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Joshua Sheats describes financial security as being debt free and having enough investment income to cover your basic needs (housing, transportation, food, utilities, and insurance). That definition works for me, and that will be the working definition of financial security for this post.
The opposite of financial security is, of course, financial insecurity. For this post, financial insecurity will mean living paycheck to paycheck or worse. On the most desirous end of the financial insecurity continuum, you have just enough to pay your bills. But your emergency fund is the combined unused portion of your credit card limits, and that combined unused portion isn’t big enough to handle more than one fairly large emergency at a time. It can handle a large car repair bill, but not a large care repair bill, and a root canal, and a busted refrigerator. On the least desirous end of the continuum, you’re a financial wreck. You have little to no income and are dependent on government welfare for survival.
Financial security is intuitively more desirable than financial insecurity. But beyond the obvious reasons of having more money to buy stuff, shoulder emergencies, and pounce on unforeseen opportunities, why is financial security preferable to financial insecurity?
After ruminating on this philosophical question for a number of days, here’s what I came up with.
What, Me Worry?
If I had to choose one word to describe the difference between financial insecurity and financial security, I would choose “worry.” Before I got my financial act together, I worried about money a lot. The simple act of going out to dinner with friends was a stress-inducing event. Would the bill be split evenly among all the participants? Or would the bill be broken down by the resident accountant so each participant’s portion of the bill reflected his or her alcohol consumption and his or her choice of entree? If it was the latter, I was good. If it was the former, I was in trouble.
Getting saddled with an unjust dinner bill is, of course, small potatoes (no pun intended). But it shows just how stressful my life was when I was living paycheck to paycheck. Here’s another example. I would actually stress over the weather. I worked for a highway department and the bulk of my overtime depended on snow. If Long Island got a particularly harsh winter, I got a lot of overtime, and my credit cards got paid off. If Long Island got a mild winter, I got squat for overtime, and my revolving debt kept revolving.
Yes, worry battens on financial insecurity. And my financial insecurity wasn’t so bad. I can’t imagine how stressful my life would have been if I didn’t have a secure job and there was no excess or frivolity built into my monthly expenses.
Fortunately for me, I managed (with the help of Mrs. G, of course) to achieve financial security in 2006. From that point on, I never worried about money again. If I wanted something, I bought it. If I wanted to go somewhere, I booked a flight. If I needed to move $1,000 into checking to cover some upcoming bills, I moved $1,000. Money simply became less of a decision and more of a click or a swipe.
To drive home the point that financial security chases away worry, I have two recent examples to share. You probably don’t need these examples, but cut me some slack. I’m trying to write 250,000 words this year, goddamnit. So here we go.
In the last half of 2018, Mrs. Groovy and I decided to venture into the merry waters of travel hacking. We picked up a Chase Sapphire card and successfully got our 50,000 bonus points for spending $4,000 in three months (ah, the side benefits of building a house). We then did a little more research and saw from a number of authorities that Bank of America actually had a pretty good travel reward card (see here, here, and here). “Great,” we said to ourselves. “We’ve been banking at BOA for 12 years and had a crapload of money parked there. Getting another travel reward card, and another 50,000 bonus points, will be easy-peasy.”
Or will it.
A couple of weeks ago, we applied for the BOA travel reward card. Unlike with Chase Sapphire, our credit card application with BOA wasn’t approved in a few minutes. All we heard from BOA was that it got our application. Some three days later we got a somewhat cryptic email stating that BOA was still trying to verify some information and the our application was still being processed.
Hmmm. A pre-financially secure Mr. Groovy would have been sweating. What’s my credit score? Maybe it dropped because I got a Chase Sapphire card and now the combined credit limit of all my cards is too big for my income? How will I be able to afford Cuenca and Chiang Mai next year if I can’t travel hack?
But because I’m financially secure now, I really didn’t give a crap if BOA approved my application. Mrs. Groovy and I are going to Cuenca and Chaing Mai whether we can travel hack the expenses or not. In fact, Mrs. Groovy and I care so little about travel hacking and BOA’s financial products, we were prepared to shutdown our BOA accounts and bank elsewhere if BOA snubbed us on the travel reward card.
Quick aside. BOA did approve us for the travel reward card. We now have 90 days to spend $3,000 and earn 50,000 bonus points. Since we need to buy a riding mower, a regular mower, and a weed whacker before March, I don’t see spending $3,000 in 90 days as being a problem.
Okay, that’s one example. Here’s the other—the partial government shutdown that just ended. I really didn’t care how long the partial shutdown lasted. I’m hard-pressed to think of one thing I get or use from the federal government right now that can’t be duplicated by the state of North Carolina or the private sector if the need to do so became avoidable (i.e., the next partial shutdown lasts for several years). Nor can I think of any federal entitlement of mine that is critical to my happiness and well-being. Would I like it if this year’s tax refund never came and Obamacare went away? Of course not. But those financial blows wouldn’t materially alter my life. My life would still be pretty freakin’ groovy. And the same can be said of Social Security and Medicare. If these two entitlements were substantially cut or disappeared entirely, my future life would be just as groovy as my current life.
Please note that I’m addressing the partial government shutdown here from a worry perspective, not a political perspective. I know this blog occasionally veers into the choppy waters of politics, but this isn’t one of those occasions. I’m just bringing it up because it’s current and because it vividly demonstrates the power of financial security to subdue worry. I don’t think about Washington, D.C., and I’m certainly not counting on it to solve my problems now or in the future. Bottom line: my portfolio is large enough to handle a much smaller government footprint. And if the government’s footprint gets too small for my portfolio to handle, a big world awaits. Mrs. Groovy and I will have no trouble finding a country that will be kind to us and our portfolio.
The Cost of Worry
Financial worry haunted me until Mrs. Groovy and I executed a textbook example of geoarbitrage. In one fell swoop, we found ourselves in Charlotte, North Carolina, with no debt, a paid-off condo, and $200,000 in the bank.
What I would like to do now is put a price tag on worry. In other words, what would it cost someone if he or she no longer wanted to worry about group dinners, winter snow accumulations, credit card approvals, and government shutdowns? Can a value be placed on having zero financial worries? Maybe it can. Maybe it can’t. All I know is that I’m willing to give it the college try. Here we go.
For the purposes of this post, the cost of worry will be calculated two ways. The first way, which I call the basic cost of worry (B-COW), is calculated as follows:
Any consumer debt (including car loans and student loans) + difference between a six-month emergency fund and your current emergency fund
The second way, which I call the ultimate cost of worry (U-COW), is calculated as follows:
Any consumer debt (including car loans and student loans) + mortgage balance + difference between a six-month emergency fund and your current emergency fund + difference between investments large enough to cover your basic expenses and your current investments.
Now, before I provide an example of B-COW and U-COW, I need to explain the methodology I’m using to determine if an investment portfolio is large enough to cover one’s basic expenses (housing, transportation, food, utilities, and insurance). To do this, I first need to know one’s monthly expenses. I then need to know what percentage of one’s monthly expenses goes toward basic expenses. Once I have these numbers, I simply multiply the monthly expense number by 12 (to get the annual expense number) and then I multiply the annual expense number by the basic expense percentage. This gives me the annual cost of basic expenses. Here’s an example.
- Monthly expenses = $5,000
- Annual expenses = $60,000 ($5,000 x 12)
- Basic expenses = 60% of monthly expenses
- Annual basic expenses = $36,000 ($60,000 x .6)
Okay, assuming a realistic annual average return of 7 percent, how large does an investment portfolio have to be to generate an annual return of $36,000? To get this number, you simply divide $36,000 by .07.
- Portfolio large enough to cover basic expenses = $514,286 ($36,000 ÷ .07)
In the table below, I calculate what the B-COW and U-COW were for me and Mrs. Groovy when we first got married in 2002. Since our monthly expenses were roughly $4,500 in 2003 (the year we discovered Dave Ramsey and started budgeting), I’m going with a monthly expense of $4,000. That might be a tad low. But since we got walloped with a huge property tax increase and a huge HOA assessment at the beginning of 2003, that estimate isn’t off by much.
To calculate what percentage of that $4,000 monthly expense was consumed by basic expenses, I turned to our 2017 expenses. This was the last year we had a complete year of housing expenses (we moved in 2018 and lived rent free for six months with mom and dad). In 2017, basic expenses amounted to 53 percent of total monthly expenses. But that percentage is way too low for New York, which has much higher housing costs than North Carolina. To account for the New York cost premium, I added 10 points to the basic expense percentage. So in the table below, I calculate the basic expenses to be 63 percent of total monthly expenses.
| Worry | B-COW Calculation | U-COW Calculation |
|---|---|---|
| All Consumer Debt (Credit Cards, Car Loans, Student Loans, Etc.) | $30,000 | $30,000 |
| Mortgage Balance | NA | $60,000 |
| Difference Between a Six-Month Emergency Fund and Your Current Emergency Fund | $24,000 | $24,000 |
| Difference Between Investments Large Enough to Cover Your Basic Expenses and Your Current Investments | NA | $432,000 |
| Sum of Worry | $54,000 | $546,000 |
Since Mrs. Groovy and I didn’t have an emergency fund and didn’t have any investments when we first got married, our emergency fund and investment fund shortfall were immense. And as a result, we had a crapload of very costly worry.
Now let’s see what our B-COW and U-COW were when we moved to Charlotte.
| Worry | B-COW Calculation | U-COW Calculation |
|---|---|---|
| All Consumer Debt (Credit Cards, Car Loans, Student Loans, Etc.) | $0 | $0 |
| Mortgage Balance | NA | $0 |
| Difference Between a Six-Month Emergency Fund and Your Current Emergency Fund | $0 | $0 |
| Difference Between Investments Large Enough to Cover Your Basic Expenses and Your Current Investments | NA | -$54,414 |
| Sum of Worry | $0 | -$54,414 |
By moving to Charlotte and buying a condo outright, Mrs. Groovy and I dramatically lowered our living expenses. Our living expenses went from roughly $4,500 a month to $1,500 a month. Since we had no debt and $200,000 in the bank, our U-COW was calculated as such:
- Monthly expenses = $1,500
- Six-month emergency fund = $9,000
- Basic monthly expenses = 53% of month expenses
- Annual monthly expenses = $9,540 ($795 x 12)
- Portfolio large enough to cover basic expenses = $136,286 ($9,540 ÷ .07)
- Difference between investments large enough to cover basic expenses and current investments: -$54,414 ($136,286 – ($200,000 cash – $9,000 emergency fund)).
Is it any wonder I stopped worrying about money once I moved to Charlotte?
Now it must be pointed out that the Charlotte U-COW calculation is a bit off. Take away a $9,000 emergency fund from the $200,000 we had in the bank and that left us was with $191,000 to invest. But we didn’t invest that money in one lump sum. We went the dollar-cost-average route and started investing $3,000 every month. So technically, the difference between “investments large enough to cover our basic expenses” and “our current investments” wasn’t anywhere near -$54,414. But in the scheme of things, that’s a minor quibble. The point that the cost of worry can be measured is still valid. Shedding my worry by leaving New York in 2006 was the equivalent of putting $546,000 into my pocket.
Final Thoughts
Okay, groovy freedomist, that’s all I got. What say you? Did I nail the primary benefit of achieving financial security? And is my stab at measuring the cost of worry a worthy contribution to the bevy of calculations that can occupy the mental bandwidth of a money nerd? If it is, let me know what your B-COW and U-COW calculations are when you get a chance. Peace.
I think your approach is dead on. This is the whole reason I am engaged in this community. I want financial security, and the more we save, the closer we get to it. Our current plan is to try to be financially able to retire up here, but usually talk about retiring down south or out west. Having visited both many times, its difficult not to love them. I don’t want to live most of my life in the same metro area I was born.
We are paying about 1/3 of our remaining mortgage this month and will get about half that back after taxes. That money is about 1/6 of our home’s value, and will shave 8 of the 21 remaining years off of our mortgage. We may do half that again later this year depending on how the market goes. That helps our piece of mind.
So what I am saying is that you are dead on IMHO.
“We are paying about 1/3 of our remaining mortgage this month and will get about half that back after taxes. That money is about 1/6 of our home’s value, and will shave 8 of the 21 remaining years off of our mortgage.”
Very impressive, my friend. And to this in New York makes it extra special. I bow before you. My wife and I got crushed by New York and had to hightail it out of there. I suppose we could have eventually achieved financial security in New York, but it would have been a struggle. Geoarbitrage allowed us to go from financial solvency to financial security in one fell swoop. Anyway, the key takeaway is that financial security does more than just fatten your portfolio; it removes worry. And that side effect alone is worth all the effort and sacrifice needed to achieve financial security. It really is an amazing feeling. Best of luck, my friend. I look forward to reading about your quest for financial security in the hostile environment of New York. Cheers.
Okay now I need to calculate this for myself. But I’ve noticed a serious drop in money worries since I really tightened up our finances over the last couple years. We’ve always lived REASONABLY within our means, but a big unexpected expense used to stress me out a whole lot more than it does now.
Keep me posted. I’d love to see your B-COW or U-COW. It’s a nice little exercise to run.
I really enjoy your tone and take on “worry.” I am on this path trying to minimize worry as a person who catastrophizes and likes to feel in control. Like you, I want to go out with people/friends and not think about the food bill.
I also like your thoughts on the Junior IRA page. My husband and I were talking about such a concept today. We want him to remember the first time he invests and make it a big event. Maybe at 5 he will remember (he’s 9 months now)? We want him to know 10% gets invest and 10% gets saved with everything he earns while living under are roof. It’s kind of a non-negotiable (like brushing your teeth). We’ll see how it works.
“It’s kind of a non-negotiable (like brushing your teeth). ”
Wow! I got a tremendous CMLT reading your comment. Thank you, Michelle. Talk about second generation FI! Your son is very lucky.
P.S. I love your website. Weaving history and FI together is very clever. Best of luck.
We think alike in many ways, Mr G. The Mrs and I have talked throughout the govt shutdown about how insane it is that everyone’s so tied up in knots. I love Joe @ RB40’s point, exactly what I’m talking about.
Have an emergency fund, people!! Better yet, have enough that you’ll never have to worry. Life’s just better that way.
An emergency fund makes too much sense to be common. Americans love to make their lives much harder than necessary. Sign. And, yes, Joe nailed it with his comment. He’s a very wise man.
Having your financial act together is a great way to avoid stress and worry, not going out to dinner with friends is another. 🙂
I love it. You said in one sentence what it took me a whole post to say.
Yep, not needing to worry is a good one, and certainly applied to me.
Perhaps leaning towards a more generous definition of financial security, I found my whole outlook changed. Somehow I got a new mindset and started to imagine doing lots of different things. I could have been thinking of such things before, but I wasn’t. Achieving financial security / FI somehow flicked a switch in my mind. I don’t know how I’d put a $ amount on that, but it would be a big number.
“Somehow I got a new mindset and started to imagine doing lots of different things….Achieving financial security / FI somehow flicked a switch in my mind.”
Nailed it, my friend. Back in 2013, I read an article in an online science magazine (MIT Review?) that discussed the possibility of a lithium shortage in the future due to the mainstreaming of electric cars. Prior to being financially secure, my only takeaway from that bit of information would have been, “oh, that’s interesting.” But because I was financially secure at the time, the first thing I thought about when reading about a possible lithium shortage was, “how the heck can I invest in lithium?” It’s amazing what happens when that mind switch is flicked. Awesome comment, my friend.
I think not having to worry is an excellent side benefit. The main benefit would be having money and the ability to pay the bills. 🙂
The federal employee example is so true. I have friends who work for the federal government and they didn’t worry much. They knew they were going to get back pay and they treated the furlough like paid time off.
That’s a really good test of your finance. You’ll get paid later, can you pay the bill for a few months?
Of course, lots of people couldn’t do that. It’s stressful if you don’t have financial security.
“That’s a really good test of your finance. You’ll get paid later, can you pay the bill for a few months?”
Wow, Joe. That’s a brilliant insight. And I wish the people who gauge the financial health of the typical American would include this test. I think the results would surely shock us all. If nearly 50 percent of American adults couldn’t come up with 400 cash for an emergency without borrowing, what percentage of American adults could remain current on their bills for a single month without borrowing? My guess it that it would be in the 80 to 85 percent range. Scary. Thanks for stopping by, my friend. Great freakin’ comment.
You just described the beauty of financial independence. The elimination of financial worries.
I remember as a medical student/resident playing the credit card roulette game. I was doing balance transfer after balance transfer when the promotional rates were about to expire. I was always worried I would not be able to transfer the money and get stuck with a high interest rate. I was very fortunate that during this time there was no credit crisis, etc and credit cards didn’t charge much, if any, for a balance transfer and I could often get 0% apr for 6-12 months each time.
It was definitely not a sustainable financial life to live. Now I am in the position, same as you, that my reliance on government programs has little bearing on whether or not I can maintain my current lifestyle. I typically plan my retirement as if I will not receive a single cent from social security. I don’t think the program is going to go away, but I will treat that as “bonus money” when I do receive any in the future.
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“I typically plan my retirement as if I will not receive a single cent from social security. I don’t think the program is going to go away, but I will treat that as “bonus money” when I do receive any in the future.”
Amen, my friend. You’ve just described the secret sauce of the FI movement. If you can get to the point where you don’t dependent on the government, and the government help that comes your way is a “bonus,” you’ve won the money game and there’s a strong possibility that you’ve lived–and will continue to live–a fabulous life. Love the way your mind works, my friend. You have a knack for discovering and pointing out the key variables or objectives in one’s financial life. Bravo.
P.S. I too am confident that Social Security and Medicare isn’t going away. I do see means testing in the future and 75 percent of promised benefits being paid out to wealthy Americans. In other words, the “bonus” isn’t going away, it’s just going to be a little smaller for the FI community.
My motivation in 1999 to hurry and pay off our house was somewhat like this. I had a big-paying contract job that teetered on the brink of extinction all the time. It actually lasted 7 years, but it never felt like that. The worry was major even though I worked in Engineering, because of where we lived the jobs were few and far between.
Once that mortgage was paid in 2003, even though we weren’t FI for many more years, the difference was so huge. We only needed one of our paychecks, so either of us loosing work would be okay. Now that beats an emergency fund every time.
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I love it, Susan. Thanks for sharing. When I was in New York, I used to dread the first of the month. Not just because the bills had to be paid, but because paying the bills amounted to at least a half hour of arts and crafts with all the cutting, writing, pasting, and licking. It was a freakin’ joke mailing out checks to all my creditors. And I remember distinctly how great it felt in 2006 when my monthly arts and crafts duty was reduced to practically nothing. And I hear ya about getting rid of your mortgage and owning your home outright. In 2013, I was a dead man walking. Some three years earlier, my company closed the Charlotte office and moved the operations performed there to Dallas. My company kept me on because they didn’t know how I did my job. It took them about three years–with my help, no less–to figure out what I did. And the beauty of it all was that I didn’t care. We had no mortgage and Mrs. Groovy had a great job. In the end, it all worked out. My company’s head of the Midwest region needed a project manager and I was offered the position. I wonder if my lack of worry helped me in getting the new position? I mean, everybody on the transition team that I was the most amazing person around. Not only was I helping the hangman make the noose to hang me, I was helping him in a very enthusiastic and cheerful way. Such is the power of owning your home outright. Thanks for stopping by, Susan. Always a pleasure.
Worry schmurry. Who does that? lol! Well, there are times where I have worried less (when I had a full time job) but other than that worry seems to be my middle name. For now.
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“Worry schmurry.” LOL. Comment of the month so far. I no doubt believe that financial insecurity makes up the bulk of the typical person’s worry. But I wonder if there’s a baseline worrying level that is equivalent to Gretchen Rubin’s baseline happiness level. In other words, maybe some people just worry more than others, even when you control for financial insecurity. As usual, you made me think, Tonya. What would I do without you!?