Chapter 9 from 1992 edition

(From the original 1992 hardback.)

Step 9: Managing Your Finances


This step will help you become knowledgeable and sophisticated about long-term income-producing investments and manage your finances for a safe, steady and sufficient income for the rest of your life.


This chapter contains the nuts and bolts of an investment program for FI-Financial Integrity, Financial Intelligence and Financial Independence. This investment program will allow you to have a secure and consistent income, sufficient to cover the basic necessities of your chosen life-style, for the rest of your life. The information is based on coauthor Joe’s insider’s view of the Wall Street investment game, on his personal research for hi = Financial Independence and on both P of our post-FI experiences. e fact that more than twenty years after our FI dates we each still have a safe, steady income, equal to our individual needs, is proof that this investment program works. Further proof is the experience of many others who have also “survived” the excesses of the outrageous 1980s with their FI income intact and consistently sufficient.


This chapter is written for the novice, but the investment dabblers as well as the pros will also find much information worth thinking about.




One of our primary missions in this book is empowerment-allowing you to take back the power that you have inadvertently given over to money. As we will see later, this includes the power you have turned over to various financial “experts,” to external circumstances and to financial beliefs and concepts.


You have, throughout this program, been urged to become intimate, comfortable, and at peace in your relationship with money (life energy). Now you’re ready for the final step: learning a bit about the world of investments.


No, this does not mean readopting the “more is better” mentality and learning how to “make a killing” with your capital. Having followed the steps of this program, you know how much is enough for you, and the purpose of your investment program will be to assure yourself that you will have that amount-and then some-for the rest of your life.


Nor does this mean entering the world of macroeconomics, the great debates conducted (but never concluded) by somber economists around the world. It does not mean being able to discuss the theories of supply-siders, monetarists, fiscalists, business-cyclers and their many brethren. There is an old saying, “If you get ten economists together, you will get fifteen different opinions.” If these Knights of the Dismal Science can’t agree among themselves, why should you confuse yourself with trying to understand their econobabble?


Becoming “knowledgeable and sophisticated” does mean learning enough so that you can free yourself from the fear and confusion (or pride and prejudice) that pervade the realm of personal investments. The principles and financial strategies outlined in this chapter are safe, sensible and simple. They are also very inexpensive to implement an – not require extensive financial management or expertise. B g e majority of Americans have no cohesive investment plan.


(According to the New York Stock Exchange, 79 percent of the population avoids even heavily marketed products like mutual funds and stocks.) For these many Americans who, through fear, prejudice or long professional experience, see Wall Street as a suburb of Las Vegas, there is a clear need for self-empowerment and development of a safe way to manage their capital that keeps to a minimum costs, complexities and risks.


Nothing in this section is to be construed as specific investment advice. The information here, like that in the rest of this book, is based on personal experience and is intended as guidelines, principles and educational data.


Don’t Leave It to the Experts


So how do you become knowledgeable and sophisticated about long-term, income-producing investments? The strategy most newcomers to the world of investing would adopt is to go to the “experts.” After all, if you go to a doctor when you’re sick and a mechanic when your car breaks down, it stands to reason that when you have money to invest, you go to a financial expert. Right? Wrong.


Step 9 is about empowering yourself to make wise financial choices, and your first lesson involves educating yourself so as not to fall prey to unscrupulous brokers, financial planners and salespeople who want to put you into all manner of investment vehicles that pay them handsome commissions.


Securities brokers have gone by different titles over the years: customer’s man, registered representative (regrep), account executive, financial consultant. They all mean the same thing: salesperson. In the majority of cases, their earnings come from commissions. To make a commission they have to sell you a product. They also make a commission when they talk you into getting rid of the product-whether or not you have made a profit. Some products generate much larger commissions than others. Some products are far more profitable to the salesperson’s employer than others. The salesperson may be expected to generate a quota of commissions.


Being an intelligent person, you might realize that such an arrangement may not be geared to your best interests. So you search out an independent “financial planner.” Then you read something like the following item from The Wall Street Journal:




Some of the questions planners are debating:


+ Should planners be required to place clients’ interests ahead of their own in all circumstances?


+ Should planners be required to solve clients’ problems through “appropriate financial procedures,” such as suggesting they pay off debt, before recommending financial products?


+ Should planners be required to disclose how much compensation they will receive if clients buy products they recommend?


If this doesn’t scare you away from depending on the advice of financial planners, try comparing this debate on a code of conduct with one that surely happened as purveyors of snake oil evolved into the pharmacists of today. Imagine them challenging the correctness of their established practices, like . . .


+ Should snake oil salesmen be required to place the patients’ needs ahead of their own in all circumstances? In selecting a snake oil, should we give the amount of profit less or more weight than what will be beneficial to the patient?


+ In the event that bed rest is all that is needed, should snake oil salesmen be required to recommend that over the possibility of selling several bottles of worthless tonic?


In other words, why are these questions being debated by financial planners? Aren’t they obvious ethical principles? No, we are not implying that investment intermediaries are dishonest. We are pointing out that you are the only person with no stake in the transaction other than your own.


Andrew Tobias, in his 1978 best-seller The Only Investment Guide You ’11 Ever Need, puts it this way: “By and large you should manage your own money. No one is going to care about it as much as you.”


And, in his 1987 best-seller The Only Other Investment Guide You’ll Ever Need, he puts it even more strongly: “Trust no one. You’ve got to take responsibility for your own affairs.”


Herbert Ringold, author of How to Lose Money in the Stock Market, is equally firm:


Repeat after me:

A broker is a salesman.

A broker is a salesman.

A broker is a salesman.


The broker is not the Delphic Oracle. He is closer to being nothing more than a high-class tout, if you really want to know the truth.


So if you shouldn’t rely on the experts to guide you, does that mean you can rely totally on yourself? Probably not. The market is a game where traditionally the insiders, the pros, win and the little guys lose. You wouldn’t think of getting into a professional boxing ring without knowledge of the art of boxing and the rules of the sport, as well as a manager and a trainer. You wouldn’t think of engaging in a high-stakes game of poker without sufficient disposable capital, an extensive knowledge of probability theory and a good measure of apprenticeship.


So there you have the paradox: it would be wisest for you to manage your own investments, empower yourself to make decisions and use a broker only for the mechanics that brokers are best suited for-simply executing your buy and sell orders. But it’s as much as your life is worth, or at least your shirt, to enter the complex world of investing alone. There are innumerable investment “vehicles,” “products,” “derivatives” and “instruments.” The old standbys, “stocks and bonds,” have evolved, multiplied, mutated and transmogrified into an assortment as varied and complex as children’s sidewalk games. Their names, terms, nicknames and acronyms are legion: Nikkei puts, pork bellies, Fannie Maes, front loads, closed end, triple witching, GIC’s, stripped securities, naked options, Ritzies-ad infinitum.


How can you apply Step 9, becoming “knowledgeable and sophisticated,” under such contradictory conditions? Since investing our hard-earned capital is a vital part of this program (mattresses produce income for only a small part of the population) there must be some way around this quandary. There is, but you won’t believe it until we discuss this obstacle to successfully completing Step 9: your belief system about investing.


Dispelling Fears


Like your assumptions about money and about work, your beliefs about investing have probably been pieced together from media hype, the opinions of coworkers, the advice you got from Uncle Harry (“Buy low, sell high, kid”), randomly generated successes and failures and sundry other unreliable sources. To pierce through these confusions and prejudices you need only recognize that most beliefs about investing rest on two primary driving forces: greed and fear.


We hope you’ve encountered and tamed your greed through applying the first eight steps of this program. You know, through experience, that more is not necessarily better, while “enough” is both supremely fulfilling and achievable. Indeed, the successful pros on Wall Street have discovered the same truth, which they state as “Be a bull or a bear, but never a hog!”


The Biggest Fear: Will I Have Enough Tomorrow?


Step 9 addresses the fear that so often underlies economic decisions. One of our biggest fears is fear of the unknown. The biggest unknown is the future. The biggest financial unknown in the future is: “Will I continue to have enough money over time?”


How do you whittle this fear down to size and transform it into appropriate prudence?


1. Through applying the investment criteria we will be suggesting. 2. Through establishing a reserve according to the guidelines we will be offering. 3. Through dispelling the irrational fear of inflation.


The social disease of the 1950s was fear of depression. Back then, frugality and thrift were still our bedrock, and “A penny saved is a penny earned” and “Waste not, want not” were still mainstays of early childhood education. We enjoyed but didn’t trust our newfound affluence. We can now look back on that era and see how that irrational fear of depression blinded us to what we currently celebrate as the “good old days.” Similarly, this generation’s social disease, the morbid fear of inflation, has blinded us to some basic truths and has greatly distorted our perceptions. The financial industry has been quick to capitalize on this pervasive paranoia-with the resulting proliferation of the many dubious “investment” vehicles mentioned above and the upsurge of rampant debt that has been bringing down many of our institutions and producing the highest bankruptcy rates our nation has ever seen.




To begin to find our way out of the investment maze, we must first shed some light on that demon “inflation,” which sets the context for so much of the current investment philosophy.


Are our Fears of Inflation Inflated?


Inflation is measured by the Bureau of Labor Statistics and presented as the Consumer Price Index, or CPI. The CPI is an index of the changes in prices of a fixed list of products and services when compared to the prices of those items during the reference base year. The prices are weighted according to consumer preferences, as shown in the base period’s Consumer Expenditure Survey. (For example, if during the reference base period the consumers surveyed bought steak twice as often as chicken, steak was given a weight of 2 and chicken a weight of 1.)


In 1970 the Consumer Price Index was 38.8. In 1990 it stood at 129.9.


Here’s a quiz. Given these figures, how can it be true that


1. In 1970 it cost a family of four about $15 to $20 to go to a movie, if you include the drive and the theater popcorn and soda. In 1990 the cost of a movie and trimmings can be $4.


2. In 1970 the typewriter to write a book cost $247.99. In 1990 a far more sophisticated machine cost $100 and a “word processing” machine with 16k memory cost $239.99.


3. In 1970 Joe’s three-speed English touring bicycle cost $100. In 1990 an excellent ten-speed cost him $50.


4. In 1970 Joe’s usual lunch cost something in the vicinity of $2. In 1990 Joe’s usual lunch cost $.60-and was much more healthful.


5. In 1970 Joe spent $299.25 on gasoline. In 1990 Joe spent $177.31 on gasoline.


6. In 1970 the tape recorder Joe bought to tape music from FM radio cost $750. In 1990 Joe got much better sound from his $90 recorder.


Take a moment to reflect. These numbers are accurate. There are no misprints. How can this be? What else might have changed to offset the CPI?


Let’s take a look at some more reality. The following prices are gleaned from the spring-summer 1970 Sears Roebuck catalog and from 1970 Seattle Times newspaper advertisements. The 1991 prices are documented sale prices found through using the careful shopping techniques discussed in Chapter 6 (items 50 to 67). Products are as comparable as we can find, considering the many technological advances that have occurred in those twenty years.


Chicken, price/lb.
Ham, price/lb.
Turkey, whole/lb.
Eggs, price/dozen
Potatoes, 10 lb.
Tomatoes, price/lb.
Flour, 10 lb.
Bread, 22.5-ounce loaf
Margarine, 1 pound
Mattress, twin
Electric heater
Garbage disposer, %-hp
Smoke alarm
Garage door opener
Tools and maintenance
Circular saw, 7-inch, 2-hp
Electric chain saw, 14-inch
Tires, 225175R15, 40,000-mile warranty 62.33 31.30
Auto floor jack, 1.5-ton 120.00 43.50
Auto ramps, 2.5-ton 44.29 33.29
Entertainment and hobbies
Sewing machine
Color TV, 18-20-inch
Basketball backboard
BIC ballpoint pen, fine-price/dozen 2.49 .89
Adding machine with multiply function
[199 1 has all functions] 177.95 29.87
Long-distance phone call, daytime, from New
York to Los Angeles 4.50 2.50
The Consumer Price Index (CPI) is not a “cost of living” index, no matter how often it is referred to as that. It is a list of prices for specific goods and services. It assumes that the same items are bought regularly. It does not account for the fact that you do not buy a new refrigerator every month or every year, or for the fact that today’s appliance is much more energy-efficient and has many more features than its predecessor and if carefully selected can last longer. It cannot account for the fact that yesteryear’s top-of-the-line model is bested in all ways by today’s “economy” model.


The CPI does not account for changing buying habits after the base period. Prices of everyday commodities fluctuate. A freeze in Florida sends the price of orange juice skyrocketing, while simultaneously a bumper crop of apples makes the price of apple juice plummet. The rational shopper switches to apple juice. The CPI does not. An automobile today is a marvel of technological advances. Corrosion resistance, greater durability, reduced maintenance requirements, electronic ignition 60,000-mile steel-belted radial tires, a seven-year warranty and three to four times the miles per gallon of cars of twenty years ago-how do you make a comparison?


As prices of travel and hotels soared, people discovered the joys of unhurried camping trips and simple vacations close to home (as any besieged National Park ranger can readily attest). How did the CPI handle that?


To expand on some figures we cited in Chapter 6, the 1989 price of a 4-bedroom, 2%-bath, 2,200-square-foot house had risen to $382,000 in Westchester County, New York; $418,333 in Wellesley, Massachusetts; $388,500 in Wilmette, Illinois. The same house in Corpus Christi, Texas, was $81,666; in Boise, Idaho, it was $82,667; in Fort Wayne, Indiana, it was $97,250. How does the CPI account for our very mobile society? Or for the many lovely towns with clean air all over the United States that are becoming ghost towns offering outrageous real-estate bargains simply because the yuppie ethos required migration to overpriced urban areas? In addition, look at the number of houses sitting empty-second homes, summer homes, vacation homes, abandoned homes. The Nightly Business Report, a daily PBS program, tells us that according to the Bureau of the Census, one of every ten houses in the United States is vacant; Vermont is highest with 22 percent vacant.


Health care and health insurance costs have increased enormously. Equally enormous has been the increase in our knowledge of how to prevent disease. We have had convincing evidence as to the ill effects on health of cigarette smoking, obesity, stress, cholesterol, saturated fats and other nutritional factors, pollution, alcohol and drug abuse, carcinogens, lack of exercise and overexposure to sunlight. While the cost of each doctor visit might be higher, we can choose to make far fewer of them thanks to the life-style choices we make. The CPI can’t figure that in.


In 1970 staying trim and fit meant doing your own yard work mowing your lawn with a human-powered mower and raking leaves. In 1990 it required a health club membership and a $300 ergono-metric stationary bicycle-and these for the person who also has a 12- horsepower riding mower and a 140-decibel leaf blower.


Is Inflation a Belief or an Experience?


As the standard of living has risen, so has the standard for a rising standard of living. Once, we were well-to-do if we didn’t have to borrow our neighbor’s push mower; now we feel poor if we don’t have a riding mower. (You may recall John Stuart Mill’s insight that we don’t want to be rich, just richer than others.) In other words, we have excelled at creating our own experience of inflation-apart from the CPI numbers.


Let’s say that in the past few years you acquired your basic “durable goods M-home, car, appliances, furnishings and essential wardrobe. Let’s also say that through careful research (see Chapter 6) you bought for durability, repairability, utility and flexibility. Wouldn’t your overall expenses be significantly lower for the next decade than they were for the previous one? (Unless, of course, you just had to have that latest version or current fad.) Joe has sometimes been chided for buying multiple pairs of khaki pants on sale and wearing them for a decade or more, but he’s in excellent company. It took consumer advocate Ralph Nader “twenty-five years to wear out the dozen pairs of Army shoes he bought at the PX for $6 a pair when he got out of the service in 1959.”


Let’s say that somehow you were given more time in your week. And that during that newfound time you read a couple of home repair manuals and your car’s maintenance schedule (or went as far as taking an auto repair course at a local community college), and even found it enjoyable and empowering to “do it yourself.” Isn’t it very likely that your annual expenses would go down?


Similarly, let’s say that you saw the wisdom (personal and planetary) of biking rather than driving, or of living closer to your job or of carpooling. Again, isn’t it likely that your annual expenses would go down?


Let’s say that rather than going down to your local bike store and buying the latest $600 “mountain bike-the eco-yuppie’s BMW complete with bologna tires, chrome-moly-magcitrate frame, twenty seven forward and twelve reverse gears and hydro-turbo derailleurs, you instead looked under “Bicycles for Sale, Used” in your local Dandy Dime, Thrifty Nickel or Penny Saver. And there you saw listing after listing of yesteryear’s fabulous ten-speed bikes, now out of fashion-and as little used as today’s fad will be in a year or so-for $50. Wouldn’t you be saving yourself a bundle, even when compared with costs twenty years ago?


Let’s say that time-and-space-shifting TV movies turned out to work for you. In other words, instead of fighting the crowds to see the latest first-run movie on a big screen from a long distance away, you watched it a few months later, on a small screen but much closer up, in a much quieter setting, with lots of much cheaper popcorn. Isn’t it likely that your annual entertainment budget would diminish?


Let’s say that instead of hurriedly gobbling down the pastrami on rye with the side order of french fries at the crowded deli across from the office (as Joe claims he did for all his Wall Street years-and his cardiologist backs him up), you brown-bagged a healthful lunch to eat leisurely in the little park across from the office. Isn’t it likely that your annual expenses-as well as your lifetime expenses-would go down? Might it be that at least part of our experience of “inflation” is due to unconscious and automatic habits as well as to our chosen life-style? Having a car is a life-style choice; using it for nearby errands may be simply a habit. Buying soda from the pop machine at work, just because it’s there, rather than buying it at the supermarket for a fraction of the price, may be a habit.


None of this is to say that there hasn’t been real inflation, even without the distortions of the CPI. The prices of auto insurance, hospital rooms, prescription drugs, higher education and hundreds of other items have skyrocketed. Yet, despite higher prices in these areas, please notice the enormous increase in multiple-car families, documented overuse of prescription drugs and the unfounded assumption that an expensive private college provides a better overall education than a state university. These items represent choices, not necessities. On the other side of the coin, some of the higher costs are balanced by advanced technology or better service so that overall costs stay the same. An example of this might be improved outpatient and surgical techniques that reduce the number of days you need to be hospitalized.


“Inflation Hedges”?


Many brokers assert that one or another investment product has historically been a good hedge against inflation. More objective observers challenge those conclusions. Here are some facts:


Stocks and their high-cost, fancy consumer-package version, mutual funds, are often touted as one such inflation hedge. In the decade between 1964 and 1974 the CPI rose steeply and almost continuously- while the Dow-Jones Industrial Average entered 1964 at 766 and ended 1974 at 616. This means that the value of many stock-based investments, such as mutual funds, actually fell. Similarly, it has been shown that the DJIA, convened to inflation-adjusted “constant dollars,” was lower at the end of 1990 than it was at its 1929 peak.


In How to Lose Money in the Stock Market Herbert Ringold points out:


In its September 16, 1985 issue, Forbes magazine listed 329 mutual funds whose records it had tracked for the most recent eight and a half years-from 1976 through the first six months of 1985.


The average for all the 329 funds was a gain of 14.39% over the indicated period. That works out to 1.22% a year! You would have done much better by putting your money in a bank passbook account.


And there are other ways of generating income, as the following comment from The Wall Street Journal suggests: “Farmers matched Wall Street and mutual funds on annual rate of return from 1960 to 1988, according to a University of Minnesota survey.” (Appropriate application of organic manure may be more of an inflation hedge than the Wall Street variety.)


Real estate has been a central “inflation hedge” for many people-people who lost thousands of dollars in the depressed 1991 real estate market. From Boston to Seattle, people are lowering their asking price to unload property that they bought at inflated prices in the 1980s when everybody knew that “real estate never goes down.” The fact remains that there is no guaranteed way to stay ahead of the Consumer Price Index. One decade’s financial fad will be the next decade’s fiscal flop-and that can be very costly to your hard-earned capital.


In summary:


+ While “inflation” may be a valid macroeconomic concept, this does not mean that it automatically rules your life.

+ Your choices, attitudes, beliefs, habits, tastes, fears and desires have the ultimate effect on your bottom line.

+ Consciousness is defined as the faculty of knowing what affects your mind or what goes on in your mind.

+ Consciousness can grow faster than inflation.

+ No investment product or program is a guaranteed hedge against inflation. Consciousness is.


Now you’re beginning to see that two common assumptions about money management-that you’re better off hiring an “expert” and that your first consideration should be inflation-may not be true. Now you’re ready for Step 9-smart investment and Financial Independence.




The basic FI investment program has three elements: Capital: The sum that is invested in the safest possible long-term interest-bearing vehicles, ultimately producing at least as much income as indicated by the Crossover Point of Chapter 8.


Cushion: A cash reserve, in insured savings or interest-bearing checking accounts that is enough to cover your expenses for six months. The purpose of the cushion is to handle emergencies and to smooth out cash needs to handle surges in expenses (annual health or auto insurance payment) and to cover deductibles and coinsurance liabilities in insurance.


Cache: Your continuing savings habit made manifest. (Cache may come as a surprise to many FIers.) Believe it or not, you can continue to save money after FI.


Early in your FI process, as soon as your savings have surpassed the amount you have determined to be a comfortable cushion, you can begin transferring monies into long-term investments such as those described in the following pages-thus creating your income-producing capital.


A good way to begin to become “knowledgeable and sophisticated” is by determining what type of account to use for holding your cushion as well as the money that is accumulating, waiting to be invested. Compare the advantages of federally insured savings accounts, insured interest-paying checking accounts and the “cash management accounts” that are run by the large brokerage houses. The last is a brokerage account that includes check-writing, a “debit card” (like a credit card except that it automatically draws on funds in your account rather than sending you a bill), weekly “sweeps” of your excess funds into a money market fund until you are ready to invest and monthly statements of all your transactions and investment positions. While there is an annual fee for this all-in-one account, it may be that the higher interest gained from the money market fund (as compared with a savings account or interest-bearing checking account) makes the annual charge worth it.




Whether we are defining “Financial Independence” as being out of debt, with enough savings to withstand economic downturns, or as a full-fledged “early retirement” that makes it possible to devote yourself full-time to whatever is most meaningful to you, the following criteria apply to whatever you do with your capital:

1. Your capital must produce income.

2. Your capital must be absolutely safe.

3. Your capital must be in a totally liquid investment. You must be able to convert it into cash at a moment’s notice, to handle emergencies.

4. Your capital must not be diminished at the time of investment by unnecessary commissions, “loads,” “promotional” or “distribution” expenses (often called “12b- 1 fees”), management fees or expense fees.

5. Your income must be absolutely safe.

6. Your income must not fluctuate. You must know exactly what your income will be next month, next year and twenty years from now.

7. Your income must be payable to you, in cash, at regular intervals; it must not be accrued, deferred, automatically reinvested, etc. You want complete control.

8. Your income must not be diminished by charges, management fees, redemption fees, etc.

9. The investment must produce this regular, fixed, known income without any further involvement or expense on your part. It must not require maintenance, management, geographic presence or attention due to “acts of God.”


The reasoning behind this list of investment criteria has been made clear by the preceding chapters, especially Chapter 8. You are not using your hard-earned capital to speculate, to parlay into more capital or to try to get rich quick. You simply want it to provide you with a safe, steady income you can count on. You don’t want to have to worry (at least about your own financial security) if there is a recession or a depression, if joblessness rises or if the Dow breaks above 4000 or below 1000.


As a lawyer, Ned Norris is trained to look at all the angles and to investigate loopholes. Both the media and office chatter led him to wonder whether the pundits and prognosticators might be right when they warned that he would need twice the income in ten or twenty years to have the same buying power-even though his experience told him that his consciousness was indeed growing faster than inflation. Shouldn’t he build an “inflation hedge” into his investment program? “Why just believe Joe Dominguez?” he thought. “Check it out yourself:” He did some research and came up with a hot investment newsletter that had all sorts of insider information. Soon he was spending hours mentally buying and selling securities-and then following the market to see how his dream investments were doing. Every newsletter added a new twist and sent him back to the drawing board. This fascination lasted four to five months, absorbing most of his non-job life energy. Then he woke up. “If these guys who write the newsletter are so smart, how come they aren’t so rich that they don’t have to write a newsletter for suckers like me?” he asked. “The purpose of the newsletter is to get me addicted to the newsletter, not to help me establish a safe, secure income for life.” He let go of the obsession with speculation and returned to relying on his own experience and on the criteria outlined in this chapter. He got back his peace of mind.


Safety is the key factor in any investment program designed to sustain a financially independent life-style. You do not want to trade your nine-to- five job for the round-the-clock job of worrying about how the stock market is doing, or if Zilch Corp. is cutting its dividend, or if Whoops bonds will default, or if the Inveterate Ecomyopic Movement will sabotage your wind power partnership, or if your Cosmic Oneness Interspecies Mutual Fund is a front for some cult, or if your venture capital is venturing capital to maintain someone’s cocaine habit.


This list of criteria automatically eliminates most of today’s popular speculations and investments. Stocks and stock mutual funds do not provide the safety of capital or the absolute safety and consistency of income that you require. Income from money market funds fluctuates dramatically according to the gyrations of short-term interest rates. Bond funds expose you to default risks in varying degrees. All of the above diminish your capital and even your income with numerous charges (failing to meet criteria 4 and 8). Bank certificates of deposit, while safe if issued by a federally insured bank, have maturities that are far too short-you would have to reinvest your capital too soon, exposing you to the risk of much lower interest rates at the time of maturity. Even a supposedly conservative investment like real estate is excluded, with the possible exception of your primary dwelling.


Only one category of investment vehicle fits the criteria perfectly: long-term U.S. treasury and U.S. government agency bonds. Note: Citizens of countries other than the United States should investigate their own nation’s government bonds. While it is possible to buy U.S. treasury and government bonds almost anywhere in the world, the fluctuations in currency exchange rates would make their interest income too unstable to meet the criteria for an FI investment program.


Herein lies the solution to the paradox that we discussed at the end of the section “Empower Yourself”: You do not have to become an expert in the entire realm of speculation and investment. You can focus on one small segment that meets your criteria perfectly- U.S. treasury and agency bonds.


Many books deal with treasury and agency bonds. We strongly suggest that you read Treasury Securities by Donald R. Nichols. If your library doesn’t have it, try Understanding Treasury Bills and Other U.S. Government Securities by Arnold Corrigan and Phyllis C. Kaufman. While the information that follows can get you started, it is not intended to provide you with the kind of comprehensive education you will want in order to feel knowledgeable and sophisticated about long-term income-producing investments.


A Primer on Government Bonds


A bond is simply an IOU. The bond issuer promises to pay back to the holder of the bond the amount printed on the bond (face value) by a certain date (the maturity date). Most bonds also pay interest, at a specific percentage rate (coupon rate). This amount, though quoted as an annual percentage rate, is usually paid in two semiannual installments.


Most bonds can be bought and sold at any time (they are negotiable, or marketable) through banks and brokers. (The original issuer has nothing to do with the subsequent purchases and sales of the bond other than to send the semiannual interest check to the current holder.) Bond prices fluctuate with prevailing interest rates. Therefore, if you sell a bond before maturity, you may get more or less than you paid for it (market risk). If you hold it to maturity you will receive exactly its face value, regardless of the interest rates prevailing at that time.


U.S. treasury bonds and U.S. government agency bonds are considered by experts to be the highest-quality, safest interest-bearing investments in the world. (Note: These are not the same as the old familiar Series E or Series H U.S. savings bonds, which do not provide the long-term high interest that you will need to make the FI program work for you.)


U.S. treasury bonds are particularly suited to a Financial Independence investment program; following is a list of their advantages:


Greatest safety of capital.


Greatest safety of interest-“full faith and credit of the U.S. government” guarantee as to principal and interest.


Exemption from state and local taxes.


Noncallability (most can’t be redeemed early by the issuer).


Greatest negotiability, absolute liquidity, global marketability. They can be bought and sold almost instantly, with minimal handling charges and in convenient denominations (such as $1,000, $5,000 and $10,000).


Easiest availability-directly from the federal government (Treasury Direct) and through most brokers and many banks, anywhere in the world.


Cheapest availability-no middlemen, no commissions, no loads.


Duration-the range of maturities available is extensive; you can buy a note or bond that will mature in a few months or one that won’t come due for thirty years.


Absolute stability of income over the long run-ideal for FI. Avoids the income fluctuations that would occur with money market funds, rental real estate, etc.


The two risks posed by treasury and agency securities are market risk and reinvestment risk. Fortunately, both of these are relatively negligible in terms of the FI investment plan. Market risk-the fluctuation in the price of the bond between the time of issuance and the time of maturity-does not concern you, since you plan to hold the bond until maturity, and your income is totally unaffected by those fluctuations. Reinvestment risk refers to the possibility that interest rates will be considerably lower at the time your bond matures, and thus you will not be able to get the same income when you reinvest the proceeds. To avoid this problem you buy the longest possible bonds (thirty years and over). In addition, if you follow the bond market over time (intelligently, not compulsively) you will see wonderful opportunities to extend the maturity of your portfolio while maintaining (or even increasing) your income level. These bond-swapping techniques are based on the fact that if prevailing interest rates drop, your yet-to-mature high-coupon bonds will increase in market price proportionally. A $10,000, 8.5 percent bond you bought at “par” (face value) might be worth $11,000 if interest rates sink to 7.75 percent. This larger amount of capital can be reinvested at lower coupon rates, with the effect of essentially maintaining the overall income level. Don’t confuse this with Ned Norris’s temporary obsession with investing and speculation, however. It is rare that you will need to do this sort of bond swap.


And speaking about fluctuating interest rates, we must note that, due to the profligate spending of both government and individuals, interest rates on long-term treasury and agency bonds have been at abnormally high levels. For most of this century, up until the late 1960s, interest rates were under 5 percent. Since their peak in 1981, long-term interest rates have been wending their way back down toward their historical norms. You did not need to catch the bond market at those abnormal highs in order to reach FI. Even at 5 or 6 percent, this program will work.


In 1969, when Joe reached FI, his capital was invested in bonds with interest averaging 6.85 percent and maturities extending into the 1990s. Through a few judicious bond swaps, and with no income other than the income from the bonds, his portfolio now has an average yield of 9.85 percent and maturities extending to the year 2007 on average. And most important, his bond income has always been more than sufficient for his needs, in spite of the supposedly huge inflation of the period.


Treasury and Agency Bonds: What They Are and How They Work


Our federal government has two basic ways to raise money: taxation and borrowing. Thus, when government spending exceeds current tax income, it has only two choices: increase taxes or borrow more. (Obviously, our government does not adhere to the principles espoused in this book of spending less than you earn.)


Treasury securities are the government’s way of borrowing money. A new bond is issued every few months, with maturity dates ten, twenty, and thirty years into the future. The first thing that each new issue does is pay off the holders of old issues coming due. The remaining monies are used to make up the deficit in the federal budget. The national debt is the most senior obligation the government has-principal and interest on treasury securities must be paid when they come due, before paying for anything else. Not to do so would destroy the “credit rating” of the U.S. government in world markets, wreaking havoc with our ability to do business and greasing our slide into the status of a Third World nation.


In recent years the interest due annually on the public debt has been greater than the total deficit, so all monies borrowed by the treasury go either to paying off the principal that is coming due or to paying the interest that is coming due on the remaining debt.


Treasury bonds are sold by auction. The total amount of bonds to be issued is preset by the government’s financial needs-not by the demand, or lack of demand, for the bonds. Simply stated, the interest rate on an issue is raised until a level is found at which the entire issue is bought.


The bond issue is bought by all kinds of businesses-banks, insurance companies, brokers, mutual funds, pension and retirement funds, credit unions, large and small companies-and by individuals.


Money paid for a treasury bond goes to the treasury only when that bond is originally issued. After the date of issuance, and for the rest of the life of that bond, the bond is bought and sold on the “secondary market,” by individuals-the monies trading hands are never seen by the government, though it continues to pay the interest to whoever owns the bond currently. Bonds purchased through brokerage houses and banks are bought on the secondary market.


A typical 8 percent U.S. treasury bond, bought for $10,000, will pay back $34,000 over its thirty-year life-$24,000 in semiannual interest payments and $10,000 when the bond comes due.


In recent years, a dramatic change in the saving habits of Americans has affected government spending and interest rates. Savings have decreased. This lack of savings has not altered the way the government spends, but it has altered the amount, because the government needs to spend more on the higher interest rates necessary to entice savings-rich foreigners to buy bonds.


Some people believe that investing in treasury bonds implies condoning the government’s spending habits. The economic facts do not support that assertion. Refusing to buy treasury bonds simply makes the problem worse by forcing the government to keep interest rates high so as to attract buyers. This causes larger deficits due to a larger outflow of interest payments. It is our taxes that finance the majority of the government’s spending. In fact, the more we earn-and the more taxes we pay-the more we directly support the spending. And the more money we have invested in treasuries, the more the government pays us-in effect subsidizing us (a gratifying idea for some FIers involved in service to their communities).


U.S. government agency bonds are issued by other institutions of the U.S. government. While many are not “full faith and credit” obligations of the government-the highest possible warranty-most are considered to have an implied warranty. Some typical agency issuers are:


The Federal National Mortgage Association (“Fannie Mae”) The Federal Home Loan Bank (“Freddie Mac”) The Federal Farm Credit Bank The Government National Mortgage Association (“Ginnie Mae”) The Student Loan Marketing Association (“Sallie Mae”)


While some of the bonds from some of these agencies fit all our criteria, they are somewhat more difficult to deal with. The minimum amount you can purchase may be higher; availability and liquidity are nowhere near what they are for treasury issues; long maturities may not be available from some agencies; all in all, it is generally a more complex undertaking for someone venturing into Step 9.


Many of our common repositories for savings-banks, savings and loans, pension funds, money market funds, insurance companies reinvest a portion of our funds in treasury or agency issues. The difference between our doing that directly and having these institutions do it for us is that the institutions get a large chunk of the profits. For example, banks buy government bonds earning 8 percent and pay us only 5 percent on our deposits. Cutting out the middleman by buying bonds directly is called “disintermediation.”


Disintermediation (Buying for Yourself) and How to Do It Disintermediation is the act of buying a given security, such as a treasury bond, yourself rather than investing your money in an intermediary (such as a fund, bank or other institution) that will turn around and put it into the same investments while taking a big chunk for itself. (There is no shortage of middlemen anxious to take a piece of your pie.) In one respected, “balanced” (i.e., it holds both stocks and bonds) mutual fund, 22 percent of the fund’s dividend and interest earnings never found their way into the investors’ pockets. Instead that 22 percent paid for the fund’s various “expenses”:


Investment advisory fee Promotional expense (“12b- 1 fees”) Transfer agent fee Printing Legal fees Registration fees Audit fees Directors’ fees State taxes Custodian fees Other


A well-known “money market fund” was returning 7.11 percent on investment at a time when U.S. treasuries and agency bonds were returning between 8.3 and 9.3 percent. In good part this discrepancy was due to the fact that 13 cents of every dollar of interest earned was going into the pockets of the fund’s administrators.


None of the above takes into account the huge commissions paid to brokers and financial planners on “load funds.” (A load on a fund is the nonrefundable ante you pay for the privilege of buying it.) And, according to The Wall Street Journal, the average retail broker earned over $79,000 in 1990-and this was in what was considered a bad year for the industry.


So what are your choices? Treasury bonds can be bought directly from the Federal Reserve, with no commissions whatsoever, through a program called Treasury Direct. These purchases can only be made at the time a new issue is being auctioned, called the quarterly refunding, which takes place during the first weeks of February, May, August and November. The Fed will pay your semiannual interest directly to a bank or brokerage that you designate and will hold the bonds for you without charge. One disadvantage of Treasury Direct is that selling a bond before maturity requires it to be transferred to a brokerage account, incurring a fee and a delay. Full information on Treasury Direct can be obtained by contacting any Federal Reserve Bank or branch.


The other way for an individual to buy treasuries (any issue, not just the most recent one), and the most common way to buy government agency bonds, is through the secondary market. Large (“full-service”) brokerage firms and commercial banks are “primary dealers” of treasury securities and as such will not charge commissions. However, there is a difference, called the “spread,” between the “bid” (the price at which a dealer offers to buy the bond) and the “asked” (the price at which a dealer offers to sell it). Note that the price you pay may be slightly higher than the price quoted in the treasury bonds tables of The Wall Street Journal or big-city newspapers because those quotes are for large transactions (usually $1 million or more) and you (presumably) will be buying in smaller amounts.


In reading a treasury bond table you will want to understand the following terms:


“Rate” is the annual interest rate that the bond pays you, and is read as a percentage; e.g., 9l/x means that the interest rate is 9% percent of the face value of the bond.


“Maturity” or “date” is the maturity date, when the loan represented by the bond is repaid to you. It is also useful to know that interest is paid semiannually on the day and month corresponding to the maturity date and six months later-e.g., a bond maturing in May 2018 pays you interest every May and November.


“Bid” is the price at which a dealer offers to buy the bond, and “asked” is the price at which a dealer offers to sell the bond. When you buy a bond you pay the asked price, plus a premium for buying in “odd lots,” under $1 million. In these tables prices are expressed on the basis of 100. To get the actual value of a $1,000 bond you must multiply the price by 10. Also, the bond prices in the table are expressed in points and 32nds of a point-e.g., a bid of 101:21 or 101-21 is actually 101-21132 or $1016.56.


“Chg” is the change in the bid price (up or down) since the previous day.


“Yld” is the yield to maturity (expressed in percent)-current yield adjusted to take into consideration whether you bought it above or below par (the face value of the bond) and thus whether you’ll have a profit or a loss when the bond is repaid.


Making the Buy The rate and maturity date are what you use to identify the bond you want to buy (e.g., the treasury 9% of May 2018) when you go to a brokerage house or bank to put in your order. In deciding with whom you place your order, remember that, unless they are in the select group of primary dealers, they will have to execute your order with a primary dealer and charge you a commission for their service. You have added middlemen.


Many investors prefer to pay the slight extra cost of buying their bonds on the secondary market, through an account at one of the large brokerage firms that serve as primary dealers, because they can choose the issue, they can buy whenever they have the money (instead of having to wait for the Fed’s quarterly refunding) and they can sell it at a moment’s notice before maturity.


One occasional irritant in dealing with a broker-according to numerous letters we have received over the twenty-one years that “Transforming Your Relationship with Money and Achieving Financial Independence” has been in existence-is that some may try to talk you out of your treasury or agency bond purchase. This is understandable, since the transaction would provide virtually no financial gain to the broker compared to the hundreds of dollars in commission he or she would get from the same sum put into United Veeblefitzer stock, Lynch- Majestic Fund or even Royal Junque bonds. It is also unforgivable, since the broker is there to serve you. If this should happen to you, ask to be transferred to another representative. (Treasury and agency bonds are the safest, most conservative investments in the world. There can be no legitimate objection to them.)


Marilynn Bradley, who cooked and catered her way to FI, grew up, like many of us, with a deep-seated belief that “mathematics and money” were areas that she just didn’t understand. Following the steps of the FZ program did a lot to dispel her fear and ignorance, but when she found herself with Now That You’ve Got It, What Are You Going to Do with It? 31 7 enough money to buy her first bond she again felt overwhelmed. “I just didn’t know how to go about it,” she confessed. “There was obviously a lot to learn, and I just didn’t know where to start.”


The bond market seemed like a foreign country to her. She wished there were someone to tell her what to do, but she realized that Step 9 meant what it said-becoming knowledgeable and sophisticated herself was an integral part of the program. With the determination that had gotten her this far, she decided to take on the challenge and began to educate herself. She read a simple book on bonds she’d gotten from the library-ten times at least. The first time was like reading Greek. The second time was more like German: the alphabet was familiar, but the words meant nothing. But with each successive reading it began to sink in and slowly it began to make sense to her. The next step was to read The Wall Street Journal, specifically the government bond tables and the section on credit markets, which explained what the bond market was doing and often explained the terms that were being used. Then she began to chart the prices of long-term treasury bonds. Her chart allowed her to see the price fluctuations, to observe the ups and downs and eventually to understand the relationship between the price and the yield. She learned how to compute current yield: current yield = coupon rate current price.


She was now ready to buy her first bond. Armed with her newly acquired knowledge and her enthusiasm, she went down to the brokerage firm in person, money in hand, and opened her account. The broker she’d been assigned when she had phoned took her to his office and attempted to give guidance to this “helpless young novice. ”


“Let me tell you about an exciting mutual fund that I think would be just right for you,” he began.


“Thanks for your advice,” Marilynn replied, “but I want to buy a five thousand- dollar U.S. treasury bond, the 9% of November 2015.”


“Government bonds are a pretty conservative investment for someone of your age. How about-”


But Marilynn didn’t bite. She had gone in there knowing what she wanted, and she remembered that Joe had said to stick to your guns. “Thank you, but what I want is a U.S. treasury bond-five thousand dollars of the 9% of November 2015.”


After a few more thrusts and parries Marilynn made her point and placed her order-and her purchase was confirmed later that day. She left feeling powerful, sure of herself and on track. Educating herself and actually buying her first bond represented a breakthrough-a victory. “I felt wonderful,” she exulted. “I did it myself! I learned to do something I would have thought impossible. If I can do this,” she added, “anyone can!”


She passed that hurdle in 1985 and several years later she was able to leave her job as a cook and caterer to explore what her next life challenge might be. The empowerment she got from following the steps through to the impossible dream of Financial Independence (before her fortieth birthday) has served her well in her life of freedom. Whenever she’s about to say ”I can’t” in response to a challenge, she thinks back to buying bonds-and she usually ends up saying “Yes, I can!” to the current invitation to grow beyond her perceived limits.


Now that you have an overview on treasury and agency, time to look at the elements in an FI investment program.




Whatever level your monthly expenses settle in at, you will want six times that amount readily available in a bank account or money market fund. You are not financially independent until you have a cushion to handle emergencies and handle the months between bond interest payments. Besides smoothing out the flow of money into and out of your life, however, your cushion has another important function. Like Ned Norris doubting that his own experience of consciousness was growing faster than inflation, you might find yourself doubting whether today’s enough will be enough tomorrow. A cushion eases those doubts.


Rosemary Irwin found herself getting increasingly uneasy as her projected Crossover Point approached. She was used to her job, and the thought of turning off that trusty faucet and depending on bond income alone was scary.


Rationally she knew her bond income was “enough and then some,” but she still had irrational fears of not being able to reenter the job market if FI somehow didn’t work. “Maybe this is what trapeze artists feel when they are assessing when to let go of their bar so they can swing over to the other one, ” she thought. Her safety net (cushion) was in place, but it felt very far away. What she decided to do was to bring the net closer and beef it up by doubling her cushion. With those extra thousands in the bank, she found it easy to face down the inner worrywart who kept asking, “But what if you total your car and have a major illness and your house burns down all in the same year?”


As Carl Merner approached FI he, like Rosemary, found himself reluctant to turn off the flow of job income that had filled his coffers for over twelve years. He jokes that there is a tenth step to this program-remembering to quit your job. He came to realize that because he had devoted the majority of his time and intellect to being a computer programmer, he had depended on money to buy his way out of many of life’s difficulties. His “what if’s” had to do with maintaining his house and car without enough money to pay a small army of mechanics, plumbers, roofers and exterminators. He handled his fear by deciding to become knowledgeable and sophisticated about home and auto maintenance, apprenticing to some experts and reading everything the library had to offer. Turning a “what if” into a “why not” is the epitome of FI thinking.


Ted and Martha Pasternak developed a different strategy for the “what if’s. ” This was especially important for them because their son, Willie, and their FI came along at about the same time. While they had no intention that Willie would be one of those $100,000 “average American kids,” they knew they’d have plenty of financial surprises during the eighteen years of full-time parenting. So they made what they call a Life Chart for all three of them. For each year from now until they will be eighty-five, they asked themselves, “What needs or desires might come up?” They included all the normal expenses of raising a healthy (but not pampered) child-things like braces, tutoring, summer camp and his first car-and determined how much each might cost. They then bought an investment vehicle called zero-coupon bonds (treasury bonds with no interest, bought at a big discount but repaid at par and especially good for future cash needs), with different bonds coming due in each of the years that Willie might need a big-ticket item. And if Willie doesn’t need braces or want to go to summer camp, they’ll just roll over the money into regular treasury bonds. They also anticipated their own reasonable needs, including housing, health care, education and travel, and calculated how the combination of their cushion and their cache could handle them with ease. They’ve even handled the “what if it doesn’t work?” fear with the reminder that they could go back to work for a finite period of time to handle a completely unanticipated change in life-style. Having thought through the “what if’s” and having already allocated funds to handle them, they can breathe easy in the present. Not only that, but they’ve projected a happy and fulfilling life for all three of them, a life in which even the normal bumps and bruises are taken in stride and are part of the adventure. They have already embraced the future and eliminated the fear and mystery that so often keep others with their noses to the grindstone.


Your cushion will be there to handle the “what if” worries, either by proving them unfounded or by providing the cash needed to see you through. And then there’s your cache, which will continue to enlarge your cushion and even increase the amount of capital you have to invest in bonds.



In pioneer days a cache was a hole in the ground where travelers buried for later use provisions that were too heavy to carry. In your FI program, your cache is a store of extra money (beyond your capital or your cushion) that builds up for future use. Funds feeding the cache account come from numerous sources:


1. In Step 4 you ask the question, “How might this expenditure change if I didn’t have to work for a living?” Most people who choose full Financial Independence (early retirement) in order to work toward their dreams find that their expenses go down significantly when they leave paid employment. No more commuting expenses, no more dress-for-success expenses, no more restaurant-lunch expenses-and many more such reductions. So since the Crossover Point is based on your total expenses while you are engaged in paid employment, the Now That You’ve Got It, What Are You Going to Do with It? 321 excess investment income will begin to pile up after you are financially independent. This is the “and then some” we referred to in the definition of FI as “having enough and then some.”


2. Continuing to do the steps after FI is a natural pattern; your experience of Financial Integrity and Financial Intelligence is now so ingrained and so fulfilling that you don’t want to stop. As a matter of fact, there may be an even higher level of zeal since, thanks to becoming FI, you know that these principles work. So between the ingrained patterns of consciousness, the intellectual appreciation of the obvious logic of the steps and the experiential awareness of how much more fulfilling your life is when lived at “enough,” you may find that you are still spending less. Yet your income continues to march on at the same level-creating more cache. Here’s what Wanda Fullner, an FIer who also happens to be a financial counselor, has to say:


In my fifteen years of financial counseling-and many of my clients have incomes of under $1,000 per month-I have never seen an exception to this pattern: with awareness of expenses and a values-oriented spending and savings plan, opportunities for capital growth proliferate beyond expectations.


3. As time goes on, you notice the wisdom of your choices back in Step 6. Your carefully researched purchases are not breaking down. Your ability to maintain your material possessions has increased enormously, and you don’t need to replace them anywhere near as often as you used to. You are also not enticed by the newest bells and whistles or the new and improved latest upgrade. Your material universe is in place. Yet the original cost of those purchases had inflated your monthly expenses before you reached your Crossover Point. You discover that you are spending less than your monthly income. More cache.


4. Your total monthly expenses included federal, state and local income taxes, based on a sizable income that included a very large amount going into your FI investments. After FI your total monthly income is just above your total monthly expenses. Now your tax bill has dropped considerably. More cache. Quite a few FIers have actually eliminated taxes altogether by finding they could live happily on an income that is below taxable levels. This has been gratifying both to those who have had qualms about how their tax dollars were being used and to those who just love beating Uncle Sam.


5. Another source of cache is incidental income. This might be anything from an unexpected inheritance to notification by the IRS of an error in a two-year-old tax return that results in a refund.


6. Cache can also be supplemented by paid employment. Some FIers find that their new life directions require short-term paid employment in order to complete the mastery of new skills. Others find that putting extra income into their cache provides an added measure of security as well as giving them a little extra money to finance new dreams.


Wanda Fullner knows that her FZ income will be more than adequate once she fully moves into her next phase of life, but for now the extra income she gets from fee-only financial services is allowing her to support her daughter through college.


Marcia Meyer uses her income from occasional temporary jobs to build up her cache so she can travel whenever she wants to-as she did recently when a family member 2,000 miles away became ill.


How to Get Rid of Cache


Your primary aim in moving toward FI is cache in the form of time and energy-and spending that time and energy in the ways you choose will be the greatest joy of FI. But you may well find yourself with cache in the form of money on your hands, too. To the reader who has encountered the ideas presented in this book for the first time, or who has been applying the steps for only a few months, the notion of having extra money may look like the height of absurdity.


The money that accumulates in your post-FI cache fund-money that by definition you do not need for your everyday living expenses has an important role to play in your overall FI investment plan. Since by getting FI you have already broken the link between income and life-style choices-i.e., having money does not lead you into spending more-this cache fund is not a source of temptation.


The initial function of the cache may be psychological. It proves to you that you do have enough and then some over time, helping to quell any lingering “what if’s.”


On the outside chance that “inflation” in one or another of your spending categories gets ahead of your ever-increasing skill and consciousness in clever use of resources, your cache fund handles the shortfall.


It is from this fund that you can replace major items necessary to your chosen life-style when they finally do wear out-things like a car, a bicycle or crowns for your back teeth.


Projects and causes that you participate in may need an infusion of capital to achieve a specific objective; you can provide that capital without damaging your ability to provide that most valuable of contributions, your undivided life energy. This cache also allows you to express the spirit of generosity with your family and friends. Amy Dacyczyn, publisher of The Tightwad Gazette, talks about the importance of that generosity for her:


However, I am not cheap. I will call my grandmother long distance and let her talk and talk and talk up my phone bill because I’m only going to have my grandmother for a certain period of time. We also donate money to the church . . . and we donate to other worthwhile causes. So what it’s about is this: if you can engineer your resources so that you have a surplus, you can afford to be generous. And this is part of what has been lacking in our culture recently-we’re all so busy pursuing the work and not having enough, in the end, of either time or money that we’re not volunteering enough and we’re not donating enough.


Reinvesting these funds in the same income-producing vehicles where you put your FI capital allows you to create an informal “endowed foundation.” You can give the income from such investments to causes and projects that move you.


(Incidentally, the authors’ personal cache funds created and maintained the New Road Map Foundation during its early years. While we had, and still have, more than enough for ourselves, our service work has called for printing, postage, and some transportation expenses all of which originally came out of our cache.)


Your post-FI work may present interesting opportunities in other parts of the world (like Sally Morris’s desire to help create a medical facility in Africa) and you will need to pay for your transportation there. Notice, however, that we haven’t mentioned the obvious “splurging on a two-week vacation to Hawaii.” There is nothing in the FI program that prohibits that, but for most FIers we know, post-FI life is so fulfilling that “vacating” from it seems silly-or comes around in the process of serving. That’s how Evy McDonald had her dream trip to Europe, all expenses paid.


Evy McDonald’s plans turned around 180 degrees when her terminal illness went into remission. With a lot more life to live, she devoted herself to a number of projects, not the least of which has been finding the ways to share her discoveries about health with the medical community. Her only nostalgia for her old way of life focused on travel. When she was an up-and coming professional she’d relished being able to hop on a plane for a weekend jaunt to visit friends or enjoy a different climate. What she’d never done, however, was travel to Europe, and she pretty much gave up her hopes for that, figuring she’d never develop enough cache for such a luxury. Not only that, but her values had changed so dramatically that she couldn’t even justify the kind of whirlwind tour of the Continent she’d always dreamed of. So she let go of the fantasy and got on with the reality of her life. Several years later she received a letter from the organizer of an international medical conference. He said, in essence, that he was trying a bold and innovative approach to this meeting and felt that her story would nicely rattle the appropriate cages. Would she come to Italy to speak at the final banquet? A11 expenses paid, of course.


Through connections made at that conference, Evy developed working relationships that eventually led not only to her research project on amyotrophic lateral sclerosis, but to repeated invitations to travel abroad to speak at conferences. Evy calls her service “working for God, ” and comments wryly, “It’s not union wages, but the fringe benefits are great!”


We often hear these sorts of stories from people who’ve chosen to invest 100 percent of their time in projects aligned with their life purpose.



This phrase was first used by a caveman by the name of Og, in response to his cavemate’s discovery of fire.


It was also uttered when a Mesopotamian farmer told his wife that he wanted to move to something called “the city.”


It seems to be the nature of the human animal that when change is proposed, the first responses that come to mind are the drawbacks, negatives, “Yes, but’s” and “what if’s.”


Our culture and our economy have undergone many shifts in our 500-year history-shifts in fundamentals, fashions and fads. We’ve gone from agrarian to mercantile to industrial to technological to information to service. We’ve had the Westward Expansion. The Roaring Twenties and the Great Depression. The Model T, the hot rods, the muscle cars, the Volkswagen van, the Honda Civic. Short skirts, long skirts, midis, maxis and muumuus. The Love Generation, the Me Generation, the We Generation.


Whether economic changes are caused by the cyclic nature of capitalism or by purely random activity is of little importance in this book. What is important to remember is that change will occur. And while it is true that no trend happens all at once, we will see shifts in direction. Following are just a few of the possible changes.


+As more people move to a more frugal life-style, they will be retiring from the work force earlier-thus freeing up jobs. (Already many corporations are encouraging early retirement with liberal incentives.) The problem of increasing unemployment might be averted if we had such “serial employment,” with jobs for bus drivers and garbage collectors and schoolteachers and salespeople and engineers continually opening up as people achieved Financial Independence. Not only that but the stress on the planet would decrease as the demand for full employment and endless consumption eased.


+As individuals begin to develop a greater sense of purpose about their jobs (as discussed in Chapter 7), productivity will rise, integrity in the workplace will return and losses due to absenteeism, white-collar crime and employee indifference will diminish. The result will be better and less expensive products.


+As the myth of growth loses its grip, cities will become more livable-and there will be enormous savings thanks to our no longer needing “crisis management” of everything from garbage disposal to overcrowded highways to air pollution to water shortages.


+Volunteerism-working at something you believe in, which gives you a deep sense of contribution, and which has no monetary strings attached-will continue to rise. And it may well be volunteers, not “the experts,” who steer us out of the difficulties we are currently encountering as a species-the social, political and environmental challenges of the final decade of the second millennium. A tremendous amount of human energy and creativity will be needed if we are to turn the next comer of our evolution without devolving into stagnation or exploding due to massive unresolved tensions. The creative geniuses needed for this transformation can liberate themselves from “making a dying” either by working for a limited period of time to become financially independent or by exercising other prudent options to get onto solid financial ground.


+The consumer feeding frenzy that’s been stoked by advertising and easy credit for a quarter of a century will slow down. As we have repeatedly pointed out in this book, our consumerism is inextricably related to the environmental, ecological, health, social and political problems facing our planet. As more people move toward more sustainable life-styles and more conscious and fulfilling uses of their life energy, the diminished impact on the earth will yield incalculable dividends.


In Conclusion: You are well on your way to taking back the power you have given over to money-and to money “experts.” You are ready to become a conscientious, loving and knowledgeable steward of your life energy. Our greatest hope is that you will apply these steps to your own finances and apply your life energy to the challenges that face our species and our planet. We wish you great success.




Become knowledgeable and sophisticated about long-term income-producing investments and managing your finances for a safe, steady and sufficient income for the rest of your life.




There are no shorter shortcuts. This whole book, with all nine steps, is the shortcut.


The steps are summarized here for review, reference and reminders. Read the corresponding chapter for the all-important context and details. These steps are simple, common-sense practices.


It is absolutely necessary that you do, diligently, every step. The steps build on each other, creating the “magic” of synergy-the whole is greater than the sum of its parts. You may not see this effect until you have been following the steps for a number of months.


Conscientiously applying all the steps automatically makes your personal finances an integrated whole; this is a whole-systems approach.


Step 1: Making Peace with the Past


A: How much have you earned in your life? Find out your total lifetime earnings-the sum total of your gross income, from the first penny you ever earned to your most recent paycheck.



+ Social Security Administration-“Request for Statement of Earnings.”
+ Copies of federal or state income tax returns.
+ Paycheck stubs; employers’ records.



+ Gives a clear picture of how powerful you are in bringing money into your life.
+ Eliminates vagueness or self-delusion in this arena.
+ Instills confidence, facilitates goal-setting.
+ This is a very basic, fundamental practice for any business-and you are a business.


B: What have you got to show for it? Find out your net worth by creating a personal balance sheet of assets and liabilities-everything you own and everything you owe.



+ List and give a current market value to everything you own.
+ List everything you owe.
+ Deduct your liabilities from your assets to get your net worth.




+ You can never know what is enough if you don’t know what you have. You might find that you have a lot of material possessions that are not bringing you fulfillment, and you might want to convert them to cash.

+ This is a very basic, fundamental practice for any business-and you are a business.

Step 2: Being in the Present-Tracking Your Life Energy A: How much are you trading your life energy for? Establish the actual costs in time and money required to maintain your job, and compute your real hourly wage.



+ Deduct from your gross weekly income the costs of commuting and job costuming; the extra cost of at-work meals; amounts spent for decompressing, recreating, escaping and vacating from work stress; job-related illness; and all other expenses associated with maintaining you on the job.
+ Add to your work week the hours spent in preparing yourself for work, commuting, decompressing, recreating, escaping, vacating, shopping to make you feel better since your job feels lousy, and all other hours that are linked to maintaining your job.
+ Divide the new, reduced weekly dollar figure by the new, increased weekly hour figure; this is your real hourly wage.
+ Individuals with variable incomes can get creative-take monthly averages, a typical week, whatever works for you.



+ This is a very basic, fundamental practice for any business-and you are a business.
+ You are in the business of selling the most precious resource in existence-your life energy. You had better know how much you are selling it for.
+ The number that results from this step-your real hourly wage-will become a vital ingredient in transforming your relationship with money.

B: Keep track of every cent that comes into or goes out of your life.



+ Devise a record-keeping system that works for you (such as a pocket-sized memo book). Record daily expenditures accurately. Record all income.



+ This is a very basic, fundamental practice for any business-and you are a business.
+ You are in the business of trading the most precious resource in existence-your life energy. This record book shows in detail what you are trading it for.

Step 3: Where Is It All Going? (The Monthly Tabulation)


+ Every month create a table of all income and all expenses within categories generated by your own unique spending pattern.
+ Balance your monthly income and outgo totals.
+ Convert “dollars” spent in each category to “hours of life energy,” using your real hourly wage as computed in Step 2.



+ Simple grade-school arithmetic. A basic hand-held calculator is needed only if you have forgotten (or are young enough never to have learned) longhand addition and subtraction. A computer home accounting program is useful only if you are already computer-literate.



+ This is a very basic, fundamental practice for any business-and you are a business.
+ You are in the business of trading the most precious resource in existence-your life energy. This Monthly Tabulation will be an accurate portrait of how you are actually living.
+ This Monthly Tabulation will provide a foundation for the rest of this program.


Step 4: Three Questions That Will Transform Your Life


On your Monthly Tabulation, ask these three questions of each of your category totals expressed as hours of life energy and record your responses:
1. Did I receive fulfillment, satisfaction and value in proportion to life energy spent?
2. Is this expenditure of life energy in alignment with my values and life purpose?
3. How might this expenditure change if I didn’t have to work for a living?


At the bottom of each category, make one of the following marks:

-Mark a minus sign (or a down arrow) if you did not receive fulfillment proportional to the hours of life energy you spent in acquiring the goods and services in that category, or if that expenditure was not in full alignment with your values and purpose or if you could see expenses in that category diminishing after Financial Independence.

+Mark a plus sign (or an up arrow) if you believe that upping this expenditure would increase fulfillment, would demonstrate greater personal alignment or would increase after Financial Independence. 0 Mark a 0 if that category is just fine on all counts.



+ With total honesty.


+ This is the core of the program.
+ These questions will clarify and integrate your earning, your spending, your values, your purpose, your sense of fulfillment and your integrity.
+ This will help you discover what is enough for you.


Step 5: Making Life Energy Visible Create a large Wall Chart plotting the total monthly income and total monthly expenses from your Monthly Tabulation. Put it where you will see it every day.



+ Get a large sheet of graph paper, 18 by 22 inches to 24 by 36 inches with 10 squares to the centimeter or 10 squares to the inch. Choose a scale that allows plenty of room above your highest projected monthly expenses or monthly income. Use different- colored lines for monthly expenses and monthly income.



+It will show you the trend in your financial situation and will give you a sense of progress over time, and the transformation of your relationship with money will be obvious.

+You will see your expense line go down as your fulfillment goes up-the result of “instinctive,” automatic lowering of expenses in those categories you labeled with a minus.

+This Wall Chart will become the picture of your progress toward full Financial Independence, and you will use it for the rest of the program. It will provide inspiration, stimulus, support and gentle chiding.

Step 6: Valuing Your Life Energy-Minimizing Spending Learn and practice intelligent use of your life energy (money), which will result in lowering your expenses and increasing your savings. This will create greater fulfillment, integrity and alignment in your life.



+ Ask the three questions in Step 4 every month.
+Learn to define your true needs.
+ Be conscious in your spending.
+Master the techniques of wise purchasing. Research value, quality and durability.



+ You are spending your most precious commodity-your life energy. You have only a finite amount left.
+ You are consuming the planet’s precious resources-there is only a finite amount left.
+ You cannot expect your children-or your government-to “know the value of a buck” if you don’t demonstrate it.
+ “Quality of life” often goes down as “standard of living” goes up. There is a peak to the Fulfillment Curve-spending more after you’ve reached the peak will bring less fulfillment.

Step 7: Valuing Your Life Energy-Maximizing Income Respect the life energy you are putting into your job. Money is simply something you trade your life energy for. Trade it with purpose and integrity for increased earnings.



+ Ask yourself: Am I making a living or making a dying?
+ Examine your purposes for paid employment.
+ Break the link between work and wages to open up your options for increased earnings.



+ You have only X number of hours left in your life. Determine how you want to spend those remaining hours.
+ Breaking the robotic link between who you are and what you do for a “living” will free you to make more fulfilling choices.

Step 8: Capital and the Crossover Point Each month apply the following equation to your total accumulated capital, and post the monthly independence income as a separate line on your Wall Chart: capital x current long-term interest rate — monthly investment 12 months income



+ Find the long-term interest rate by looking at the interest of the thirty-year treasury bonds in the treasury bond table of The Wall Street Journal or a big-city newspaper. After a number of months on the program, your total monthly expense line will have established a smaller zigzag pattern at a much lower level than when you started. With a light pencil line, project the total monthly expense line into the future on your chart.

+ After a number of months on the program, your monthly investment income line will have begun to move up from the lower edge of the chart. (If you have actually been investing this money as outlined in Step 9, the line will be curving upward-the result of the magic of compound interest.) With a light pencil line, project the monthly investment income curve into the future. At some point in the future it will cross over the total monthly expenses line. That is the Crossover Point.

+ You will gain inspiration and momentum when you can see that you need to work for pay for only a finite period of time.



+ At the Crossover Point you will be financially independent. The monthly income from your invested capital will be equal to your actual monthly expenses.
+ You will have enough.
+ Your options are now wide open.
+ Celebrate!


Step 9: Managing Your Finances – the final step to financial independence: become knowledgeable and sophisticated about long-term income-producing investments. Invest your capital in such a way as to provide an absolutely safe income, sufficient to meet your basic needs for the rest of your life.



+ Empower yourself to make your own investment decisions by narrowing the focus to the safest, nonspeculative, long-duration fixed-income securities, such as U.S. treasury bonds and U.S. government agency bonds. Temper the prevailing irrational fears about inflation with clear thinking and increased consciousness.
+ Cut out the high expenses, fees and commissions of middlemen and popularly marketed investment “products.”

+ Set up your financial plan using the three pillars:
Capital: The income-producing core of your Financial Independence.
Cushion: Enough ready cash, earning bank interest, to cover six months of expenses. Cache: The surplus of funds resulting from your continued practice of the nine steps. May be used to finance your service work, reinvested to produce an endowment fund, used to replace high-cost items, used to compensate for occasional inroads of inflation, given away, etc.


WHY: There is more to life than nine-to-five.