A Miserable Debt Free Life Part 2

The first post was very popular, and sparked debate all over the Internet. I’ve read many of the discussions, and would like to add a few points.

Firstly I don’t feel I did a very good job of building my assets – plenty of my friends have done much better in terms of net worth and/or early retirement. Many have done the Altruism thing better than I. Sites like Mr. Money Moustache do a better job at explaining the values I hold around money. I’ve lost interest in more accumulation, but my lifestyle seems interesting to people, hence these posts.

The Magical 10%

The spreadsheet I put up was not for you. It was just a simple example, showing how compound interest, savings and time can work for you. Or against you, if you like easy credit and debt. A lot of people seem hung up on the 10% figure I used.

I didn’t spell out exactly what my financial strategy is for good reason.

You need to figure out how to achieve your goals. Maybe its saving, maybe it’s getting educated to secure a high income, or maybe it’s nailing debt early. Some of my peers like real estate. I like shares, a good education, professional experience, and small business. I am mediocre at most of them. I looked at other peoples stories, then found something that worked for me.

But you need to work this out. It’s part of the deal. You are not going to get the magic formula from a blog post by some guy sitting on a couch with too much spare time on his hands and an Internet connection.

The common threads are spending less than your earn, investment, and time. And yes, this is rocket science. The majority of the human race just can’t do it. Compound interest is based on exponential growth – which is completely under-appreciated by the human race. We just don’t get exponential growth.


Another issue around the 10% figure is risk. People want guarantees, zero risk, a cook book formula. Life doesn’t work like that. I had to deal with shares tumbling after 9/11 and the GFC, and a divorce. No one on a forum in the year 2000 told me about those future events when I was getting serious about saving and investing. Risk and return are a part of life. The risk is there anyway – you might lose your job tomorrow or get sick or divorced or have triplets. It’s up to you if you want to put that risk to work or shy away from it.

Risk can be managed, plan for it. For example you can say “what happens if my partner loses his job for 12 months”, or “what happens if the housing market dips 35% overnight”. Then plug those numbers in and come up with a strategy to manage that risk.

Lets look at the down side. If the magical 10% is not achieved, or even if a financial catastrophe strikes, who is going to be in a better position? Someone who is frugal and can save, or someone maxed out on debt who can’t live without the next pay cheque?

There is a hell of lot more risk in doing nothing.

Make a Plan and Know Thy Expenditure

Make your own plan. There is something really valuable in simply having a plan. Putting some serious thought into it. Curiously, I think this is more valuable than following the plan. I’m not sure why, but the process of planning has been more important to me than the actual plan. It can be a couple of pages of dot points and a single page spreadsheet. But write it down.

Some people commented that they know what they spend, for example they have a simple spreadsheet listing their expenses or a budget. Just the fact that they know their expenditure tells me they have their financial future sorted. There is something fundamental about this simple step. The converse is also true. If you can’t measure it, you can’t manage it.

No Magic Formula – It’s Hard Work

If parts of my experience don’t work for you, go and find something that does. Anything of value is 1% inspiration and 99% perspiration. Creating your own financial plan is part of the 99%. You need to provide that. Develop the habit of saving. Research investment options that work for you. Talk to your successful friends. Learn to stop wasting money on stuff you don’t need. Understand compound interest in your saving and in your debt. Whatever it takes to achieve your goals. These things are hard. No magic formula. This is what I’m teaching my kids.

Work your System

There is nothing unique about Australia, e.g. middle class welfare, socialised medicine, or high priced housing. Well it is quite nice here but we do speak funny and the drop bears are murderous. And don’t get me started on Tony Abbott. The point is that all countries have their risks and opportunities. Your system will be different to mine. Health care may suck where you live but maybe house prices are still reasonable, or the average wage in your profession is awesome, or the cost of living really low, or you are young without dependents and have time in front of you. Whatever your conditions are, learn to make them work for you.

BTW why did so few people comment on the Altruism section? And why so many on strategies for retiring early?

4 thoughts on “A Miserable Debt Free Life Part 2”

  1. Real estate has been a good investment mostly because of government-driven economic distortion. Here in the U.S. (and perhaps elsewhere) essentially infinite government-underwritten credit has been made available for the scarce resource of housing, with the result that the prices have been driven to unbelievable levels and the typical home-owner will be saddled with a lifetime of debt. My home has quadrupled in value since 1995. I was able to eliminate my debt early, but most folks never will.

    This can’t last forever. We’ve had one serious correction in the U.S., which left many debtors “underwater” with more debt that the sale value of their homes, but we are still at totally absurd prices across much of the country.

  2. Yes real estate is out of control here, thanks to a government policy called negative gearing (interest payments on rental property are tax deductible).

    Home ownership levels are dropping every year. Average price of a house is 10x annual income ($500k) and keeps rising. I had thought housing prices would “crash”, but they keep rising. Too complex for me to work out! But I have made an ethical choice not to participate in the housing market for now.

  3. For what it is worth real estate is likely to continue to have a base upwards price rate as long as population increases. For new home construction materials costs are going up due to scarcity and inflation. Labor costs are going up thanks to inflation and labor unions often unreasonable demands. So that’s a base rate of increase in real estate costs to consider. The winners make good guesses.

    But then you have government sponsored initiatives that require banks to make very bad loans. There is a reason banks did not tend to issue loans to inner city dwellers. They seldom were paid back. Now the banks are required to loan to bad risk cases in the name of “fairness” and “equality.” That drives prices up well beyond the base rate discussed above. The canny investor can see this disparity and ride the wave. The really good investor gets off the ride before the wave breaks or the “bubble breaks” as eventually it must when interest payments and loan repayments stop coming in for one reason or another.

    The long term winner has spent a lot of time learning about this in detail rather than in concept as I discussed it. I learned this much and figured out it isn’t for me. Most of the get wealthy methods don’t really work for somebody who isn’t at least a little cutthroat enough that bad investments, employees, or whatever are dropped when identified. I don’t have the heart to fire somebody. So business is “right out” for me.

    Compound interest is the basic friend. HOWEVER, it is not a sure friend. You still must figure out a way to earn more compound interest than the inflation that’s happening around you for prices for the basics you need to live. You may end up with a million dollars that is worth $100K when you get done with 40 years of compound interest and savings. In that regard, thanks to some overly liberal (with my money) POTUSs, I am running behind in real purchasing power. In terms of my first year’s professional salary less taxes I have less than a decade put away in savings even though the number is approaching a megabuck. Obama, Bush, Clinton et al have seen fit to take large chunks of my money and toss it into other people’s, crony’s, pockets with Obama as the worst exemplar of this effect.

    (IMAO big governments don’t work. The US government told me it would end junk phone calls. While typing this I received two. That same super efficient and effective government is now killing my friends with ObamaCare. Er, please, Bruce, tell me that at least your wife is benefiting. I lost a long time ham friend a couple weeks ago to Oregon’s utter failure with ObamaCare. Huge savings don’t help. The government simply takes it away as they feel like. REALLY huge savings mean you can contribute large sums politically and get crony benefits in return.)


  4. Joanne: Government can’t end junk phone calls; the calling parties are often using automatic sequential dialing software to get around the “do not call” lists, since the software in question can be acquired from sources that do not acknowledge the authority of US laws. As for the Affordable Care Act (aka Obamacare), you think its bad now? Wait til the states have to find the money to finance things themselves, as that’s going to happen in a few years. And yes, the bleeding hearts in the federal government that decided that people that have no credit and no stable source of income must have the same chance to own a home that others have need to have their cranial cavities inspected with a microscope.

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