Every year I try to review the steps in Your Money or Your Life to see how we're doing. It's been about two years since my last review, but much to my delight, I found we are following most of the steps well, and I just needed to update some numbers.
Step 1: Making Peace With The Past
A: Determine your total lifetime earnings
The book was written before the Social Security Administration started sending out statements. If you have earned income all your life through regular jobs, this is extremely handy. I needed the numbers from my last review in 2004, Social Security statements, and our last tax return. The combined number for me and the Spousal Unit: $865,872.
B: Determine your net worth
So what do we have to show for all that moolah? Often, this is a depressing part of the assessment. Until recently, I came up in the negative, which is fairly common. For the last review, my net worth was a whopping $2,869. So. Add up assets: I include anything in the house that I could sell for cash, all bank accounts, current market value on the house, investments, etc. $316,183. Now for liabilities: the balance on the house, any other loans or credit card balances, and a tax debt from being a goob last year: $231,690. Net worth: $84,473. Hey! That's not entirely bad. I can tell you this: most of that increase is because we stopped throwing money away on rent and bought a house.
Step 2: Being in the Present; Tracking Your Life Energy
This is a touchy-feely way of asking how much sweat you put into the things you buy. It's about learning to think of money as an investment of life.
A: Establish your real hourly wage
Your hourly wage isn't just gross earnings/40 hours per week: there are expenses in time and money involved in keeping a job, and it's important to take those into account when calculating your hourly wage. The key is to add up all the expenditures you would not have if you didn't have a job: work clothes, gas, lunch money, etc. Also add up hours outside the regular 40: overtime, commute, decompression. Bill works long hours and has a 70-minute bus commute. I have a shorter commute, and work just a little over 40 hours/week. He spends little on lunch, I spend a bit more. Neither of us buy special clothing. Between the two of us, we're sweating out $35.23/hour. Doesn't seem like much, eh?
B: Keep track of every cent that comes into or goes out of your life
Surprisingly, we've gotten pretty good at this. The debit card is easy to track, the only sticking point is allowances. We take out $100/week and split it 60/40 (I spend more on lunch, remember?), and tracking those little cash expenditures was something of a pain. We started out with a sheet on the kitchen counter that we would fill out when we got home, then I entered it in the budget spreadsheet at the end of the month. We kept the habit for a couple of months, then got slack. Now Bill is keeping track of this stuff in a spreadsheet, and I just let him know when I spend something. For some reason, this more casual system is working better so far. Expenditures are always broken into categories that are unique to us. These were determined not by guessing ahead of time, but by tracking expenditures for a few months, and then breaking things out into categories. The information is great to have–we can know at a glance if we're over budget, and where.
Step 3: Where Is It All Going? The monthly tabulation.
Each month, get all that spending into a categorized table. Balance your incoming and outgoing. Then convert the amount spent in each category to hours of “life energy”–your real hourly wage. The idea is to see how much of your life you spend to buy books, movies, housing, etc. While we do the first two parts, and we review each category to see if we're satisfied with the amount we're spending, we don't do the last step of “life energy” conversion. I did this conversion for a few months, just to get a feel for how much I was working for my spends. While I no longer find it necessary, it is a good step to do for a while, as it brings home the true cost of living.
Step 4: Three Questions That Will Transform Your Life
1. Did I receive fulfillment, satisfaction, and value in proportion to life energy spent?
By each category, mark a – if you didn't get all the bang for the buck you'd like, a + if you would be happy spending more on this, and a 0 if it's juuuust right. Follow the same procedure for each question. Our big minus at the moment is food out. Everything else is okay.
2. Is this expenditure of life energy in alignment with my values and life purpose?
Our expenditures are on track with our goals for the most part. We'd just like to be a bit more frugal, and add to our monthly charity spending as soon as we've cleared some debt.
3. How might this expenditure change if I didn't have to work for a living?
The goal of YMOYL is financial independence–especially from work. I like working. So does the Spousal Unit. We both have jobs in alignment with our values, and enjoy them very much. While we don't share this goal with the book, it's still a good question to think about. The answer for us is: very little.
Step 5: Making Life Energy Visible
Create a wall chart plotting your total monthly income v. expenditures. In the book, the difference between these is supposed to be savings. I cheat a little, and add a savings line. The idea is to see your expenditures going down while your income goes slowly up. I love, love, love our wall chart. Our expenditure and income lines are still way too close together, but the savings is marching up the wall nicely.
Step 6: Valuing Your Life Energy–Minimizing Spending
This step is certainly about frugality, but it's also about awareness. Keep your real hourly wage in your head. When you pick up a DVD, do a quick calculation. Is it worth two hours of your life? This habit has become ingrained for me, and it's been extremely useful. That doesn't mean we're perfectly frugal. I think the biggest thing we could do to minimize spending right now is cook, cook, cook.
Step 7: Valuing Your Life Energy–Maximizing Income
This is not just about earning more money, it's about giving your life energy for something that lines up with your goals and values. Think about what you get out of work. Money, sure. How about security? Community? Enjoyment? Are you squeezing your work hours for all they're worth? The answer for both of us is a resounding yes, which we realize is a rare and fortunate thing in a world where most people have jobs they hate just so they can get by.
Step 8: Capital and Crossover Point
Figure out your total capital, multiply it by the current long-term interest rate (they use 30-year treasure bonds), and divide that by 12. That gives you your monthly investment income. This number goes on your wall chart. When it crosses your monthly expenditures, you've reached financial independence.
At the end of Lee Eisenberg's The Number (review coming soon), the very rough assumption is that you can safely withdraw 4% of your investments to live on. This YMOYL step is about tracking your investments to see how close you are to, well, retiring. I'm not into retiring, but it's still an inspiring step. One I admit I'd missed, but I've officially added it to the wall chart as of this month.
Step 9: Managing Your Finances
Become knowledgeable about long-term income-producing investments. This is an ongoing process. When I first read YMOYL, I didn't know a mutual fund from a wombat. Now I'm pretty sure one of them is a furry, ill-tempered critter. Which one I leave to your discretion.
I read Your Money or Your Life after reading The Overspent American, and realizing I needed serious help. At the time I made about $24k/year, and would go to work in $400 suits. I couldn't figure out why it was so darned hard to make the rent! I've come a long, long way since then. I've repaired my awful credit, de-cluttered, bought a house, and I've learned what stuff is really worth to me. It's been a great journey. The Spousal Unit thinks I'm crazy for reading all these finance books and blogs, but my own progress has made the subject fascinating and inspiring. Here's to next year's YMOYL assessment.