Wednesday, January 6, 2021

Your Money or Your Life

The first edition of the best selling personal finance book Your Money or Your Life, written by Vicki Robin and Joe Dominguez, came out nearly 30 years ago.  In 2018, Robin revised and updated it, and added a foreword by Peter Adeney, a.k.a., Mr. Money Mustache.  The book lays out a 9-step plan to fix your finances.  Only the last two steps deal with investing, so the main focus is on transforming the way you think about spending and earning money.

Robin’s passion for helping people comes through loud and clear.  Part of her motivation for rewriting the book came from thinking about rampant student debt: “What kind of society turns its young people into a profit center for the debt industry?”  We work and waste our money so that “We are sacrificing our lives for money, but it’s happening so slowly that we barely notice.”

In the original version of this book, all 9 steps were simple to understand and perform.  In the update, the final two steps related to investing are more muddled and complex.  However, the first 7 steps remain easy to understand.  Following them requires some work, but they can’t help but transform the way you think about the money you earn and spend.

I won’t try to describe all the steps, because I think they need Robin’s words around them to explain how and why they work.  I will say that for the many of us who don’t really feel a connection between our daily purchases and how it affects our lives over the long term, Robin’s steps will close that loop.  It will become obvious which purchases are consistent with our values and long term desires and which aren’t.

I found it interesting that none of the steps involve creating a budget.  Rather, we’re asked to track our spending with “no blame and no shame.”  Instead of setting spending restraints at the start of each month, we reflect on our spending after each month which leads to making different choices in the future.

A starting point for the 9 steps is recognizing that “Money is something you trade your life energy for.”  The steps aren’t about trying to become rich: “Financial independence has nothing to do with rich.  It is the experience of having enough—and then some.”

One exercise among the steps that I found interesting was calculating your true hourly wage.  We’re used to thinking we make so much per 40-hour week which comes to some hourly rate, but this ignores many factors like commuting time, extra grooming time, babysitting costs, and much more.  Once we deduct expenses that only exist because of work and add up the time we lose outside of official work hours, the resulting hourly wage can be surprisingly low.

Many of us get used to a lifestyle that consumes all our income, and this makes us think that big life changes just aren’t possible.  Robin encourages readers to figure out what would really make them happy and to find a way to make it happen.  Among many questions, she asks “What did you want to be when you grow up?” and “If you didn’t have to work for a living, what would you do with your time?”

Even if you choose to stick with your current job, you’ll see benefits from building savings.  Knowing you’ll be fine if you lose your job can make you fearless and principled in how you do your work.  Not worrying “whether I stepped on toes … was extremely empowering.”

The bulk of the book that is designed to take the reader from unconsciously building debt to consciously building savings is excellent, but the parts on investing are weak.  The original version of the book advocated investing exclusively in U.S. Treasury bonds.  This worked well enough decades ago, but as Robin admits, today’s low interest rates makes this a bad idea now.

Rather than finding a new simple investing prescription to replace U.S. Treasury bonds, Robin offers a wide range of investment ideas, many of which seem at odds with the idea of preserving one’s life energy (time).  I’m sure some people are happy being landlords, but this isn’t just an investment; it’s a job together with an investment, and many people fail miserably at it.  The brief section on passive index investing is well done, but it doesn’t stand out among many other approaches listed that have much higher likelihood of hard work and failure.

Some of the old material related to investing still needs updating.  Robin asks us to calculate investment income based on your capital and the 30-year U.S. Treasury rate, which is only 1.65% as I write this.  Based on this definition, I’m not financially independent yet.  Fortunately, I invest mainly in stock index ETFs and I’m financially independent by a comfortable margin.

“For mathematical simplicity, we will use 4% [as the current interest rate].”  This isn’t really an interest rate; it’s an appeal to the 4% rule for retirement that assumes low-cost investing mainly in stocks.  Given that this book is aimed at readers who see time spent investing as a necessary evil, I’d say that 3% would be a safer figure for retirees under 50, and ramping up to 4% by about age 65.

It’s clear that the author thinks in terms of building capital and spending the interest in retirement without touching the principal.  This worked reasonably well decades ago when inflation was higher, so that in real terms you were effectively spending some principal.  Today, having a decent retirement lifestyle requires dipping into principal, particularly later in life.

In one person’s story, Tammy “invests the bulk of her money in Treasury bonds so she knows that no matter what the world throws her way, she has enough income to cover her basics.”  Unfortunately, this strategy would fail if we had a period of high inflation, or even modest inflation for many years.  Tammy would have to own inflation-protected bonds to be safe.

Overall, I think this book could be very helpful for readers who have tried and failed to get their finances under control.  Anyone prepared to do the work of following the first 7 steps is very likely to have a positive outcome.  However, one they get to the point where they have a meaningful amount of savings to invest, I’d suggest looking elsewhere for simple, low-cost investment ideas.

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