(this one's not quite as silly as my weight graph.)

introduction

in the late 1990s, i read your money or your life, a book about rethinking your relationship with money. i was very interested in it at the time, but set it aside and didn't do much about it. i did, however, keep complete financial records in the meantime (every penny i received or spent since 1998, from paychecks to nickles in parking meters), so when i started this page in 2001, i was able to plot this graph going all the way back to then.

there's a lot to the book, and just plotting this graph shouldn't been seen as the whole of it, but it is a large part. here's what it means:

one of the messages of the book is that everyone is going to be financially independent at some point in his or her life. for some people, that will be at retirement. for others, at death... if you're going to get past the need to work for money at some point, why not do it asap, while you still have the youth and health to do what you want? ^[1]

the authors' suggestions for getting to financial independence involve taking a close, long look at what you're spending and why, and whether you're getting your money's worth. as a result of just realizing what you're doing, you:

reduce your expenses until you're only spending money on things that bring you fulfillment equal to the amount of energy you had to expend to buy them.
increase your income as much as you can without doing work you think is wrong or just inappropriate for you.

in other words, the income and expense lines on a graph like this should be splitting further apart until you hit the point at which you're making enough and spending enough but not more than enough.^[2] when that happens, the gap between the two each month is your savings, which should be considered capital. this is where the third line comes in; it's calculated this way:

($capital * $i) / 12

where $i is the annual interest rate on a no-risk investment vehicle, something that has a modest interest rate but which guarantees not to lose your money.^[3] as an example of this, the book holds up long-term u.s. treasury bonds (but see this article that revisits the investment plan in the light of current trends).

so the "investment income" line is what you could make if you took your capital (savings) and invested it. as your expenses come down and your income goes up, the investment income line naturally rises, especially as you get enough money together to actually invest it and start making interest on your investments (and reinvesting that interest).

the magic crossover point comes when the investment income line rises so high that it crosses the expense line. at that point, you're making enough money each month just from your invested capital that you don't have to work if you don't want to.

in the dated sections below, i'll give updates on my progress and what's happening with my thinking about these things. (i've moved the even older news to separate pages so this one isn't as long.)

news

ch-ch-ch-changes...
new in december 2007
12/16/2007	house no more i see it's been 19 months since i had anything to say here, and really nothing to say even then. there's been nothing to report, i've just been working along, saving along, investing along. i did move into greenblattized value investing, but you have to make up your own mind as to whether you're one of the faithful there. i have news this month, though. i sat down at settlement thursday and signed my house over to new owners. it's now the first home of a young couple starting out together. from time to time, i've updated the spreadsheet i made after my last look at what the house had cost. i was able today to update it with final sums and take a view of how the house turned out as an investment. the quick and superficial story is that i bought it for $108,000 and sold for $225,000, making a 108% return on investment, or about 18%/year. better than stuffing it in a mattress any day. as i said before, though, i don't think that gives a realistic picture of what happened. i sat around today making up different formulas to reach a more meaningful number, and decided the simplest way is to look at it like a big savings account. over the years, i put x into the account, and when i closed it, i took y out. this gives me two numbers: input: $198,865. this is the $108,000 to pay off the original house cost, plus mortgage interest, settlement fees, realtor's commissions, property taxes, home improvements and repairs, homeowner's insurance, etc. all the money that came out of my pocket (or out of the sale price at the end) and into the property. output: $282,349.10. the sale price plus tax savings and rent i collected. $24,000 of this is rent i didn't have to pay for the two years i lived there, estimated at $1,000/month for a similar house or apartment. i decided to include this as money saved through the investment, so subtract $24k if you think it bogus. the result is a $282,349.10 withdrawal from $198,865 of deposits, or a 42% return. instead of 18%, it was an average of a 7% climb a year.^[4] better than i would have found in a deposit account, less than i would have hoped for from stocks and bonds. whether i should have just rented, made regular investments, and avoided the past year's aggravation is something i'll have to ponder. in the meantime, many, many thanks to my realtors for all their advice and to all the contractors who made the house presentable and pleasing to the buyers. i hope they have happy years in it and that the market is as favorable to you if you sell soon, too.

footnotes

1. this doesn't have to be as materialistic as it may sound. 'what you want' could be teaching adults to read or researching alternative fuels. whatever it is, the need to work for money can be a huge obstacle to doing it.

2. the word 'enough' is very important to the authors; read the book for all their thoughts about it.

3. they provide a good checklist for the sort of investment(s) that qualify:

Your capital must produce income.
Your capital must be absolutely safe.
Your capital must be in totally liquid investment. you must be able to convert it into cash at a moment's notice, to handles emergencies.
Your capital must not be diminished at the time of investment by unnecessary commissions, or other expenses.
Your income must be absolutely safe.
Your income must not fluctuate. You must know exactly what your income will be next month, next year and 20 years from now.
Your income must be payable to you, in cash, at regular intervals.
Your income must not be diminished by charges, management fees or redemption fees.
The investment must produce this regular, fixed known income without any further involvement or expense on your part. It must not require maintenance, management, geographic presence or attention due to 'acts of God'.

4. all of this before taxes, of course.

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