POST OF THE DAY
Living Below Your Means
Double the Price - An Epiphany

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By WhitemiataXP
February 27, 2003

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It's that time of the year again. The time when I read something that makes me do a double-take and then it's just like a backed up water pipe... you remove the clog and with untold fury the water rushes through and I realized I've just been exposed to a little more of the "Light."

Of course the only appropriate thing to do, after picking up my jaw off the floor is to share this experience with my LBYM buddies.

Of course even I am not pretentious enough not to realize that many, maybe most of you already know this, but I'd rather risk insulting your intelligence by pointing out the obvious rather than keep this to myself :-)

Anyway...

The inspiration, the spark for the understanding came while reading posts in the Retire Early board (lots of cool folks, some of you are there and know this already, a lot less chit-chatty than here). I was exposed to their 13 year Rule (I didn't see it identified as such but there were so many references to it that I'd say it's as close to a rule as we get).

In brief this rule goes something like this: (And I apologize If I'm not being exact here)

Given an average return rate of 6%, if you invest the same amount every year for 13 years, by the time you reach the 13th year the accumulated capital will generate in interest the amount of money you've been investing.

You can prove this to yourself by creating a spreadsheet like the following:


yr  capital      interest        total          add

1   $100.00       $5.50          $105.50        $100.00
2   $205.50       $11.30         $216.80        $100.00
3   $316.80       $17.42         $334.23        $100.00
4   $434.23       $23.88         $458.11        $100.00
5   $558.11       $30.70         $588.81        $100.00
6   $688.81       $37.88         $726.69        $100.00
7   $826.69       $45.47         $872.16        $100.00
8   $972.16       $53.47         $1,025.63      $100.00
9   $1,125.63     $61.91         $1,187.54      $100.00
10  $1,287.54     $70.81         $1,358.35      $100.00
11  $1,458.35     $80.21         $1,538.56      $100.00
12  $1,638.56     $90.12         $1,728.68      $100.00
13  $1,828.68     $100.58        $1,929.26


The implication is awesome. After only 13 years you can stop investing the amount of money and it will be generated automatically by what you've accumulated.

Now, before the Yawn factor sets in, here's the fantastic consequence of this... if you can save 50% of your salary, you can retire in 13 years.

And that, in and of itself is just incredible, but true.

Of course there are other considerations as well, like taxes, inflation, that must be dealt with, but those may only offset things a bit or require more planning, the basic premise is unscathed.

So what does any of this have to do with an epiphany and/or with DOUBLING THE PRICE, as this thread's title suggests?

Well... the epiphany IS that prices should be doubled, and the reason should be apparent.

Any expense you make today is liable to cost you 2X as much as you think!

Why?

Here's a scenario. Let's say I make $40,000 a year, and save 50% of my salary, so $20,000 goes into savings to retire early on the 13 (or thereabouts) year plan.

I decide to subscribe to Satellite TV at a cost of $50 a month -> $600 a year.

Suddenly while my income remains stable at $40,000, my expenses went up to $20,600 ... and my savings of course went down to $19,400

How much did Satellite TV cost me? $600, right?

Think again.

If this were the case, then if I wanted the satellite TV not to affect my plan, I should be able to increase my means by $600 and remain on course.

Get ready for the truth.

In order to continue on my course to early retirement it is imperative that my savings be 50% of my income (this is not exactly the case, but we're assuming it is for argument's sake).

So let's see what happens when I add the additional $600 worth of income from additional work.

My income becomes $40,600...

my expenses remain the same at $20,600
and my savings rise from $19,400 to $20,000.

We're back where we started?

Nope.

While our savings are the same as they were before we got Satellite TV, our savings even with the additional income are still not back to 50% of income.

So, what's going on here?!?!?

Simply put... the $600 Satellite Tv doesn't really cost $600, it costs $1,200. Yup!

And to prove it to yourself, pretend I took on more work for $1,200 rather than $600, the figures would be:

Income= $41,200
Expenses = $20,600
Savings = $20,600

And we're back in balance.

So there you have it. If you're looking to retire early (and/or not *have to* work all your life) you might be well served by considering any additional expense you make to be 2* what you're told it is.

This of course is not meant to be a suggestion to cease and desist from all *un-necessary* spending. Life is to be enjoyed and if some of the things you enjoy cost money, then keep balance in your life.

What it IS meant to be is a tool to help yourself make decisions when your gut is telling you "we don't really need to spend this much for X" ... you might find it much easier to eliminate an expense (especially a routine one!) if you think of it in terms of 2x the price.

Papa Johns Pizza on sale: $9.99? Nope... $19.99 ;-)

Alessandro

P.S. As a consequence of this realization I have made a decision regarding the DSL dilemma I posted about a few weeks ago. I will be calling BellSouth and canceling the service. The high speed is nice, and having the phone line free is nice too. But frankly I was hoping that DSL would mean that I'd spend LESS time on the 'net. In 2 months of having the service I realized that I've only been browsing TO MORE PLACES, rather than reclaiming some of my free time. So considering that DSL is $50 a month (I mean $100 of course!) and my dialup ISP is $16 a month ( I mean $32!) ... the $34 a month ($68) ... $408 a year (I did mean to say $816.00) is NOT worth it TO ME.


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