The 80/20 Rule in Personal Finance

[Tortoise]

The ERE philosophy is about empowering your life through wise lifestyle choices without having to spend much money to do so.  Why have a car at all, for example, if you can structure your life not to need one (e.g., live so close to work and places where you shop regularly that you can get around by lower-cost alternatives such as walking, bicycle, or public transportation)?

Interesting. This reminds me of one of my favorite books, Walden by Henry David Thoreau. In the first chapter, entitled "Economy," Thoreau explains in detail how he was able to live a remarkably free and soul-satisfying existence on a shoestring budget: "For more than five years I maintained myself thus solely by the labor of my hands, and I found, that by working about six weeks in a year, I could meet all the expenses of living. The whole of my winters, as well as most of my summers, I had free and clear for study."

And that was way back in the mid-1800s. Imagine how much easier it should be today to live an even freer and more satisfying existence than Thoreau's at Walden Pond, by working even less than six weeks per year!

[LifestyleFreedom]

I'm not into rock climbing myself.  But here are a couple of guys ("working" as part-time freelancers) who figured out how to get paid well for having fun.

http://video.nytimes.com/video/2009/12/ ... e-job.html

[dualstow]

Those two items alone--housing and transportation (including car purchases)--eat up about half of most people's paychecks. Talk about heavy hitters! Why pinch pennies and sweat the small stuff when one can instead simply choose a modest home close to work and drive a modest car? That way, if you want to splurge once in a while by eating out at a nice restaurant or going out with friends to have a few drinks, you won't have to feel guilty about it or track it in a spreadsheet to avoid going broke.

I like this. I live in a very small townhouse and don't own a car. The missus I do go out to dinner often, and we almost always go on foot. The worst is the rise in our real estate taxes, but of course that's not under our control.

[gizmo_rat]

In all fairness, I can think of very few people I've met who've not espoused the 80/20 school of personal finance. However generalising from what people say to what people do is a different matter.

Most decisions involving money don't actually seem to be rational, and when you do your best and do the "right thing" self doubt / herd mentality / peer group pressure tends to pull you back into living outside your means... Even if it's just for a nice suit and car. 

BTW Sort of want some of those cow horns for my work ride.


   

[6 Iron]

I am all for safety on a bike, but knee pads?

[Coffee]

I am all for safety on a bike, but knee pads?

Oh, sorry-- that's for the office.

[MediumTex]

I am all for safety on a bike, but knee pads?

Oh, sorry-- that's for the office.

I wonder what type of office it is where you wear shorts with sport coats.

[gizmo_rat]

Oh, sorry-- that's for the office.

Most consultants in London wear them, I think chaps might do in a pinch.

I wonder what type of office it is where you wear shorts with sport coats.

Finally after 30 years of reading American novels I find out what a "sport coat" is. [Dies happy]

[AdamA]

The idea is to live so well below your means that you can save and invest 70% of your income.  It won't take long for you to be able to stop working entirely if you choose to do so and have your investment income cover your living expenses.

I read this book too, and I loved it. 

Have you been able to save enough money to use investment income to cover your living expenses? 

Do you bother with a Roth IRA or a 401K?

[Lone Wolf]

The resource is the book Early Retirement Extreme by Jacob Lund Fisker (the related blog and forums are at http://earlyretirementextreme.com/).  The idea is to live so well below your means that you can save and invest 70% of your income.  It won't take long for you to be able to stop working entirely if you choose to do so and have your investment income cover your living expenses.

Yeah, I really enjoying "peeking in" on this community from time to time.  I'm not personally interested in that level of austerity but I think their philosophy is a great reminder of how important it is to prioritize your life in a way that makes you happy.  Time is our only non-renewable resource and we're always spending it, like it or not.

Tortoise's comparison to Thoreau is right on the money.  That's what came to mind for me as well.

[MediumTex]

The resource is the book Early Retirement Extreme by Jacob Lund Fisker (the related blog and forums are at http://earlyretirementextreme.com/).  The idea is to live so well below your means that you can save and invest 70% of your income.  It won't take long for you to be able to stop working entirely if you choose to do so and have your investment income cover your living expenses.

Yeah, I really enjoying "peeking in" on this community from time to time.  I'm not personally interested in that level of austerity but I think their philosophy is a great reminder of how important it is to prioritize your life in a way that makes you happy.  Time is our only non-renewable resource and we're always spending it, like it or not.

Tortoise's comparison to Thoreau is right on the money.  That's what came to mind for me as well.

When I discuss these topics with my wife (i.e., living below our means, seeking freedom from a consumption based lifestyles, etc.), I always turn to the TV set and remind her that what we are talking about is extremely upsetting to the TV, and the TV will do everything in its power to prevent us from acting on any of these ideas.

In so many ways, the vision from 1984 has arrived, it's just far more subtle and seemingly comfortable than Orwell imagined it would be.

We are in a state of perpetual war with a vaguely defined set of enemies.

We do have these monitors in virtually every room of our homes that influence us in profound ways.

We have to a large degree destroyed history, primarily through simply losing interest in it.

I think we have also worked a little Brave New World into the picture as well, with "Dancing With the Stars" and "American Idol" taking the place of Soma.

[KevinW]

We do have these monitors in virtually every room of our homes that influence us in profound ways.

I'm reminded of 1984 and Fahrenheit 451 every time I see TVs in public, pedestrians staring at smartphones, and DVD players in SUVs.  A lot of people seem to be looking at an LCD, delivering preprogrammed media, every waking moment of their life.

[MediumTex]

We do have these monitors in virtually every room of our homes that influence us in profound ways.

I'm reminded of 1984 and Fahrenheit 451 every time I see TVs in public, pedestrians staring at smartphones, and DVD players in SUVs.  A lot of people seem to be looking at an LCD, delivering preprogrammed media, every waking moment of their life.

The movie They Live is an outstanding addition to this library.

[moda0306]

They Live...

That wouldn't be the movie with the seemingly half-hour fist-fight over putting on a pair of sunglasses between Rowdy Roddy Piper and Keith David, now would it?

I'm probably embarassing myself, but there's an episode of South Park wher Timmy and Jimmy (wheelchair-bound and crutch-bound, respectively) recreate that entire scene.

It was almost as jawdropping as the original.

[MediumTex]

They Live...

That wouldn't be the movie with the seemingly half-hour fist-fight over putting on a pair of sunglasses between Rowdy Roddy Piper and Keith David, now would it?

I'm probably embarassing myself, but there's an episode of South Park wher Timmy and Jimmy (wheelchair-bound and crutch-bound, respectively) recreate that entire scene.

It was almost as jawdropping as the original.

Such a classic.

[Pres]

I absolutely love that movie.

[LifestyleFreedom]

Have you been able to save enough money to use investment income to cover your living expenses? 

Do you bother with a Roth IRA or a 401K?

I sock away as much money as possible into tax-advantaged accounts on grounds that while I can't predict what taxes will be like in the future, I believe they will be much higher than they are today.  I would rather have an after-tax acorn grow into a tax-free oak tree rather than a pre-tax acorn grow into a taxable oak tree.  If the United States replaces the income tax with a consumption-based value-added tax (as Europe has), then I will look like an idiot.  But I can't predict the future, so I pick a course of action that seems reasonable at the moment and take my chances with fate.

I have been able to save enough money to allow my investment income to cover my living expenses.  It just takes discipline and enough time.  Back in the early 1990s, my financial adviser recommended that I put as much money as possible into tax-advantaged accounts and invest an additional 10% of my gross income in taxable accounts (which is otherwise known as "paying yourself first").  The dot-com bubble helped on the upside, and the dot-com crash hurt on the downside.  I have also been motivated by the Safe Strategies for Financial Freedom (by Dr. Tharp) and the Work Less, Live More (http://workless-livemore.com/) books.  The Retire Early Home Page (http://retireearlyhomepage.com/) was useful back in the 1990s before the financial-freedom idea started taking on a greater prominence in the financial press in the decade of the 2000s.

Then the financial crisis hit (which I see as a tail risk or black swan risk).  Now I've decided to cover myself with multiple margins of safety:  4% SWR from index investing, 3% dividend yield from a dividend growth portfolio, and active income from lifestyle businesses and profitable hobbies.  I'm also building bigger cash reserves to handle sudden financial shocks because I don't want to have to be forced into selling assets to raise cash when the market is way down.  For me, the Permanent Portfolio fits between the short-term cash and longer-term equities portfolios because its long-term CAGR is in the 7-10% range (which is higher than what cash returns), while its volatility is half that of equities.

[Tortoise]

The movie They Live is an outstanding addition to this library.

That movie has one of my all-time favorite action one-liners: "I have come here to chew bubble gum and kick ass... and I'm all out of bubble gum."

[Jan Van]

The resource is the book Early Retirement Extreme by Jacob Lund Fisker (the related blog and forums are at http://earlyretirementextreme.com/).

Thanks for mentioning this book, LifestyleFreedom! I'm now reading it, on my Kindle I must admit, and it's quite an interesting read. Though I must say it feels like a stream of consciousness type book. It keeps going on and on. Maybe that's the way the Kindle version is structured?

Reading the ERE blog pointed me to another interesting blog about the same: Mr. Money Mustache http://www.mrmoneymustache.com/category ... g-started/. Also interesting, and I like the writing style a bit better.

Too bad I'm already too old for "Early Retirement Extreme" 

[AdamA]

Thanks for mentioning this book, LifestyleFreedom! I'm now reading it, on my Kindle I must admit, and it's quite an interesting read.

I really liked the book too.  The fact that something so simple struck me as so profound is probably a bit of testament as to how ingrained the "consumer mentality" has become in a lot of us. 

The simple message is that you can have a very happy life without iphones, plasma screen tvs and 4 bedroom houses.  And you don't have to save a million dollars before you can do it, nor do you have to move to the country and start your own farm. 

I also like that he encourages people to produce rather to consume.