A quote that is entirely relevant to financial independence:

“His goal attracts him, because he doesn’t let anything enter his soul which might oppose the goal. This is what Siddhartha has learned among the Samanas. This is what fools call magic and of which they think it would be effected by means of the daemons. Nothing is effected by daemons, there are no daemons. Everyone can perform magic, everyone can reach his goals, if he is able to think, if he is able to wait, if he is able to fast.” — Siddhartha, Hermann Hesse

You can read the entire thing here.

The short list of required ingredients for reaching your financial goals:

• Being able to think.
• Being able to wait.
• Being able to fast.
• Not doing anything that opposes the goal.

Let’s deal with them in turn.

Being able to think means knowing and understanding personal finances. Reading the small print. If those people who got the biggest possible adjustable rate mortgages had stopped to think, they would have realized that adjustable rate means that the rate adjusts(!) If those who live paycheck to paycheck and spend everything they earn would stop to think, they would realize that an unforeseen expense or accident could send the whole house of cards tumbling down. If those who do trend following daytrading on options would stop to think they would realize that it is a zero (actually negative) sum game with many losers for each winner.

Being able to wait means having the patience to stick with the plan. People don’t get wealthy over night. It takes years of sustained effort. Even as little as $100 saved every month adds up even though initially it seems like trickles. Those who can’t wait and raid their savings from time to time will fail. It also means sticking with the chosen investments rather than switching them around every time the market turns negative.

Being able to fast does not mean starving. It means saying no to instant gratification. It means saying no to easy credit that has to be paid back some day with high interest. It means separating present wants from future needs. It also means controlling desires and being more immune to advertising. It means waiting an hour to get tap water for free rather than buying a $2 water bottle.

Not opposing the goal means that counterproductive actions should be curbed. It makes little sense to save on pennies if dollars are used on splurges. It means having a spouse with the same values. Frugal efforts are quickly ruined by a spendthrift spouse. Not opposing the goal is making every effort count towards saving more money rather than spending more money.

Originally posted 2007-12-22 15:53:00.

Financial independence comes from the combination of having enough money and spending sufficiently little so that interest from the former covers the expenses of the later. The biggest sources of personal expenses are generally

1. Children
2. Housing
3. Transport
4. Food
5. Taxes

Reducing expenses in these areas will make a much larger impact that token efforts such as using CFLs, turning the thermostat down, line drying, getting books from the library or buying less.

As far as children go, the choice comes down to having them or not having them. In our economic system those who don’t have children are economically better off than those who do. As such children can be considered a luxury. In other places, for instance, when children are seen as a retirement insurance or cheap labor, the opposite may hold.

Sometimes I also talk about ways to reduce housing costs. Since people rarely move, this is not a big source of continuous commentary. Suffice to say, there are some big savings to be had by living in a room and sharing kitchen, bathroom, etc. with a lot of other people or living in a very small home such as a cottage, a boat, an RV or a van. Since such savings are stupendous compared to the cost of living in a larger place, these should not be ignored. They could mean the difference between retiring in 5 years or 10 years.

Transport is next. Transport typically means paying for one or more cars instead of saving for financial independence. However, not only does one have to consider the cost of the car and its eventual replacement. There is also insurance, gas, and general maintenance. Most people are culturally not ready to accept any alternative means of transportation. Cycling is one such mean. Cycling is competitive in time with any car commute that take 30 minutes. If they are shorter, the bicycle wins. For rides shorter than 5 minutes, walking may be faster. However, for many people riding 5 miles on a bicycle or walking a couple of miles is a big deal though. This is due to low expectations of what actually constitutes being in shape. This is not surprising when “overweight” is the new “average”. Hence, many rants are dedicated to resetting the image of what level of physical conditioning should be normal and expected.

Another big category is food. I’m told that some people spend $400/month/person for food. This is enough to feed a car and could easily be reduced down to $100/month/person or less with the rest going towards financial independence instead of the gut (rescale according to regional prices, I’m using California pricing). Therefore I also talk a lot about food. Besides, I somewhat enjoy cooking.

I do not talk a lot about taxes, because I’m still new to the US tax system. Expect more revelations (at least to me) to follow though.

The best thing you can do right now though is to start (re)considering how many additional children you want, where to live, how to get from point A to point B, and how to minimize taxes. Then you can worry about CFLs later.

Much thanks goes to ML for the donation.

Originally posted 2008-04-28 07:37:51.

In the past few weeks I have written a lot about about wealth and how I became financially independent (part I, part II, part III, part IV). One of my posts, Stranger in a Strange Land, elicited a response from Lily over at The Honest Dollar. Of course I had to write my own response in the comments (sometimes I just can’t help myself), but later I realized that the disagreement or apparent incompatibility was due to something else.

That something else is the difference between being wealthy and being rich. My position is one of wanting wealth. To me wealth is not about having money. Money is entirely secondary to my goal which is about the freedom from requiring an income. This freedom means that I can, within limits of course, choose to do with my time what I want. I can work a job because I like it, not because I need it. And I can stop working if I don’t like it. I can go back to school if I so chose. Or I could spend time volunteering if I so chose. In summary, my time is 100% mine. Normally I would still have to work, but I have saved and invested enough so that other people essentially pays my living expenses through interest and dividends.

The downside is that I am not rich. I am not free to buy whatever I want when I want without compromising my freedom. For instance, I have to be quite careful with how I spend my money to afford this freedom. However, if I had chosen a mortgage and other forms of debt my time would no longer be fully mine. If I paid 10% of my salary in interest on the debt, 10% of my time would not be mine but belong to someone else. I would be working for other people rather than myself. First I would have to work 100% for myself, but then 10% of that money would go to someone else. It is those 10% that would bind me to my job.

The world is set up so that people may be as rich as possible as soon as possible because that is what most people prefer. The contribution limit for 401k, IRAs, etc. are basically set so that people may become as rich as possible without becoming wealthy. Many people are not more than a few paychecks away from economic disaster. Some can’t even afford to miss one paycheck. A few are so compromised that they need their money before they get paid and thus they turn to payday loans. Taxes are predefined so that health insurance is cheaper when you are working to make someone else wealthy rather than yourself. There is a reason for that. Our entire consumer driven economy exists to make people rich rather than wealthy. The wealthy teach their kids to be wealthy, but everybody else is taught to strive to become rich. The key to getting rich is to get a college education and a mortgage resulting in six digit debts. At that point they have not choice except trying to become rich or at least break even. Wealth is no longer an option.

If you want to become wealthy and in particular if you want to become wealthy fast, you have to adopt an entirely different mindset than what the middle class is normally taught. You must work to acquire money and assets rather than things. I hate to invoke “classes” because classes are much more fluid today and speaks more of your mindset than anything else. I say normally, because the wealthy are taught something else. They are not expected to get an education to become effective cogs in other people’s machines in order to live a comfortable and predictable life. They are expected – taught by osmosis – to start companies, to take risks, and to work for themselves rather than someone else. I grew up in a nice middle class home, but I have had some friends who were “poor” e.g. they thought like poor people viz. that education or hard work was pointless and that buying lottery tickets, getting on TV, or being good at sports was their one shot of making it.

Being wealthy, rich, poor or broke is all in the mind. The mind creates thoughts and values which govern actions. Yet it is exactly when something is part of one’s mental box that it is hard to see how it shapes one’s thoughts and values. If your values are different from those of the land, you will indeed be a Stranger in a Strange Land.

• Clearly, you are an ass
  

Originally posted 2008-01-24 06:59:26.

Note: In this post I discussed some of the aspects about my former career while I was still working. One of my problems was “lack of adequate replacement”. Like some people have pointed out, most people need something to do. However, I would point out that this does not need to be a job. It could be taking care of a bonsai tree; or it could be working as a gardener. In terms of the suggestions below, they are remarkably constant. The only thing that’s changed in the two years that have passed is that I no longer foresee starting a bookstore.

What does early retirement mean for those who chose to save so intensely and early for retirement and essentially had enough money to stop working around age 30? This is a question I have been asking myself and for which there does not seem to be any conventional solutions.

In most cases, at least as far as I understand from reading Smartmoney magazine, early retirement means spending more time playing golf, being home with the kids, or seeing the world. None of this seems particularly appealing to me (I don’t have kids) right now. In 15 years, maybe, but not now.

Conventionally, I should be doing what most phds with a few years of experience do, that is, try to work myself to death in the desperate attempt to get tenure. Except for the death part, that is actually what I still do even though I in principle could quit. However, having seen first hand where this road can lead I must admit that I am no longer so sold on the idea as I was 5 years ago. Here’s my cost benefit analysis: costs: 95% of the students, grant writing, committees, relatively poor pay, forced mobility, department politics, and did I mention, 95% of the students – benefits: making my own schedule, 5% of the students, and doing research. I think having the freedom to take half the day off on Monday and work 16 hours on Tuesday is overrated given that it comes with a constant pressure to perform. It feels equally nice to work 9-5 and know that you are not supposed to work outside of those hours. Call me naive, but I have finally realized that 95% of the students at higher ed do not really seem to want to be there. Some professors live for the enthusiasm for the remaining 5%, but I don’t think the 1 in 20 ratio is high enough for me. Research is interesting and frustrating. Interesting because everything you do is a “first” e.g. you have discovered something that no humans have known before. Frustrating because there is a ton of dead ends that must be explored. It is really 99% perspiration and 1% inspiration. Just imagine trying to come up with something creative when you know that in all likelihood it will fail. Then repeat and do it again. In addition, most researchers, myself included, are working on things that are only interesting 5 other people in the world. There’s a slight shot at fame. For instance, I have published a good 20 papers. Forsooth, you can find them in university libraries around them world, even! However, 30 years from now, I will just be a set of initials in some dusty journal that will only be read by some poor suffering grad student. I am after all not working on curing cancer, so while somewhat meaningful, my work is perhaps not terribly important [except for those 5 persons in the world]. It’s not a terribly bad life though. One gets to influence events in the sense of deciding where thousands and even millions of tax payer/alumni money gets spent. There’s all the free traveling to conferences etc. I have been to 14 countries so far and never paid a dime. It’s not exactly a luxury vacation, but the similarities are probably larger than the differences. However, I wonder whether I am going to spend the rest of my life doing this. If I do, I’m projected to pass $1,000,000 when I’m 40, but what am I going to spend that money on anyway? The law of diminishing returns of extra dollars is knocking on my door already. There is also significant opportunity cost. Maybe I will be wondering what if I had done something differently. The question is, what is the alternative. I think it is exceedingly important to live a life of no regrets.
Okay, so I could in principle retire, but I haven’t. Why not? One problem is that I have not found anything sufficiently meaningful to replace a full fledged career with. In contrast to a job a career should be a means of self-actualization and I tell you if you actually have a career goal in mind, this works out quite well. If you don’t, then it turns into a job fairly quickly, whoops!

Financially independent is a better description of my situation. Maybe people aren’t meant to retire this early. It’s almost like breaking the law of the rat-race e.g. “you still have so many years left in you”.

Perhaps Beingfrugal.net‘s son’s mom said it best when it what described as re-tirement as in changing tires during a pit stop. Yeah, I might want to change my tires.

Here’s my list of possible re-tirings.

1. Start a PF blog (I have previously thought of becoming a tech writer and this seems to fit the bill).
2. Start a bookstore.
3. Buy a small farm, breed an army of sheep and take over the world.
4. Sell my soul to Wall Street.
5. Become a watch maker.

I have started on 1. The question is whether I can make a career out of it in the traditional sense of a career e.g. something that takes up much of the day and keeps me active while being somewhat meaningful and self-actualizing.

As you might have surmised I am not really sure about this. It turns out that it is a lot harder to figure out what to do with financial independence than to achieve it in the first place. It is definitely something I should have thought of earlier in the process.

What would you do if you did not have to work again?

Originally posted 2008-01-06 08:45:24.