Financial Wisdom for Free People

December 4, 2010

Introduction
I've always enjoyed keeping track of money and planning my finances. Some of this is innate, and some was encouraged by my parents, who gave me opportunities to earn modest amounts of money as a child and had a policy of doubling whatever I put in the bank as savings. Money was a topic of frequent discussion in the home, and I've carried this tradition into my adult life.

By age 33, I've acquired a large degree of freedom, due in large part to sound financial strategies I've developed over the years, as well as a certain amount of good fortune. Here I will share my attitudes and some things I've done that have proved beneficial in the long run. Not everyone wants or needs a life like mine, but for those who share similar goals as myself, this article may prove useful.

Attitude towards debt
I have never been in debt or owned a credit card, and I have no credit history. I have borrowed small amounts of money from people for a few months at a time, but I've always paid the debts off promptly (in contrast to those who have borrowed from me). For me, avoiding debt is both a financial strategy and a form of ideological protest against the exploitative American system.

Consumer credit is an absolute scam. I would never consider taking out a mortgage or car loan or even borrowing to pay for university studies. The problem is not the concept of borrowing money from someone, but rather the fact that the corporate capitalism system is designed to put people in debt slavery in their youth and keep them in it till they die. This allows various financial entities to syphon off a large chunk of your productive output over the entire span of your working life while doing nothing of value. Infrastructure and conventional wisdom have been shaped to encourage debt and make it seem like the proper thing to do. Advertising and publications overplay the benefit to be gained from easy credit and downplay the difficulties involved in paying off loans.

Indebtedness is one of the greatest limitations to freedom there is. In my financial planning, I don't even consider the option of taking out a loan. If I had grown up a generation or two ago in a booming economy, my views might not be so radical. But today things are different.

Indebtedness in a contracting economy
The U.S. has been in hidden financial decline since the 70s, when domestic oil production peaked and rapidly fell below demand. It's been in military decline since 9/11 (2001) and in overt economic decline since 2008. It appears likely that the days of a growing economy are over. Yet cultural inertia continues to churn out young people who think society is obliged to pamper them with tons of hydrocarbons to satisfy their whims. This will be the first generation in a long, long time that will have a lower standard of living than their parents. In a contracting economy debts will become harder and harder to pay off because the same amount of labor will produce less and less net wealth. People who start out their adult life with substantial debt may never be able to pay it off.

Don't plan your future based on the paradigm of perpetual growth; start planning for a world where you might not be able to afford a personal automobile and a large house, or even a separate house. Take a look at Peak Oil, unfavorable demographics in developed countries, and the rising cost of utilities, healthcare, and education — not to mention ballooning national debt — and begin to visualize a future quite a bit more modest than what you'd been brought up to expect.

In a contracting economy many people who invested greatly in training for the modern economy will find themselves out of work. Competition for white-collar jobs will rise until even the best can't find employment. Learn to do things that can help you provide for yourself in any scenario, and don't invest all your energy into developing a niche that is about to disappear.

Higher education
In recent decades the cost of higher education has spiralled out of control and is now wildly out of proportion to the services rendered. It's a trap. Guess what — education is free. If you really want to learn something, there are almost always ways to learn it for free or at little cost. With the Internet, free public libraries, and the "school of life" that has always offered free enrollment, there is no excuse to have to rely on institutions of education alone. They offer expensive documents (diplomas) and environments that are often conducive to learning, but the content and quality of education has always been up to the resourcefulness of the student.

If you do choose to get a higher education, either get scholarships to cover your costs or go to a place you can afford without going into debt. Take your education into your own hands. At your disposal are books, Internet, computers, and people. Those who have mastered a field are almost always open to helping others who have a strong desire to learn from them.

The worst thing to do would be to go to an expensive college, acquire a large student debt, and earn a degree in a field that you could have mastered more effectively in a different environment, or in a field with limited employment prospects. For those majoring in foreign languages, take note: instead of spending 4 years at school trying to learn the language in a classroom, just spend a year in a foreign country at far less cost. The same can be said of many other fields of study.

As a parent in the U.S., one of the best things you can do to pay for your child's college education is to make sure they learn a foreign language growing up so they can study in a foreign country where education is cheap.

The best education is self-education combined with apprenticeship — learning via observation and imitation directly from a master. This shouldn't have to put you tens of thousands of dollars into the hole.

Flexible spending patterns
If I am only making $600 a month, then I live in such a way that I'm spending only $400. If I'm making $2000, I can afford to increase my expenses to $1000. If I make $3000, I spend $1200 or so. Most people adjust their spending to always eat up almost all of what they are earning. This is an almost incurable human weakness. If people could just twist the dial to set it at 50% of earnings instead of 95%, then everyone could be free.

Most of my success in achieving financial freedom stems from simply being able to adjust my "spending as percentage of earnings" dial. So many people seem unable to do this, and I have little hope for them other than that someone else will take over their finances.

First-world dwellers' expectations of comfort and wealth tend to be abominably high. Many Americans would be completely debt-free today if they could have just settled for a home with 50-70% of the square footage of their current residence. Our grandparents were just as happy as we are growing up in small homes where children had to share a room. People in the Philippines or Kenya are just as happy as us and have much lower levels of consumption. On top of that, most of them have no debt and the amounts owed are a smaller percentage of annual income.

Each category of spending has its rational bounds. It's dumb to spend 50% of what you earn on housing or 20% of your earnings on transportation. I have always been flexible in my housing arrangements in order to accommodate my current level of earnings. If I'm earning little, I rent a room or even share a room. If I'm earning more, I rent a small apartment, and so forth. Americans tend to cling to their houses at all cost even when it's essentially ruining their quality of life. It's a deep-seated property instinct that banks exploit to their advantage. Homeowners don't fully realize that they will never own their home. Either they'll be paying a bank for it, or they'll be paying property taxes plus the cost of utilities. Again, it's the way the system is designed.

If you want to be free, either find a place to live that won't draw money out of your pocket till the day you die — for example, in a country where you don't have to be connected to centralized utilities and pay property taxes — or avoid becoming too attached to real estate and think of it as rented property, even if you formally "own" it. In the animal world, rodents get kicked out of their dens all the time, and being able to find or dig a new one is one of the most valuable skills. So, learn to treat housing as a temporary arrangement and preserve your mobility.

Location is everything
So much of one's expenditure profile is derived from where one lives. If you work in city X but live in city Y, then you'll need a car, with all the attendant expenses (if you live in the U.S., at least). With the rapid depreciation of most cars, the high cost of gasoline, car insurance, and the cost of interest on one's car loan, a car can easily take a few hundred dollars out of your pocket each month. Who gets your money? — Shell and Exxon and the like, shareholders of insurance companies and automakers, the workers in these companies (to a lesser extent), and the companies who produce the infrastructure for manufacturing cars and construction materials.

In most cases, living close to work is a great financial advantage. Even if housing itself is costlier, you might be able to avoid buying a car, and you'll save a lot time because it's a short walk to work. Time = money.

Your choice of city also makes a big difference. A few U.S. cities have decent public transportation, saving you hundreds of dollars each month if you're able to part with the liability in your driveway. Or, if you work at home, you can move to an area with a depressed real estate market and save a ton of money.

You can also choose the "right" or the "wrong" country for your profession. If you're like me, you didn't have a clue what you wanted to do after graduating from college. I made a prudent choice and took my hard-won savings to Ukraine, where they lasted a lot longer there than they would have in the U.S. Meanwhile, I tried out a bunch of different things until I gradually gained a clear idea of what to do next. With its high cost of living and wasteful infrastructure, the U.S. isn't half as good a place for freelancers as most other countries of the world.

It may be that freedom awaits you in another country. If so, go there while young and start building the bridge. For unskilled, but highly motivated workers, the U.S. may be an excellent route to freedom (since unskilled "natives" are almost always unmotivated). For the highly-trained and versatile, freedom may be easier to obtain elsewhere (where there is a lack of training and versatility).

Brief periods of intense money-making
Sometimes an opportunity presents itself to make a large amount of money quickly. The way I approach these is to gear myself up for what is to be a temporary effort and clamp down my expenditures at current or close to current levels so that I can save as much of the windfall money as possible. What many other people do is raise their expenses in sync with the higher earnings, then end up obligated to continue working there because they have become used to the higher income level. Being stuck doing something you don't like is not my idea of freedom.

Likewise, sometimes you have periods of "doldrums" where you're earning very little. If you've kept your expenses low enough and have some savings, then you can use the extra time on hobbies, education, and developing personal interests and new business ideas. With this approach, a bust can be just as much fun, if not more, than a boom.

Tracking finances
My monthly financial spreadsheet is quite sophisticated. I have four columns in the spirit of Robert Kiyosaki — active income, passive income (which he calls "assets"), discretionary expenses, and nondiscretionary expenses (which he calls "liabilities"). I also run a yearly spreadsheet where I enter these four sums from each month and have it automatically calculate a bunch of financial indicators — for instance, how much of my total expenses were covered by my passive income, etc.

Let me just say that I qualify as "rich" by Kiyosaki's standards (i.e. assets cover all expenses), even though I rent my apartment and use public transportation. Kiyosaki's term "rich" basically corresponds to my definition of "free" — free to try new things, move to new places, experiment with new professions, devote time to personal projects, and be able to choose work that stimulates me rather than having to do what other people want from me.

In my opinion, you don't have to build a passive income stream to be "free." Another route is to develop a number of ways of earning money that you truly enjoy, accumulate a decent amount of savings, limit your expenses to a reasonable fraction of your earnings, and continue working as you see fit. If you want to, you can take some months off from work and do something else for a while, or switch to a lower-paying job that you enjoy more. This also fits my idea of freedom.

Each month I am aware of just how "free" I am by looking at my spreadsheets. Maybe this is just because I like numbers. But I suspect every free person has developed some sort of system to monitor their situation and ensure their continuing freedom.

Attitudes towards wealth
There is really no surefire way to stockpile wealth and secure your total financial freedom once and for all. Stock markets can crash and inflation can eat up savings. Baby boomers can all get old at the same time and wake up to discover that their retirement fund has melted away just at the moment when they begin to need it. Once secure sources of passive income can erode away as the economy changes.

Nothing in life is permanent, and no one gets to sit on their laurels for long. I know of three basic strategies for increasing your chances of getting through bad times: 1) develop a range of marketable skills, 2) accumulate useful assets, and 3) align yourself with productive breadwinners (through marriage or friendship). What people excel at seems to depend mostly on their personality. My high-mobility route (#1) to freedom is not for everyone. Some people are happier accumulating and managing useful property, which is best done in one location.

Conclusion
I hope this article has been helpful. I wanted to avoid the "101 tips" approach and talk about the psychology of financial freedom, general financial strategy, and personal lessons I have learned. If you have unanswered questions about this topic, feel free to write me using the "Contact" link at top right. Maybe your question will contribute to improving this article!