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Financial Freedom: Work

This is the third post in a series about aspiring to Bumhood—that is, achieving financial freedom so you can get off the day-job treadmill and gain control over the way you spend your life. Today let’s talk about gainful employment.

One of my editors at Arizona Highways told me about the anguish he felt during a three- or four-month period of unemployment after he’d been laid off a job. His wife earned a good salary, so it wasn’t that they didn’t have enough to live on. But he felt devalued as a human being. The words he used—I remember them to this day—were “If you don’t have a job, you’re nothing.”

Well, no.

Paid work exists for one reason and one reason only: to put food on the table and a roof over your head. You are not your job!

Some of us feel a calling for certain kinds of work. From the time I was about six years old, I wanted to be an academic, for example (having no clue what that really meant); my ex- always wanted to be a lawyer. Many of these callings are none too profitable: teaching, for example, is poorly paid in relation to the actual number of hours a good teacher puts into the job, and I don’t imagine many clergy or social workers earn much. Some of us still have no idea what we want to do when we grow up, and so have to take whatever job comes along.

Truth to tell, unless we fall into a large inheritance or win the lottery, to achieve financial independence most of us will have to pass part of our adult lives in a day job. We need to earn enough to provide for our children and to establish our own permanent financial security. This will likely entail holding a job for at least 15 or 20 years while at the same time practicing some basic money management.

So…what to do to make a living? Whatever brings in some cash.

Do you need to earn a six-figure income to break free from wage slavery? I don’t think so. Certainly SDXB did not: he was a reporter, and although The Arizona Republic paid a decent wage compared to other publications in this right-to-work state, it still wasn’t great. The period in which he made good pay as a freelance PR man was brief, during the bubble that occurred right before the savings and loan crash, which led to a recession almost on a par with the one we’re seeing now. But he did have an income, and by dint of frugal living and steady investment, he managed to step off the treadmill at 47.

Similarly, the Adirondack Chimney Sweep passed most of his adult life in modestly paid work, but because he lived within his means and had built a small sideline, when the city offered him a buyout long before he’d reached retirement age, he was in a position to accept. A friend of mine cleaned carpets for a living. He retired a millionaire, gave the business to his son, built a beautiful house in the woods, and went fishing.

I believe if you live sensibly, stay out of debt, save regularly, and invest your savings, you can build financial freedom no matter what you earn. I know a corporate lawyer who earns a fine income, but because he never put a high priority on managing his money, he’s still trudging to an office every day—and he’ll be 70 next fall. Others who have held lower-paying jobs as teachers, tradesmen, nurses, or, like my father, merchant seamen have been able to quit working altogether or to start new careers that pay less or interest them more.

There are three tricks to converting a job, any job, into financial independence:

1. Live below your means.
2. Develop more than one income stream.
3. Save and invest all funds not needed to cover living expenses.

Living below your means is going “live within your means” one better: the trick here is to stay out of debt and to live sensibly enough that you don’t spend all your income. Then use your unspent income to build savings. If you have a 401(k) or 403(b) to which your employer is contributing, be sure to take advantage of that. But save more, above and beyond pre-tax contributions from your salary.

As part of his strategy to quit his job at the earliest possible moment, my father never went into debt. Any debt. All the time I was growing up, we lived in rentals. He didn’t buy a house until he had the cash to pay for it in full. Now…he had some ugly reasons for this that had nothing to do with personal finance—I’m not giving his bigoted thinking enough credit to describe it here, except to say it was a symptom of the times in which he grew up—but the practical effect was that all the money that might have gone into house maintenance and mortgage insurance went into his savings, which he invested for the long term. The less debt you carry, so-called “good” debt included, the more you can save.

From my own experience, I can see that having a side income stream is crucial, especially if your day job is modestly paid. Teaching on the side allowed me to pay off the second mortgage on my home a year before the Great Desert University canned me. And, when my beloved employer kindly delivered six months’ notice that my office was to be shut down and I and all my staff thrown into the street, I landed a noonlighting job that allowed me to rack up a $10,000 cushion. It will keep the wolf from the door during this difficult 2010, when Social Security rules will bar me from earning more than a subsistence wage.

I feel extremely lucky (or maybe smart?) that over the years I’ve developed more than one set of marketable skills: I write, I edit, and I teach. Today the three of those allow me to earn salaried income and self-employed income: blogging, freelance editing, and part-time teaching in the community colleges. These will carry me over the period required for my investments to recover the $180,000 lost in the crash of the Bush economy.

At this point, I’m free of the day job, light part-time work will support me without having to draw down my savings, and I have enough independent income to deal with the other baleful result of the late, great economic mirage, an upside-down mortgage on a house my son and I mistakenly thought had fallen in value as far as it would fall at the time we bought it.

Things could be better: to be fully confident of having enough to carry me through old age, I would have preferred to work, save, and invest for another five or six years. But because I’ve lived below my means, invested everything in sight, and cranked extra money on the side, I’m far better off than most single women my age, and I’m clearly in a position to enjoy life without ever having to take on another full-time job.

Financial Freedom

An Overview
Education
Work
Debt
The health insurance hurdle
The roof over your head

Financial Freedom: Education and training

The other day, Funny about Money started a series on making your way toward financial freedom, the state where you find yourself independent of the day job and free to do what you want to do with your life. We identified several components in this project, all of them having to do with personal finance.

Today, let’s start with the first of those: Education

One issue we should bear in mind is the difference between true education and vocational training. A bachelor’s degree in business, engineering, or nursing (for example) may line you up to get a decent job, but it may not make you an educated person.

Education furnishes your mind. Broad reading, writing, thought, and discussion make you a wiser person and cultivate your ability to think logically, to recognize flim-flam, and to make good decisions. For that reason, a good undergraduate degree in the liberal arts is useful—maybe even indispensable—to anyone who hopes to take a leadership role in industry, government, education, and the  law. Those of us who aspire to high-powered careers in any of those need a strong undergraduate degree in the liberal arts followed by a graduate or professional degree in business, law, science, or technology.

Some graduate degrees are scams and should be avoided. A master of fine arts in writing, for example, will leave you fully unemployable while teaching you nothing that you wouldn’t have learned by spending the same amount of time applying your bottom to the seat of your desk chair. Graduate degrees in vague new pushmi-pullyu programs with no real entry requirements, such as Arizona State University’s “master of liberal studies,” are similarly suspect: if you want a degree in the liberal arts, take the GRE and get yourself into a solid program such as English, history, or mathematics.

Undergraduate technical degrees are useful in that they provide high-level vocational training for young people whose cast of mind is not especially academic. Often the resulting job opportunities are better paid, at least at the entry level, than a bachelor’s degree in the liberal or fine arts will generate. Over time, however, people with bachelor’s degrees in subjects like business, education, and technology may need master’s degrees or professional certifications to move up in their trades.

On the college level, vocational training—which defines a large number of undergraduate and graduate-level programs—will set you up to get a job, assuming jobs in your major are available by the time you graduate. Vocational education includes degree programs in business, nursing, medicine, engineering, computer sciences, graphic arts, education, and journalism, to name a few. It must be remembered that none of these guarantees high-paying work. To the contrary,  some, such as journalism and education, pretty much guarantee their graduates low pay. Some, such as accountancy, provide entrée to trades that make a good living but that may bore the pants off you.

Many people truly are not suited for higher education. Sometimes this has to do with the student’s level of maturity—some should delay college until they are focused enough to profit from it. Having to earn a living for a while speeds maturity and creates a much better college student. Others are more likely to succeed in the trades than in low-level white-collar jobs; in the case of young people who are not interested in school or who find study painfully difficult and discouraging, a short stint in a community college and a decent apprenticeship may be a smarter strategy. A person with skills in the trades is likely to earn as much as or more than an ill-educated college graduate. Remember that most millionaires in the United States are owners of businesses that provide services like pest control and plumbing. The beauty of the trades is that the work can’t easily be offshored. Even though some of these jobs pay little more than minimum wage, an ambitious young person can learn the trade well and then build his or her own business. Once you’re hiring someone else for minimum wage, you’re in a position to make a good living.

Choose wisely and choose well: consider first what you really want to do; then whether you want to do that for the rest of your life; and finally what you can earn with the credentials the degree provides.

None of this, as we all know, is likely to be cheap. A young person who’s savvy to personal finance or an older but wiser person who’s going back to school can find ways to minimize the damage. The idea should be to avoid a heavy burden of student loans, which can saddle a young person for years—even, possibly, for the rest of one’s life.

One obvious strategy that many people overlook is simply to take your first two years of undergraduate work at a community college. These schools are much cheaper than universities and are often close enough to home that you can live with your parents for an extra couple of years. Yeah, we know: what a drag! But have you priced apartments lately? Lower-division courses at community colleges are usually staffed with professionals who are dedicated to teaching, in contrast to universities, which often foist the scutwork courses onto exploited graduate students, underpaid junior faculty distracted by the grinding quest to attain tenure, or senior faculty more interested in their research than in teaching.

It’s important to be sure that courses you take in a community college will transfer to the university of your choice. Many state universities have articulation programs with local colleges, and some state legislatures have mandated that their universities accept credit from community colleges; however, these rules may not apply to out-of-state colleges.

If you’re an excellent student but can’t afford an expensive private college, seek “Ivy League public schools,” such as Michigan or Berkeley. If you’re fortunate enough to live in a state that hosts one of these institutions, by all means try to get in. Savings can be huge, and the quality of education is good. If you have to go out of state, consider living and working there for a year or two to establish residency before enrolling—most state schools require a local driver’s license and evidence that you or (if you’re still a minor) your parents have paid state taxes.

Whether you go to a community college or an in-state university, living at home can save a great deal of money, lightening the load of student loan debt by many thousands of dollars.

Working your way through school is a hard row to hoe, but the reward can be huge: freedom from student debt. The federal government has a work-study program designed for students in need. If your family’s relative affluence renders you ineligible for this program, most universities and colleges have their own work-study programs or part-time job opportunities that provide a small salary and enough flexibility to work around class hours.

Summers offer you the chance either to take on full-time work temporarily, racking up some savings for the following school year, or to speed your way toward graduation by taking coursework. Two summer sessions of six credits adds up to twelve credits, the equivalent of a full semester. In your lower-division years, consider a community college for summer school—just be sure, before you sign up, that your university will accept transfer credits for the classes you take.

An alternative to work-study is a regular 50% FTE job at a university or college. Most institutions provide a tuition waiver for employees. Pay, especially in public schools, is usually abysmal, but it should cover studenty lodging and help pay the other bills. Jobs not considered part of a work-study program may have rigid hours that preclude attending certain classes. However, schools are famously flexible (it’s part of political correctness), and so you often can obtain work on campus that will allow time to take your courses. Pay, though poor, is usually better than student work, and you get a full range of benefits.

Look for scholarships, fellowships, and grants to help underwrite the cost of college or vocational training. A surprising amount of free money goes unused, simply because people are unaware of the opportunities. Some are offered by local groups, service clubs, communities, and churches and are so specific that even candidates who qualify for them don’t think of looking for them. Check websites that aggregate information on scholarships, and ask at college and public library reference desks for leads to funding opportunities.

Some students come up with enterprises to help underwrite costs, such as the guy who realized he could make a profit buying back students’ used books for more than the bookstore paid for them and then reselling them for less than the bookstore charged. Find a need and fill it: this requires some ingenuity, but a microbusiness run out of a dorm room or an apartment can go a long way toward defraying the cost of education.

Speaking of dorm rooms and apartments, refrain from regular drinking, partying, or drug use. These cost a ton of money. You’re already spending enough to keep you in the traces for the rest of your life. Why make things harder on yourself?

Book publishers, seeing a captive audience, have turned textbook publishing into assembly-line fleecing of the sheep. Textbooks are so expensive that some colleges are seriously considering abandoning books altogether and having students use websites. This is a recipe for further dumbing-down of America’s already dumbed down educational system, but that’s another topic…  Consider ways to keep at least some of the wool on your back.

First and foremost: buy books anywhere but at the campus bookstore. Amazon.com is almost invariably cheaper than college bookstores. Try to get your books used, and sell them back through Amazon, using the bookstore’s repurchasing program as your last resort. Look online for sellers and buyers; some online outfits offer a better deal than either Amazon or the bookstore.

A cheaper but less convenient alternative is to use the library. Many texts are put on reserve and so can be accessed during library hours; others are available for check-out and often can be re-checked for the better part of a semester. If a course’s texts are not on reserve, ask the professor if she or he will put them in reserve.

I don’t recommend asking the professor if you really need to buy the book. It’s extremely annoying. Faculty know about and dislike the cost of textbooks. If the professor didn’t think you needed the book for the course, he or she wouldn’t have put it on the syllabus! This strategy flags you in the professor’s mind as someone who’s in school for a rubber-stamp degree and who doesn’t care about the course, its content, or its value. It starts you off on the wrong foot: avoid!

Starting off on the right foot, though, is what adequate education or vocational training will do for you. Even if you have to go back to school later in life to obtain the training you need, a degree, a certificate, or an apprenticeship will help you to earn enough to position yourself for your future of financial independence.

Financial Freedom

An Overview
Education
Work
Debt
The health insurance hurdle
The roof over your head

Do you have to be wealthy to be financially independent?

Going for home
Going for home

I’m such a bag lady. Not literally…but I suffer acutely from Bag Lady Syndrome. You can tell me till you’re blue in the face that I have plenty to get by, but I won’t believe it until the bills are paid and no one has carted me off to the poor farm.

Matter of fact, this morning after I’d run another Excel spreadsheet that showed, contrary to the present optimistic theory, an average shortfall in 2010’s enforced “retirement” of $740 a month, my financial adviser was on the phone, cooing in soothing tones, “You’ll be f-i-i-n-e.” Even though I don’t have anything like a million bucks in the bank, he says, there’s more than enough to supplement Social Security and cover all my expenses for about 50 years, at a 4 percent drawdown.

The other day Frugal Scholar, the professor with the penchant for thrift-store shopping, reported a delightful revelation: truth to tell, she and Mr. FS could rent their paid-for house and retire to Costa Rica. Today. Gone fishin’. Once and for all… If they so chose.

Ah hah! Financial independence: freedom to do as you please, absent the chains of debt.

Many of us, I think, assume that to enter that blessed state we need to have stashed enough in savings to make us wealthy by most anyone’s definition: a million bucks or more. But I beg to differ. With a reasonable standard of living and a paid-for roof over your head, you don’t have to be a millionaire to achieve financial independence and maintain a middle-class lifestyle. A much more modest stash can support you, given the right conditions.

The Scholars appear to be situated firmly in the financial middle class. With the exception of university presidents, certain deans, and the occasional patent-holding bioengineer, academics don’t earn much. At least, not in the larger scheme of things—compared, say, to the owner of a carpet-cleaning service, to a doctor or a lawyer, to a basketball player, or to a twenty-something kid on Wall Street. It’s unlikely that even between the two of them they’ve stashed a million bucks in their 403(b) plans. Yet they are financially independent. They could, if they wished, retire today with little or no change of lifestyle (other than moving to a tropical paradise…).

The first key to financial independence is to get out of debtAll debt, including the mortgage. You’ll notice that the Scholars had the initiative and self-discipline to pay off their house. In my own case, I’m especially grateful that I managed to do that a few years ago. Because I don’t have to come up with hundreds of dollars every month to keep a roof over my head, now that I’ve been laid off…hallelujah! I don’t have to get another day job!

And the other key? Come to terms psychologically with living within your means. Though I won’t be enjoying the Queen of Sheba’s lifestyle, neither do I expect to move to the poorhouse. The only real “sacrifice,” if you can call it that, is that I will have to drive my fully functional, very nice nine-year-old Toyota a few more years, rather than trading it in when it reaches the ten-year milepost. I will have to earn a few thousand bucks a year to cover my share of the house M’hijito and I are copurchasing, but that can be done  by taking on a couple of easy, part-time teaching gigs. Pay is low, but work is minimal and mildly entertaining.

Debt, particularly mortgage and automobile loans, racks up the largest part of most Americans’ month-to-month costs. Once you no longer have to pay an outrageous slug of interest to keep a roof over your head and wheels under your feet, your ordinary living costs are surprisingly modest.

Financial independence doesn’t necessarily mean not working. After you’ve attained financial independence—that is, your living expenses are low enough that the proceeds from modest savings and other forms of passive income will support you—you’re free to do as you please. If you want to keep working at your job, you can. Or you can take up a more interesting line of work, try to do something less profitable that you’ve always dreamed of doing, or devote your time, energy and skill to altruistic pursuits.

A friend retired from his medical practice with plenty of zing still left. He and his wife spent a year working pro bono at a hospital in New Zealand. Another friend passes his time working for Habitat for Humanity, as does my step-sister. A third decided to become an organist in her old age, an enterprise that led to a wonderful adventure in Australia. With the possible exception of the anesthesiologist and his wife (who by and large live modestly, by Seattle standards), none of these people are wealthy. They live middle-class lifestyles, dwelling in ordinary homes in decent neighborhoods, driving nice-but-not-gaudy cars, staying out of debt, and generally doing as they please…within their means.

Image by Gargoylepni, public domain, Wikipedia Commons

What IS frugality?

Every now and again, a blogger agonizes over whether frugal habits lead to cheapness—or worse, will be perceived by friends and relatives as miserliness. Beyond Paycheck to Paycheck ruminates, to entertaining effect, on the wacky ideas people have about personal finance and frugality. True frugality, IMHO, does not mean asceticism, tightness, or pathological self-deprivation. So, what really is a healthy, productive frugality?

Frugality is. . .

Independence

The frugalist knows better than to jump off a cliff just because all the other sheep do it.

Freedom

Not until you’ve paid off your last penny of debt are you truly free to work where you please, to choose an occupation that remunerates you in something more meaningful than cash, or not to work at all.

Common sense

True frugality recognizes the difference between penny-wise and pound-foolish.

Charity

What goes around comes around. Over at Gather Little by Little, GLBL has been trying to explain the importance of giving for a while.

Living light on the land

Frugality by its nature is “green.” Frugalists neither waste nor want…nor do they accumulate junk. So frugal habits tend to preserve resources of all kinds.

Goal-setting

Pinching pennies for no other purpose than to pile up pennies is a miser’s habit. Frugal people save money for specific reasons: to get out of debt and stay out of it; to send the kids to college; to take a dream vacation; to buy a house; to accrue an emergency fund; to finance a secure retirement.

Self-discipline

The frugal person stays on track toward the goal.

Organization

Frugal people keep track of their finances and other aspects of their lives.

Ambition

Frugality is self-motivation to do better in life as well as in personal finances.

Minimalism

Frugal people furnish their lives with only what they need or truly appreciate.

Love

Frugalists work to build a better life for those they care about: born or unborn, found or yet to be found.

Faith

. . . in a better future.

Jamaica Sunrise, Adam L. Clevenger, Wikipedia Commons

Saving: Every little bit helps

The other day, J.D. at Get Rich Slowly posted an interview with his real-life “millionaire next door.” In a very interesting article, he made the point that you don’t have to earn a Wall-Street salary to accrue enough wealth to achieve financial independence. John, the interview’s subject, did it on a teacher’s salary. The trick, he says, is to spend less than you earn.

True that. I would add that it’s crucial to build your budget so that you do spend less than you earn by including a line item for savings, and then to foster the habit of saving everything else that you don’t spend on living expenses. Even if you’re fighting to get out of debt, at least some small amount of your total income can go into savings. Paid Twice sets the example for this strategy: despite setbacks such as the car crapping out, she and her husband persist in building emergency fund savings while beating back a debt load that started out at a depressingly large figure.

Thanks to the collapse of the Bush economy, I’m no millionaire, but I’m a great deal less perturbed about the pending layoff than one would expect, because I have plenty to live on despite the obligation to help with the mortgage on a second house. The mortgage on my own home is paid for and I have no other debt except a $21,000 loan taken out to renovate the downtown house. Suspecting the university would can me, I started setting aside enough money to pay off that loan last year and for the past several months have had enough to kill it. The reason I haven’t paid it off is that I felt I should hang onto the cash to make it double as an emergency fund in the event I lost my job.

I have, however, decided that next week I will pay off the Renovation Loan. Why? Because by the end of this year I’ll have saved another $24,000! That’s after setting aside enough to cover COBRA until Medicare kicks in and after paying the $1,200 for my car’s 90,000-mile service.

That will have happened because I don’t spend anywhere near what I earn.

First, I’ve always engineered the budget so that $200 a month goes straight to savings. While trying to accrue enough to pay off the Renovation Loan, I budgeted another $204 toward that (started out more, but GDU’s furlough days cut my net income by $180 a month). Once enough was saved for that purpose, I just kept on putting the extra amount in savings: a total of $404 a month.

Second, I have two side income streams, freelance editing and teaching. Every after-tax dollar from those activities has gone into savings. These income sources made it possible to accrue enough to pay off the second mortgage by the end of last year.

Having cut spending by $180 a month, in August when the furlough days end (so we’re told…), I’ll continue to put that much in savings, too. I should net about $5,000 from the three community college courses I’ll teach in the fall, and a conservative estimate of freelance income is about $200 a month, for a total of $1,600 between now and layoff day.

Staying on budget has allowed me to spend less than I put into the credit union accounts set aside for recurring expenses and for credit card charges (I charge everything other than monthly bills on the American Express card, pay it off each month, and collect a kickback of between $250 and $500 at the end of AMEX’s fiscal year). This means a fair amount has accrued in accrued in dribs and drabs and is just sitting in those two accounts. Here’s how that shakes out:

savingsfigs5-3-09

Projecting the amount the regular savings from my GDU paycheck should grow, by December 31, layoff day, I should end up with almost $5,800 to add to existing credit union savings:

savingsprojected12-09

Okay. Now let’s add to that the amounts I figure to net from teaching and freelancing, to arrive at the projected 2009 savings as of December 31:

savingsincprojected12-09

Amazing. The $12,380 I expect to squirrel away from net teaching and editing income plus routine savings from my GDU paycheck plus the $11,931 already on hand comes to $24,311.

That’s with a pretty conservative estimate of freelance earnings, and it doesn’t count the so-called “extra” paycheck coming in July, thanks to the crazy bimonthly pay schedule. Add another $1,200 (some of the “extra” paycheck has to be used to cover regular spending—it’s not really extra) and the vacation pay GDU will owe me in December (around $2,600) and you come up with a projected total of something over $28,000.

This will be my fallback fund in retirement. If utilities and healthcare bills exceed a given month’s income from retirement savings and teaching (as they will in the summer), this “cushion” will keep me from bouncing checks.

It’s come about because I spend a lot less than I earn! Whenever I take a side job, I put the money into savings. My budget covers only the amount I make in my day job at the Great Desert University, and that budget allows for a $404 monthly deposit to savings—soon to be $574, after I pay off the Renovation Loan.

scenario-1bEven though I’ll have to spend almost everything I earn once the day job ends, I’m still planning to deposit at least $200 a month in savings. Assuming I put $10,000 of the accrued savings into my main checking account, things will be tight: in a month when I’m paid for only two weeks of teaching, I barely squeak by. However, when the community college checks come in twice a month, I accrue so much extra that unemployment during the expensive summer months will not cause spending to run the bottom line into the red. I should start August with $11,650 in checking and end it with $11,508. After that, as utility bills fall, spending money rises. After all the bills are paid in December 2010, I should have about $12,970, leaving me $3,970 in the black at the end of the year.

That’s $3,970 that will go into savings…