Posted by Dave on March 7, 2011
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
In the past few weeks, two people have been fired from my workplace. Both departures were announced via very vaguely worded e-mails, which has lead to all sorts of speculation around the cause of the dismissals. Personally, I feel a little uncomfortable right now. I like my job, and at this point I have no reason to believe I will be at the end of a vaguely worded e-mail, but I recently lost my unemployment money buffer when my wife and I used all of our savings to purchase a car.
From a personal finance standpoint, it seemed like a toss-up whether to take on the debt of car payments or maintain a healthy savings account. My wife and I chose to keep our debt at zero and spend the next few months building our savings account back up, rather than add a burden to our current cash flow. The only problem with this method is that for the next few months, we are somewhat vulnerable to cash fluctuations (such as a random firing) that would cause some financial difficulty if a new job couldn’t be found quickly.
So, why did we make this decision? Last fall my wife got her driver’s license with the intention of using it to drive to a new job in the coming months. In getting her license, we knew we would need to get an automatic transmission car, as she was not comfortable driving my manual-transmission (which is over 10 years old now and would need to be replaced soon). Rather than waiting, we utilized all of our available savings to buy this car, with the intention over the next few months of building them back up to our normal 3-5 months of living expenses. I am very anti-debt and felt that keeping our consumer debt at zero would be better than having money sitting there “just-in-case”.
The good thing about our personal finance plan is that our fixed spending is based on being able to support our household on the lowest earner’s wage. These fixed expenses include our mortgage payment, insurance, utilities, and food. Because the only debt we carry is a mortgage, which was structured 2 years ago with a 35-year amortization (which we hope to pay off in under 6 years) our fixed monthly expenses are fairly low. Outside of these fixed expenses, we could essentially eliminate all other monthly costs (if need be).
So, right now I’m just hoping to keep my job over the next few months. I dislike debt enough that I am still satisfied with my car-purchasing decision, but I’m wondering what you would do in a similar circumstance? Would you have financed the car on a short-term basis, paying interest rather than being “cash poor” for a few months?
Posted by Robert on
This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
Something that’s very important to me is the idea of finding meaning in my life. My wife recommended a book that I really enjoyed, called What Should I Do With My Life, by Po Bronson. It is a collection of stories about people who are trying to answer that question. Some do and some don’t find an answer, but it was interesting for me to see the role that money plays. My assumption was that trying to find something meaningful in life was a luxury for the relatively rich. I also assumed that when people cash out, it becomes easy to do what they want with their lives. It turns out that neither assumption is very accurate.
The story that struck me with respect to financial resources was of bond traders (where the author worked). They earned $300,000 a year commission, and many of them were going to do it “just a few more years, then follow their dreams.” Seriously, after just three years of that kind of income, most people could afford to follow their dreams for quite a while without worrying about earning a paycheck. The author turned down that job, choosing to do what he loved: write. But where are the bond traders? 12 years later, most of them are still earning fat commissions.
My suspicion is that they became addicted to the income. I’ve seen it before, and I sometimes call it “lifestyle inflation.” The more a person earns, the more they spend. For one thing, they feel entitled to their quality of life. And then they buy a bigger house and a faster car, and the monthly payments chain them to their source of income. But people also seem to measure their self worth by the size of their paycheck. They may tell themselves something like, “I’m a worthwhile person because I have a house on the lake and two imported cars in the garage. Look how successful I am!” I’m not saying they’re not a success, simply that when you define yourself by your job or your income, how do you ever leave it?
I understand that not everyone wants to leave their job. My father is a prime example. He loves what he does. He’s been saying for the last five years that he’ll retire “in the next five years.” This year, he plans to retire about five years from now. But why would he retire? He’s doing what he loves, and was never a candidate for early retirement. The reason I want to leave my job is that I feel my calling in life is in education and that where I’d prefer to spend my time.
Lifestyle inflation is something I haven’t really struggled with. Part of the reason is that I’ve always been careful with money. In university, my wife and I lived on very little. As we could afford more, we ate better and we committed more to savings. When we took on commitments, we made sure we could handle them, buying a moderate (1550 sq ft 2-storey) home and just one small car (Toyota Echo). I guess I’ve always had a bit of a minimalist streak. As we earned more income, we used some of it to buy investments. Where my wife’s friends would buy shoes and matching handbags, we’d get excited about publicly-traded companies and stretch a little to buy their stock.
But it helped that I defined what I wanted from life before the income became abundant. We had set our plan to follow our hearts to teach in an international school in Asia. That helped us focus on paying off our house and building our investment portfolio. Now that our house is paid off, we have more disposable income than in the past. Sure, we spend more of it, but we are already focused on our version of early retirement.
I wonder if people who spend all of each increasingly larger paycheck will ever be able to make a break. The job may not be meaningful, but the income sure is nice and they couldn’t make this much money anywhere else. That’s probably true, but what makes it all worthwhile? Are they just addicted to income? Have you experienced this? Do you know anyone who has ditched a big paycheck to do what they love?
Posted by Tim Stobbs on March 4, 2011
Got a book order the other day so I am now re-reading Early Retirement Extreme by Jacob Fisker and The Moneyless Man by Mark Boyle. Despite completely different books the similarities are striking. Don’t worry I’ll have a review on Mark’s book when I’m done.
Now onto the links:
I’ve always recall how much money I sunk into video games while I was a teenager so I’ve been worried about picking up a gaming system as an adult. Then I came across this story called “Gaming Without Breaking the Bank“ from Get Rich Slowly and I feel better about the idea.
I rather liked this post from Zen Habits about creating your dream job.
I already tweeting this link but I had to include it, Reining in the purveyors of debt. Perhaps the issue so much the use of credit but just how much we have out there? I wonder what the banks would do if they had to have $0.50 in deposits for every $1 the borrowed to someone?
There is a good discussion about should we hike the minimum wage over at Walletpop.ca.
Oh, this was fun from the Globe and Mail “Home prices nearing bubble territory, but cool-off expected“ Why doesn’t that make me feel better?
A review of mobile banking from Boomer & Echo.
Wow, people are a touch sensitive on a 6.8% investment return at Moneyville. A good commentary on this over a Moneysense.
