Why You Don’t Need Debt

I do have debt, but it’s a small amount. For example, I have credit cards, but I always pay it off before there is interest. I also have a margin loan, but I have this so I can buy easily when the opportunity presents itself, and I try to pay off any debt quickly.

Many people talk about how debt is a tool for making money, and theoretically this can be true. For example, if you borrow at 4% from the bank and invest in something an asset, e.g. an investment property that makes 8% then you make a profit. However, if you borrow money from the bank to invest, you need to ask yourself why the bank didn’t invest in that investment itself. The answer is that it is risky.

Banks have a certain level of risk they are willing to take. The property could have gone up 8% but there is no guarantee that it will. If there were a guarantee that the property would go up 8% then the bank would simply invest in it rather than let you borrow money to invest in it. By letting someone else borrow money to invest in the house, the bank effectively transfers risk. If the bank vets the borrower to make sure they e.g. have high enough income, etc and if there were clauses in the contract enabling the bank to seize assets in the event of default, then that 4% the bank makes is almost risk free.

But don’t you need to take on more risk to make more return?

Risk appetite is a very personal topic because everyone has different risk appetite. Generally speaking, it is recommended that young people take on more risk because they have greater ability (and time) to recover should something go wrong. This is the main principle behind the “age in bonds” rule, which states that you own your age in risk-free investments, i.e. government bonds. For example, if you are 25 you should own 25% of your wealth in government bonds.

However, if you’re a 25-year-old who has higher risk appetite, the “age in bonds” rule can be modified to e.g. (age – 25)% in bonds. This slightly more complex rule states that the 25-year-old would have zero in government bonds, which would increases to 1% when he or she is 26 and so forth.

A 25-year-old who has no government bonds and puts all his or her wealth into, say, the stock market, has a high risk appetite, but more risk can be taken if he borrows to invest.

You don’t need to borrow to take on more risk

However, even if someone does no borrow, he can still take on more risk. This can be achieved by investing in internally leveraged ETFs (e.g. GEAR and GGUS) as well as investing in more risky investments, such as emerging markets (e.g. VGE), small caps (e.g. ISO), tech stocks (e.g. TECH and ROBO), and cryptocurrency (e.g. bitcoin, ether, or litecoin).

Right now bitcoin and cryptocurrencies in general are making headlines because of spectacular growth. Had you purchased $10k worth of bitcoin in 2013, you’d be a millionaire today. However, everyone knows that bitcoin and cryptocurrencies in general are risky, and when you hear stories about people borrowing money from their homes and putting it all into cryptocurrencies, most people think this is stupid. It is not that it is stupid but rather than their risk appetite is very high.

However, the example of leveraging into cryptocurrencies shows that you don’t need to borrow in order to gain access to high risk and potentially higher returns. If you simply invest in a riskier asset class, e.g. cryptocurrencies, you already increase risk and the potential for higher returns.

Debt is slavery – the psychological benefits of having no debt

I would argue that there is no need to borrow to increase risk and return because you can simply reallocate your money to risker assets (unless you believe that leveraging into bitcoin is not enough risk).

The benefits of having no debt goes far beyond the lower risk you’re exposed to. Debt is slavery. Happiness is an elusive goal. It is almost impossible for you to know what will make you happy in the future. You may think a particular job, relationship, car, holiday, or house will make you happy, but once you actually have it, you may not be happy. Trying to predict what will make you happy is hard, which is why the best way we humans can be happy to experiment and try out different things. In order to be able to try or experiment with different things that will make us happy, we must have the freedom to do so, and you don’t have that freedom if you’re forced to work in order to pay debt.

Even though freedom does not guarantee happiness, freedom is the best assurance we have of being happy.

Freedom comes from reducing your obligations. Obligations are mostly financial obligations (debt) but can be non-financial as well.

Ultimately it depends on your risk appetite

As I mentioned earlier, everyone has a different risk appetite. I have a fairly high risk appetite myself, but there are limits. For example, I’m happy to put 5% of my net worth into cryptocurrencies. I invest in certain sector ETFs because I estimate that they will outperform in the future (e.g. I am bullish on the tech sector).

Market fluctuations can result in the value of my ETFs and shares to go down by tens of thousands of dollars and I would sleep fine at night. However, there have been many times in my life when I have gotten carried away with buying too using my margin loan account and regretting it. You know you’re taken on too much risk when you worry about it.

Results don’t matter

The outcomes from investing are probabalistic, not deterministic, so results don’t matter. This is a common investing fallacy. Some guy would claim that he is worth $100 million due to borrowing money to generate wealth and that this is proof that you must use debt in order to become rich. However, this is misleading.

The outcomes from investing are probabalistic, not deterministic.

A person may borrow money to invest and be very successful, but another person may replicate the process, borrow to invest, and lose everything. What happens for one person may not necessarily happen for another person. For example, in 2013, there were many people who stripped money from their homes using home equity lines of credit and invested all that money into bitcoin. Just about everyone called these people stupid, but now they are multimillionaires. Does this mean you should borrow to invest in bitcoin right now? No. Just because bitcoin went up from 2013 to 2017 it doesn’t mean the same thing will happen e.g. from 2018 to 2020. Investing is not deterministic. Luck plays a major role.

Do you need debt?

Suppose you put 100% of your investments into risky areas such as cryptocurrencies, frontier market ETFs, mining stocks, etc. If you feel that this is not enough risk, borrowing to invest may be the answer, but I believe that most people do not want to take on this level of risk.

Where debt may be appropriate is if you having little savings and need to borrow money to invest in something that you are fairly certain is greater than the cost of borrowing, e.g. borrowing money for education and training can in most circumstances be a good idea. Even though borrowing money will cost you in interest, you boost your job prospects and your income. If you have savings (or if your parents have savings) then it is better to use those savings to educate or train yourself, but if you don’t have this, you need to go into debt as a necessary evil.

unsplash-logoAlice Pasqual

Buy Banks, not Houses #Budget2017

Buy bank ETFs and rent a cheap unit instead.

Recently the Australian government has announced in its Budget 2017 that there will be a bank tax applied to the five biggest banks in Australia. This may affect me because I live off dividends, and much of these dividends come from Australian banks via ETFs. When I mentioned my concerns to others, I was surprised at how much hatred others have for banks in Australia, which is surprising to me.

I am not too concerned by the bank tax, and I will continue to invest in ETFs that invest in high-dividend paying stocks (e.g. HVST) as well as the finance and banking sector (e.g. OZF and MVB).  The reason why I am confident is because I feel that banks can simply pass on the tax expense to borrowers by raising interest rates and fees. Many people may be unhappy about this, but they have the freedom to take their business to other banks.

Banks should also benefit from the cutting of the corporate tax rate from 30% to 25%.

The housing affordability scam

The budget also includes a complex scheme whereby people saving up for a deposit to buy a home can salary sacrifice at most $30k per year into their superannuation fund thereby obtaining tax benefits and then taking that money out to use as a deposit on a home.

This, in my opinion, is such a scam because it is effectively the same as the various grants that the government gave to home buyers. Why put first home buyers through the whole process of putting money into super to get tax benefits and then taking it back out again? Why not just give the expected tax savings to these first home buyers directly?

suburbs-2211335_1920

The scheme also does nothing to address housing affordability because every economist knows that the price of housing will go down if demand goes down and supply goes up. If there are tax benefits to using super, and if super is used to buy houses, this will only increase demand, which increases prices. Make no mistake, this scheme does not help buyers. It is designed to prop up the market.

Once again, first home buyers are being scammed. The major problem is that most first home buyers don’t understand economics and believe that the government giving them money will help them buy a house. Rather, it will simply drive house prices up even more thereby requiring them to get into even larger debt. The debt that they’d be getting themselves into will also be nondeductible debt, which means they pay more tax than if they had borrowed the money to buy a investment property or other investment e.g. ETFs.

What should you do?

Unfortunately I don’t see the housing affordability issue being addressed because too many people benefit from high house prices, so governments will do what they can to prop up the market. Homeowners benefit from higher prices; banks earn interest from mortgages; and real estate agents, property developers, builders, and lawyers also make money from the property boom. Those hoping to buy a house suffer, but the solution seems to be to help them become homeowners, and when these young homeowners finally buy a house with government support, they have a vested interest in high property prices, but what many of them don’t seem to understand is that they are buying into a very expensive market by loading themselves up with so much debt they effectively become slaves to the bank.

Those who borrow from banks to buy houses believe they are oppressing renters, but really in most cases it is the other way around. Rental yields are so low that the average Melbourne house only produces about 3% in rental yield. If you had $1 million and invested it in a house and rented it out, you make $30k in rent. Had you invested that money in NAB shares as of today you’d be earning 8% dividend yield, i.e. $80k per year if you invested $1 million, which means you could invest your $1 million in bank stocks, earn $80k, rent that house you wanted for $30k, and have $50k leftover. By buying the house, you lose $50k in opportunity cost.

The market will continue to be propped up because everyone benefits, and those who don’t benefit think they are benefitting. First home buyers think that by receiving government money they are closer to buying a home, but they don’t realize that homes will be more expensive. Those who recently bought a home think they are better off than if they rented, but they don’t understand how much they will pay in interest nor will they understand how much opportunity cost there is in owning property. The best slaves are those who believe that they are the oppressors.

The major problem with housing is that it is commonly associated with a debt-fuelled depraved and wasteful materialistic lifestyle. Once someone borrows large sums from the bank, it is not just a massive house that they buy. They increase their spending in other ways, e.g. furniture and renovations. The debt that they hold tricks them into believing that they have more than they actually have.

The solution then is to go back to basics. Own bank ETFs and live cheaply off the dividends. You can rent a cheap self-contained unit in the outer suburbs for less than $250 per week and then wake up early to commute to work via train. Insecure tenancy is not a problem in the age of Airbnb. Renting gives you the freedom to move to different areas to minimize costs and maximize opportunities. Renting also frees up cash flow to enable you to seek out the best investments.

 

You Save 100% of Your Salary? What if You Die Before You Retire?

I probably shouldn’t do this, but I told someone recently that I save 100% of my salary and live off dividends. One of the argument he used against this is that, if you save up a considerable amount of money, you deprive yourself while you save and there is a chance that before you retire, you may die, which means you never had the opportunity to enjoy spending the money that you saved.

This made me think about why I continue to live a minimalist lifestyle and live off dividends.

If you die with lots of money saved up, you could have enjoyed that money. However, for many people, freedom is so important that it’s not the spending of money that makes them happy but the holding of money. This applies to me as well. I love to hoard money not because of what I can buy with it but because of the freedom and autonomy it gives me.

If I had, say, $1 million then according to the 4% rule I can spend $40k per year forever. I never need to work ever again so long as I’m satisfied with a $40k per year lifestyle. There is no need to suck up to some boss, and I can do jobs on my own terms and live according to your own rules. I continue to work, but I do the work that I love. That is freedom, and I care about that more than some shiny Ferrari.

You enjoy your work when you’re not dependent on it

In my opinion, you enjoy working when you don’t care if you’re fired. If something at work bothers you, you simply ask your manager if you can be transferred elsewhere. If for some reason you are fired, just shrug and walk to a job agency or find a new job yourself. Because you live off your investments, it doesn’t matter if you’re unemployed. You don’t work to feed yourself because other people feed you.

However, if you’ve never saved up any money, if rather than living off dividends you have massive debt and spending obligations, you are then dependent on your job, and dependency is slavery.

Slavery has not been abolished. It has evolved.

Advice to Millennials: Don’t Buy a House

Where I live in Australia, most people are obsessive about property investment. There is an assumption that you must buy a house otherwise you will fail financially. As a millennial who doesn’t own a home, people always ask me when I will plan to buy a house or whether I have made any progress in saving up for a deposit on a house. People are either pressuring me to buy a house or to get married.

My response is that I will never ever buy a house. There is simply no need to buy a house when there are investments available that are far better. For example, BetaShares (a brilliant organization, in my opinion) has recently issued the BetaShares Global Banks ETF. This ETF tracks an index that invests in big multinational too-big-to-fail banks. The top 10 holdings are disclosed on the BetaShares website and is reproduced below:

top 10 holdings of BNKS as at 29 July 2016

Investing money in large too-big-to-fail banks, in my opinion, is a wise strategy. For years now, Australians have only had access to Australian banks on the ASX via ETFs such as QFN and MVB. Banks are an excellent investment because typically they pay very high dividends.

The more dividend income you have, the more freedom you have in your life. Dividend income is true passive income because you don’t have to do anything to earn it. Even if you own property and rent it out, you must still find tenants, fix broken showers, and unless you own the property outright you have to slave away at work in order to meet monthly mortgage repayments. Then you pay outrageous taxes such as stamp duty, and every year you must pay bills and council rates, as well as land tax. If you own the BetaShares global bank ETF, you pay virtually nothing other than a minuscule 0.47% management fee. You can literally sit back, relax, do nothing, and watch the dividends enter your bank account.

When you own property, you typically need to borrow money from a bank. If you’re borrowing money from a bank, you’re not generating dividends. Rather, you’re paying for someone else’s dividend income. If you borrow money from a bank, you make the bank rich, which effectively means you’re making bank shareholders rich.

What happens if there is a GFC 2 and bank shares collapse?

This is a fair argument. One could make a strong argument that the financial system is more precarious now than ever. However, even if we are nearing a massive recession (which I suspect we are), I don’t think that is a reason to not invest in bank stocks (or stocks in general) because we don’t know when the bubble will pop, and bubbles can perpetuate for decades or centuries.

When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational.

~George Soros

Furthermore, if you own a property and the global economy collapses, how will owning a house help you? Property prices can go down just like stock prices can go down.

One of the benefits of owning bank stocks is that, even if these banks fail, many of them are too big to fail. They are so integrated into the economy that in the event of an economic crisis they can hold society as hostage and demand ransom (or bailout money) from the government. The government will typically give money to these banks, either from existing funds or from simply by printing new money to hand to the banks. Once banks receive bailout money, they can use it to repair their balance sheet, and stock prices should go back up again.

Below is a passage from the Financial Systems Inquiry report in Australia:

Global history records governments of all political persuasions using taxpayer funds to support distressed institutions. As undesirable as it may be to put taxpayer funds at risk to support financial institutions, in the midst of a crisis it is often the fastest and most certain option to stabilise the system and avoid widespread economic damage.

Investors can rationally surmise that the government is likely to rescue systemically important institutions if no other options exist, as their collapse would cause the most damage to the financial system and broader economy. This leads to a belief that some institutions are too-big-to-fail — that they receive an implicit government guarantee.

http://fsi.gov.au/publications/interim-report/05-stability/too-big-to-fail/

In a world characterized by wage slavery, big banks are basically the apparatuses of wage slavery. Whips and chains have been replaced with mortgages and credit cards, and banks are the institutions responsible for distributing these instruments of oppression to the masses in order to enslave them.

If the big banks are in trouble, the entire system of wage slavery is under threat, and for this reason I don’t think the government will allow the banks to collapse. They might make one bank fail just to make an example of them (e.g. Bear Stearns) but if you buy a broad-based index fund, you’ll be investing in the entire banking sector, so it’s not a problem.

How can you live without a house?

Of course you need to live somewhere. Shelter is a necessity. However, shelter is not expensive. I currently live with my parents and pay some of their bills. Other people can easily lower costs by sharing a house with others. They can rent (or even buy) a place and then rent out spare rooms. I recommend buying or renting a place far away from the city in order to get the cheapest price or rent possible and then simply use public transport to travel into the city if you need to work.

Living with others can be problematic because it can be difficult to get along with other people, but there are easy ways to fix this problem. Try to find people who are kind and who will not cause drama. Also try not to interact with people you live with too much. Personally I am always out of the house, either at work or at the local library. If I am at home I usually stay in my room. I have food cooked for me, but even if there is no food, I have a large supply of Australian Soylent (Aussielent Body) that I can drink should I need to eat. This ensures I never have to bother with cooking or cleaning, and arguments over who should clean the dishes are common when people share accommodation.

Personally, with food technology so advanced nowadays, cooking and cleaning are quaint, archaic and useless activities that must be eliminated from your life. People are always trying to tempt me into a life of slavery by telling me that I must get married because I need a woman to cook for me, but Soylent has now made the housewife’s cooking skills completely redundant.

Conclusion

You don’t have to buy a house. Live with your parents or find good housemates, and then keep interactions with them minimal to prevent drama.

Drug dealers have a saying: “Don’t get high off your own supply.” In other words, drugs dealers make money off their customers’ drug addiction, but if a drug dealer were to consume his own product, it will be to his detriment because the strength of his business depends on the weakness of his customers. The same applies to banking. Everyone in society is addicted to debt. The “drug dealers” who supply this debt to the masses are banks, and anyone smart enough can become a drug dealer by buying bank stocks or bank ETFs, but as a drug dealer you should not “get high off your own supply,” that is, you should be very cautious about going into debt.

The goal of my life is to produce passive income mainly from dividends. This ensures I can obtain income without working, which gives me freedom. I am not dependent on anyone. Even though I live with my mother, I rarely speak to her as I’m out of the house all the time, and even if she wants me out of the house, I can easily rent a small one-bedroom apartment paid for with dividend income. Most people move out of their parents’ home, buy a house, and drown in mortgage debt, which makes them slaves to their managers. Because I live off dividends, I am not dependent on my work. I don’t need a job. If I get fired or even if I dislike my work, I can simply find a different job that I enjoy or I may even fly off to Chiang Mai where US$1000 per month ensures you live like a king, and in Chiang Mai I can spend all my time in coworking spaces where I can work on whatever I want that I am passionate about regardless of whether it makes money or not since I don’t need income to live since I live off dividends. None of this would be possible if I had a massive mortgage over my head that forced me every month to pay a large chunk of my income to the bank so that other people can collect their dividend payments. I’d rather be on the receiving end of a dividend payment.

Typically when someone has a large mortgage over their head, they have more than a mortgage. A house has associated costs such as electricity and gas bills as well as taxes, and people who are desperate to buy a house in order to keep up with the Joneses are usually trying to show off in other ways as well, so they will likely have expensive furniture, massive kitchens, refrigerators, huge couches, and expensive TVs. People always put me down for being a minimalist. Some do it with more subtlety than others, but people always try to put me down for not owning a house or having expensive furniture or having a trophy wife or multiple children in elite private schools. I am usually very honest nowadays. I tell them I am trying to have more freedom in my life so I can do what I want, and I tell them I am trying to build up dividend income. This usually comes as a complete surprise to most people because most people have been conditioned by society to buy things and to go into debt. All the money they earn is eaten up either by debt or by lifestyle expenses whereas all the salary income I earn is invested. My savings rate is 100 percent, and I subsist off dividends of approx $30k per year. I do not live a hand-to-mouth existence. I am not fed with money obtained from my own labor. I am fed with money obtained by other people’s labor. My hands don’t feed me. Other people’s hands feed me.

Living off dividends and escaping slavery is not about showing off, in my opinion. I have no need to show off to people because I am quite detached from people. As such, other people’s opinions don’t matter because I am not close to them. Most people must care about what others think because they’re forced to be around them due to circumstances, and if they’re stuck with these people, they need to get along with them, which means these other people must have a good opinion of you.

But I don’t need to be around anyone. I am not dependent on anyone for anything. I am completely independent. I am not afraid of bullies. Bullies can bully me, but because I live off dividends, I can use dividend income to block them from my life. I don’t need to suck up to anyone because, unlike salary income, dividend income doesn’t impose upon you an obligation to keep someone happy. I am no one’s slave.

But from my position of freedom, I am a witness to all the manipulation, deceit, propaganda, slavery, and oppression in this world, and I personally cannot be willfully ignorant of it. I cannot close my eyes and pretend that atrocity does not exist in this world.

Doing something about it is the difference I can make. I can spread the word and help vulnerable beings escape from oppression. That is my purpose in life: to be free myself and to help others be free as well.

Can we change the world? No, but hell, we can all try.

~Rupert Murdoch

There is nothing in life more important than freedom. Even if you don’t want freedom, being free will give you the freedom to not be free. Better to be free and have the choice of being a slave or not rather than be a slave and have no freedom to be free.

 

 

 

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.

IMG_20151228_191209

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.

 

What Can Be Done about Killing Sprees?

image

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.