Here’s the longest “money hack” I’ve ever posted. This is another reader comment from our recent discussion about the transition from “becoming debt-free” to “living debt-free”. In this guest-post from James, who is new to GRS, he describes how he created a “virtual employer” in order to limit his natural spending habits. By playing games with himself, he was able to go from $20,000 in debt to having over a million in savings in just fifteen years. This guest-post is long, but I think it’s worth it.

How is living debt-free different than becoming debt-free? If you are rational (and fortunate) it shouldn’t be different at all.

In my early 30s I lived paycheck-to-paycheck, had no assets to speak of, and was $20,000 in debt. At that point I decided to change things. I did so in the usual and most uninteresting way:

  • I moved to a less expensive apartment.
  • I stopped eating out (or eating take-out) every night, and started cooking my own meals a majority of the time.
  • I found ways to buy the luxuries I enjoyed more cheaply — it is easy to find ways of spending 20-30% less on many things things that bring you pleasure, like wine and good food.
  • I reduced the size of my wardrobe but spent more on each item. I saved money because the clothes lasted longer and looked better throughout their useful life.

Through these frugal ways I devoted 20-30% of my income to paying down debt, and was debt free in several years while enjoying my life no less.

Since I was devoting so much of my income to debt, I decided to keep things the same in the next phase of my life. I opened 401K and IRA accounts and maximized my contributions immediately. I had a little left over, so I opened an account for savings. Since I knew I was still bad with money, I decided to play a trick on myself. I set up my financial accounts to make it appear that my salary was mine to do with what I pleased, but did so in a way to disguise my actual income.

A tale of two employers
My real-life employer direct-deposited my paycheck into a money market account. This account used an automated bill-payment service to make deposits into my regular checking and savings account every two weeks. This last set of accounts was used for ATM transactions, and for paying all of my bills. Income into this account was my “salary”. I had to live within my means just like I ought. However, it was like I did not work for my employer, but for a fictitious employer. When I got raises or bonuses, they went into this fake employer’s money market account and did not appear in my salary — they were left to build my savings faster.

Once a year, I gave myself a raise by changing the amount of the bi-weekly salary that went into my personal bank accounts. My income kept rising, just a bit more slowly than in my real-life job. I never felt that I was scrimping because my virtual job was increasing my virtual salary faster than inflation. It took me about two years to pay off debt, and another 4-5 years to build up emergency savings and open a brokerage account and start investing.

Now, my fake employer (my emergency fund money market account) kept making deposits for my “salary” but also started making deposits into my investment account. Again, I was tempted to spend more as I started building assets. However, I was still able to limit myself to my virtual “salary”, and though I treated myself to slightly larger “raises”, this still only happened once a year and I could do so rationally without feeling too tempted.

I had a couple of windfalls along the way, an unexpected gain, and a severance package when one of my employers went under. However, these benefited my fake company, and never appeared in my virtual salary. Thus I increased my assets and did not suffer any loss.

Fake employer, real rewards
Now, fifteen years after I started, I have a modest amount of wealth. I passed $1,000,000 a while back and am nearing $2,000,000. My income from investing is now larger than what I ever earned as an employee. However, my long-term goal has remained unchanged, and my way of accomplishing it is just as useful. My goals are to be financially independent (not tied to any external source of income) and rich (having a reasonably high disposable income).

As most of you know, being rich is the enemy of being wealthy. The road to wealth is simple: keep expenses (and the effects of inflation) beneath income. It really is that simple. The larger the difference between income and expenses, the faster your wealth will grow.

Now I am at a point where I could retire immediately. However, once I stop devoting many hours per week toward generating income, I will want to spend more time doing things which raise my expenses — travel, enjoying various hobbies, etc. I also might have insufficient assets if accident or the economy or my portfolio significantly affect my outcome. Thus, I should delay my retirement for a longer time.

My virtual employer is just as useful as before. My goal is still to have as small an income as possible without feeling deprived. My goal for retirement income is at least twice my current virtual salary. Once the retirement income I desire is less than 3%/year of my investments, my time will be my own.

I will be richer because my virtual salary will be much higher (about twice as high) than I am accustomed. I will also be wealthy because my income will no longer be linked to how I spend my time.

Stay the course
As you can see, though, my life and my actions did not change when I crossed the line from debt to savings or when I crossed various milestones on the way to financial independence. I still lived within my means. I use credit daily, but pay credit cards in full each month. I increase my salary each year and am allowed to spend it as I please.

However, I structured my finances in such a way that I was never tempted to treat bonuses, tax refunds, raises, or other increases to income or wealth as if they were my own. My virtual employer — me — kept me happy enough on a slowly rising income, that I truly was never aware of any hardship.

One commenter wrote:

I don’t think being debt-free feels any different than being in debt. It is just different. You are paying off for your future rather than your past. Until you reach your objective where you no longer need to save, you are still living the same life. Instead of worrying about how much debt you have left, you worry about how much you have left to save. The good thing is that I don’t feel wealthy.

He hit the nail on the head. If you play your cards right, you will experience a slow and steady rise in income over time. You will enjoy your life along the way. But you’ll neither feel wealthy nor as if you were enduring hardship. You should never feel wealthy at all until you actually are wealthy enough to accomplish your goals.

Summing it up
That’s my take it on it. I started with less than nothing, and lived slightly above my means. I redefined my means, and then lived within them. I won’t lie to you — for the first year or so, I did find this difficult to do. However, once I got over that humped, it seemed easy. It actually was all uphill from there since for over 10 years my savings as a percentage of real income was increasing each year. However, it felt all downhill (effort-wise) since my fictitious salary did rise slowly and steadily each year.

The only emotional hardship and challenge to will-power occurred when I sat down each year and decided how much of a raise to give my self in the next twelve months. As a boss, I was sometimes a real bastard. My virtual employer (me as boss) once gave me a 6% raise in a year that my real employer (the company I showed up at 5 days per week) gave me a 12% bonus and a 20% raise! However, he (me) was right, and I did enjoy the extra few hundred a month in virtual salary and never missed the extra income since I never experienced having it.

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