With all the numbers we ran last week in the formulations of our new plans, I was reminded just how long is really left in our journey. I’m impatient by nature and would like to retire yesterday! As I made a batch of peanut butter balls, I realized the journey is worth it. The recipe for peanut butter balls comes from my great aunt, Joanie, who always knew that delicious candy could make the world a better place. These tiny bits of heaven are simple to make, but take quite a bit of time. After the peanut butter center is mixed, it has to be rolled into balls and chilled before dipping each one in chocolate. As I carefully rolled and dipped a batch recently, I started thinking about all the parallels to personal finance (geek alert!):
Tag: Personal Finance Page 4 of 7
Welcome to the culmination of a week of numbers! On Monday, we took a look at the historic spending of the Banks family and emerged with an ideal early retirement budget of $51,300 with an after-kids budget of $47,000. Remember that these numbers are all based on maintaining our current lifestyle in our current home in Alaska. Moving will most likely decrease those needs, but since we have data about what we currently spend, we’ll build projections based on the life we currently live.
Today we’re going to take a good look at the three numbers most retirement calculators make you just guess. All three are very arbitrary and are based on future market and economic performance.
Inflation and Market Return
For ease of use, I like to combine inflation and market return. Often, when the market is high, so is inflation. But that’s not always true. So, luckily, some very nice people have combined the two metrics for us in an overview of historic market performance. All charts we discuss below are adjusted for inflation.
This week, we’re doing an in-depth look at numbers and we’re kicking it off by taking a good, hard look at how much we spend. Annual expenditures are really the magical number needed to retire. We’re getting real (with charts!) and taking a look at 2013, 2014, and 2015. First up, 2013:
I had an interesting conversation with Penny last week. It went something like this:
- Penny: McKinley is a saver. I’m a spender.
- Me: What makes McKinley a saver and you a spender?
- Penny: McKinley just saves all of his money. I buy things. Like my waterproof camera. Well, I guess I’m more of a saver, then a spender.
- Me: What’s the point of McKinley saving his money? What is he going to do with it?
- Penny: I don’t know. He just keeps it.
- Me: Dad and I are savers. But do you know why we save money?
- Penny: So we can go on vacations and dad doesn’t have to work until he’s old.
- Me: Right. Money isn’t worth anything if it doesn’t have a purpose.
The book, Your Money or Your Life is said to have introduced the term “Financial Independence” and offers a very specific road map for achieving it. I strongly advocate every person read this book. A large part of the program involves creating a chart. Let’s start with how to create your own chart and then talk about why it’s the greatest thing since sliced bread. In Excel,* or on graph paper on the wall (I will argue for doing both momentarily), start tracking in a point-to-point or line graph form the following numbers:
GRATITUDE AND TEMPORAL DISCOUNTING
Everybody is impatient to some degree. When it comes to money, we want money now. We want to spend money now. This economic impatience is called temporal discounting. In short, temporal discounting means that we value $50 today over $50 tomorrow and it’s one of the main reasons most people don’t have enough money to retire. The ability to overcome temporal discounting would be considered an economic super power! You would be the world’s greatest saver! Unfortunately, there isn’t a way to overcome temporal discounting entirely, but there are ways to lessen its impacts.
We’re big fans of They Might Be Giants. They make catchy, intelligent children’s music. My kids were listening to one of their favorite CDs by They Might be Giants, Here Come the 1,2,3s. The Seven Days of the Week song came on and we all started singing loudly. I realized this is it. This is the Financial Independence Anthem. It’s about never going to work and living a dream. Maybe your dream is to play the trumpet. When you reach Financial Independence, you can practice all day every day so Sunday you play best! “Oh no, no I never go to work…”
Want to know EVEN MORE about us? Today we had the pleasure of being interviewed by the great Mr. 1500 Days! Check out our interview.
One morning while we were in Hawaii during Christmas time, Mr. T and I left our sleeping kids in the care of my parents and took a walk out onto a rocky point to watch the sunrise. It was still pretty dark when we arrived, so we sat and watched the waves crash against the rocks. As we sat, we saw a group of fishermen getting ready to fish off the point. They spent about twenty minutes setting up their poles, baiting them, and casting out the lines. Then, they tied bells to the poles and walked away. I watched them leave the poles behind, get out some food, and start visiting with each other. I’m used to Alaskan fishing, which is very hands-on, so it surprised me when they walked away. And I kept staring at the bells.
The biggest financial finish line in the majority of people’s lives is retirement. Researchers have poured years into studying how to get people to actually take the steps to prepare for retirement because not enough people are doing so. The definition of retirement is to leave one’s job and cease working. Quitting work is the easy part of retirement. The hard part is being financially prepared to no longer have paychecks coming. Everyone is looking for a magic bullet to retirement—the as-seen-on-TV pill for becoming rich. People want to win the lottery or inherit large amounts of unexpected money because otherwise, they just don’t know how they will ever have enough money to retire.