December 18, 2013 | Posted in:Early Retirement
Imagine that one day you’re on vacation and you’re visiting a coastal region somewhere in North America. There’s a tropical storm coming up the coast. It’s still a few hundred miles away, but it’s already started producing great waves.
So you grab your swim trunks and your flip flops and head down to the beach to check them out. The beach is packed, because pretty much everyone in town had the same idea. And you notice that there are a LOT of people swimming. Since you’re in your bathing suit, you decide to take a dip as well.
You’ve been in the water for a while, jumping through the waves, when suddenly you start to realize that you’ve been pulled out from the shore a little bit. It isn’t too big of a deal. You’re still in control of the situation, because you can still feel the sand under your feet.
But after a while, your situation has degraded. You try to swim towards land, but you aren’t making any progress. Minutes go by and you’re still in the same place. You start to panic. You’re stuck in a rip current.
The water gets higher and higher as minutes pass, and eventually your toes can’t feel the ground.
You have a few options at this point.
You can continue to swim in place until you completely run out of energy, at which point you will drown. You can pray to whatever god you believe in to send somebody to save you. Or you can simply swim parallel to the coast and escape the rip current with ease.
Now, let’s grab a towel and dry off.
In relation to personal finance most people choose option #1 and #2 without ever realizing that option #3 exists. Just like people die in rip currents every year, so too do people find themselves in the WORK-SPEND-WORK cycle without the understanding of how to break free from it.
In the scenario above, the time that you spend swimming is a metaphor for how long you will have to work. Also, it reflects the effort that it takes to just get by. It’s literally harder to just get by than it is to have financial security.
Every wave that crashes over the swimmer’s head is a paycheck, and the force that’s constantly trying to pull the swimmer further from shore is their spending.
When you imagine the typical Middle Class citizen, you have to imagine a person that’s swimming against the current as hard as possible. Typically, they’ll remain there for the duration – until they retire or die.
I’m not even going to bring debt into the picture. In this scenario, debt would most likely be a powerful cannon that would blast you nearly half a mile from the shore into shark infested waters. Every trinket you finance is a lead weight strapped to your body. Maintaining this type of lifestyle cannot possibly lead to wealth.
As far as option #2 goes, have you ever wondered why the lottery system is so popular? These are the people who are wishing and praying for help, rather than taking action. Some of them win. MOST of them don’t, and they continue to swim in place hoping for the wrong thing.
Currently, I’m in a transitional phase in my own life. I’m still swimming as hard as ever, but I’ve freed myself from the potentially fatal rip current – the 40 year working career. Basically I’ve decided to take the rip current head on, but with a floatation device. Now things don’t look so bleak. The paychecks are still crashing into me, but I can barely feel the undercurrent’s effects at all.
Imagine that during our rip current scenario that you’ve had a blow-up floatation device in your pocket this entire time. You may never really feel like there’s an opportune time to blow it up, because if you do, you will have lost a few strokes which could end up being fatal.
But what if losing those few strokes isn’t fatal? What if you’re able to get a few breaths into your floaties, and they actually help keep you semi-afloat?
This can be accomplished in a few different ways, all of which fall under the umbrella of Optimization.
The goal is to obtain the highest income possible, while minimizing monthly expenses. Big waves, minimal undercurrent. Whenever you widen the gap between income and expenses, in your favor, you are essentially blowing air into your water wings. You create buoyancy.
People let cell phone and cable TV contracts keep them from inflating their personal floatation devices. They think that it’s too expensive to terminate contracts, and will submit to premium costs on these things instead of paying ONE high cancellation fee. This type of thought process isn’t logical.
For example, back in January I had all I could take with Verizon. We were paying $134 per month for cable and high-speed internet. To cancel our plan we had to fork over $200. This meant we had to deal with an extremely large $334 final payment. That’s a LOT of money!
But now let’s compare that to our current situation. We were able to switch to a local high-speed internet company that charges less than half the price of Verizon’s $70 internet only plan. $34 after taxes. Add in the cost of Netflix and Hulu to replace cable and we’re looking at a $50 bill every month.
If I were to stay with Verizon for one full year at $134/month it would have cost us $1,608. Instead, we paid the first month to Verizon, the $200 cancellation fee, and a $30 installation fee with the new company plus 11 months of service.
This led to a first year total of $914. With current rates, the second year will cost us $600. This frees up about $84 per month of money that would have otherwise been spent. This is one simple way that we have created buoyancy.
Cell-phone contracts control the masses by locking victims in to two-year agreements. In exchange they get a subsidized phone and an outrageous monthly bill. How outrageous? Two phones with minimal data plans with Verizon were running us $160 every month. The cost to break the contract per phone? About $250. EACH.
The price for new, RELIABLE, unsubsidized, non-contract phones: $300 each. The cost of the monthly plans? Mine is $10. My wife’s is $30. $40 TOTAL. (Find out more about the provider that we use, Republic Wireless, here.)
We had to halt our swimming in order to blow a massive breath into our floaties for this one. Total cost if we kept the Verizon plans for a year: $1,920. Terminating two contracts early, purchasing two phones, and carrying plans for an entire year: $1,580. A second year will cost us $480. This frees up $120 every month!
This type of thinking carries over to almost every aspect of life. If you have a financed vehicle that’s upside-down (not literally), sell it for a loss. There are probably 100 thousand decent vehicles for sale in the US for under $7,500. If your vehicle is paid off, run that sonofabitch into the ground.
The fear that you’ll have to take on loss isn’t rational either. When you purchase a new vehicle it loses value the second you drive off the lot. Instant depreciation. Low-cost used vehicles, however, tend to maintain their value. They DO depreciate, but not nearly as quickly and noticeably as new or newer vehicles.
By moving into a smaller house with a less costly mortgage, we were able to shave a few dollars from our expense ledger, which helped us to comfortably fill our water wings to near maximum volume. The only thing left to do is to try to increase the size of our wave; to make more money.
How are you going to escape the rip current? What steps are you going to take to reduce your obligation to work?
This week I want you to find one monthly bill that you hate and know that you can reduce. This should be something that you’ve been reluctant to take control of, because of an ugly cancellation fee, or because you fear the loss that is associated with it.
Make a short-term plan to reduce this bill as fast as possible. Take control of at least one of these expenses and you’ll soon find yourself closer to the shore.