Is Saving Money Depriving Yourself? 

“The best thing money can buy is financial freedom.” ~Rob Berger

One of the biggest problems most people have is that they believe that only spending money makes them happy. As a result, many people are reluctant to save because they reason that, taken to the extreme, if they save up money, they will be rich when they are older, but then they will be too old to enjoy that money.

The problem with this line if reasoning is that it assumes that spending gives happiness and therefore saving up money means you are not spending money and therefore while you are saving you are depriving yourself, making yourself unhappy.

The problem with this reasoning is that it ignores the happiness that comes from holding money rather than spending it.

When you hold money, you give yourself freedom and optimism about the future. You give yourself a sense of security. Holding money and investing that money also allows you draw income in the form of dividends, which gives you security because you don’t need to work for that money.

This is why I have no fear of dying with money saved up. I imagine I will adopt a child when I am very old and he or she will inherit everything or I will just will it to charity.

Many people consider this wasteful but it is not. Money held is not wasted. It serves a useful purpose, which is to give you passive income and security, which gives you happiness.

Whether You Are a Slave or Not Depends on the Direction of Your Future Cash Flow

 

I couldn’t help think today about how great it is to work. I love working now, but that was not always the case. Only a few months ago I was dreading work. I hated it. I am happy now because I was able to transfer to a different area, and I did this simply by asking someone.

I now work because I want to work. I don’t have to work because I earn dividend income that covers my living expenses. I earn around $25k to $30k per year and I spend around $15 to $20k per year. But I like to work not only because I like my job at the moment but also because I like to grow my dividend income. This means I can improve my standard of living. When I am getting a coffee with my work colleagues, I notice that many of them buy the cheapest option, which is a small coffee with dairy milk whereas I always buy the biggest latte with soy milk or almond milk. Personal finance guru David Bach is anti-coffee (see latte factor) but I am a big believer in small expenses spread over time that make you happy. Getting a coffee is more than a coffee. Some people only care about the caffeine and are willing to stay at their desks and take caffeine pills. For me, getting a coffee allows me to get out of the office, get fresh air and sunlight, get some exercise by walking, and I can chat to my coworkers and even the barista girl who is serving or making my coffee. Then I can slowly sip the warm and smooth coffee when I’m back, which calms me. At any time, I can stop buying coffee. It’s not like a huge debt or a long-term contract. I’m free to walk away. 

For me, small expenses such as a coffee are not a problem. The main problem comes from large expenses, especially those that we put off to the future (i.e. debt). I will explain this in further detail later in this post.

Back to my job…I think I love my work right now because I don’t need to work. I’m happy to put in extra work after hours and over the weekend. I am not a manager or an executive or anything. I am still quite junior. If suddenly things go wrong and I end up with a bad manager, I am confident I can transfer to another area. If things really go bad and I cannot transfer for whatever reason, I can just quit and do something else. I plan to just pack up and go to Chiang Mai and become a freelance web developer. Even if I am not successful, it doesn’t matter because I live off dividends, but it would be nice to work on my own terms.

Recently UberEATS has opened up in my area. I thought about signing up for it and working on the weekend, but I have decided against that because I actually want to use the weekend to focus on learning how to code so that I can be a remote coder or a digital nomad. Today at the library I spent about an hour on Codecademy. I wish I spend my university days studying computer science or software engineering, but my major was in economics, which wasn’t that bad, but if I had to choose again I wouldn’t major in economics. Instead I’d study a tech degree instead. Luckily, many tech workers learn a lot of what they learn online, and they are self-taught, so that gives me hope that I can change careers.

Freedom is the purpose of my life. Freedom gives me happiness. Freedom gives me the option to experiment with and pursue what makes me happy rather than hope that whatever circumstance I am in makes me happy. It was Robert Kiyosaki who introduced me to the importance of cash flow, and I think freedom and slavery can be thought of in terms of cash flow. As much as possible, you want to increase passive income and decrease future obligations. Future obligations are expectations (including the risk) that in the future money will flow away from you. If you take on debt (e.g. a car loan and even a home loan) then in the future some debt collector will take money from you, which forces you to work. Anything that forces you to do something means that you have fewer choices, and so your freedom goes down and your level of slavery increases. Most people think this only applies to monetary debt, which is obvious because it is written down and it’s clear, but even e.g. having children creates future obligations that tie you down. The more you avoid debt, obligation, and commitment, then you increase freedom and reduce slavery. The words “commitment” and “responsibility” or even “duty” are just euphemisms for debt and slavery. If you tell a slave that he must clean a toilet because he is a slave, he will likely try to revolt or may reluctantly clean the toilet and will probably do a bad job at it because his heart is not in it. However, if you reframe and tell the slave that he must clean the toilet because it is his duty or responsibility, he will likely clean the toilet with pride and enthusiasm. So it is that many men proudly work 60+ hours per week at a job they hate just to fund the mortgage on the mansion, the children’s private school fees, the loan for the luxury car, and maybe even a stay-at-home wife as well. If they shirk these obligations, they are told that they are not “responsible” or that they are not fulfilling their “duty” and that they need to “man up” and get back to wage slavery.

In all these situations (car loan, home loan, credit card debt, children, school fees, etc), there is an expectation that money will flow away from you in the future.

Alternatively, if you create passive income from dividend income or even e-book royalties, Adsense revenue, Amazon affiliate revenue, etc, then there is an expectation that money will flow towards you in the future. You then have a choice of what to do with this money. This gives you freedom. It gives you more options rather than reducing your options. It results in less slavery and more freedom.

As much as possible, make money flow towards you in the future rather than away from you. In practice, this means getting rid of all debt, commitment, obligations while simultaneously increasing passive income, mainly from savings, investments, and building businesses.

How to Live Off Dividends

It’s the Christmas season now. My family does not really celebrate Christmas. I remember being really disappointed not receiving any presents when I was a child because my parents were always busy and didn’t really think about Christmas. Over time, I began to accept this as normal, and now that I am an adult, it doesn’t bother me at all. There is definitely something wasteful about Christmas. People suddenly splurge on toys, clothes, and gadgets. They eat large amounts of food. Then when January comes around, they are back at work slaving away. Chances are their bellies are bigger, and when they get their credit card bill, they realize their debt is bigger as well.

For me, Christmas in 2015 has been a spartan and minimalist Christmas. I remember my previous Christmases. I would buy all sorts of presents for family and friends, and I’d usually have a credit card debt in the thousands, but nowadays I usually use a debit card to make purchases. I do have credit cards, but I pretty much only use them for emergencies or online or foreign purchases. Even when I use my credit card, I pay it off maybe within a few days.

During past Christmases, I would always dread going back to work the next year. When everyone winds down at work, it’s a nice feeling. Office Christmas parties, Christmas decorations, and so forth set a nice and relaxed atmosphere, and I look forward to having time off to relax.

However, during the holiday period, and especially during the new year, you think about the year that has ended and naturally you think about your life. You think about your career and whether you’ve done the best you can. It can be stressful.

This year is different for me mainly because my dividend investing has gotten to a point now where I can live off dividends. When I started working, I was saving about 85% of my take-home pay and living off just 15% of it. I invested in shares, managed funds, or ETFs that pay high income. As time goes by, the amount your investments pay you will rise, and when they reach a point where they are equal to your expenses, you are a free man because you are no longer dependent on your job. If you quit, you can live off your investments.

“Although freedom does not guarantee happiness, it is the best assurance we have for obtaining happiness.”

~ Andrew Perlot

Every man should strive for freedom, and the easiest and simplest way I know of obtaining freedom is to build passive income.

I am going to lay down below the steps I took to live off passive income. Most people should be able to do what I have done.

Save 85% and create two separate bank accounts

As I have said earlier, living off dividends starts with saving up about 85% of your income. I recommend setting up two bank accounts. Talk to HR and ask them to send 85% of your income to one bank account. The other 15% will go to a separate bank account.

Having two bank accounts is an excellent system to separate your “spending money” from your “investing money.” Spend only from your spending account. Use your investing account for investing.

Live with others to keep costs down

Living with others can be tough, but it is the easiest way to save significant amounts of money to allow you to hit your 85% savings rate. Accommodation is the biggest expense most people face, so it makes sense to hit it hard. Most people focus on trying to save money on small things like coffee (see David Bach’s latte factor) or discount vouchers for t-shirts!

In my opinion, don’t bother with the little things. If you want to have a soy latte, drink it! So long as you are spending 15% of your income, you’re fine.

Living with parents is the best policy, in my opinion, especially if you get along with them. If this is not possible, then renting with others is also another option. You can even buy a house and then rent out spare rooms to bring in rental income. All these three options should cost approximately the same (although living with parents could be free depending on how generous they are).

Related reading: How to Live with Annoying People

Save money via abstinence, not discounts

When trying to save money, most people make the mistake of trying to look for discounts. For example, when buying jeans, they look for jeans that have 50% off, or when they travel to Thailand they look for airfares that are 30% off.

An even better strategy is to just not buy the jeans in the first place and not travel. Discounts often lure people into spending more than they otherwise would. Often discounts are fake, that is, an apple may be $10 but be 50% off, and so the discounted price is $5, but in reality that apple only cost about $0.50 and the retailer made a $4.50 profit. In other words, forget about the percentage discount and think about the actual price.

Basically the only necessities in life are accommodation, clothes, transport, internet, and food.

Do not conform. Rebel against society

If you’re living with your parents, driving an old car (or taking public transport), watching YouTube rather than cable TV, then many people will think you’re weird. They will put you down and try to persuade you to conform. Try to resist. Don’t conform to society. Do what you want to do. Also remember that this is not permanent. As your savings go up, your dividends will go up, and your standard of living will go up, but this will take time.

If you must, borrow from yourself

Spending only 15% of your income might be difficult, and you may run out of money when you need to spend on something you need.

If this is the case, one option is to borrow from your own savings. This is where setting up two bank accounts is a great idea. You transfer money from your investment bank account into your spending bank account. You then keep track of how much money your spending account owes to your investment account. The aim is to pay yourself back as quickly as possible.

Invest for income

Invest in a variety of assets that pay high income, e.g. ETFs, shares, and managed funds. If you’re unsure where to go, sign up for an online broker and buy shares in banks. Banks typically pay high dividends. As of December 2015, shares in Australia’s ANZ bank provide a dividend yield of 9%. I recommend using Bloomberg to find the indicated dividend yield of an investment.

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Diversify your investments and always direct dividend payments to your “spending account.” This means that over time, the amount you have to spend increases, which should motivate you to keep saving up.

Invest 100% of your income

Once your passive income from dividends (or other sources) is high enough, talk to HR at work and direct 100% of your salary to your “investing account” so that you are living off passive income. This may be difficult to do, but just remember there is no rush. Once the 15% you get from your salary seems like a small amount compared to your passive income, this is a good time to cut it off completely so that you can actually live off dividends.