Your Money or Your Life? - Episode 3

Episode 3 of the Financial Freedom Series

In this series, we have gone through Investing 101, where we talked about the importance of saving and investing at any age, and The Wealth Formula, where you learned the magic of compounding interest and how it starts a snowball effect that makes you wealthier over time.

This time around, I have two more insights to share with you which are related to the awareness of how much you really get paid at work, whether you can let go of some expenses to invest instead and the beauty of the time value of money.

Insight #8: Your Money or Your Life?

While searching for my next read I came across the book Your Money or Your Life? by Vicki Robin and Joe Dominguez. “That’s an attention-grabber title”, I thought to myself. It truly is, because if you’ve had the misfortune of ever being asked that question at gunpoint 🔫 (as I unfortunately have), you come to understand what you truly value… and believe me, money comes dead last.

We are safe to assume that almost no one will say “take my life, but let me keep my money,” right? But if money is less important than life, why do we live the way we do?

You know… working to buy things, accumulate things, working to buy happiness and status through our clothes, our next phone, watch, car, boat, or house?

So I hit the purchase button and started listening away. As I finished the book, the biggest takeaway was that life is made to be enjoyed simply. Your energy should not be traded for a “hamster wheel” of a job, working to get paid more, to buy more, and be happy only when you buy your next thing, while, in reality, you are living two paychecks away from homelessness. 

The only person who can truly change that is you. Get your priorities in order, have the money talk, talk to your life partner if you have one, and align how you truly want to live. It is definitely possible to be happy with less, to be frugal without being stingy, and once you understand how you want to live, you will understand what you need to do to live an optional work life for the rest of your days. 

Retiring early can be achieved if you truly learn how to figure out your Financial Independence (FI) number, by when you want to achieve it, and work backwards from there.

We know we are not immortal, every day that goes by is one less day we have to enjoy life, so we need to live with a sense of urgency and start working towards our dreams TODAY! We need to understand how we trade our life energy for money, this concept will help us understand what is really important in our lives.

Now, you may be asking yourself what kind of things you can let go of to live more frugally. To help you decide, the authors of this book also came up with a concept that was later improved by Grant Sabatier called the real hourly rate.

In his book, Financial Freedom, Grant invites us to calculate and regularly monitor our real hourly rate. That is, the real amount we get paid to work one hour. This allows you to see how much time you are trading for your money. 

In summary, we should take a look at our salary per hour and make a list of all activities we do outside of our job that are job-related. Examples include commuting, shopping for work clothes, travelling on work trips, de-stressing after work/weekends, etc. 

The real hourly rate calculation can look somewhat like this:

If you work 50 hrs per week, 5 getting ready, 7.5 commuting, 3 traveling to clients, .25 shopping for work clothes, and 8 detoxing or relaxing, then you are really investing an average of 73.75 hours per week in work-related activities. 

Multiply that by 52 weeks in a year and you get 3,835 hours per year. Now, if you make $50k a year, then your effective hourly rate is $13.04 ($50,000/3,835 hrs). But when you deduct the 25% income tax that we pay, you really make about $9.78 per hour of take home pay money ($0.16/minute).

Now let’s put that into perspective! How much was that Grande Double Chocolate Chip Crème Frapuccino? $5.95 plus tax? A whopping $6.64.

That means you need to work 41.5 minutes of your day to pay for this! Whooa! 41.5 minutes for a Frapuccino. 

Are you willing to trade 41.5 minutes of your working day for that? The answer can only be yours, and maybe you do, however, the moral of the story is to start putting your life into perspective. Define what is worth the cost and what is not.

This is a very general example to illustrate the point, but you will be faced with similar decisions when you purchase a car or a house, for example. What should you do: buy a car or save that money and keep using public transit?

Insight #9: Time Value of Money

We briefly discussed this concept when we talked about compounding interest in Insight #5. However, we now cover it in depth as Time Value of Money (TVM) is the bread and butter of financial literacy. Any time we have some money, we get to decide how we spend it. And the cost of that decision includes the cost of the best-forgone opportunity – the option we did not choose to take.

So, if we understand every purchase as a trade-off for something else (in this case, savings) we should get used to making the following analysis: 

If I have $30,000 on hand today I have two choices:

1. Spend the $30k in a car (whether I use the money as a down payment or if this is the final price); or

2. Invest the $30k and multiply my money and my wealth. 

Let’s see what happens 6 years in the future!

Option 1, buying the car, means in 6 years we will have a fully depreciated asset that we could sell for about $5k. 

Option 2, investing, means those $30k turn into ~$45,000 with a 7% rate (average return of the Stock Market, since it started) and a monthly compounding for 6 years (72 months). However, if we continue to leave that money untouched for 14 more years, at the end of 20 years my original investments will have quadrupled to $121,162.17.

But we’ve heard this before, right? what we must assimilate, though, is that everything we decide to “spend” our money on has this TVM associated with it.

Now, let’s look at that Frapuccino again. It cost us $6.64, but if we choose to invest it instead, it has the potential of becoming $26.82 in 20 years. We know it doesn’t seem like a lot, but how many Frapuccino’s did you buy this year? Let’s say 1 a week, x 52 weeks in a year = $345.28, that’s almost $1,400 in 20 years.

What happens when we take this to a pair of sneakers for $180, the latest Gucci purse for $3,500, or a trip to Europe for $10,000? Yes, you guessed it, each option, if invested at 7% compounding monthly will grow to be $726.97; $14,135.59; and $40,387.39 after 20 years.

Every dollar will move through time, gain value, and create wealth to fund future goals such as retirement. This is especially true if the money can be invested at a rate that exceeds the inflation rate. Understanding how the TVM works in our favor with time and a good interest rate will only benefit you as you consider the lost opportunity of investing every time you spend.

If you want to retire early, or even achieve that optional work lifestyle, know what you are working for…calculate your Financial Independence number, align your earnings and spending with your values, save your money, get additional “side gigs”, maximize your income, pay yourself first, lower you expenses and increase your savings. Save as much as you can, invest wisely, use the power of compounding interest, get that money working for you and retire early!