Season Investments

 facebook-logo.pngtwitter.pnglinkedin-logo.png

The Most Valuable Thing Money Can Buy

Posted on August 2, 2016

“The most valuable thing money can buy is freedom from worrying about money.” – Anita Dhake

2016-08-02_Money_Wad.jpgToward the end of last year we wrote an Insight entitled Escaping The Rat Race which was our response to a separate blog post that was lighting up social media entitled If You Have Savings In Your 20s, You’re Doing Something Wrong. The number one reason people become a slave to their jobs/career is because they lack the discipline to save money. Our society and education system puts all the emphasis on how to make money rather than how to keep the money we make. As such, most Americans fall prey to the rat race of working their entire lives but never feeling a sense of freedom to pursue their dreams and desires. A couple weeks ago I came across some interesting articles (Yahoo Finance, Forbes) about a women named Anita Dhake who bucked that trend by retiring at age 33 from her well-paying job as an attorney to travel the world.

Anita Dhake is a smart cookie. After graduating from law school in 2009, she was offered a job that paid her a base salary of $160,000 a year. That amount of money was a king’s ransom for Anita who had always embraced the thrifty lifestyle. As such, she asked the question, “If I make four times what the average person makes, can’t I retire four times earlier?” She set out to do just that by living on a small budget and keeping most of the money she earned from her well-paying job. The first thing Anita did was pay off the $100,000 she had in student debt.

I had an Excel spreadsheet with all my loans listed that I looked at every single day. Every paycheck, I would calculate how much I would need for my bills, and then I’d throw everything left over to the loan with the largest interest rate. Every bonus, every tax return — everything went toward my debt. I was also “lucky” in that I had to work a lot, so it was easy to save.

One year after starting her new job as an attorney in October of 2010, Anita had successfully paid off her entire $100,000 student loan balance. With the debt eliminated, she turned her sites on early retirement. After several years of aggressive savings, pay bumps, and bonuses Anita had squirreled away close to $700,000 and decided to call it quits. She made the decision to walk away from her high paying career as an attorney where she was making over $300,000 a year in order to pursue her dreams and desires of traveling the world. She now lives on a very modest budget of $24,000 a year but has been able to visit 49 different countries in her travels.

We actually ran Anita’s financial situation through our financial planning software where we modeled a $700k investment portfolio with a 6% rate of return kicking off $24,000 of living expenses (pre-tax, inflating at 2%/yr). Since Anita’s expenses are less than her assumed rate of return, the static analysis (e.g. compounding exactly 6% every year) shows that Anita’s portfolio would not only be able to cover all of her living expenses, but it would grow to a value of just under $3 million by the time she is 90 years old. That being said, we don’t live in a static world where you can make 6% year in and year out, so we stress tested the plan using a Monte Carlo simulation where the rate of return still averages 6% but varies from year to year. This analysis showed that she only has a 60% chance of her portfolio sustaining her spending levels through age 90. So it isn’t a foregone conclusion that Anita will never have to go back to work, but she has provided a nice long runway for her to enjoy the prime of her life.

2016-08-02_special_graphic.JPG

Obviously, not everyone can make $300k a year and live off a mere fraction of that amount. I consider myself to be a fairly frugal individual (rumor has it that I was linked to an alter-ego by the name of Frugal Franco back in the day), but even I wouldn’t want to live on $24,000 a year! That being said, the moral of the story is still valid and when asked about her unique circumstances, Anita had this to say:

It’s more about your savings rate than how much you earn. I knew people who made my salary and spent every penny. They will never retire. It will definitely be harder if you make less, but it’s doable.

Get off the hedonistic treadmill and don’t buy stuff… Embrace the thrifty lifestyle: You’ll find that you don’t need that much.

And therein lies the rub. For most people, it isn’t about how much you make that determines if/when you will ever reach financial independence it is about how much you save. For the vast majority of Americans, higher income just equates to a higher level of expenditures, which further perpetuates the rat race.

For some people, their job is part of what makes their life truly rich so working doesn’t feel like a rat race. For others, like Anita, it is simply a means to an end. This is why we like to speak in terms of financial independence rather than retirement since the latter is commonly associated with “checking out” from the workforce, which may or may not be each client’s individual goal. At the end of the day it all comes down to how much value you assign to your time and how much enjoyment you garner from your job. For Anita, the most valuable thing money could buy was the freedom of her time. She walked away from a job that was paying her $300k a year because she valued her time much more than her hourly wage and now she is able to pursue what makes her life truly rich.


elliott_headshot_bw.jpgAuthor Elliott Orsillo, CFA is a founding member of Season Investments and serves on the investment committee overseeing the management of client assets. He spent nearly ten years as a financial analyst and portfolio manager working primarily with institutional clients prior to co-founding Season Investments. Elliott earned a bachelor's degree in Engineering from Oral Roberts University and a master's degree from Stanford University in Management Science & Engineering with an emphasis in Finance. Elliott and his wife Gigi have three children and like to spend their time outdoors enjoying everything the great state of Colorado has to offer.


Subscribe to our Weekly Insight via email!

 


Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.