Your Money or Your Life, Calculating Your Lifetime Savings Percentage

I have read several sites and posts where people have said that Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century was the one personal finance book that had changed their lives the most. For one reason or another, I had never read the book. I had my own "best money book" in The Millionaire Next Door: The Surprising Secrets of America's Wealthy -- a book I had learned from, applied to my life, and amassed a decent net worth as a result. So I never thought I needed to read Your Money or Your Life.

Then I was in the library a few weeks ago looking at the personal finance books and somehow it jumped out at me. I thought "I should read that -- if for no other reason than to let FMF readers know what I think of it." So I checked it out and started reading.

As you might imagine from the title, the book lists nine steps people should take to get a handle on their money. I'm going to give you all nine steps over a series of posts and let you know my thoughts on them.

Step #1 actually has two parts as follows:

• Find out how much money you have earned in your lifetime.


• Create a balance sheet of your assets and liabilities. What do you have to show for the money you've earned?

I think this is probably the most depressing money-related exercise most people could ever imagine undertaking. This is what it would look like for many Americans:

• Age: 44


• Years working: 20


• Average annual salary for 20 years: $40,000


• How much money you've earned in your life: $800,000


• Net worth: $40,000 (I used the mid-point between the age and income numbers on CNN Money's net worth calculator)

Look at it this way. You've slaved for 20 years, are halfway to retirement, and what do you have to show for it? $40k. That means, even with growth/appreciation of your savings, you've only been able to squirrel away 5% of what you've earned in your life. And not only that, but it's so small that it's a pittance of what you'll need for retirement, not to mention college and other major expenses. See why it probably seems so depressing for so many?

So why do they ask us to do it? Because it's part of "coming to terms with your past relationship to money." It then sets the stage for "looking at [your] present [relationship with money]." Translation: this shows you how messed up you are because of bad choices in your past. Now we're going to work on setting you straight.

Ok, I can give them a partial break. After all, my first step to great finances is to calculate your net worth. But it's the lifetime earnings that just seems to be over the top for me. It will hit people pretty hard that they have worked so long and so hard for so little. Then again, maybe that's what it's designed to do. :)

So far, I'm not really feeling the inspirational vibe that so many people have noted comes from this book. Then again, I'm only done with step 1. Stay tuned to see if things change for me or not.

Update: Click here to read part 2 of this series.

Comments

[Matt]

I find the average hard to believe. But then again alot of things surprize me.

Some of us are just not the norm.

[Jon]

You can actually total up the real income numbers by using the Social Security Statements you receive. It's not less discouraging, for being more accurate.

[Holly]

I bought this book a while ago due to the many accolades from PF bloggers. I did not enjoy reading it nor did I find anything revolutionary.

The single thing I found interesting was a graph illustrating the gap where investment dividends/earnings are greater than your expenses (and how that represents financial freedom).

It's very difficult to have those types of returns on investments these days; even real estate is a gamble.

[RichUncle EL]

The book might say that 40K is the average for a 40 year old American, but I tend to see it differently, as that example is way below average. Also the average numbers get skewed when it comes to extremely low figures from certain individuals.

[Sean @ One Smart Dollar]

Looking forward to hearing your thoughts on the rest.

[DR]

Looks like ours is around only 35% of total earnings. Eye opening. Always assumed it is around 50%.

[DCS]

That "average annual salary for 20 years" doesn't mean the average salary of a 40 year old, but the total income from all 20 years added up and divided by 20, right? So the salary you earned when you were 20 (much lower than you make now), plus the salary you made when you were 21, etc. If anything the figure seems high to me. Presumably the previous years' wages would be lower, dragging the average down.

I'm one of the people that said this book did the most to change my outlook on personal finance. It is most certainly intended for people likely not reading this. If you are here, that book will probably not help you much. It is very much a beginner's guide.

I also won't say I did every step. But I did add up my total wages (from SS statements) then look around at what I had and thought about it's value. I think the point of the exercise, like several other steps, is to emphasize the cost versus value ratio of stuff. This is an important theme throughout the book. We all talk about tracking expenses and having a budget - that exercise is trying to show the reader why that's important, instead of just saying "You need to do this." It's also getting you to do a net worth calculation for people for whom net worth is right up there with budget and expense ratio as financial mumbo jumbo that makes a beginner's eyes glaze over. It gets you to pull out all the junk, see how much is useless, and think about how much it cost and how much it is worth now. It also graphically illustrates just how much money you can't even account for, and makes you start thinking about why that is, shaping your mindset for later steps like tracking expenses.

As a matter of fact, the initial act that lead me to the book was the 2000 census. I got the long form and it asked how much I had spent on natural gas (or something like that) for the last year. My initial thought was "how the heck should I know" which I suspect would be a common reaction (of people who don't read FMF of course). But as I thought about it, I wondered "You know, why don't I know that? Maybe I SHOULD know it!" So I opened an application that came bundled with my computer for the first time. It was called Quicken. The rest is history.

But I'd have to agree - step one certainly wasn't the aha moment in the book.

[Catherine]

Count me among the fans of YMOYL. In my opinion, it is far superior to and more widely applicable than the "Millionaire" series. The Millionaire books, and the research behind them, are rife with survivorship bias. While valuable and interesting, they simply are not a cookbook for how to become a millionaire.

YMOYL's value is that it encourages the individual to decide the worth of their time and thus determine the real costs of certain choices.

I'm very interested to read your opinion once you've finished with it.

[Old Limey]

My wife and I left England on 11/2/1956 with $450, our passage paid and the promise of a job.
I worked for 2 years in Canada, the rest in California as a structural engineer for Lockheed/Martin.
I retired in September 1992 with no debt and a total investment portfolio incl. my 401K of $319,950.
I added up my gross salary since leaving England, it came to approx. $950K ($1394/week maximum).

On 12/28/1992 I moved all of our investments to Fidelity and began active trading of mutual funds.
By 12/31/1998 it had grown to $1,460,345.
By 12/31/1999 it had grown to $2,378,452, a one year gain of $918,107, close to my lifetime earnings.

What worked for us was:
.. Working and saving hard for 36 years and living the typical immigrant life, well within our means.
.. Having a great marriage and a supportive wife that also worked hard after the children were older.
.. After retirement, learning to become an active trader of mutual funds.
.. Most of all - Taking full advantage of the once in a lifetime dot.com bubble and a great economy.

[Apex]

@Holly,

"even real estate is a gamble."

I suppose everything is a gamble, but this sounds a bit like rear view mirror analysis. If real estate is a "gamble" now then it has never made any sense because it is certainly a better time to be investing in real estate right now than it has been at any time since 1991.

If you judge an investment by how it has been working in the past you are likely to chase diminishing returns and that usually doesn't work out so well.

You don't want to get into tech stocks in the late 90s or houses in the mid 2000's or Gold right now. The gains are already in.

The good thing about real estate right now is you don't have to have any good sense of when the real estate market will recover. In fact it never has to, because the cash flow that the properties generate right now are better than they have been for decades so if the property never goes up or even goes down even further in value, it makes better than should be expected actually. That is as minimal of a gamble as I can think of when it comes to the investment world.

And as a side note that is partly why the real estate market has to eventually recover because the investment returns are too good. Eventually when the foreclosure inventory gets worked through and supply of cheap housing reduces, the investors and home owners will bid up houses because landlords are making too much money currently on rent. Either other investors will come in or responsible renters with good credit will buy houses which will bid up prices. Markets are cyclical, judging them on the recent past leads to very large mistakes.

[Old Limey]

Apex,
The housing market is already coming back nicely in the SF Bay Area, particularly the high priced segment of the market ($3M and up) that is in demand by many of the rising stars in the hi-tech companies. The rising prices have also prompted more homeowners that had been wanting to sell for some time to finally put their homes back on the market. Some homes have even undergone a bidding war between multiple would be buyers.

At 77 and after 20 years of being retired I no longer think of our home as an investment. It wouldn't change a thing for us if it was only worth $10, it's where we plan to spend the remainder of our life and after that we're leaving it lock, stock, and barrel to our daughter in order to keep it in the family and preserve its low property tax assessment.

The real estate market has to be judged entirely differently from financial markets such as mutual funds. The volatility differences are huge. Unlike mutual funds, homes also have all kinds of ongoing expenses and cost quite a bit to sell. I find that the performance of the recent past, i.e. several months, to be of great help in deciding whether a mutual fund should be bought, held, or sold. Mind you though I don't believe in falling in love with a mutual fund investment, I believe in riding uptrends but selling when the trend changes direction. Various indicators help quantify trends, the most common being an exponential moving average of a number of days based upon the fund's volatility.

[Crystal]

I think it's supposed to shock the reader, right? Like, "look, you are sort of sucking" and then they can start saving more? Let's see how my rundown would be...

•Age: 29

•Years working: 7

•Average annual salary for 7 years: $42,000

•How much money you've earned in your life: $294,000

•Net worth: $267,400 (so I guess $130,000-ish since I am married and there are two of us...)

Eh...

[BD]

It sure is a depressing exercise, especially for people whose average yearly earnings over their lifetime are closer to $10,000 a year.

[Apex]

@OldLimey,

I see some of those same trends in MN although not at the high end, more at the low end. However places like SF with limited land and large demand as well as tech hot beds, some people with lots of money, etc, makes it kind of a market unto itself.

As far as my comment about not trying to focus on the recent past, my recent is a little longer time scale than you are talking about. I believe you use an exponential moving average strategy to move in and out of your funds. I can see value in that philosophy. You are trying to detect turning points. The recent past I am talking about is more like tech stocks are up 400% the last 5 years ... run away. Housing prices have been going up 15% per year the last 5 years ... run away. Gold is up 300% in the last 5 years ... run away. People who get in at those times without an exit strategy have missed most of the gains. What is left for them?

For housing recently it is that housing is down 35% the last 5 years and every one is scared of them. People are now saying its better to rent than to own. People no longer think of a house as an investment or a source of funds for retirement. When those things start happening that is indicative of the downside mostly having been already taken out of the market. It doesn't mean they are going to go up or that the absolute bottom is in but when the rest of the numbers make sense, the recent decline in housing gives me no concern.

[Rick Francis]

Apex,

What are your thoughts on REITs? I like that they are diversified so I don't have to bet everything on one property, I can invest small amounts at a time, and I don't have to worry about the property management.

It seems REIT could do very well today with the combination of low interest rates and depressed prices, however, Yahoo finance lists VNQ (Vanguard REIT Index ETF)'s PE ratio at 43, which I find disturbingly high.

-Rick Francis

[Apex]

@Rick,

Funny you should mention them because there are 4 that I am paying close attention to with the intent of adding a little of them to my retirement portfolios.

Before I say anything about them I will give a couple caveats. 1. While I am bullish on the real estate sector in general from here, I am far less informed about the internal details of how a REIT operates. 2. While they provide some diversification I have noticed in looking at the charts that they are closely coupled to the overall performance of the market in general. While some correlation might be expected the level of the coupling is stronger than I would expect. This indicates to me that I do not have enough of an understanding of how they work.

It's also the case that they all seem to trade at a P/E in the 40s. Not having enough information about the internals of how a REIT operates I do not know how to analyze that. For instance, what counts as profit (the E part of P/E) for a REIT. Is it only operational profit or is it also asset appreciation/deprecation profit. How do sales of properties affect profits. Is a capital gain or loss accrued to annual earnings. Is that gain or loss somehow capitalized? Again, I just don't have enough knowledge of the internals of how a REIT operates.

What I do believe about real estate is that in the short term, operational profits should be quite good in general. In the long term I also believe appreciation profits are likely to do well over say 20 years. Certainly it's a good starting point from an appreciation profit standpoint.

I am trying to learn a bit more about them before I pull the trigger on any but the 4 that I am tracking after reviewing about 20 are the following:

All of these are U.S. REITs.

RWR - broad based REIT comparable to the VNQ
REZ - residential REIT which I feel I have more knowledge of and have a better feel for.
RTL - retail REIT which I have very little feel for at all but am trying to get a bit of an understanding of.
ICF - large REITS that supposedly are designed to benefit from industry consolodation, but I wouldn't put too much stock in that prediction.

This is not intended to be advice to purchase any of these, although I do intend to take some minor positions in the near future.

[Financial Independence]

I am totally agree with your calculation. However if we will look at this from this point of this point of view - it is more
economically sound to be DINKs rather than have kids.
What about taxes? out of $800k roughly 20% are the taxes or $160k. Where are they? What kind of service have I recieved for $160 k?

It is quite easy to point to people, but it is not always their fault. Then at the current market performance
is it worth to invest or just live your life in full, try new thing and enjoy yourself?

[Spike]

My favorite exercise in YMOYL is comparing money earned to "life energy". As they state in the book (1992 edition) "how much life energy (in hours) are you currently trading for how much money (in dollars)- i.e. how much money are you making for the amount of time you work?" This exercise was quite enlightening for me and really helped me to improve my "relationship" with money approximately 15 years ago. I still keep track of my "real" wage vs. actual costs of items every day, every year. I also read blogs like this to help keep me on track.

[Lance@MoneyLife&More]

This is a pretty cool exercise but being younger definitely helps. I'm doing pretty well for my mid twenties :)

[Mike Hunt]

This is a great exercise, and one that I wrote a draft article on for FMF but never published.

I have been able to save much more than 50% of my total lifetime earnings. The key is not only to make more but to keep it as well.

-Mike

[FMF]

Mike (and others) -

I wonder what the "goal" should be. What is average, acceptable, etc.? The book never gives a standard to judge by.

[Catherine]

Mike/FMF et al,

The book doesn't give a recipe for mayonaise either. It's about YOUR money and YOUR life.

I appreciate the chance to compare my earnings and savings against the average (especially against my siblings) because I come out ahead and that makes me feel smarter than almost everyone. But it isn't a particularly useful exercise.

What I get from YMOYL is a clearer picture of how much I need, how much is enough, and how much time and effort I should devote to accumulating "enough." This is unique to every individual. Publishing a standard is like stating everyone should weigh 150 lbs. At 5'9" that's quite thin for me, but for my MIL, it would be obese.

A book that promises how to make a million is selling a lie. We can't all get there. Can most of us improve our present circumstances? Absolutely. That is the point of YMOYL.

[Old Limey]

Apex,
I took a look at the four REITs you mentioned.
All four are way too volatile for my temperament.

In just the six trading days between 5/11/12 and 5/18/12
RWR -7.07% loss -- ANN=-97.51%
REZ -5.50% loss -- ANN=-94.23%
RTL -6.70% loss -- ANN=-96.96%
ICF -7.03% loss -- ANN=-97.46%

[FMF]

Catherine --

It's a percentage, not an absolute amount, so it should be easier to set some sort of standard. Not that you (or others) would like to see it, but I for one certainly would.

And a mayo recipe would be nice too...

[Catherine]

FMF -- I see your point, but I still don't think it's necessary or especially meaningful in the context of YMOYL. The median is not the message.

The average, even as a percentage, changes a bit from year to year and changes dramatically from generation to generation. The value of the book transcends both the short and long term horizons and even individual circumstances.

My father was a natural musician who trained to be an accountant. He was a government auditor by day and took side gigs on nights and weekends for extra money to support his young family in the 50's. It was, after all, extra money and he was a numbers man. At a certain point, he saw a diminishing value to the fun and good paying music gigs, then scrapped it to focus on the 9-5 plus family time. He likely just did whatever my mother told him to do, but he could have applied a cost/benefit analysis to the choice. There was a cost to quitting the part time job. There may have been a cost to keeping it. Was it worth it? How would an economist quantify that? What was the impact over a lifetime in terms of earnings and relationships?

These are the kinds of questions all of us ask ourselves each day. Do I buy this home with the long commute or that one with a short commute and lousy schools? Do I go $50,000 into debt for grad school? Do I switch careers for something more meaningful and less stressful? Do I move to support my spouse's career? Do I buy Hellmans, Miracle Whip or make my own?

I'm content with the percentage of lifetime earnings I've accumulated. In my twenties, I earned barely above minimum wage and we bought a home that reflected our modest earnings. Decades later, I'm financially in a completely different place, different field with lots of experience, but the same home. The gap is is exponentially different. Comparing where I am to the average is a trap. Either I'm smug because I'm doing so great or I risk coveting another's balance sheet if I fall below. I should only evaluate where I've come from; where I'm headed; and what has value it has to me. In other words, how much is enough?

PS.... have your kids learn to make mayo. It's cheap, easy and tastes way better than the stuff in a jar.

[FMF]

Catherine --

You sure like mayo. :)

I was thinking a benchmark (something to shoot for) would be better than an average or mean. Something like:

"If you have saved at least 20% of your lifetime earnings, it's likely you're a good saver and on the right track."

Just looking for perspective.

I understand the time/money trade-off you're talking about above. The book covers it again and again and again (even though I "got it" the first time).

[Apex]

@OldLimey.

You are correct sir. Of course they were up that same percentage in the 20 or so trading days prior to that. And as I had stated they seem to be highly correlated to the market. The REITs waited a few days after the markets started selling off but then they caught up on the downside in those days you mentioned. If you look at the drop in the DOW and NASDAQ going back a few days earlier than that the loses are equally large in the market overall.

They tend to pay a slightly better dividend than other stocks, but in the end they are still a stock and with stocks comes volatility.

For someone who wants a stable real estate investment, I am sure REITs are not as lucrative as actually owning the property and managing it yourself. Its likely the case that any hands off passive investment is not going to be as good as if you are hands on doing it yourself.

If REITs are just as good as buying property then I should stop buying property and just buy REITs. I am sure I could not get even half or a third of the return doing it that way. I do not believe REITs are any kind of easy path to real estate riches.

[Old Limey]

@Apex
If you go back to the very bottom of the bear market (3/6/09) and happened to buy RTL then, by now you would have made 290% on your money (ANN=52%) but along the way you would have experienced a maximum drawdown of -23%.

If you had instead bought PIMIX (Pimco Institutional Income fund - 100K min. purchase) you would have only made 70% on your money (ANN=18%) but only experienced a maximum drawdown of 3%.

At my age and with the money I have I would go for the PIMCO fund since it can be considered a true Buy & Hold income fund with little risk, whereas RTL requires that you be a savvy trader that knows when to get in and when to get out.

As one speaker said at a conference I attended, "it's the part of the chart that's still to be drawn on the right hand side that matters and we must remember that history seldom repeats itself".