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:
Tag: retirement
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.
Yesterday, my dad drove up to his office with his briefcase in hand, went in through the back door, met with clients as usual, and when the day was done, he walked away forever. He hadn’t planned to retire for another 5 years, but someone offered to buy his small business earlier this year, so he did some calculations. He realized that if he carried the loan on the business and charged a low interest rate, the person buying the business would be happy with the low rate, and my dad could use the loan payments to retire five years earlier than planned. I’ve known about this for nearly six months and have had several thoughts since hearing the news. Here are a few of those thoughts:
When you set out on a bike ride, you may get out elaborate maps, check for construction updates, and chart an exact path from beginning to end. Or, you may hop on your bike and start riding. There are benefits to both approaches. However, if you choose to just start riding, you may have a great ride, but you’ll never get anywhere.
Happy Monday everyone! I hope your weekend was pie-filled and celebratory in meaningful ways. This Monday we’re doing something a bit different. Steve over at Think Save Retire issued a challenge to record a one-minute retirement sound bite. He posted an example (so fun to hear voices!). I started recording mine and suddenly it became a full afternoon of recording all the kids being crazy. Laughter ensued. While I cut most of that out to stay close to one minute, the family is all present. Enjoy our voices and we’ll be back to normal on Wednesday with our November plan update!
(music from Bensound.com)
Yes, Mr. T and I are on the road to financial awesomeness. But our road is different and complicated because we’re already down a path. So we have to chip our path over to the one of financial awesomeness. We already got a job, bought a house, and started living on nearly all the income we made. Those things don’t allow for a simple path. But what about you? I hear you are about to get your first job out of college! Congrats! That’s an exciting adjustment! I bet you’re looking forward to actually making real money! And guess what? I have great news for you! Your path to financial awesomeness is completely simple! Let me tell you about the magic number:$23,500. Let me suggest that you take whatever offer you are given for your next job and subtract $23,500. Just pretend it isn’t part of the package. Wait, wait, WAIT! Hear me out before you walk away. I’m only asking for FIVE YEARS. I know, that may be nearly half of your offer. But how much money were you making in college? Isn’t that still an improvement? Before you decide, let me show you just what $23,500 can do in five years and why that number is so magic.
The Personal Finance blogging world is full of posts on which order you should contribute to retirement funds, the Roth vs Traditional IRA debate, even arguments about whether paying off your mortgage early makes the most financial sense. Here at Northern Expenditure, we don’t pretend to know what’s best, and we are big proponents of the best financial plan being the one you’ll actually do! If you read early retirement blogs, you know that most of these people are saving over 50% of their incomes, maxing out 401ks, IRAs, and Health Savings Accounts with savings left over to dump into brokerage funds. This is not us. First of all, we don’t love the savings percentages, because they are heavily biased toward making a lot of money. Though our goal may eventually be to hit that 50% savings mark, that would leave us a lot less to live on (for a family of five!) than people that make sometimes triple what we make. But this blog is about encouragement. Even us… a family of five that make significantly less than $100,000/year can achieve financial independence! And so can you!
We’re going to throw around some terms today that will impress your friends at dinner parties. Get out your notepad. Today’s topic is intertemporal choice and temporal discounting. Intertemporal Choice is a term used when a choice involves making a decision at a certain time that will impact the outcomes at a different time. For example, remember the Marshmallow Study? It is an intertemporal choice to choose between taking one marshmallow now or waiting for the second marshmallow. Temporal Discounting simply means that we value the second marshmallow less than we value the one sitting in front of us because the one sitting on the table is here NOW and the other one is LATER. If I told you I would give you a dollar now or you could wait a week and get the same dollar, why would you wait a week? The dollar now is worth more. You could spend it on your way home (don’t. even though the dollar is fake). In one of the most obvious financial examples, it’s hard for people to save for retirement because they value the money now more than the money later.
Temporal discounting is a highly studied topic because it’s important for people to understand how much an individual will discount that future dollar (or marshmallow, or whatever) for the one today. (Would you trade a dollar today for FIVE dollars next week?) It’s also important to understand what factors into that discounting. (Do you trust me? Have you been raised on a family saying of “Take the money and run?”) This is one of my favorite topics (I reserve the right to share more research in this field at a later date… but because of temporal discounting, THIS post NOW is definitely worth more… I know. I’m hilarious.)
So what does the research say, and how can we learn from it?