Apr 062017
 

A New Way to Measure Your Success

There are varying degrees of success and many different ways to define it. For example, in order to be a successful frequent flyer, you will probably need a lot of connections. 😀 And if you’re trying to lose weight, success is all about mind over platter, and winning that Nobelly Prize. 😄

how much do you value your free time?

Financial success is often evaluated in terms of income or wealth. But I often argue that time is our most precious resource. Unlike money, all our days are numbered. So given this reality, perhaps the best way to evaluate our success is to find out how much we value our free time. 🙂 This can be done with the following steps.

  1. Think of an activity that is neither pleasant nor unpleasant to do for you. It also can’t help you gain skills or make you smarter.
  2. Determine the minimum amount of money you would charge to perform that service for 1 hour for a stranger.

This mental exercise will reveal how much you value your time at an hourly rate. 🙂 For example, services I can provide that I neither like nor dislike include slowly folding laundry and walking around town for no reason.

I would have gladly accepted $20/hour to fold laundry 10 years ago. But things have change now. I would not give up my free time for any amount less than $40/hour today, because I can offer valuable skilled labour. Furthermore, I’m 10 years closer to death so there has to be an added premium on the remaining time I have compared to the past me. Due to simple economics, the fewer days I have to live, the more valuable those days are to me.

In a way, $40/hour is an indicator of my level of success in society. Perhaps a doctor or lawyer would value their free time at $120/hour. This wouldn’t be surprising given their place on the social economic ladder. It is not only a measure of their immense human capital compared to mine, but also their financial status.

How the Value of Time is Tied To Success

As self sustaining adults, the value of our free time should be the lowest at the start of our careers. But over time this value should increase to keep up with our growing human capital. Over time our demand for time is increased, and demand for money is reduced because we can earn money easier and more quickly.

Continue reading »

Oct 062016
 

16-10-spend-less-with-inexpensive-hobbies

Why It’s So Easy to Overspend

We are all tempted by instant gratification to some extent. And thanks to poorly implemented public policies it’s now easier than ever to live beyond our means. When we run out of savings, we can simply use credit to continue buying what we want. At least that’s what I usually do. 😉

Once upon a time people had to work almost constantly to prepare, track, hunt, build, forage, and gather resources so they would have enough food to survive the winter. But now the average American only works 34 hours per week, according to the OECD. That’s 20% of their available time. In other words, people spend 134 hours each week sleeping, eating, and doing leisurely activities that don’t involve getting paid for labour. That’s a lot of time to kill.

We have so much free time on our hands we often have trouble deciding what to do with it. Businesses use this opportunity to target our wallets, which leads us to buy things we don’t really need.

The Advantage of Distraction

In order to prevent impulse purchases we simply need to distract ourselves and do something else with our time and attention. 🙂 The best way to do this is to find free or cheap hobbies that can take up a lot of time. For example, if we are already preoccupied with reading the latest Harry Potter book, then we are less likely to think about shopping. To put it another way, we spend money when we’re bored or have nothing better to do. This is why many workaholics tend to be frugal. They’re so busy with work, they literally don’t have the time to enjoy all the money they’re making, lol.

I recently came across this Reddit thread about affordable hobbies that anyone can do. I will share the top activities mentioned in the thread and add some of my own ideas. We sometimes overspend because we don’t have the willpower to walk away from something we want. But hobbies such as the ones below can distract us so we won’t even get the chance to think about shopping in the first place, and therefore, save money. 🙂

Continue reading »

May 092016
 

Time and Annual Returns

I recently watched an interesting YouTube video about time and the rate of return, by finance columnist Preet Banerjee. He explains the relationship between an investor’s time horizon and his or her rate of return. Here’s a question to illustrate an example. If our goal is to accumulate $100,000 by age 65, how much do we need to save per month?

Here’s a table that breaks down how much investors will need to put away each month depending on their current age and the expected rate of return. For example, we can see that someone at age 30 who expects their portfolio to return 4% a year should save $109 per month.

16-05-time-rate-return-yt-preet

As we can see, the rate of return is a much stronger factor for investors with a longer time horizon. The 20 year old still has 45 years until retirement and how much he has to save is heavily influenced by his average investment returns. On the other hand, the 60 year old investor only has 5 more years before retirement so most of his accumulated wealth will come from savings rather than from investment gains. This means he shouldn’t take on more investment risk and reach for higher returns since the his rate of return simply doesn’t matter very much. This is why I have a relatively high risk tolerance, even though some people don’t approve. It’s because I’m in my twenties and if I can get that higher rate of return on my portfolio now, my life would be so much better in the future. 😀

The other thing to note about the table is that time trumps rate of return in most cases. If one person starts to invest at age 40 and earns a 2% rate of return, and someone else starts just 10 years later but earns a 6% rate of return, then the first person would still come out ahead despite making 4% a year less. In other words if we start investing 10 years earlier than our peers, then that will have the same effect as outperforming their investments by more than 4% each year. Wow! Let that sink in.

We can also track our retirement progress with this information. For example if we plan to retire in 15 years we can use the AGE 50 row of numbers in the table above. Let’s say we want to accumulate an extra $300,000 between now and our retirement date. We know the table is based on an accumulation of $100,000. So to find out how much we need to save each month we just multiply the green numbers by 3, since $300,000 is 3 times $100,000. The tricky part is guessing which rate of return we are most likely going to see over the next 15 years, but I think 4% sounds like a reasonable assumption.

So start investing as early as possible and front load more risk to the earlier stages of wealth accumulation. 🙂

——————————————————————–
Random Useless Fact:

16-05-half-Canadians-live-North-of-this-line

 

 

Aug 142015
 

Time – A Nonrenewable Resource

Is $700,000 enough to last you for an entire lifetime? Imagine you were given $700,000 and can spend it any way you like. The catch is you can’t invest or make any more money for the rest of your life. If you were forced into such a scenario would you spend your days differently?

Everyone already experiences this in the form of time. Most people are given about 700,000 hours in this world, plus or minus maybe 5% depending on gender, class, and geography. I’ve already used up about 250,000 hours of mine. That was valuable time I can never get back.

15-08-running-out-of-time

We are all humbled by time. Wealth is the ability to fully experience all that life has to offer. Money will only get us so far, but the rest is up to our internal discourse about how to spend our time. It doesn’t matter if we’re financially rich or poor. Everyone is ultimately limited by that 700,000 hours. Time is the ultimate equalizer.

All we have to decide is what to do with the time that is given us.” Gandalf

The important thing is to enjoy the things you’re doing right now. Time you enjoy wasting is not wasted time. 🙂 Unless you enjoy attaching all your watches together to make a belt. Then that would be a waist of time. 😀

Continue reading »

Nov 242014
 

How do you handle change? Some people put it in parking meters. But everybody copes with it differently. Change can appear in many ways but it is always inevitable. You have memories and life experiences today that you didn’t have 20 years ago. Your appearance has probably changed quite a bit too. Even the matter of which you are made up of is different. Millions of new cells in your body are created everyday, and old ones die off. Scientists say about every 5 to 7 years just about every atom and molecule in your body is replaced. 20 years is enough time for your body to go through several of these cycles. It appears that the only constant in life – is change.

14-11-change

Similarly the person that you will become 20 years into the future will be psychologically different, remember very few of your current experiences, and have a body that only resembles your present one in appearance, but contain none of the same physical matter. So in a way, you have more in common with your next door neighbor today, in terms of memories, experiences, and history, than with your future self 20 years from now.

Continue reading »