I did something different this holiday season than I ever did before: I took two five-day weekends. This may sound like a minor thing considering the FIRE* community I supposedly belong to**, but to me it was a serious adjustment.
The first long weekend over Christmas didn’t feel like a true long weekend. Every day was filled with family events so I didn’t have to worry about filling lots of dead time.
The New Year’s weekend was the opposite. I had a full five days to do anything I wanted. Sure, I still checked the office email a few times and kept current with social media, but for the most part I stayed the course and enjoyed five days without the obligations of work.
As most people know, it is easy to waste a day or five if necessary. For hyper-productive people this is more of an issue. Can you imagine what Elon Musk, Bill Gates, Warren Buffett or the late Steve Jobs would do with their free time? You guessed it. They do exactly what they do every other day. Either you create value in the world or you don’t. One has a reason to be alive; the other does not. You choose.
The extra days off were delightful, actually. I enjoyed several good books and extra time with Mrs. Accountant and the girls. Still, I was reading the stuff I always read. I was learning and growing. The only difference is I was on my couch versus my office chair.
But this story isn’t about my long holiday weekends; it’s about money; the reason you stopped by this place.
Anyone Have Some Spare Change?
As the holiday came to an end I was sitting on the living room floor reading a book as Pinky, my cat, pawed underneath the edge of the couch. I put my book down to see what she found. (I was hoping it wasn’t a real mouse (as opposed to the toy mouse we gave her.))
Pinky had her paw underneath the edge of the couch as far as she could reach and kept trying to push further. Whatever she found—or lost—she wanted back badly. I nudged Pinky to the side and lifted the edge of the couch and reached under and found the elusive prize.
A quarter! Pinky’s keen eyesight found a shiny quarter deep under the couch. A guest over the previous weekend must have lost the coin and it finally fell through the cushion to the floor beneath the couch.
To most people this coin is a modest 25 cents. If found in a casino most people would immediately drop the coin into a slot machine with the outside chance of turning the coin into serious cha-ching. Most people would be just as broke as the moment before they found the coin.
Pinky is not a gambler; neither am I. As small a prize as the coin was, Pinky still wanted it. It was shiny. That was it’s value and Pinky knew it.
The Gift that Keeps Giving
Like any cat, Pinky soon gave up her prize when she realized I wasn’t giving it to her. (In my defense, I retrieved the coin she couldn’t get. A smile emoji might go nice here.)
Proud of the prize I stole from Pinky, ah, earned, I should have dropped it into my coin bucket I use for playing cards Friday night. But I didn’t. Something else entirely different crossed my mind.
You see, that simple coin is money! Add enough of them together and it becomes a serious nest egg. Even a mere 25¢ has value! If you respect money—which is a store of value—then a simple quarter will be respected as much as a hundred dollar bill. You don’t toss it away in a mindless casino game.
Even Pinky understood the coin has value (as a toy). But it’s worth a heck of lot more than that to me.
The first thought that entered my mind when I saw the coin was how much of a fraction of a share of an index fund will that buy and how much of dividend (an income stream) will it throw off? Pinky, our resident diva, placed a more immediate, hedonistic value on the coin. Pinky’s human (me) was thinking longer term.
Now I know what some of you are thinking. How much income can one simple 25¢ piece actually throw off? Well, by my calculation, the same amount as every other quarter in my portfolio.
Think about that a moment. From this perspective, your entire investment portfolio is made up of a bunch of quarters throwing off an income stream.
This isn’t a hard concept to understand. Your body is made up of a large number of cells. Cells are made up from numerous chemical compounds constructed from atoms. Atoms are made of electrons, protons and neutrons. And the components of atoms consist of a number of elementary (sub-atomic) particles.
All things of size are composed of many parts. Each part alone seems small, but remove the infinitesimally small part and the house of cards starts to crumble. Remove an electron from an atom and the atom is different; responds and reacts different. Helium has two protons. Take one away and the atom is now hydrogen, a very flammable element. One small change does make a difference.
Anatomy of Wealth
What makes one person rich and another poor?
Two people working the same job side by side earning the exact same wage can have radically different financial conditions. One worker can squander her paycheck each week while the other maxes out her retirement plan and saves even more for a rainy day.
The worker spending all her income as it comes in is under a lot of stress. A slow economy is cause for concern. If her hours are reduced, or worse, she is let go, hard times will follow quickly. The worker saving a large percentage of her income feels virtually no stress. A lay-off or reduced hours is nothing more than a reallocation of life-hours. She can always do something else productive with her time. Since she has plenty saved, money will not be a problem.
So why did one worker save/invest and the other live paycheck to paycheck? It might take a series of questions to get to the bottom line, but I bet the final answer sounds something like this, “I save so I have an income stream when I need it or when I retire.”
The concept is simple in theory; difficult in practice. Everyone knows they need to save and invest for the inevitable day when the money will make life easier. But some see money as a chance to spend and party. So why do some save? What motivates them? Triggers them?
Once the thought entered my head when I saw the quarter Pinky was trying to dig from under the couch it seemed silly. Why was my first thought to invest the newfound wealth for an income stream? And do other people think this way or am I just weird? (Don’t answer that!)
My guess is about the same number of people who have financial wealthy have the thoughts I have about money. Financial wealth is a simple process. Start investing early as much of your income as possible, reinvesting the income stream except in extreme emergencies. Yet, some people can’t do it. If they have it, they spend it.
It comes down to mindset. The ancient Stoics talked about visualization. Well, investing money for an income stream tomorrow requires vivid visualization. I could see the income stream from that quarter the second I saw it. It’s the reason my first thought was to invest it.
People who spend most or all their income can’t see the benefit of saving/investing some of their hard-earned income. “I don’t want to be the richest guy in the cemetery,” they say. “Can’t take it with you.” To which I reply, “You’re right. But I’d like to have some while I’m here!” Perhaps it is time to train your mind to visualize yourself with lots of money and the income stream it provides.
If Pinky can see value in digging a coin from under the couch you can visualize the value and benefits of investing a significant portion of your income.
Warren Buffett is known to keep personal expenses low so he has more to invest. Wealthy people think this way and you need to adopt the financial mindset of the rich if you want less stress and more options in the future.
Every dollar that passes your paw is an opportunity to create an income stream. Even a bank deposit throws off a limited amount of interest. The income stream is vital to your financial health and future.
My grandfather always had a saying that has stuck with me: Never take off the pile. Granddad was an old farm boy living the dream in the backwoods of Nowhere, Wisconsin. He lost the farm in the farm crisis of the early 1980s and then rebuilt his fortune doing nothing more than saving a serious portion of all his income. Most money was only deposited in bank accounts. And he still managed to re-grow his liquid net worth well into the seven figures starting over from an old age. His rule of only consuming the income from an investment had a lot to do with his success.
The corpus of your investments, that original seed money, is sacred. If you never touch the sacred you will always be safe! The income stream keeps growing larger with time. Dividends reinvest to earn more dividends. You don’t need a pension when you have one far safer and personally designed.
As for the quarter I commandeered from Pinky? Well, I tossed it into the coin bucket I use for Friday night cards. Seems Vanguard requires a deposit larger than 25¢. Guess I’ll up next month’s auto investment.
* FIRE: financial independence/retire early
** Before someone takes these words wrong let me clarify. There is no doubt I’m a member of the FIRE community. I handle tax issues for several key bloggers of the demographic and attend conferences periodically. I say “supposedly” because I don’t feel like a member to the FIRE community. I’ve never been a fan of retirement—I like doing productive activities as long as I’m breathing. As readers may notice, I don’t chum with many members of the community either, instead choosing to keep plugging along in my tax practice. I’m a rural guy who likes his rural life without the bright lights of center stage.
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Thursday 2nd of May 2019
Nice post. I like how you broke it down to such a small unit. I feel that's more meaningful than talking about the teens of thousands or millions. Quarters add up too. I travel often for work. When I get to the TSA line and find I have change in my pocket, I throw it in a side pocket of my backpack. I usually forget about it. Every now and then I'll go through and clean it out and there will be some real money. Same decision required: do I treat myself with the newfound cash (eating out is my kryptonite), or do I save it for something better later? Like atoms joining together, adding quarters together (over time) builds up into a quantity that can be used to buy more index funds that will then throw off more quarters.
I like the analogy. Thanks!
Thursday 10th of January 2019
My grandpa always did the same as yours, though he didn't tell me this until a few years ago. I always assumed he lived off a portion of the substantial nest egg he and my grandmom acquired throughout their lives. Instead, he lived off his pension and social security, and still managed to save from those two incomes, adding even more to his investments. He died a year ago at 90, having never touched his investments. Unbelievable! Well, he sold some and used it to buy others he deemed more profitable, but he never spent it. Still, it's amazing how good a life he and my grandmom lived and how much they saw on his salary. Frugal living served them well, and I'm glad I learned some of their habits. But I did sell a portion of my investments to return to school and buy a home, but both those investments have served me well, so I can't complain. Now, I just sock away more and more and more.
As for the people with the different incomes, I agree. It reminds me of one of the nurses I work with (she was also a fellow classmate). She complained that she never had any money, despite how much we made. I, on the other hand, had amassed a pretty substantial amount of savings. Habits. Nothing more, nothing less. Oh, and I graduated with student loan debt that I paid off in less than 5 years. She, as I'm 99.9% certain, had no student loan debt.
Monday 7th of January 2019
Thank you for the encouragement, but my job is a 40 minute drive away and only pays $10 an hour. If something were to happen I'd have to sell all those stocks I bought during the good times just to buy a car and get and make ends meet.
It is easy to get excited about a quarter when you see that there is a surplus of money coming in. But watching a deficit has been incredibly depressing and it alters my behavior. I just hope I remember how to behave if the good times come back.
Mr. Rounding the Bend
Monday 7th of January 2019
You ask an excellent question! Why do two people with the same income end up in such different financial positions? Why does one enjoy saving while the other enjoys spending? I worked for a company that administers 401(k) plans for millions of employees and I saw this dynamic play out in the data -- given a group of employees with similar paychecks, working at the same company, living in the same town, one in 10 would become wealthy, 4 in 10 were not wealthy, but could ride out many common financial shocks, and half were living paycheck to paycheck.
Surprisingly, this pattern was roughly the same for people earning $40k a year and people earning $150k per year.
Another thing I learned is that teaching people about the tax benefits of a 401(k) and the value of compound earnings doesn't help convert them to be savers. People don't need "financial" advice, they need advice like a grandfather from the depression would give.
It makes me wonder if savers are born and not made.
Monday 7th of January 2019
I have to point out one inaccuracy, removal of an electron does not change helium to hydrogen. It is the number of protons that defines an element. The number of electrons defines an ion.
Monday 7th of January 2019
Oops! I stand corrected. You are right, Keith. That'll teach me to write at 2:30 in the morning. Should have caught that in the edit.