Payday should be just like any other day. If there is a spending decision to be made, the outcome should not be any different based on whether you recently received a paycheck or benefits payment that is not contingent on lack of assets.

A key factor in the path to financial independence is earning much more money than your expenses. The idea of orienting your discretionary purchases and bill payments around when you get paid is antithetical to this principle. The timing of when your paycheck comes should be a mere triviality.

There is a mindset toward spending money as quickly as it comes in. I am not sure where it comes from, but it seems to be clustered in families, social circles, people of certain age brackets or socioeconomic status, et cetera. Platitudes about needing to enjoy life and the certainty of one’s continued destitution are common. There is an idea that one should consume resources quickly, before they are seized, stolen or become worthless. This is evolutionarily and historically appropriate, but inappropriate for modern financial life in developed states like the United States, European Union, and People’s Republic of China.

There is a justified, populist backlash against “experts” chastising the public for their financial situations. For instance, when MarketWatch recently declared that Americans should have twice their annual salary saved by Age 35, the derision on social media was widespread.

Many people are in financially untenable situations through no fault of their own. They are not feckless or even necessarily financially illiterate, and are often work full time or even more than full time. This has been explored in great depth, such as on the Bad With Money podcast. For example, the cost of housing in the United States has become quite high relative to incomes, contributing to penury and inequality.

Many people inherit financially unfortunate circumstances. Although people are lucky to be born in the United States, the inequities of being born into education, wealth, et cetera are profound. It is not fair that some young adults have to work and pay rent at a young age while others get to live rent-free with family. It is not fair that children of financially independent parents enjoy financial security, better nutrition, more time with their parents, and greater opportunity, without justification based in human rights or merit.

Separating what you can change from what you cannot change is important. I think it can be done in a “judgement-free” way, but this is difficult even one evaluating oneself, and nigh impossible for an outsider. One can look at examples of those who have succeeded despite bad situations, although others have not been so fortunate and/or diligent.

Regardless, the mathematics remain the same. To become financially independent, one must somehow increase earnings, save a high proportion of income, and invest it in reliably profitable avenues—most commonly, equities or real estate. Along the way, getting paid has to completely lose its day-to-day, practical significance. For example, if your expenses are $2,500 per month and your net income is $2,700 per month, getting paid matters (assuming you have a low amount of liquid net worth). However, if your net income increases to $5,000 per month, getting paid might continue to matter if your expenses rise to $4,800 per month, but will quickly not matter if you keep your expenses at their prior level, due to accumulation of savings. Toward this end, a useful psychological “trick” is to automatically contribute a large portion of pay to your 401(k) and savings/investing accounts.

There are definitely exceptions to the principle that payday should be just like any other day. For example, if you are a recipient of Supplemental Security Income (SSI), you have to maintain assets of less than $2,000 to continue receiving benefits. Similar means tests apply to other benefits such as subsidized housing. Such recipients are in an ironic situation, as they move away from financial independence by accumulating assets, and consequently should keep their expenses close to their income. For everyone else, having low overhead is key. Hence, payday should be just like any other day.

As a financial researcher and aspiring financial educator, I’ve been thinking at length about the principles behind good financial teaching. These five ideas are by no means new or original. However, they are research-supported and not yet mainstream.

1. Behavior Under Management

Know when the student is not ready.

This is straight from Andy Hart’s podcast and conference, with support from a wealth of research in behavioral psychology, economics, and personal finance. Emotion, perception, knowledge, and experience all play an important role in why people make bad financial decisions.

It is widely accepted that younger people should be fully invested in stocks, because their time horizon is long. As they get older, volatility and profits should both be suppressed by divesting stocks into safer, less profitable assets such as bonds. However, young people commonly freak out when there is a bear market, selling their investments and even losing part of their principal. This is traumatic and may result in them never investing in stocks again, which is a worse outcome than if they had invested later in life with greater knowledge, experience, and resilience.

It is not fair to a student to advise an objectively superior course of action when it will lead to financial ruin because the student is not ready.

2. Educate in Arithmetic and Statistics

When the odds are in your favor, it’s only “gambling” if the consequences are disastrous.

Recent evidence suggests that mathematical education may be more important than financial education. The ability to perform mental computations is important, as well as skill with picturing compound interest and percentages. Understanding risk and reward over time is critical. Anyone with a complete understanding of gambling mathematics should know that as you gamble more, you get closer and closer to a guaranteed loss of money.

Investing in the whole global stock market, on the other hand, is neither speculation nor gambling because the odds are in your favor and the consequences of loss are temporary. Although the market declines in about 25% of given calendar years, over longer spans it almost surely increases from the starting point.

Insurance companies make money because they pay out less money than they take in. On average, the odds are in their favor. For any one individual or family, however, the consequences of losing the bet are disastrous. This is why it is wise to purchase health insurance, term life insurance, auto insurance, et cetera. You are insuring against uncommon yet disastrous events. Nonetheless, these disastrous events are much more likely to occur than winning a large lottery jackpot. On the other hand, purchasing insurance against minor losses, like a SquareTrade warranty or collision insurance on a car, is only necessary if these items are critical to you and you do not have the funds to replace them.

3. Make Choices Simpler

Don’t do business with businesses that put bad choices on the table. (Unless you are beating them at their own game.)

People often ask why one should pick Vanguard over Fidelity, Charles Schwab, or another firm for directing their investments. Although Fidelity and Schwab do offer low-cost index funds and arguably offer superior customer service, they are also determined to sell you on products and services that are very bad for your financial health, such as actively managed investments with high management fees.

It is an unpleasant and cognitively taxing experience to be required to repeatedly decline detrimental options. The extended warranties that are sold at the checkout counter at Best Buy are an awful deal. Likewise for trip “insurance” from your airline and GoDaddy’s upsells of inferior hosting services and over-priced options when all you want to purchase is a simple Internet domain name. It is bad enough when a business puts bad choices on the table; aggressive sales tactics are the coup de grâce.

This is why a hard rule of using cash instead of plastic is effective and beneficial for most consumers. The exception is if you are a “travel hacker” beating the credit card issuers at their own game. If you have to ask, you’re not a travel hacker. Simplifying the equation by avoiding the potential for making bad choices is worth losing a few benefits that are, by comparison, small. In some industries, all the major players violate this rule. However, when there an alternate option is available, it should usually be preferred (e.g., Vanguard, cash or debit cards instead of credit cards, etc.).

4. Inculcate a Habit of Inquiry

The squeaky wheel gets the grease.

There is plenty of information available easily via web search. For example, you can easily learn about investing, retirement accounts, or strategies for convincing your bank to waive an overdraft fee by searching Google. However, many people are not in the habit of seeking information nor asking for special consideration from a lender, bank, et cetera. There are differences between how subject-matter experts and novices seek information; novices may not know where to begin, and are typically unfamiliar with the jargon of personal finance, insurance, taxes, credit cards, mortgages, student loans, credit-reporting bureaus, and more. Therefore, it is unfair to blame them for failing to seek out information. Instead, we should educate them in the basics and encourage them to build a habit of inquiry, so they less likely to be shortchanged in their financial dealings.

In addition to educating others, we should lobby for laws and regulations that compel employers and financial institutions to conduct business in ways that do not unfairly disadvantage the non-wealthy (e.g., comprehension rules), and advocate for prosocial behaviors among employers, financial institutions, corporations, and governments that benefit the poor. For instance, it is unfair that many government benefits are not received by the most needy, due to being difficult to claim.

5. Focus on Long-Term Lifestyle Strategy

But, give tactical advice when appropriate.

Reducing bills, increasing income, and changing one’s habits is important. There are many forums and other websites about living frugally. In some ways this overlaps with Item 4; for example, one can save quite a bit on a car, phone or cable bill, rent, or terms of debt service by inquiring with sellers, service providers, landlords, and lenders. Responsible financial educators should encourage learners to (a) reduce expenses as a way of life (e.g., smaller living space, more roommates, no dining out, etc.), (b) focus on significantly increasing income by leveraging education, skills, et cetera, and (c) eliminate debts, save, and invest.

Financial education appears to be more effective when it either focuses on norms and general principles or is given tactically (i.e., “just-in-time“). The best time to tell someone how to write a check is immediately before they need to write a check. Financial advisers can serve as financial educators by offering key information and advice soon before significant financial events such as shopping for a house and mortgage. On the other hand, if this advice is offered many months or years in advance, it is neither remembered nor followed.

The above article is also posted on Thripp.com.

Building on my prior post, to achieve financial independence, meaning being able to live off your accumulated assets without any other income, you need roughly 9,000 times your daily expenses.

The 4% “safe withdrawal rate” rule means that you can generally withdraw 4% of your investment portfolio per year, in perpetuity, without running out of money. This should not be taken as 100% assured, but is more likely to result in a much greater portfolio balance decades in the future rather than running out of money.

Based on the 4% guideline we can say that you need 25× your annual expenses, or 300× your monthly expenses, or 9,125× your daily expenses (rounded to 9,000× here for simplicity). The bulk of this money should be invested in equities, such as the Vanguard Total World Stock Market index fund. This could alternately be split between their U.S. fund and International fund for the same result with slightly lower fees, or restricted to U.S. stocks only if you want to bet on continued prosperity in the United States.

The 9,000× rule means that if your expenses are $100 per day, you need $900,000 invested to be financially independent. If you buy a $5 coffee everyday, you need $45,000 invested to sustain this habit in perpetuity. If you average $25 per day on food expenses (eating out, groceries, etc.), you need $225,000 just to account for this.

The 9,000× rule is more useful when looking at day-to-day recurring habitual expenses. If you smoke two packs of cigarettes per day at $6 per pack, you need $108,000 to cover this. (You may need extra money to account for increased health insurance premiums, reduced life expectancy, and worse health.)

If you are considering monthly bills, the 300× rule is simpler. If your rent is $1,200 per month, multiply by 300 to see that you need $360,000 invested to be financially independent with respect only to this expense.

The 9,000× rule can be quite useful for putting into perspective how much those “little” daily expenses are actually costing you. When Alex Trebek peddles whole life insurance as costing “less than 35¢ per day,” actually, the cost is closer to $3,150 with respect to financial independence, which is bleak indeed for an insurance policy that may have a maximum payout of $5,000 or less. A habit like dining out for lunch instead of packing a lunch could easily mean you need an extra $50,000 invested just to achieve financial independence. This is why there is such an emphasis on frugality in the financial independence / retire early (FIRE) community.

The 300× rule is based on a generally accepted conjecture that withdrawing a maximum of 4% of your investment portfolio per year will result in a 95%+ probability of the portfolio sustaining itself indefinitely. Therefore, this means you need 25× your annual expenses or 25×12 = 300× your monthly expenses. In many cases the 300× rule is conservative and you will wind up with far more money decades in the future thanks to market returns. At the same time, it is also U.S.-centric in that it relies on the U.S. stock market and U.S. dollar as being exceptionally favorable as compared to many other countries’ stock markets and currencies (e.g., Japan’s “lost decade”).

How can you apply the 300× rule to your life as you move toward financial independence? Here are several concerns and principles:

  1. Frugality is key. If you are paying $100 per month for cable TV, you need an extra $30,000 (300×) invested to support this bill in perpetuity. If your monthly expenses decline from $3,333.33 to $3,233.33, cutting the cord means you can be financially independent with $970,000 instead of $1,000,000 invested.
  2. Investments, types of accounts, and management fees matter. Putting most of your money in index funds of the whole global or U.S. stock market is vital, while a bond market index fund is also an important component to reduce volatility. Even if you are retiring early, tax-advantaged retirement accounts are beneficial—they save income taxes (sometimes, payroll taxes too), and you will certainly still require U.S. dollars at Age 59.5 and older. Using index funds with management fees of less than 0.1% per year is much better than 0.5% or 1.0% per year.
  3. In the first decade of early retirement, being willing to adjust your lifestyle based on the performance of the stock market is critical, to minimize sequence-of-returns risk. If the next Great Recession happens early in retirement, your portfolio might be cut in half in value, requiring you to be more frugal and perhaps even partially come out of retirement. But, if this happens after 20 years of great returns, it won’t affect you as much.
  4. Financial independence means, by definition, not being required to earn money to sustain your financial needs for the remainder of your natural life. Conceptually, this is similar to an endowment that funds a university or organization’s operations through its investment returns, providing financial strength and long-term stability to the institution. This is why a whopping 300× your average monthly expenses may be required, rather than a more modest amount like five years living expenses or a six-month emergency fund.
  5. Although financial independence is often conflated with early retirement, the more flexible you are about having a “soft retirement,” the less money you need. For example, if you can continue working as a consultant, in the gig economy, or other part-time job, or acquire one if needed (i.e., when threatened by sequence-of-returns risk due to the next Great Recession happening in your first decade of early retirement), the probability of your success increases.
  6. Cost of living is vitally important. You cannot expect to continue owning a new car or living in the San Francisco Bay Area. Instead, driving a “beater” car and moving to a low cost-of-living country or lower cost-of-living U.S. state is desirable (preferably, one without state income tax). Every dollar you can trim from your monthly expenses is $300 less needed in your investment accounts. You can achieve financial independence far earlier if you “downgrade” to a smaller home and become accustomed to living with less space and fewer possessions.
  7. Many people think they desire to fully quit their job and be unemployed, but what you may really want is more autonomy and flexibility while working from home and/or working fewer hours per week. Rather than going from $100,000 earned income to zero earned income per year, consider going from $100,000 to $25,000. There are a plethora of massive tax tax benefits to having a modest earned income instead of zero earned income, particularly with children. You may qualify for a sizable Earned Income Tax Credit (EITC) from the IRS. You could have your health insurance fully paid for by the U.S. federal government via the Health Insurance Marketplace and Advance Premium Tax Credit, and, due to having a high-deductible health plan, be able to contribute to an advantageous Health Savings Account. There are even stories of millionaires collecting housing subsidies, state benefits, and USDA SNAP benefits (food stamps) due to their low income, if these programs fail to look at accumulated assets. Although many consider this a social injustice, it may be in accordance with the terms of these programs. Because many benefits require some earned income but not zero earned income nor high earned income, quitting work “cold turkey” can have a high cost.

The 300× rule can be demoralizing due to the huge amount of assets required for financial independence. Even something as basic as a $13.99 monthly Netflix subscription costs a whopping $4,197 to fund in perpetuity. But, the flip side is that the 300× rule can motivate you to lower your bills and be more frugal. For example, if you can cut $1,000 a month from your housing bill, that is instantly $300,000 less you need to accumulate toward financial independence. This encourages a worldview oriented toward a more simple, austere life rather than costly, disingenuous displays of opulence. As we know, many people who appear to be doing well financially actually have a negative net worth and are up to their ears in debt.

We always hear about the importance of starting early to save for retirement. This yields several questions:

  1. Why start early? Why can’t you just focus on your bills now and “catch up” later when you are earning more money?
  2. What does “save” mean? Does this mean putting money in a savings account?
  3. What is “retirement”? Is retirement something you do at Age 65? If I love working, does that mean I don’t need to save?

The truth is that both “saving” and “retirement” are misnomers. The key is to invest for financial independence. This means having enough assets to cover your living expenses without having to work again. This might include having enough money to support your significant other and family, too. Whether you “retire” in the traditional sense or not is your choice.

Why start early? There are two big reasons:

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