“In The Millionaire Next Door the authors, Thomas J. Stanley and William D. Danko, note that people who have achieved a high net worth relative to income know how much they are spending on clothes, travel, housing, transportation, etc., and those who don’t achieve high net worth relative to income have no idea how much they spend. It’s a stark contrast.” – Your Money or Your Life
Author Vicki Robin in Your Money or Your Life frequently equates ample savings (and investments) with freedom. This means you have the freedom “to leave your job if the boss is intolerable or the benefits have just been yanked.” With sufficient savings (and investments) you have the opportunity to transform your life, including achieving financial independence if you want to. Here are my takeaways and favourite parts from Your Money or Your Life; what you’ll read about should you wish to pick up a copy.
Change your thinking
In the book’s prologue, Robin likens financially independent thinking to cartography – you need to create your own map. Your map will depict the delta between your life today and the one you want to lead. The results of financially independent thinking will allow you to step back from your assumptions and emotions about money and observe them objectively. This will help you move towards financial integrity – understanding the impact that your earnings and spending habits have on others and our planet.
Chapter 1 – The money trap
Robin believes we have developed an affinity to debt – because widgets keep us happy. Consumption keeps “keep American strong.” “What else would we do with disposable income?” The book suggests you start to re-evaluate your current roadmap with money; focusing on enjoying what you can do with your money and stop purchasing anything that doesn’t add value. To help you assess what value money has provided you in life thus far, Robin suggests you complete a net worth statement. These are your assets minus your liabilities. While net worth is an important metric I don’t think you should dwell on this.
Chapter 2 – Money ain’t what it used to be – and never was
“Money is something we choose to trade our life energy for.” Consider how much time you spend commuting to work, how much time you spend on costuming for work, how much time you eat on the run or feel the need to treat yourself after a tough week at work; the “I deserve it” money. All this time and money is traded for your time on earth. Time the author suggests you need to become much more conscious about.
Chapter 3 – Where is it all going?
This chapter recommends you keep a detailed log of your expenses, so you can follow the exercises in Chapter 4.
Chapter 4 – How much is enough? (the nature of fulfillment)
Now that you know where all your money goes…you can answer some of the following questions about money fulfillment:
- What brings you the most fulfillment and how is money involved?
- If you didn’t have to work for a living, what would you do with your time?
By reflecting and writing answers to these questions down you’ll soon realize how your spending is aligned with your values. Ultimately your behaviour represents your values. Values can be represented by what, where and when you spend your money on.
Chapter 5 – Seeing progress
“Insight can happen in a minute but growth happens over time.” Everything has a beginning. Consider making some sort of money chart that includes your income and total expenses as a starting point for you, if not already done.
Chapter 6 – The American dream – on a shoestring
The American (or Canadian) dream can begin with the intelligent use of life energy, your time, and the conscious decisions that come with it. Robin encourages readers to take good care of what you have, wear things out as much as you can, learn to do-it-yourself where reasonable, anticipate your needs and when making any purchase; marry quality, durability and price. Over time by doing these things you will get the positive experience of choosing quality of life over an ill-conceived standard of living.
Chapter 7 – For love or money – valuing your life energy
This chapter recommends you review some of the following questions to see what relevance your paid employment has to you. Do you keep your paid employment to:
- Provide necessities?
- Provide luxuries?
- Leave an estate?
- Ensure your value is recognized by others?
- Carry on a family tradition in a particular field?
- Meet new interesting people?
- Do your “fair share” for society?
- Acquire new skills or learn?
- Influence your power?
- Challenge yourself?
- Compare yourself to others?
- Achieve fulfillment?
Robin suggests you define what work means to you and challenge yourself to continually re-define it going forward. The more often, the better. The essence of this exercise is to form a habit of evaluating what you get for your life energy in exchange for work. Make sure it’s worth it.
Chapter 8 – The crossover point – at the end of the wall chart
Following the guidance in Chapters 1-7 will move you inexorably towards financial intelligence but they may not lead you to financial independence. This last step will depend on how aggressively and diligently you follow the lessons in the book. By applying your new found financial wisdom in Your Money or Your Life you should, eventually, reach a point whereby your monthly investment income will exceed your monthly expenses. At this point, “the crossover point you have enough – and then some.” Robin tells us the crossover point will give us a number of freedoms:
- To do the kind of work you choose, whether or not you’re paid for it.
- How to structure your time.
- Options to use existing skills or develop new skills on your schedule.
The crossover point provides us all with choices. According to Robin, this is ultimately what financial independence is all about.
Chapter 9 – Now that you’ve got it, what are you going to do with it?
One of the primary missions of Your Money or Your Life is empowerment – providing readers with the power to take control over their money choices. Now that you’ve got this power, Robin recommends the following to avoid losing it:
- Don’t blindly leave all financial decisions to the experts, nobody will ever care about your money more than you.
- Be mindful of your investing risk tolerance and how it should change over time.
- Remember your capital should produce income; that income should be safe and predictable, and that capital must not be diminished by unnecessary fees, commissions or management expenses.
This means most of your investments/capital should have a bias towards low-cost financial products that produce income.
Your Money or Your Life will help you create your own financial road map, if you don’t know where to start. It will guide you towards financially independent thinking, coach you on financial intelligence, and give you some motivation for financial integrity. All of these building blocks are essential to realize financial independence – the by-product of having an income stream sufficient for your basic needs and comforts beyond a source of paid employment. I have added this book to this page on my site, one of the many you should check out if you want to improve your financial acumen.
What did you think of this book? Are you now more curious about this book given my review? Stay tuned to my blog for more book reviews later this month including at least one giveaway.
I read this book 20 years ago ( in my mid 30s) on the advice of a friend. It literally changed my mind about money. That is it’s greatest power. It can change the way you think about money to make it a tool you can use, not the other way around. I semi-retired around 5 years after reading it and fully retired within 10. This book is required reading for anyone who wants to learn how to think about money. This, The Millionaire Next Door and The Single Best Investment should be in everyone’s library.
Well said Ed.
I’m a big fan of Andrew Hallam’s books and I enjoyed Lowell Miller’s as well. They are on my mandatory reading list for a reason:
Congrats on your retirement. Well done. Mark
I’m currently reading this book (I’m on Chapter 6). What I like about it is that it gives practical exercises for figuring out when you reach “enough”. This is where you experience the most fulfillment. Anything more than that is excessive and actually takes away from your fulfillment.
The ideas in this book have strong resemblance to those of minimalism.
I think so as well Alex but with a twist. It’s about truly understanding what you value and where does that money go for that value. Then working towards a plan that ultimately provides the following:
investment income > expenses = time (and money) for what you truly value.
There’s absolutely something great in that message.
It’s not about being frugal, which usual comes across as not spending money on anything, but more about not spending money on everything. I read something apropos recently: spend money on those things which money can buy, spend time on those things which money cannot buy.
I wonder how much warm weather money can buy?
This is what I’ve learned writing this blog, how I react to money and what value I get for it. I’m now very choosy on where my money goes and on what.
Based on today’s weather in Ottawa, I would be happy to buy some warm weather.
The most common argument against frugality is that one wants to enjoy life i.e. Frugality equals being a skin flint. What I say is frugality allows me to have my cake and eat it too!!!!
Well done Rob. Sounds like you’re living the life you want to lead!
So many of the points are about figuring out your perceptions and mental relationship to money. It’s not about controlling money, it’s about controlling your mind (both emotion and intellect). Money is not the problem — the world is awash, wrangle the brain and the rest is easy.
Not always easy to adjust the brain. I speak for myself! 🙂