Living with Parents to Save Money

You must always have a way of getting out when things go wrong.

When most people try to save money, they look at small expenses such as coffee. According to David Bach’s “latte factor” concept, by skipping your daily coffee, you save about $4 per day, and this adds up to about $1000 per year.

While I do not disagree that skipping your daily coffee can help you save, I’d rather put my effort into actions that have a bigger impact. The biggest expense that most people face is accommodation, i.e. putting a roof over your head.

My recommendation for those who want to save money on accommodation is to live with other people. Either buy a house and rent out spare bedrooms to others (e.g. via Airbnb) or rent with others. Another simple way to live with others is to live with your parents. By living with others, costs are spread out.

However, living with others is not easy. That being said, if someone wants to pay more money to live by himself, I have nothing against this because I know how bad it can be to live with other people. For example, today is a Sunday, and I live with my parents. Today I was at home in my bedroom on my computer. My mother was in the living room. She is screaming something to my grandmother, arguing about food. I could not concentrate at all.

My recommendation to those who live with others to save money is not necessarily to move out. Rather, the answer can be as simple as buying noise cancelling headphones or simply temporarily getting out of the house if your roommates, parents or spouse start making noise.

For example, I was so annoyed that my family were making too much noise that I had a shower, got dressed, grabbed my laptop, hopped into the car, and drove to the local library. I am typing this blog post right now in the local library.

Like I said, living by yourself is fine. It makes sense to have some privacy. However, living with others can save you a considerable amount of money. It can be annoying to live with others, but the annoyance can be mitigated e.g. with noise cancelling headphones or with a visit to the local library or park.

Driving out of the home when the family goes crazy, in my opinion, highlights a fundamental law that everyone must be aware of: always have an exit plan. No matter where you are, no matter what relationship you have with anyone, be it a professional relationship or an intimate relationship, you must always have a way of getting out when things go wrong.

Even better than a plan is an exit plan.

The Tech Lead

There is a YouTuber named “The Tech Lead” who is a millionaire who lives with his parents. While I definitely do not agree with his political views or his arrogance, he makes very good points about the benefits of living with parents in many of his videos, which I share below.

Don’t Aspire to Buy and Live in Your Own Home

There is much talk of a housing affordability crisis in Australia. Average house prices in Melbourne and Sydney are reaching $600,000 or even more.

However, for young people looking to buy a house, my recommendation is that you do not buy.

Instead, go to your parents and negotiate with them an arrangement whereby you pay, say, $300 per month to live with them. Depending on how nice your parents are, they may even allow you to live with them for free.

If this is not an option, try to arrange to share a house with other people.

If you do buy a house, consider ways you can offset the burden of a big mortgage, such as renting out spare rooms.

I know a friend who, after purchasing a house, decided to renovate the garage so it was liveable. He lived in his garage and rented out the rest of the house. The rent was pretty much able to cover the mortgage repayments, which meant he was able to pay off the mortgage in about six years.

I have lived with my parents for the past five years and have been able to save up about $60k per year. After five years that adds up to about $300k, but rather than invest in property, I prefer to invest in shares, index funds, and managed funds. Nevertheless, shares have gone up in value in the last five or six years, and my net worth has increased at a rate of about $100k per year, which gives a net worth of about $500k now.

It doesn’t matter whether you invest in shares or property. Both are good investments. However, I believe shares are better because they usually make more money and because you generally pay less tax (although this depends on which country you live in).

To sum up, try to live with your parents. If you rent, try to rent with others. If you buy, rent out the rooms. Any of these three strategies frees up money to allow you to invest. You’re not really investing much if so much of what you earn goes towards paying interest, which is the situation most people have when they take out a massive mortgage to buy their dream home. It is true that rent money is dead money, but interest is also dead money.

The main benefit of real estate as an investment is the ability to borrow money to invest. If you are able to borrow more money, you have more assets exposed to the market, which means returns are higher. However, this can be achieved via index funds or shares simply by getting a margin loan (i.e. borrowing to invest) and/or investing in internally leveraged ETFs (i.e. investing in a fund that borrows to invest).

Note that just because you can use debt to make more money, it doesn’t mean you should. Borrowing to invest can be profitable, but there are many assumptions you are making about interest rates and returns. With leveraged ETFs, fund managers usually use dividends to pay off their own debt, which means the investment produces very little income. Furthermore, when you borrow to invest, you usually need to make regular monthly repayments. These regular monthly repayments diminish the value you get from any passive income you may receive from dividends or rent. Debt is anti-passive income and therefore anti-freedom. Borrowing money from the bank makes you are slave to the bank.

There is a myth pervasive in Australia and many other countries that renters are second class citizens who must aspire to own a home because owning a home makes money. This is a lie. What matters is how fast your net worth increases. Most people who buy a home have such massive mortgages with huge interest repayments that their net worth increases very slowly because any progress made when the price of the house goes up is quickly lost when they have to pay interest. Their net worth would have grown faster if they had rented a cheap place and socked the saved money into index funds.

It is not just interest. Buying a house is also associated with massive fees to accountants, real estate agents, and lawyers, as well as huge taxes (such as stamp duty in Australia). All these bring down the growth of your net worth, often by more than people expect.

When most people at my work “invest” in property, I never hear them talk about the rate of growth of net worth, rental yields, or variability of prices. They seem more keen to talk about how nice the patio is, whether the kitchen has a granite bench, and whether it has period styling. All this is bling that distracts them from the massive expenses associated with property.

Don’t bother buying a house. They are clunky massive assets that are taxed heavily and usually produce little returns. They tie you to one place and stifle your movements.

What Can Be Done about Killing Sprees?

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There has recently been another mass shooting in America, this time in Umoqua College.

Some say this is a mental health issue. The shooter is a sick man who needs help from a psychologist.

But mass shooting are happening so often that I wonder if the problem really is a mental health issue.

I wouldn’t say it’s a mental health issue. I think we live in such a corrupt and evil world today that it’s reasonable to expect that a significant number of normal people would grow so frustrated with it that they suddenly lash out, and a rifle within arm’s reach doesn’t help either.

There needs to be a way for people who don’t fit in with this corrupt and evil world to be able to distance themselves from the world safely and live their lives independently. Maybe a guaranteed minimum income would help. Under this policy, the government pays everyone a guaranteed minimum wage, say, $10,000 per year.

A person so disillusioned with society can take his or her $10,000 per year from the government and go live in the mountains or the forests or even overseas in, say, Chiang Mai, Thailand. The bottom line is that wage slavery should not be the default. There needs to be an option for individuals to drop out.

If a man does not have a guaranteed minimum income from the government, he has to go to university, go to work, and save up until he has enough money to be able to drop out of society.

Not everyone can live off dividends, especially when they are young and have little wealth. That they are forced to slave away at work just to earn their freedom, in my opinion, is an injustice, a sign that although we have progressed from the whips and chains of slavery in the eighteenth century, slavery has not been abolished but has merely evolved.

Is America Socialist?

Is America Socialist? Or is it a shining exemple of capitalism? It really is hard to know.

Now that China is suffering from a downturn, the government there is propping up their share market by buying assets and everyone is finger pointing, saying this sort of socialist intervention in the economy doesn’t work.

But in the US, the Fed intervened in the economy to prop up asset prices after the GFC, and the size and reach of the US government increases all the time, even or especially when Republicans are in power.

The Dismal Future of the Australian Economy

gold price vs asx200 27 august 2015
GOLD vs the ASX200 (Commsec)

The recent volatility in stock markets has gotten me worried. Everyone keeps telling me to relax because “economic fundamentals are sound,” but when I ask them to explain how this is true, it’s revealed that they don’t really know what they’re talking about. It seems that most people just hope for the best and rationalize away bad news.

The Chinese stock market is certainly wobbly. Some say the Chinese economy is very healthy. After all, they have low debt and a massive foreign exchange reserve. They are the biggest lender nation in the world with the USA the biggest creditor nation. However, we don’t really know much about the true size of China’s debt because there is significant activity in the underground economy that is not transparent, and I’m not too confident in official figures provided by the Chinese government. Of course, China has been manufacturing products from t-shirts to smartphones, but the government has in recent years been intervening in the economy to prop up the stock and property markets. It’s uncertain whether these distortions can be held together by the government or whether the market will eventually strike back.

America has resorted to printing money, which has resulted in surges in the stock and bond markets. However, unemployment is still high and wage growth is low. Printing money doesn’t seem to have done anything other than make the holders of stocks and bonds wealthy (these are mostly wealthy people anyway).

In Australia, our economy used to be dominated by two sectors: the banks and the miners. The miners dug resources from the ground and shipped them to China. China makes goods and ships them to US consumer who buys these goods.

But the American consumer (or consumers from any other developed country) is not buying as much as they did before the GFC. This means China is slowing down, the price of resources is dropping, and the mining sector in Australia is getting crushed. We only have the banks left, and how do they make money? The balance sheets of Australian banks is mostly in loans to consumers who buy real estate. Real estate prices have been going up thanks to profits from mining. In other words, banks do well because house prices have been sustained by profits from the resources sector. Now that mining is dead, what will sustain us? Where are our strong fundamentals? House prices only go up with people buy houses, but to buy houses you need to make money in the first place. You can’t make money from houses without putting money into it in the first place.

Many who have bought stocks have made great wealth from quantitative easing, but now that tears are emerging in a bubbling world economy held together by printed money, it’s time to look at investing in gold.

Gold tends to shoot up significantly when stocks tumble, and when stocks go down, gold tends to go sideways or go up anyway, so there doesn’t seem to be any downside to investing in gold.

Personally, I will be buying this shiny metal from now on.

Fear of Being Fired and Fear of the Future

Today is Sunday. Last night I stayed up until three in the morning. I woke up today at nine, which means I got six hours of sleep, which is not good. It would explain why I feel so horrible today. I don’t want to sleep in because I know I’ll have trouble waking up early tomorrow for work. I know poor sleep increases cortisol and destroys muscle. I had a lunch catch up with a friend booked in today, but I didn’t feel like going, so I texted him and told him I was busy. I didn’t get into the detail. He seemed cool with it.

It’s all hitting me, I suppose–my girlfriend ignoring me, my career completely stagnating, my lack of sleep, my lack of good friends. I’ve recently been mulling over in my head a new income goal. I currently earn $80k a year in income. About $5k of that is from investments (conservative estimate) and $75k is from my salary. I aim to increase gross income from all sources by $5k per year. This means next year I should be earning $85k and the year after that I’ll be earning $90k and so forth. I can increase my income by getting promotions or progression at work, but if that fails (and it probably will) I can save up more and rely on investment income. I am also going to get serious about starting a side business on the internet so I can earn money online. I need some goal to keep me motivated otherwise I will start to get lazy and depressed.

I’ve heard rumours at work that senior management will fire a few people in the next few weeks. Supposedly they have a few people they want to target. I can only hope I don’t get fired, but even if I do get fired, it’s not like I love my job or anything. I’m not fully certain what I’ll do if I get fired, whether I’ll hunt for another similar job, start over and do something completely different, or fly over to Asia and retire. There are always options, I suppose, so I don’t have too much fear, and I do have savings. I’ve always been paranoid about the future. I avoided marriage, mortgage, and children for this reason alone. This is the thing about the future: it is always uncertain and scary. You want to give yourself the best opportunity as possible to tackle the future. That means you need good health, no debt, and no massive obligations or commitments.

Love and Frugality

Last night I watched a romantic movie called Before Sunrise. It is about a young boy and girl who meet on a train, get off at Vienna, and spend the night in the city before they need to separate from each other the next day. I thought the movie was absolutely beautiful and I suppose by watching it I feel great loss that I never really fell in love with anyone. I’ve been on quite a few dates (most of which are first dates) and had one relationship that lasted for a year, but otherwise I’ve lead quite a simple life. I would love to fall in love like they do in the movies.

Of course, the frugal side of me tells me that just because something is glamorized in a movie it doesn’t mean I should follow it. Movies, TV shows, books, and other forms of art have a way of making you desire things more and creating greater expectations. Greater expectations normally lead you into spending more money than you otherwise would.

Saving up money is simple. You simply don’t spend much. Of course, if it were this simple, why are most people living under enormous debt? I think it is because most people have high expectations. An average person may earn $50,000 per year, but if his expectations are such that he needs to spend $50,000 per year in order to afford the things he feels he needs, he will not save anything. However, if his expectations are lowered. If he were to suppress his desires such that he can live on $10,000, he’d be able to save much more.

Where do expectations come from? There are two sources: internal and external. Expectations can come from yourself when you tell yourself that you need something or that you don’t need something. But expectations can come from others: friends, girlfriends, TV, movies, salesmen, etc.

When we talk to ourselves, we can try to convince ourselves that we don’t need something that we may desire. To react to external influences, we can avoid friends who spend more than we do.

To suppress feelings of love or desire, it is probably best if I avoid romance movies or books. If I keep watching these movies, I desire more.

The point I am making is that love is the tool that other people use to make you desire something, and desire leads to greater expectation, and this normally leads to greater spending. Marketers try to make you love a product so that you buy it. Women try to make you love them so that you spend money on them. It is sad then that in order to be successfully frugal that you must suppress your love. They say love is a beautiful thing, and it can be, but when I look at all the examples of love in the real world, I have trouble separating acts of love from acts of greed, envy, or hedonism. From one perspective, love is beautiful, but look at a different perspective and love is also vile or vulgar.

Can I live a life without love or desire? I doubt it. I am willing to spend money to pursue love, but it must be controlled.

Reduce Spending vs Increase Income

I currently aim to save 85% of my after-tax pay (as recommended by Early Retirement Extreme). I try not to tell too many people in real life about my high savings rate, but back in the days when I was more naive, I’d talk about my savings rate all the time, and one common response I hear is the recommendation that I should be focusing on increasing income rather than reducing spending.

My response to this recommendation is: why not do both? Why not increase income and reduce spending at the same time? Why assume that you can only do one or the other?

While I recommend increasing income and reducing spending at the same time, I recommend you put more effort into whatever gives the biggest bang for your buck. In other words, do what gives the greatest return on effort.

For example, when I graduated from university and started working, I was earning only $40,000, and four years later that has approximately doubled. I have received only one promotion. I am on a fixed salary with zero bonuses. I get paid the same amount regardless of my performance. I don’t consider this to be spectacular, but I have been saving approximately 80% to 85% during that time, and adding my salary plus my passive income from investments, my total income today puts me into a higher tax bracket whereby I pay approximately 40% on income tax. In other words, due to progressive income taxation, higher income is rewarded with higher taxes. I am a big fan of progressive income taxation mainly because it earns government significantly high tax revenues while also reducing the gap between rich or poor, but there is no disputing that for some people progressive income taxation reduces the incentive to work hard because once you are at a certain income, effort is not sufficiently rewarded.

This is why I prefer to save. Saving is easy. One very easy way to save money is to automate. For example, talk to HR and ask them to send 85% of your income into a separate savings account. All this will take about one hour. Assuming you earn an average salary of $50,000 and pay zero tax, you will be saving $42,500 per year. In other words, one hour of work will give you are return of $42,500.

Now suppose I were to try to increase my income. I’d have to search for jobs, catalogue my skills and achievements, update my resume, write a CV, talk to referees, apply for the job, talk to the relevant contact at the firm, practice for the interview, go to the interview, and follow up after the interview. All this will take maybe 50 hours and even then there is no guarantee I’ll get this job, and even if I do, the increase in salary is only about $10,000, and that is not counting taxation.

Which gives the better bang for your buck: one hour of work yielding $42,500 or 50 hours or work yielding $10,000? This is extreme example, but I think it illustrates my point.

Everyone is different. For those working in jobs that pay performance bonuses (e.g. real estate agents), a structure is in place that rewards hard work, so there is no question that you should be working hard at achieving these performance targets. Furthermore, while automatically saving 85% of income is easy for some, if your circumstances are such that you must spend a lot (e.g. you have a mortgage, children, or expensive housewife) then you may have no choice but to focus on increasing income rather than reduce spending.

The bottom line is that is does not matter whether you make money by making money or saving money (“a penny saved is a penny earned”). What matters is that you devote your limited time and efforts to whichever area provides the greatest return.

Thoughts on “Early Retirement Extreme”

I love listening to podcasts when I’m driving, exercising, or stretching. It’s free education and entertainment. A recent podcast I’ve listened to that I feel I need to write about is one on the Survival Podcast featuring Jack Spirko interviewing Jacob Fisker of Early Retirement Extreme.

I have always been fans of both Jack Spirko and Jacob Fisker, so having these two together in a podcast is brilliant. Basically, Spirko is a “modern survivalist” who works to set up a homestead in the country where he can take refuge in if there is ever some disaster scenario. He focuses on self-reliance, independence, frugality, and being prepared. Even if nothing happens, it doesn’t hurt to be prepared.

Jacob Fisker of ERE, on the other hand, is different. Whereas Jack Spirko works outside the system (or “off the grid”) in order to free himself from it, ERE is about using the system to your advantage, i.e. applying capitalism to achieve freedom (or as the ERE website sometimes says, taking advantage of “rentier capitalism”).

Fisker’s story is remarkable. He takes retirement to the absolute extreme. Mainstream retirement advice is that you save up 5% or 10% of your income and then over forty years or so, assuming some wildly optimistic rate of return and then harnessing the power of compound interest, you will retire when you are incredibly old and frail with an income that is about $50,000 a year.

ERE, in a nutshell, states that you save up to 85% of your income and then retire within five years. Because you are saving up in five years, compound interest does not matter. What is remarkable about Fisker is that he was able to retire at age 33 after saving 85% of his income with an income of only $25,000. He achieved this by e.g. not having a car and walking to work (walking about five miles back and forth).

Suppose the typical person earns $50,000, and assuming zero taxation (for simplicity), then in five years, assuming you save up 85% and assuming zero rate of return on your savings (again for simplicity), you’d have a little over $200,000 saved up. Assuming a rate of return of 5% on the savings if invested in a mixture of cash, bonds, stocks, REITs, etc, you’d be earning about $10,000 per year or about $800 per month.

Can you live off $800 per month? In a country like Australia or even the United States, I think it’s highly unlikely. Maybe you can buy a place in the country and scrape by, but I’m not too sure.

However, in a country like Thailand, $800 per month is more than enough.

JC of Retire Cheap Asia is a retirement consultant who lives in Thailand. He advises expats from America and other developed countries on how to retire in Thailand. According to him, the minimum amount you need to survive in Thailand is $500 per month. At $500 per month, you live a very rough and bare life. However, if you have $1000 per month, you live a life of luxury. An income of $800 per month achieved through five years of Early Retirement Extreme would afford you a comfortable existence in Thailand (see Retire Cheap Asia Retirement Income Categories). This applies not just to Thailand but other countries like Cambodia, Philippines, and maybe even Belize and many others.

Career Planning is Like Walking Through a Foggy Maze

I’d like to talk about career planning. Many times I think back at my career development and think about lessons learned. What I have discovered is that career planning just doesn’t seem to work.

Many people pressure you into defining what you want to do before you go out and do it. The problem with this idea is that it assumes that it is easy to determine what it is that will fulfil you. It is not. Suppose you think you like accounting. There are so many branches of accounting that you can’t possibly know if the branch you eventually fall into will satisfy you. Furthermore, there is so much more that makes up career satisfaction than a broad academic category like “accounting.” You may love cost accounting but when you end up in a job where you hate the people you work with or you hate your manager, you will not be happy.

To complicate matters, although you may think you like accounting, there is no guarantee you will even end up in an accounting role. You may study accounting and specialize in, say, accounting standards, but once you enter the job market you may find that there are no jobs available that suit your stated passion, and you have to settle for something else.

Career planning is like walking through a maze. You know you need to reach your destination and you may know the general direction of your destination, but there are multiple walls or obstacles around you, so much so that long-term planning seems pointless.

So what are we to do when we walk through the foggy maze that is our career? When you walk through a maze, you focus on what is ahead. You focus on the walls around you. You focus on what paths that are available for you right then and there. If you make a wrong turn and reach a dead end, you walk back and learn your lesson.

The same applies with your career. You follow the paths available to you. If the only jobs available are general finance graduate jobs rather than the accounting standards job you were hoping for, it may be better to settle with what is available. Even if you get something you think you want, for whatever reason, you may end up not like it. Even if you end up liking something, circumstances change. Your manager can change. There might be a restructure. The world is not fixed, and planning too much leaves you inflexible and vulnerable to a rapidly changing world.

We need to be flexible and adaptable. We need to be prepared to be the best we can be regardless of the situation presented to us.