Have you ever considered how much of your life you trade in exchange for money? This is the focus of Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez.
The first step is gaining Financial Intelligence. It is hard to manage what you do not know.
The authors start with recommending you track everything you spend. The more precise you can be, the better handle you will get on your expenses.
With that data in hand, the next step is to determine how much you really make with your current job. That’s easy you say. I make $20 an hour. But wait a second. It’s not quite that simple.
What does it really cost you to work?
- Taxes take a chunk out of your pay.
- You probably have some kind of commuting costs. Gas and wear and tear on your vehicle. Don’t forget about insurance. Would you and your spouse both need a vehicle if you didn’t work? Would you need a vehicle at all? Some metropolitan areas have good enough public transportation you might not need a car.
- Then there is clothing. Do you have to wear dress clothes? A special uniform? Protective gear?
- Do you pay for on-going education that is not reimbursed by your employer?
- Day care expenses for the kids?
- How about lunches? Do you regularly eat out at lunch?
All these things and possibly more cut into what you really make. This is part of the reason the authors encourage you to be very diligent about precisely tracking your spending. This gives you the data that you need to analyze what your true hourly rate is. You might find for example that instead of making $20 an hour, by the time you consider all of the expenses associated with work, you really only make about $8 an hour.
The second level of analysis, once you know what you spend and what you really make an hour, is to go back and examine each of those expenses.
If you are really only making $8 an hour and your monthly cable bill is $80, you need to evaluate if watching TV really worth 10 hours of your life each month. Perhaps it is. Perhaps it isn’t. That is your decision. But having this kind of information helps you quantify in terms of real life what each of those budget items really cost.
On a deeper level you can also use this data to make sure your spending aligns with your values. What categories are you spending the most time to finance? Do those categories reflect what you value most?
The ultimate goal is Financial Independence. This can be achieved in a couple of ways.
Suppose after carefully examining your expenses you find you could have all you need for $2000 a month and you are able to earn that $2000 by working only 20 hours a week. You now have the freedom to work part-time and have more time to spend doing other things that really matter to you.
Another approach is to consider how much you really need each month. What if you were able to invest enough that you could reliably earn $2000 per month simply off your investments? You would then be truly financially independent. If you chose, you could quit your job and volunteer doing something that you really loved.
Or let’s suppose you really love your job. You could continue to work, but since you are now financially independent, you would have the ability to give away 80%, 90% or maybe even 100% of your earnings to a charity of your choice. How many people’s lives could you change by doing that?
Your money or your life
It does come back to the question, do you want your money or your life? The point of the book isn’t necessarily that you have to live frugally on $100 a week. You choose the life you will lead. If you want to live a more lavish lifestyle, that is fine. Just recognize the amount of life energy you need to expend to achieve it. There isn’t a right or wrong answer. It is your call. By having detailed information about what you spend and what you earn, you have what you need to make those judgements.
To truly follow the advice in Your Money or Your Life, it will require a good deal of effort. Would it be worth it? I think so. But I also expect many people would not be willing to stick with that level of detailed tracking. For those who do, it provides a solid framework for analyzing your spending and making sure you are living the life you desire.
What would it like to live a life beyond consumption? A life that wasn’t about spending the money as fast as it came in? Having a life that matters is the essence of financial independence.