How one spends his life is as much a question of psychology as anything else. Several years ago, a friend of mine, Paul, was a partner in a large accounting firm. He made big money, but in order to maintain the image required of a partner, he had to spend big money. He needed a big house in a good area with a big mortgage, a prestigious car (actually two) and expensive suits. He had to entertain and keep up with the Joneses. He worked so hard and long to support the lifestyle necessitated by his success that he had no time for the things he really wanted to do.
So he sat down and did some arithmetic. He totaled how much he would collect by liquidating all his assets: the cars, the house, the pension, and the artwork. It came to $500,000. Was it enough to live the life he wanted?
Invested at 8 percent it would yield $40,000 a year, only about a third of what he was earning at the time. But he no longer would have to pay Social Security taxes, which are due only on “earned” income. He would not need auto, homeowners’ and similar insurance. He would no longer need to maintain his possessions and support gardeners, maids and mechanics. He would no longer have monstrous house and car payments. He and his wife would no longer have to keep up with the Joneses. And his income would be about twice what the average person made working full time. So he decided to quit his job. Instead of working for the capital he would let his capital work for him.
It was quite a shock. He had been raised with the idea that we are not supposed to do what we want to do before age 62 (retirement). And the concept that we are who we are, not what we do, took some getting used to. But he chose wisely.
In the years since, Paul and his wife, Vicki, have dropped out of the rat race, they have read everything they ever wanted to read, been everywhere they’ve ever wanted to go, and still do whatever they want to do. In his spare time Paul has written several novels and played a lot of chess and, in general, has been able to follow his desires.
In fact, Paul has more money now than he did when he retired, he is in better health, and he has had a lifetime of experiences he would never have gained if he had continued as an accountant in L.A. He spends a lot of time in Third World countries where the climate is good, the natives are friendly, and the cost of living is low. When he is in the US, he usually rents a place in the South where there are few jobs and prices reflect that fact. He doesn’t need a job but appreciates the low cost of living and the mellow lifestyle that can be found away from the economic mainstream.
Best of all, if he wants to go back to work, he can. But I doubt he will; he is having too much fun and doing too much to want back what he has already given up. More likely he will use a small part of his capital to do deals which interest him when his thoughts turn to money.
I have observed his lifestyle and those of several others who have done much the same thing. There is much to recommend it, especially when ostentatious wealth has the potential to bring the kind of attention you just don’t want.
The key concept (as I’ve mentioned in International Speculator) is not working for your possessions, but liquidating them so the capital they represent can work for you. Instead of making a $6,000 monthly mortgage payment on a $700,000 house in which you have $200,000 of equity, you would be better off putting the $6,000 in a money market fund each month and collecting another $15,000 per year in interest from the $200,000 equity that would be available if you sold the house. By the time you add in the car payments, taxes, insurance and the rest of it, you may find that your possessions own you and you are spending most of your time working for them, not yourself. It’s nice to have a lot of stuff, but it may be nicer to have a lot of income, great experiences, and a lot less stress.
Especially given the road we’ve now embarked upon. It’s entirely likely that we’re not in for mellow times, which makes it all the more important to pull back and reassess. And make changes in your life, not just your portfolio, while you’re still in charge, not some margin clerk – cosmic or otherwise.
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