Thursday, May 07, 2015

Hiring or Firing

I like to think of money as an employee. When considering how much is enough to be financially independent (a better idea than retirement), a big part of that depends on what your money will be doing. If it is in cash, it is basically sleeping. Banks will lend it out to other people, keeping just enough for the amount you are likely to withdraw. If it is in cash, you (and inflation) will slowly eat away at the pile till it is gone. This makes people panic when they think how much they will need to retire given that we'll likely be living much longer.

If money is an employee, inflation is like the 'use it or lose it' principle of exercise. If you don't move for long enough, your body stops functioning. If it is doing something productive, then the whole game changes. Money regenerates itself. It creates more employees. It is up to you whether you hire them or fire them.

This is the reason many great investors get freaked out by conspicuous consumption. Conspicuous consumption is when you buy something that is rare that other people can't have. Like walking through a poor area with a flash watch and lots of bling. Not only does this not show empathy for the people you walk past, it also means you have likely paid a lot for whatever it is. Rare things cost more, not because of inherent value, but because they are rare. Conspicuous consumption is a stupidity tax. Once you have paid that money, it doesn't work for you. As you whip out the cash, you are basically shouting 'You're Fired!'.

Money can be managed in a sustainable way though. If you keep your wits about you, the equation basically becomes simple. Spend less than your money makes. More in than out. If you spend a lot less than your money makes, it can actually carry on growing. It can live forever. If you spend more than your money makes, tick tock.

The goal then becomes to get to the point where your money earns the same as you. At that point, you are working because you want to, not because you have to. You can be your own patron and start thinking about creative pursuits. You can be the homemaker and let you money be the breadwinner.

Clearly getting to the point where your money earns the same as you is the tough part. You need to learn to Multiply Marshmallows. Given two, eat one. If you can save half of what you earn, for 15 years and earn 5% real return. You will be there. 50% for 15 years at 5%. Ouch you say. Most government savings plans talk in the 5-15% area. Sorry. Not enough unless you only want your independence in your later years.

If you have a job you love, you don't have to worry about independence. You can even choose to borrow heavily in the early years to even things out. You might want to build up a buffer though. In case the rug gets pulled out from under you. Rather than 20X your salary, having 3-5X your salary would give you the breathing space to let your employees look after you for a while if you have a bump in the road and need to get back on track.

Are you hiring or firing?
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