billionaire - economics - entrepreneur - innovation - investing - product management - silicon valley - startups - technology - trending
Personal finance writing has gotten a bad rap with some people. And when you look at some of the articles being written—is it any wonder? Most people don’t like to hear that they can’t afford a house… because they occasionally enjoy an avocado!
Your Money or Your Life was first published in 1992, then updated a couple times, most recently in 2018. But don’t be fooled by the age of this book—it presents a radically different approach to mastering our relationship with money.
The authors say most budgeting plans fail because they are based on self discipline. That means forcing ourselves to do something we don’t want to do. In the long term, most of us simply don’t have the iron willpower to succeed at that!
On the other hand, this book starts from the inside out. To change our outer financial situation, it says we must first adjust the ideas and beliefs that we carry about money. Then we must better understand who we are and bring more consciousness to how money is flowing in our lives. The authors give a 9-step plan for how to do all this from beginning to end.
Joe Dominguez reached financial independence and retired at the age of 31, after just a 10-year career. He worked as a financial analyst and writer on Wall Street, but he only made a regular modest income. He was able to retire so early because he had a clear plan, which he explained in Your Money or Your Life (official website). Vicki Robin co-authored this book with Joe. She has also written other books about sustainable living.
In our society, many of us enter the adult world and soon fall into patterns that make us trapped. We quickly enter into debt and stay in debt endlessly. And we feel it’s okay as long as we make the minimum payments, because that’s what most other “real adults” around us are doing too.
For example, in my country of Canada, more than 50% of new car buyers are signing 7 year loans for a car! Not too long ago, this long of a car loan was unheard of.
We rarely stop to consider how new these mass habits of consumption are.
Most of our parents and grandparents entered debt with the goal of paying it off quickly and then staying out of debt. They saved up beforehand to pay for large expenses rather than putting them on the credit card to worry about later. It was only in 2005 that the rate of savings in the US fell below 0%.
This is not to say that everything people did 50 years ago was perfect, or that it’s even possible for all of us to live the same way today. Of course, we live in a different time. But there’s an important truth people in the past understood that we have somehow been taught to forget…
We have been taught that debt is freedom because it lets us buy what we want now. (The authors of this book compare this to Orwellian propaganda similar to “war is peace.”) In fact, debt equals servitude. With debt, we become trapped and scared. We’re trapped in our current life situation, not being able to leave a job we hate or take time off to look for something better. And we’re scared because even a small tragedy can turn our life upside down.
Savings equal freedom. The authors give us two goals to aim for:
Another author who strongly emphasizes stepping out of “the social matrix” is Tim Ferriss, who wrote the 4-Hour Workweek, a book about designing your ideal lifestyle, and building an online business to fund that lifestyle.
His book starts with re-examining many of the invisible rules and assumptions that we are following. For example: why do most jobs require about 40 hours per week, no matter what the job is about? That doesn’t really make sense! Once we have understood that many of these old social norms are really baseless, then we will feel a lot more freedom to walk our own unique path.
We’ve been taught that debt equals freedom, but in reality debt makes us trapped and scared. Instead, savings equal freedom. We should aim for a 6 month cushion, and eventually enough to give us financial independence.
In their financial seminars, Joe and Vicki often asked the audience how much more money they needed. And guess what? Almost everyone told them they needed 50% to 100% more, no matter how much they currently made.
We all know that ‘money can’t buy happiness,’ but what do our actions say?
Robert Cialdini, a professor of psychology, wrote “Our best evidence of what people truly feel and believe comes less from their words than from their deeds.” I think he’s probably right. (By the way, his book Influence is one of the best ones that I’ve ever read! If you’re at all interested in marketing, negotiation or human nature, then go check out our summary of Influence.)
There are two huge reasons why getting more doesn’t make us happier:
This reminds me of a different quote that says “you can never get enough of what you don’t really want.” (Which I believe comes from self help author Wayne Dyer.) The needs that we are trying to fill are coming from our mind and spirit, so we will never fill those needs with material consumption, but that’s what many of us are trying to do.
We all say money doesn’t bring happiness, but our actions tell a different story. Many of us fall into habits of spending our money on things that not only don’t bring us joy, but actually add unhappiness to our lives because of the added clutter.
To most of us, money feels vague and abstract, just numbers on a computer screen. Let’s end this confusion now. Money is really our life energy. This may be the most important idea in the whole book, so I’ll repeat it: Money is really your life energy!
In other words, when you buy something, you’re trading some of your life energy. For example, if you made $20/hour and bought jeans that cost $40, then you traded 2 hours of your life energy for those jeans. Seeing money as life energy will really bring clarity to your spending and finances. Try it yourself. Next time you buy something, convert the price into the hours of life energy you are spending. You may never look at buying something the same way again!
This idea reminds me of something the famous classic writer Henry David Thoreau said: “The price of anything is the amount of life you exchange for it.”
Our life energy is finite—we only have a limited amount of it. So doesn’t it make sense to treasure our life energy, to treat it with care and consciousness? Yes, absolutely! And this is the real meaning of the word “frugality.”
Being frugal is not about being cheap, but about getting maximum fulfillment from our expenditures of life energy. For example, it can be frugal to buy an expensive high-quality pair of shoes that will last a long time and you’ll really enjoy, and it can be wasteful to buy 10 cheap pairs of shoes you don’t really like that usually sit in the closet.
So how can we be more frugal? That is, how can we avoid wasting our life energy and spend it towards our maximum personal fulfillment?
Money is not just abstract numbers on a screen, money is your very real life energy! Being frugal means taking care of your limited life energy, spending it wisely to get maximum fulfillment. The first step is getting in touch with what you find truly important.
What are you really selling every hour of your life energy for? The number that you see on your paycheck can be very misleading. In Your Money or Your Life, the authors recommend we all calculate our “real hourly wage” which is how much we are really earning per hour:
When you add all the additional hours and costs of your job, you’ll probably find that you’re making less than you thought! This means your current job is not worth nearly as much as you believed. However, this can be good news. The authors of this book share stories from their readers, some of whom realized they could quit and find more flexible work closer to home, while keeping the same amount of money at the end of the day. Their high-pressure jobs had a lot of invisible costs that they had never considered. When they did, they decided it was not worth it and they were much happier!
To be honest, for me personally this exercise would be difficult to do. 10 years ago when I first began my online business projects, some of the best advice that I heard was to create a business that was “scalable.” This means to create something where your income is not attached to your time. For example, with this project Growth.me, it doesn’t matter whether 10 people are customers or 10,000 people, I will still do around the same amount of work. This provides a great foundation for building wealth. On the other hand, a business that is not really scalable is like a local accountant, who can only serve a limited number of clients per year. This reminds me of a really important book…
Rich Dad Poor Dad is probably the most popular personal finance book ever. In that book, Robert Kiyosaki shares the story of learning from his ‘poor’ middle-class dad and his ‘rich’ dad, who was really his friend’s father and a successful entrepreneur. The core lesson he learned from rich dad was “The poor and the middle class work for money. The rich have money work for them.”
In other words, poor and middle class people make their income from working a job. But rich people buy or create assets that generate income for them, whether or not they are working. These assets could be stocks, bonds, real estate… if you’re more entrepreneurial you can create new assets like a business, website or social media presence that generates income.
What are you trading each hour of life energy for? Start with the number on your paycheck, then add additional hours you spend because of your job, then add additional expenses because of your job. Then you’ll know how much you really make.
Another step this book recommends is gaining clarity on your financial past. This is about understanding where you’re coming from, so you can point yourself towards a better direction from now on. If feelings of guilt come up, the authors recommend you repeat a mantra to yourself: “No shame, no blame.”
The authors clearly believe that bad feelings are not useful for changing our behavior. Instead, they believe that our behaviors can change with increased self awareness, combined with self compassion. This approach is quite unique for a personal finance book. I am reminded of a quote from the great psychologist Carl Rogers who said, “When I accept myself just as I am, then I can change.”
To understand your financial past:
Seeing your financial past with clarity is the best foundation for setting yourself on the right track from today onwards. So calculate your lifetime earnings and then your net worth. If bad feelings come up, remember to tell yourself ‘No shame, no blame.’
At the core of this book is a system of keeping track of where your life energy (aka money) is going. The authors believe that by writing down all spending and reflecting on it regularly, our behaviors will naturally shift. Over time, we will spend less on things that don’t bring us much fulfillment and more on what gives us joy.
This system has 3 parts:
Personally, I’ve used systems in the past to track my behavior like this and I’ve found them very helpful, but not for spending. For example, I’m self employed so I don’t have a boss to be accountable to. This sounds great, but it can also be a big challenge not to slide into unproductive habits. So I’ve often kept track of my work hours on charts and graphs, to make sure I’m making progress in my business. As the influential business author Peter Drucker wrote, “What gets measured, gets managed.” Simply measuring the amount of hours that I work increased my awareness of when I was getting distracted, which was tremendously helpful for increasing my productivity.
By writing down where money is flowing in your life, your awareness will increase, which will automatically change your future behavior. Write down all your daily purchases, then analyze them monthly to see where your spending doesn’t align with your values. Finally, make a monthly wall chart that shows how your income and expenses change over time.
Over time, as you update your wall chart, you will see a growing gap between the two lines, between your decreasing expenses and your income. This gap is your savings, the money left over after all your expenses are paid. Now, those savings can be put to work for you, earning you additional income through investing.
The authors say you can later add a third line to your wall chart which is “Income from investments.” At first this income will probably be very small, but it will grow over time. At first you’ll be making $20/month, then $50/month, then $100/month.
Now here’s the really exciting part. When that line “Income from investments” grows higher than your line for expenses, then you are free! In the book, they call this “the crossover point.” Basically, you’ll be making enough money passively from your savings that you no longer need to work.
But let’s not get ahead of ourselves. What should someone invest in? Well, just like in most books that talk about basic investing, this book talks about stocks and bonds:
Stocks and bonds have their pros and cons. Generally, investing in stocks provides higher income, but they’re more risky. While investing in bonds returns less income to you, but they’re safer.
30 years ago, when the first edition of this book was published, Joe Dominguez invested only in something called US Treasury Bonds. However, this probably wouldn’t be the best path today because those bonds pay far less money than they did decades ago.
Today, most of the top-rated personal finance writers recommend stock index funds, mixed with bonds for greater stability. All of this would be a little too complicated to explain in detail right here, but please take a look at our summary of Millionaire Teacher by Andrew Hallam. That is probably the best book that I’ve found that explains the details of basic investing in a simple way.
To achieve financial freedom, your income from your savings/investments must be higher than your expenses. 30 years ago, US Treasury Bonds were Joe Dominguez’s choice for investment, but today you’ll need to look at other options like stock index funds.