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Learning from frugal lives of years past

I’ve been reading a lot about early frugal living. I read Henry David Thoreau’s Walden (1854), and I followed a link in a blog post to Ralph Borsodi’s This Ugly Civilization (1929) and thence to his Flight from the City (1933, during the Great Depression – particularly poignant bits in the chapter on security versus insecurity). Both authors provided detailed breakdowns of their expenses and descriptions of their methods, fleshing out philosophies of simple living. There’s much that I don’t agree with, but there are also many ideas that I recognize and can learn even more from. I’d probably get along with the authors, and their mental voices will be handy to keep in my mind. I found both of them somewhat more relatable than Ralph Waldo Emerson in his essays, but I’m sure Emerson will yield additional insights on re-reading.

Both Thoreau and Borsodi emphasized the freedom you get (or keep!) by minimizing your wants. Thoreau wrote, “… for my greatest skill has been to want but little.” Borsodi points out the artificiality of many desires as products of a factory-oriented culture that must have people buy the things that factories produce. By questioning your wants and becoming as self-sufficient as you can be, you free yourself from the restrictions many other people have. In a way, it’s a follow-up from what I’m learning from Epictetus. I like how the Greeks tend to be more about living in society instead of going away from it, though.

Homesteading is a big thing for both Thoreau and Borsodi. I’m not particularly curious about exploring homesteading at the moment. City bylaws ban keeping chickens, and I still struggle with garden productivity. The city is all I know so far. W- and J- both have reasons to be here. Besides, the Toronto Public Library system and a decent, reliable connection to Internet are doing amazing things for my learning at the moment. Perhaps someday, but not now. In the meantime, despite Borsodi’s disdain for the stock market, I like the fact that it’s doing well. The gains are much less than Virginia Woolf’s five hundred a year (about US$45,000 these days; mentioned in A Room of One’s Own), but I don’t need that much to live well, anyway. Still, I’m going to keep working on some skills for independent living (cooking, sewing, repairing, making, etc.), since I can do that wherever I am.

Onward!

Baby steps towards investing

When you’re learning something complex, it can help to break it down into small steps and figure out what sequence is right for you–especially if there are lots of other people who want to influence your decision.

Let’s take investing, for example. There are all sorts of businesses built around making you want to earn more, all sorts of complex instruments that seem to enrich advisors more than clients, and all sorts of decisions that you can make that can either help you or screw up your life. Me, I’m trying to learn slowly.

I’m a simple investor. I don’t need to beat the market. In fact, I’d like to stay as close to average as I can. I don’t need to be smarter than other people who are buying and selling. Even if I have plenty of time, I don’t want to spend that time and attention on tracking financial news. Baby steps – one lesson at a time.

I started by saving up. Then I opened up an investing account with TD and started with their e-series funds, since those had low management expense ratios and no commissions. After years of annually stashing money into TD e-series index funds, I’m now relatively confident about my ability to not panic based on the ups and downs of the market. The stock market has been practically all up since I started, actually. I’ve been investing at the rate I previously set for myself. I haven’t figured out the best way of transferring larger amounts from the corporation yet, but that can wait. In the meantime, it’s a good buffer for emergencies, and it means I can think of corrections as a good thing.

Over the past two years, I’ve gradually learned to think of my TFSA + RRSP + locked-in RRSP + non-registered investments as one big bucket to manage instead of having multiple allocations in multiple accounts. I sold some units (for the first time!) in order to shuffle my allocation around, simplifying my paperwork a little. I still have some duplicates because there’s only so much each account can hold, but ah well. I’ve only ever sold units within tax-sheltered accounts, so I still haven’t gone through the exercise of calculating my adjusted cost base for the e-funds in my non-registered account.

I briefly considered real estate, but I don’t think real estate is the right fit for me (yet? at all?). It’s a big commitment that I don’t know enough about. Sure, there are probably upsides, but there are also scary downsides–especially with Ontario’s tenant laws, which make it difficult to evict people if there are problems.

I’ve also thought about ETFs. After crunching the numbers, I don’t think my portfolio size is large enough to justify switching. I’d probably save a little in fees, but it adds complexity.

For me, the next step is probably to sell a token amount from my non-registered holdings so that I can practice calculating the adjusted cost basis (and so that any tax penalties are also pretty small in case I totally mess up). Slowly leveling up!

On why frugal me is cool with paying other people to do things

I am frugal by nature. I do the mental calculations almost reflexively. Food is my favourite measure of equivalent value, since I rarely buy books these days. If I bike instead of taking public transit, that’s three Vietnamese sandwiches. For the price of dinner for two at Pho Hung, we could buy and roast two whole chickens. I hardly eat out, since I know I can make my favourite meals for $2-$4 a serving.

2014-03-06 Our frugal life #finance #frugality

2014-03-06 Our frugal life #finance #frugality

Many people who are working on financial independence take pride in doing as much as possible themselves. It’s a great way to save money and build a variety of skills. I usually do the same. It’s great knowing that fixing a washing machine doesn’t have to be a scary thing.

But there are some areas where I spend more than most people do, like outsourcing.  For example, even though no one expects transcripts for podcasts and even though I can transcribe my own posts, I pay other people to transcribe them for me. I pay people to research, draft, code, experiment, learn. I’m slowly getting the hang of passing on tasks even if I feel like I could learn a lot by doing things myself. If I outsource those tasks, then at least two people learn: my assistant and me. In fact, since they write down things I might otherwise just skim or take for granted, I can usually take what they send me and share that with other people.

For me, outsourcing is so much more than just a money-for-time trade off. I think of outsourcing as a way to help other people build up assets and skills as they figure out flexible work that fits their needs. It’s a way for me to learn from different perspectives and experiences, too. I don’t need stuff. I don’t crave experiences: no exotic vacations, no once-in-a-lifetime memories. I’d rather take advantage of the abundance to scale up and help others.

2014-01-28 What do I get out of delegation

2014-01-28 What do I get out of delegation

(See more in Ramping up delegation)

Independence matters to me. So does interdependence. If I can carve out enough to provide reasonable security for myself and I have the skills to go and earn more money if I need to, then I’ll use the surplus to make the world a little bit better. I had thought about focusing on stashing away more money so that we might have a greater margin of safety. (Who knows, maybe W- might even be able to retire.) I’m slowly adding to that stash, but that doesn’t rule out helping other people along the way.

I don’t want to become dependent on outsourcing. I make sure all my tasks are documented so that I can take over if needed. I establish financial limits so that outsourcing doesn’t encroach on my other plans. (This is one of the reasons why I like working with assistants on an as-needed basis instead of committing to a specific number of hours or tasks a month.) I learn from small experiments before I move on to larger ones. I prefer outsourcing to people who can learn from the experience instead of to established companies with polished solutions.

I don’t have to spend the money on this, but I decide to, and it’s worth it to me.

How hacking my wants helped me experiment with early retirement

During his Third Tuesday Toronto talk on How to Live an Amazing Life (see notes), C.C. Chapman saw me sketchnoting near the front and called it out as an example of a creative and unusual profession. He asked (probably rhetorically) how I explain it to other people. I said that I usually told people I was retired, which boggled even more people. He said I should tell my story more.

So this is where I am, how I got here, and what I’m learning along the way. I’ve been extraordinarily lucky, so this is definitely not a recipe for how you should live your life. (Hard to plan for luck!) But maybe it helps show some of the possibilities, and maybe that will shape some of your decisions, and maybe that will lead you to living an even awesomer life than I do. (Please share your notes!)

How I prepared for this phase

It helped that I had never been buried in debt. I graduated without student loans, thanks to scholarships, assistantships, and my parents’ financial support. My mom had drilled into us the importance of never carrying a credit card balance and of living within our means. I’ve never had a car, so I’ve never had a car loan. W- owns the house we live in, so I’ve never had a mortgage. My parents are doing all right, and so far they haven’t had any major health issues. This gives me a lot more space than most people have, and I’m grateful for this excellent start.

I had saved the majority of my income ever since I started working at IBM. I grew up reading personal finance books, so when I started working, I was excited by the opportunity to practise good habits and resist lifestyle inflation. I knew I wanted to try other things someday, and a good nest egg would help me with that. I remembered how my sister saved up for her trip to South Africa. She told us how she would say to herself something like: "One hamburger here, or one more day in Africa?" That made it easier for her to make frugal decisions. I also learned how to think about expenses in terms of how much time it took me to earn the money to pay for them. Was that purchase really worth several hours or even days of my life? Usually, the answer was no.

Keeping my wants simple meant that I didn’t feel deprived. I kept the same lifestyle I had enjoyed as a graduate student, aside from occasional new expenses like buying office clothes. I still enjoyed home-cooked meals, books from the library, and taking public transit or my bicycle; I didn’t need to swap those out just because I was earning more. I didn’t buy designer handbags, perfume, or makeup. W- and I agreed that we wouldn’t buy each other gifts. Stuff was just stuff, after all. Reading books like A Guide to the Good Life: The Ancient Art of Stoic Joy helped me realize that a lot of luxuries that other people might consider part of happiness are entirely optional and could easily be substituted by inexpensive or free activities that I enjoy. I’m a happy person by default, and I’d learned early on that happiness doesn’t come if you chasing after it. That and growing up in an advertising photography studio probably helped me gain a resistance to marketing, which made it easy for me to focus on simple joys.

I’d learned from Early Retirement Extreme and Mr. Money Mustache that reducing your expenses can drastically increase the rate at which you earn your freedom. A penny saved is more than a penny earned. If you spend $2 for every $4 you earn, you free up a year for every year you work. If you reduce that to $1 for every $4 you earn, you free up three years for every year you work. This gave me even more incentive to shift my spending to the things that really mattered to me instead of frittering it away.

After I filled up a decent-sized emergency fund, I split my savings among long-term investments as well as a short-term opportunity fund. The long-term investments were for peace of mind, while the opportunity fund was for learning how to make better decisions. I figured that as long as I was saving at least 10-20% for the long term, I’d be well ahead of where most people would be at my age. In practice, I ended up saving much more than that, and it was liberating.

Following Tim Ferriss’ advice in the 4-Hour Work Week to figure out the actual costs of your ideal lifestyle, I realized that I didn’t actually need that much money to support the modest lifestyle that I wanted. After tracking my expenses for more than seven years, I had a good idea of what my core and discretionary expenses were. When I estimated how much I needed, I was pleasantly surprised to discover that I was practically there in terms of my opportunity fund. I set aside what I needed for five years using laddered GICs, and I left my long-term investments alone as a safety net.

As I was building up that opportunity fund, I started planning what I could do with it. I wanted to learn about building businesses that could fit into the kind of lifestyle I wanted: plenty of time at home with family and other interests. I talked to many mentors about their careers – consulting, web development, startups, small companies, large corporations. Many people wished they had more time, but they were handcuffed by their financial commitments: a mortgage, college educations, private schools, expensive hobbies, and so on. If I kept my expenses low and saved up enough, I could free myself (even temporarily), and then explore from there.

I decided that instead of waiting until I had sorted everything out, I would take a risk and move some years from my "retirement," like the way Stefan Sagmeister interrupts his work with year-long sabbaticals. But I wanted more time than that, and five years seemed like a good chunk of time to work with. Statistically speaking, most businesses fail within their first five years. If I gave myself at least five years without worrying about cashflow, I probably had a decent chance of learning enough about business to build something that can last me a while. Besides, five years would be longer than my high school, longer than the time I spent in university, longer than the time I worked at IBM… If I could learn so much and grow so much during those periods, I should be able to make good use of five years too. I figured that if I could give myself the space to explore these possibilities, I should, since not many people get a chance to do so.

Like the way I get ready for other risks, I plumbed the possibilities of failure. What if I ended up with nothing to show for the five years? I’d probably have at least a story, though – people are really good at rationalization. What if something happened to W-? If I kept in touch with people and I kept my skills sharp, I could probably go back into web development or consulting easily. What if? What if? What if? When I was comfortable with the downsides as well as the upsides, I gave myself the go-ahead.

The timing worked out wonderfully. I had a one-on-one meeting scheduled with my manager to discuss the results of the yearly performance review. He told me that once again, I’d received a top rating. I told him that was fantastic – and that I was planning to leave in order to start on this experiment. I really liked working with IBM and was happy to leave at a convenient time for the team, so they asked me to stay on for a couple of projects that needed my web development skills. A few months later, I wrapped up all my work, and I started my experiment in February 2012.

So far, it’s awesome

Thanks to amazing people, I hit the ground running. I had expected to flounder around a little trying to find ways to create value, but people stepped forward right away with suggestions. A former colleague had read my blog posts preparing for the experiment and wanted to know if I was interested in working with his team, so I had my first consulting client lined up. Another friend needed help with Rails development, so I experimented with that as well. I picked the brains of mentors who helped me spot opportunities and avoid pitfalls. I read forum messages and blog posts. There’s so much out there to learn from.

I tried out different business models and found ones resonated with me. I got better at floating ideas and getting to that first sale. I dove deeper into skills that I wanted to improve, like sketchnoting and programming. If this is what I can learn in a little less than a year and a half, I can’t wait to see how the rest of the experiment will unfold.

If things work out really, really well, this is how I imagine this five-year experiment succeeding: I’ve learned and shared a ton, and I’m ready for more. I could easily see it extending to a lifetime. Wouldn’t that be neat?

After C.C. Chapman’s talk on how to live an amazing life, the people I chatted with told me they didn’t pick up anything particularly new, although they enjoyed his talk. Likewise, there’s very little that’s new in what I do, if there’s anything new at all. I just want to illuminate possibilities and show that you can get there in small, non-scary steps. I want to help people explore these paths, whether it’s experimenting with life, quantifying/analyzing your decisions, sketching your notes and plans, writing code for fun… I work on this by learning, writing, drawing, and making things, and I’m going to get even better at this learn-share-scale cycle as we go on.

If you want to do this too…

Hack your wants. I have simple wants, and what I want the most is time. I deliberately dig into what I want and what I can give up. Wants are more changeable than you might think, and letting go of attachments can actually be pretty fun. Frugality follows naturally from this, and savings follow frugality. I think it’s easier to shape your wants than it is to force yourself to be frugal if you don’t want to be. Then save, save, save, because that safety net makes all sorts of interesting things possible (and less stressful).

Have a supportive partner. This is a huge part of what makes it possible, and I often thank W- for helping me explore this experiment. He thinks it’s a good experiment and could possibly pay off well for us in terms of the decisions we want to make in life, and that means a lot to me. We have a simple lifestyle and are both frugal. It’s super-helpful to have a spouse who’s on the same financial page. It’s easy to imagine how this could’ve gone differently. If W- had disapproved of the idea or if we had a two-income mortgage, it would be much harder to explore this, or I might not even have tried it. I could probably have done this on my own, but it would have been more difficult to save up, the jump would have been much riskier, and it wouldn’t have been nearly as much fun.

It’s a little difficult to tell people, "Oh, make sure you have a supportive partner," so this is not really advice. But if you do happen to have a supportive partner, work on making the most of life together. Be that supportive partner, too. Investing in relationships pays off a lot.

Get help from other people, and help others. I learn a ton from people’s experiences as shared in books, blog posts, forum messages, e-mail, Skype / Google Hangout / phone / in-person conversations, and so forth. I get opportunities from people who are willing to take a bet on me. I always learn a lot while answering questions or helping people out. I’m amazed by the results of betting on other people, too – the world is a candy store of talents.

There’s a lot that I’m forgetting to explain because I take it for granted or because I don’t know that it’s missing, so please ask! =)

Thinking about movies

It’s getting harder to spend on leisure, because I’m getting so much better at talking myself out of it. There are just so many other good alternatives.

For example: Iron Man 3 has started showing in Canada. I’ve skipped watching most movies in the theatres, but I do like superhero movies, and theatres are great for superhero movies because they make the movies larger than life. I like the outsized situations that the writers put the superheroes in and how they have to get them out. I like the way the movies push visual effects forward without taking themselves too seriously. So I’m going to watch it at some point. I just have to decide…

  • Do I watch it in the movie theatre during opening weekend, as a vote for more movies like that, maybe with W-?
  • $26 for two tickets
  • Can lead to rich in-joke material
  • Good sound and perfect playback (no worries about scratches)
  • Larger than life / immersive
  • Immediate gratification
  • Focused attention
  • Do I watch it in the movie theatre as a social event, which probably means a weekend get-together with friends?
    • $25-35, depending on dinner
    • Bonding time with friends – find out what’s going on in their lives
    • Buying tickets and organizing seating can be difficult
    • Good sound and perfect playback (no worries about scratches)
    • Larger than life / immersive
    • Short-term gratification
    • Focused attention
  • Do I watch it in the movie theatre off-peak, which probably means mid-day sometime during the week?
    • $13 by myself, or possibly with other friends who also have flexible schedules
    • Better seats
    • Good sound and perfect playback (no worries about scratches)
    • Larger than life / immersive
    • Short-term gratification
    • Focused attention
  • Do I wait for it to be available in the library, so that I can watch it with W- at home?
    • Free
    • Can lead to rich in-joke material
    • Writing time or cat time
    • Can watch with subtitles
    • Can pause and rewind
    • Can watch extended material, commentary
    • Can talk to W- while hanging out (extra in-jokes and movie references!)
    • Comfy seats, clean floor (no spilled popcorn or drinks)
    • I can read IMDB trivia and tvtropes entries or research interesting ideas

    And you know, that library option is looking pretty darn tempting. The biggest downsides are a less immersive experience and a longer wait. I don’t need big sound or big images to get into a story (I can imagine things from books). Watching musicals from closer to the stage was much better in terms of being able to see facial expressions, so there’s something for that.

    It takes a while for movies to be released on DVD, and some more time for the library to obtain copies. The DVDs are available on a catch-as-catch-can basis at various branches, and then they’re available for general holds after a year. New items are released on the 15th of every month. W- and I check the new listings on the 15th or 16th, by which time there are sometimes hundreds of holds for popular movies. For example, The Avengers (2012) has 992 holds for 107 copies. Movies can be checked out or renewed a week at a time, and transit between branches takes another day or two. That means that requesting a popular movie like the Avengers would mean a wait of maybe a year and a half from when the movie was released, which is actually not that big a deal because we’ve got a ton of other things to watch. Besides, sometimes we luck out. In this particular case, the Annette Street branch is the home branch for one of the Avengers DVD copies, so we spotted it during our regular library walk and we checked it out even before it was available for general holds. =)

    Popular movies tend to be well-stocked, and I have three branches in easy reach: Annette, Runnymede, and Jane. The Hobbit was another movie that I decided to wait for as a library release, and writing this blog post reminded me that I should go look for it. It’s not available for general release yet, but one copy is due at Runnymede tomorrow and another is due at Annette on Monday. I might bump into it one of these days. If not, I can wait for it to become available for holds on October 15. (Hmm, time to set a reminder…)

    Besides, there’s so much else to do, and so many other movies, shows, books, and games out there. We can keep ourselves endlessly entertained if we want to with just the things we have. So it really comes down to the question: what do I want?

    • I want to be delighted by and learn from storytelling.
    • I like the way that shared movies turn into great in-jokes between W- and me, layers of references building on other references.
    • It would be nice to spend time with friends, but there are other things I can do to spend time with friends.

    So probably library, then, for this and most other movies. W- says, “That’s a lot of thinking about $26.” But it’s this gradual shaping of wants and desires that creates the space for even more possibilities later.

    The less I want, the more I can enjoy.

    How I got started in investing

    When I was growing up, I raided my mom’s bookshelves for whatever I could understand—and quite a few things that I didn’t at first, but which yielded under repeated reading. In one of her personal finance books, I came across an anecdote about someone who bought stocks of the companies of which he was a frequent customer. When my mom decided it was time for us to learn a little about investing and offered us a choice of several Philippine stocks, I used the same reason to pick Jollibee. Although I didn’t eat at Jollibee that often, I knew lots of people did, so I figured that it would work out the same. I haven’t been tracking Philippine stocks since then, but apparently Jollibee has been doing pretty well.

    When I moved to Canada for my master’s degree, I was fortunate to have a combination of research assistantships and scholarships. I never spent more than I had – another lesson drilled into me by my mom. Living frugally helped me graduate without student debt. By that time, I’d grown to love W-, which made it easier to accept IBM’s job offer and go through the permanent residency process here in Canada.

    Once I started earning money here, I wanted to apply the best practices from the personal finance books I’d been reading all this time. I set aside a portion of my income for long-term investments. After lots of research, I settled on TD e-funds as an inexpensive way to get started with index funds. I didn’t know enough about individual companies to feel comfortable buying stocks, and books and blogs said it was really hard to beat the market anyway. Index funds were a less intimidating way to get started. Small steps – a tiny investment here to see whether I’d set things up correctly, then more as I became more comfortable with the idea.

    I figured that if I hold the funds for decades and get average performance, that’s still all right. If the funds lose value, well, that’s life, and I wouldn’t be any worse off than if I hadn’t been saving. I joined the workplace and started investing just as the financial crisis broke, so it was a little tough buying while people were losing so much, but it turned out all right.

    Canada has a Registered Retirement Savings Plan program (RRSP) where you can shelter some of your investments and savings on a tax-deferred basis, so I put in as much as I could. When the Tax-Free Savings Account program started, I moved my emergency fund into that, and then started using it for some of my investments too (also in TD e-funds). For my long-term goals, I needed non-registered investments as well, so more TD e-funds there.

    The stock market has been up and down since then. The market value of the portfolio is occasionally below the book value, which looks a little discouraging. When I use the XIRR formula in Excel or other spreadsheet programs to analyze my actual returns, though, it works out okay because the reinvested dividends are also accounted for. Besides, as long as I keep an eye on the money I may need within the next five years, I can let the long-term investments go up and down without panicking.

    Investing with uncertain income was a little more difficult for me to get used to. At the beginning of my experiment, I was worried that I might not have enough in cash despite my budget, and I wanted to keep as much as possible in savings accounts just in case. Lately, though, I’ve been able to relax a little and say that at least 10% of this should be put in long-term investments. I look forward to being able to increase this proportion as I become more comfortable with managing finances during this experiment.

    It’s getting easier and easier to postpone present spending for the abstract idea of enjoying extra time and flexibility later on. For example, we were at a thrift store looking for books, and we came across some DVDs for movies we had enjoyed. After some consideration, we put the DVDs back because we get a lot of free movies from the library anyway. It’s easy to keep my lifestyle simple now so that I have the space to keep exploring things later.

    I still haven’t sold a single stock or index fund I’ve ever bought. Well, I guess the transfer of my Sun Life funds (from the IBM defined contribution pension plan) to TD counted as a sale, because it needed to be transferred in cash, but I put it back into investments once the transactions got sorted out. I haven’t tried doing the paperwork for capital gains in non-registered accounts yet. I might do it one of these years just so that I know how that’s done and so I’m sure I’m keeping all the records I need. At some point, I should probably convert some of these e-funds to exchange-traded funds (ETFs) for even lower management expenses. Bonds and stocks still boggle me, so it’ll be quite some time before I get around to buying these. (If ever!) Many things to learn! My sister is a lot more sophisticated when it comes to investing, I think, but as long as I can figure out something that’s comfortable for me, I’ll be fine.

    Investing can be scary for lots of people, but if you can create some space for yourself so that you aren’t as worried about the ups and downs, it seems a little bit easier. The biggest risk of loss comes from having to sell at the wrong time, and that space can help. Many people struggle with saving even just a little, but if you can manage it, it might be worth trying investing. Like in gardening, it’s fun to see things grow without much more effort from you, even though sometimes the seasons can be tough. As long as you don’t have to use up your seeds for food, there’s always next season.