In this podcast, I discuss what the lockdown quarantine experience can teach us about our own financial situation and how we can use that information to achieve financial freedom quicker than we ever thought possible.
Please note: I realise that this is a traumatic time for many people around the world and it might seem insensitive to talk about subjects as unimportant as money right now. If you have been affected by Covid-19 my heart goes out to you and I wish you all the strength in the world to help you through this.
In our little part of the world (New Zealand) we have largely been spared the death and destruction caused in other countries and many of us are about to enter back into some semblance of normal life. This post is for those people who want to learn what they can from this experience to improve there lives in future and to ensure they are prepared when the next pandemic comes along.
This experience has shown us that we can survive on a level of spending far below what we otherwise would have experienced in the past.
Disclaimer. I’m not a financial advisor. It’s important that any advice that you hear in this podcast or read in this post, you understand that this is from my point of view. This is my personal situation that I’m sharing. The advice I provide or the suggestions I talk about may not apply perfectly to your situation, so please get professional advice before making any big changes.
Audio link (written version below)
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What does the word ‘wealth’ mean to you?
How would you define being wealthy?
Stop and think about it for a moment. How would you know when you have become ‘wealthy’?
For most people, the idea of being wealthy connotates material things. And most people, if you ask them, “How would you define being wealthy,” they’ll throw out a random number. It’s having $5 million.
There’s a book I read a long time ago, which changed my thinking on this massively. It included the idea that wealth is how long you could survive without working, without earning any more money.
How many weeks, how many days, how many months, how many years could you survive if suddenly your income stopped?
In other words, wealth = freedom.
Wealth is the freedom to make your own choices and decide what you want to do with your time. And I think that’s a really powerful idea because if you think about wealth as freedom, then that freedom is defined by two variables.
1. How much money you have in your bank account.
2. How little money you can live on.
That’s a powerful idea. And I believe that the second variable is actually the more important of the two. If you can find a way to live on a minimal budget, you can reach the point of financial freedom so much quicker than if there’s no control. If there’s no thought put into it.
This is something I’m really passionate about, because if you can obtain this level of financial freedom, then it opens up a whole lot of opportunities for you.
If you can learn to minimize your expenses, you create choices for yourself.
If you don’t like your job, you can stop doing your job. Maybe you want to move to a job that you’ll enjoy more but it pays less? You can find a way to do that. Do you want to retire early and go travelling the world and be a travel blogger? You can probably find a way to do that. If you want to work part-time and spend more time with your family, there’s a way to make that happen.
Check out: How to create the working future you deserve
How does financial freedom tie into the Covid-19 lockdown experience?
This lockdown experience has provided us with an extremely valuable understanding of what life would be like on a really strict budget.
One of the issues for our family is we would always ponder, what could we live on if we really had to? How little of an amount of money could we live on? And we’ve tried to do budgets in the past and estimate this number, but it’s all guesswork. What we’ve experienced over the last four weeks has shown us, if we take away all the discretionary spending, how little we can actually survive on.
And I don’t know about you, but I haven’t felt particularly restricted. I don’t even know where my wallet is in the house right now, having not used it once in the past four weeks.
I haven’t been able to do any sort of spending, but I haven’t felt deprived, haven’t felt short of anything. We’ve got all the food we need. My family’s here. They’re safe. The power’s on. The heaters are on. The heat pump’s going, and we’ve had beautiful weather. We’ve been able to get outside and go for walks. And I’ve been pondering this idea that isn’t it incredible, when you think about it, how much of our spending is discretionary, ie. purely up to us as personal choice?
Look at your expenses from the 1st to the 28th of April, 2020.
Just go into your bank accounts. Hopefully, you’ve got one credit card that you use for your expenses, but if you’ve got multiple accounts, total them up over each of the accounts and look at the total amount you’ve spent over those four weeks. And that will give you an idea of how much you could live on over a four week period if you really, really had to.
When I worked that out, that number came in at $2,600 for that four-week period for my family (2 adults, 2 pre-school kids and a puppy). And if you times that number by 13, that’ll extrapolate it out over a year-long period. And for us personally, that means our expenses are, for a real minimal lockdown lifestyle, around $33,800 per year.
So why does that matter?
Well, it’s extremely powerful because if we were trying to make decisions on whether one of us was going to be a full-time stay-at-home parent, we now know how much income we need from at least one of us to make that happen.
If we want to up our savings rates because we want to do a big holiday in the next few years, then we know that’s the minimum we can live on. So if our household income is actually $100,000 a year (after tax), there’s potential for us to save up to $60,000 – $65,000 a year, if we really, really tried our best to do so.
Using the last four weeks of spending isn’t a perfect guide.
I’ll admit that. There will be expenses that come up that haven’t happened during the lockdown. There are always things that happen in life. Something will break. You’ll need a new dishwasher, or hot water cylinder or similar. You have one-off expenses like dentist bills, all sorts of things. But even if you added in a certain amount of money to account for that (eg. $5k per annum), for a lot of people, this experience would have shown them that they can survive on a level of spending far below what they otherwise would have experienced in the past.
This information could help you make important decisions
Maybe you want to make a career change. Or maybe you want to go back and study? Or maybe just take a mini-retirement and hang out with your kids more? Maybe you want to take a ‘skillbatical’, a word I learned recently, which perfectly sums up what I’m doing right now. Understanding more about our minimum living expenses will allow me to keep doing what I’m doing for longer. With less anxiety, knowing how long our funds can last if we need them to.
I hope these ideas spark some interesting conversations in your household around financial freedom and how to define ‘wealth’. If you are keen to learn more, there are a few resources I would recommend, listed below. Best of luck on your journey.
An awesome kiwi finance blog which inspired this post:
The coolest finance blogger around a.k.a “Mr Money Mustache”
A Facebook group of like-minded individuals:
The book which started it all for me:
The Four Hour Work Week (book)
How to create passive income with property investment: https://www.ifindproperty.co.nz/blog/passive-income/