If you’ve followed me through the previous parts on understanding the formula of the Voluntary Worker, living frugally and staying out of debt, you’ll know know that the core of getting to Voluntary Worker status is living on as tiny a part of your income as possible so that you can save lots and lots, until your non-work income exceeds your expenses and voilà – you have become a Voluntary Worker.
To my mind, how you go about storing your surplus is surprisingly unimportant when compared with the enormous importance of having a surplus in the first place. That’s right, I’m saying again just how important it is to live frugally and avoid consumption traps.
Anyway, that’s not to take away from the fun and satisfaction that you can get from squirreling away the results of your hard work and frugality. It’s wonderful to see bank accounts swell from week to week, and to reach targets you have set yourself for savings.
As with the other articles in this series on how to make work voluntary, I’m setting out to give you an overview rather than trying and failing in providing a definitive guide complete in every detail. I can’t know every reader’s circumstances, and in any case a big part of the puzzle is YOU learning how to understand and then address the parts of the puzzle – and thankfully there are only a few of them.
I do think it’s important to mention that in modern times we’ve all come to accept the notion that surplus money must be invested – that is, placed at risk in the market in the hope it will increase in value and will be returned when needed. Somehow the idea of preserving one’s purchasing power in a risk-free way has vanished from our collective financial consciousness, and we’re all addicted to finding the bank account with the highest interest rate (banks are certainly not risk free) or the portfolio with the highest returns (I shouldn’t need to say anything at all about risk in stock markets). Perhaps our aversion to trying to simply save has got to do with the covert taxation of currency savings that occurs through monetary inflation. But that’s a topic for another blog. I do encourage you to think about it, though, and to consider assets that can protect your purchasing power without counterparty or other risks.
What’s my approach? I like to store money in high interest bank accounts if I may need it in the next few months to a year. I am always on the lookout for good small businesses, though these are sadly very rare in my local market. I would like to add productive land to our portfolio in the future, and rental properties.
If you’ve read much about investing in the past, you’re probably wondering why I’m not talking about rates of return, or volatility, or asset allocation theories. Well, my perspective on what constitutes an acceptable return has changed since I’ve become a Voluntary Worker. Previously I might have sneered at the idea of a rental property returning 5% if a bank account could give me 4.5%, but now that I have enough to live off, I am more interested in having a diverse range of investments. I think about these things more as a series of nets through which I hope never to fall into Forced Work. Mr Money Mustache has a pertinent article on safety levels that I recommend reading for more on this topic. I’m no longer much of a fan of Warren Buffet, but he has made famous the idea that return OF capital is much more important than return ON capital – on this point I think he is completely right. I want to store my surplus somewhere I feel sure I can retrieve it, and I want it spread around so that I have (a) an array of income sources that keeps me interested and (b) some protection against calamities.
On the topic of portfolio theory, I will just say that I have not come across anything I’ve liked better than Harry Browne’s Permanent Portfolio, chiefly because it makes explicit the fact that we cannot know the financial future, and it does not aim for crowd-beating returns. I do not use the Permanent Portfolio myself. There’s lots of investing information at the Boglehead’s Forum.
PS I can’t help adding one other point, and that’s to be aware of the importance of fees in determining your final return. Many accounts look good from a distance but are decidedly unpalatable when you calculate the impact of fees of various kinds.
Have fun stashing your surplus!