How to make work VOLUNTARY Part Three – Avoid debt like the plague

In one sense, debt is just another expense. However, as well as nasty interest payments, it brings an even nastier inflation of your consumption beyond your means.

Again, there are many blogs out there that explain the evils of debt. For now, suffice it to say that you should NEVER go into debt for anything except a house (I am reluctant to even include that!) or a business. Certainly NEVER NEVER NEVER for any sort of consumption e.g. car, clothing, travel or whatever other crazy things people pretend they can afford by getting into debt.

It took me years to figure out why I always got confused when business books would talk about optimal levels of debt for maximised profits, and why I got chills when real estate books talked about leveraging A to buy and then leverage B. It’s because it makes no sense in the real world. It’s an example of things in the financial plane getting frothy, artificial and unhealthy. Thank goodness I largely avoided the perils of debt, albeit more by good luck than good management initially.

I did, though, have a line of credit with a bank when I started my business. It was a very big mistake. For years that line of credit trundled along at $25,000 or $30,000 or $27,000 or $40,000 in the red – up and down from month to month. Because that was nowhere near the limit, it never worried me (although it should have!) and because I was free to increase and decrease my level of indebtedness at will, I never focused on paying off the ghastly thing. When I came to my senses at 31 or so, I realised what a drag on my finances it represented, and after several YEARS of unnecessary interest I paid off and closed the facility in a matter of months. I have never put myself through the pain of calculating just how much money I flushed away in interest, but I have a good enough idea of the size of the loss that I won’t ever fall prey to a mushy target like that again. Incidentally, after seeing the idiocy that it reduced me to, I’m convinced that banks just love to persuade people to save pennies on interest by setting up a big debt trap of this sort in conjunction with a business loan or a mortgage on a house – you might save a few dollars in interest by having all income go into a line of credit type account, so that the balance is a little lower when averaged over the month, but you will likely lose thousands and thousands of dollars through the fuzziness of thinking that can result. I’m not a stupid person, and I’ve always taken an interest in finance, and yet I was no match for the line of credit. My new Voluntary Worker self, however, remembers the painful lesson.

We have no debt and I don’t plan to ever go into debt again as long as I live. (Actually, I would be OK with taking on a debt equivalent to maybe 25% of our total assets if it made it possible to secure a great business. But I shudder a little bit at the thought and would take it VERY seriously.) If you wish to become a Voluntary Worker, I believe you will be very well served by joining me in a healthy hatred of debt.

How to make work VOLUNTARY Part Two – Live way below your means

In Part One, we looked at the simple relationship between income-producing investments and annual spending, and my rule of thumb that investments must be 40 times annual spending if work is to remainly truly voluntary for me.

Now we move to a vital part of becoming a Voluntary Worker – frugality, or the art of living on a little.

If you think back to the basic equation, non-work income must exceed annual spending. As I said in the earlier post, I think the most important place to get started is reducing spending. If you’re bleeding money every month, you won’t have anything to invest, or at least nowhere near as much as you should.

Imagine trying to fill a big bucket so that the overflow can fill your cup. You can keep filling the bucket (earning income) as fast as you like to no avail if the holes in the bucket (spending) are too big. You need to focus first on fixing the holes, and THEN your bucket will fill quickly.

There are hundreds of articles out there on frugality, and it’s well worth reading lots of them. I’d recommend starting with Early Retirement Extreme and Mr Money Mustache, and it’s worth looking at the Tightwad Gazette to see what some people do in order to save money. It’s up to you to figure out just how frugal you want to be. The important part for now is to commit to learning how to spend less money, so that you can take it to the extent that fits your income, desired lifestyle and desired date to become a Voluntary Worker. Read, read, read – and put into practice those frugality tips that make sense to you. The big ticket items are usually housing, heating, transportation, groceries and sometimes dining out.

Again, your goal is to learn how to save money and then get stuck into doing it in the ways that are palatable to you. You’ll be amazed at how much your spending can be trimmed without having a significant impact on your quality of life. Just getting conscious about spending reaps big rewards.

Some examples of savings that we make in order to live way below our means:

  • We drive a very economical car and combine trips where we can.
  • We shop at the cheapest supermarket in town, and we stock up when items we use are deeply discounted.
  • We borrow if we can; buy used if we can’t borrow; and buy wholesale if we can’t get it used. New from Ebay is next on the list, and retail is a last resort!
  • We live in a modest but charming home of about 1000 square feet.
  • We use CFL bulbs, no heating (we live in a temperate climate) and we’re pretty good at switching things off at the wall when they’re not in use.
  • We use cloth nappies and wipes (mostly).
  • We very rarely buy clothing new.

There are dozens of other areas in which we save, and maybe later I’ll put more of them into an article. For now, you just need to know that you need to get out there and learn how to get maximum value from every dollar, and to prune, prune, prune your spending.

How to make work VOLUNTARY Part One – Understand the formula of the Voluntary Worker

This is the exciting part of the Voluntary Work concept – turning paid work into an option rather than an imperative.

The formula is very simple.

In order for paid work to become optional, you need enough non-work income to comfortably cover your expenses. In a simple equation:
Non-work income > Expenses

I like the equation because it highlights that there are two sides to this – you can make the equation balance by reducing expenses, and by increasing your non-work income.

In my opinion, reducing expenses is by far the most important side of the equation, at least initially, as every dollar you DON’T spend is another dollar available to save or invest – that is, reducing expenses directly assists you in your goal of increasing income, as well as reducing the amount of non-work income you will need.

Here’s another equation, from Jacob at ERE. Here, Jacob has assumed a typical modern investment portfolio, which I don’t believe to be the best option. However, for the purposes of this discussion it will do fine. He explains at his blog that it is possible to stop paid work when you make this equation true in your life:
Annual expenses < 3% of invested savings
Please visit his blog for an explanation of the 3%, which some early retirement authors consider is actually more conservative than necessary (that is, they believe you can have a lower level of investments).

I actually prefer to say this one a different way.

If my expenses must be less than 3% of my invested savings, then my invested savings must be at least 33 times my annual expenses.

Following on from that, every thousand dollars that I prune from my annual expenses means I can cover them with $33,000 less in invested savings. And every thousand dollars I add to my annual spending means I need to save another $33,000 to cover it.

If I am using $20,000 every year to live, then I need $660,000 in invested savings to cover that with non-work income. If I am using $30,000 every year to live, I need $990,000 invested. If I am using only $10,000 per year, I only need $330,000 invested.

If this idea is new to you, I think it’s worthwhile reflecting on it for some time and considering the implications in your life.

A weekly meal out for $30 translates into roughly $1500 per year and therefore will require $50,000 in invested savings to cover it. A $20,000 car you replace every four years is costing you $5000 annually in depreciation alone – the savings ‘price tag’ is $165,000. Cutting your grocery bill by $10 weekly means an annual saving of $520 and therefore a reduction in invested savings of $17160.

I have a spreadsheet into which I entered all of the recurring expenses I could think of in our life, with the amount and the frequency – replacing the refrigerator, washing machine, car etc; groceries; medical; and so on. From this the spreadsheet calculates the cost per year for each item, and then multiplies that by 40 (I prefer a wider margin than Jacob uses) to show me the invested savings required to fund that item. I found this a very useful exercise, and can share it if people are interested. I always know within a couple of thousand dollars what we are spending annually, and I use that number often e.g. when evaluating investments.

This rule of thumb – ‘investments must be at least 40 times annual spending’ – is very handy and becomes interesting in a different way as your savings increase and your spending decreases. It’s fun to look at items and see how a one-time purchase can actually reduce the need for savings e.g. one pair of $200 boots that will last 10 years vs $50 boots that will last a year. Sometimes spending more can reduce your need for savings.

Looking at spending and income in these ways provides another lens through which to look at the financial world, and your spending.

More easy ratios to come in a future post on numbers for Voluntary Workers.

And in part two of this little series, I will expand on the other parts of the puzzle – frugality, debt, saving, investing and (of course!) working.

Work is good

My brain works pretty well but along simple lines. I’m not aiming in this article to say anything profound or to make a logical argument of the philosophical kind. However, I’ve noticed some things in my limited life experience that I think are important and generalisable to other people.

Modern living is a very long way from the real world
When human life is boiled down to the core elements – like it was for Robinson Crusoe – we need water, food and shelter or we will die. The extremely complicated world around us can blind us to the fact that, separated from all of our modern conveniences, we will die if we can’t eat, drink and protect ourselves from the elements. We may live in a welfare state, we may have people around us who would hate to see us perish, and we may not like sweat and blisters, but that doesn’t change reality. Even if we have a good chance of never having to truly fend for ourselves at any point in our entire lives, I think we should be mindful of just how basic and demanding our simplest needs really are. If there were no supermarkets, how would you get on? If you had to find and draw water, how and where would you do it? What if there were no cars and no internet and no fast food outlets? It wasn’t very long ago that our ancestors experienced life without these conveniences, and they achieved amazing things. How do we compare, really, sitting in front of computer screens or steering wheels all day? Trust me, when you increase your ability to function away from modern fanciness and frills, you feel better for it.

Doing hard work brings benefits
You get stronger and fitter, if it’s physical work (sorry, fellow knowledge workers, but contrary to the current pay pyramid that has paper shuffling on top, I think physical work is better for the worker). You build persistence and self-confidence. You make money or improve an asset or help someone out. You avoid paying someone else. You build relationships if you’re working with others. You make it easier for significant others to feel good about you. And you get better at doing hard work.

Working hard helps you on the path to becoming a Voluntary Worker 
You spend less, earn more, save more and – importantly – learn the value of a dollar. (I think that hard work does tend to help you to notice what’s fluff and what’s a waste of money, though there are plenty of physical workers who waste all of their spare income.) All of this adds up to rapid growth in assets and thus a quicker journey to having your investment income cover your living expenses, making your job something you choose to do and therefore something much more palatable.

Even forced work is good
Yes, it is, although Voluntary Work is better. Forced Work is still work, and thus preferable to not working at all. Remember, you’d die in the real world if you didn’t get off the couch, and if you don’t work you miss out on all of the benefits of work outlined above.  That’s quite aside from moral objections that can be raised against not working to support yourself when you are able to do so.

Working feels good
It feels great to relax at the end of a long day spent working. Food and drink taste better, sleep comes quickly and easily, and it’s extremely satisfying to look at what you’ve achieved. Consumption, whether it be eating at a restaurant or acquiring the latest gadget or going to the movies, just cannot give that deep sense of satisfaction.

What is a Voluntary Worker?

This blog is about Voluntary Work – the idea that work is good but that it’s much better to avoid HAVING to work to make ends meet. That’s what I call Forced Work.

Because of his financial position, the Voluntary Worker doesn’t need to work for money, but works nonetheless. He finds satisfaction in getting things done, and he savours the pleasantly-tired feeling at the end of the day that reminds him of his efforts that have left the world a slightly better place. And knowing that he didn’t HAVE to do that work to put food on the table makes it all the sweeter.

The Voluntary Worker can be flexible without having to worry about his next meal. If he really wanted to, he could study the habits of ants (inspiringly hard-working creatures that they are) for a day or a month, just for his own betterment. Just knowing that the work he’s doing is truly by choice gives him a sense of freedom and flexibility even though he may be doing hard or even unpleasant work. A pink slip might be undesirable but will not inconvenience him financially.

On the other hand, the Forced Worker must work for pay in order to survive. Job security is very important to him, he may feel that he is slipping behind financially even though he is working hard, life can feel like a grind, and he may not even be able to take holidays. A pink slip might mean financial catastrophe.

How does a man make the transition from Forced Worker to Voluntary Worker? Full posts on these topics to follow:

I’m a Voluntary Worker. We’re not ‘rich’ by Western standards, but my wife and I could live on the income from our investments for the rest of our lives, and on our present track our children would probably inherit more than we have now even if neither of us worked for money again. However, I work full-time, for pay – not because I need the money but because I enjoy what I’m doing, I want to get better at it, I have plans for some of the surplus we’re accumulating, and because I think that work is good. If I take a break from paid employment, as I have been doing for the last few months, I will still be working.

This blog is not about my personal story, although I will probably discuss it at times for illustration. I have been fortunate in many ways in my life, but I’ve never won the lottery or been given any money. I have not always liked work, and I have not always been frugal – and I did not become a Voluntary Worker until I improved in [not mastered] both of those areas. I still have a lot to learn about working and frugality, but I’m a long way from where I started.

We spend much less money than most people around us, but our standard of living is at least as high as most because we pay pretty close attention to how we spend our money (we don’t track our spending, though, and don’t really have a typical budget – we use a very simple form of envelope budgeting using and weekly transfers between online accounts). We are happy to live without frequent travel, expensive cars and a big house because they don’t appeal to us all that much and because even if they did we’d be willing to pass in return for the freedom we have.

What about people who do ‘volunteer work’? That’s great, but different. In my world, that makes you a volunteer. (I realise that the terminology will confuse some, but never mind!) Of course, some Voluntary Workers are volunteers too. However, they are called Voluntary Workers because paid employment is optional for them.

Perhaps a summary will be helpful:
If a man can support himself with his investments indefinitely but he still works, he is a Voluntary Worker.
If a man works because he cannot pay the bills otherwise, he is a Forced Worker.
If someone gives a man money to pay the bills, he is a Beneficiary. (Some people, through no fault of their own, are unable to work and would perish without support from others. I think people in this category should be supported if at all possible. I don’t believe that people capable of work should be allowed not to work. I do not plan to tackle the problem of unemployment on this blog.)

The inaugural post

I’d like to set out a clear description of the concept of Voluntary Work. I think I can do that best with a pinch of autobiography.

I came to appreciate the beauty of Voluntary Work recently, in my mid thirties, and I’m still learning. Before that, I’d been intrigued for various periods of time by trends that I broadly categorise as ‘anti-work’. A good percentage of internet traffic is generated by promises of lots of cash with little or no work, à la ‘The Secret’ and probably even worse. Move on, dear reader, and don’t dally there!

Tim Ferriss’ promise of a 4-Hour Work Week has become prominent and the book does have some interesting content. Even though Ferriss himself works a lot (on a computer or in meetings, at least), I think the overall flavour of the book and the community overlooks the virtue of work and sometimes glorifies idleness. Outsourcing everything is boring and weakens muscles we all should be developing – muscles of self-reliance.

Jacob from Early Retirement Extreme approached the issue as a mathematical problem, writing excellent articles on how a person could stop working after only a few years of saving 80% or more of their income (I prefer to reframe that as living on 20% of the income) as well as being generally anti-work (he never promoted hedonistic early retirement, however). Even though I enjoyed his writing and learned a lot from it, I struggled to get excited about his idea of a post-retirement life that seemed to me to comprise a lot of reading and web-surfing. Eventually he seemed to feel this too, and took on paid employment as what I call a Voluntary Worker. To be fair, Jacob does discuss in his book the virtues of being a Renaissance Man and he does place a fair amount of emphasis on the ability to avoid paying others for things by learning to do them oneself.

Mr Money Mustache (warning, some strong language – use a profanity filter if you like) is a newer voice in the personal finance wilderness. Jacob pointed readers there when he stopped blogging, and I’m pleased to have discovered the blog where MMM shares about his lifestyle of frugality and what I think of as ‘optimised spending’. I find him a thousand times more interesting and useful than the proliferation of vanilla personal finance blogs. He also touches on the virtue of hard work in some of his writing, and that got me thinking about and developing this idea of the Voluntary Worker. There’s a lot of good writing and commenting over at the MMM blog, but I felt there was a need for (swearing-free) discussion in more depth on the virtues of Voluntary Work. Hence this blog.

Returning to my own life for a minute might help draw out some of the concepts. In my mid and late twenties, before reading the 4-Hour Work Week, I experienced ‘retirement’ for a couple of years, living off a decent income I received passively and doing things like travelling and spending quite a lot of money. Overall, this time was empty and unfulfilling for me. I resumed paid employment at around 32 and I’ve been working since. Initially my living expenses were too high, though, and it was only after learning how to live frugally that I could really think of myself as a Voluntary Worker and learn to love the combination of freedom and good hard work. That freedom has allowed me to spend the last few months on ‘vacation’ producing a lot of sweat restoring our new old cottage to a livable standard. Some days of hard work feel very much like – well, hard work. But I’m seeing more and more the benefits of learning to put my head down and work at something strenuous, difficult or boring until it’s done.

Why am I writing? I think this blog will help me to clarify my thoughts on Voluntary Work and to learn to write better, and I’d like to get a few people thinking about the virtue of work, the evils of idleness, and the reality of Forced Work. One of the main reasons, though, is that I’m tired of hearing people talking as though Work is the chief evil in the world – something to be avoided at all costs, with the most ‘successful’ person being the one who spends the most time lying down. By that definition a man in a coma is doing pretty well, so there’s clearly something wrong with aiming for a life with no productive activity.

It may be that this blog ends up as a collection of a dozen or so essays. That’s fine by me, as I don’t want to feel compelled to create posts daily or weekly or even monthly. If you think you might be interested in what I’ve got to say in the future, please do subscribe but don’t feel cheated if another article is some time coming. I have lots of other things to do!