Recently I posted thoughts about money I'd written from back in 2013.
Money is hard to write about, because there are many different ways we can approach it. It's easy to feel judged when someone does something with their money that I don't do with mine.
That all said, there have been some books, articles, and ways of thinking that represent an internally consistent approach to earning and spending money, and have aided me tremendously in my own thinking on money.
I want to explain this approach, and share these resources. Hopefully they'll spark some thought, and you can read more deeply as you see fit.
Money is a function of time
In a normal "go to work, earn money, and spend it on things" world (which is the world we all live in) money is a concrete representation of time.
If you get paid $20/hr at work, and you buy a $20 t-shirt, that t-shirt cost you one hour of work. If you earn $40/hr, that t-shirt now costs you 30 minutes of work.
Its easy to convert between an annual wage and hourly wage. Assuming someone works about 40 hours a week, for 50 weeks a year (two weeks vacation) if you earn $xx,000/year, to get to your hourly wage, remove the "thousands", and cut the first number in half.
$30,000/yr > remove thousands > $30 > cut the first number in half > 15. $30,000/yr = $15/hr.
$100,000/yr = $50/hr
$24.50/hr = $48,000/yr.
If you earn $25,000/year, a $8 burrito from Chipotle costs 40 minutes of your time.
The good news is, this math is quite easy. The bad news is, this method overstates your earnings.
Your hourly wage includes not just your income divided by hours that you work - it equals (your income - work related expenses) divided by (hours worked + hours spent preparing for/ recovering from work.)
So an effective hourly wage of $30/hr (or $60k/year) drops quickly once you take out taxes, monthly gas/metro fare costs, business-casual clothing budget, food purchased while at work, retirement contributions, and more.
The hours that you spend working are probably more than 40. You have to count your time traveling to and from work, prep time in the mornings, rest time in the evening, and the drinking you do on weekends to recover from the stress of work. Oh, and you don't work JUST 40 hours, anyway.
All this works together to drop your effective hourly wage from what's listed on paper to something lower than that. My first out-of-college job, when I did this math when I had a particularly bad commute, I was earning not much more than minimum wage. Oof.
It's miserable math to do, because your current effective hourly wage may be really, really low. The good news is you can quickly improve your effective hourly wage in two ways:
- Spend less time doing work-things (less prep in the morning, or leaving every day after 8 hrs instead of 9)
- Spend less money on work-things.
Money is not the goal. Options is (are?) the goal.
Why spend all this time and effort on money? Doesn't that make me seem really materialistic, scared, and untrustworthy of my job, God, my family, etc?
Off the top of my head, my goal with money is "create margin".
What is margin?
Margin is the space between our load and our limits. It is the amount allowed beyond that which is needed. It is something held in reserve for contingencies or unanticipated situations. Margin is the gap between rest and exhaustion, the space between breathing freely and suffocating.
Margin is the thing that allows us to absorb surprises, enjoy rest, and basically do the things that make us happy.
You want to be rich, but getting there is slow, boring, and un-sexy
The Millionaire Next Door looks at many, many millionaires in the United States. Guess what? Most of them are indistinguishable from non-millionaires. They drive inexpensive used cars, live in modest houses, and work normal jobs.
They start by saving a certain percentage of their income, and over time, never save less, and try to save more. Since income generally rises with age, if you're saving 10% of your income at 25, if you avoid lifestyle inflation, by 35, you could be saving 30% or 40% of your income, without feeling like you're living like a pauper.
Lets say you're earning $40,000/year at 25 years old. 10% of that is $4,000/year saved. Over the next ten years, you get raises to $75,000. If you let yourself spend $52,000 (that's $1400/month more than you spent at $40k/year-10% savings) you would be saving $23,000/year. This is why avoiding lifestyle inflation is a BIG DEAL!
Friction will dictate most of your spending/saving habits. Don't fight it, use it.
Money in your wallet wants to get spent, just as food in your refrigerator wants to be eaten. You know the rule "don't shop for groceries on an empty stomach"? This is because your willpower is affected by your emotional state.
I've got a "rule of thumb" that I follow, both in money and in food.
Food: If I think I shouldn't eat an item of food, but it's easily available to me, I will eat it, and not spend willpower to resist it.
Money: If I want to buy something impulsively, as long as I've budgeted for it, I'll buy it, and not spend willpower to resist it.
These rules may look insane, so here's the background:
When getting groceries, Kristi and I almost never buy cookies/crackers/processed foods, and we don't drink soda. There are 21 meals in a week, and in a normal week, 20 of these meals are healthy, filling, and don't have much sugar. I "fight" for my diet in the grocery store. If I'm at a friends house and they have brownies, I'm loading up, because I know that the vast majority of the food I consume is healthy and good. There is friction to us eating poorly at home, because unhealthy food doesn't exist in our house. If it does, I gladly eat it, and feel no guilt. I follow the path of least resistance, and I'm fine with that.
Similarly, most of our finances are automated. Every time I get paid, a percentage of that money goes straight to retirement accounts. Every time I get a raise, that percentage goes up. It's difficult and time consuming to change that percentage, so unless we fell on very hard times financially, I will not ever decrease how much of my income goes to savings. There is friction between me and saving less money, so I follow the path of least resistance.
I Will Teach You To Be Rich opened my eyes to a whole new world. I read it right after I got married, and it heavily impacted me. (4.5 stars, 761 reviews.) I recommend you give it a read, and start thinking about how to apply that wisdom.
Friction cuts both ways. I've got some pending issues with our finances related to rolling over old retirement accounts that Kristi had in a prior job. I need to roll them into accounts that we manage, and then I need to get those accounts put under Vanguard. This all requires paperwork, and things that seem quite complex to me. So I've not done it. Remember - friction. I follow the path of least resistance.
But, once I get this done and the money in Vanguard, it will sit untouched for many years. And will grow. And this is good.
Money is time, create margin, learn to love friction. Why does it matter?
Why does this matter? Why save money?
Phew. Good questions. Others have said this better than me (I'll link out to the folks that inspire me below) but here is my perspective:
- The difference between your income and your spending is related to how fragile you are to life changes. One who spends 100% of their income as soon as the paycheck clears is in a different spot from someone who has been saving 40% of their income for two years.
- Spending less than you earn is a rejection of a lot of the unappealing part of our (USA) consumption-driven way of life
- Saving money allows you to be generous to others when the opportunity arises.
- Money isn't the point. Manage it well and with responsibility, and you can move on to other, more significant parts of life, like living.
- The Hedonic Treadmill will suck all sense of happiness out of your life. Don't play that game.
- Mr. Money Moustache. Endlessly entertaining, a bit contrarian.
- r/financialindependence. Lots of smart, motiviated people there will make this seem less crazy.
- r/personalfinance. Ditto.
- You Need A Budget. This tool is a game changer. I actually enjoy managing money now. Whoa.
This should get you a pretty comprehensive approach to a very non-traditional approach to money.