3080: The Three Methods of Finance - When Enough is Enough by Jacob Lund Fisker of Early Retirement Extreme

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[00:00:30] Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep.

[00:00:55] So press play on good sleep tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app, and be sure to pick the one from Optimal Living Daily. This is Optimal Finance Daily, the three methods of finance, when enough is enough, by Jacob Lund Fisker of EarlyRetirementExtreme.com.

[00:01:21] There are three methods of paying for stuff. Some work and pay as they go. Some borrow and pay interest. And others live off the interest. I'll try to make this as simple as possible. The three ways look like this. Number one, you pay as you go. You save money and then you spend it. If you don't have the money, you can't afford it. And if you can't afford it, you don't buy it.

[00:01:45] For example, if you save $1,200, you spend it on something that costs $1,200. This could be a reoccurring cost of $1,200 per year or $100 per month. Number two, you borrow money to buy things you can't afford because you haven't saved the money. In return, you pay interest. For example, you borrow $1,200 and in return, you pay $36 in interest each year. This is how most people do it.

[00:02:12] And number three, you save much more money. About 33.3 times as much or $40,000. Then you lend it out to 33.3 people in the example previously mentioned and they pay you interest. Each pay $36. So in total, they pay $1,200. You use this to pay as you go. Financial independence means not having to finance like the people in class two.

[00:02:42] And it usually also implies not having to earn money by working. But let's not get hung up on words. This blog primarily talks about class three financing. My life is financed like this. Note that DW's life is financed like class one. We do not buy anything on credit. Now you can decide whether you spend $100 or $80 per month on entertainment. For class three financing, that would cost $40,000 and $32,000 respectively.

[00:03:12] Now perhaps we can agree, I know this is the hard part, that for some the $80 version is as entertaining as the $100 version. Perhaps one is tennis and the other is soccer. What do I know? Saying that one is more entertaining than the other is kind of ridiculous though. Similar to food. Perhaps one involves a diet of red meat, which gives me heartburn, and potatoes. And the other involves rice and dal, which I really like. Why would anyone pay more for something they don't like?

[00:03:42] Housing is more expensive. And so a $500 a month house would cost $200,000 to finance in class three. Where a $1,500 a month house would cost $600,000. Of course, it's ridiculous to think that price tells the entire story. $600,000 around here in the San Francisco Bay Area buys you a wooden one-story with about three bedrooms, a bathroom, and a front lawn.

[00:04:07] $600,000 in the Midwest buys you a McMansion with six bedrooms, four bathrooms, four acres, and lakefront access. I submit it's more fun to live in the Bay Area, so with more limited means, we only finance about $200,000 worth of living costs when calculated this way. This means living in an RV. On the other hand, $200,000 in the Midwest would buy substantially more about what a million dollars buys around here.

[00:04:37] More important, though, are more intangible effects. Suppose we go back to the food plan. Now, depending on where and how you buy it, you get different amounts of the very same food for $100. So, for example, just walking into the closest upscale supermarket and indiscriminately pulling food down from the shelves might cost $160,000 or $400 a month.

[00:05:01] Whereas shopping at stores like Aldi with few but good choices will only cost $40,000 or $100 a month. Now, to some, saving that extra $120,000 will be no problem, but others may value not having to save that much in exchange for more careful shopping. Pardon me while I digress, but is it not silly to work for years to accumulate a retirement fund allowing you to finally relax and do what you want to do?

[00:05:30] Of course, it just may be that working all the time is exactly what you enjoy most of all. But it seems that this is not always the case, even for people who enjoy their jobs. They want to take some time off to do other stuff, but they can't because they must return to their jobs. Saving for decades is silly, as is the idea of remaining in the workforce for five more years, because staying five more years will allow one to have a retirement which includes that much more spending.

[00:05:58] Because what if you get hit by a bus tomorrow? There are a lot of stories of people who wanted to squeeze in just one extra bit of work to meet some retirement target. Then when they reach it, they think to themselves, well, if I work just a little longer, I could buy this and this and that. If I retire now, my salary will never get this high again, so I should keep working. They set a new target.

[00:06:22] The same thing happens a couple of times and then the poor b**** dies of a heart attack, gets Alzheimer's, or develops a chronic depression before retiring. Thus, figure out the price of various things you could easily live with and work out a class three finance. Add all these together. This is your number. Once you hit your number, pull the trigger. Now, if you want more stuff, do class one finance. Get a simple job and pay as you go.

[00:06:51] Unless your sole activity is reading books or watching TV, anything you do will be worth something to someone. Remember that even $100 will stretch pretty far when all your needs and most of your wants are met. The main problem, of course, is that if you presently feel great with one bathroom, but a few decades down the road, you suddenly feel you need three of them. Then you made a huge mistake and have to return to the workforce quite possibly at a lower income.

[00:07:18] Your only consolation then will be that you enjoyed a few decades of freedom. You just listened to the post titled, The Three Methods of Finance, When Enough is Enough, by Jacob Lund Fisker of EarlyRetirementExtreme.com. This post reminds me of one of the first things I learned about money that really blew my mind.

[00:07:43] Rich people use their money to buy stuff and luxuries, whereas wealthy people use their money to buy assets and then use the profits from those assets to buy stuff and luxuries. If you make a high income, you could probably consider yourself rich. But regardless of your income, if you consistently buy assets, then it's inevitable that you will become wealthy.

[00:08:09] Towards the end of this article, Jacob described a phenomenon often referred to as the one more year syndrome. It's when someone meets their financial independence target, but then doesn't quit their job because they decided to move the goalpost out of fear or because they're overanalyzing their plan out of fear. I once met a guy at an event called Camp Mustache who had quadruple what he needed to retire. I'm talking multiple millions of dollars.

[00:08:38] And he was looking for reassurance from the group that he could pull the trigger. He had safety net upon safety net and lived a super frugal lifestyle. And it was clear to all of us that he had way more than he needed to retire. And yet he was still scared. This is a very common thing that happens in the fire community. Many of us have spent years or even decades carefully saving and investing. So it can be difficult to shift your mentality once you've won the game.

[00:09:08] And that will do it for today. Have a great day and start to your weekend. Thank you for listening. And I'll be back here reading to you tomorrow where optimal life awaits.