saving

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Save the World by Building Your Wealth

Monday’s post listed the wide range of environmental challenges that threaten our livelihood over coming decades

The single best solution to this problem is reduced material consumption. Most see this as a painful sacrifice, while, in reality, it’s a great way to increase your quality of life. 

Today’s post discusses this claim from the viewpoint of personal wealth. 

The double benefit of financial responsibility

Obviously, consuming less stuff will allow you to save more money and earn your financial freedom at a younger age. But there’s another less well-recognized benefit. 

Less consumption does not mean less economic activity. Those who save money by consuming less generally invest this money in new endeavors, most of which will make the world a better place. 

In other words, investing instead of consuming redirects economic effort from producing and distributing wasteful consumer goods to producing and implementing solutions for a better tomorrow. 

A better life through less spending

Consumerism has conditioned us to continuously chase happiness through consumption. However, the human mind requires more sophisticated things than common consumption to be happy. 

Maslow’s classic pyramid of human needs illustrates this nicely. Clearly, material consumption is essential for the bottom two levels. But things become rather murky for the upper three. 

It’s easy to picture buying food, shelter, and security. But can you really buy love, esteem, and self-actualization? I think not. 

I recently published a longer article on this topic showing that less consumption will get you to the top of the pyramid much faster than more consumption. 

In that article, I outlined four beautiful aspects of less spending: the satisfaction of growing wealth, the fascinating challenge of smart lifestyle design, the joy of creative freedom, and self-expression through investment.  

The big five expenses

Smart lifestyle design deserves some additional mention in this post. To get the most bang for your lifestyle change buck, it’s wise to focus on the big five expenses: home, car, health, food, and kids. 

Master these five elements and their interesting interactions, and you will achieve huge savings without any sacrifice in life satisfaction. In fact, you’ll gain plenty of life from your reduced spending. 

Such zero-compromise reductions in consumption can go a long way towards saving the planet 🙂 

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Classic Wealth Advice

Welcome to the fourth chapter in the Supermorning series! Over the next month, we’ll be taking a somewhat unorthodox look at wealth.

This week will start us off fairly conventionally with investments in tangible assets. Next week will get a little more interesting, focusing on intangible asset investments. 

The final two weeks are reserved for the most interesting topics: how wealth influences personal liberty and how to invest in your own freedom and purpose. 

So, let’s get the ball rolling with some classic wealth advice: 

Start thy purse to fattening

This is the first cure for a lean purse from “The Richest Man in Babylon” – a wealth classic that everyone should read.  

The advice is ridiculously simple: everyone should divert a fraction of their income towards saving and investment.

Without this simple step any following wealth advice is useless. 

Luckily, modern banking makes it very easy to start thy purse to fattening 🙂

Make it automatic

Thanks to the hedonic treadmill, people will always be driven to spend as much as they can in the pointless pursuit of happiness through consumption.  

Luckily, you can trick your mind to get off this consumerist hamster wheel by artificially lowering your disposable income via automated investments. 

Setting this up in any modern banking system is very simple. Choosing the right assets to invest in is less simple though. This will be our focus for the rest of the week. 

Adjust as you go

This automatic investment regime should be tuned so that you can live comfortably with the remainder every month. It will take a little bit of trial and error to get this right, but making the adjustments via online banking is very simple. 

Then, as your income gradually rises, please make sure you stay off the hedonic treadmill! 

Gradually increasing your automatic savings rate so that your disposable income stays constant is the best and simplest way of doing this. 

Having wealth is fun!

Initially, limiting your disposable income may feel like self deprivation. But, as your investment portfolio steadily grows, you’ll find plenty of satisfaction just from being in control of these assets. 

Having wealth with which to buy genuine creative freedom for yourself and your loved-ones is even more fun. 

Of course, this fun can be cut short quite abruptly if you take too much risk and lose a lot of money.

Tomorrow, we’ll talk about ensuring that this does not happen to you. 

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Money Tracker

Following more than a decade of saving more than half my income, my personal finances are in a good place. And while I’m certainly not rich by any stretch of the imagination, I am financially free. 

Financial freedom means that you no longer need to work to sustain a lifestyle you genuinely enjoy. This milestone can be achieved either by becoming very rich or by building an enjoyable lifestyle that is very cheap.

My financial freedom comes largely from the second option, enabled by a simple life philosophy:

Sustainable happiness comes from the freedom to create what you want, not the freedom to consume what you want. 

In line with the well-known 4% rule, I achieved financial freedom at the start of this month when my net-worth exceeded 25 years of my annual living expenses for the first time (see below). 

From this starting point, I have resolved to put the 4% rule to the test in the real world.

So, starting on July, 1st 2019, my personal finances are split into two parts: 

  1. Daily living. This includes my current net-worth with the breakdown shown below. Hopefully, this wealth can sustain my lifestyle indefinitely. 
  2. Research fund. All my future income will go into a separate account for funding research on sustainable development. When this fund reaches a meaningful size in a couple of years, it will be tracked on a separate page together with the research it is financing. 

Over the next decade, I’ll live from increases in my home loan, leaving my stock portfolio to grow. This will gradually shift my overall asset allocation towards stocks to make it easier to achieve a long-term average return of 4%. 

Cutting off all my income is pretty scary, particularly at this time when most assets look rather overvalued. But I’m very interested to see if I can manage my wealth to prove that the 4% rule works.

I’m also highly motivated to get to a position where I can fund promising sustainability research. This will be a very direct commitment to my life philosophy mentioned above. 

I’ll keep a monthly tab on the developments in this interesting experiment. Let’s see how it turns out…