Your Money or Your Life: Three Pillars of Financial Independence

YMOYLThis is the twenty-seventh part of The Simple Dollar Book Club reading of Your Money or Your Life. Want to know more?

According to Your Money and Your Life, the three pillars of financial independence are capital (the amount you have invested), cushion (a cash reserve/emergency fund), and cache (your saving habits and frugality). This section focuses on the capital and is perhaps the most controversial part of the entire book.

Dominguez and Robin offer nine basic criteria for investing, and these are quite interesting:

1. Your capital must produce income.
2. Your capital must be absolutely safe.
3. Your capital must be in a totally liquid investment.
4. Your capital must not be diminished at the time of investment by commissions, loads, and fees.
5. Your income must be absolutely safe.
6. Your income must not fluctuate.
7. Your income must be payable to you, in cash, at regular intervals.
8. Your income must not be diminished by charges, management fees, redemption fees, etc.
9. The investment must produce this regular, fixed, known income without any further involvement or expense on your part.

If you read through those pieces, it’s pretty clear that Your Money and Your Life does not recommend most of the common investment tools of the modern era. By these critera, stocks don’t fit the bill in any way, shape, or form.

Obviously, this isn’t going to cut the mustard if you need 10% growth to reach your goals. There is no investment opportunity that returns that 10% with that level of reliability – it just doesn’t exist. Because so many investors shoot for high returns, they ridicule this advice because it doesn’t add up to the numbers they need.

This advice, actually, leads directly to investing in U.S. treasury notes. Those completely fit the bill for this description and return 3%-6%. Another option is a very high yield savings account, again one that returns a consistent percentage. These options are very close to rock solid and pay out very regularly and consistently, much like a paycheck. The good part of such investments is that the returns are going to be the same (3%-6%) whatever the stock market is doing. The bad part is that it’s impossible to get double digit returns in a single year with such investments – you can’t do it.

That’s why this is good investment advice if you plan on living strictly off of your investments, but not so good if you’re trying to grow your investments for wealth. That’s why retirement portfolios are very heavy in stocks when you’re young, but gradually shift to bonds when you move towards retirement, eventually being dominated by bonds. They’re stable and safe and return a steady amount – but they don’t grow like gangbusters, ever.

I don’t believe this is intended for investment advice for people looking to grow their wealth – instead, it’s for people who want to live off of the income of the money they’ve saved up and don’t have a lot of interest in growing it further, but they want long-term stability. For that, I think this advice makes sense.

Tomorrow, we’ll finish up the ninth chapter, “Now That You’ve Got It, What Are You Going To Do With It?” starting with the header “Cushions Make For Smoother Landings.” This section appears on pages 318 through 327 in my paperback version of the book.

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