Financial Stability Allows You Dignity Money
It was several days before I heard back from Betty. When I saw her, she literally bounced into my office, with a sparkle in her eyes. My heart gladdened. This is the part I like best about working with any new person—the moment she has made a decision to take over her future financial life. Betty beamed and waited for me to speak first. “Okay, I’m all ears. What is it?” I asked with a knowing smile. “I got it! I really got it!” Betty bubbled. “I’m losing by not growing my money. Joan, I want to start planting right away, I want to financially secure.” Betty’s power was about to be unleashed. I asked her how it felt.
“How does it feel? Like I’m in the middle of a revolution,” she answered with a laugh. And she’s right. We’re all in the midst of a revolution.
I remember a discussion I had about the Equal Rights Amendment so many years ago when women fought for their rights and knew they were not to be taken for granted. A large circle of professional women sat around a table in a Philadelphia restaurant talking adamantly about legislating our rights as women as a way to secure those rights. I argued that economic power was the key, and that legislating our rights wouldn’t be the simple answer. I thought at that time—and I continue to think—that our strength rests in our ability to fortify our financial well-being and then to have the independence and courage to stand up for what we truly believe in our hearts. We have to make our stand regardless of what lawmakers do.
It’s all part of the revolution, the last leg of the larger women’s movement, which got lost in the “me first” shuffle of the 1980s and early 1990s. You must realize the enormity of this moment: You can actually own your financial future! You have the right to economic independence. This moment is as dramatic as when women won the right to vote, and is a monumental time in history—a period that has far-reaching implications for our lives and our world.
“So where do I go from here?” Betty wanted to know.
Betty, like so many professional women, was accustomed to being on top of things, to being in control of their financial success, and to being capable of making decisions without batting an eye. All of a sudden, she was stymied. Devising financial strategies seemed as mystifying to Betty—whose idea of cooking was choosing from a take-out menu—as concocting the perfect béarnaise sauce. But her joyful spirit motivated her.
“No one starts out as an expert, Betty. We all begin from somewhere in every area of our lives—from school to career to relationships. The good news is that you already have strategies that are working for you in these other areas and that will help you be successful in the financial part of your life, too,” I said.
“And in your financial life, you have the beginnings of an important concept I call the ‘Money Machine.’ It’s another of my secret ‘jewels.’ ”
“The Money Machine! I like the sound of that,” Betty said. “What exactly is it?”
“Your Money Machine is where you put your cash and let it grow. It is the generator of all the cash you’ll need in order to lead a healthy, stress-free, and joyful life. Think of it as a pot of invested capital that is sufficient to create the returns that will meet your personal financial goals.”
“Wow! That’s sounds better than the Porsche I’ve been dreaming about. But how does it work? Please tell me more.” Betty sat back to learn all about the Money Machine, my third financial jewel.
The Money Machine
Think of your Money Machine as a well-oiled piece of equipment that churns and burns as it works for you, even when you don’t. A properly tended Money Machine is a constant, reliable source of cash ﬂow. If you nurture it correctly, you’ll eventually reach a point in your life when your Money Machine takes over for you. When that happens, you no longer have to work. Instead, you’ll work only because you love what you’re doing. That’s financial freedom!
The secret of creating a Money Machine is the “spend less than you earn and invest the difference” approach. Each month, you give part of your earnings to your Money Machine. You make sure to regularly feed your Money Machine before you “donate” cash to the nearest multiplex or restaurant or department store.
Betty liked that idea. Having her own Money Machine will allow her to stop working to support herself so that she can have time to pursue the things she loves. Back at the Ranch, she had talked about adding more value to society and to her own life by giving something back. More recently, when I asked Betty how she envisioned her life a few years from now, she talked about wanting to make pottery and to counsel young would-be lawyers. I could see her face glow as she talked about how these desires tap into her passion. She wants to welcome her creative and artistic side into her daily life, and to become part of the bigger picture of improving society. But she never had a ﬁrm financial plan that would allow her to realize her dreams.
I suggested that life was too short for her to delay pursuing her passions, and that, possibly, she could find a way to begin to incorporate pottery and mentoring into her life right now.
Many of us can relate to Betty’s dreams. Who wants to be a slave to money—to be held captive to a corporation, institution, or government agency by a paycheck? Most of us would pursue a variety of interests if money were not a factor. We each dream of a lifelong quest—to learn a new skill, to do volunteer work, to start a small business, or simply to have some free time to go out and have fun. With a well-running Money Machine, you can do it.
The Money Machine is designed to be a holding pen for cash that will be invested and doubled again and again until it’s sufficient to generate the sum you will use to meet your monthly expenses throughout your life. Remember the Rule of 72 (go reread this article if you are not familiar with the Rule of 72): The incredible ability of money to grow works to your advantage, and it is the grease that makes your machine hum.
This is the purpose of your Money Machine—to let you walk away from having to go to work each day to earn income. Your Money Machine will assume the role of providing income to pay your living expenses. At this point, you will have arrived at financial freedom, and once you set up your Money Machine, you will have it for life.
Furthermore, the Money Machine allows you to serve your community at some point in your life. Part of being a well-balanced person—of having a smooth ride on your Wheel of Life—is not only enjoying personal benefits from your Money Machine, but also allocating some of those funds to good deeds. When we have ample financial resources, we can and must give back some to the society that has helped nurture us and supported our economic well-being. After all, everything we’ve gained in life has been a gift to us. Giving and sharing are also part of the power and joy of money.
Your Money Machine isn’t a piggy bank designed simply to hold a bundle of cash. Nor is it the repository of one single investment. It is the sum of all your investments—the reservoir of capital wisely invested to yield solid, steady returns. Your Money Machine will be producing during the years when income is needed and wanted— and with a surprisingly low level of maintenance. With a well-tended Money Machine, you’ll enjoy that good feeling in the pit of your stomach that comes from being able to say, “I’ve guaranteed my financial future, and I feel great about it.”
Feeding Your Money Machine
Of course, you won’t want to take your Money Machine for granted. As in other areas of your life, if you don’t contribute, you don’t get anything back. Try having a relationship in which all you do is take. Or try having a job where you do nothing but expect to be paid. Neither one will last very long. In the same way, your Money Machine depends upon your being a giver, not a taker. I’m talking about being not just a one-time contributor, or an on-again, off-again, sort-of contributor, but a consistent contributor. I’m talking about making the Money Machine a priority in your life. Because, by looking out for your financial future, you’re also caring for your soul. Remember the Wheel of Life, and you’ll realize that you must nurture and inspire all seven areas of your being.
When you feed your Money Machine, you can’t dump just any old investment into it. Imagine someone with terrible eating habits, who puts lots of fats and sugars into her body. Over time, this person loses energy, slows down, and may even become ill because her body is not properly fueled. Your Money Machine is like your body: You can’t put garbage into it and expect a healthy return. What are the “fats” and “sugars” of the investment world? There are two kinds of unhealthy investments to avoid: (1) investments that are excessively risky—investments in which you could lose all of your money—and (2) investments that have an inadequate rate of growth—investments that simply won’t pay you very much.
On the website here we’ll be talking about your investment choices. I’ll explain how to pick investments that will grow at a healthy rate without unnecessary risks and how to pick investments with tax advantages, which can boost your return even further. The food you feed to your Money Machine will determine the quality of your future.
The creation of a Money Machine begins with your first investment, and with the plan you devise to add to it regularly. It is not something that can solve your financial problems all at once, like winning the lottery. It’s a process. It might take ten, fifteen, or twenty years to fully fund your machine, depending on how much and how often you contribute to it, when you first begin, and how wisely you select your investments.
When you decide to build your Money Machine, you embark on a voyage toward financial freedom. You’ll definitely choose to get on with this journey.
You’ll rev up your Money Machine by first by creating what I call “dignity money.” This is money you’ll need down the road in order to live a very minimal, luxury-free life. It’s your insurance, so to speak, against destitution. You can figure out how much dignity money you’ll need by determining the smallest amount that it will cost you to live each month. Using the Dignity Money worksheet below, add up what you spend each month for food, transportation, taxes, housing, telephone, utilities and insurance. Don’t include any frills. The monthly expense for dignity money will most likely be less than what you calculated on the Lifestyle Expenses worksheet in the “Steps To Becoming Financially Free” article on this site. Remember, the Lifestyle Expenses worksheet included the extras—vacations, dinners out, clothing, electronic equipment, entertaining, and so on. Now we’re examining the basics.
One very important basic is your home. If you own your house or apartment, your mortgage or maintenance is likely to be one of your major expenses; it is perhaps your single greatest expense. Paying off your mortgage greatly reduces your monthly outlay and therefore reduces your total dignity-money requirement. For many women, eliminating mortgage debt is an essential step to achieving financial independence.
Calculate your dignity-money needs both ways—with a mortgage and without. Depending on the current size and condition of your Money Machine, you may find that financial independence may arrive for you only after the mortgage is paid, whether that date is five, ten, or more years from now. Of course, the sooner the better!
Monthly Expenses Minimum Amount
Your dignity-money calculation can be a rough number; that’s okay. It might be $1,000 a month or $10,000. Each person’s sum will be different. In any event, your dignity-money figure is the target level of income for the first stage of your Money Machine. Your goal is to generate this amount of cash from your Money Machine each month so you won’t have anxiety about the basic care of yourself in the future.
If you already have your dignity money, then you can feel at ease. Knowing that you’re financially secure should give you a good feeling all over and relieve whatever stressful ﬂutters you might have had. If you have yet to establish your dignity money, then it’s time to begin working toward it. Believe me, no outing, new trinket, or other toy is worth the cost of not taking this step.
Figuring Out Your Dignity Money
How do you figure out how much your Money Machine needs in order to generate your dignity money? The calculation is simple. Multiply your monthly dignity money by 12; then add a 0. This provides an estimate of how much money you’ll need to invest in order to generate the appropriate monthly income.
For example, if your minimal monthly expenses are $4,000, then multiply $4,000 by 12 and add a 0. That means your yearly expenses will total $48,000. Your Money Machine will need $480,000 in order to provide you with dignity money. Why? At $4,000 a month, your yearly expenses will total $48,000. The rate of return on investments varies, of course, but history shows that a conservatively well-tended Money Machine should yield approximately 10 percent per year over time. This means that your Money Machine will need $480,000 in order to pay you an annual income at the rate of 10 percent per year, or $48,000.
The same formula—monthly expenses times 12, plus a 0— works for any expense level. If your minimal monthly expenses are $6,000, your Money Machine should contain $720,000: $6,000 times 12 is $72,000; adding a 0 brings it to $720,000. If your monthly expenses are $1,500, then you’ll need $180,000 in your Money Machine. Do your own calculation.
This calculation requires one important adjustment—deductions based on the inflation rate. Inflation gradually shrinks your money’s value. Therefore, whatever figure you compute will be worth less in the future. Consequently, the amount in your Money Machine will have to be somewhat greater to compensate for the effects of inflation.
Unfortunately, no one can know for sure how high the inflation rate will be in the future. A high inflation rate, like the one we experienced in the 1970s, will have a strongly negative effect on the value of the money generated by your Money Machine. The moderate inflation we’ve had so far during the 2000s (averaging around 1.4 percent a year) isn’t nearly so powerful. The latest inflation rate for the United States is 0.2% through the 12 months ended October 2015 as published by the US government on November 17, 2015.
Use the “Rule of 72” in reverse to estimate the effect of inflation on your Money Machine requirements: If you divide the inflation rate of 1.4 into 72, your dollar will be worth half as much in 51.43 years. This will be close to how much you will need in your Money Machine in order to generate a basic income.
The power of inflation grows significantly as time passes. If you are only one or two years away from the time when you plan to ease out of working, inflation will have little effect on your plans. But if you expect to work for two or three more decades, inflation will make a noticeable difference. For example, over twenty-four years, a modest 3 percent inflation rate per year will greatly increase how much dignity money you’ll need. So the $2,000 a month you now spend for basic expenses might rise to $3,000 or more by the time you stop working. In addition, whether income withdrawn from your Money Machine is taxable or not is a significant factor. We’ll discuss in a later website article the effect of taxes on your money strategies. For now, just make a mental note that taxes will affect your financial plans, and let’s continue working with your rough dignity-money calculation.
Let’s say you calculate your dignity money to be a whopping $600,000. That seems like a lot of money to feed to your Money Machine, and the thought of how to amass such an amount might be daunting. But if you save this $600,000 gradually, rather than all at once, it will be much less intimidating.
Consider Rachel Levine. Remember Rachel? She’s the assistant museum curator who lives with her husband in a house they’re fixing up in Dallas. Rachel earns $30,000 a year. When I met her, with her discreet diamond earrings and self-assured air, I imagined that Rachel had already begun to build a financial future for herself. I was wrong. Once we warmed to each other in the hot tub at the Ranch, she easily confessed that her fiscal future was tottering a bit and asked what she could do at her age, starting with the $10,000 she and her husband had squirreled away in money market funds.
Rachel and I chatted about the dignity-money concept, and she concluded that she and her husband would want to have $600,000 in their Money Machine. Here’s a closer look at how Rachel and David can accumulate the dignity money they’ll be looking for in later years.
Rachel enjoys museum work, and David enjoys his work, too. So they see themselves working into their mid-sixties. That’s about thirty-six years from today. Using the Rule of 72, we calculate that if their money grows at an average annual rate of 10 percent (the historical average of the S&P 500), it will double every 7.2 years. In thirty-six years, when they reach sixty-six, their current $10,000 investment can double five times:
$10,000 X 2 = $20,000
$20,000 X 2 = $40,000
$40,000 X 2 = $80,000
$80,000 X 2 = $160,000
$160,000 X 2 = $320,000 at age 66
So with their current savings of $10,000 alone, they’re halfway to their goal! Rachael was so surprised to hear this great news.
Now all they need to do is squirrel away some money each month in order to meet the other half of their goal. It is likely Rachel’s income will increase with raises, promotions, and career moves, and David’s contracting business is expanding rapidly. This should dramatically raise his annual profits. As the Levines eventually accumulate more cash to invest, their Money Machine will gain more steam. Another plus: They have only about $50,000 left to pay on their mortgage, so they will own their house by the time they want to ease out of working full-time.
To grow my own dignity money, I estimate that I will probably need to put $700,000 in my Money Machine. That means I’ll have $70,000 a year to live on. To advance to the next step—to live more freely, to travel several times a year, and to entertain and frolic without guilt at some of my favorite stores—in other words, to maintain my present lifestyle—I will have to have more cash invested in my Money Machine. I will need in excess of $1million. And to dream bigger, I’ll require several million dollars. The important thing to note is that creating the Money Machine begins with securing your financial necessities and then moving on. And the tools are at hand to make this process easier than our fears would lead us to believe.
Betty figures she’ll need less dignity money than I do. She earns $76,000 a year as an attorney at a small public-interest ﬁrm that specializes in environmental law. Betty grasps the principle of spending less than you earn and investing the difference and is prepared to do exactly that. Right now, her basic, no-frills monthly expenses total $3,500. That means her Money Machine will have to contain $420,000 to establish her dignity money.
“If I cut back my expenses, I think I can eventually squeeze out $10,000 to invest,” Betty announced.
“That means you have to really shave those credit cards,” I reminded her.
But if Betty is able to commit $10,000 a year to her Money Machine, she’ll be in great shape by the time she’s sixty-five. Sounds good, huh? I’ll show you how to do this, too. We’ll also consider the benefits of securing tax-free income from your Money Machine to boost your results.
“It’s that simple?” Betty asked.
“Yes. It can be simple and very doable,” I replied. “There is no reason to develop indigestion pondering what your financial picture will be in the future. It’s possible to handle it all along the way and still have a good time enjoying life as you go.”
“And what do I have to do with my Money Machine in the meantime? What’s the maintenance?” Betty hurled a chain of questions; this is exactly what you should do when devising money-building strategies and growing and maintaining your Money Machine. Ask as many questions as you wish in order to feel comfortable. Then take action.
“I have a house. Does that count in my Money Machine?” Betty asked.
Many people I talk to say that they have a big investment in their house, and they count this as an asset for the future. But remember, your house is money in “jail.” The same is true for your car. That’s because these two commodities have your money tied up, unable to work for you.
Your house and your car exist mostly for your use: They don’t produce cash ﬂow to meet your expenses. That’s why they’re not in your Money Machine. There are exceptions: If you rent a room in your house and collect rent, it’s a cash-producing asset. And, of course, commercial real estate is a definite investment option. But under normal circumstances, not only do your house and your car not produce income, but they usually require upkeep, which raises your monthly expenses.
Similarly, I’m sometimes asked whether a small business you own is part of your Money Machine. No, not if you are the business— that is, if your labor is central to making it work. When that’s the case, annual profits from your business are much like your salary from a job: This is work income that you’d like to eventually replace with investment income so that you have the option of walking away from work when you’re ready to do so. For your business to be an investment in your Money Machine, it has to have value independent of your labor and thus, the potential to be sold to someone else for cash.
If you want to turn a small business into a Money Machine investment, you, as the entrepreneur, may have to change roles. You must stop being the center of your business and begin shaping it so that it can exist without you. Think of your business as you would a child: It has to grow up and leave home. Only then will your business be an asset in your Money Machine.
You will begin building your Money Machine by spending less than you earn, and investing the difference in your Money Machine. First you will create a Money Machine that has sufficient investments in it to pay you dignity money each month, which can replace the money that you would have to earn from working. Then you will be on your way to creating the lifestyle income that you want to derive from your Money Machine so that you can eventually stop working and maintain the style of living that suits you. This is the path to financial freedom.