Posted by Tim Stobbs on June 7, 2013
As a mental exercise I will occasionally ask myself a question: could I retire today? The point isn’t to actually plan that option, but rather look at my current situation in a new light to see if it would be possible and what would have to change to get there.
So currently I have about $218,000 in investments, which, if you use the 4% rule, I could potential yield $8720 annually. Not even close to my target spending of $26,000/year or even my bare bones spending of $18,000/year. So this would be utterly impossible right. Nope, we crack open a backup plan and I use some home equity, after all I do own my house debt free. How could that work?
Well in my case I could sell off the current house and purchase a 2.5 story across town which has been converted into three rental units. By renting out a unit at $1000/month and living in the rest of the house we could boost our income to $20,720, which would be just above my bare bones spending amount. Hardly ideal, but never the less an option if for some reason I just had to get out today.
Or if I’m really desperate I could cram the my entire family into a one unit and rent the other two stories. At that point let’s assume the rent at $1800/month in total for two units and that would boost the income to $30,320 annually, which gives the plan a much needed margin of safety. Yet to do so would significantly reduce our living space, which while I’m ok with downsizing I’m not really prepared to move my family into less than 750 square feet space and become a landlord.
So what was the point of this? To remind myself it is all about choice. I’m choosing to work where I do, and I’m choosing my current lifestyle. Yet if I’m willing to consider other significantly different options, different results can occur. People can often feel trapped in their jobs, but reality is the trap largely exists in your own mind. The real question is: how desperate are you to get out? Depending on your creativity and what you can accept for a lifestyle either in the long or short term, entirely new options can be opened up in most cases. So don’t let today be a prison, find your own way out…it might not be perfect, but it is comfortable to know the option exists.
Could you escape today? If so, how? If not, what is holding you back?
Posted by Tim Stobbs on May 3, 2013
So did you ever wonder if we could give a simple test to a young child to determine if they would be successful in life? Well there is a test that will strongly predict it…really?!? Yes it is the classic marshmallow test. The test is simple: put a young kid in a room with a marshmallow and tell them if you don’t eat it while the researcher is gone for twenty minutes they will receive a second one when they get back. If they can wait, which about 1/3 will be able, they will on average have better health, earn more and save more in life. Heck the test is such a strong correlation it even trumps what social economic status you were born into. See here to understand how it works.
This simple test is all about self control, which isn’t always about willpower, but rather also about how well can you distract yourself from temptation. Today and right now is always way more important than next week and obviously WAY, WAY more important than the next 10 years. So if you find saving for your retirement hard, it could be an issue with your self control.
So if you failed the marshmallow test as a kid are you doomed to not retire early? No, not exactly. While I would wager the vast majority of early retirees have excellent self control, the good news is if you practice it and plan around your temptations it is possible to still be a good saver. How? Well in no particular order:
- Pay in Cash for High Temptation Items – Everyone has their weaknesses in spending. For some it is food, others movies, books , shoes…take your pick. Now if you put yourself on a cash spending for your problem area you trigger an interesting psychological affect called the pain of paying. We work hard for a money so giving it up can hurt just a little bit. Cash is the hardest form of payment, unlike credit cards which often can be a little bit more surreal. Also it provides a handy way to check how much money you have left in a given month for your vice.
- Plan for a Lack of Control – So rather than wait to save with what is left over at the end of the month, make an automatic transfer to your savings on payday. Why? Because we tend to just deal with what we have in our main bank account, the less there is, the more likely you won’t over spend.
- Play Mind Games – When saving for something long term it is hard to keep focused, so plan for the lack of focus and plot out rewards along the way. They don’t have to be huge, just something to keep you head in the game. For example, if I save $12,000 in my retirement accounts in the next three months I will buy myself a new DVD that I really want. This is called reward substitution using something right now to keep you on the path for the long haul.
- Plan a Guilt Trip - There is nothing like guilt some days to keep you on the path. If your kids, your wife, your friends and half you work place know about a short or medium term goal, there is a lot of social pressure to keep to that goal. So tell the world your plan (or part of it) and keep yourself accountable.
- Never Shop When Your Exhausted – Your self control is like a muscle the more you use it during the day the more likely you will have it fail towards the end of a long work out (or day). So plan your high temptation situations early in the day if possible. For example, you could do you grocery shopping after breakfast when you are full and in a good mood.
So you might ask, well great, but how do these really work? Well guess what, I’ve used or am using everyone of those ideas in my own life. I’m not sure if I would have passed the marshmallow test as a kid, but regardless I’m still on track to do well in life because I learned some self control. You are not doomed in life due to your birth self control, it can be improved with practice and a few tricks.
How is your self control? Would you have passed the marshmallow test? For fun here are some adults doing the test.
Posted by Tim Stobbs on April 10, 2013
You know that nervous feeling you get before you do something new, I get most of the time when I’m making my investment decisions. Despite reading a fair bit on the subject and having done fairly damn amazing on some investing decisions (doubling my TFSA value for example). I still have no confidence on the subject. I feel like a talented amateur at best.
Why? I think perhaps I read some other blogs with more of an investing focus and my mind is like…I can’t do that. I’m not that interested in investing as a topic, I like the results of investing, but reading theory and practice doesn’t do that much for me (other than make me want a nap). So in the end I don’t write on it….heck the astute reader would notice I don’t even comment much on it. Given I write a blog about money I think people assume I know lots on investing when in fact I think I have a lot to learn yet myself.
Yet I’m hitting an important brick wall in my plan to achieve financial independence. I’ve got massive stream of money going into my investment accounts that if I don’t start making some decisions I’ll screw up the plan. So after internal debate on the topic I’ve made some basic decisions on where I want to go.
First off, a little background theory. In most cases people tend to have two different sets of portfolios: 1) the accumulation phase – where they are saving up for retirement and 2) the income phase – where they draw down their investments to live on. The object in #1 is all about growth, while in number #2 the end focus is more about sustainable yield. I’ve been struggling with the fact of my compressed accumulations phase how much risk should I take. In the end I played around with some online calculators and came to an important conclusion: my rate of return means jack to my plan (for the most part).
Pardon!?! It’s true, my saving rate is so high that even a really low rate of return doesn’t mean much to the plan. Perhaps $50,000 difference at the tail end of seven years, which is fairly minor in the grade scheme of things. So with that fully in mind I’m skipping the accumulation portfolio and jumping directly income portfolio. Yes it may delay the plan if I screw up, but I have to get moving on my investing. Not making a decision is worse than a wrong decision after all.
As I crawl up on my investing diving board, please try not to laugh too hard if I belly flop (a giggle is fine, but try to repress the laughing at my face).
So how about you? Do you fear investing decisions? Why or why not?