A Money Mystery
I have been unemployed for 10 months now and my net worth is greater today than it was when I quit my job. The purpose of this piece is to explain how that has happened.
First, I want to be clear about a few ways in which I did not make money. I did not receive any government money through unemployment nor from the stimulus checks. Unemployment money is not for people who quit their jobs voluntarily and the stimulus checks were not for people who made more than $99,000 in 2019. I have not had any paid job at any point in the last 10 months. I did not start a profitable business at any point during that time. I have not made any money from this blog. My only material source of income has been through the appreciation of investments that I have made on my own, but that is not the part the matters most.
The Water Bucket Analogy
What matters most is how I have kept from losing money.
To explain, let me introduce a simple analogy. Think about a bucket of water with a hose that fills it and a hole near the bottom where the water leaks out. The water in the bucket represents your money and the speed at which it leaks out of the hole is the speed at which your money is spent. Most people have a paying job. That’s the hose.
People want to increase their net worth over time and so naturally they think about how they can get more water faster from the hose. The better place to start, however, is to focus on limiting the leakage. People’s general focus on the hose rather than the hole is well demonstrated by the fact that anyone you ask will be able to tell you how much money they make by some unit of time but almost no one will be able to tell you the same in terms of their costs. They probably know the cost of their rent or mortgage payments and a number of other standalone expenses (by varying units of time) but very few will be able to tell you how much money they spend on an average day including their monthly, annual, and other periodic expenses spread out over the course of the respective period. I certainly could not have answered that question myself a year ago but doing so seemed like the sensible place to start.
Base Burn Rate
I knew when I quit my job in banking that in order to keep my cash burn in check I would need to get my expenses in order. I had turned the hose off so I needed to manage the hole. I started with my subscriptions (monthly and annual payments). I looked at the recurring expenses on my credit card and bank statements. I cancelled almost all of them. I had to add one significant one, health insurance, which my employer had been paying previously. I went with the second cheapest plan I could find from Horizon Blue Cross Blue Shield for $287/month. Next time I would instead go with the second cheapest plan from Oscar for $293/month because I like newer companies in broken industries and they tend to offer a better customer experience.
My next largest recurring payment was my phone bill. I went into the Verizon store and asked what the differences were between my current plan and the cheapest one I could possibly have. The only difference of any significance was the inability with the lower plan to use a hotspot. That infrequently used function was not nearly worth the ~$80/month difference in plans. I cut my phone bill in half to $78/month.
Below are the rest of my monthly and annual expenses as they stand today. As you will see, if I didn’t actively spend any money, these passive expenses alone would result in only a $15/day average burn. I call this my base burn rate. Note: this figure was closer to $60 when I was living in New York pre-covid (+ rent, WiFi, utilities) and between $30-$60 when I was traveling in Europe and Asia (+ hostels/Airbnbs), but right now I am fortunate to be living with my family for free.
Not bad right? It gets better…
I think about my investments in terms of three categories – crypto, stocks, and real estate. Real estate is unique among the three in that it pretty predictably generates cash flows each month. This is because our monthly rents collected from tenants are more than enough to cover the monthly mortgage payments, the cost of our property manager (10% of rent), and any necessary maintenance and/or repairs that she facilitates on our behalf over the course of a given month. Subtracting those expenses from the total rent collected each month and splitting the balance with my good friend and co-owner Kyle leaves me to expect $319/month (assuming the average amount of monthly repairs) which comes out to about $10/day. This is a far cry from the passive income of a real estate magnate but it is solid for a first property and not insignificant for me when it is the only dependable income that I have. Most importantly, this passive income offsets two-thirds of my base burn rate at the moment.
With my base burn rate and passive income figured out, I can calculate what I call my net base burn rate which in this case is equal to $5/day,
3 Basic Principles
After minimizing my base burn rate and estimating my passive income to calculate my net base burn rate, the next category I considered was comprised of the regularly re-occurring but variable expenses that cost me the most. This includes food, drinks, transportation, and entertainment. I came up with a few principles to help myself spend less in these areas. That said, I believe one of the best things money can buy is the ability not to have to worry about money so rather than force any hard rules upon myself I mostly just keep these principles in mind and try to be reasonable most of the time. Note: these principles were most applicable when I was traveling and then living in New York pre-covid.
- Food – don’t drink a lot at restaurants. You are there for the food and the company.
- Drinks – drink less and mostly at yours or friends’ places. The lower your tolerance, the cheaper the fun.
- Transportation – walk when you can. Subways are usually quicker and always cheaper than cars.
The goal is not to be watching your wallet all the time. It is to figure it out, then forget about it. Knowing my net base burn rate of $5/day leads to an annual burn of less than $2,000 allows me to live and spend confidently because I know if I ever want to slow my burn I can basically do so simply by doing nothing (therefore slowing my active spending). I don’t need to drink alcohol or go golfing and I could easily eat for a few dollars per day if I was willing to eat less healthfully and not go out for a while. Fortunately, I have not had to sacrifice any of these things. If I did have to, I know that I could, but I would probably just go and get a job at that point and realistically well before that point ever came.
In order to quit my job in the first place, I had to be willing to endure some level of burn in exchange for the freedom of time that I was buying for myself. I was confident that I could offset some of it with my investments in crypto and stocks, and the non- cash flow part of my real estate investment (the appreciation of the value of my equity in the property). Never would I have anticipated what has happened to date. I am pleased to say that between Bitcoin’s surge this week, Amazon’s last month, the appreciation of my Kentucky property’s value, and some other smaller stock and crypto investments along the way, my investments have now offset the entirety of my burn over the last 10 months. My net worth is slightly greater today than it was the day I quit my job, and it is not because I’ve been a hermit or lived a miserably frugal life. Quite the contrary. I traveled the world for a few months, had a four-month lease in New York City and stayed in a couple hotels before that, got a month-long Airbnb in Georgia with Lauren, have eaten well, been golfing a lot lately, and the list goes on. Not every day is roses. I would be skeptical of anyone who says that is the case. But I have not often if ever but rarely felt restrained moneywise. I have been enjoying my time quite a bit.
When I quit my job, I figured I would burn a good chunk of my savings in a few months and expected I would feel the need to get a job after several if not before then. I thought it would be well worthwhile to burn that money in exchange for the time that I would buy for myself to do whatever I wanted. I was right in the sense that this time has proven valuable to me but wrong in another. It hasn’t cost me a dime.