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Wealth

Is $1 Million Still F.U. Money?

Painting: The Tribute Money by Masaccio (1401–1428)

Ask someone how much they’d need to quit their job and follow their dreams. For most people the magic number to walk away from it all is $1 million. That’s their F.U. (f@ck you) money.*

*F.U. money is the money you’d need to have saved to say “F.U.” to your boss and job.

However, people have been quoting that number for many, many years. Realistically – with inflation – $1 millions means less today than years ago. But it’s a nice clean amount so it has retained its status as the magic number.

Is $1 million still a lot of money?

Let’s not pretend to be stupid. A sudden inheritance of $1 million would be life changing for most people. You could take care of a lot of shit with that kind of money. But is it enough to buy a lifetime of freedom?

If you won $1 million, you’d probably first need to pay off your debts and mortgage. If you’re lucky to live in a an area with reasonable house prices you’d probably be left with about $700,000. (If you live in a place like Toronto, New York or Tokyo, consider moving to a city with a lower cost of living.)

If you invest that $700,000 in a balanced portfolio I think it’s fair to say you’d get a conservative return of 4-6%. If you didn’t touch your initial capital, you’d be generating $28-42k annually. This is livable, if you have your primary residence paid off. However, it might be an unreasonable range if it’s only 25% of your current income.

Of course, one must consider taxes in a situation like this. Often, income from investments is taxed more favorably than regular income. So $30k from investments might be worth more after tax than a $30k salary. Meaning, you might require slightly less capital to generate a desired level of after tax income. However, for purposes of simplicity – and because I don’t know who you are and where you live – I will ignore taxes.

A 75% cut in income would most likely require a substantial change in lifestyle. Moreover, the real value of that lower income will be eroded by inflation as time goes on. The longer remaining life you have the worse it’ll get.

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The previous example assumes you don’t touch your initial investment. If you change your strategy by withdrawing initial capital along with your gains you can draw a larger income. The downside is you will eventually run out of money.

For example, if you drew an annual income of $50,000 (assuming 5% rate of return), you would run out of money in 23 years. Increase that income to $60,000 and you’d run out in 17 years.

To achieve a consistent annual $50k income over 40 years you’d need $885k in starting capital (given a 5% return assumption). Again, that $50k is worth less and less as time proceeds, due to inflation.

For some, that amount and timing works perfectly. For others it doesn’t. If you can handle a $50k lifestyle and are well into retirement age, $1 million might be your magic number. However, $1 million no longer appears to be F.U. money for anyone with a considerable time horizon.

Additional sources of retirement income (e.g. government pension) will help, but it won’t amount to much for most people. Many people will require more.

After reading all this, if you’re anything like me, you’re thinking “well that’s just f@cking great – I’m going to be a corporate schmuck forever then.” Maybe. Or maybe there are other options.

For starters, you can take out a smaller income and supplement it with part-time work…perhaps a secret passion project. Or you can live like a student on ramen noodles and Pabst Blue Ribbon.

Cut and supplement. If you can’t do that, I’m afraid you might need to play the corporate game for longer. Because $1 million is no longer F.U. money.

Categories
Wealth

20 Wealth Tips from Real Financial Professionals

Each of the following wealth building, budgeting and investing tips comes direct from the brains of 20 different financial advisors across Canada and the United States.

Some great advice here:

  1. Spend less than you earn.
  2. Boring might not make you uber-wealthy, but it sure won’t make you poor. There are solutions for having too much money, but there aren’t many for having too little. You can’t manage your money until you can manage your behaviours and emotions about it.
  3. Stop obsessing about your investments. Buying and selling frequently is well proven to hurt your returns and it steals your attention from the other very important financial issues you need to be on top of. Investment advice is the tip of the proverbial iceberg when it comes to your personal finances. Managing your cash flow (e.g. budgeting), protecting your family against a catastrophe (e.g. insurance), creating instructions for what happens to your wealth when you die (e.g. estate planning), retirement planning, maximizing your work benefits and pension, etc. There’s a lot to get on top of. Thinking systematically about these things are covered in a financial plan. Go find an advice-only financial planner who can coach you through it (these are professionals who sell only their advice and do NOT get paid for selling you a financial product).
  4. Stay invested and don’t try to time the markets. Know the risk you’re willing to take. Do your research prior to investing, have a strategy and plan. Know your time horizon.
  5. When I bought my house, friends suggested that I spend money (~5-10k) every year on something – fixing the roof, adding a garden, upgrading the furnace or AC. That way I’d always be ahead of the ongoing repairs that a house requires. I could do maintenance stuff or something that would be fun for me. But I should do something. It served me very well over the many years I owned my house. Over the years I researched what added value and what didn’t which helped me make better decisions. Great advice from very good friends.
  6. Create a budget within your means based on what brings you deep meaning and joy. Then strategically redirect the wastage towards saving, debt, and investing.
  7. Slow, boring, and passive indexing wins the race over hype, complication, and risk.
  8. Make debt repayment mandatory like rent and you’ll get out of it much faster.
  9. Understanding and applying the principles of compounding, leverage (other people’s money), and assets will make you wealthy over the long term.
  10. Not sure you can afford that mortgage? Don’t have a down payment? Act like you have a mortgage. Put the money into a separate account or investment. The result is you prove you can pay the additional cost of a house over and above your current dwelling costs plus you contribute to your down payment.

    New to DumbWealth? Start here.

  11. Tell your money where to go with a proper budget instead of asking where it went when it’s gone.
  12. Maximize any and all workplace programs that match savings, offer shares at a discount or any other program that pay you to invest. It’s unbelievable how many people don’t take advantage of these programs that offer “free money”. And don’t underestimate their value when evaluating job offers or thinking about leaving an employer with great savings incentive programs.
  13. Don’t buy a new car, go used and never finance the purchase of a depreciating asset.
  14. Credit card balances carried over to the next month and the outrageous interest rates will make you poor or even bankrupt. My advice is to never put anything on a credit card that you cannot pay off in full the next month. Otherwise don’t buy it, you can’t afford it.
  15. Money comes last… your vision, your values and your goals must come first when designing a strategy for your future.
  16. Buy an umbrella when it’s sunny outside. In other words, buy insurance when you’re young and healthy because it will rain eventually.
  17. Don’t compare what you have to others – there’s a good chance their financial position isn’t as good as it appears.
  18. You will never become wealthy chasing a larger paycheck. True wealth will come only from wise investing over time – understanding the concept of compound interest and the impact inflation has on the future value of your money.
  19. Never purchase something if you can’t buy it 3 times.
  20. Give! Money is like water-it’s clean and refreshing when moving! Who wants to drink from a stale pond?
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Categories
Wealth

The Latte Factor Warning

There is a concept floating around the financial world that goes something like this: if you quit buying lattes every morning at work you will end up far richer in the long run. The industry refers to this as ‘The Latte Factor’, named after the popular book.

While I appreciate the sentiment that you can build wealth by cutting out small daily expenses, I can’t fully buy into this concept. The latte factor concept ignores the reality of how people lose wealth and fails to consider the beverage’s greater life benefits.

Yes, I know that the book isn’t only referring to lattes. But let’s go with it since the latte is a good demonstration of where The Latte Factor concept generally falls short.

Misdirected Focus

While you don’t want to allow small expenses to get out of control, many people would be better off directing their focus elsewhere. When I say ‘small expenses’ I’m not referring to the easily identifiable small spending habits, like record collecting or clothes shopping. Instead I’m saying you should spend less time trying to cut the expenses that allow your life to go from point a to point b. These are the expenses that act as a lubricant in the gears of life – unnoticeable but vital. While these seemingly unidentifiable expenses cost real money, they are low value targets in the battle to build personal wealth. 

In contrast, some expenses are clearly extravagant. Many one time large expenditures can wipe out years of savings from forgone lattes. I’m talking about things like that Louis Vuitton bag, family cottage or leased Audi. If you truly want to build personal wealth, these status items are what you need to avoid. Especially since all can be easily and satisfactorily substituted with other options that are far less expensive.

The amount of time and mental energy it takes to decide on a 1 year old Subaru instead of the brand new Audi is minuscule compared to that required to avoid a latte EVERY SINGLE MORNING.

Worse yet, those who do focus on the lattes gain a false sense of accomplishment and are actually more prone to justifying those large, extravagant purchases. 

Life Utility

Most of you know that we only live once. Taken the wrong way (YOLO!) some people interpret this to mean they can take stupid risks and live like there’s no tomorrow. On the contrary, I believe this means we should seek simple daily pleasures, whether that be time spent with friends, eating a nice meal or drinking a daily latte. Months or years of shitty living can’t be offset by a single big ticket purchase. This is why I think pleasure needs to be had in frequent bite-sized doses. 

Moreover, there are many spillover benefits to the daily latte, including the dose of caffeine and calcium. Many use this ritual as a means to socialize, decompress and think. Sometimes people use it as a way to escape the drudgery of the office for a few minutes, or work in a slightly different environment.

Sometimes I take my kids to the coffee shop and unnecessarily spend $12 on cookies and coffee to read together for an hour. Is that time and money wasted? Or is that a ritual I can forever keep doing with my kids as they get older? I hardly see it as a waste, and is not worth trading for a fancy car or purse (both of which have zero benefit to my relationship with my friends, colleagues or family). 

Before you subscribe to concepts like The Latte Factor, be sure you know what you’re actually cutting. And be sure you are getting a good return for your time and effort by focusing instead on the highest-impact expenses.

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Also Read: The Intelligence of Dumb Money