Your Money or Your Life by Joe Dominguez and Vicki Robin is credited with starting the now infamous FIRE movement. The premise of the book is that in modern society, the majority of people trade their time for money.
Think about this for a second. If someone were to hold a gun to your head and ask ‘Your Money or Your Life?’, you would almost certainly hand over your wallet without second thought. And yet every day, consciously or unconsciously, people all around the world trade their time/life for money and live consumerist lifestyles which prolong that reality.
The book forces you to consciously consider your current lifestyle choices and proposes a 9 step approach to reducing your personal expenses and consumerist lifestyle to achieve greater happiness and financial independence far sooner than you might have thought possible.
Step 1: Make peace with the past and calculate your ‘enough’
This first step is all about understanding your own personal attitudes towards money and what it buys. Are you caught in the race to acquire more meaningless belongings, perhaps influenced by advertising or keeping up appearances?
In this step, you should:
add up all of the money you have earned in your life up to this point.
calculate your net worth today. This means counting how much cash you have plus the value of the assets which you hold (shares, pension, equity in your property, etc).
look at the difference between what you have made and what you have managed to hold onto.
This exercise should be completed in as much detail as possible.
After completing this exercise, most people will be unsatisfied with the outcome. However, it’s important not to beat yourself up about it.
It’s time to make peace with the past and start your new journey armed with this information.
You should also calculate your ‘enough’. This means working out what level of assets / income you would be satisfied with to stop trading your time for money.
Step 2: Calculate your real earnings and spending levels
Whereas step 1 was all about the past, step 2 is all about the present.
This step involves calculating your true hourly wage.
In order to do this, you should consider:
Your annual wage.
Total number of hours worked including any time spent commuting to/from work.
Work related costs such as commuting, work uniform (e.g. shirts/suits you wouldn’t otherwise buy if you didn’t have to work), any surplus food costs incurred as a result of your job (e.g. restaurant meals), day care you wouldn’t have otherwise had to pay for, etc.
Let’s imagine you are earning £40,000 a year after income tax and NI (approximately £55,000 gross salary) with 25 days holiday excluding bank holidays. You work an 8-hour day on average which means a total of 1,832 hours per annum (calculated using 254 working days excluding bank holidays, less 25 days holiday and multiplied by 8).
Using this information, your hourly earnings would be £40,000 / 1,832 = £21.83 per hour.
However, this ignores the additional hour you spend commuting to/from the office and additional work-related costs such as £1200 on petrol, £400 on work uniform (shirts, work shoes), £400 on work lunches and £8,000 on day care.
Taking this information into account, your earnings from work would actually reduce to (£40,000 – £1,200 – £400 – £400 – £8,000) = £30,000, and your annual total hours would increase to 2,061 hours.
Using this information, your hourly earnings would be just £14.55 (£30,000 / 2,061).
The net result of this exercise is likely to be that you actually earn a lot less than you expected per hour when all time and costs are considered.
Therefore, when you buy yourself a new shirt or dress for £50, or even a Costa Coffee for £4, you’ve actually spend a lot more ‘life energy’ than you might have expected.
From now on, you should track all of your spending so that you understand what you are spending your money on. More importantly, you should also make a note of why you incurred that expenditure. By consciously asking yourself why you are spending, you are far more likely to curb impulse buying.
Step 3: Create monthly reports of your earnings/spending
In the consumer-driven world we live in, it is incredibly easy to get drawn into buying things for the sake of it. Shopping is addictive.
Step 3 is all about continuously reflecting on how much money you are earning and how you are spending it.
You should create a table of monthly earnings and spending, broken down into categories.
All figures should be converted into the number of hours of ‘life energy’ spent. For example, if you spent £50 on a new shirt and your true hourly earnings are £14.55 as in the example above, you would have spent 3.3 hours of life energy.
Step 4: Three questions that will transform your life
For each item of financial expense recorded in your monthly report, ask yourself:
Did you truly receive happiness/satisfaction commensurate to the hours of life energy spent?
Does that expenditure align with your overall life goals / beliefs?
If you didn’t have to work, would this impact your level of expenditure on this item?
Step 5: Create a graph of income/expenses which you display prominently
Once you have been following this advice and carrying out the previous steps for at least a few months, you should create a graph on which you plot your income and expenses as a monthly trend line.
This should be kept prominently so that you are reminded of your progress and continuously question whether you are spending wisely.
Step 6: Value your life energy by reducing spending
Next, the authors give 101 tips about living a more frugal lifestyle.
The crux of the advice is that you should spend your money on things that maximise your fulfilment, and avoid spending your money on things that do not.
Some of the most important examples include:
Forget what people think about you and don’t pursue a lifestyle that you cannot afford. There’s no point in spending money to keep up with appearances.
Don’t shop for the sake of shopping. Do you really need that new shirt or dress, or are you just spending as a form of entertainment?
Don’t automatically replace something if its broken. Think about whether it can be fixed before automatically going out and buying a replacement.
Don’t buy anything of value without first checking whether it is available cheaper elsewhere and trying to haggle the price where possible.
If you don’t need to drive, then don’t. Walking or riding a bicycle is both free and better for your health.
Don’t buy a flashy new car or take one out on finance. Most people spend far too much on their vehicles compared to their earnings.
Step 7: Maximise your earnings
This step is all about taking employment which will give you the most amount of money for your life energy/time.
You should always:
Consider additional time spent on work-related activities like commuting when comparing different jobs.
Look for opportunities to earn more money, even in jobs which are unrelated to your current field.
Remain positive about your work and think of it as a tool to generate earnings which will ultimately provide you with financial independence.
Step 8 & 9: Calculate the crossover point & managing your money
The ‘crossover point’ simply means the point in time when your investments generate sufficient income to cover your cost of living.
The authors advocate investing your capital in government bonds (gilts). This is perhaps linked to the fact the first edition of the book was written in 1992.
Given the low interest rates now available via government bonds, many in the FIRE movement now advocate building a more diversified portfolio of investments including shares, corporate bonds, real estate and even peer-to-peer lending.