Hey! Welcome to our first book review! Today, our book of focus is:
“Your Money or Your Life”
Authored by Joe Dominguez and Vicki Robin, Your Money Or Your Life discusses choice, freedom and fulfilment—instead of deprivation and discipline. You’ll learn how to use money to achieve your real dreams and escape the modern traps of consumerism, clutter and debt.
Noteable Quote:‘Money is something we choose to trade our life energy for. (…) Life energy is all we have. It is precious because it is limited and irretrievable and because our choices about how we use it express the meaning and purpose of our time on Earth.’ – Joe Dominguez and Vicki Robin
The authors say most budgeting plans fail because they are based on self-discipline. That means forcing ourselves to do something we don’t want to do. In the long term, most of us simply don’t have the iron willpower to succeed at that!
To change our financial situation, it says we must first adjust the ideas and beliefs that we carry about money. Then we must better understand who we are and bring more consciousness to how money is flowing in our lives. The authors provide a 9-step plan for how to achieve all this from beginning to end.
7 Must-Learn Lessons from Your Money or Your Life
Money = Freedom
Too many of us enter the adult world and soon fall into patterns that keep us trapped. We quickly enter into debt and stay in debt endlessly. We feel it’s okay as long as we make the minimum payments, because that’s what most other “real adults” around us are doing too.
For example, in Canada, more than 50% of new car buyers are signing 7-year loans for a car! Not too long ago, it was unheard of to have a car loan for such a long period of time.
We have been taught that debt is freedom because it lets us buy what we want now. The authors of this book compare this to Orwellian propaganda similar to “war is peace.” In fact, debt = servitude. With debt, we become trapped and scared. We’re trapped in our current life situation, not being able to leave a job we hate or take time off to look for something better. And we’re scared because even a small tragedy can turn our life upside down.
Savings equal freedom. The authors give us two goals to aim for:
- 6 months in savings, or enough money to pay for 6 months of expenses if you suddenly couldn’t work. This will give you a lot more peace of mind and help you survive life’s inevitable accidents and problems.
- Full financial independence, which means making enough income from your savings to cover all your expenses, so you no longer need to work.
2. Reject ‘More’: Know How Much is Enough
In their financial seminars, Joe and Vicki often asked the audience how much more money they needed. And guess what? Almost everyone told them they needed 50% to 100% more, no matter how much they currently made.
We all know that ‘money can’t buy happiness,’ but what do our actions say?
Robert Cialdini, a professor of psychology, wrote “Our best evidence of what people truly feel and believe comes less from their words than from their deeds.” I think he’s probably right.
There are two huge reasons why getting more doesn’t make us happier:
- Hedonic Adaptation: Fancy word for “we quickly get used to what we have.” This is why people driving past you in a shiny Mercedes-Benz don’t look any happier than those in a beat-up old car. We buy something new, feel good for a little while, but the feeling fades. Then society comes and tells us we need just one more thing, then one more thing, which leads to…
- Clutter. Eventually, we reach a point where each new thing we get makes us less happy. Clutter is all those things that take up our space, energy and attention, without giving anything positive in return. They only make us feel stressed and add to our expenses.
3. Money is Life Energy: Taking care of our most precious resource.
To most of us, money feels vague and abstract, just numbers on a computer screen. However, Money is really our life energy. This may be the most important idea in the whole book, so I’ll repeat it: Money is really your life energy!
In other words, when you buy something, you’re trading some of your life energy. For example, if you made $20/hour and bought jeans that cost $40, then you traded 2 hours of your life energy for those jeans. Seeing money as life energy will really bring clarity to your spending and finances. Try it yourself. Next time you buy something, convert the price into the hours of life energy you are spending. You may never look at buying something the same way again!
This idea reminds me of something the famous classic writer Henry David Thoreau said: “The price of anything is the amount of life you exchange for it.”
Our life energy is finite—we only have a limited amount of it. So doesn’t it make sense to treasure our life energy, to treat it with care and consciousness? Yes, absolutely! And this is the real meaning of the word “frugality.”
Being frugal is not about being cheap, but about getting maximum fulfilment from our expenditures of life energy. For example, it can be frugal to buy an expensive high-quality pair of shoes that will last a long time and you’ll really enjoy, and it can be wasteful to buy 10 cheap pairs of shoes you don’t really like that usually sit in the closet.
So how can we be more frugal and avoid wasting our life energy and spend it towards our maximum personal fulfilment?
- Understand the importance of your personal values. Your values are simply what you find important. When we’ve lost touch with our values, then we resort to bottomless consumption, short-term pleasure-seeking, impressing others and comparing ourselves to our neighbour.
- Ask yourself questions to discover your values. Some of my favourite questions for this purpose include… Who do you admire and why? What would you do all day long if money were not a consideration? What kind of work would you do if you weren’t thinking of being ‘practical?’
4. Find Your Real Wage: Working can be more expensive than we think
What are you really selling every hour of your life energy for? The number that you see on your paycheck can be very misleading. In Your Money or Your Life, the authors recommend we all calculate our “real hourly wage” which is how much we are really earning per hour:
- Start with your hourly wage. What it is on paper.
- Calculate how many additional hours your job requires. This includes transportation, checking email at home, needing time to unwind after working every evening, etc.
- Calculate how many additional expenses your job costs. This includes all the extra money you spend on transportation, your car, gas, clothes, extra grooming, daily takeout coffee/food. Don’t forget all the money spent to escape, distract or relax yourself because of the job, and all the money spent on services you can’t do yourself because you’re too busy like daycare and house upgrades.
When you add all the additional hours and costs of your job, you’ll probably find that you’re making less than you thought! This means your current job is not worth nearly as much as you believed. However, this can be good news. The authors of this book share stories from their readers, some of whom realized they could quit and find more flexible work closer to home, while keeping the same amount of money at the end of the day. Their high-pressure jobs had a lot of invisible costs that they had never considered. When they did, they decided it was not worth it and they were much happier!
Create a “scalable” business. This means creating a business where your income is not attached to your time. On the other hand, a business that is not really scalable is like a local accountant, who can only serve a limited number of clients per year.
5. No Shame, No Blame: Looking back at our financial life without guilt
Another step this book recommends is gaining clarity on your financial past. This is about understanding where you’re coming from, so you can point yourself towards a better direction from now on. If feelings of guilt come up, the authors recommend you repeat a mantra to yourself: “No shame, no blame.”
The authors clearly believe that bad feelings are not useful for changing our behavior. Instead, they believe that our behaviors can change with increased self awareness, combined with self compassion. This approach is quite unique for a personal finance book. I am reminded of a quote from the great psychologist Carl Rogers who said, “When I accept myself just as I am, then I can change.”
To understand your financial past:
- Add up your total lifetime earnings. How much money has passed through your life up to now? You can find this number by looking at past tax returns or contacting the right government office directly.
- Find your current net worth. How much are all your possessions and savings worth together? This is ‘what you’ve got to show for all those years of working and trading your life energy.
6. Raise Your Financial Awareness: Keeping track of how you spend your life energy
At the core of this book is a system of keeping track of where your life energy (aka money) is going. The authors believe that by writing down all spending and reflecting on it regularly, our behaviours will naturally shift. Over time, we will spend less on things that don’t bring us much fulfillment and more on what gives us joy.
This system has 3 parts:
- Keep a daily money journal. Write down every single purchase, either in a notepad or in a mobile app. This simple act will increase your self awareness about where your money is going.
- Add up spending monthly. At the end of each month, go through your expenses. Divide them into major categories, then find how much you spend on each category. Convert the dollars into the amount of life energy you spent. Then ask yourself, “Was it worth it?” Put a plus or minus beside the category if you feel that you should spend more or less according to your values, or a zero if you feel there should be no change.
- Create a yearly wall chart. This chart will only have two lines, one for income and the other for expenses. Each month update this chart to see whether these numbers have gone up or down. Put it on a wall somewhere you will often see it. The authors say that after 3 months, most people who follow this system will find their expenses going down automatically, simply from the increased awareness of where their money is going.
As the influential business author Peter Drucker wrote, “What gets measured, gets managed.” Simply measuring the number of hours of work increases awareness of when you get distracted, which is tremendously helpful for increasing productivity.
7. Aim Towards Freedom: Putting your savings to work for you
Over time, as you update your wall chart, you will see a growing gap between the two lines, between your decreasing expenses and your income. This gap is your savings, the money left over after all your expenses are paid. Now, those savings can be put to work for you, earning you additional income through investing.
The authors say you can later add a third line to your wall chart which is “Income from investments.” At first, this income will probably be very small, but it will grow over time. At first you’ll be making $20/month, then $50/month, then $100/month.
Now here’s the really exciting part. When that line “Income from investments” grows higher than your line for expenses, then you are free! In the book, they call this “the crossover point.” Basically, you’ll be making enough money passively from your savings that you no longer need to work. But let’s not get ahead of ourselves. What should someone invest in? Read Here.
30 years ago, when the first edition of this book was published, Joe Dominguez invested only in something called US Treasury Bonds. However, this probably wouldn’t be the best path today because those bonds pay far less money than they did decades ago.
Today, most of the top-rated personal finance writers recommend stock index funds, mixed with bonds for greater stability.
My Key Takeaways:
- A monumental shift is needed from the whole of the world’s affluent populations. A shift away from “More is Better” to “Enough is Best”. Too often we don’t truly take stock of what we need and instead aim for the maximum we could have. This only ends with us being dissatisfied with what we have and imbalanced distribution of resources.
- The hourly or daily rate you think you earn, or even your yearly salary, is not actually what you think it is. If you work an 8-hour shift for £10 per hour (totalling £80) you might think you’ve earned £10 per hour of your time. However, there are many hidden costs (in time and money) of working. Maybe it took you an hour to commute to work and an hour to commute back spending £10 on transport. You spent the equivalent of £10 per day on work clothes this year. Dinner costs you £15 when you get home because you’re too tired to cook. Adding all of that up your actual hourly wage today was £4.50. (£80 – £10 – £10 – £15 = £45, shared across the 10-hours at work and commuting).
- Once you know the cost of your time (£4.50 per hour, 7.5p per minute) you can start to think of your money as your life energy. One minute of your life is worth 7.5p, and vice versa. That means that the packet of chips you just bought for £1.20 really cost you 16-minutes of your life.
- Thinking about outgoings as time spent can drastically change your outlook on money.
- While it can be depressing to calculate and realise your actual hourly wage, it can also be liberating to free yourself from the idea that a higher wage is better. Sometimes earning more comes with more time, stress, and responsibilities at work, leading to a lower actual hourly wage.
- Another practical exercise the book encourages us to calculate the total amount we have earned so far in our lifetime. You will be astonished by how much you have managed to earn!
- You can then calculate your total net worth at present, by adding up your savings, any amounts owed to you and the amount you would make if you sold everything you own today. Once you have this you can calculate your savings rate to date: how much of that money you’ve earned throughout your life is still yours? ([net worth / total earnings] x 100 = the per cent of your lifetime income that is still yours)
- Thinking about expenses as exchanging your life energy (your time) for goods and services can help to realise which of your outgoings is providing you with good value.
- Honestly, there is a tonne of actionable points including a whole load of exercises, guides and recommendations in the book – too many for me to cram into one blog post. I’d recommend getting a copy and getting stuck in.
Your Money or Your Life is a great read. If followed to the latter, you’ll achieve financial intelligence (understanding that where and when you spend your money is a choice, as is where and when you earn it), financial integrity (awareness of where your money is coming from and going) and financial awareness. Graciás!