This is the second post in a four part series. You can find the first post here.
Near the end of my time in Saigon a friend asked me to visit her English class to talk to her students and give them a chance to practice with a native speaker. When she introduced me to the class she told the students that I wrote a blog “about meditation,” a comment which left me with a mix of amusement and embarrassment. Is my enthusiasm in recommending meditation really that over the top!?
One of the things I like about this series on time and money is that it’s about something I’m equally evangelical about but which I’ve barely touched in this blog – personal finance and more generally being smart about money. (By the way, the “>” in the title is the math symbol for “greater than”, not an arrow, and the title of this series is my assertion that, in the context of a human life, time and our ability to control how we spend it is vastly more important than money.)
I first got interested in personal finance about 20 years ago when I was still a graduate student and had very little money to manage (which was great because I made a few early mistakes and learned a lot with relatively small sums!). Over the years I’ve come to feel that while almost everyone cares about their finances there are lots of misconceptions out there and that bad financial habits are vastly more common than good ones.
I’m definitely not presenting myself as an expert on this subject but I have made managing my finances a priority since before I even began working full time and it’s largely because of those habits that I was able to mostly retire at around 40. I have benefited from several books and blogs by people who are thought leaders on this subject and I’ll share those later in this series. (By the way, as an homage to one of my favorite bloggers, I’ve borrowed the subtitle of this entry in the series from his post on this same idea – by working, we’re essentially “selling off” a portion of our lives in order to pay for the costs of living, and it’s really worth actively considering how much we want to sell off. You can find David Cain’s excellent take on this topic here on his blog Raptitude.)
One of the endless eye-opening things I learned when I read Sapiens: A Brief History of Humankind last year is that in spite of astounding technological advancement, modern humans work more than hunter-gatherers:
While people in today’s affluent societies work an average of forty to forty-five hours a week, and people in the developing world work sixty and even eighty hours a week, hunter-gatherers living today in the most inhospitable of habitats – such as the Kalahari Desert work on average for just thirty-five to forty-five hours a week.
And after this passage the author notes that pre-agricultural people in more hospitable habitats in all likelihood worked much less.
One of the book’s central themes is that humans have been really good at populating the planet and in advancing socially and technologically, but at great cost to the environment, other species and, crucially, to the happiness of individual humans.
Isn’t it amazing that in modern global society most people work significantly more than primitive hunter-gatherers! To my mind, the answer isn’t to do a Ted Kaczynski and live in a hut in the mountains of Montana. My own personal answer to this dilemma over the promise and perils of modernity is to seek, in a sense, to hack the modern world – to develop my own unique form of global postmodern life. In short, to enjoy the rich benefits of contemporary life while avoiding the harms (excess consumption, debt, poor diet, sedentary lifestyle, mental illness etc.).
I find a lot of the conventional wisdom and common practices in the areas of work and personal finance questionable at best and completely dysfunctional at worst. Take the standard vanilla retirement plan to save and invest about 10% of your income and retire around 65. There are people for whom that makes sense of course and the sad reality is that most people don’t even meet this low bar. But with a bit of financial knowledge, good saving and investing habits and self-discipline, many people could do much better than this.
Everyone’s financial situation is unique of course, but as someone who’s highly educated and single with no children, I find the standard retirement assumption that I need to work 40-50 years to fund a couple decades of retirement completely ridiculous. My work exists to support my life. My life doesn’t exist to support my work. And more generally I think that an overemphasis on “career” can sometimes take the focus off even more important life priorities, such as health and happiness. Of course, I advocate educational and professional development, and these have been important parts of my own life. I just think it’s important to maintain a healthy perspective and priorities.
My income is far from eye-popping but well above average (by American standards), and as a single person with no children living in places like Thailand and Vietnam, I think spending 90% of that would be wildly profligate. Rather than purchasing more luxury I don’t really need or care about in the present, I’d rather buy more discretionary time both now and in the future by working less and by saving and investing a much bigger portion of what I earn.
I’ve saved and invested something like 75-80% of my income while living in Spain and Southeast Asia and even in Tokyo, which is an expensive place to live, I didn’t spend more than 50%. Instead of the standard retirement model, I prefer one where I save and invest huge portions of my income and mostly retire after a single decade of full-time work. My time is mine and your time is yours, and personally I think the conventional wisdom about retirement requires selling far too much of that off.
At the outset, let me make it clear that my situation is really unique and I completely realize that retiring after only ten years of full-time work is not possible for most people. The purpose of this series on how we balance time and money is to provoke thought and to encourage people to come up with their own plan, but the last thing I’m doing is offering myself as a model. With a clear plan and some self-discipline, I do think that retiring well before 65 is completely realistic for many or even most people from the lowest rungs of middle class on up.
In theory, anyone can retire early by saving and investing a high enough portion of their income, but in practice circumstances like the following make that easier:
1) Low basic living expenses relative to income
2) A bias toward frugality and against profligacy in discretionary spending. As an example, I remember getting my hair cut near the end of my time in Saigon with the same barber at the same local barber shop ($2 for a cut!) that I always went to. As I texted on my phone in the barber chair, the young, heavily tattooed Vietnamese barber laughed good-naturedly at my old iPhone 6 and showed off his new top of the line model.
Dude, no disrespect but the road to my financial independence is paved by endless completely painless (non) sacrifices like using my phone, laptop and other gadgets for as long as possible.
If you spend everything you make, you will never be financially free.
Going to this local barber shop (instead of a posh place for foreigners) is another example of the endless easy-peasy, completely pain free frugal choices I make. As is eating mostly local street food, which here in Bangkok means absolutely fabulous Thai food for $1-2 a meal (though cooking instead of eating out is the classic example that applies to most people).
3) Higher than average income
4) Fewer children
I’m at the extreme of early retirement not because of extraordinarily high income or a financial windfall but because all of the above are “very true” in my case. Of course, no one makes choices about marriage and having children based on when it will allow them to retire and I’m not advocating that (though I do think that marriage and family planning have financial dimensions that we would be wise to consider). I’ve put the circumstances that can be controlled first – 1), 2) and to some extent 3). I think that people for whom at least 2 or 3 of the above are true could retire early with a bit of financial knowledge and a clear plan (and I’ll share a selection of the best readings on this topic and easy tools to develop such a plan in a future post in this series).
A year or so ago I was startled to read in a front page article in the New York Times that two thirds of Americans can’t cover a $1,000 emergency expense (say, a medical bill or car repair). I found this so astounding I reread it several times to make sure I understood. This state of affairs would be completely understandable in places like Somalia or South Sudan where the majority of people are desperately poor, but American salaries are among the highest in the world. And, with incomes at those levels I think it’s ludicrous that most people can’t cover an expense that amounts to less than 2% of the median annual income in that country. Equally appalling is the level of consumer debt in that country (about $75,000 per capita, not including mortgage debt, from another recent front page article in the New York Times).
Aside from the truly poor, for whom living on the edge of a financial cliff is tragically unavoidable, what these statistics tells me is this – a lot of people spend too much money and buy too much shit. While I do think the United States is a place where the hedonic treadmill spins particularly fast, this isn’t of course an exclusively American problem. Except for the poor, I think the inability to live below one’s means is a uniquely modern and globally pervasive behavioral disorder and I see evidence of this affliction everywhere I live and travel.
Step 1 in the best personal finance books and blogs is to avoid consumer debt like an infectious disease and pay down what you already have as quickly as you can. (I’m with Rich Dad, Poor Dad author Robert Kiyosaki here – nothing smaller than a house should be bought on credit.)
Step 2 is to have an emergency fund equal to 6-12 months of your income in cash equivalent accounts. Beyond money for basic living expenses and an emergency fund, keeping money in bank accounts, stashed in shoe boxes or anywhere else that it doesn’t grow is a bad idea.
With apologies to and respect for Martin Luther King, the arc of the financial universe is long, but it bends toward wealth. Your money should be making more money!
And it will, as long as smart financial practices are followed. When I look at my accounts summary in Mint (the great personal finance web site and app) it pisses me off when I see too much money in cash accounts (and more than 6-12 months of living expenses is too much). Most people are happy to see lots of money in their bank account so why am I peeved? Because it means that commercial bankers are making money with my money and not me, and those people are not smarter than I am! When I see that I add an entry to the top of my to do list (in a great app and web site called Trello) to move funds into sound investments (mostly Vanguard stock, bond and REIT based index funds or ETFs).
As I mentioned in the first post in this series, I think there’s a big misconception about early retirement that it’s only something that people with fabulously high incomes, trust fund babies and tech moguls who sold their companies for a fortune can do. In fact, after taking the two steps above, the only thing that determines how many years you need to retire is the proportion of your income that you save and invest. I’ll get into the easy-peasy math of early retirement (or retirement at any age) in the next post. And some great news for math haters out there – you don’t need to do any of it! There are fabulous, simple and free financial calculators on the internet to do it for you, and I’ll share the best of those in that post.
The third post in this series has been published here.