay this high price because they don’t know any better and also they hardly ever have the cash to purchase the car outright so they accept the higher price because the dealer gets them a loan usually.

How to get the most for your money

The way to get the most for your money is to try to buy on the bid and sell on the offer, or in other words, buy wholesale and sell retail. Most people end up doing the opposite of this and so they are about $3000 behind right from the beginning.

Looking at the Edmunds table, let’s assume you want to buy the 2012 model Camry which would be a 5-year-old car with 75,000 miles. If you buy it retail from a used car dealer you will pay $11637. Let’s say you keep it for 5 years and trade it into the dealer for $2734 (using the 2007 Trade In Value). This car cost you ($11637 – $2734)/60 months = $148 per month. This is not terrible and if you don’t put a lot of miles on it, you might even be able to keep it a few years longer before you have to worry about mechanical problems.

Now let’s assume you want to buy the same 2012 Camry but you are able to get it at the Trade In Value (or close to it) of $8253. In five years you sell it, but instead of trading it in, you sell it yourself and get the Retail Value (or close to it) for it which is $5764 (using the 2007 Retail Value from the Edmunds table). Now your cost is ($8253-$5764)/60 months = $42 per month.

By now you may be thinking that these numbers are fantasy numbers because only car dealers actually get to buy wholesale and sell retail. Yes and no. You may not be able to buy your car at or below Trade In Value and you may not be able to sell it later at Retail Value, but you can come close.

How to buy close to Trade In Value

You can buy close to Trade In Value by buying a car off of friends or family before they trade their car into the dealer to buy a new one. Just talk to people you know who buy a car every 5 years or so. Tell them you will pay them cash before they even go to the dealer to get the car appraised. Offer them Trade in Value or a few hundred higher to give them the incentive to sell to you rather than just trade it in. Everybody wants to get more than what the dealer offers them, but most people are afraid to sell their car themselves to get closer to the retail number so this is an easy way for people to get a better price for their car.

Only ask the people you know who have a car that fits your needs. Also, this is a very good way to get a good used car without the uncertainty of the car’s previous history. Only buy off people who you know take care of their car and do not abuse it. Do not buy off of people who are messy or have messy cars because they may not maintain their cars well. Also, do not attempt to buy cars off of people who are super Type-A about their car because they will think it is worth twice the retail price. I know somebody who squeegees his whole car after it rains and does other crazy things on his 8-year-old pick up truck. What do you think he thinks his car is worth? You want to buy off an older person that just uses their car like any other appliance and gets all the scheduled work done at the dealer. If you just let people know in advance that you are interested, you will be surprised at how many offers you will get from people.

If that doesn’t work or you need a car at a time when your friends are not getting rid of theirs, then the next best thing is to buy it from a private seller on a website like cars.com. Private sellers list their cars here to try to get a better deal than they would by trading it in to a dealer. You can get a car from them somewhere between Trade In Value and Retail Value depending on the condition and how well you negotiate. One problem with buying from private parties off of websites is that the more expensive the car is, the less private sellers there are. This is because there are very few people who have $10,000 in or more to pay for a car. That’s where the dealers come in with their loans and “affordable monthly payments”.

For example, if we check cars.com across the whole country for a 2012 Toyota Camry with the 4 cylinder engine with under 80,000 miles we get 1563 listings ranging in price from $8900 to $20,995. Only 10 of these listings are from private sellers! Also notice the crazy range in prices for these cars. Some dealers are trying to sell 5-year-old cars for almost what a new one costs. Cut out the middle man and buy directly from a private owner with cash.

So how do I sell my car?

If you are selling your car after owning it 5 to 7 years, you might want to ask your friends and family if they know anyone that is looking for a car in the price range of yours. If not, list it on cars.com or Ebay or Craigslist or something similar. You can check Ebay it see what cars similar to yours actually have sold for. You can’t see that on cars.com but you can get an idea of what your car is worth in your area by looking at similar private party car listings. If you think your car is worth more than some other similar cars then you can list it a little higher. Just know that if the people don’t call about your car, then it is priced too high. A lot of people look for cars on the weekend so if the weekend went by with no one calling, then lower it by about 5% every Monday until people start calling you. That is how you can get the highest price for your car when you sell it.

Conclusion: Car dealers exist to make things easier for people. If you don’t have enough to buy a car outright, they make it easy by giving you a loan. If you don’t want to deal with listing your car and showing it to strangers, they make it easy to just trade it in to them. All this so called convenience comes at a pretty big price. On a big purchase like this, making a little more effort can save you a large amount of money. I know most people dread dealing with car dealers, and they dread even more having to negotiate with strangers buying a car off of them. Even though I like doing that, I realize that it is not for most people. That’s why people are always asking me to sell their car for them. At the very least, make it a point to let friends and family know that you are willing to buy their car. With very little effort, you might be very surprised at the deal you are able to get.

 

 

What Can A Billion Dollars Buy You? Not Much

A billion dollars can not buy you much

 

When people daydream about being rich, they believe that if they had a billion dollars, they could buy anything they wanted. What they don’t realize is that they can already buy pretty much what they want.

There is a saying: “Money isn’t everything, unless you don’t have any”.  But what if you have more money than you could ever spend? What can a billion dollars buy you that mere millionaires or thousandaires can’t buy? Even if billionaires can buy things that mere mortals can’t buy, is the quality worth the price or do they just spend one hundred or one thousand times the normal price of something just so they can feel special? Let’s take a look at the things they buy and compare them to what an average middle class person has to settle for:

     Housing:  Billionaires often have very large and maybe many houses in different places.  Sometimes you hear about their houses on those lifestyle shows. Often you hear that someone has a house with thirty bedrooms and thirty eight bathrooms. Besides the obvious questions about why they have more bathrooms than bedrooms, do they ever really sleep in more than one bedroom? I can only sleep in one bed at night. So the only thing better about their house is maybe the quality of materials and the number of rooms and square footage. With that comes the requirement to have a staff to maintain the garden, pool, cleaning etc. Their money does not buy them a bed that somehow let’s you sleep for five minutes yet gives you the equivalent of eight hours of rest. So they get the same thing the average person gets except it is bigger with more expensive materials.  Even middle class people have Mcmansions with more rooms than they use so this is not that exclusive.

     Cars:  Most billionaires are not really into cars except maybe a few nice cars to drive or be driven around. Let’s use the example of billionaires who really are into exotic cars. What can they buy that the average person can’t?  Well they can buy a Bugatti Veyron for over a million dollars and about 1000 horsepower.  It can do zero to sixty in a probably 3 seconds and probably tops out at 200 MPH. Forget about the fact that they are never in a big enough hurry that the zero to sixty time will make a difference, or that they will never get it close to 200 MPH unless they are on a closed track, the car does nothing special. It still has four wheels a seat and a steering wheel. It doesn’t have an anti-matter engine  and it doesn’t fly. It is not that much better performance wise than a $60K Corvette or BMW.  Surely it is not twenty times better as the price suggests.

     Food:  Yes, they can buy the finest food, but so can you. Maybe you can’t afford to spend $200 every day in a restaurant on steaks that cost $15 in the supermarket, but you can still eat very well and very healthy if you chose to. Also, just because they can buy the finest filet mignon and lobster, they can’t  eat it every day or eat unlimited amounts because there is only so much you can eat of those types of foods before it severely affects your health. Billionaires can also buy the finest wine, but you also can’t drink unlimited amounts of that either. Most people can’t tell the difference between $20 wine and $200 wine anyway.

     Travel:  Here is a secret most people don’t realize: billionaires can only buy private planes that fly as fast as regular commercial planes. No matter how much you are willing to spend, you still have to fly at the normal speed to your destination. There is no such thing as walking through a portal in New York and two seconds later walking out of a portal in Singapore.

I could go on about things like jewelry, art, vacations, education, etc, but the conclusion will still be the same.  There is nothing new under the sun. Whatever a billionaire can buy, most people can buy the same thing that functions the same way. And no matter how much money you have, you cannot buy more time.

When Is The Optimal Time To Retire Early?

Most financial advisers tell you that the optimal time to retire is some time after 65 depending on how much money you have saved for retirement. To me, the optimal time to retire is way before that. So when should you retire?

The short answer is as soon as possible. Of course it depends on a lot of things including your family situation, future obligations, health, and how comfortable you are with the unknown. There are a lot of variables and what works for one person obviously does not work for everyone. That doesn’t mean you can’t take a specific case and tweak it to work for you. I’m going to use the example of my situation because that is the example I know best.

Let’s make some assumptions:

I am a single male with no kids therefore I don’t really care if I have any money left when I die to leave to any relatives.

Assume a life expectancy of 75 years old.

Assume you will not receive any Social Security.

Assume no debilitating health bills.

To compensate for unseen contingencies, we will assume that the money you have when you retire will equal your yearly expenses times the years until you are 75. In other words, if you retire at 45 and your living expenses that year are $25,000, then you need 30 x $25,000 = $750,000 to retire. I am not including the growth in your investments or the increase in your living expenses due to inflation.  In reality, if you have $750,000 today and only assume a 4% growth rate in your investments, while assuming a 3% yearly growth rate in your living expenses, you will still have about $350,000 at the end of 30 years.

First let’s see what a typical worker’s lifetime of work, retirement and savings looks like if they follow the path of pretty much spending what they make and probably only saving in a 401K account:

The Typical Worker’s Retirement And Savings Rate.

As you can see, they probably have about 5 years of living expenses by the time they retire at 65. They might get a small pension and Social Security and this covers a 10 year retirement. For some people this is fine.

 

Now let’s see the different retirement scenarios for people who start saving, investing early, and actively live below their means:

This Is A Person That Saves And Invests But Never Retires.
This Is A Person That Saves And Invests But Never Retires.

This is not a bad outcome if you love your job or career so much that you couldn’t imagine doing anything else with your time. The bad part is that you saved way too much money so you died with a fortune. It’s kind of like how all the money goes back to the bank when you finish playing Monopoly. Thanks for playing.

 

This Is A Person That Saves And Invests And Retires At 65.
This Is A Person That Saves And Invests And Retires At 65.

This person has about 10 years of retirement just like the person in the first graph who didn’t save much, yet also retired at 65. The only difference is that this person dies with way too much money left.

 

 

This Is A Person That Saves And Invests And Retires At 45.
This Is A Person That Saves And Invests And Retires At 45.

This person retires at 45 and still has a lot of good years left to do the things they want to do without being too old or tired to try if they were much older. They will die broke or almost broke but who cares?

 

These are obviously very simplified examples, but the point is that you really can retire early if you are serious about it and plan for it. There is nothing noble about ending up with a lot of money when you die, especially if it comes at the cost of working many extra years unnecessarily.

I have been guilty of this myself. I wanted to quit my job years earlier, but my cautious nature always kicked in and said to me “Every year you stay at work, you’re saving about two years of living expenses.”. The truth is that I never made the decision to leave, they made it for me. I think they did me a huge favor.

 

 

 

 

 

 

Welcome

Welcome to Maximize Freedom

          What is the maximum freedom someone can have? Freedom means different things to different people. It also depends on your age and your situation in life. If you are 10 years old, your idea of maximum freedom may be to stay home from school, play video games and eat ice cream all day, every day. If you are an adult, it may mean not having to work for someone else, or just being able to do what you want, when you want. For someone with kids, it may mean being able to home school them. Some people may consider freedom to be working 60 hour weeks in a job they love. I’m not one of those people.

A little about me

          My name is Nick and I am 45 years old and currently live in the Tampa, FL area. I moved here almost 2 years ago from NJ and was laid off from my job in May 2015. My background is in engineering and finance. I consider myself financially independent, not because I am rich, but because I have been planning for this for a number of years. It also helps that I am single, have no kids, and have learned to enjoy a simple lifestyle. I like to travel and may consider moving abroad in the near future.

So what will I do in this blog?

          I intend to write articles that help people and maybe make them think of things from a different perspective.  I like simplicity, efficiency, minimalism and not wasting time. This blog will differ from the other blogs because I do not follow the belief that anytime is a great time to throw all your money into an index fund and it will all work out great in the long run. I also believe in diversifying not just within your stock portfolio, but with assets physically in other countries.

What I won’t do in this blog

         I will not pretend to have all the answers all the time. There will be no vague low information articles just to get you to buy some overpriced e-book with the “secret information they don’t want you to know”.  You won’t see a cliché article telling you how cutting out Starbucks every day will put you on the road to riches in no time. Also, there will definitely not be a “Top 20 list” article with a 20 page slideshow with a stock photo and one sentence on each page.  In other words, I don’t want people to feel like they wasted their time after reading my articles.

I hope you stick around for my future articles.

Nick