Posts Tagged ‘wealth

08
Mar
12

What we can learn from Thoreau

Like.  Whoa.  Woff.  Woff.  Joe over at Retire by 40 has a blüg post that we agree with and were so into, that neighbor’s dawg was able to sneak in and pee on our dawghouse (no worries, it is been properly claimed back as ours).  RB40’s actual article was good, but what floored us and got us really hooked was the naive young bloggers who think they can earn their way into financial independence (if this is your definition of rich).

And we agree with RB40 when he adds this point:

The problem is, most people succumb to lifestyle inflation and spend more money every year as well. This is where being frugal comes in. If you can minimize lifestyle inflation while earning more every year, then you will eventually become rich!

Certainly, lifestyle inflation is a wealth killer.  It happens to the best of us.  And in our opinion, a little bit is ok (another discussion).  Letting it run rampant, no nos gusta!  I think this is a point we can all agree on: if Expenses < Income, we are all good (cue up Winston Churchill cliché quote).

What we think is most appalling is no one pointed out what Henry David Thoreau learned in the mid-19th century as he spent 2 years, 2 months and 2 days at Walden Pond.

A man is rich in proportion to the number of things he can afford to let alone

Ok, we didn’t expect anyone to want pull out a favorite quote of ours, but…

Is that saying the same thing as don’t let lifestyle inflation creep into your life?  Sort of.  What we think is important, as highlighted by RB40, wealth or being rich, is not just how much money you can accumulate, but it is the connection between wealth and what you spend.  But being rich means different things to different people.  In our dawghouse, we want to enjoy a few simple pleasures in life and not have to go into an office if we don’t want to (in other words, financial independence).

Here’s another example illustrated by Nords showing the connection between income and expenses.  In other words, at a 5% rate of return, if you save 15% of your income, you will be come financially independent in 43 years.  If you started working at 22, that means you’ll be 65 when you reach early retirement.  Will anyone think you are rich when you retire at 65?  It certainly doesn’t impress us.  But, at the same rate of return, if you up your savings rate to 40% of income, you’re financially independent in 22 years.  So, if you retire at 44, is that an impressive feat?  Of course, there are assumptions in these equations and neglects things like social security.  And we can all tweak them to our heart’s content, so no sense arguing over rate of return.  Nords has a spreadsheet on his blüg you can play with.

What we think is more important than the nominal value of your savings, is what can you actually do with it?  If you had $3MM, could you pull the plug? or do you have to keep at the grind?  A $3MM nest egg is impressive, but not in our minds if you have to keep to the grind.  We’d much rather have $2MM and be financially independent.  To us, that would be rich.  We considered Jacob to be wealthy.

And finally, We’ll leave you with a neat math trick to chew on like a big new juicy bone.

1 penny saved is the same as 1.47 pennies earned.

So, mathematically, saving is better than earning more.  What say you?