The Number One Joy of Financial Security

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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.

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.

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.