The year was 2001, and in hindsight I see what an arrogant bastard I’d become. I was 22, a few months post graduation, and enjoying my first professional job as an engineer. I was pulling in $50,000 a year, an unimaginable fortune for me.
A little history: I grew up lower-middle class. My mom stayed at home, and my dad worked for the government were he’d slowly earned his way to a cushy $50,000 salary. I went to a great private college, but only because most of it was paid for by FAFSA government grants. The rest was paid by student loans and a “work study” job on campus. Because the school was an expensive nationally ranked engineering school, most of my college friends were relatively rich. Almost none of them had jobs, and almost all of them had cars. I, on the other hand, travelled to my job on a $10 bike that I procured from a police auction. I didn’t even bother to own a lock. I lived a genuine frugal lifestyle, but not by choice. I was just me making sure I had food and beer money. Perhaps I grew an inferiority complex during this time, I’m not sure.
Regardless, when I got that first job in 2001 I went from broke to rich in an instant. Like a prospect signed to the NBA straight out of high school, I had no clue how to measure money. All I knew is that for the first time in my entire life, I could buy pretty much anything I wanted. I had $3500 coming in each month, and a $600 rent. Considering a box of Mac & Cheese was only $1 back then and my taste buds were still equipped for Bud Light, I was left with a lot of spare change. This sudden financial change had significant effects on me, mostly for the worse.
Shortly after I started the job in Texas my Dad came to visit me and we began talking. I’m not sure what tipped him off, but he obviously sensed my newfound arrogance, and brought up the discussion of money. The conversation is fuzzy 13 years later, but I distinctly remember bragging about one thing very clearly:
“If I see a penny on the ground, it’s not even worth my time to pick it up. I make $50K a year. That’s $25/hour, almost 50 cents a minute, which is practically a penny every second. So if it takes 2 seconds to bend over and pick the penny up, I’ve wasted my time.”
His response, with a particularly smug look:
“Someday you’ll understand, buddy. Someday you’ll pick up the penny.”
I shrugged it off. What did he know? It took him a degree and 25 years of work experience to get where I got with just the 4 year degree. As I said… I was an arrogant bastard.
My dad was wrong about a lot of things. He told me someday I’ll wear a tie to work, that I’ll have to get into management and speak more eloquently to be successful, and I’ll have to get comfortable speaking in front of large audiences (all things he did). He also said the Pirates would someday win the World Series again. Wrong, wrong, wrong. But he was right about one thing: eventually I realized that I should pick up the penny.
Choosing not to pick up the penny is what I refer to as Income Thinking. It’s the thought process that weighs the time spent doing a task vs. the time it would take to earn enough income at a traditional job to pay someone else to do the same task (or to pick up the penny).
Income thinking is calling the plumber if the garbage disposal breaks. The logic would go like this: Let’s say you make $50/hour and the plumber will charge $200 for parts and labor. It would take only from morning until lunch time at your cushy job to pay for this plumber, and when you come home it’ll magically be fixed. Alternatively, it would take you more than 4 hours to diagnose the problem, do some Google research on the solution, find the parts at a local hardware store, go to the store to get the part, then finally come home and get you hands dirty fixing the disposal. The Income Thinking choice is easy, you call the plumber.
The same is true for all kinds of similar choices – broken refrigerators, furnaces, and washing machines… You name it. In almost all examples, taken on a case by case basis, a well-earning professional using Income Thinking will come up with the same decision… Outsource.
Income thinking also expands to more unskilled tasks such as grass mowing, car washing, house cleaning, window washing, food preparing, and, believe it or not, Christmas light hanging! People pay $100 to hang up and pull down Christmas lights. This is a real thing!
Expense Thinking is totally different. Expense Thinking is differentiated from Income thinking in that you consider your expenses when making the decision to do a task yourself. For those living paycheck to paycheck, income and expenses are the same, therefore the decision would likely be the same. Ironically and unfortunately, many people have expenses matching their income as a result of their Income Thinking.
Let’s take the garbage disposal situation again, and this time let’s use my personal situation since I’m now a penny-fetching Expense Thinker:
The plumber will cost $200 to fix my garbage disposal. My family of 4 budgets about $80/day. Wait a second!?! This plumber wants to charge me 2.5 days of living expenses to fix my garbage disposal?!? In this case, the logic for me is just as obvious as it was for the Income Thinker – but with opposite results, there’s no way I’m paying a plumber 2.5 days of living expenses to do something that I can do myself. I can use Google to diagnose the problem, then bike down to the hardware store and pick up the $5 part myself. Even if it takes me a day to diagnose, and half a day to do the dirty work, I’ve still come out well ahead. I’ve also learned a valuable skill, so that if the disposal breaks again I’ll already be familiar with it’s anatomy.
As with Income Thinking, Expense Thinking also expands to other more unskilled tasks: lawn mowing, car washing, house cleaning, window washing, food preparation, and even our good friend Christmas Light hanging.
Expense Thinking supports self-reliance, and self-reliance decouples one’s needs from money. And freedom from the need of money leads to emancipation from wage slavery.
Expense Thinking also applies to other expenses. Monthly cable bills, expensive cell phone charges, car payments, laptop upgrades, and daily lattes and lagers – just to get started. When you’re making $80,000 a year, these expenses look like chump change. But when viewed against your monthly budget of $2,500, this perspective changes.
Income vs. Expenses
On a related note, the challenge I laid out in a previous post starts at the end of January. I’m challenging you to sign up for the new forum (this link has also been added to the top of the blog), and use it to track your income and expenses. I also hope you’ll support/encourage/advise others on the forum who share their own financial reporting so we can build a positive community that achieves real positive results. I can say from experience that this can be life changing.
For those interested, here’s a Google Spreadsheet to track your cash-flow, month by month (courtesy of my buddy at InterestingMoney.com). It includes nifty little graphs that you can embed into your reports on the forum. So go register now, introduce yourself, and watch out for my own January update the first week in February. I hope you’ll join me there with your own updates!
Note: The spreadsheet is a read-only template. So once you open it, click on “File->Make a Copy” and save that. This will be your own private writable copy. The first tab is the master tab where you can fill in your monthly budget and expected incomes. You can add/remove/change the categories to match your personal budget categories.
On the individual month tabs, you can itemize each expense on the left. Personally, I use Quicken to track all this for me, so I don’t itemize in the spreadsheet. Instead, I’ll just fill in the category totals farther to the right.
For income, I’ll only be including my passive and “fun” income so that I can see if/when my passive income exceeds my expenses. You can choose to include your normal 9-5 wages or not, however you prefer. I suggest that if you’re early into the savings process, you include your wages and focus on your savings percentage (last tab), but if you’re nearing retirement it might be more useful to exclude your 9-5 wages.
The last two tabs will graph your results over time.
Note #2: The forum is live, and over the next few weeks I’ll be cleaning it up to look nicer. In other words, please ignore how amateur the page looks right now. I just wanted to get it out ASAP so that it’s ready for the challenge, and so you guys can sign up in advance and hopefully say hello.