Budgeting: Part 4: Learning From Children

"Children are like wet cement. Whatever falls on them makes an
impression."

- Dr. Haim G. Ginott

A few years ago, we were vacationing in Kennebunkport, Maine for two weeks. At the end of the first day, we were thoroughly enjoying ourselves. The weather was great, the coastline was beautiful, and the lobster rolls were delicious. But there was one big problem.

Kennebunkport has a small downtown area of shops and restaurants. Depending on your point of view, you might call Dock Square a "quaint retail district" or "the usual tourist trap", but at any rate, it's so centrally located that it's not possible to avoid it for two weeks. Personally, I found it quite enjoyable to browse through these shops because many of the buildings are right against the Kennebunk River (some on stilts) and most of the shops are quite easygoing. (Kids OK. Dogs OK. Bathing suits OK. Coffee OK. Food OK. Loitering OK. You get the idea.)

Unfortunately, however, my children were driving us absolutely crazy whenever we passed these shops! They kept picking up everything and holding it up and asking us to buy it for them. Since it was only the first day and most of the items held up were total junk, there was a universally negative response from the parents, which was met with an equally negative response from the children. In spite of all the no's, the continual nagging went on all day. In fact, as the day wore on, it only seemed to get worse. The children were determined to find something to acquire, and it seemed they were going to ask hundreds of times about hundreds of items until we relented. It was almost as if some "spirit of consumption" entered their body and said they must not leave without buying something! Obviously this is very wearing for any parent, and we were alarmed that if this continued the whole time, it would ultimately ruin the vacation.

After the kids were asleep that first night, my wife and I sat down to discuss what we were going to do about the problem. Now one thing I always try to do as a parent is to imagine myself as one of my kids and try to understand exactly what they are thinking. If we are honest, I think we have to admit that the emotions and actions from children are not usually fundamentally different than that of adults - with kids, everything is just a lot more exaggerated. After a little reflection, it suddenly occurred to me that the kids' behavior was not really that irrational after all.

The reason why they were treating their parents like a slot machine was because, in fact, we were acting a lot like a slot machine. We kept saying "no" to them, but there was a hesitation in our voices. Kids always pick up on that immediately. They could tell we were thinking about it. Also, we didn't care to spend our limited vacation time giving a lengthy rationale for each response, and this was interpreted as indecisiveness. So the bottom line is that they intuitively assumed that mom and dad had no real game plan for what could be purchased, and that because we hesitated without explanation on each item, there was a small chance that if you asked enough times with enough items, eventually some request would be granted. And do you know what? They were right! We had no game plan and if we were sufficiently worn down, we would probably just say "yes" to something at some point!

So we formulated and agreed on a simple plan. We were going to give them a framework for buying things themselves. I had no idea whether this would work, but I felt it was worth a try. I still have no idea whether this was good parenting, but I know one thing: it solved all the nagging. Immediately. In fact, we were truly startled by how well it worked. Here's what happened.

The next morning I sat down with the children and explained the new rules:

• I am giving each of you $25 to spend on our vacation trip.
• The $25 is entirely yours to spend however you like provided nothing is age inappropriate (e.g. no sharp knives).
• Once the money is gone, there will absolutely, positively be no more money given.

Immediately after explaining rule #1, my oldest asked, "How much do shrimp cost?" Trying to hide my laughter, I then also had to add some additional guidance that all meals and desserts and activities would be provided at no cost to them. (This was vacation after all.)

(I know some people will argue that you should never give children money unless they earn it. Others will complain that $25 per kid was a ridiculously large amount of money to entrust to small children who could barely add things together. Still others will say that the amount was "unfair" because it was way too small relative to the large amount of money it costs to stay in a resort area for two weeks in the summer. So let's be clear: I'm not holding this out as an example of the "right way" to teach kids about money. I'm holding it out as an example of how kids respond.)

After this discussion, the very first thing my oldest child did was to march into a toy store, pick up some item, and ask how much it cost. I cringed as I read the price tag aloud: $24. It seemed really poorly built and I was certain it would be discarded after a couple of days. Nonetheless, I needed to abide by the rules I had established. If the kids wanted to buy it, then we would buy it. Upon hearing the price, to my great relief, my oldest blurted out, "No way! We're not spending all my money on that!"

Suddenly there was a lot of comparison of prices between stores and comparison of features between items. My oldest child seemed to learn more arithmetic in those two weeks than at any other time in life. There was also a willingness to wait and see whether something better turned up tomorrow. All the mindless nagging about potentially buying every item in sight was gone, and was replaced by a reasonably careful consideration of how to spend their money. But it was even better than that. The advice from mom and dad about purchases had previously been totally dismissed as parental gibberish. But now we were suddenly sought out as consultants! "Do you think this will break easily?" "Could I get this cheaper somewhere else?" "Why is this model so much more expensive than the other?" "Would I be able to take this back if it didn't work?"

All in all, it was an incredible turnaround of behaviour. So what changed? Two things changed: ownership and budgeting. First, ownership of the money themselves made them value it and respect it. Second, having a very simple, clearly defined budget made them take a holistic approach to spending it wisely.

By the end of our vacation, I was very proud of the way my kids handled their money. I even had them write down on a 3x5 card all the different things they were able to get for $25. You would be surprised how far $25 goes when you are so careful with it! On the last day, I also snuck out and purchased a couple of quality items from the toy store that the kids had admired, but could not afford with their money. How startled they were to unwrap these items at our next Christmas!

My initial fears that the shopping district would ruin our vacation were unfounded. On the contrary, not only did we have a great vacation, but the entire spending issue proved to be a great learning experience for both the kids and the parents.

If a budget works this well for kids, think what it can do for adults.

Budgeting: Part 3: All About Choices

"Your life is the sum result of all the choices you make, both consciously and unconsciously. If you can control the process of choosing, you can take control of all aspects of your life. You can find the freedom that comes from being in charge of yourself."

- Robert F. Bennett

[ I'm picking up right where I left off after a year of various time-consuming issues. I have many new things I'd like to write about, but I believe in finishing what I start, so I'll be continuing this budgeting series for now. It's probably a lot more appropriate for many people now than it was a year ago. I know it is for me! ]

Every single day of our lives we are faced with a barrage of spending decisions. Sometimes it can be almost overwhelming. Are we in control of our spending? Or is our spending in control of us? Even those of us who don't feel like we are "out of control" nonetheless often feel like our spending decisions are not always explainable. Why do we say "yes" to certain purchases one month and then "no" to the same purchases the next month? Why do our choices on some occasions seem almost arbitrary?

A large part of the confusion about spending is that purchase decisions are usually framed in isolation. For example, the following three purchases could be framed as simple yes/no decisions:

• "Should I purchase this new car or not?"
• "Should we eat out tonight or not?"
• "Should I replace my air conditioner or not?"

A small step up from yes/no framing are the sorts of questions that are framed as "Can I do better?" Thus, the previous examples could perhaps be reframed as:

• "Is this the best price I can find on this new car?"
• "Do we have a coupon for this restaurant?"
• "Will the air conditioner be on sale later this year?"

Another typical framing is some variation of "Is it worth it?" For example:

• "Is this car really worth $18,000 to me?"
• "Do we really enjoy eating out that much to spend $40 on dinner?"
• "Am I prepared to spend $2000 to have the house be cool this summer?"

Yet another framing is some variation of "What are my other options?" In other words:

• "Would I be better off with a $6,000 used car or a $18,000 new car?"
• "How about ordering takeout for $30 to avoid charges for drinks and tips?"
• "Could I get by with a couple of $200 room air conditioners?"

There is nothing wrong with the how any of the questions above are framed. Even a simple framing of a purchase decision will help you avoid stupid mistakes. It's a good thing to eliminate purchases that you haven't properly considered (i.e. "Should I buy this?") or that you don't really value for the money (i.e. "Is it worth it?"). And it's always good to find the best price (i.e. "Can I do better?") and consider your other options. But let's face it: even after you've done all that, there will still be millions of things in the world that you consciously value and are reasonably priced - far too many things than you could ever really purchase in your whole life!

It's a sad fact of life that many people really don't go beyond the above approaches with their decision making process. Instead, having only muddled through each purchase in isolation and having found that there are lots of cool things in the world to be had, people often continue to purchase things with this framework until a certain trigger is reached. Now where exactly the trigger is reached depends on attitudes toward savings and debt. For some people, the purchases continue until the checking account is zero. For others, the purchases continue until the credit cards are all maxed out. For still others, the purchases continue until 3/4 of their income is spent, at which point the remaining 1/4 of their income is saved. So please note that a simplistic approach to purchases does not always imply debt. Such a paradigm is not necessarily irresponsible. On the contrary, a lot of reasonably frugal people operate with a simple framework and manage to save a substantial amount of money. As I said earlier, the trigger point to stop spending is determined by preconceived ideas about savings and debt, which vary wildly from person to person.

However, regardless of the differing trigger points to stop spending, there is something badly broken about this sort of process. Each individual purchase may be reasonably well considered, but as a whole, I would argue that such an overall spending pattern is rather arbitrary due to the lack of a holistic approach.

So what do people lose with such an approach? Money? Probably not. What is lost - for lack of a better word - is happiness. If you are truly determined to save 10% of your income and you stop spending when that limit is reached, then it's not money that's at stake. One way or another, you will save 10%. But without proper context, the 90% of your income that was spent will not really be spent on the things that you value the most!

Think about how one arrives at the spending limit with such an arbitrary approach. You spend, spend, spend until the trigger is reached and then stop. Without a holistic approach, what determines which things were spent first and happened to arrive before the cutoff? Random chance? Advertisements? Other people? I certainly don't want those things to be the determining factors in what I buy with my money.

That is where budgeting comes in. A good budget will be able to frame spending decisions in context and emphasize this critical point: Whatever you spend on one item leaves less to spend on all other items. This is the true insight of a properly constructed budget. Another powerful concept is to consider saving money as just another budget item. Saving (or borrowing!) is usually thought of merely as a by-product of your income and spending - it's simply the part of your income that is left over after all the spending is finished. However, since saving money (consumption deferral) is so critical, I would encourage people to view a "savings" line item as competing with all the other items. Thus, when you are creating a budget, you should weigh each new item not only against the other items, but also against your savings target. Here is the basic idea:

• Make a list and rank order everything you want/need to purchase.
• Work through the list in order. After each item, calculate the cumulative total of everything you've decided to purchase so far. Compare the total to your income and decide whether you are comfortable with the resulting saving (or borrowing) total.
• Revisit the list whenever you consider a purchase of something not originally on the list, or whenever you want to revisit your savings rate.

Does our family really do this? Well...yes. But perhaps not as you might imagine. We certainly don't sit around with calculators to figure this out, and we certainly don't agonize over each item. We also know we haven't captured everything and we don't worry about it. We know we will have to adjust things as we go. However, the main idea is still very much there. When we decide to spend more money on something else, we know we've weighed that against the other items in the budget and against how much money we are saving, and we're at peace with the decision. We also do this exercise when truly unexpected items arise. So if the refrigerator fails, of course we don't sit around and do spreadsheet analysis while food spoils. We march down to Sears and buy a refrigerator. We intuitively know we value a working refrigerator more than most items, so we know we should buy it. However, we're also aware that buying a bottom-of-the-line refrigerator will either bump other items in our budget or will change our savings goal. And we know that if we choose to buy a fancier refrigerator, we know exactly what we're trading off for that additional cost. We've already decided what's first in line to go!

I anticipate that there will be objections to this sort of process, so let's work through a few of the obvious ones:

• "You don't understand. I already purchased a new car with credit and I'm still paying off the loan. I don't really value the car as much as I value other things I see right now, but I still have to make the payments on the car loan." Absolutely. Whether you value the car highly right now is basically irrelevant. You value your credit worthiness and perhaps you want to stay away from anything legally messy like a repossession. Hence, you value your commitment to your obligation to paying the car loan very highly, and so it's near the top of the list. Nothing about your situation contradicts the budgeting process I described.

• "I have to eat. I need a place to live. I don't see how these sorts of things can be prioritized and placed in a list." Obviously one has to have basic needs met to live. Clearly you must have food to survive. Thus, "food" should be at the very top of the priorities list. But be careful: you must eat a reasonable quantity of something nutritious or you will die. On the other hand, a $5,000/month grocery or dining budget is clearly a luxury. Thus, you must break down the food budget into strata. You MUST eat something, so for example, you (probably) must budget $20/week for food. You cannot choose anything instead of this or you will die! But what about an additional $20/week? Getting by on $20/week for food is very tough, but it can be done! If things are very, very tight, then you have to make a choice between that additional $20/week or housing or clothes or other pressing items. If things are not tight for you, then first be thankful it is not, but also realize that your food bill can grow unchecked to $50, $100, or $200 or more per week. At some point, that incremental amount of money is not going to be worth it compared to what you could spend on other items, and that is exactly what this whole blog post is about: finding the right balance between all your spending items.

• "There's absolutely no way I could compare every item I think about purchasing against all the other items! It would take half my waking hours and paralyze all my decisions if I really did that." The initial creation of your budget will absolutely take some solid hours of work. Assume that you'll have to spend a good chunk of one weekend and that you'll need to involve other people in your household if you want to do it correctly. But beyond that, the time involved is pretty minimal. Once things are all set up and ranked, it only takes a couple of minutes to handle a brand new spending decision, and if the purchase isn't that large, you can handle the adjustments after the fact. It's really not that difficult.

Go back and look at the quote at the top of this post. Don't dismiss it as flowery words! It's a powerful idea that can really apply to all aspects of your life. But since this blog is about finance, I will narrow down the scope and paraphrase the original quote: "In the realm of your personal finances, a budget is your tool to help you control the process of choosing the things you value most. And in that realm, if you can control the process of choosing, you can control all of your finances. You really can find the freedom that comes from being in charge of yourself."

Budgeting: Part 2: Creating A Framework

"High achievement always takes place in the framework of high expectations."

- Charles Kettering

In the first part of this series on budgeting, I discussed the importance of starting the budget process by looking at the big picture. Now let's try to bring those lofty ideals down to earth. When I asked myself some significant questions about life (listed in the previous article), I found that some of the things that were important to me were:

• Travel. (...more specifically, wanderlust. More on that another time!)
• Learning.
• New experiences.
• Diversity of experiences.
• Family.
• Service.

I also discovered some things that weren't so important to me:

• Limited desire for structure.
• Limited desire for recognition.
• Limited desire for "things" or "stuff".

I've already generalized quite a bit of my life in constructing the list above, but it can be generalized further. Hopefully you can pick out some common themes in the above list. Newness. People. Independence. Freedom. So let's do one more level of generalization:

Most of what I appreciate in life requires a lot of time, but not a lot of money.

Now, of course, your desires are undoubtedly much different than mine. Maybe you really want to stay in the town where you grew up. Maybe you want to own a luxury boat. Maybe you want to run your own business. The important thing to understand is that with limited time and resources, only some of your goals in life can realistically fulfilled, so it's important to create a framework for what things are most important and work toward them. Otherwise, it's likely you may only achieve things that aren't very important to you, or worse yet, by failing to prioritize, you may not achieve much at all.

So far this all looks great as a theory, but like all theories, there is often a big disconnect when you attempt to apply them to the real world. Suddenly things get messy and you discover that what seemed so consistent in theory can often be quite contradictory in practice! So without ducking the issues any further, as an example, let's attempt to run a very common and very big expenditure through my personal framework. Let's talk about budgeting for a car. (Groan!)

So what kind of car should I buy? According to the above framework, the car shouldn't require too much of my time, or I won't have as much time for other things I want to do. I suppose that means reliability, so perhaps a new car? On the other hand, new cars cost a lot more and I don't care about impressing people with my car. Also, time is money, so buying a new car means spending more hours working so that I can pay for it. Well then, maybe I could take public transportation - it's cheap, and reliability is someone else's problem. But public transportation only runs at certain times to certain destinations, so this is not going to work out very well with the whole freedom and structure goals. At any rate, whenever there are mechanical issues, I should have someone else fix them to save me time, right? That sounds right except that I really like learning about new things and so I might actually enjoying performing the repair.

So it's easy to see that my goals are not always aligned with each other. Sometimes they can be complementary, while at other times they can be contradictory. Goals can also change over time. Prioritizing the goals or creating a hierarchy of importance can help a little, but in the end, everything is not going to be nicely consistent. We can't realistically expect that life can be reduced to a decision tree.

So what good then is the framework? The framework does not give you the answers to your choices in life. The framework is designed to make sure you are asking the right questions. That may not seem very helpful to some people at first blush, but think about how you would answer a friend who asked for your help with an individual purchase.

For example, suppose a friend who knows little about computers asked, "What kind of computer should I buy?" As a helpful response, you would want to ask your friend some questions. "What do you want to use it for? How much do you have to spend? Do you want to be able to take it on trips? Do you want to store photos and music on it?"

As another example, suppose a different friend who knows very little about investing asked, "I have $2,000 to invest, so what should I do?" You would probably continue the conversation along these lines: "When do you need the money back? How comfortable are you with potentially losing some of this money? Are there any special tax considerations with this money?"

In both cases, you simply want to make sure that the right questions are asked. However, there are no automatic answers to the questions and no automatic choices. After your friend has answered the questions, he or she will still have to mentally weigh everything and make a gut decision on the purchase. The best choice will not necessarily be clear and mistakes may be made. Nonetheless, your friend is in a much better position to make a good choice than someone who did not ask and answer these questions.

When making decisions, people often do not ask many questions or they ask the wrong questions. This is what I try to avoid by having a framework. Just as it is helpful to have a decision framework for an individual purchase like a computer or an investment, it is even more helpful to have a framework for the entire budgeting process.

Budgeting: Part 1: The Big Picture

"These people who are always briskly doing something and as busy as waltzing mice, they have little, sharp, staccato ideas, such as: 'I see where I can make an annual cut of $3.47 in my meat budget.' But they have no slow, big ideas."

- Brenda Ueland

Budgeting ought to be about very big ideas, yet somehow we have managed to trivialize the budgeting process and transmogrify it into various pedantic exercises. Budgeting has taken on such negative connotations that it is no wonder that one third of people don't budget at all and two thirds say they are unsuccessful at budgeting. For many people, budgeting has become merely:

• An exercise in arithmetic. "If the numbers all add up, then I've really accomplished something."
• An exercise in irrelevance. "I made up a budget once. I never did understand it. It was just a bunch of numbers. It never did anything for me."
• An exercise in technology. "I learned how to use all the features in Quicken or Money, so I guess I have a pretty good budget."
• An exercise in statistics. "If my spending conforms to what other people spend on average, then I must be doing OK."
• An exercise in fantasy. "I construct the budget I would like to follow, but it bears no resemblance to reality."
• An exercise in guilt. "I'm always over budget. I feel terrible. If only I didn't have a budget, I would feel better."
• An exercise in magic. "I thought creating a budget would magically make all my debt disappear and I would be on the road to riches."
• An exercise in power. "I will make make other members of my household conform to my spending plans!"
• An exercise in negativity. "I can never do anything or have any fun because of my stupid budget."

In order to avoid these traps, try to start with the big picture in mind before you begin to work on your household budget. DON'T start with the average housing or grocery bill in the country. Instead, ask yourself big-picture questions such as the following:

• When I look back at age 70, what would I like my life to look like?


• When was I the most happy in my life? Why?


• If this morning I was diagnosed with a terminal illness, what would I do during the next 6 months?


• Am I satisfied with my contribution to the planet?


• What do I regret NOT having done in life?

Unfortunately, while the average person may see the value in asking such questions from time to time, they probably think that such "heavy" questions have nothing to do with budgeting.

But the reality of achieving lifelong objectives is that the big picture needs to permeate everything in your life - including budgeting. With any endeavor, the first question you want to ask is: What is my objective? Budgeting is a tool that can help you accomplish your objectives, but how can you properly construct your budget if you don't know what your objectives are?

And pushing it further: Why limit your objectives to this year's income statement? I suppose you could read Dickens to "learn the street names in London", or you could listen to Beethoven to "hear what a violin sounds like", but how foolish it would be to stop at that point! In the same way, why use a budget merely to make ends meet or to save some money?

It is often said that money cannot buy happiness. Fair enough. However, we usually recognize that money can to a large extent be traded for time and vice versa. We also often define money as a store of value. Budgeting, being a tool to manage money, can therefore be extended to help manage those most precious of commodities - time and values. And if economics can be defined as "the allocation of scarce resources among competing ends", then I contend that the household budget is nothing but economics in action at that level. Budgeting is all about choices, and you are the decider!

When people find out that we have a formal household budget, they often ask why we bother. Surprisingly to many people, the real reason we have a budget is not to save money or to provide discipline (although it probably does both of those things). We formally budget our financial resources in order to make sure that our finances are aligned with the big picture of what my spouse and I are attempting to accomplish with our lives.

Are you doing the same?

Negative Reactions To Early Retirement

"Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great."

- Mark Twain

While I certainly don't associate retirement with "greatness", I nonetheless have found that when discussing the possibility of early retirement, I encounter a substantial number of negative reactions, occasionally bordering on the belittling attitude Twain mentions above. In my previous article, I indicated that our family and the Nielsen family experienced the same two negative reactions from many people: (1) You're going to be bored. (2) You're being quite irresponsible.

It seems our two families are not alone in this regard. A recent comment to same article on this blog asked the following questions:

"What keeps you going in the face of the two reactions by your friends? I am in a job that I dislike but is bearable for a few more years. I am working to pay my house off so I have choices of which job to have after I quit without worrying about pay as much. I have a few select people who understand this, and the rest (who don't know what I am doing exactly but are life-long friends and know something is going on) are really reacting to me not spending what they figure I must earn. I'd love to see your thoughts on how you have handled the reactions and kept going."

I think the negativity mainly comes from misunderstandings, along with a healthy dose of financial ignorance in some cases. Very rarely do I find that there is an undertow of jealousy or antagonism involved.

Many people feel that early retirement is irresponsible because they think it would necessarily involve abdicating my responsibility to adequately provide for my children. This is not the case. Obviously I owe my children a safe, loving environment and appropriate food, shelter, and medical care. Beyond that, I also owe them an opportunity for success and happiness in the broadest sense of the words - including education, recreation, and many other avenues of life. However, I do not owe them everything Madison Avenue advertises, nor do I owe them whatever someone else has in life. Specifically, for example, I don't owe them an iPod, an ATV, or a new vehicle just because they see them in advertisements, and I don't owe them a 7-bedroom house, weekly dinners at Morton's, and a yearly vacation in the Hamptons just because some of their friends choose to spend (and borrow) that much money.

Once you accept that many "needs" in life are unnecessary, a much smaller income level is possible. I've also learned that even if the desired income level is defined, most people still don't have an appropriate ballpark idea of how much money someone would have to accumulate to support that income level. Some people guess wildly too low and other wildly too high. Educated people sometimes guess way too high, and this leads them to assume that you can't possibly have that much money.

Financial articles in the mainstream press are often not helpful in this regard. I remember a prominent article last year on Yahoo Finance that claimed that even if one had a house that was paid off at age 65 plus $4 million saved for retirement, you were probably in trouble. The article suggested that under such circumstances, it was very likely you would have to downsize from a 4-bedroom home to a 2 or 3 bedroom home, and replace the mid-range sedan or SUV with a Honda Accord. This seems preposterous to me. We can talk all day long about sustainable withdrawal rates for portfolios, but at the end of the day, if a 65-year-old person (who incidentally qualifies for both Social Security and Medicare) has a $4 million stash and no mortgage, that is a lot of money. Did the writer of the article realize that with $4 million, a 65-year-old person can purchase an inflation adjusted annuity that starts at $250,000 / year, is adjusted up for inflation each year, and the payments are guaranteed for life? Think about it. You could buy a new Cadillac every year on that kind of income. (I don't necessarily think an annuity is the best choice, but because it's a defined and guaranteed income stream, it lucidly supports my contention that $4 million is a decent chunk of change!)

As for the comments from others that I would be "bored" in retirement, I can only suggest that is likely to be a psychological projection. A lot of people basically vegetate when they're not working, and so if someone can only imagine watching television and lounging around the pool during off hours, it's not very surprising they would consider life without work to be boring. Under that paradigm, it certainly would be boring. However, I do find that, for me, almost every major activity outside of work is more intellectually challenging and fulfilling than the activities I perform at work. Note that I'm certainly not disparaging work. There can be intellectual stimulation and a certain degree of fulfillment in a corporate job, and I'll even admit that my daily work experience is not really all that negative from that standpoint. However, my current vantage point is that I most certainly would not be bored if I had to expand my "non-work" activities to encompass most of my time.

So specifically how do we handle these reactions? It depends on the particular response:

• Mindless disagreements. If someone continues to simply repeat the same criticism over and over without any true engagement of ideas, then it's time to move the conversation to a different subject. (There's no point in banging your head against the wall.)


• Lifestyle disagreements. When someone tries to understand our point of view, but can't understand how or why we would choose not to acquire a more "upscale" or "consumerist" lifestyle, I usually try to explain that everyone draws the line somewhere. Everyone has a point at which more acquisition and spending become simply waste and decadence. I don't usually criticise where others draw it for themselves, so I encourage others to agree to disagree on where the line should be for me.


• Financial disagreements. If someone understands your motivations and accepts your chosen lifestyle, but merely disagrees on the financial cost, then the conversation can actually be very useful. If you have friends who engage you at this level, consider yourself lucky. They can often poke holes in your arguments, force you to readjust your plans to reality, or at the very least, make you explain your assumptions and calculations in a clear and convincing fashion. This is a great thing, although it can sometimes involve some financial transparency if the conversation gets detailed.

In summary, disagreement and negative reactions can be helpful if they allow you to more fully explore and understand your own motivations or to engage in conversations with friends at a deeper level.

On the other hand, I would strongly urge anyone not to abandon their own ideas about what they hope to do with their life just to please someone else - especially if that person is not even a close family member. It is amazing to me how much we often crave acceptance from even the most casual of acquaintances. For many of us (myself included at times), we can be manipulated by a salesperson we have never met before and will probably never meet again. We may purchase or upgrade a product or service simply because we don't want to "disappoint" the salesperson or appear "cheap" or "unstylish" to him or her. Amazing!

Thus, when a friend or co-worker puts down early retirement as a losing proposition, it does affect me to a point. It sometimes does sting when someone says to me, "Come on! You could be making some serious bucks when you're 50! Think of your children! Do you really want to drop out of corporate life as a quitter? And if you stop working, you'll eventually run out of money, and then you'll end up flipping burgers or living on the street because no company is going to hire anyone with a big employment gap. Don't be irresponsible. And what's wrong with you, anyway? Don't you want to someday be proud to own a Lexus? Besides, I know you'll be much happier working. You'll be bored if you stop. Come on...everyone secretly aspires to be a Vice President. When you say you wouldn't want that, it only tells me you're either lying or you're content to do nothing with your life. Or maybe you just think you can't make it, so you pretend you don't want it."

Sigh... I'm afraid my desire to please only goes so far. Hence, I can't structure my life around comments like that. I just can't. If I really want to do something different with my life and my whole family is behind me, it would be the epitome of cowardice and underachievement to change that to please friends and acquaintances who think otherwise.

Reflections on the Nielsen's Early Retirement

"The trouble with retirement is that you never get a day off."
- Abe Lemons

Over the past few years, I've read many personal stories about early retirement. Unfortunately, in most cases the story details didn't resonate very much with me. Sometimes the person in question retired after a supreme event of good fortune, such as receiving a large inheritance or cashing out of a hugely successful stock option grant at one's place of employment. In other cases, it appears that a career change was redefined as "early retirement". (e.g. "I accumulated almost $100,000 and then retired early. Soon after that, I was bored so I started earning money in a different line of work six days a week, and now with that extra income, I'm really enjoying early retirement more than ever." Huh?)

Other articles describe an "extreme" lifestyle where someone lives on $7,000 a year or some similar number. Still other articles feature someone who does not have a plan but merely "hopes to retire early". And then there are the occasional self-serving articles where the person in question "retired early" by writing a book about how to retire early.

All these articles had some entertainment value for me, but they didn't resonate with me because I could not imagine myself in a similar situation or relate to them in any meaningful way. However, a recent Money magazine article about a military family who retired early really struck a chord with me.

On the surface, the family in the article seems much different than my family. They live in the midwest. We live in the Northeast Corridor. They worked in the military. We have always been civilians. Their primary source of retirement income will be their combined pensions. Our primary source of income retirement income will be stock dividends. They will have lifetime medical benefits provided by the government. We will need to pay for medical expenses. On the other hand, it appears they are starting retirement with many years on their mortgage, while we will probably be mortgage free when we start retirement. We also have a sizable sum earmarked for our kids for college, while this is still a big concern for them. Additionally, we don't share the same family backgrounds, the same occupations, or even the same hobbies.

Yet a closer examination reveals a whole host of financial and lifestyle similarities between our two families:

• Early retirement was a conscious, but evolving, plan over 15-20 years.


• The success of the plan mainly depended upon consistent execution.


• Frugality was important, but was never taken to extreme levels. Consistency in all areas for long periods of time was more important than a few spectacular penny-pinching maneuvers.


• They adhered to a budget for long periods of time.


• Their spending level is in the general ballpark of what we are planning.


• Interestingly enough, upon discussing the possibility of early retirement with friends, we have also experienced the same two negative reactions from many people: (1) You're going to be bored. (2) You're being quite irresponsible.


• Career success was a reasonably large factor, but their strategy did not require an extensive climb up the ladder.


• They saved about 35% of their income at first, and even more as retirement approached.


• They invested mainly in equities.


• They felt like quitting many times, but ultimately persevered.

In addition to a modest $400K in savings, they can also draw about $60K / year from their military pensions, which are adjusted up for inflation each year. While a pension seems intangible to many people, a pension is just an annuity stream and one can easily calculate its value. Using publicly available annuity quotes from Vanguard, I attempted to put a value on their military pensions. Here are the results:

• Male; Age 44.5; Missouri resident
  
• Annuity income = $36,900


• Paid monthly ($3,075/month)


• Adjusted for inflation (yearly to CPI)


• Value of annuity:
  
• $955,982 (Single Life)
• $1,044,396 (Joint / 50% survivor benefit)
• $1,132,810 (Joint / 100% survivor benefit)



• Female; Age 40.5; Missouri resident
  
• Annuity income = $36,900


• Paid monthly ($1,800/month)


• Adjusted for inflation (yearly to CPI)


• Value of annuity:
  
• $629,494 (Single Life)
• $646,343 (Joint / 50% survivor benefit)
• $663,193 (Joint / 100% survivor benefit)
  

Depending on the survivor benefits chosen, the total value of both annuity streams is worth somewhere between $1.6 to $1.8 million. Again, just as our projected spending level is similar to theirs, our projected necessary wealth accumulation is (perhaps unsurprisingly) also in the same ballpark.

Congratulations to the Nielsens. If all goes well, we hope to be joining them in about 5 years.

Net Worth Update 2007

"Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones."

- Benjamin Franklin

I've calculated our net worth at the end of 2007 and appended it to the previous ten years of data I posted last year. I was perhaps hoping for a bit more progress last year, but I'm nonetheless satisfied with the results.

You may also wonder why I only update our net worth statistics once a year, as I've noticed a number of personal finance blog authors provide monthly or even weekly updates. In our case, we have a portfolio consisting primarily of equities, and the total portfolio dollar amount size has grown to dwarf even our yearly savings. Thus, I'm afraid that a monthly net worth update would merely be a reflection of monthly market fluctuations, which I don't think is a useful thing to calculate and post.

Year	Net Worth At Year End
1997	$80,641
1998	$134,135
1999	$224,502
2000	$300,710
2001	$337,281
2002	$401,199
2003	$477,903
2004	$549,144
2005	$684,813
2006	$864,380
2007	$950,346