This week, The Simple Dollar is conducting a detailed review of the personal finance philosophy title Your Money or Your Life. This book looks at a whole-life approach to the relationship between a person and his money and applies a nine step process to fleshing out this relationship. Do these methods work? Let’s dig in and find out!
The final three steps of Your Money or Your Life build upon the life re-evaluation that fills up the first two thirds of the book. It’s an interesting end to an interesting book, to say the least.
The seventh step basically instructs you to critically re-evaluate your job and says that if your job doesn’t match up with your values, quit it. The entire chapter does a very good argument for doing this based on the outcome of the first six chapters, but it’s a very scary step for most. The book does encourage you to use your current job as “training wheels” as you get ready to make the leap, but your goal should be to spend your time in a way that’s both personally and professionally fulfilling.
The eighth step is finding the crossover point, or that moment in which your investment income can cover your living expenses. Once you’ve switched your priorities around and your living expenses are less than your income, you should start investing that money to maximize your investment income and continue living frugally. Once you’ve reached a point where your income from your investments can cover your living expenses, you’re free to basically do whatever you want with your life. This is a point I can scarcely imagine reaching; at this point, I’d love to be a stay-at-home father who did a few community volunteer projects and continued blogging for some minor additional income (covering some or most of my living expenses while my own investments could build on themselves).
The final step is where you’ve reached the point where your investments are still growing even after you remove your living expenses. At this point, you can begin to splurge, but do it carefully. The book basically encourages you to split your money into three parts: capital (the amount that you have invested), cushion (six months of living expenses in a savings account), and cache (overflow). The cushion should stay roughly steady, being filled by the income from your capital at the same rate you spend it, and your cache is the overflow from that. Your cache is what you can spend on your dreams: constructing a non-profit organization, building your own business, giving to charities, or reinvesting for even bigger dreams. At this point, your life is your oyster.
Tomorrow, I’ll give a “buy or don’t buy” recommendation on Your Money or Your Life.
Your Money or Your Life is the sixth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.