A rule of thumb for buying insurance

Should you buy the add-on insurance for your iPhone that covers your loss in case you drop your phone and crush the glass?

Or should you get the one that covers your house, car or bicycle?

The insurance market can be a jungle to navigate sometimes, but I once learned a great lesson from a professor at finance school, that I have lived my life by ever since.

Only buy insurance that can save your life from ruin or total catastrophe

Would it be a total catastrophe if you had to pay for a new iPhone screen out of your own pocket, in case you dropped your phone? Probably not. Otherwise, you shouldn’t buy such an expensive phone.

What about if your house burned down? … That would ruin most people.

Make this distinction and you have a pretty simple and clear guideline for when you should buy insurance and when not to.

When you buy an insurance deal, it is essentially the same as placing a bet in a casino. The insurance company is the casino, and remember: “The house always wins”.

I know it would suck hard if your flatscreen TV fell off the wall and you had to go out and buy another one, but the odds of this happening is calculated into the insurance premium, and the odds are not in your favor.

Most people pay for many different insurance services that they never end up using because they have overestimated the likelihood of them getting triggered.

You don’t want to be that much of a sucker, do you?:)

Now would be the time to pay off some debt

Here is a time-sensitive post for you.

There is no question about it: times are good right now in the financial sphere. Stocks are going up (and have been for years), internet-articles about people living as daytraders are popping up all around, the Bit-coin craze is at an all-time high and housing prices are unfathomably ridiculous no matter which country you look to.

I am not here to try and predict a new crash in the market. I couldn’t possibly guess whenever everything blows up the next time. I am just saying that things aren’t at a low point these days.

The average amateur investor usually jumps on the train when everything looks shiny, and every banker in town is drinking champagne for lunch. But the capitalist/banker type is only partying right now because they have had stock in the marked ever since things looked a lot worse – so they are taking home a lot of profit at the moment.

So I believe that there is a lot of risk and potential for downside in getting invested in the market right now, and the rest of us, the regular mortal people, should probably stay out of it and allocate our money somewhere else.

You could look towards the safer option in bonds instead, but since the interest rates are so low in that field, your best bet is most likely to pay off some debt if you have any.

Next time you should get invested in the stock market is when there is blood in streets and one of your neighbors is getting thrown out of their house because they can’t afford it any longer. Then you invest in stocks or index funds, or what have you, like a real, cold and cynical capitalist.

Thanks for reading.

Describe your dream day, to find out what you really need

When I was younger I used to read a lot of classic self-help books, a la the Tony Robbins and others.

One common theme I saw, was the concept of listing up anything (material) you want in life, in order to make the ultimate goal more concrete and attainable.

What Tony Robbins usually would have you discover, was that you are almost never farther than a semi-successful business idea away from having your most indulgent materialist goals met.

Now, an exercise I would like to propose instead, is to map out your ultimate dream day, in terms of what activities you want to do, for you to be as happy as possible, and then realize (*SPOILER ALERT) how little materialism is needed.

Let me be the center of attention for a moment, and showcase my own dream day:

  • 05:30 Wake up, make coffee for me and my wife and be present for when she wakes up (I am an early riser by nature – not something I pride myself in or proselytize)
  • 05:40 Read
  • 07:00 Make/eat breakfast
  • 08:00 Write/handle investments
  • 10:00 Gym time
  • 12:00 Lunch
  • 12:45 Cognitively non-demanding tasks: run errands, attend to a garden, go for a walk, meet for coffee with a friend (My mind is only capable of doing heavy processing earlier in the day)
  • 17:00 Prepare and eat dinner
  • 19:00 Social time/Relaxation with the wife (eg. watch a movie or talk)
  • 21:00 Slowing down, getting ready to sleep

Even this is eyeopening for me.

By mapping out the exact activities I want to do during, in my view, the best day of all time, I can learn that:

  • I don’t need a fancy car, clothes or other status symbols
  • I don’t need a gigantic place to live, however it might be nice to have small garden
  • I don’t need to spend time in expensive bars, restaurants and clubs.

I can also learn, that the actual cost of this lifestyle is practically very low, which makes it entirely possible, that I can gather the required funds for investment capital to make it all float, in a matter of a few years .

The problem with me doing this exercise before you get to do it, is that you probably can’t help but benchmark your dream day against mine. But try not to.

The idea here, is that you just get a handle on what you want to DO with your life. Not what you want to own, or how you want to be perceived by others.

According to what I believe in, this is a more logical way to prioritize your highest wishes.

Make them work for you

With the urbanization, gentrification and economic polarization of modern society, that the developed world is experiencing currently, it is getting increasingly normal to talk about “an elite” that supposedly controls everything and isolates itself from the rest of the common folk.

I don’t know if this phenomenon of an elite is anything particularly new in human history. However, it is clear that the wealth is now getting more concentrated in fewer rich people, and that the western middle-class is getting smaller.

You hear in the media that a lot of people is feeling disenfranchised due to this dynamic, and much of the successful election campaign of Donald Trump was build on this platform.

With this post, I am not going to make any political statement about the matter, but rather highlight how most people can feel like the come out on the winning side of this power struggle with a very simple strategy.

For more than a year now, I have promulgated the minimalist lifestyle as well as the concept of early retirement on this blog, and a funny side effect of this has been a change in my attitude towards the issue mentioned above.

I feel like a winner in the most widespread social battle of our time, and I am not even breaking a sweat in the meantime.

 

My solution

I lead a very simplistic lifestyle, spend my money only on the stuff that matters (which isn’t many things), work in a very low-stress position for a maximum of 30 hours a week, save most of my paycheck and invest it in stocks.

The last part is important.

People tend to forget, what actually happens when we buy stocks in a company: we become the owner – the ultimate CEO!

It is very easy to buy a stock, it requires almost nothing of you and anybody with half-a-decent salary is able to do it.

A guy working in Walmart can become the partial owner of Apple (not a stock recommendation) after a handful of paychecks, and suddenly Tim Cook is working for him!

I often think about how all of the phd’s and master degrees among my fellow citizens are stressing themselves out to give me a return on my investment. I’m not doing anything, I am just giving them 100 bucks, and let them figure out how to give me 105 or 110 back a year later.

They are sweating, I am not, and they are supposed to be the smartest people in the country ?

With a little frugality and minimalism, you too can become the true master of the corporate world in whatever country you live in, and take pleasure from the thought of how the most ambitious people are now working for you. If they are the elite, while working for you, I don’t know what that makes you!

Telling ourselves that we are irrational

You know about the old quote by Henry Ford:

Whether you think you can or whether you think you can’tyoure right.” ?

The essence of this is that our own attitude and perception of our capabilities plays a vital role in our odds of succeeding in anything. And I think it’s true.

Recently I have noticed many examples of people doubting their own capabilities/behavior in relation to their personal finances. They think they are irrational by nature and can’t be trusted with their own money.

Here are 3 examples of this:

  • In Denmark, we have a mandatory vacation fund, where employers are forced to take out a small portion of all employees paychecks, and pay it into this fund, so that employees can apply to have this money refunded to them, next time they can prove that they are going on vacation. Our government is basically saying: “you people aren’t responsible enough to be trusted with the long-term administration of your own money”. So they have decided to take them from us, however temporarily, pays us no interest in the meantime, and the worst part is that people are HAPPY about this arrangement. Even happy about the fact, that this isn’t a voluntary concept because they would not trust themselves to sign up for it, because they think of themselves as being economically irrational, and it is better to let Bigbrother handle their vacation money.
  • I was recently discussing the general concept of insurance with an otherwise really smart friend of mine. He told me how happy he had been about paying for the premium package with his insurance company because his policy had been triggered years earlier, which had meant a nice payday for him back then. After some quick calculations, though, we figured out that he had paid much more to his insurance company over the years, compared to the premium they had paid him on that particular day. He then said: “I know that I could have just saved all the money that I spent on insurance over the years, and been better off in the grand scheme of things, but nobody is able to act like that, so I am still happy with my decision”. (For the record, I am not against all insurance – topic for another day).
  • I also know a lot of people who feels like buying a home is more economically rational than renting because their housing loan serves as a mandatory savings account. I see how this can work, but buying a house in itself is not by default an effective way of saving up a lot of money – watch this video, to learn how renting can be just as smart IF you can manage to save and behave rationally!

I know that we are only humans, even myself :). And I don’t think that anyone has the capabilities to behave perfectly rational in all aspects of life.

However, I am a firm believer, that most people can behave mostly rational by cultivating the right automatic habits over time.

This is the type of journey I have been on for the past 2 years, ever since I dedicated myself to paying back those student loans, things have been going well, whereas I didn’t used to save anything for the future when I was younger.

The point is that we can all strive to become more rational and be smarter with our attitudes towards money. But it all has to begin with a belief in our own ability to become exactly that, and that we can make anything happen if we just change one small thing at a time – without forcing it or overloading ourselves with commitments. It has to come slowly.

My first year of working on early retirement: how is it going?

It has now been almost exactly a year since I discovered the early retirement community on the internet when I was immediately hooked.

I found that early retirement was the next logical step to pursue, for a minimalist who seldomly has found a job that he truly enjoyed.

Early retirement is not something I aim for because I dream about laying on the couch all day. It is something I fantasize about because there are many things I want to do in life, that won’t necessarily earn me any money, and so I just need a lot of time.

If there is anything you want to accomplish in life, you must track your own progress, in order to stay on course and fully optimize for success.

So as you might have read about in an earlier post , I keep track of my overall progress in a spreadsheet, on how far I have come in my journey to financial independence.

The basic idea is that I calculate how much of monthly expenses can be covered by the passive income I generate, and so I can either cut back on expenses or generate more passive income to make progress on this goal.

Currently, I only have 2 passive sources of income:

  1. I put aside money every month, and invest them in either stocks, mutual funds or index funds. The basic assumption in almost all early retirement plans is that you should be able to withdraw 4% of your total investment every year and still leave room for continual growth of your nest egg.
  2. Income from this and other blogs, which is comprised of Google Adsense ads and Amazon affiliate links.

At the moment, the majority of my passive income stems from the investments, but as I see and up-trending tendency in my blog income, I hope this might not be the case within the next few years.

 

Getting to the point

So as you can see in the graph below, I have been able to generate enough passive income recently, that it corresponds to about 7% of my total expenses.

skaermbillede-2017-01-10-kl-07-25-55

(The only setback that is visible in the graph, is explained by me cashing out some of my investments, in preparation for quitting my job in the fall of 2016)

This might not seem like a lot, but then again, this actually means that I am retired 2 days out of every month, which is a little uplifting to think about ?

Where do we go from here

It is important to understand, that I don’t actually take these 2 days off every month, and I don’t withdraw the 4% from the investments every year (yet), which means all of my passive income gets reinvested.

This way, I should see even faster and faster progress every month from here on out, which should result in a more exponentially shaped continuation of the graph above – especially if stock prices keeps going up.

One of my goals for 2017 is to make that graph reach 20% by December, and I will, of course, keep you updated on whether I reach this goal or not.

This first year of working on this goal has made me optimistic about the possibility of reaching retirement within 10 years (max) from when I began, which means I should be able to leave the rat race once I get to the age of 37. Let’s see 🙂

I am not poor

…. is what I would like to have several family members and friends understand.

Most of them hear me explain, that I am running a lifestyle experiment, in which I try to observe how heavy time and money respectfully weighs on either side of life’s happiness scale.

You only need to look for a guy like Epicurus, to find out other people in history has asked this question before.

 

I am not poor, I just avoid spending a lot of the money that I earn, because I feel like they are a tremendous tool for feeling secure, once kept, and on the other hand, evaporates all too quickly from my psyche and memory, once spent.
It is not that I wouldn’t enjoy a luxury item like a nice car. I have already owned a luxury car once in my life, and what I noticed, was that the happiness it brought me was extremely temporary, while the worries and anxiety that came with it were very long lasting. Mostly because I couldn’t really afford it.

 

I sometimes wonder why many talk to me like I am poor, even though they are well aware of the fact, that our compared net worths are all in my favor. Talking to me, implicitly, like I am poor, seems to stem from an insecurity they feel in themselves about their own financial choices.

It sure seems like I am able to make them question, whether many of their own decisions were all worth it.

I am not poor, I just think a lot about how to live life optimally, and sometimes you need to live without something, to find out if you will really miss it.

Working More Than Necessary

This post will only be applicable to those who don’t absolutely love their jobs. That should be around half of the readers (1). You may, therefore, skip this one if you are totally satisfied at work.

Not long ago, I quit my first real “adult” job, because I wasn’t happy there.

After having been there for more than 2 and a half year, I was realizing that the hamster wheel wasn’t getting any more enjoyable, and if I was ever going to become as “happy” as my co-workers, I would have to become a lot less happy myself.

For the past year and a half, I had been on this minimalism journey too, where I would carefully evaluate everything I did financially, judging it by how happy it made me.

In which ways did I spend money, that didn’t make my life happier or better?

In which ways did my spending actually create stress and worries?

I still haven’t perfected the optimal lifestyle yet – where every dollar I spend is completely worth it – but I sure have come a long way since the beginning.

By way of this thinking, it suddenly occurred to me, how a big percentage of my monthly paycheck was beginning to end up in my bank account, untouched, because my expenses were radically decreasing. I was putting aside more than half of my salary for many consecutive months, and it dawned on me that I was doing much more work than I needed to, in a job that I did not like at all!

So I decided to quit .

Now, I’ve switched to a part-time position, as a personal trainer, which is actually much more enjoyable than my last job, and I earn just about enough to cover my monthly expenses.

This new job doesn’t come with the same amount of social status and approval from my parents in law, but that is just something I/they will have to get over.

The best part is that I’ve now gotten the time to work on stuff, that I actually love. I have a ton of projects that I would like to start working on, just because I want to, and whatever they end up paying me is pretty irrelevant.

As an example, this blog post is probably going to earn me a very small amount of money over it’s lifetime, with the Google ad I put in it. However, that should be regarded as an added bonus, as I would have written it no matter what the earning potential was.

The main point is, that I am now doing exactly the amount real “work” that I need to. Not more.

This strategy frees up a lot of time to do exactly what I feel like, and I may even think this could be the smartest decision, in terms of earning money, in case one of my passion projects end up a success.

So far I am happy with my decision to not work more than necessary.

How not to be an idiot with money

In this post, I will describe the very simple system I rely on to make sure, that I don’t spend any “underserved” or “unjustified” amount of my income on things I may desire.

To begin with, I decide on a ratio. A ratio that determines the relationship between the sensible and the lesser wise ways I am allowed to get rid of the money I earn.

Let’s say I earn 10.000 DKK (sorry for the weird currency – I am from Denmark) of unexpected income tomorrow, and my decided ratio is 50/50. That means, I am allowed to spend 5.000 DKK on whatever I want (although, I try to be smart about what I want), while the other half would have to go towards some destination that could enhance my long term financial situation e.g. investments or paying off debt.

This is extremely simple, and it requires some measure of discipline, but the basic idea is, that you never spend any amount on things you don’t need, unless you have a matching amount in the other hand, ready to invest in something that might be more boring, but wiser – like stocks.

 

My own setup

Depending on your own current situation, you might decide on a different ratio than me, and you might choose to invest your “smart money” differently from what I do. But currently I am on a 2/5 ratio, meaning I have to invest 5.000 DKK before I am allowed to spend 2.000 DKK.

So If I want to buy some semi-superfluous object or service that costs 4.000 DKK, I need to invest 10.000 DKK first, which means I cannot buy it before I have 14.000 DKK.

This might seem tough to some people, but I find it to be a very nice guideline, that helps me see clearly when I deserve some kind of costly treat. At this point, I choose to invest all of my “smart money” in financial assets like stocks, as I am currently out of debt, and see no better way to put money aside for the future.

 

To make this as easy as possible for a beginner, you might decide to start with a 5/1 ratio, meaning you have to put 1 aside for every 5 you spend. In the long run, this will make a bigger impact on your financial situation than you think.

What do you think about my simple rule for not being and idiot with personal income? Would you consider following it?

To get a first class life, you need to start living a first class life… Or what?

The headline above is aimed to describe an ideology that sometimes is able to threaten the confidence I have in the frugal lifestyle that I lead.

I recently heard the world-renowned strength coach Charles Poliquin say something to this effect, on the Tim Ferriss podcast, and he gave the example of his airplane travelling between the seminars he gives all over the world. He explained, that he always makes it a point to fly first class, to ensure that he gets a good night’s sleep on the plane, so he can show up refreshed for the seminars and give a first class performance, which ultimately results in repeat business with the customer. And it makes total sense, right?

To my ears though, what he was actually saying, was that the first class tickets were an investment that generated a long term positive return – and that you can’t really argue with.

But I think we should be careful not to oversimplify this idea, unless we want some impressionable people to get hurt from the advice.

Say I, as a young man, who is just getting started with life, goes out and takes an expensive loan to buy a Lamborghini, with the thought in mind that it will raise my overall standard of living. Maybe this expensive sports car can enhance my social status, which will allow me to establish relationships to rich people, who has business opportunities that I can capitalize on, and thereby be able to pay back the car. Is this a possibility? Probably! But what you may also call this, is “betting on dumb luck”, and I think that it may even slightly resemble some other popular self-help concepts such as The Law of Attraction and The Secret.

But I know a guy, who one day decided to start living the good life, had no basis for it, and suddenly had all the best things in the world flowing towards him”. This is called the survivorship bias. You probably also know a lot of other people who went bankrupt because they tried to jump 10 steps ahead in the game, without being particularly calculated about it – those examples we tend to forget.

You see, there is no luck involved in the case of the strength coach I mentioned before. He will hop on an air plane, check in to a hotel, give his lecture and go home again. All steps throughout the process are already known from the beginning. The first class tickets are just a way of optimizing this process (you may even define it as improving upon the value chain that is the product he delivers).

In the case of the Lamborghini, we are just optimizing or even amplifying uncertainty, instead of a known process, and that can only result in extreme outcomes – most likely a negative one.

I think the key lesson here, is that we should learn to be more calculated than just taking mindless head-dives into economic uncertainty. We should even be aware, that a luxurious lifestyle can hurt us sometimes. For example: the marketing genius Seth Godin talks about how he had to stop wearing expensive suits early in his carrier, because it resonated badly with the type of people he was trying to establish partnerships with.

In short, the better we are at anticipating the future, the more success we can expect. But hoping is never a strategy.

If you carefully estimate that a 1000-dollar suit is going to a give you a great return on the investment within the near future, then by all means, go ahead and buy it. But if reality says, that a 200-dollar model will get the same job done, I think only a fool would count on the law of attraction to do any other magic than just hollowing out one’s bank account.

The examples of the strength coach and the Lamborghini are opposite extremes of a spectrum, but we should always be careful not to lean too much towards the latter.

 

Thank you for reading

Max