Vicki Robin and Joe Dominguez

Your Money or Your Life

1-Page Summary

We feel like we must choose between our money and our lives, so
we spend time at jobs we dislike to earn money that we don’t have
enough time or energy to enjoy. In other words, most of us choose
money.

But we don’t need to choose; we can have both. This book offers 9
steps to transform your relationship with money and become
financially independent—the state of not having to work for money.

How quickly you reach financial independence depends on your life

circumstances, plus the speed and consistency with which you
apply these steps.

Step 1: Understanding the Flow of Money in Your

Life
To begin transforming your relationship with money, you need to
understand the reasons you choose money, and why they’re
harmful.

Problem #1: Choosing Money Over Life Hurts Our Wellbeing

We choose to stay in jobs we don’t like, even when it’s harmful to

our wellbeing. The more time we spend working, the less time we
have to care for ourselves and our families, be involved in
communities, rest, and engage in other pleasures. This causes
mental and physical stress, yet we have little to show for this
sacrifice. People in the US are working more hours, saving less, and
taking on debt.

The two main reasons that we choose work over wellbeing are:

1. We don’t know how to leave jobs we don’t like.

2. We don’t know how much money is “enough” for our happiness.

Problem #2: Choosing Money Over Life Hurts the Earth

We often consume things we want, but don’t need. When we over-

consume, we deplete the planet’s finite resources, robbing future
generations.

This modern consumer culture dates back to the early 20th century,
when factories could produce more goods than ever before. But
though more goods were available, people weren’t buying them
because they didn’t need them. Companies needed a way to
convince people to buy goods they didn’t need. Thus, the marketing
industry was born.

To break this habit, we must break from the myths that drive
consumer culture:

Myth #1: Growth is good. We think that spending money will

grow the economy, which will alleviate poverty, decrease
unemployment, and improve the standard of living for
everyone. But we can’t endlessly consume or we’ll deplete
the planet of its finite resources.
 Myth #2: Technology will save us. We think the right
technology will solve the world’s problems, and feel
powerless as individuals to effect real change.

Myth #3: The danger isn’t so immediate. We don’t feel the

urgency to reduce consumption and take action to help the
planet because climate change feels like a far-off apocalypse
we won’t live to see.

Practice Step 1: Visualize Earnings and Calculate Net Worth

Now that you understand the dangers of choosing money over life,
you can start the process of changing your relationship with money
and living a life you love. The first step is to examine all the money
that you’ve ever earned, and what you have to show for it.

This step has two parts:

1. Calculate how much money you’ve earned in your lifetime. Look

to sources like income tax returns, Social Security administration
statements, and bank accounts.

2. Calculate your net worth. Assign a value to each of your

possessions worth more than a dollar. Sort them into things you
own and things you owe—your assets and liabilities. Subtract
your assets from your liabilities to calculate net worth.

Step 2: Tracking Your Money

To understand your relationship with money, you need a definition
of money that is consistently true. With this definition, you’ll learn
what it means to become financially independent, calculate your
real hourly wage, and track your expenses.

Money and Financial Independence

People’s definitions of money vary. Some think of it as a material

(such as the paper cash is printed on), or a reflection of human
psychology—how you spend money reflects your personality. But
the one consistently applicable definition is that it’s your life
energy: Money represents the time and energy you dedicate to paid
work.

With this definition, it’s easier to resist buying things you don’t need
—what you buy must be worth the life energy you exerted to pay for
it. Do you use and enjoy that jet ski enough to make it worth the life
energy you paid for it? In the long-run, you’ll use the definition to
transform how you spend both your time and your money to reach
financial independence—when you’ve saved and invested enough
money that you no longer have to work for pay.

Practice Step 2: Calculate Your Real Hourly Wage and Track

Money

Step 2 has two parts:

1. Calculate your real hourly wage. Examine the hours you spend
working and doing work-related activities—getting ready for
work, commuting, shopping for work clothes—per week. This
step can help you evaluate whether a job you’re doing is worth
the time and money you dedicate to it.

2. Track money, down to the penny, that you receive or spend.

 You’ll use this information to start evaluating and reducing your
expenses in Steps 3-6.

Step 3: Creating a Monthly Tabulation

In this step, you’ll categorize your monthly expenses to capture your
unique spending habits. You’ll learn where your money goes and
what you have to show for it.

This is different from making a budget. You’re not designating how

much to spend in each category and subcategory. Instead, you’ll see
what you spend and evaluate if your purchases are worth it.

Practice Step 3: Categorize Monthly Spending

1. Develop categories and subcategories for your expenses.

Include categories like Food, Housing, and Transportation. For
example, in your housing category, create subcategories such as
rent and utilities.

2. Create a spreadsheet, budgeting tool, or Google Sheet to list

different categories and subcategories. Then, sort each expense
for the past month into your subcategories. For each subcategory
and category, calculate the amount of life energy you spent by
dividing the total by your real hourly wage.

3. Calculate your savings for the month: (Income - Expenses) +/-

total error. Error is any unaccounted money gained or lost for the
month.
Step 4: Aligning Spending With Your Values,
Purpose, and Dreams
To assess whether you’re living the life you want, you need to
explore your values, purpose, and dreams. You’ll use this as the basis
for Step 4: deciding whether your spending aligns with these
benchmarks.

Values, Purpose, and Dreams

Our values, purpose, and dreams should dictate how we spend our
time and life energy, or money. We feel fulfilled when our behavior
is in line with these criteria. But this isn’t always the case, hence why
people stay in jobs they dislike.

In order to align your time and spending with these criteria, you
need to identify and get acquainted with your values, purpose and
dreams. To do this, think about the fulfilling ways you spend your life
energy. Fulfillment is a deep sense of satisfaction, contentment, or
happiness that you get from working toward and recognizing
achievements. We’ll explore some questions to help you define
each of these things for yourself.

Practice Step 4: Evaluate Monthly Spending

Using your monthly tabulation from Step 3, ask the following

questions for each subcategory and category of spending:

1. Is the amount of happiness and contentment I got from these

purchases worth the life energy I spent?

2. Is spending this amount of life energy consistent with my values

 and purpose?

3. If I didn’t have to work for money, would I spend more, less, or

the same life energy on these purchases?

For each question, assign a value:

Use a “-” if you didn’t get fulfillment proportional to what you

spent and should spend less

Use a “+” if you got fulfillment proportional to what you spent

and think you should spend more

Use a “0” if you got fulfillment proportional to what you spent

and think your spending should stay the same.

Step 5: Graphing Your Income and Expenses

Now that you’ve evaluated your monthly expenses, you’ll learn how
to track them and your income with a hand-drawn or digital graph.
This graph will track your progress toward financial independence.

Seeing your spending and income in visual form will encourage you
to:

1. Earn more than you spend.

2. Pay off your debt.

3. Build savings.

Practice Step 5: Graph Your Income and Expenses

1. Select an 18 by 12-inch or 36 by 24-inch piece of lined graph
paper.

2. Draw a horizontal (x) axis and mark time out in months.

3. Draw a vertical (y) axis, mark out dollars.

4. Each month, plot your monthly income and expenses (soon,

you’ll add a line for investment income, too).

Step 6: Strategies and Categories to Cut Spending

To reduce your spending, you need to learn what it means to be
frugal. Then, you can employ some strategies to help you spend
less.

The True Meaning of Frugality

People think frugality means severely restricting your spending. But

it’s really about enjoying things, whether you spend money on them
or not.

To enjoy things more, you need to cultivate a high joy-to-things ratio

—feeling great joy with each thing you buy or use. You’ll buy less
because you feel more fulfilled with each purchase.

Practice Step 6: Reduce Spending

Use these 9 general strategies to reduce spending:

1. Avoid shopping. Don’t go shopping when you don’t have

anything you plan to buy.
2. Spend only what you can comfortably afford. If you want to buy
something, but don’t have enough money, wait to buy until you
do.

3. Repair your possessions. Repair things instead of replacing them

with new ones.

4. Use stuff to the end. This helps avoid frequent spending on the
same items.

5. Dive into DIY. Learning how to repair and fix things can save you
money.

6. Think about what you need. Create a list of things you anticipate
needing to buy in the coming year.

7. Investigate durability and multipurpose uses. Know whether a

product will last long enough to make its price worth it.

8. Don’t pay full price. Search for the best price, haggle, buy used, or
get stuff for free.

9. Devise new ways to meet your needs. Listen to your needs and
desires and ask if they can be met without spending money.

Trim spending from the following 11 categories:

1. Banking and Loans

2. Housing.

3. Transportation
 4. Health Care

5. Sharing Your Skills (developing one or more you can provide in

exchange for another service, like yard work or haircutting)

6. Food

7. Entertainment, News, and Cellphones

8. Vacations

9. Insurance

10. Spending on Children

11. Gift Giving

Step 7: Increasing Your Income

The more money you earn, the faster you’ll reach financial
independence. Plus, if you earn more, you have more time for the
activities that matter to you, so striving to maximize your income is
in your best interest.

Just like with money, you need a better definition of work. Work is
any activity that aligns with your values, purpose, and dreams,
regardless of pay. With this definition, you’ll realign your time to
earn money and do the work or activities you enjoy, even if they’re
unpaid. In other words, your job doesn’t need to be your favorite
activity, but it should pay you enough that you have time to do
things you care about.
Practice Step 7: Increase Income

Here are ways to ensure you’re earning as much as possible for the
life energy you invest in work:

Ask for a raise. Get paid more for the work you already do.

Ask for increased vacation time. Use time off to relax and do
activities you enjoy.

Ask to work fewer hours. If you’re earning more money than

you need, you can work fewer hours and still meet your
needs.

Find another job or jobs that will pay you more for fewer
hours.

Step 8: Graphing Your Investment Income

To learn when you’ll reach financial independence, chart when
you’ll reach your crossover point—when your monthly income
exceeds your monthly expenses—and you no longer need to work
for money. Use your graph from Step 5.

Practice Step 8: Graph Your Investment Income

1. Calculate your monthly investment income and plot the figure on

your graph. Use the formula monthly investment income = capital x
current long-term interest rate divided by 12.

For current long-term interest rate, use the interest rate for 30-year
US Treasury Bonds, or the interest rate for certificates of deposit.
This isn’t how much investment income you have at the moment
you calculate it. It’s a projection of what monthly investment
income you can expect if you invest your capital, regardless of the
method you use to invest. For example, if you have $1,000 in capital
and the current interest rate is 4%, the formula would be: monthly
investment income = $1,000 x 4 % divided by 12, or $3.33 per
month.

2. Apply this formula to your total savings each month and plot it on
your graph. Eventually, you’ll be able to project approximately when
you’ll cross over.

Step 9: Investing Your Capital

Learn where to invest your capital—savings that you don’t intend to
spend.

This is the culmination of the program—having enough money

coming into your life through passive income that paid
employment is optional. It’s not about getting huge amounts of
money but about knowing how to invest so that you have enough
money for the remainder of your life.

Investing Lingo

Here are some key investing terms:

Asset Classes: Different categories of investments, like stocks

or real estate

Passive Income: Also called investment income—money you

 don’t work to earn

Risk Tolerance: Your willingness to make risky investments

Time Horizon: How soon you plan to use money you’ve

invested

Step 9: Choose Investment Options

Treasury bonds used to have the best interest rates of almost any
investment, but this is no longer true. Now, it’s better to opt for a
diverse investment portfolio that mixes low-cost index funds,
certificates of deposit, real estate, as well as bonds. Considering
your risk tolerance and time horizon, develop a plan to invest in a
diverse mix of these assets. Do research and consult with a financial
advisor if desired.

Introduction

Most of us feel forced to choose between “money” and “life,” and we

inevitably choose money, sacrificing our relationships, health, and
joy in the process. Instead of living our lives, we spend all our time at
jobs we don’t really like to make money we have little time or
energy to enjoy.

But we don’t have to choose between our lives and our money. We
can have both. Your Money or Your Life offers 9 steps toward
rethinking your relationship with money and becoming financially
independent (FI), the state of not having to work for money. It’s the
key to having both the life you want and the money to achieve and
maintain it.
The 9 steps, in brief, are:

1. Visualize earnings and calculate net worth.

2. Calculate your real hourly wage and track money.

3. Categorize monthly spending.

4. Evaluate monthly spending.

5. Graph your income and expenses.

6. Reduce spending.

7. Increase income.

8. Graph investment income.

9. Choose investment options.

FI-Thinking
To reach financial independence, you need to practice FI-thinking:
cultivating a sense of curiosity toward money. There are 4 aspects to
FI-thinking:

1. Financial Intelligence: Looking objectively at your money. This

includes the money you’ve earned and what you’ve bought with
it. Plus, you need to know what money is, examine the money
that comes into and out of your life, and evaluate whether the
type of work you do and the time you spend doing it are in line
 with your values, purpose, and dreams.

2. Financial Integrity: Understanding the effects of earning and

spending money on yourself and the earth. You have to find the
sweet spot—enough material goods to fulfill and enrich your life,
but not so many that they become excessive or create clutter.

3. Financial Independence: Escaping your dependence on money.

This includes paying down debt and changing harmful
assumptions you have about finances.

4. Financial Interdependence: Recognizing the ways that you

dedicate your time to the world and how that enriches your life.

You’ll practice each of these components as you work through the

program’s 9 steps.

Reaching Financial Independence

When you’ll reach financial independence depends on the speed
and consistency with which you apply the book’s steps. People
generally fall into two categories:

Hares apply principles quickly and set early financial

independence goals.

Turtles apply principles more slowly, but systematically to pay

down debt and save money so that they’ll reach financial
independence around retirement age.

Aside from how fast or slow you work through the steps, there are 3
styles of personal finance management:

Ninjas work diligently to optimize their finances and

investments through reading finance blogs, playing with their
investment portfolio, and maximizing savings on purchases.

Minimalists prioritize experiences over material goods and

keep their lives clutter-free.

DIYers, or do-it-yourself-ers, are “conscious materialists”:

They make careful use of material resources and enjoy
hands-on experiences with the world, like using wood scraps
to build a birdhouse.

You may not identify with any of these styles, but it’s helpful to know
how others apply the steps in this book. The bottom line: People will
approach this book differently, but they all have a desire to change
their relationship with money and work steadily to complete each of
the steps.

Step 1: Understanding the Flow of Money in Your

Life

There are a variety of factors that compel us to choose money over

our lives. This chapter delves into the emotional factors and
economic realities that dictate our relationship with work and
money, as well as why choosing money over life is harmful to both
our wellbeing and that of the planet.

Finally, we will explore the first step in reframing your relationship

with money: visualizing your earnings and calculating net worth.

Problem #1: Choosing Money Over Life Hurts Our

Wellbeing
There’s growing evidence that wanting more and valuing our job
over our personal life has detrimental effects. In one US survey:

60 percent of people suffered from job-related stress,

anxiety, and depression.

12 percent of people worked more than 50 hours in a week.

The majority expressed dissatisfaction with their jobs.

Yet we’ve little to show for all this hassle. Economic circumstances
in the US mean people are earning less, saving less, and
accumulating more debt. Here are the numbers:

The majority of wage earners haven’t seen their pay increase

more than 5.3 percent since 2000.

Before the 1980s, people saved over 10 percent of their

income. Today, most save 5 percent or less.

Fewer earnings and savings has led to more debt—about

$11,000 for every person in the US.

There are two reasons that we choose money over life: We don’t
know how to leave jobs we don’t like, and we don’t know how much
money is “enough” for our happiness.
We Don’t Know How to Leave Jobs We Don’t Like

We don’t know how to leave jobs we don’t like because our work is
tied to our identity, and we think we need to stay with jobs to earn
money.

Identity

We conflate our job with our identity and worth as human beings.
We also judge others based on their work. For instance, teaching is
considered less prestigious than being a doctor, even though
guiding and instructing children is arguably just as demanding. This
is called jobism.

We spend so much time working that it has become the main way
that we express ourselves, but this wasn’t always the case. We used
to develop identity from our interactions in the community, through
places like churches and neighborhoods.

Additional Reasons

There are three additional reasons that we stay in jobs we don’t like:

1. We face burnout, boredom if the work isn’t challenging enough,

and a competitive atmosphere that is hard to succeed in. Though
these seem like reasons to leave a job, we often interpret these
circumstances as the norm in all workplaces—and any notion we
had of finding the dream job of our childhoods gets filed away as
idealistic. We think that this is the best we can get.

Example: Elaine wished she could leave her job as a computer

programmer. The work bored her and she hated it. But she worked
well enough that she wouldn’t be fired. Her earnings bought
luxuries, like a sports car, but not satisfaction. She thought that life
would always be this way, no matter the work she did.

2. We have debts—house payments, student loans, and more—that

can make leaving a job difficult.

3. We have bought into the idea that we need money and the things
it can buy to satisfy our needs.

We Don’t Know How Much Money Is “Enough” for Our

Happiness

The second reason we choose money over life is that we don’t

recognize when we have “enough” money. This is due to money
lessons we learned in childhood and continue to apply as adults.

Childhood: Learning About Money

Many habits get solidified in childhood before we’re fully aware of

them. When we carry these behaviors into adulthood unchecked,
they can be harmful to our wellbeing.

Young children are hard-wired to meet their needs externally. If you

were hungry, you’d cry and a parent fed you. Over time, you learned
that not only could your basic needs be met by looking outside of
yourself, but so could your desire for niceties—things beyond basic
needs that enriched your life in some way, like a bicycle or a toy. But
you learned that you needed money for such goods—and to have
money, you needed to work.

Eventually, you expanded from using money to purchase basic

goods and niceties to purchasing luxury goods. As you got older, you
continued to look externally to address your emotional needs. This
required spending money.

Adulthood: The Elusiveness of Happiness

It’s difficult to discern when we have enough. As we enter

adulthood, we expect to accumulate wealth and possessions as we
move through our lives. From lavish weddings to ice cream cones,
we spend money both to mark our successes and to comfort
ourselves in times of distress or boredom.

We think that we’ll feel happier and more satisfied as we spend

money. But often, this isn’t the case. Most people want about 50
percent more income than they have. A study asked people to state
their income and rate their happiness on a scale of 1 to 5, from
completely unhappy to completely fulfilled. Scores ranged from
2.6-2.8 regardless of how much money the person earned—people
earning below $1,500 a month and over $6,000 a month gave
roughly the same responses.

To remedy this, we need to identify what is enough for us, both

from a money perspective and a stuff perspective. This means:

Examining how much money it takes to satisfy basic needs,

niceties, and even some luxuries.

Spending within our means so that we don’t take on debt.

Avoiding having excess stuff, or clutter, that causes us stress,

guilt, or shame. When we accumulate stuff that we don’t use,
like once-worn clothes that we then donate, we question our
motives for buying them in the first place, augmenting our
dissatisfaction.
 Reducing clutter. This includes spending time and money on
immaterial experiences and activities that have no meaning
for us, like going to a networking event that you have no
interest in.

In Step 4, you’ll use several questions to examine your spending and

determine what is enough for you.

Problem #2: Choosing Money Over Life Hurts the

Earth
Not only is spending more money unlikely to make us happier, it
also has severe consequences for the earth. Everything we consume
comes from this planet, from the sand that’s used to make the glass
in our windows to the cashmere in our sweaters. If everyone
consumed resources at the rate of the US, we’d completely deplete
the earth’s resources in less than a year.

Because the planet’s resources are finite, consuming more than our
fair share means that we’re robbing resources from the generations
to come.

A History of Consumption

Why do we consume so much? It started with the Industrial

Revolution. Machines started making goods and fulfilling more of
people’s needs. By the 1920s, people felt like they had enough—they
worked enough, and got paid enough. They asked to reduce their
working hours in order to relax.
But these changes didn’t sit well with two groups:

Protestants valued a strong work ethic and eschewed leisure.

They thought leisure opened the door to corruption by the
devil and a pathway to other sins.

Industrialists also balked at the idea of people working less. If

people weren’t interested in buying goods and services,
factories wouldn’t need to produce them at the same rate.
This would halt economic growth, threatening civilization
itself.

For production to continue at the same rate or faster—and to

continue to line the pockets of industrialists—there needed to be
new demand for factory-produced goods and services. Thus,
marketing was born: the practice of convincing people to buy
things they didn’t need.

Doing this required changing people’s ideas about why they worked.
Advertising played a critical role, making a person feel that they lack
something, then providing the solution to their problem—a product
or service for purchase. Marketing taught people that:

They should earn enough money to cover their basic needs

and to buy things they want.

Leisure no longer meant just relaxation—it became a time to

fill with things and activities you buy to relax, like travel and
entertainment.

Breaking the Consumption Habit

The first step toward breaking your consumption habit is

dismantling the myths you hold about growth, technology, and
climate change.

Myth #1: Growth Is Good

Our economy is still based on the idea that growth is good. We think
growth will alleviate poverty, decrease unemployment, and improve
the standard of living. Because not spending money could lead to
these woes, we’ve become convinced that it’s not only our right to
consume, but our patriotic duty. By this same rationale, saving
money is seen as not being patriotic and not contributing to the
economy.

But the “growth is good” mantra ignores that the planet has limited
resources. Every plant and animal is limited by access to resources,
like water. And nothing lives forever. If we harvest a species of fish
too fast for the population to replenish, then we drive that species
to extinction.

Breaking down the myth that more is better will help us break
harmful consumption patterns that deplete the planet of its
resources.

Myth #2: We Just Need the Right Technology or Policy

Sometimes we’re too quick to look to technology or government to

solve the world’s problems. Here’s why:

We think better technology will help. It has helped address

pressing problems, like developing the polio vaccine, so it’s
easy to think it’ll save us again.

We think that our government will step in, creating programs

 to solve pressing issues.

We blame third world countries for the world’s problems. We

worry about overpopulation there, while doing little to
address overconsumption in our own country.

Looking to technology and government makes us feel powerless to

effect any change.

Myth #3: The Danger Isn’t So Immediate

Humans are hardwired to react to threats that pose immediate

danger, like being hunted by a predator. We have trouble addressing
less immediate issues, like climate change—we just don’t feel in
danger. We may not feel the danger, but if we don’t act soon, our
planet and future generations will pay.

Instead, we need to accept scientific understanding of the climate

crisis and work to change our habits with the same urgency as if we
were facing down a bear. Working through the steps in this book will
help build sustainable consumption patterns that will preserve the
planet for future generations.

Step 1: Visualize Earnings and Calculate Net Worth

The first step in examining your relationship with money is to
systematically take an inventory of all the money you have earned
and the material possessions you own.

Though you may feel tempted to skip this step, don’t. Examining the
money that has come into your life can be a powerful step toward
understanding not only your earning power, but how you choose to
spend it. In later steps, you’ll analyze your spending to evaluate if it
helps you satisfy your “enough.”

While completing this step, and all further steps, practice the
following:

Don’t shame or blame yourself for what you learn. Your

earnings and net worth don’t equal your value as a person.

Be thorough in attempting to dig up all that you can about

your financial past and present. That way, you’ll get the
clearest view of how much money you’ve earned.

Here are the steps:

1. Calculate how much money you’ve earned in your lifetime.

Include income from your first babysitting job when you were 13 to
your current job, and all the full-time jobs, side gigs, and gifts
received in between.

To round up all sources of income, look at:

Income tax returns

W-2 forms

Bank statements

What the Social Security Administration says you’ve earned in

your life so far

Checkbook ledgers
 Money you received as a gift, or won

Earnings from work that you might not have reported on your
taxes, such as tips and babysitting wages

Loans

Capital gains records

Illegal sources

Add in any earnings that you didn’t declare in tax returns, like tips
you earned but didn’t report, and income from odd jobs. It may take
a few days to comb through these records.

2. Calculate your net worth. Sort your possessions into things you
own and things you owe—these are your assets and liabilities,
respectively.

Liquid assets include cash itself and anything you can exchange for
cash, including:

Money in checking and savings accounts

Savings bonds (US)

Bonds

Stocks

Brokerage accounts

Money Market accounts

Mutual Funds
 Certificates of Deposit or other savings certificates

Any cash you have on hand

Security deposits

Debts owed to you that you could collect

Fixed assets include any material possession you own worth a dollar
or more. Assign a value for each of these possessions. Look at online
marketplaces, such as auctions or Craigslist if you need help.

Write down liabilities as any debts you have or money you owe. If
you list an asset like your car or house, make sure you list the money
you owe on it as a liability.

To calculate your net worth, find the sum of your liquid and fixed
assets. Then, subtract your liabilities.

Exercise: Determine the Flow of Money in Your

Life

Complete the first step in Your Money or Your Life.

Make a list of all your income sources in your lifetime and how
much you earned from each.
List all of your assets and liabilities. Then, subtract your liabilities
from your assets to calculate your net worth.

What’s surprising or notable about your earnings? About your net

worth?

You’ve now calculated your earning potential and your net worth.
List some things you have to show for it (a house, jet ski, handbag,
and so on).
Step 2: Tracking Your Money

To understand why you don’t have to choose between your money

or your life, you need to understand what money is. It’s hard to
define money, but it’s important—your personal definition may be
preventing you from understanding how much you truly earn and
how many hours you spend on work and work-related activities.
After we define money, we’ll define what it means to be financially
independent.

Lastly, we’ll cover Step 2 of the program. You’ll learn to:

Calculate your real hourly wage

Track your expenses

What Is Money, Really?

There are 4 basic ways people think about money:

1. It’s a material—literally the bills, plastic, or transaction that allows

for the purchasing of goods.

2. It’s a reflection of our psychology, embodying our dreams and

fears. How you spend money can reflect your personality,
whether you’re a penny-pincher or like to spend liberally.

3. It’s a reflection of our culture: thinking that “more is better” and

that we have a role in growing the economy.
4. It’s “life energy”—we are willing to dedicate our time and energy
in exchange for money. This is the most useful definition of
money because it’s consistent in most situations.

Defining money as life energy allows us to make statements like, “I

invested 8 hours of my life to pay for this pair of shoes”—we can see
exactly how much time and energy goes into each purchase.

Your life has a finite number of hours. In general, you can assume
that half of the hours remaining in your life will be filled with doing
basic body-related things: sleeping, eating, exercising, and more.
That leaves the other half to squeeze in work and everything else
that matters to you, like spending time with family.

Escaping the Money Game

Like it or not, we are all part of the money game—the buying and
selling of goods and services. We need some to survive, but
advertisements encourage us to consume things beyond the basic
necessities. For example, you might be convinced to upgrade your
phone even when you have a functional one.

In addition, there are some economic indicators that force us to

keep playing:

Inflation

Cost of living

Recession and depression

We’ve been trained to be sensitive to these kinds of economic
indicators. If we’re told something is off, we respond accordingly.
Here are some examples:

If we hear that a recession is imminent, we might decide to

forgo taking a vacation that year, despite having a stable job
and plenty of savings.

If the news says that the cost of living in our area has
increased, it makes us feel poorer, playing off of our existing
concerns about money. However, the consumer price index,
which is used to evaluate cost of living, continues to add
items that were once considered luxuries, like cell phones.
We’re expected to need more things, even if our earnings
haven’t risen to match.

The money game’s ability to keep us spending isn’t unlike the

premise of the popular film, The Matrix . In the movie, machines
pacify humans through a simulated reality and use human energy to
power themselves. The main character, Neo, is offered a “red pill” to
be able to see this reality.

Understanding that money is life energy is like taking the red pill.
You learn to:

Identify what you need, rather than being convinced to

squander your money or time.

Reflect on your spending, and decide if you would spend

differently in the future.

You can’t decide whether or not to play the game, but you can
make more cognizant decisions about when to play. In some
instances, you might realize that spending money isn’t the best way
to satisfy your needs or the needs of others. Instead, you can make
use of other resources at your disposal, such as affection or
expertise.

Financial Independence: Myth and Reality

Just as you need to understand the definition of “money” to
improve your relationship with it, you need to understand what
financial independence is in order to work toward it.

When you hear the term, “financial independence,” you may think of
becoming rich and the myriad of luxuries that would afford, like
endless, swanky vacations. But being “rich” is a relative term— you
can’t feel rich unless other people have less . Striving to become rich
isn’t a realistic goal and plays into the “more is better” myth.

Financial Independence means having the money you need to

survive, plus more for the things you deem important for your life.
This is the definition of “enough.” It will be different from person to
person.

Aside from learning what your “enough” looks like, achieving

Financial Independence means:

Spending money based on your choices, not at the whims of

your circumstances.

Interrupting your assumptions about how you should or

shouldn’t think about money.
 Understanding your finances so that you feel confident.

Acknowledging the emotions you experience when thinking

about money—anger, guilt—and moving beyond to make
choices that fit your values.

Step 2: Track Your Money

Step 2 has two parts. First, you’ll calculate your real hourly wage.
Then, you’ll start tracking every penny you spend.

Step 2.1: Calculate Your Real Hourly Wage

Calculating your real hourly wage is an important step in

understanding your relationship with money. Most people take their
hourly wage at face value (“I earn $25 per hour”). This neglects two
things:

1. The time they spend doing work-related activities.

2. The money they spend on work-related expenses.

A real hourly wage accounts for all of these factors. Ultimately, you’ll
determine how much money your “life energy” is currently worth.

For some categories, like commuting, the time and cost will be
obvious and built-in. For others, you need to assign a value.

1. Create a table to calculate your real wage, as shown in this

example:

Hours/Week Dollars/Week Dollars/Hour

 Job (before
40 1,000 25
adjustments)

Adjustments

Wardrobe/Upkeep +1.5 -25

Commuting +10 -125

Food +8 -80

Sickness from
+1 -25
work stress

Escapism +5.5 -45

Unwinding +5 -30

Time Off +5 -30

Total Adjustments
(time and money
+36 -360
spent maintaining
job)

Actual Total (job

76 -640 8.42
with adjustments)

2. Fill in the second row with the hours/week you work,

dollars/week you receive, and your hourly wage.

3. Below, record the number of hours you spend on work and work-
related activities and assign a cost. Here are the basic categories and
some examples; feel free to add your own:

Wardrobe and upkeep of your physical appearance: time

spent grooming yourself for work each day, such as getting
dressed and putting on makeup, as well as time and money
 spent on shopping for professional clothing, shaving your legs,
etc.

Commuting: time spent commuting to and from work, and

the associated costs, like gas and insurance.

Food: the cost of any beverage or meal that you eat out
because of work, from coffee to any dining out you do
because your job leaves little time to cook.

Sickness from work stress: any time that you get sick due to
stress from your job.

Escapism: activities that you treat yourself to as

compensation for how stressful your job is, like binge-
watching The Great British Baking Show to take your mind off
of work after a stressful meeting.

Unwinding: time spent destressing from your job, like talking

about it, or money spent on recreational substances.

Time off: any vacation that you consider necessary to keep

you coming back to work. It’ll likely be the vacation where
you’re not doing much—maybe just parking yourself on the
beach to recharge for a week.

Miscellaneous: anything else you spend time or money on for

your job, like taking out your frustration with your job onto
your partner, or buying tools.

4. Add up all of the hours and money in columns 2 and 3 to

calculate the hours you dedicate to work and work-related
activities, and how much you spend on work per week.
5. Divide your adjusted dollars/week by your adjusted hours/week
to find your real hourly wage.

In the above example, a job where the person’s hourly rate is $25 an
hour really only pays $8.42 an hour when factoring in all of the time
and money spent on job-related activity.

Use this real hourly wage to evaluate whether your job, and future
jobs, are worth your time. For example, if a job in the city pays more
than a job close by, but you have to spend time and money
commuting, it may be less lucrative over time than something close
by that pays less.

Optional Step

You can also calculate the value of your time down to the minute,
which allows you to decide if a purchase is worth your time. In the
example above, the person must work 7.12 minutes for each dollar
spent. Let’s say they want to buy a new set of earphones for $40.
That would require nearly 285 minutes of work time. Is it worth it?

Step 2.2: Track Money, Down to the Penny, You Receive and
Spend

Tracking the money that comes into and goes out of your life allows
you to reclaim control over your spending. You can begin to discern
necessary and fulfilling purchases from frivolous ones. You make a
habit of taking an honest look at how much you earn and what you
spend it on, leaving no room for exasperation, excuses, or
resignation.

People who are in control of their finances know exactly how much
money they spend, and on what. Consider it a solid investment in
your financial future.

Start by tracking every penny. There are many formats to do this.

You can use physical or digital formats, such as pocket-sized
notebooks, calendars, notes on your phone or computer, or online
software that tracks spending from your bank accounts.

Ideally, break down payments where you bought more than one
thing into each individual item. For example, when you buy
groceries, record each individual item. Use round numbers for most
items as long as the total accounts for the cents involved.

It’s easy to get wishy-washy or want to round to the nearest dollar.

But for starters, in service of getting the most accurate picture
possible of your financial life, aim for the nearest penny. If you
eventually round to bigger coins, or even whole dollars, that is fine.

Exercise: Question Your Money Assumptions

Examine advice you’ve received about money.

Think of a message, lesson, or piece of advice you got from your

parents about money as a kid. What did you think of it at the time?

Do you apply this lesson to your financial life now? If so, in what
way? If not, why not?

Knowing that money is your life energy, would you modify how you
apply your parents’ advice in any way? If so, how?

Step 3: Creating a Monthly Tabulation

In this chapter, you’ll take the data you have recorded about your
spending and create a monthly tabulation.

First, you will develop different spending categories for what you
spend money on. Next, you will create a way of tabulating your
monthly spending and sort your expenses for the month into each
of your categories. Lastly, you’ll use your real hourly wage to
calculate how much life energy you spent in each category.
How Is This Different From a Budget?
Some finance programs have you make a budget to help you plan
how to spend your money.

This program avoids two pitfalls of budgets:

They aren’t detailed enough to capture your unique spending

habits. Developing your own spending categories will help
you get a more accurate picture of your spending patterns.

They don’t encourage you to reflect on your spending. With a

monthly tabulation, you’ll gain a clearer picture of your
spending and evaluate whether or not it’s worth it.

Step 3: Categorize Monthly Expenses

Step 3.1 Develop Your Categories and Subcategories

First, develop spending categories and subcategories that capture

what you spend money on each month. For example, let’s say one of
your spending categories is “Food.” If you realize that you’re
frequently buying vending machine snacks in your office building,
include “vending machine snacks” as a subcategory of “Food.” Find a
balance between capturing more detail than the broad category,
but not driving yourself crazy.

Here are some potential categories and subcategories:

Food
 Food for home eating

Food for sharing with guests

Restaurant visits

Snacks

Housing

Rent or Mortgage

Utilities

Renter’s insurance

Clothing

Leisure

Work

Athletic

Shoes

Pro-tip: consider subcategories that reflect emotional reasons for

spending, like buying clothes to make yourself feel better.

Transportation

Car

Public Transit

Ride Shares
 Auto Insurance

Electronics and Tech

Cell phone

Internet

Wearables (ie. a smartwatch)

For Fun

Television/Movie streaming services

Music streaming services

News subscriptions

Alcohol from bars

Movies

Kids’ entertainment

Health

Gym Membership

Vitamins

Prescription drugs

Nonprescription drugs

Health Insurance

Doctor’s visits
Unexpected Expenses

There are often large, unexpected expenses that occur each month.
Examples include:

Car repair payments

Once-a-year insurance expenses

Paying down a chunk of your house

Not all unexpected expenses come up each month, but usually one
will. Choose a strategy to account for these. You have two options:

1. Put unexpected expenses in whichever subcategory they fall in.

Over time, you’ll build a sense of how much you spend on
unexpected expenses each month, regardless of category, and
learn to have money on hand to deal with them.

2. Prorate expenses that you pay once per year across 12 months. If
you pay $600 for homeowners insurance once a year, divide that
by twelve and include the monthly figure in your expenses each
month.

Miscellaneous Categories and Considerations

In addition to the above, make a small table that includes each of

your income streams. Eventually, this will include interest from
Investment Income (discussed in Chapters 8 and 9)

Also make sure that you separate business and personal expenses.
For example, what percentage of your time using your phone goes
toward work versus personal use? Split the cost accordingly.
Step 3.2: Create Your Tabulation System

List the categories you’ve created in a spreadsheet or similar tool.

You’ll use this to sort your monthly expenses into your categories
and subcategories.

The table below shows one way to set it up:

Expenses Total Dollars Life Energy 1. 2. 3.

Clothing

Leisure

Work

Athletic

Shoes

For Fun

Streaming services

News Subscriptions

Movies

etc.

Income

Loans

Tips and/or Bonuses

Interest

Paychecks

(1) Total spent __ (2) Total income __

(2)-(1) Savings __

Don’t worry about the blank columns for now. You’ll use them in
Step 4.

Once your system is in place, follow these steps to understand your

spending for the month:

1. Place each transaction in its appropriate subcategory.

2. Total the transactions in each subcategory, category, and overall.

3. Count any cash you have leftover, and note the balance of your
bank accounts.

4. Calculate your savings for the month:

5. (Income- Total Expenses) +/- error

6. Error is any unaccounted for money you have, lost or gained.

7. For each subcategory, calculate the hours of life energy you spent
by dividing the total by your real hourly wage.

8. Example: $80 on magazines divided by $8.42 = 9.5 hours of life

energy

9. Assess: are the hours of life energy that you expended to make
that purchase worth it?

Exercise: Assess Your Spending

Reflect on your spending in the past month.

What categories did you spend the most life energy on?

Which categories did you spend a surprising amount on, either less
or more than you expected?

Which subcategories did you spend the most life energy on?

Which subcategories did you spend a surprising amount on, either

less or more than you expected?
If you’ve budgeted in the past, how has this experience been
different?

Step 4: Aligning Spending With Values, Purpose,

and Dreams

The next step in understanding how you spend your life’s energy is
to look at the things—material and immaterial—that you want in life.
First, you have to get in touch with what you are trying to achieve in
life—your values, purpose, and dreams. We’ll explore some
questions to help you define each of these things for yourself.

Once you’ve identified the above, you’ll use it as a guide for Step 4—
looking at your monthly tabulation and asking a series of questions
to assess whether your spending aligns with your values, purpose,
and dreams.
Values, Purpose, and Dreams
Values

Your values reflect your beliefs. We feel content when our behavior
is consistent with our values. But how we choose to spend our time
and life energy doesn’t always reflect our true values. Sometimes we
need to adjust how we spend our time and/or money.

For example, maybe you value reducing your carbon emissions to

combat global warming. You’d like to express that value by
commuting by bike, but instead, you justify driving your car to work
most days because the bike commute adds an extra 20 minutes of
travel. To solve this, you elect to prep your lunch and work bag at
night to reclaim 20 minutes of your morning, allowing you to bike.

You’ll explore aligning your spending with your values later in this
chapter.

Purpose

Similarly to values, identifying your life’s purpose can guide your

spending habits and how you use your time.

There are two kinds of purpose:

1. Your general purpose is more short-term and personal. It’s when

you act or do something in the present that allows you to achieve
something important later. For example, you save money now so
that you can take a sustainable farming course later.

2. Life purpose is more long-term and focused on the bigger

 picture—how you choose to put your life energy to use to
contribute to the world. It’s recognizing that you are a small part
of a bigger whole, but instead of feeling insignificant, you’re
empowered to contribute your talents to important causes.

If our purpose in life is out of focus, we amble along with little

direction. Identifying your purpose allows you to align your life’s
energy with it.

Finding Your Life’s Purpose

Ecologist and writer Joanna Macy suggests three approaches for

finding your life’s purpose:

1. Identify your passion. Think about a cause or activity that you’d

dedicate yourself to, not to escape or avoid your life, but because
you care about it. Maybe you’re a skilled kayaker and you decide
to lead guided kayaking tours of your favorite local lake.

2. Identify your pain. If you’ve navigated a tough experience, you

may have expertise to help others in similar situations. For
example, if a close friend of yours committed suicide, you could
dedicate part of your time to suicide prevention organizations.

3. Identify problems close by. There may be problems in your

community that you feel called to make better. For example, you
start writing regular letters to get your city council to allocate
money to homeless services.

Rediscovering Your Dreams

Another way to get in touch with your sense of purpose is to revisit

childhood dreams. These dreams can indicate how we’d enjoy
spending our time.

But sometimes, we abandon our dreams. There are two main

reasons:

1. We dismiss dreams as too childish, thinking they will never

come true. Trying to get your painting career off the ground
might be difficult if your current desk job takes up all of your
time, and you have bills to pay. More often than not, you might
just stick with work you don’t like, as discussed in Step 1.

2. We take on debt, and dreams start to feel impossible.

Sometimes achieving a dream involves going into debt, as in
getting a college education. This debt limits our ability to achieve
additional dreams—we can’t afford to pursue them.

To find fulfillment, we have to reclaim our dreams and take steps to

achieving them while dealing with our other obligations, like debts
or bills.

At first, it might feel difficult to access and work toward dreams that
you’ve set aside for so long. Answer the questions below to
remember your dreams:

1. When you were a kid, what did you picture yourself doing for
work?

2. What is something you’ve done—in your career, or in general—

that you’re proud of?

3. What is something that you’ve wanted to do for a long time, but

haven’t yet?
4. What makes you feel fulfilled? How does it relate to money?

5. You learn you have one year, max, left to live. What would you
choose to do with that time?

6. If you could live without having to work for money, how would
you spend your time?

Step 4: Evaluate Monthly Spending

Now that you have a sense of your values, purpose, and dreams,
you’ll use them as benchmarks to evaluate your spending in each of
your categories and subcategories.

Using the 3 blank columns on your monthly tabulation, ask yourself

the following questions for each category and subcategory:

Question 1: Is the Amount of Happiness and Contentment I Got

From These Purchases Worth the Life Energy I Spent?

Ideally, the more money you spend, the more enjoyment you
should get. But it’s common to spend money that doesn’t bring
adequate fulfillment for the expense. Question 1 helps identify
areas where you’re overspending relative to your enjoyment. On the
flip side, it helps you see spending categories that bring great joy to
your life that you could spend more money on. You’ll start to map
the intersection between spending and fulfillment—what’s enough
for you.

Look at each subcategory and category of your spreadsheet, and

assign one of three symbols in the first column for each:
 Use a “-” sign if you didn’t get fulfillment proportional to what
you spent and should spend less.

Use a “+” sign if you got fulfillment proportional to what you

spent and think you should spend more.

Use a “0” if you got fulfillment proportional to what you spent

and think your spending should stay the same.

For example, you ask Question 1 looking at the $50 you spent
on magazine subscriptions in the past month and realize that
most of those magazines regularly go unread. Because you
don’t enjoy them in proportion to their cost, you mark a “-” in
the first column, indicating that you can spend less.

Do this as objectively as you can without thinking too hard about

the amount you spent. This will help you evaluate the subcategory
purely from an enjoyment perspective without passing judgment.

Asking monthly whether your spending brought you fulfillment will

calibrate you to your “enough”—the intersection of your spending
with fulfillment. Learning what your “enough” is rather than relying
on external sources for fulfillment is a major component of making
sure your spending leads to happiness.

Question 2: Is Spending This Amount of Life Energy Consistent With

My Values and Purpose?

Next, you’ll examine your spending in each subcategory and

category through the lens of your values and purpose.

Look at the next blank column, to the right of the column you used
for Question 1. In this column, follow the same procedure as before,
using “-”, “+”, and “0” to show when spending less money, more
money, or the same amount is necessary to bring each particular
category and subcategory in line with your values and life purpose.

For example, you spent about $25 dollars each week on lunches
from chain restaurants and $16 on lunches from locally-owned
businesses. You’re comfortable with the total amount spent, but
you’d prefer that the majority of the lunch money go to locally-
owned businesses because you value keeping wealth in the local
community. To reflect this, you mark a “-” for the chain restaurants
subcategory, and a “+” for the local businesses subcategory.

Question 3: If I Didn’t Have to Work for Money, Would I Spend More,

Less, or the Same Amount of Life Energy?

Earlier in this chapter, you were asked to consider how you might
spend your time if you didn’t have to work for money. Question 3
goes one step further, asking you to consider how you would spend
your life energy (money) differently if you didn’t have to work for
money.

Working often requires that we spend money on things like

commuting. Asking Question 3 for each subcategory and category
illuminates how much of your spending is due to work and work-
related activities.

You may find that life would be cheaper if you didn’t have to work.
For example, maybe you’d stop spending money on your fancy work
wardrobe. But you might spend more in certain categories, like
travel.

There are no right or wrong answers. The point is to imagine how

your spending would look different under a different set of
circumstances. Since you’re working toward financial
independence—not having to work for money—this will ultimately
help you plan for life once you’re financially independent.

In the next blank column, to the right of the column you used for
Question 2, follow the same procedure as before, marking a “-”, “+”,
and “0” to show how you think your expenses in each of these
categories would change.

Spotting Patterns and Making Adjustments

Once you’ve gone through each question with each of your

subcategories and categories, the next step is to return to each
subcategory to reflect.

Evaluating your subcategories according to each question may

make clear the areas to adjust. For example, if you marked a minus
indicating that you didn’t derive enough enjoyment from what you
spent on movies, and you marked a minus indicating it didn’t align
with your values and purpose, this is a sign you should adjust your
spending in that category.

Again, try to do this as objectively as possible, and go easy on

yourself. Ultimately, the goal is to adjust your spending so that you
only have 0s (“I’m spending exactly what I want to spend in this
category”) or pluses (“Spending life energy in this category brings
me great fulfillment in proportion to what I spend, and spending
even more will bring me even greater happiness.”)

This process allows you to redirect or eliminate excess spending

and get closer to your “enough.”
(Optional) Question 4: In a World Where Everyone Could Meet
Their Basic Needs and Had Enough, How Would My Spending in
This Category Change?

We over-consume material goods. If everyone in the world did this,

we’d quickly deplete the earth’s resources. To interrupt this
tendency, consider asking this fourth question to determine
whether spending in each of your subcategories aligns with people
around the world having enough to meet their needs now, and in
the future.

Tailor this question to make it compelling to you. Here are 4

examples of ways to rephrase it:

1. If everyone spent like this, would the world be a better place?

2. Is this good for the environment/Earth/others?

3. What would Jesus do?

4. If everyone in the world were this mindful about how they spent
their life energy, would it change the world?

Though this question isn’t required, you may find yourself naturally
asking it after the first three.

Exercise: (Re)Discover Your Dreams

Explore your dreams, past and present.

When you were a kid, what did you picture yourself doing for work?
Why?

How did this image of your future work change as you got older?
Why?

How closely does what you do for work reflect your dreams?

If you could live without having to work for money, what work would
you choose? How would this better reflect your current dreams?
Step 5: Graphing Your Income

After completing the first four steps, you’re ready to do Step 5—

visualizing your expenses and income on a hand-drawn or digital
chart. Your graph will offer a clear representation of your finances
over time, providing motivation to reduce your spending, pay down
your debt, and build your savings.

First, we’ll tackle how to find motivation to continue with the

program at this point. Then, we’ll outline how to complete Step 5,
followed by a discussion of the benefits it will afford you over time—
including reaching financial independence.

How to Keep Going

At this point, you may find it tempting to stop following the
program. Perhaps you feel the first steps have only confirmed what
you already knew, that you’re deeply in debt or spend money on
things that don’t make you feel fulfilled.

If you follow the steps of this program, you’ll eventually reach

financial independence. But it requires persistently working
through the steps, and developing this habit takes time.

Here are three tips to keep moving forward:

1. Consistently do the steps. Don’t consider them optional—work

on them even if you don’t feel motivated to do so. Over time, it
will start to feel less like a chore and more like a part of everyday
 life, just like taking a shower.

2. Hold yourself accountable by sharing your progress with

someone else. Just like exercising with a buddy, regularly
discussing your experience with another person motivates you to
do the work and improve. This could take many forms, from
weekly check-ins to giving someone access to your online
expense tracking tool.

3. Create a graph to be able to track your monthly income and

expenses. This is Step 5!

Step 5: Graph Your Income and Expenses

Charting your income, expenses, and savings over time will help you
visualize your path to financial independence and stay motivated.

Decide if you want to make a paper chart or a digital one. Though

programs like Microsoft Excel offer nice charts, a paper one is
useful because you can hang it somewhere you will see it—and feel
inspired by it—every day. Seeing it each day reminds you of why
you’re following the steps—to spend less than you earn, climb out of
debt, and increase your savings.

If you go with paper, get a sheet of graph paper that can

accommodate up to 10 years of data. Choose an 18 by 12-inch
piece of lined graph paper, or 36 by 24-inches. (If you can’t find
graph paper, you can line a large blank sheet of paper yourself.)

Setting Up Your Graph

1. On the horizontal, or x-axis, mark out time in months. Allow
room for 5-10 years (60-120 months).

2. On the vertical, or y-axis, mark out dollars. Start with 0, and allow
enough room for your income to double, even if that feels
impossible at the moment. Create a scale that causes your larger
figure for this month—income or expenses—to be recorded
halfway up the axis. For example, if your income this month is
$3,500 and your expenses are $3,200, make the $3,500 mark of
your vertical axis fall about in the middle.

3. Each month, mark your monthly income and expenses. It’s

helpful to use two different colors: one for monthly income, and
one for monthly expenses. Draw a line from the current month to
the previous month. Over time, your chart will look something
like this:

The Benefits of Step 5

Completing this step each month offers several concrete benefits
that will put you on the path to financial independence:

1. You’ll strive to earn more than you spend.

2. You’ll pay off your debts.

3. You’ll build savings.

1. Earn More Than You Spend

The graph serves as a potent visual reminder of what you’re working

toward—making the gap between your income and spending larger.
This is your savings. By following each of the steps in this program,
you can expect to lower your expenses by about 20 percent.

But take caution—after doing Step 4, you may be tempted to

severely restrict your spending in certain categories. Though this will
decrease your spending, it often isn’t sustainable in the long-term.
For example, if you’re eating only beans and rice in an attempt to
save money, you’ll likely see a decrease in your spending. But this is
very restrictive, and you may feel like you don’t have enough variety
in your diet to do it long-term. After one month, once you confirm
that you can restrict your food spending, you may ease the
restrictions, returning your food costs to what they used to be.

Rather than taking on severe restrictions you won’t be able to

maintain in the long-term, simply ask the questions from Step 4,
expand your chart through Step 5, and choose some strategies to
reduce your spending in Step 6. This will naturally orient you toward
spending within your means.

2. Pay off Your Debts

In order to become financially independent, you need to pay off
your debt. When you no longer have debt to pay, those dollars are
freed up for you to use elsewhere.

If you don’t proactively pay down your debt—paying more than you
owe—you lower your income, and by extension, your savings, over
time. For example, if you pay exactly what you owe on your thirty-
year mortgage, you can end up paying 2-3 times the sales price of
the house due to accumulating interest.

Your graph can motivate you to find creative ways to pay off debt
faster and dissuade you from taking on more. For example, some
people choose to forgo using credit cards altogether in order to
avoid going further into debt and to encourage themselves to spend
less money. Others have decided to take on a housemate to help
pay down their mortgage faster.

3. Build Savings

Many people in the US are financially insecure and have little to no

savings. A 2015 study found that 47 percent of people in the US
would struggle to pay an unexpected $400 payment.

But the faster you save money, the more quickly you’ll reach
financial independence. Once you pay off your debts, it becomes
even easier to save money because you can save what you used to
pay toward debt. Then, you can devise ways to boost your savings,
such as cutting back on spending or adding income.

Over time, as you live within your means, work to pay off your debts,
and increase your income (more on this in Steps 7-9), the space on
your graph that represents savings will grow.
Step 6, Part 1: Strategies to Cut Spending

In this chapter, you’ll learn strategies to spend less. To better

understand these strategies, we’ll first explore what it means to be
frugal. This will help you reframe your thinking around spending
money and learn to meet your needs in creative ways.

The True Meaning of Frugality

A key component of this program is finding fulfillment by spending
your life energy—money—on what brings you happiness and
learning to live with what is “enough” for you. Learning to practice
frugality will help you do this.

While most people think that frugality means severely restricting

your spending, it’s really about enjoying or making use of something
—and you don’t have to own things to enjoy them. Yet people often
try to satisfy their desires by buying things. Sometimes we like
buying things because of the symbolism of owning them and the
approval we get from others. For example, owning a fancy car is
symbolic of a successful career. But practicing frugality means being
able to enjoy stuff for what it gives you materially, not what it
symbolizes to you.

To practice frugality, cultivate a higher joy-to-things ratio. If you

enjoy getting things more than having and using things, this could
be a sign that you need to improve your joy-to-things ratio. For
example, if you have 5 perfectly good pairs of shoes but aren’t
excited about wearing any of them, you might derive more
enjoyment from getting things than using them. In contrast, if you
enjoy wearing all the shoes you own, you buy only what you need
and enjoy it to its fullest.

Ideally, take joy in each thing you use. This will help you avoid
running toward the next material thing in search of fulfillment.

Step 6, Part 1: Strategies to Cut Spending

There are 9 general strategies to help you cut how much you spend.
In Step 6, Part 2, we’ll look at 11 categories to cut spending from.

1. Avoid Shopping

As we’ve discussed, we’ve been conditioned to fill immaterial needs

with material goods. Thus, when we shop, we feel tempted to buy
things, even if we didn’t plan to spend money in the first place.

Here’s how you can shop less:

Don’t go shopping when you don’t have anything you plan to

buy. Be deliberate with your purchases.

Don’t mindlessly scroll through shopping websites for

amusement. Only visit these when doing research or when
you have a plan for what to buy.

Handle promotional emails by unsubscribing or filtering

them. Emails can trigger shopping desires.

If you have an itch to buy something, wait a few days so you

 can figure out if you really need it or whether you’re just
impulse buying. Research shows impulse buying is common
(75% of people admit doing it), but the majority who do it
regret it later.

Pay attention to your shopping triggers. Men tend to impulse

buy when drunk; women do it when they’re sad or bored.

2. Spend Only What You Can Comfortably Afford

Try to limit spending to things you can afford without having to take
on additional debt. Here are some general strategies:

If you use credit cards, spend only what you can pay off each
month.

If you want to buy something, but don’t have enough money,

wait to buy until you do.

But what about buying houses, where most people have to take on
debt? Investing in housing or something else that appreciates in
value over time, can be a good investment. Always make sure to
weigh your choices to take on as little debt as possible, and work to
pay it off quickly.

3. Repair Your Possessions

Every time we buy something new, there are energy, labor, and
environmental costs that go into producing that item. Though it may
be tempting to buy cheap replacements for things that break, you’ll
save resources and maybe even money in the long-run by repairing
things instead of replacing them with new ones.
4. Use Stuff to the End

Many perfectly good items end up in the landfill just because we

decide we want a newer item instead. Using something until it’s
completely worn out helps you avoid frequent spending on the
same items.

Here are some more strategies to use things longer:

If you do successfully wear things out for their intended

purpose, ask whether you can repurpose them in some way.
For example, use grubby dish towels as cleaning rags instead.
Look to the internet for suggestions.

Resolve to upgrade less often than you usually do. For

example, instead of buying the latest phone model every
year, resolve to only upgrade every two years.

If you’re already on the frugal side, remember not to hold onto

items so long that it costs you more life energy than it’s worth. For
example, if you’ve worn your running shoes so thin that they’re
hurting your knees, invest in new shoes—they’ll be cheaper than
having to pay for knee surgery.

5. Dive Into DIY

These days there are more resources available than ever to help you
learn how to do work yourself. Take advantage of online classes and
YouTube videos dedicated to imparting new skills. If you do choose
to hire out the work, watch it being done and use it as an
opportunity to learn something that you can use later.

6. Think About What You Need

Thinking about what you need ahead of time can be a powerful tool
to avoid buying things on a whim.

Here are some strategies to plan for long-term purchases:

Create a list of things you anticipate needing to buy in the

coming year.

Research different brands and the price range of the item.

Use sites such as online sellers or Craigslist to compare

pricing, and set notifications to learn when an item has
dropped in price.

Buy around the holidays, or other times when retailers offer

discounts.

Anticipate things you’ll need in the short-term, too. For example,

rather than buying expensive one-off items at a convenience store,
think about what you need before you need it and try to buy it
ahead during a supermarket trip or online where you can get it for
cheaper.

7. Investigate Durability and Multipurpose Uses

In addition to price research, investigate how long something will

last. If you plan to use something frequently, learn if it will last
enough time to make it worth its price. On the other hand, if you
don’t plan to use a product that frequently, you don’t need to invest
as much money in ensuring it’s durably constructed. Less frequent
use means it’ll naturally last longer.

Here are two ways to assess a product’s durability:

 Examine it in-person. Look for signs like well-sewn seams and
strong material.

Read online reviews where users share their impressions and

experiences.

For example, let’s say you’re in the market for a washing machine.
You come across a model that seems like a reasonable price, but
notice that most of the online reviewers have checked a box saying
they would not recommend buying it. Plus, many complain that the
machine broke down after just a few uses and required frequent
repairs, costing them more money in the long-run. You decide it’s
worth looking into a slightly more expensive machine that users
recommend.

Buying multipurpose items also saves you money because you pay
the price of one item instead of several. For example, one all-
purpose pot can eliminate the need for other appliances like a rice
cooker or deep fryer.

8. Don’t Pay Full Price

There are 4 main ways to purchase items for less than their original
price:

1. Search for the best price. Use price-comparison tools on your

web browser or metasearch sites to find which retailers have the
best prices. Call retailers that don’t list their prices online. Many
retailers have programs to match lower prices from other stores
in town, or even some online stores.

2. Learn to haggle. An item’s listing price is usually high. There’s no

 harm in asking for a lower price. Ask for a lower price when a sale
has already ended, when you’re paying in cash, or for items
already being offered at a discount. This strategy works best at
small, locally-owned stores.

3. Buy previously owned or used items. Many items put up for sale
are still in very good condition. Try thrift stores, garage sales, and
online sites like eBay and Craigslist. Garage sales tend to be best
for small home appliances and furniture, while thrift stores are
best for clothes. But thrift stores often offer more than clothes, so
explore widely.

4. Get stuff for free. Sites like Buy Nothing Project and FreeCycle
Network connect people with goods others are giving away.

9. Devise New Ways to Meet Your Needs

Once again, living frugally is not about living a life of deprivation. It’s
about learning to meet your needs without having to spend vast
sums of money, and ideally, without spending much money at all. In
order to do this, we need to listen to our needs and desires and ask
if they can be met without spending money.

For example, we might value freedom and look to travel to satisfy it.
Travel allows us to feel free in our movement. But perhaps the
desire to travel is really a desire for novel experiences and a break
from our routines. In that case, it might be possible to satisfy that
need closer to home by seeking out novel experiences in our own
area. We could take a vacation within a few hours drive of where we
live, or explore a new part of town we’ve never been to before.
Step 6, Part 2: Categories to Cut Spending

Now that you have some general strategies for how to limit
spending, we’ll look at some specific suggestions for cutting
expenses across 11 categories.

1. Banking and Loans

Many big-name banks have high fees associated with opening and
maintaining accounts with them. Instead, open accounts with a
credit union. Credit unions are not-for-profit, which translates to
having lower fees and better interest rates than for-profit banks.

In general, most banks, credit union or not, will charge you a fee if
you attempt to spend more money than you have, known as
overdrawing. Avoid this by using your bank’s online tools and other
money management software to track what you spend, set up
automatic bill pay, and alert you when an account balance is low.

2. Housing

Popular wisdom of the past century says to aim to spend about 25

percent of your monthly income on housing. But these days, people
often spend 40 percent or more of their income on housing.

Cut your housing costs with these strategies:

Join cooperative housing. Co-op living allows you to have

your own space while sharing common responsibilities like
cooking and cleaning. They’re a great way to save money and
grow your social circle.

Move to an area of town where rent is less expensive, if

 possible.

Move to a town that is less expensive if your job allows you to

work from home.

Choose smaller apartments or houses, which are cheaper to

heat and cool.

If you are looking to buy a home, consider buying a duplex or

something that you can rent part of. This will allow you to
lower your mortgage payment each month, and could even
help you pay off your mortgage sooner.

3. Transportation

Owning a car is second only to buying a house in expensiveness.

Apart from the initial cost, the maintenance, upkeep, and insurance
add up. Avoiding car ownership entirely is often the cheapest way to
go, with alternatives like car-sharing programs, renting cars, and
public transportation abounding in cities.

If you still want or need to own a car, try to prioritize the following:

Fuel efficiency. It’ll save you gas money in the long run.

Reliability. It’ll save you maintenance and repair costs.

Even if you have a car with these qualities, you should still try to
drive as little as possible to avoid costs associated with fuel and
wear. Here are two suggestions:

Minimize your commute to work by living closer, or work

from home some days.
 Opt for walking, biking, and taking the bus.

4. Health Care

Saving money on health care tends to fall into three categories:

Self-care

Health Insurance

Health Care

Maintaining your health in a preventive way, or self-care, is one of

the most important ways to save money. Basic self-care includes
eating well, exercising, adequate sleep, and plenty of rest. It’s much
cheaper to pay for services to keep yourself healthy rather than to
pay medical bills.

But even if you’ve developed healthy self-care habits, you’ll still

want health insurance coverage in case you experience more
serious health issues. Here are some suggestions to consider when
selecting health insurance coverage:

Choose state-run health insurance, which is often more

affordable.

If you’re healthy, choose a plan with lower premiums and

higher deductibles. These plans have lower month-to-month
costs.

Some employers will let you place pre-tax earnings towards

health coverage. You can use the money set aside there to
pay for certain medical expenses.
 Many healthcare plans offer low-cost preventive services,
such as annual exams and screenings, as well as some
counseling services. Take advantage of all your health
insurance benefits.

Certain medical procedures in other countries can run between 20-

90 percent cheaper than in the US. However, if you suffer
complications once you’re home, treatment could be expensive. Do
thorough research before choosing this route.

5. Sharing Your Skills

As we’ve discussed, developing a sense of community helps you

satisfy your needs through human connection instead of spending
money. Giving your time and talent in exchange for someone else’s
time and talent is a way to build your community and get your
needs met for cheap.

All you need to do is come up with something that you need and
something that you can give. For example, maybe you can cut
someone’s hair in exchange for some tax advice.

6. Food

Everyone needs to eat. But there are ways to source your food that
can significantly reduce your food bills.

Here’s how to reduce your spending on food:

1. Cook for yourself. Restaurant meals tend to run more expensive

than simply buying the raw ingredients and cooking them
yourself. If you have friends over for dinner parties, this strategy
could reduce not only your food bills, but your entertainment
 bills.

2. At the store, try the following:

Use coupons.

Buy bulk items.

Buy sales items.

Avoid prepared or highly processed foods.

Stick to seasonal produce.

1. Consume less alcohol, coffee, and meat, or buy them on sale

(they’re the top 3 most expensive food items).

2. Access food outside of the supermarket. Try these four ways:

Grow your own food, giving yourself access to fresh produce

for just the cost of the implements and your time.

Band together with friends or family to form a buying club.

Buying clubs allow you to buy foods in bulk, such as meat
from a local rancher, for a discounted price.

Ask neighbors with excess produce or tree fruit if they’d let

you harvest some.

Forage for food that grows wild in your community.

7. Entertainment, News, and Cellphones

How we entertain ourselves, learn about the world, and

communicate all have significant costs.
To cut down on entertainment costs, try the following:

Avoid paying for cable television by opting for a free receiver

instead. You can still access basic channels this way.

Subscribe to streaming services. Find the service that most

closely aligns with your interests to avoid paying for multiple
services.

One way we learn about the world is through watching and reading
news. But access to news has gotten more expensive, with many
outlets now charging hefty monthly subscriptions. It’s important to
support news outlets, but as with streaming subscriptions, make
sure that you’re only paying for the services you need and use.
Libraries also offer ample access to entertainment and news these
days, and membership is free.

For phone coverage, try the following:

Go without a landline if you haven’t already.

Explore no-contract options, which allow you to bring your

own device. This way, you can use a used phone of your
choosing that costs less than a new one.

Use a family plan. They tend to offer better rates than

individual contracts.

Try a pay-as-you-go plan. It can be cheaper than a consistent

monthly payment, depending on your usage.

Use WiFi as much as possible to reduce your data costs.

8. Vacations
The more you become aware of your relationship with money and
learn to enjoy what you have, you may not want to vacation as
much. Even so, you likely won’t give up traveling entirely. Try the
following cost-cutting strategies:

Sign up for alerts on sites that feature discounted flights.

Be flexible about where you travel and when you go. Going
during less popular travel times or to less popular
destinations will save you money.

Opt for cheaper accommodations, such as hostels, or couch

surfing.

While traveling, steer clear of touristy areas, as they tend to

charge a premium for goods and food.

Walk and use public transportation to avoid spending money

on expensive cab fare or other private transport options.

9. Insurance

It’s common to overpay on all kinds of insurance. Look through each

of your insurance policies to ensure you’re getting only the coverage
you need and want.

For example, one couple realized that they were paying $6 a month
to insure jewelry that they wouldn’t want to replace—the value was
in the history of the item, so a contemporarily-made replacement
would not be the same. They decided to drop the insurance entirely.

10. Parenthood

A study estimated that parents in the US will spend over $230,000

raising a single child to age 18, not including the cost of higher
education. Finding ways to keep child-rearing expenses low is key.

Try these strategies to cut back:

1. Embody frugal living. Children tend to emulate the role models

in their life, especially parents. Living frugally will encourage your
child to do the same.

2. Substitute creative activities for spending money on goods. That

said, if a kid is really excited about getting a physical item in lieu
of doing something creative, try telling them you’ll talk about it
again in a few days. As with adults, this may be enough time for
kids to realize that they don’t really want the thing after all.

3. Get things for less. Some of the biggest kid-related expenses are
basic needs, like clothing. Look into parent groups in your area
that swap and sell used goods of all stripes, from cribs to
clothing.

4. Find parents that you can share babysitting duties with. Maybe
one week, you watch their kids, and the next week, you swap.

5. Look for cheaper ways to pay for higher education. Try these
strategies:

Research scholarships and other ways to save money.

Use university calculators to estimate how much aid a school

might give you. These kinds of tools break down what portion
of aid will be from loans versus work-study and scholarships.

Have your child enroll in community college classes through

 the Running Start program, which allows high school students
to take up to two years of community college classes.

Have your child take AP tests in high school to earn some

college credit.

Have your child earn a 2-year degree from a community

college before transferring to a 4-year school.

11. Gift-Giving

Giving gifts is a popular way to show affection. But not only can gifts
be costly, there’s also no guarantee that your gift will be enjoyed or
used.

Here are three strategies to avoid over-spending on gifts:

1. Ask your children to name 1-3 things they want for Christmas or
birthdays and limit presents to just these gifts.

2. Give experiences instead of physical things. For example, instead

of giving your Mom a piece of clothing she doesn’t really need,
consider giving her the gift of cooking a meal together. You’ll
enjoy each other’s company, and avoid spending money and
resources on something that will just gather dust in the closet.

3. Practice regifting. If you receive a gift you don’t want, consider

regifting it to someone else that you think would make use of it.
Just be careful to avoid giving the gift back to the person who
gave it to you.
Exercise: Cutting Spending

Identify ways to cut your expenses.

Of the 9 strategies to reduce your spending, which 1-2 stand out as

the most appealing to try? Why?

Pick one of the strategies you identified. What challenge do you

anticipate facing while implementing this strategy?

Look at the challenge you just outlined. Discuss 1-2 things you could
do to help you overcome this challenge.
Step 7: Increasing Your Income

In this chapter, you’ll explore how to align your time with your life’s
purpose. This means maximizing your income so that you work less
and dedicate time to other things.

We’ll cover 3 things:

The history of work

Redefining “work” and using the definition to understand how

to spend your time

Maximizing your income

A Brief Human History of Work

Work During Hunter-Gatherer Times

For the majority of human history, humans lived in hunter-gatherer

groups. But hunting and gathering isn’t as time-consuming as you’d
think.

Modern-day hunter-gatherers average just 15 hours of work per

week, far below our “normal” 40. They often work for two days, then
take two days off, with work, family time, and leisure blending
together. This shows that we need about three hours of work per
day for basic survival.

The Legacy of the Industrial Revolution and the Great

Depression
Today, we accept the standard 40-hour workweek and think less of
people who work part-time. But how did we come to fill our time
with so much paid work?

First, the Industrial Revolution sped up the pace of work and shrunk
leisure time. People who worked in factories worked long hours
doing very repetitive tasks. In 1900, workers averaged 60 hours a
week.

A movement emerged calling for a reduction in work time. As a

result of this movement, the average workweek dropped to 35
hours. But the Great Depression reversed this progress. Suddenly,
many people were jobless.

Now, instead of valuing the right to leisure time, people valued the
right to work. People thought poorly of not having a job, or working
less than full time, and viewed leisure time as a missed opportunity
to contribute to the economy.

Redefining Work
Our definitions of work vary because they’re drawn from media,
culture, what our parents taught us, and other experiences. A
common definition of work is that it’s what we need to do to survive,
or “make a living.”

But this definition falls short for two reasons:

It ignores work we don’t get paid for.

It values paid work more than unpaid work, free time, and
 leisure.

Just like with money, we need a definition of work that holds true
for everyone consistently: Work is any activity you do that aligns
with your values, purpose, and dreams. By this definition, work can
include both paid and unpaid activities, freeing you to seek
fulfillment beyond paid work.

Looking Beyond Pay

There are many reasons people like to work besides pay—they enjoy
learning and mastering new skills, socializing with coworkers, and
contributing to the community they live in. But the primary benefit
you get from paid work is pay; everything else you can get
elsewhere.

People consistently report four things apart from pay that make
work satisfying:

interest in the work

helpful communication among coworkers

recognition

potential to advance into new roles

How Redefining Work Benefits You

Broadening our definition of work to include paid and unpaid work
allows you to do two things:
 evaluate whether your work respects your values, purpose,
and dreams

balance work you do and don’t want to do

Finding Your Calling

It’s possible that your greatest joy comes from work that doesn’t pay
well, or at all. Acknowledging that you may never get paid well for
the work you want to do gives you freedom to pursue it without
worrying about pay. To do this, you may need to continue to work
your paid job, but you can at least adjust your schedule. Viewing
paid work as a ticket to make unpaid work possible helps you find
meaning in dissatisfying work while being true to your purpose.

Aligning Work With Your Identity

If someone asks you, “what do you do?” you’re expected to answer

with what you do for paid work. But if you make a living doing paid
work that doesn’t mesh with how you see yourself, you can answer
this question differently.

For example, if you’re a lawyer but you’ve realized that your true
calling is as a teacher, you can say you’re a teacher, but that you’re
currently practicing law in order to make a living. This response
allows others to see you how you see yourself—independent from
your current work.

Step 7: Increase Your Income

To recap, the primary benefit of paid work is getting paid. In order to
respect your time, you need to ensure your work pays you fairly for
the skills you bring and the time you dedicate. This step is simply to
look at your income and identify opportunities to maximize.

Here are ways to ensure you’re earning as much as possible for the
life energy you invest in work:

Ask for a raise. Get paid more for the work you already do.

Ask for increased vacation time. Use time off to relax and do
activities you enjoy.

Ask to work fewer hours. If you’re earning more money than

you need, you can work fewer hours and still meet your
needs.

Find another job or jobs that will pay you more for fewer
hours.

Exercise: Increase Your Income

Choose a strategy to increase your income.

Look at the list of reasons that people like to work apart from pay.
Which 1-2 items resonate with you the most? Why?
Is/are your current job(s) providing you the benefits you like? Why or
why not?

Considering your answer to the above, which strategy for

maximizing your income appeals to you most? Why?

Step 8: Graphing Your Investment Income

In this step, you’ll learn how growing your investment income will
help you achieve financial independence. First, you’ll learn what
financial interdependence is and how it will help you accumulate
savings. Second, we’ll define some useful terms and discuss how to
grow your savings through compound interest. Lastly, we’ll discuss
how to navigate your approach to financial independence.

Building Your Savings

When you embody frugal living, you learn to find ways to enjoy
more and spend less without relying on the transactional (money-
based) economy for needs or fulfillment. Instead, you grow your
participation in the relational economy—meeting your needs
through cultivating your abilities and community. This is called
financial interdependence: money-free wealth that you both give
and benefit from.

Skills

As the economy fluctuates, different skills are in demand at

different times. Growing your skills and abilities is a great way to
save money because you can get things for yourself and do things
for others while paying little to nothing. Plus, it allows you to
weather the changing market and gives you paid employment
options to fall back on, if you need them.

Some skills include:

DIY repair or construction

Cooking

Marketing

Community

If we have little to no meaningful familial or social life, it’s easy to

feel lonely and disconnected.

Developing close family relationships and friendships in which you

give and receive helps you avoid loneliness by generating a suite of
people to support you and vice versa. This is known as social capital.
It also helps you build savings by relying more on people and less on
things to meet your needs.

Some examples of building your community include:

Joining social communities like churches or book groups

Making amends with friends or family

Singing in a choir

Running for county council

Putting Your Savings to Work

By following Steps 1-7, your spending dips, and your income and
savings grow. Below, you’ll learn key terms and the basics of how to
invest your savings to reach financial independence by building a
cushion and investing your capital. (Step 9 will lead you through
your investment options in more detail.)

Cushion

The first stop for your savings is your Cushion: the readily available
cash that lets you weather financial hardship. You’ll keep this money
in a savings account, aiming to build it to cover 6 months of
expenses. If you find yourself out of work, you’ll have this cushion to
fall back on.

Capital

Savings you don’t need to spend in the short-term is your capital:

money you can invest to generate passive income. Unlike your
cushion, you won’t keep your capital in a bank account. You’ll invest
it so that it grows over time.

Compound Interest

Getting your capital to make money for you is one of the keys to
reaching financial independence. Investing in bonds or other
investment instruments allows capital to accrue compound interest
—money that the investment instrument adds to your invested
capital.

You can use the following formula to calculate how much interest
your savings will accrue each month: monthly investment income =
capital x current interest rate divided by 12.

Example: Your first month, you have $100 in capital. The current
interest rate is 4 percent. The formula would look like this: monthly
investment income = $100 x 4% divided by twelve = $0.33 per
month.

In one year, you’d earn $4 in interest ($0.33 x 12) for a total of $104
(your initial investment plus your interest). If you reinvested that a
second year, you’d earn $4.16 for a total of $108.16. And so on.

Compound interest exponentially grows your savings because it

works on both the initial investment and the interest accrued.

Crossover Point

When you have more monthly investment income than expenses,

this is your cross-over point: when you no longer need to work for
money and have reached financial independence.
Step 8: Plotting Your Investment Income
In Step 5, you created a graph to chart your monthly income and
expenses. Now you’ll add a third line to the graph to chart your
monthly investment income.

1. Calculate how much monthly investment income your capital will

generate per month with the same formula discussed above:
monthly investment income = capital x current long-term interest
rate divided by 12. For current long-term interest rate, use the
interest rate for 30-year US Treasury Bonds, or the interest rate for
certificates of deposit.

This isn’t how much investment income you have at the moment
you calculate it. It’s a projection of the monthly investment income
you can expect if you invest your capital, regardless of the method
you use to invest it.

Example: You have $1,000 in capital and the current interest rate is
4%. Plugged into the formula, you’d get $1,000 x 4% divided by 12 =
$3.33 per month

This capital, if you invested it now, would conservatively yield $3.33

per month in compound interest, or $40 per year. Using a third color,
plot $3.33 on your graph. Over time, as you build your capital each
month, your graph will look something like this:
2. Apply this formula to your total savings each month. For example,
if you save $500 next month, plug $1,500 into the formula.

Projecting Your Crossover Point

As your expenses stabilize, and your monthly investment income

grows, you’ll be able to project your crossover point—approximately
when you’ll reach financial independence.

To estimate your crossover point, you need several pieces of

information:

1. average yearly spending

2. monthly withdrawal rate—the percentage of assets you’ll

withdraw each month.

3. total assets—how much money you’d need to make paid work

optional.
Four percent is widely considered a safe withdrawal rate to avoid
overdrawing your assets. Effectively, you need 25 times your annual
expenses in order to guarantee a 4 percent per month withdrawal
rate indefinitely. Use the following equation: total assets needed =
average yearly spending x 12 divided by the withdrawal rate.

Example: You spend an average of $36,000 per year, or $3,000 per

month. You want to be able to withdraw 4% of your assets per
month. The formula would read: total assets needed = $36,000 x 12
divided by 4% = $900,000.00

In graph form, your monthly investment income line will have risen
above your monthly spending line, as shown below:

Navigating Financial Independence

Even as you approach and cross over into financial independence,
you’ll still need to navigate stress, work, and expenses.
Stress

Stress comes in many forms. You may encounter three issues:

wondering about how you’ll spend your time

emotional swings—wanting to dabble in many experiences

worrying if you’ll have enough money

Here’s how to navigate this big change:

Before the crossover point, try spending your weekends

doing some of the things you plan to do in your free time.
That way, you’ll have a starting point for what to do.

When you do reach crossover, start to enjoy some of things

that you promised yourself you’d do once you’d reached
financial independence. Examples include sleeping, camping,
or volunteering.

As for having enough money, all of the steps you’ve completed up

to this point were designed to help you spend within your means.
Financially independent people often discover that their expenses
decrease even more during FI because they don’t need to pay for
work-related expenses.

Work

Financial independence means that you don’t have to work for

money. However, that is just one option available to you. Not
everyone decides to stop doing paid work when they reach FI. If you
choose to work, FI gives you flexibility to decide when you work and
what kind of work you do.
Here are some examples of what work might look like:

Example 1: You work for a few years, save, and invest, and then leave
the workforce for months to years to go back to school, raise
children, or take a long vacation.

Example 2: You work a summer job and have the rest of the year off.

Example 3: You use passive income to supplement income from

part-time side hustles.

Example 4: You work full time doing work you’re passionate about,
but feel no pressure to make money because of your passive
income.

Expenses

Financial independence doesn’t mean that you won’t periodically

face large expenses. For example, your car may eventually need to
be replaced.

In addition to your Cushion, you can develop a Cache—a readily

available source of savings to put toward large expenses. Even if
you’re not working full-time anymore, you can still continue to build
up savings.

This money may come from:

work-related expenses you’re no longer paying

paying fewer taxes

taking on side hustles

 receiving gifts or inheritances

Exercise: Evaluate Your Social Capital

Examine the quality of your social network.

List the various social and community groups you are part of.

Select one of these groups. What do you get out of being part of this
group?

Thinking about the same group, describe what you give in return for
your participation.
Are you satisfied with what you receive and give as part of this
group? Why or why not?

What is something you could do to improve your experience of this

group?

Step 9: Invest Your Capital

In this step, you’ll learn about options for investing your savings and
building additional capital.

This is the culmination of the program—having enough money

coming into your life through passive income that paid
employment is optional. It’s not about getting huge amounts of
money but about knowing how to invest so that you have enough
money for the remainder of your life.

First, we’ll explore some key investing terms and principles. Second,
we’ll delve into each of the investment options in more detail.

Investing Lingo
Passive Income

Passive income is another way of saying “investment income”—

money you don’t work to earn.

You can earn passive income from investments in five different

ways:

1. Interest. If you invest capital in certificates of deposit, bonds, or

savings accounts, the money accrues interest over time.

2. Rent. This is any payment you receive from renting out estate
property that you own. It is the money you received, minus any
associated expenses, like taxes or repairs.

3. Dividends. You’ll get paid dividends, or a slice of profits, if you’re

the owner of a private company, or if you invest in ETFs, stocks, or
mutual funds.

4. Royalties. If you own a patent, natural resources, or a franchise,

you’ll earn money through royalty payments when others use the
property.

5. Capital gains. If you sell stock or real estate, you’ll earn capital
gains: earnings from the sale that exceed the money you
invested when you purchased it.
Risk Tolerance

Risk tolerance is your willingness to make risky investments. It’s a

spectrum from not wanting to risk any capital to wanting to risk all
of your capital in return for large gains.

Your willingness to make risky investments depends on many

factors, which include:

How you were raised

Beliefs about money

Age

Time horizon—how quickly you expect to need access to your

investments.

Crossover point—you may take more risks to build wealth

quickly ahead of reaching your crossover point (though not in
all cases). After your crossover point, you’ll want to invest in
less risky instruments to preserve your wealth.

Age and time horizon are the two most significant factors. If you
have multiple decades to go until you retire, it’s customary advice to
invest 90 percent of your capital in stocks and 10 percent in bonds.
Later in life (or if you’re more conservative) you might invest 20
percent in stocks and 80 percent in bonds. Practicing the steps of
this book means you’ll likely err on the more conservative side,
because you want to retire early and retain wealth past the
crossover point. Conservatively investing ensures that your monthly
investment income is greater than your expenses, no matter the
state of the economy.
Fees

To avoid incurring lots of fees, choose investment options that aren’t

actively managed. Not only do they have lower fees, they generally
outperform actively managed options.

Financial Advisor

Investing can be time-consuming. A financial advisor is someone

who provides expertise and aligns your investments with your risk
tolerance as markets shift. Take time to research financial advisors
to make sure you get your money’s worth.

Socially Responsible Investing (SRI)

Socially Responsible Investing is investing in companies that align

with your environmental and social values. It began during the
Vietnam War, when people sought to divest from companies
supporting the war effort. SRI financial advising services research
company practices to ensure that they align with best practices, like
paying workers a living wage. Today, SRI investments account for 22
percent of all professionally managed money.

SRI investments generally match or exceed the return of traditional

investments. However, the research involved generally makes it
more expensive than conventional financial advising. If you’re
unsure whether to pursue this or standard financial advising, look at
the cost difference over the long term and assess if it would be
worth it given the quality assurance inherent in SRI.

Diversifying Your Assets

When the authors first published this book, they advised people to
invest primarily in US Treasury bonds, but more recently, the bond
interest rate has dropped so far that it’s no longer a high yielding
investment.

There are plenty of options for investment beyond treasury bonds.

It’s rare that all asset classes, or types of investment instruments, will
be growing in value at the same time. Diversifying, or investing
capital in a variety of asset classes, allows you to preserve a steady
passive income over time.

These are the main asset classes:

Fixed Income (certificates of deposit, bonds, etc.)

Stocks (index funds, mutual funds, etc.)

Real Estate

Commodities (agricultural products, minerals, oil and natural

gas)

Foreign Currencies

Green Energy

Peer-to-Peer Lending

Alternative Bonds

Though treasury bonds are not as high-yielding as they used to be,

there are 2 other bond options to consider that generally have
higher interest rates:
 Agency bonds: invest in a specific part of the government you
care about, like agriculture.

Corporate bonds: a bond issued by a corporation.

Low-Cost Index Funds

Low-cost index funds are the go-to option for many seeking
financial independence. They’re designed to follow bond market or
stock market indices using passive management. Minimal trading is
a built-in, low-cost feature.

Index funds come with combinations of 3 characteristics. Mix and

match to diversify your investment portfolio:

Stocks or bonds

Domestic or international

Small, medium, or large

Choosing funds with different sets of characteristics decreases your

risk. However, there is always risk. Because stock market funds
fluctuate with the market, they’re riskier than bond funds. In the
history of the US, there have been multiple major market downturns
in which it took decades or more for the market to recover. Young
people like investing heavily in stocks but may not realize that
they’re putting their capital at risk. Bond funds are less risky—if a
crisis hits, you only risk dropping a percent or two.

Individual Retirement Accounts (IRAs)

Employers may offer low-cost index funds to help you save for
retirement. IRAs (“individual retirement accounts”) often have low-
cost index fund options.

If your employer offers a matching program, go for it—you’ll expand

how much money you invest.

You can still enroll in these kinds of funds even if your employer
doesn’t offer one. Opening an account with a company like
Vanguard or Fidelity is similar to opening a bank account, but the
returns are better.

Real Estate

Buying a single-family home or multi-family dwelling is a great

investment opportunity. If you rent out part of it and make it your
home, your tenants effectively pay you to live there.

The two main downsides to homeownership are that it’s not easy to
access the money quickly if needed, and there are considerable
costs, like taxes.

Ask these three questions to select an appropriate real estate

investment:

Do you like the location well enough to consider living there

or maintaining the house for the next few years or longer?

Is the property value predicted to go up over time?

How much in expenses do you expect? This includes taxes,

insurance, utilities, etc.

A Caveat on House Flipping

Some people like to buy homes, fix them up, and sell them for a
higher price. This strategy can work well while you’re building up
savings, but isn’t a great long-term investment strategy for financial
independence because it’s risky—you can’t always make a profit,
and it may drive the gentrification of a neighborhood by selling at a
high price that displaces local residents.

Local Lending

Connect with organizations that pair investors with small businesses

looking for loans. For example, you could lend money to a local
bakery and ask for the principal and 5 percent interest back once
they’re up and running.

Step 9: Evaluating Investments

Ask these questions when deciding what to invest in:

Does it fit my risk tolerance?

Does it fit my values?

Does it help diversify my portfolio?

How easy is it to buy and sell?

Will it offer the income I need?

When can I access the income associated with it?

Will I have to pay local, state, or federal taxes on the income it

produces?
Exercise: Risk Tolerance

Explore your risk tolerance.

When do you hope to reach financial independence?

What investment opportunities appeal to you most? Why?

Are these investment options in line with you reaching financial

independence when you want? Why or why not?