Archives for 2017

The Key to Financial Freedom

by J.D. Roth on 15 June 2017 8 Comments

It’s been a crazy couple of months for me. Since April, most of my time has been dedicated to selling our condo and buying a new home. Now, at last, the turbulent times are almost over. Kim and I closed on the condo last week, and we’ll close on the “country cottage” next Monday. On July 1st, we’ll move to the new place and a new chapter of our lives will begin.

As some semblance of normalcy returns to my world, I’ve been sorting through my Money Boss inbox. I love reading what you folks write to me (even if I don’t always respond!), especially when you share your goals and dreams for the future.

Debt is Slavery

For instance, here’s part of a message from a woman we’ll call Irene. Irene recently experienced an epiphany:

I see my parents, both of them tired and still worrying about the money. I see people in my country, counting days to retirement yet dreading the date like it’s some kind of an invisible curse that cuts off their pay by a large margin they now have to live with from month to month, even asking for a federal support to make the ends meet. I see young people whose potential is squandered just because they are slaves to the system they were told about — go to school, finish it, find a job, work your part until retirement, and then, if you’re lucky, you have ten to twelve years to enjoy…probably.

I see all that…and I want more out of my life than simply be a part of a rat race we all are invariably losing. I want to be that girl who dared to dream the impossible and then realized it.

I love it! It’s email from money bosses like Irene that keeps me motivated to continue doing the work I do.

In this case, Irene’s message struck a deeper chord with me. It reminded me of my own struggles with money.

When I was younger, I lived paycheck to paycheck on an average salary. I was deep in debt. I had no savings. I spent every penny I earned. Like many folks in similar circumstances, I felt chained to my job. I felt like I had no options.

“Debt is slavery,” argues Michael Mihalik in his book of the same name. “You drag yourself out of bed and go to work because you have to.” You have a mortgage, a car payment, credit card bills, student loans, and other financial obligations. If you don’t go to work, if you don’t keep earning money, you risk financial ruin.

Most people believe this is simply how life works. It’s the price you pay to live in a modern society. And because most people allow themselves to accept these financial burdens, they’re chained to their jobs. They lack freedom. They’re unable to take risks.

But most people aren’t money bosses. You are.

The Key to Financial Freedom

Because you’re a money boss, you recognize that it’s up to you to escape the chains of debt. You know that the key to financial freedom can be found through a simple concept: profit margin, the gap between what you earn and what you spend. And the best thing about profit margin is that it buys you freedom both today and tomorrow.

The greater the gap between your earning and spending, the more freedom you have today. This profit margin gives you power — power to make choices that might otherwise be unavailable to you.
At the same time, profit gives you greater freedom tomorrow. When you earn more than you spend, you’re able to set aside savings. This savings — your accumulated profits — grants you a wider range of options in the future.

The more money you save, the more freedom you have, and the greater risks you can take. As your financial independence increases, you chip away at the wall of worry. You’re able to make decisions based on happiness rather than dollars.

Remember my roadmap to financial freedom?

[The Stages of Financial Freedom]

A lot of folks think financial independence is a fixed point. It’s not. Financial independence is a process, with different stages along the path to complete freedom. As you reach each stage, it’s as if you’ve gained a key to unlock another chain that has tied you down.

When you reach solvency, for instance, you obtain the key that unbinds you from depending on others for financial support. When you reach stability, you unlock the chains of consumer debt. When you reach agency, you’re no longer shackled to your job. And so on.

This is not just theory. This is how money works — not just for me, but for you as well.

Buying Freedom

My inbox is filled with examples of folks who have managed to shed their financial shackles to one degree or another. For instance, another money boss — let’s call her Marie — wrote to say that she’s in a precarious position at work. There’s conflict, and she’s worried about her job. But because she’s managed to boost her income while trimming her expenses, she’s less worried than she might have been in the past.

This is a terrific real-life example of the security that comes when your work as a money boss comes to fruition. If she were in debt and/or spending exactly what she earned, Marie would feel stuck in a job that’s causing her stress. But because she’s paid off her debt and has accumulated some savings, the work conflict isn’t as scary. She knows that if she leaves her job, she’ll be fine for a while. She’s bought a degree of freedom.

No matter where you are on the road to financial freedom, I urge you to continue making smart choices. Remember to manage your life like a business. Ruthlessly guard against unnecessary expenses. Boost your income whenever possible. Never forget that your goal is to remove the chains that hold you back, to gain the freedom to do and be who you choose.

How to Do Great Work

by J.D. Roth on 07 June 2017 8 Comments

I’ve been frustrated lately with the quality and quantity of my work. I haven’t produced as much here at Money Boss as I would like — due largely to the fact that I’m selling one home and buying another — and what work I have produced isn’t as good as I would like. This lack of productivity has put me in a funk, which in turn makes me even less productive than before. It’s a vicious circle.

How nice, then, to stumble upon the transcript of a 30-year-old talk from Richard Hamming, a former math and computer professor and researcher. (Hamming was also part of the team that worked on the Manhattan Project during World War Two.) Hamming titled his talk, which he presented on 07 March 1986, “You and Your Research,” but his actual subject was how to do great work.

I read the transcript this morning during my flight from London to Portland. (I spent the past week in London, in part to give a talk of my own. I spoke to other financial bloggers about the importance of community.) Although it discusses the work of researchers and scientists, I found much of the advice applied to me and to writing. I suspect that many of you will find its lessons valuable too.

It’s a long talk, though. I know how tough it is for me to sit and read a computer screen most of the time. (On a ten-hour flight, I’m perfectly happy to devote a chunk of time to wading through pages of text though!) In order to make things more palatable — and in order to help me remember more of this material — I’m going to summarize Hamming’s message. I hope you find it useful.

What Greatness Isn’t

Most people think greatness is achieved by luck, Hamming says. They’re wrong.

Yes, great ideas and achievements all contain elements of chance, but hard work and preparation are the necessary groundwork to bring about this luck. “Luck favors the prepared mind,” Pasteur once said. And the brash Newton argued that, “If others would think as hard as I did, then they would get similar results.”

Hamming would agree that luck is no accident. Unexpected good things are more likely to happen when you do the work needed create favorable conditions for them.

Nor is greatness achieved solely by genius. Sure, there have been many brilliant scientists. But there’s been more great work done by folks who were less gifted yet willing to put in the time and effort to achieve the results.

Finally, it’s never too late to be great. Yes, many researchers did their best work when they were young. But plenty of others produced greatness later in life, after they’d had a chance to accumulate knowledge and experience.

So, if luck and youth and brains aren’t pre-requisites for great work, what is necessary? Let’s take a look. [Read more…]

Money Boss Theater: The Cluttered Lives of the American Middle Class

by J.D. Roth on 02 June 2017 25 Comments

Long-time readers are familiar with my decade-long war on Stuff. I was raised in a cluttered home. From a young age, I was a collector. (Some might even say a hoarder!) After Kris and I got married, I began to acquire adult-level quantities of Stuff. When we moved to a larger house, I found ways to acquire even more Stuff. I owned thousands of books, thousands of comic books, hundreds of compact discs, and scads of other crap.

Eventually, I’d had enough. A decade ago, I began the s-l-o-w process of de-cluttering.

While I still bring new Stuff into the house — Kim would tell you I bring too much Stuff home — I’m not nearly so acquisitive as I used to be. In fact, for the past decade I’ve purged far more than I’ve acquired. And that process continues, week by week, month by month, year by year. In four weeks, when we move out of this condo into our not-so-big house, I intend to get rid of even more Stuff.

The Cluttered Lives of the American Middle Class

Turns out, I’m not the only one fighting this battle. Many Americans struggle with clutter. This is one reason for the popularity of the simplicity movement. When I visit my friends who live in tiny houses, they rejoice at the lack of Stuff in their lives. And it’s why books like Marie Kondo’s The Life-Changing Magic of Tidying Up become popular bestsellers. (That book is great, by the way. Here’s my review from my personal site.)

Last week, I stumbled on a video that documents the work of a group of anthropologists from UCLA. These researchers visited the homes of 32 typical American families. They wanted to look at how people interacted with their environments, at how they used space. They also wanted to look at how dual-income, middle-class families related to their material possessions. They systematically documented the Stuff people own, where they keep it, and how they use it.

This team produced a book called Life at Home in the Twenty-First Century, which records their findings. They also produced this twenty-minute video that provides an overview of the results:

“Contemporary U.S. households have more possessions per household than any society in global history,” says Jeanne E. Arnold. That’s both shocking and unsurprising all at once.

Her colleague Anthony Graesch notes that our homes reflect this material abundance. “Hyper-consumerism is evident in many spaces,” he says, “like garages, corners of home offices, and even sometimes in the corners of living rooms and bedrooms.”

Graesch continues: “We have lots of Stuff. We have many mechanisms by which we accumulate possessions in our home, but we have few rituals or mechanisms or processes for unloading these objects, for getting rid of them.” All of this stuff causes stress. It carries very real physical and emotional tolls.

One interesting finding? Clutter bothers women more than men. This might be because the responsibility for cleaning the clutter generally falls to women.

“The United States has 3.1% of the world’s children but consumes 40% of the world’s toys,” notes Arnold. In households with children — or, in my case, puppies — the toys can take over the home. Children’s toys and objects spill out of their bedrooms into living areas, kitchens, and bathrooms. The push to become consumers, to value Stuff, starts at an early age.

Why do modern kids have so many toys? It may be because there are so many playthings available so cheaply. There’s more Stuff available for kids than there was fifty years ago, and that Stuff costs less. Plus, priorities seem to have shifted. Modern parents see spending on kids as a priority; parents fifty years ago did not. [Read more…]

How to Make Better Decisions

by J.D. Roth on 24 May 2017 18 Comments

It’s been a busy two weeks in the Rothwards household!

Last Monday, Kim and I had inspections on the home we want to buy. The results weren’t good. The inspector concluded that, overall, the house shows evidence of deferred maintenance. Needed repairs have been left undone. Translation: Nearly everything related to the exterior of the home needs work. The roof needs to be replaced, as does the siding. The deck and fence are beginning to fail. And, worst of all, the foundation may be severely damaged.

The country cottage we'd like to buy

When I was younger, this news would have made me distraught. Back then, I was an emotional buyer, not just for small stuff but also for big things like houses. When my ex-wife and I bought our home in 2004, for instance, almost everything about the transaction was emotional. I loved the house (or the idea of the house, anyhow), and that clouded my judgment.

Now, in 2017, I find that I’m much more rational. I understand that there are lots of other houses out there, and that Kim and I could live almost anywhere and be happy. Sure, this particular place meets most of our needs — and it’s cute — but neither one of us is overly attached to it. We’re making this purchase from a business perspective first and a lifestyle perspective second.

In short, we’re doing our best to make a rational decision instead of an emotional decision.

How to Make Better Decisions

When I first announced that Kim and I were looking for a not-so-big house, Money Boss reader David Hatch suggested I read Decisive by Chip and Dan Heath. This book is all about how to make better decisions in life and work.

“If you study the kinds of decisions people make and the outcomes of those decisions,” the authors write, “you’ll find that humanity does not have a particularly impressive track record.” Business decisions are frequently flawed. On a personal level, people fail to save for retirement. We make irrational purchases. We date people we know we oughtn’t date.

How can we be make better decisions? It all comes down to process.

“Understanding our shortcomings is not enough to fix them,” the authors write. “It’s hard to correct a bias in our mental processes just by being aware of it.” Just because you know which foods are bad for you doesn’t mean you’ll stop eating them. Being aware that you tend to spend compulsively won’t stop you from spending compulsively. To actually make better decisions, you need a plan.

According to the authors, there are four major villains when it comes to making good decisions:

Narrow framing, “the tendency to define our choices too narrowly, to see them in binary terms”. Too often, we see our options as either-or, when in fact we have a wide array of choices. We ask ourselves, “Should I do this or that?” instead of “What is my best option here?” So, for instance, you might ask “Should I buy a new car or not?” instead of “What’s the best way I could spend money to improve my life?” We ask the wrong questions. Narrow framing makes you miss options.
Confirmation bias, which occurs when we reach a quick conclusion then seek only the info that supports this belief while ignoring everything else. “When we want something to be true, we will spotlight the things that support it, and then, when we draw conclusions from those spotlighted scenes, we’ll congratulate ourselves on a reasoned decision. Oops.” Confirmation bias leads you to gather self-serving information.
Short-term emotion. When making difficult decisions, we get caught up in our feelings. Our minds are so clouded with pros and cons and what-if scenarios that we can’t think straight. We lack perspective. We’re unable to take the long view. Short-term emotion will often lead you to make poor choices.
Overconfidence — unfounded belief in our own abilities and in the direction the future will take. “The problem is that we don’t know what we don’t know,” the authors write. They cite some findings that boggle my mind. For instance, once study showed that when doctors said they were “completely certain” in a diagnosis, they were wrong 40% of the time. (There are lots of studies like this.) Overconfidence leads us to make poor predictions — and to overestimate our own abilities.

If these are the four villains of decision making, then how do we defeat them? Again, it comes down to having a process, a formalized strategy to help make better decisions. And that’s what Decisive is all about.

The Heaths suggest that for each of the four villains of the decision making, there’s an effective strategy to defeat it. Taken together, they call their system the “WRAP process”. It works like this:

Widen your options to avoid narrow framing.
Reality-test your assumptions to avoid confirmation bias.
Attain distance before deciding to avoid short-term emotion.
Prepare to be wrong to avoid overconfidence.

Let’s look at each of these steps in a bit more detail. [Read more…]

April 2017 by the Numbers

by J.D. Roth on 12 May 2017 20 Comments

Here’s the fourth (and final?) installment of my 2017 project to document my actual spending habits. After returning home from our year-long RV adventure, I wanted to get a feel for how much I spend each month. It doesn’t feel like I spend a lot — but is that feeling accurate? This project is an attempt to document how Kim and I actually live. Once we have some real numbers, then we can start to make changes for the better.

After four months of diligent tracking, it’s likely this will be the final update for 2017. I’ll continue to track all of my data, but I’m pausing the reports for a few months — possibly until early 2018. Why? Because (a) I’ve gathered enough info to know what areas need work and (b) we’re moving.

Clarification: I’m not abandoning my quest to track how much I’m walking, biking, spending, and eating. I’m pausing public reporting temporarily. My goal with this endeavor is to document normal life. For the next few months, life will be abnormal.

Why I’m Pausing This Project

Let’s get the big news out of the way: Kim and I have sold the condo.

We listed the place for $497,000 on Friday, April 28th. Our agent held an open house on Sunday, April 30th. On Tuesday, May 2nd, we received four offers — all over asking price. In the end, we accepted the second-highest offer for $530,000.

The highest offer had an escalation clause that went up to $550,000 in increments of $2500. We could have accepted it at $532,500, but that offer was contingent upon the sale of an expensive home that wasn’t yet on the market. We gave up the $2500 for an offer that seemed much more secure in almost every regard. (We were also swayed by the personal letter from the prospective buyers.)

The inspection period for our home ends this afternoon. Now it’s a matter of tying up loose ends before we close the transaction on June 6th. The buyers are allowing us to do a “rent-back” until the end of June, which is good because that’s when we’re scheduled to close on the home we want to purchase.

With a secure offer in hand for the condo, we felt comfortable pursuing our plans to buy a place with space for us and our animals. Kim and I made a full-price ($449,000) offer that was accepted for the 1948 English cottage I mentioned in my article about our quest for a not-so-big house. Monday morning, I’ll be present for a variety of inspections. That process will reveal whether or not we move forward with the transaction or go back to the drawing board, searching for another smallish home with land in the Portland area.

Now let’s look at the stats for last month. [Read more…]