YMOYL Chapter 1: The Money Trap

Isn't a lot of this anticonsumerism stuff, you know, kind of obvious?

This question is from a friend who's reading along with our virtual book club. My first reaction was to tell her how lucky she is. Seriously. If you instinctively view status-based consumption as an insane oxymoron, this book is gonna be a million times easier for you. Heck, your entire life is gonna be easier.

Remember though, this anticonsumerism stuff might be obvious to you, but it sure as hell ain't obvious to the rest of humanity. Which is why Chapter 1 contains twenty or so pages of discussion on things like the fulfillment curve, the ecological impact of our consumption, the idea of "enough," the concept of "making a dying" and so on. The authors walk you through all this before hitting you with the real meat of this chapter--the exercise at the very end where you add up your lifetime income and calculate your net worth.

Why do they take so long to get to the important part? Simple. Because most normal people won't do these calculations. The authors have to take extra time to sell the idea before they can actually get to it. Yep, even books on anticonsumerism need to sell their ideas.

I'm guessing that few readers here need to be sold on being mindful about money. So I'll leave the anticonsumerism discussion for the Appendix/Side Thoughts portion of this post and jump right into the key exercises, which start on page 27 of Chapter 1. This is where you do two things:

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

B: Find out your net worth by creating a personal balance sheet of assets and liabilities.

The authors say you can put this off until later, but don't. Do it now. And keep in mind the following quote, which is perhaps the most important in all of YMOYL:

The purpose of this exercise is to increase your awareness, not your arrogance or your shame.

Do not blame yourself for the information you turn up doing these steps. Do your best to accept and understand, and don't let your emotions--or your ego--sidetrack you.

Ego and emotion are dangerous here, because both of them will blind you from accepting the truth of your financial situation (for more on this, see below). And understanding the truth of where you are is a giant step towards getting to where you want to be. Don't judge yourself, and most importantly, don't let your ego get in the way of facing the facts. I promise you, it will be worth it in the end.

Your lifetime earnings: As the authors say, the easiest way to get at your lifetime earnings is to pull out your last statement from the Social Security Administration (this tip works only for US residents, but international readers may have their own similar government agency). Every year the Social Security Administration sends you a document listing your earnings over the course of your entire life.

If you can't lay your hands on your Social Security statement, then dig out your old tax returns. Remember to use your gross income, not your income after you've subtracted out deductions. Finally, if you can't get your hands on the records you need, just estimate as accurately as you can.

Don't forget ALL your income sources: I'm doing the exercises in the book too, of course. And in our case, our Social Security files only give us a partial picture of our total income, especially in the years after Laura and I finished grad school in the late 90s. This is back when we read YMOYL for the first time--and it was the beginning of a period of our lives where we saved money extremely aggressively. (See? This book really works!).

So when I summed up our income this time around, I had to make sure to include our investment income: things like interest-bearing accounts, stock dividends and municipal bond interest. Social Security (and Medicare for that matter) doesn't tax--or even track--these forms of income.

I'm getting ahead of myself, but what the heck, I'll just say it anyway: this tax favorability is just one of many reasons why you'll want to join the investing class and supplement your salary with income-generating investments.

Clearing the fog: Okay. So why is calculating your lifetime income so important? The book says that it "clears the fog shrouding your past relationship with money." I agree. Even the most financially challenged among us will have little choice but to be surprised by the amount of money we've earned over the course of our lifetimes. Further, once you see the sum total of your lifetime earnings right there in black and white, you pretty much have to accept that quite a bit of money has passed through your hands. You earned all that money, by yourself.

Keep in mind the story on page 29 of the housewife who never valued herself as a breadwinner, but after doing this exercise saw herself as a capable wage-earner. This is exactly why this exercise is powerful.

Now, on to calculating your net worth. What have you got to show for all of that money that's passed through your pockets over all those years?

Add up all your assets, then add up all your liabilities--and then subtract. The difference is your net worth. Pretty simple, and the book (on pages 31-37) is extremely clear on what to include and how to do it. Be especially careful not to get delusional and "forget" any of your liabilities.

You might be devastated by what you see. You might be pleasantly surprised. You might already know your net worth because you've made a healthy practice of tracking it as part of your current financial habits. Whatever the case, recognize that this is just the first step in a process. Don't be self-critical. (I know the book tells you this over and over again. Well, I'm telling you this over and over again too.)

And if you're not happy with what you see after doing these exercises, be grateful. You've been dodging the truth about your financial situation, and this is a giant step towards facing it. And owning it. Criticizing yourself for past financial mistakes is pointless. It's crying over spilled milk, and it stops you from objectively and honestly learning from those mistakes. And it will divert you from your goals.

As the book says, no shame, no blame.

But what if you can't handle the real numbers? I'm not going to lie to you. If you can't handle the idea of accepting and understanding your financial net worth, and if you reject the truth of your financial situation as it stands right now, then you have some serious mental blocks about money. You've got some work to do before you're ready for this book or this virtual book club. I'm sorry.

At this point, I have two burning questions for readers, and I really want to hear your thoughts in the comments section below:

1) What were your feelings and reactions after calculating your lifetime earnings?
2) And once you had arrived at your net worth, what were your feelings then?

Appendix/Side Thoughts:
1) A quick side note on your net worth: I believe you should calculate your net worth at least once a year. Laura and I generally do an extremely thorough calculation during the first few days of January, as soon as all of our year-end statements are available online. We use the calculation as one of our steps in our financial goal-setting for the coming year. This has worked extremely well for us over the years, and it's increased both our financial mindfulness and our wealth.

2) Diminishing returns on the fulfillment curve: If there's one gigantic insight from the fulfillment curve chart on page 24, it's that it explains why you were happier when you were young and broke, and why your belief back then that "if only I had more money I'd be happier" was deeply mistaken. Money can be weirdly ironic sometimes.

3) The concept of "making a dying": An important YMOYL metaphor that refers to the long hours, stress and irritation of a typical life focused on work-and-spend. This concept impacted Laura enormously, and it really helped her crystallize many of her views on money. What about you?

4) Gazingus pins: Another important metaphor in YMOYL. Gazingus pins are any tempting item you can't help but buy. For some people it's shoes, for others it's clothes. For some, it's--I don't know--Fabergé eggs. We'll be hearing this term again.

5) "Once we're above the survival level, the difference between prosperity and poverty lies simply in our degree of gratitude." I don't really have a point to share here--this was just a meaningful quote that deeply resonated with me.

6) Finally, thoughts on "knowing" the obviousness of ideas about anticonsumerism. I want to take a minute to remind readers how often our egos shield us from the truth by telling us we already "know" something--when in reality we don't really know it. I've written before how phrases like that's obvious or I know that already actually signal a lack of comprehension and knowledge.

This helps explain how so many people can say things like Yes, I know that money can't buy status, and Yes, of course I value my life over money ...while they run up their credit card debt to pay for status-based purchases.

Remember my friend who used the ego-protecting phrase "I'm just not preoccupied with money" as a defense mechanism to avoid facing his money problems? One of the most common money stumbling blocks is that our egos tell us we "know"--but our actions indicate otherwise.

Even worse, this is an invisible stumbling block: people can't see it even when it's right in front of them. Why? Because whenever there's an inconsistency between the facts and your ego's interpretation of the facts, your brain will try always try to protect your ego by telling you that there's no inconsistency. In psychology there's a word for that: rationalization.

So when someone asks you is more better? or do you enjoy making a dying? take a good hard look at your answers. Are the actions you take in your life truly consistent with those answers? Or is it just your ego talking?

We'll get much, much deeper into this in Chapters 2 and 3. For now, though, just keep these ideas in the back of your brain... preferably someplace where your ego can't get to them.

Readers, if there's anything you read here or in the book that strikes you as interesting, wrong, naive... or even ridiculous, please say so in the comments! What are your thoughts and reactions so far?

Coming up next week! YMOYL Chapter 2: Money Ain't What It Used To Be

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Ryn said...

The book finally showed up at my local library, so I'm answering this a little late.

After calculating my lifetime earnings, my feelings were pretty much a resounding "meh". I knew going into it that the number wouldn't be high, since I recently graduated college in the middle of the recession and spent a year unemployed.

I was a little happier after I calculated my net worth and realized it was greater than 40% of my lifetime earnings, and that most of it was liquid. If I can continue to keep expenses to less than 60% of my income, I think I'll be on a very stable financial footing. (I was also very grateful to my parents, who agreed to foot the cost if I was willing to head to a state college. If I had student loan debt as a liability my net worth would have looked much different.)

Daniel said...

Thanks for your thoughts Ryn. I think you're right, if you're practically right out of school and don't have that many years of life experience behind you, you're not going to blow yourself away with your lifetime earnings number.

However, the fact that your net worth is sitting at 40% of your lifetime earnings is really impressive. With that kind of a savings rate, you're going to be in great shape.

Glad you're joining us!


Brittany said...

This is an interesting exercise. I didn't count any of my pre-college-graduation income (seemed excessive to count every penny I earned since I started working as a young teenager, as that money went mostly to help my family and to put me through college).

So my total earned in the 3 years since graduation... about 77k. 22k went to pay off my whole student debt. Networth is currently 21k. This means I lived off of only $34K for the last 3 years combined.


This exercise has convinced me I am excessively cheap.

Daniel said...

I wouldn't consider that excessively cheap at all. You just made a mindful decision to pay down your student loans aggressively. To me that's just smart.

And with an expense line like that you will be in great shape as you work towards financial independence. I like it!


BB said...

I am very late to the party but I just finished reading YMOYL (1992 edition) and am now going back chapter by chapter to do the steps. I love how after reading it I feel encouraged rather than depressed like the other books on money I've read.
I was shocked to add up my lifetime earnings! I'm a stay at home Mom and have only worked part time jobs over the last 10 years but still managed to make over $100,000! I really expected it to be only half of that. I can see already how important each step of the book is. I am now ready to add our net worth but I'm unclear on if I should include IRA's or if I should leave that out since we can't touch that money for a very long time. Also I am curious if you added detailed amounts for all of your "stuff" or just a general figure. The thought of going through everything and giving it a value seems exhausting to me but then again maybe that's telling me something too. Thanks for writing this series, it's a big help!

Daniel said...

BB, thank you for your comment. First, yes, definitely include your IRAs and other long term investment accounts.

As for your "stuff," I would recommend ignoring most of your possessions and just concentrating on your major physical assets, like your car(s) and any equity you might have in your home. Remember that the key focus on this book is *financial* net worth, and that's what you'll be building as you live the YMOYL process.

PS: You're not late to the party at all.. there are plenty of readers who are picking up this series now, several weeks after I began it, and that's totally okay. I wrote all this up and posted it on the internet so it would be a permanent resource for anybody wanting to get on top of their financial situation in the future. Happy to hear you're already getting results. Keep at it!

Juli said...

I had a lot of ego-push-back on the first exercise for this chapter, because it seemed like it would be such a pain! I also tried to give the "already know this" excuse. But with electronic records nowadays, it was easy to complete the exercise, and interesting to see the results!

To answer your questions:

1) I was definitely surprised and impressed by my lifetime earnings; however, when I considered the number in light of what I've learned about "extreme" savings and early retirement, I literally, physically cringed. :\ For comfort, I'm reminding myself that we'd ALL love to go back and give our teenage selves all the advice we know NOW... but it takes the failures we've made along the way to earn that knowledge, and all we can do now is do our best moving forward.

2) I knew my net worth before I calculated my earnings... so I don't know if my answer is what you're looking for. I'm idealistically disappointed, but realistically... not entirely dissatisfied. Had I known what I know now, the proportions would have been a lot better. But I'm still "above average" for the various savings rates I've heard tossed around for the "average American." (Not that "average American" savings rate is a good benchmark to shoot for... o.O )

I wish I had understood the concept of financial independence (and its attainability by average Joes and Janes) a lot sooner in life, but that feeling isn't new. :\

Nevertheless, I would recommend doing the exercise, because it does give a nice, personal snapshot of one's ability to acquire wealth over time.