Wishing you a safe and joyous holiday season. I hope that your resilience, hard work, and optimism pays off even more in the new year. We made some ornaments and characters out of salt dough today… I call this piece “Tired Snowdaddy and his three little snowgies”. (Posting will be light for while.)
Imagine an aeroplane makes an emergency landing and breaks into three parts. As the cabin fills with smoke, everybody inside realises: we’ve got to get out of here.
What happens?
On Planet A, the passengers turn to their neighbours to ask if they’re okay. Those needing assistance are helped out of the plane first. People are willing to give their lives, even for perfect strangers.
On Planet B, everyone’s left to fend for themselves. Panic breaks out. There’s lots of pushing and shoving. Children, the elderly and people with disabilities get trampled underfoot.
Now the question: which planet are we living on?
According to the book Humankind: A Hopeful History by Rutger Bregman, about 97% of people believe that we live on Planet B. This book systemically breaks down all of the various “evidence” supporting that assumption, and shows us that the historical evidence actually shows that we live on Planet A. The daily news machine loves to focus on the negative and outrageous. (I switched the letters initially, too sleepy from late-night Thanksgiving food prep!)
Let’s take Lord of the Flies. Most of us think we understand the story of those feral kids, but that’s a fictional book! Meanwhile, we have a real-world example of what happens when a group of young boys get marooned on a remote and uninhabited island. This excerpt from Humankind was republished in The Guardian: The real Lord of the Flies: what happened when six boys were shipwrecked for 15 months.
I haven’t finished the book, but the basic idea is that the world could look very different if we assume that people are basically decent and naturally look to help others. Many things in life are self-fulfilling. Prisons are presented as an opportunity to implement. In the same way, perhaps we can change our own lives by assuming that others are basically decent. If someone cuts us off in traffic, perhaps they aren’t just a jerk but distracted and/or late for a job interview because their child is sick. (Besides, getting angry only hurts us and not them.) Assuming the good in people allows you to ask others for help, and makes you more likely to help others. This can lead to better job opportunities, better friends, who knows? A better life? You may get burned once in a while, but on the whole it is better to lean toward the positive, virtuous cycle. (Don’t be reckless, of course.)
I’m sure that many of you have had an extraordinarily difficult year, in ways that I can’t even imagine. Still, there are many reasons to be hopeful. Thank you for reading. Happy Thanksgiving!
After reading the book Sapiens about how the history of our species affects our everyday experience, I found the related book Tribe: On Homecoming and Belonging by Sebastian Junger. Again, our genetic material hasn’t had enough time to change much from a human living 10,000 years ago, when all humans roamed together in nomadic bands of around 30-50 people. Humans today still retain a strong instinct to belong to such small, social groups that work together toward a common purpose – “tribes.”
What happens we can’t live in tribes anymore? Why does living in our modern, affluent society actually lead to higher rates of depression and suicide?
First agriculture, and then industry, changed two fundamental things about the human experience. The accumulation of personal property allowed people to make more and more individualistic choices about their lives, and those choices unavoidably diminished group efforts toward a common good. And as society modernized, people found themselves able to live independently from any communal group. A person living in a modern city or a suburb can, for the first time in history, go through an entire day—or an entire life—mostly encountering complete strangers. They can be surrounded by others and yet feel deeply, dangerously alone.
In contrast, when a large-scale catastrophe occurs, rates of depression and suicide actually drop for a while, perhaps because we again feel united and connected with others.
[Researcher Fritz] was unable to find a single instance where communities that had been hit by catastrophic events lapsed into sustained panic, much less anything approaching anarchy. If anything, he found that social bonds were reinforced during disasters, and that people overwhelmingly devoted their energies toward the good of the community rather than just themselves.
The book includes many examples of how this need for true community is behind many societal problems. This also fits in with self-determination theory:
The findings are in keeping with something called self-determination theory, which holds that human beings need three basic things in order to be content: they need to feel competent at what they do; they need to feel authentic in their lives; and they need to feel connected to others. These values are considered “intrinsic” to human happiness and far outweigh “extrinsic” values such as beauty, money, and status.
Here how Wikipedia describes these three pillars:
We want to help others. We are perfectly willing to sacrifice to do so. But we also want to be in a trusted group that would also risk themselves to help us. These smaller groups that extend past your nuclear family are a common element of Blue Zones.
What would you risk dying for—and for whom—is perhaps the most profound question a person can ask themselves.
A lighter version might be, how many people do you know that would be willing to commit real, significant sacrifice to help each other?
In the big picture, our country is struggling because we don’t feel united as one team. In the small picture, this is a critical part of “retirement planning”. Many people derive both competence and community from their work, and you will have to replace that to create a happy post-work life. (Similarly, if you hate your work, you probably don’t find community and competence there.)
If you’re reading this, then financial independence is probably a goal of yours. Yet, most people who accumulate a pile of money big enough to retire upon keep on working if they are able. Why? They may truly love their job and be willing to work for free, they may worry that they won’t have enough, they might decide they’d rather have nicer things, or they may simply not have fully considered a life after paid work.
The problem is that reaching your “Number” is like finally buying that big house or fancy car or 100,000th social media follower. There is never a point at which you can say “I’m here! I’ll be forever happy and satisfied from now on.” It is always tempting to keep reaching for more. As the saying goes: If all you care about is money, you’ll never have enough money. If all you care about is social prestige, you’ll never have enough social prestige. You are forever stuck on the hamster wheel.
The article Redefining Success So It Doesn’t Crush Your Soul touches on many concepts related to this puzzle.
It’s high time to redefine success. Success is not something that you reach—not something that is outside of yourself, just down the field. Success is creating a life you want to live in right now. The great tragedy, Fromm writes, is that “man misses the only satisfaction that can give him really happiness—the experience of the activity in the present moment—and chases after a phantom that leaves him disappointed as soon as he believes he has caught it—the illusory happiness called success.”
According to decades of psychological research, a successful life is one in which your basic needs for food, shelter, health care, and income are met and in which you have a sense of autonomy, mastery, and belonging. A life that is not about enduring means you can’t stand in order to reach ends you are supposed to want; but rather, about selecting pursuits based on how much you’ll enjoy the process of doing them.
Happiness is not a goal. It is a side effect of how you spend each day. Imagine a day where money is not limitless, but it also doesn’t matter to your wellbeing. You can pick to “work” on something you both enjoy and find meaningful, while also spending time with people you love. What would that look like? I completed a similar Dream Day activity in 2005, and the improved clarity definitely helped.
Starting out, I thought of financial independence as a race to a fixed goal. Track numbers, plot them on a chart. I’d work hard, save hard, reach my net worth target, and finally turn in my resignation letter and disappear.
Looking back, what worked better was a gradual transition between two versions of the same sustainable lifestyle. To build up your assets, you have to enjoy your daily process so you don’t burn out, while also maintaining a gap between your income and expenses. Invest that excess money into productive assets (building a private business, buying stock shares of public businesses, rental real estate, etc), and over time your choices expand. You can work the same job but less hours, work a different job with lower pay/lower stress, decline promotions, or simply do nothing (much rarer than you think). Part of this is the ability to be content with your non-work lifestyle and expenses. Life should just keep getting better and better, instead of you simply wanting more and more.
But it all starts with that work lifestyle, which requires something meaningful, moderately enjoyable, and pays well. Even with an aggressive savings rate, you’ll need to work for more than a decade, so invest money into yourself first! Get a job that is more interesting, more enjoyable, or just pays better. Use your money to take time off, switch to a entry-level job in a different industry, go back to school full-time, or spend nights and weekends working on new skills. Perhaps find a government-based job with a secure pension agreement if that fits you.
I plan to advise my own kids to spend their 20s in this manner. Live cheaply and invest in yourself. An emergency fund is important, but after that – What are you willing to spend 80 hours a week doing? Take the job that opens up future opportunities. Work with a great mentor. Study hard and don’t settle until you finally get into your target professional school. Work 80 hours a week because you (and maybe your friends) are building a business from scratch. Take asymmetric risks with big upsides and minimal downsides. Find your joys, and don’t waste money on the rest.
I’m still working on improving my own daily routine. I look back onto my 20s as a special period because time felt so abundant before you have others to support (partners, kids, parents). Having dependents also makes it harder to take risks and change your life. These two factors help explain why life satisfaction is lowest in your 40s. Yet harder doesn’t mean impossible. My father went back to school in his 30s and didn’t finish his schooling until I was already 10 years old. I constantly remind myself that I will eventually think of today as “back when I was young”:
Bottom line. Financial independence is not simply a faraway number like accumulating $1,000,000 in 30 years. Most important is figuring out how to enjoy the process by creating a content lifestyle that is meaningful and aligned with your values so that saving regularly doesn’t feel like a constant struggle. You want life to keep getting even better as you go vs. simply wanting ever more.
For most households, the biggest expense is housing. A time-tested way to reduce your housing costs is to share a place with others, but usually we think of a bigger house as the result of a bigger nuclear family. However, even young professional adults can choose to boost their savings rate by embracing shared living past the college days, and families can save big money by embracing the multigenerational households that are popular in other cultures.
In the article The “N” Factor and Retirement Planning, Scott Burns focuses on the financial impact of having kids but also shares a interesting way to estimate how the size of a household affects how much it spends overall:
Here’s the algorithm: The cost of living for a household is the square root of the number of people in the household. So if you are single, your cost of living is the square root of 1 or… 1.
But if you are recently married, your cost of living is the square root of 2, or 1.414. Yes, two can’t live for the price of one. But they can live for only 42 percent more than the price of one. Economists call this “economies of shared living.”
The article is focused on families with children, but here I am shifting it to talking about individual adults. Therefore, I’d rather talk about it in terms of the amount you are saving through shared living as a percentage of your previous level
Theoretical savings from shared living. If you’re single and live by yourself, your total cost of housing may be $2,000 per month.
Does this match up with actual rental prices? Using rental data from Abodo.com, I found the average rents for a one, two, and three bedroom rental in four major metro areas from around the US: Austin, San Francisco, Atlanta, and New York City. For example, if a 1-bedroom costs $1,366 in Austin and a 2-bedroom costs $1,725, that means your per-person share is $862.50, which is 63% of the cost of a 1-bedroom. This should provide a quick check for this rule, even though we are just looking at housing. It turns out to be pretty close:
According to the √N Rule, the biggest relative benefit comes when you stop living alone, at a savings of nearly 30%. This magnifies the savings ability of a dual-income couple, with possible double the income and 30% less in housing expenses.
Burns applies this to the savings that parents can feel after their kids move out of their house. As a result, retirees may be able to survive on much less than might be expected based on other rough rules of thumb.
Bottom line. Shared living is a powerful way to reduce your housing costs. As rents rise, this may result in more single adults sharing a house, or increased rates of multigenerational family living. Consider shared living as an available option to save more money and increase your financial stability, as opposed to only a last resort. Put another way, “Cooperation is a wonderful but generally overlooked substitute for money.”
[Revised and updated from original post from many years ago. I’m cleaning up my archives and updating selected articles.]
One trick that I picked up these year was to replace “I have to” with “I get to” when I start feeling tired, stressed, and grouchy. It’s a simple way to remind myself to be thankful for many of the everyday things we “have” to do. Here are some recent examples:
There are so many things that I “get” to do because I am healthy and able-bodied, live in a safe area, have a reliable source of income, and have a loving family. I’m always surprised at how easy it is to take such things for granted when you get engrossed in your own situation.
Happy Thanksgiving and I remain thankful for you as a reader! I hope that you find yourself surrounded by some of your own blessings this weekend.
Parents want their children to have a better life than their own. We want our kids to eat more healthily, accumulate more knowledge, enjoy closer relationships, live longer, and – if we’re honest – make more money. However, the academic paper The Fading American Dream: Trends in Absolute Income Mobility Since 1940 by Chetty et al. shows us that earning more money than your parents has gone from nearly a sure thing to no better than a 50/50 coin flip. Via WSJ Daily Shot.
Here is a chart where each line shows the percentage of children born in the indicated year that earned more than their parents, as a function of their parent’s income percentile.
Every decade, the numbers get consistently worse. In terms of overall percentages:
What does that mean? Even if you as parents today earn an above-average income, there is no guarantee that your kids will grow up to earn more than you on an inflation-adjusted basis. In fact, if the trend holds, the odds are that they will end up earning less.
Very few parents have the kind of wealth that guarantees financial security for their offspring. This creates increasing stress about gifted programs, private schools, magnet schools, sports teams, test prep, and any other opportunities that can give them an edge.
We took our kids to a local pumpkin patch this weekend, and in between choosing your own pumpkin and feeding farm animals, our oldest started complaining about not having $5 lemonade. This reminded me of a simple rule:
Happiness equals reality minus expectations.
My kids should not expect to have a certain lifestyle. I hope (!) to teach them gratitude for the many advantages that they have been given, a strong work ethic for obtaining what they want to achieve, and tempered expectations of what makes a good life (not just money). Now, how do I pull that off?
Previously, I wrote about how you might consider retiring earlier if you have adequate flexibility to decrease your spending temporarily and/or earning additional money. If you have early good luck with market returns, you will gain many more years of freedom.
Now I’d like to present the other side of that argument. If you retire in your 40s or 50s, there are hopefully many years of fun times ahead of you. However, there is also a higher chance for events that significantly increase your expenses and decrease your ability to earn more money.
Let’s say you and your spouse/life partner are both 40 years old and have saved up $2 million and are pretty confident that you can live off of $60,000 to $80,000 per year. That’s may seem like a lot of money. However, here are some things that can throw a wrench into your plans.
Yourself
Many of these situations can be offset by proper insurance. Disability, life, homeowners, long-term car, and/or umbrella liability insurance.
Your spouse (Divorce)
A divorce can be devastating, both emotionally and financially. There are many articles about increasing divorce rates amongst those aged 40+ and 50+. Even if you split your assets equally into two parts, a couple can usually live more efficiently than two individual households. In addition, you may no longer be eligible for the full spousal portion of a pension, healthcare package, and/or Social Security.
Parents, Elderly Relatives and/or Siblings
Children
I may be wrong, but my impression is that early retirees are more likely to be childless than the general population. Perhaps knowing that you have less people to be responsible for makes it easier to take the retirement leap. I strongly believe that you should only have kids if you want to have kids, not because your parents or society wants you to have them. I can’t imagine how I would get through a single day with my kids if I didn’t want to be a parent.
It may be my own personal situation coloring my view, but the 30s, 40s, and 50s feels like the “sandwich decades” where you are most likely to be responsible for both parents and children. Retiring very early may permanently impair your ability to earn any more money, which in turn may be a source of future regret. You can (and should) insure against certain things, but not everything.
My take. Retirement timing is a form of regret minimization. You want to minimize the regret of “I should have retired earlier and had more freedom time”, but also minimize the regret of “I wish I made more money so my limited freedom time is more enjoyable”. It’s hard to find that happy medium where you give yourself enough financial wiggle room while keeping an eye on your mortality.
I started down the path of “semi-retirement” in 2012 with the birth of our first child. “Semi-retirement” is a rather generous take on our reworking of the traditional one full-time working spouse and one full-time parent arrangement so that we were both 50/50. Since then, we have both had the urge to try to live solely off our investments, but we are also keenly aware of the large number of people that we are responsible for caring for. In the end, we’re still both working part-time as that seems to be the solution with most optionality for now.
I love my Roth IRAs. They just keep on growing tax-free and never send me any annoying tax documents. Vanguard has a post about Working teens and Roth IRAs. I like the idea of a teenager putting some hours in at Jamba Juice and having the discipline to tuck some away for the future. However, the article suggests that you gift your teenager money in order to fund the Roth IRA (with the teen keeping their earnings).
Why wait until they are teenagers? You could take this further into what I call the Toddler IRA. Basically, you find a way to have your 3-year-old (or 6-year-old, etc.) have some earned income, usually via your small business. Maybe they “model” in an advertising spot. Maybe they did “administrative work” and helped organize some business papers for you. Can they weed or dig? Time to pay them for their lawn maintenance skills. Now that your kid has earned income, they (you) can contribute the same amount into a Roth IRA.
At first glance, it’s a little weird. Can I really justify these payments? I’m inclined to pay them more (so I can stuff more contributions into the Roth IRA), but would I really pay that much money if they weren’t my kid? Some parents go as far as making arrangements with other parents where they pay each other’s kids. In fact, there used to be a website (I forget the name) where your kid did some sort of simple online “work” and they would send your kid a check. (The parents would pay for this passthrough employment service.) Yet another example of government incentives working in unexpected ways.
The math sounds pretty impressive when you compound returns tax-free for 60+ years. $1,000 at 6% annual return times 60 years = $33,000. $1,000 at 8% annual return times 60 years = $100,000! Here’s a simple chart from Vanguard that shows the possibility of your kid getting a $100,000 head start on retirement:
I would add that the effect is exaggerated because doesn’t take inflation into account, but even a 4% real return will make $1,000 into $10,000 after 60 years. You put in $1,000 times 12 years, they end up with close to $100,000 inflation-adjusted after 60 years.
Why my kids don’t have a Toddler IRA. I have a small business. See that cute picture on the top right? I could easily pay them to model for a new photo shoot every month. (Trust me, it’s hard work to get them to all smile at the same time… for me.) I’ve thought about it. In the end, it doesn’t fit in with my personal philosophy about teaching them to fish:
Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.
This act is giving them a big pile of fish. It’s a tax-advantaged gift, but still a gift that they’ll know about at a young age. I don’t like the idea of them turning 18 and finding out they have $XX,000 waiting for them without doing any work.
What about “teaching” them to save? If they don’t feel the pain of earning the money and the separate pain of not spending it either, then I don’t really see the educational benefit. When they start to really earn money as teenagers by waiting tables or bagging groceries, then I will consider doing some sort of 401k-like matching program as a “carrot” to letting me teach them about investing and IRAs.
When they are kids, I will instead contribute any money towards college tuition via a 529 plan. I doubt that I’ll be able to cover full tuition and housing for three kids anyhow. Most parents can’t. Above that, I’d still rather give them $500 to start a food stand at the local farmer’s market than stick it into their IRA.
I feel this is a topic where opinions will vary widely. What do you think?
There is an ongoing debate about personal finance education in school. It sounds like a good idea, but multiple studies have found that financial literacy classes don’t really improve future behavior. It may be too much to expect an easy fix to such a complex problem.
As a parent, how do you best set up your kids for financial success? In the end, how can you really tell if you made a difference anyway? You can only try your best. My personal philosophy boils down to this famous proverb:
Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.
Some parents plan on giving their kids a big pile of fish. An inheritance. Real estate. A business to take over and run. That’s out of love, and I am not judging that choice. I might leave them something, but I’m going to tell them to expect nothing. Instead, I hope they will see that I put in a lot of effort to help them develop the tools to go out and “fish”, and that as adults it’s up to them to make money for themselves.
To be clear, this is not the only thing that I am teaching them. Good relationships with family and friends are more important than an early retirement. However, I have observed several specific traits useful in navigating the financial world. As a result, I want to help them:
None of the factors above require a ton of money, although private schools can be quite expensive. The best option may be maximizing the public school options available. My parents rented a small apartment in a good school district, as they couldn’t afford buying an expensive house with high property taxes. I only realized this recently when I visited our old duplex and found a house down the street listed for nearly $2,000,000 (median price in this city is $370,000).
I do plan to contribute to a 529 plan and minimize student loan debt. Maybe college tuition will be more sane in 15 years, but I think this is the best use of cash right now – keeping them from having to fight the power of compound interest in reverse. (I also classify paying for education as “teaching them to fish”.) I want to show them that we value education and also strive to avoid debt whenever possible.
Bottom line. How does anyone get rich? Most people who got rich quickly had equity in a business venture. This takes a combination of specialized skill, interpersonal skills, risk-taking, and luck. Most people who got rich over decades got there with a steady career, work ethic, patience, self-discipline when it comes to spending, and investing the difference repeatedly. I’d be happy with my kids taking either path, and tried to think up a list of ways to help promote these traits.
If there’s one topic that’s probably more sensitive than people talking about their money, it’s how they split their money with their partners. I am swayed by the method proposed by this post – Why Couples Should Split Expenses By How Much They Make by Tracy Moore.
Let’s say Partner #1 makes $7,000 per month and Partner #2 makes $3,000 per month. That means Partner #1 makes 70% of the total income and Partner #2 makes 30% of the total income. The proportional sharing method would have Partner #1 pay for 70% of the total expenses and Partner #2 makes 30% of the total expenses.
Result: If the household expenses are $5,000 per month, Partner #1 pay $3,500 per month (70%) and Partner #2 makes $1,500 per month (30%). Why not any of the alternatives?
You can act all day long like you don’t mind supporting someone, but you do. You can act all day long like you don’t mind being completely subsidized by someone else, but you do. You can act all day long like you don’t mind going halvesies even though she makes $50k more than you do, but you do. And so on. You can pretend to throw everything together in a blind pot and pay everything out of it, but if the one who makes less spends more, and believe me, they always do, you’ll care.
I should disclose that my wife and I don’t do this, and we’ve always just put everything into a single pot and spent from there. However, I don’t think what works for us will work for everyone. First, we married relatively young with minimal individual net worth. (I did work really hard to pay off my student debt so I could at least start us out on a positive number.) Second, we both agreed to the communal pot idea from the beginning. I’ve always figured that if somehow we divorced, we’d just split whatever assets we had down the middle anyway even if I earned more. Third, although our incomes both varied, we never went through a prolonged period where one person was unemployed and resentment could possibly build up. We have both worked consistently the entire time, even after transitioning to working less than full-time and watch the kids the rest of the time.
In the end, I do know that both sides have to agree that the setup is fair. Our choice to both work and both take care of the kids was definitely a conscious decision to pursue our idea of “fairness”, although I know that setup isn’t possible for everyone. That’s why, for a couple that is starting out with a history of being on their own financially, it seems like this idea of proportional sharing is a good starting point for an open discussion.
Do you think there is a better “default” method for merging finances if you’re a couple with different incomes?
Have you heard of the “happiness curve”? According to multiple studies of life satisfaction, I am entering the unhappiest period of my life at age 40 (WaPo):
My theory is that this is simply the inverted curve of “number of humans that I am responsible for”. When you are in your 40s and early 50s, that is when you have both children and your aging parents to worry about. Younger than that, you have no kids and your parents are still healthy. Older than that and your kids are grown and you are back to being only responsible for yourself again.
In any case, I definitely feel that right now is the hardest time for me to stop and enjoy the moment. There’s always another fire to put out. Either a kid or a parent has a health issue. At the same time, I will never be younger than today.
Brendan Leonard has a great graphic is his Outside article Remember When We Were Young?:
I am reminded of the old quote (Chinese proverb?):
“The best time to plant a tree was 20 years ago. The second best time is now.”
The best time to improve your financial situation is now. The best time to gather the courage to live a life true to yourself, not the life others expected of you, is now.
I think this extends to life as well. The best time to work at building an happy and fulfilling life is now. The best time to enjoy time with my young kids is now. The best time to enjoy time with my parents is now. One day, I will look back on this period and realize it was one of the best times of my life… I just need constant reminders!!!
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