There really is just one personal finance book you should read if you’re not quite there yet in taking control of your financial situation.
That book is Your Money or Your Life by Vicki Robin and Joe Dominguez.
Maybe you just can’t stick to a spending plan, are too overwhelmed by your debt to do any more than making the minimum payments, or thinking about money at all gives you a massive headache.
Ironically, the book you need won’t provide how-to instruction at all for any of those things. What it will do: it will completely transform the way you think about money.
As the prologue to the book states:
Over time our relationship with money—earning it, spending it, investing it, owing it, protecting it, worrying about it—has taken over the major part of our lives.”
Many times, you really are truly choosing between life or money.
THE MAIN IDEAS OF YOUR MONEY OR YOUR LIFE
The authors provide ten questions at the very beginning of the book to determine “why” you should read the book. A couple of these questions include:
- Do you have enough money?
- Do you have time to participate in things you believe are worthwhile?
- Is your life whole? Do all the pieces—your job, your expenditures, your relationships, your values—fit together?
When you read Your Money or Your Life, do not skip the introduction or prologue, as these have some of my favorite quotes from the entire book. They do a great job of explaining the premise of the book and why you should challenge mainstream societal views around work and money.
STEPS TO CREATING A NEW ROADMAP
YMOYL lays out nine steps throughout the book that increase your awareness of money, time and ultimately your true life values.
These steps are summarized as well on Vicki Robin’s website. Here’s my take on them.
Step One: Making Peace with the Past
You always have to address your past before you can move on. This exercise definitely makes you want to make sure that history doesn’t repeat itself. In step one, you total up all the money you’ve made throughout your entire life and compare it to your net worth today.
It’s not quite as difficult as it may sound because you can access all of your earnings (at least everything that was reported on payroll taxes) through the Social Security website.
Step Two: Being in the Present—Tracking Your Life Energy
After looking at the past and likely convincing yourself that you need to make a change, the next step is to determine your real hourly wage.
Your real hourly wage is determined by the following formula:
Gross weekly income minus job costs such as commuting, work clothing, amounts spent directly related to relaxing from work or work-related illness and any other costs related to your job.
Weekly hours spent at work plus time spent preparing for work, commuting, relaxing from work, and any other hours related to your job.
Equals: Real Hourly Wage
The term the book uses to apply the real hourly wage is “life energy”. This is the main thing the book is known for. The example that the book uses is someone making $680/week, which at 40 hours worked would be $17/hour. After adding in all other work-related time and costs, it may more like $420/week and 70 hours. This would only be $6/hour (yikes!). Even if this is a little bit of an exaggerated example, you’ll still be able to see the benefit in calculating the real costs and real-time involved with your job.
Step Three: Where is it All Going? (The Monthly Tabulation)
Hopefully, you already know that I’m a huge proponent of tracking your expenses. And I’m even more hopeful that you are actually tracking your own expenses.
If you already have a record of your spending, the next step will simply be a matter of converting all of your spending to “hours of life energy” as calculated in the previous step.
This is a surprisingly simple calculation at this point. Simply take each expense, (let’s say $30 on eating out) and divide it by the hourly rate ($6 in the previous example). Eating out for $30 would then cost you 5 hours of your life energy.
Step Four: 3 Questions That Will Transform Your Life
I’m sure you probably know where this is going next. For each category (such as shelter, transportation, food, etc.), determine the answer to the following three questions.
- Did I receive fulfillment, satisfaction, and value in proportion to life energy spent?
- Is this expenditure of life energy in alignment with my values and life purpose?
- How might this expenditure change if I didn’t have to work for a living?
Completing this exercise will help you determine what you really value and what you can (and should) eliminate from your budget.
Step Five: Making Life Energy Visible
By creating a line chart with your actual monthly income and expenses, you can visualize your progress toward financial independence.
This chart should show the months on the bottom and amounts on the left-hand side similar to the following.
The gap between income and expenses represents savings, which should be maximized.
Step Six: Valuing Your Life Energy—Minimizing Spending
Now that you have a clearer perspective of how much life energy it takes to purchase the items and services you need, you will naturally want to minimize your spending.
The quick summary of this step is to stick to purchasing things that actually provide value to you as determined in step 4 and be frugal in your spending.
Step Seven: Valuing Your Life Energy—Maximizing Income
One of the biggest controversies I come across in the many personal finance blogs I follow centers around the decision of cutting expenses or maximizing income. I personally agree with the order in which this book was presented, which encourages you first to minimize your spending.
Maximizing income, though, is also an important tool in your toolbox to be able to really achieve financial independence. By realizing your true value, you may want to consider moving to other opportunities or otherwise trying to increase your income. The internet is full
Step Eight: Capital and the Crossover Point
Capital refers to the savings you have accrued by increasing the gap between your income and expenses. If invested, this “capital” will start to grow exponentially through the power of compound interest, calculated through time value of money calculations.
Your capital times the interest rate equals your monthly investment income. At the point that you get more investment income per month than you have in expenses, you have reached the “crossover point”. An example of this is shown below:
As you have already noticed, the crossover point signals the time when you no longer need to trade life energy for money as you do with a paying job. This is true financial independence.
Step Nine: Managing Your Finances
If you’re saving this much money, you’ll definitely need to gain some knowledge about investing. The advice given in the book is to invest in extremely conservative funds, which may be appropriate for some people and not for others.
The concept of taking personal responsibility for managing your money is completely solid, but better investment advice can be obtained from other sources.
Changing your perspective regarding money will be the catalyst for all other changes you need to make with your personal finances.
Once you change your beliefs regarding money, you’ll ultimately change our financial destiny as this famous quote by Mahatma Gandhi explains:
Your beliefs become your thoughts,
Your thoughts become your words,
Your words become your actions,
Your actions become your habits,
Your habits become your values,
Your values become your destiny.”
You may have heard of Your Money or Your Life before, but I highly recommend actually reading it for yourself to get more than just a high-level summary of the main points. It just may change your life!