Elizabeth Kerr suggests categorising your 'non-negotiable needs' and 'everything else' will help with money management

Elizabeth Kerr suggests categorising your 'non-negotiable needs' and 'everything else' will help with money management

By Elizabeth Kerr

A sincere welcome if you are new to joining me this week.

There is a lot to cover off together today so it might pay to read the ground rules first and brush up on the previous posts and their comments if you want to keep up.

I am writing about smart lifestyle design which allows you to leave paid employment well before you reach 65 if you want to.

For those people who achieve this state of being it is largely because they take some pleasure from saving as well as spending.

In their minds they do not have a half-life devoid of any fun or nice possessions, in fact they would say their lives are full of more pleasure now that they have the freedom to pursue that which makes them happy each day.

They already know that happiness does not come from owning big cars, fancy houses, large screen tvs or a hummingbird rug and so they don’t waste their money buying these things. They don’t feel deprived.

There is an entire lifestyle that goes hand in hand with being this successful and they are tapped into it.

How did they get there?– they just changed their mind and decided that creating their own money machine was going to be more important than anything else they could buy with their earnings.

For some this is just going to be too hard. In your mind going without some things is akin to depravation and brings you sadness. For you I only hope that you receive a giant windfall somewhere along your journey which will continue to fund your every desire once you do stop working.

Because if you don’t change your perception on deprivation and spending now while you have the earning capacity to do so, then you will have it forced on you when you don’t.

When you don’t have to work to pay for things that you don’t really need, then you get to live your life as uniquely and exactly as you want to.

For me right now this means having my husband at home to help smooth the hard edges of motherhood when the boys are home and to share adventures with me when they are not.

For others it may mean being able to travel wherever they want to without having to limit it to just 4 weeks annual leave a year; start a new business or be available to your community or church  ... all the while knowing that your non negotiable needs are provided for by your money machine.

I’m talking about retirement well before you are too old to enjoy it properly. I’m talking about using the best physical years of your life to be the best self you can be.

None of this sounds like depravation to me. In fact it segways nicely to this week’s topic ...

Your needs are non-negotiable

So, last week I introduced the idea of spending less than you earn and investing the difference to create a money machine to support yourself.

Okay let’s start where it matters. How are you going to afford what you need and have enough left over for your early retirement – aka your money machine?

Budget. Eeewww even writing that word makes me want to puke.   Budget  *puke…cough...spit*….

This word in my opinion is actually the root of what I think is all that is wrong with our modern approach to spending and living. Alas, I write it here because I’m yet to invent a word that is better.

However living according to your money machine is not budgeting as you may understand it to be. It’s so stunningly simple you can understand everything you need to know about how to manage your money for the rest of your entire life in this one post.

It takes a pen and a piece of paper - a calculator if you must.  That’s all.

After that I’m going to explain quickly why this approach is better than the traditional budgeting that we are taught to believe is the way from rags to riches.

On your piece of paper write two columns.  Title one column “Non-Negotiable” and the second column “Everything Else”. Not too hard so far is it?

Under the column “Non-Negotiable” list all of the expenses that you have which you need to exist physically and/or to keep your family safe and healthy.

The easiest way to do this is to imagine that you have suddenly lost your job and you can’t work.Someone is going to come and give you just enough money for just the minimum you need, but you have to show them your list of what it is for.

If they think that you are asking for more than you need then they will walk away without giving you a cent; so you had better be sure that what you are asking for is only that which you really truly need to be safe and healthy.

With this in mind your non-negotiable list might look something like this:

  1. Roof (rent or mortgage payments per week)
  2. Food.  Basic food items only.  Meat, fruit, vegetables, oats, milk, eggs.  (Chippies, pesto, beer and blue cheese are not basic food items!!).
  3. Insurances
  4. Minimum costs for essential transport.
  5. One communication device (I advocate for the mobile phone over the home landline.)
  6. Power

Of course you haven’t lost your job so anything else that you currently spend your money on goes in the “Everything Else” column.

Most people I meet generally understand the difference between a need and a want. But when we start looking at the “Everything Else” column things can start to get a little murky and the line between need and want starts to wobble.   (Sometimes they even start to cry)

With this list in mind you now understand how much you need to survive, and more importantly how much you would need to be earning at a minimum passively to continue to survive without having to go to work each day.

I’m not going to be tactful here I’m just going to stab you with some hard truth - It is all the items in your “everything else” list that is holding you back from achieving your own early retirement.

This list is the one that holds the majority of your power.

If you can delete the expenses on this list and instead save and invest that money then you have some real money machine magic starting my friend.

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I think your column is fast becoming the most "interesting" thing on this site.
A couple of extra entries for the non-negotiable list:
1/ Rates: In Auckland this huge sum of money comes attached with visions of a particularly unfortunate Mayor
2/ A pot of safety money if you haven't already got this stashed away.
and possibly a house maintenance pot as well.
Insurances are an interesting one. With full car insurance you are paying for all those drivers out there who tailgate. I recommend 3rd party only. If you think you are a safe driver put your money where your mouth is...

Many people's definiition of housing ad transport also is well into the want category. Hopefully there will be more articles on optimising these areas as these are significant drags on your finances.

Thanks Uninterested.   Given your username, i take that as the highest of compliements.
1) agree..... rates form part of 'Roof". 
2) the "safety" money would come from your contribution to your money machine.   It's less likely one would want to draw down from that .
3) Insurance is a tricky one.... i advocate for full insurance for the things that really matter to you until you have enough to cover yourself adequately without it.    Many insurances become spare wheels once you have enough set aside and no real expenses to worry about.

I am writing about smart lifestyle design which allows you to leave paid employment well before you reach 65 if you want to.
I’m talking about retirement well before you are too old to enjoy it properly. I’m talking about using the best physical years of your life to be the best self you can be.
Show me the money - ie a range of discounted cash flows etc for different desginated ages of retirement before 65, inflation adjusted to achieve a realistic annuity. 
And refute the seeming injustice, implied by this type of anaylsis, imposed upon those wishing to acheive the stated early retirement outcomes.  

Hi Stephen, you're overthinking it.   Just put money aside, watch it grow until such time the returns will pay for your expenses.  It has nothing to do with your age prior to retirement... everything to do with your spending and income.   A calculator will be available to "show you the money" on this site soon.

LOL, honey bun you are out of your depth with this guy.
and dont even get me started on the next 30 years will not be like the last which is what all your simplistic modeling is assuming.

Honey Bun? Haha - steven you cringeworthy cretin

Im just waiting on SH's reply....

So am I.  Hopefully he teach her a bit.   Calculator?  Jesus

Yes, a calculator will set the world right. Give me strength.
I retired at the age of 41. I am self aware enough to know it wasn't down to any particular brilliance on my part, just a particular set of circumstances based on the economics of the time, and based on the bubbling of a particular set of asset classes.
Problem is the world is a vastly different place now and is going to be a vastly different place in the near future. What worked economically 10 years ago (for example) is in the process of failing/has failed. Tell us something about how to deal with the new reality (rather than some regurgitation of a smorgasbord of financial self help books).

Already a large part of the population is condemned to rent for the remainder of their lives.
They do not have the inherited or intellectual capital to rise above the hole they are in. On this site you are preaching to those who already have achieved or are capable of achieving the required level. They are probably already able to do it themselves without any preaching.
Based on that your contribution is of doubtful value to many.

Thanks Basel.     Your kind words noted this week :)   Lets both hope there are many more readers than there are those who make comments, otherwise you might just be right!.   Have a good week.

I'd count myself as a fairly common reader?  Financial sector, mid 30s, no house, no car, no savings, 6 figure salary, I do have some very nice suits though.
To be honest I wouldn't want a house, I'm quite happy with the freedom of renting, especially since I'd like to work overseas for a few years.  My current apartment has just developed massive issues and what I love is that they're not my issues.
"Condemned to renting"!  I'm not convinced that owning property is the sole way to become financially secure.  I'm hoping this is something you'll cover.
Anyway, I'm looking forward to the column.  And just thought I'd leave a note on behalf of the "not a slumlord or aspiring slumlord" demographic. 

Retiring early helps reduce the wealth inequality. ie If those who have well paid jobs could live frugally and stop work once they have enough to retire on. It would be good if they would not be greedy and hog their position in the company. Inheriting the family home should be deemed sufficient by most offspring.
Whether the job is filled by an immigrant or a kiwi is not your problem. It is up to young Kiwis themselves to get a useful education. Hopefully the quotas on the more useful courses are not filled by immigrants.

You may wish to explore some personal and financial impediments to early retirement.

Stephen, im writing for the middle squeeze.   Those who earn good incomes, enough to retire earlier than 65,  but can't seem to get themselves ahead.  Those two links are not appropriate for my columns.... one guy is missing the income... and the other.... well he just doesn't make much sense.

The more I read on what you write the shallower and uncaring you come across as. 
"and the other" He does make sense actually, he's commenting on the symptoms of the desease, "One economy (the financial one) thrives while the other economy (the real one) withers."   The trouble is the former is a parasite on the latter. As is the delusion that you can retire early by being in the former group without consquence for others, the latter group and indeed that person mentioned to start with.

I think we need to have the retirement definition conversation. Retirement doesn't mean being put out to pasture, playing golf or sitting on a beach unless you want it to. Personally, I would go nuts without something productive to do.
Early retirement/financial independence means not having to work for money. It does not preclude working for enjoyment. Once retired, you can choose to work - could be less hours, a hobby that turns into an income stream, a new lifestyle business, a new career in an area you always wanted to work on but it never paid enough (winemaking anyone?) or the chance to build the next Google from your garage.
The point is you can do what you want to do, not what the man tells you to do. And if it doesn't work out, you are free to pursue something else - that's retirement.

Halleluiah!!   Thanks Kiwimm - couldn't have said it better myself.
"Early retirement/financial independence means not having to work for money. It does not preclude working for enjoyment".    Well said!

"The point is you can do what you want to do, not what the man tells you to do.  And if it doesn't work out, you are free to pursue something else - that's retirement."
The point is, why are we doing what the man tells us to do in the first place.  Just because that's the way you were taught/programmed doesn't mean that's the way it needs to be.  It only takes a little bit of commonsense, logic and intelligence to completely alter the status quo.
And if it doesn't work out, you are free to pursue something else - why are we already not free to live life this way?  Retirement is propaganda bullshit taught to keep you on the hamster wheel.

Well said kiwimm. Retirement is not just waiting for God to call. I retired at 58 and just keep an eye on an interest in a retail business that I have. I get to it mid morning and leave just after lunchtime and then go for a bike ride if the weather is nice. A brother recently said to me a few months ago " you are not really retired" as I go to the shop daily.  He is retiring in a couple of months and last weekend he said he wished he had an interest in a business like me. The worm has turned. We have both been busy professionals and we need to keep the mind going. Sitting at home and just reading books will not cut the mustard. Retirement is about the freedom to get up when you like and do what fancies you at the time.

Hi Elizabeth, I saved and invested towards a passive income with the help of Vicki Robbins great book Your Money or Your Life (Amazon.com). The book was first published in the early 1990s and has had several new editions since then (latest is 2011 I think). The book is very practical and intelligent and helps ordinary salary earners achieve financial independence over time. I highly recommend this book, which became one of the key texts in the Voluntary Simplicity movement. 
An important first step in Robbin's book is to build savings for 6 months of income as an emergency fund BEFORE starting to build a capital base for passive income. 
Regards, Michael

The biggest advantage of that technique is learning to live in your budget.
It gives an immediate gratification (you can see your funds building) and improper behaviour is immediately punished (you can see your funds falling away from target and previous gains).

Sadly in a country where much is government controlled and many feel they're entitled to "good pay that supports their lifestyle" just for being alive and that's what community is for, having to build a personal money collection is seen as an undesirable behaviour. It makes one look cheap or money-grubbing, and thus the only people doing it are frequently the paranoid or the sly.

"It's not how much you earn it's how much you spend that determines how well you will do"
I got told this as a youngest- served me well. My 4 kids hear it from me now.

giant windfall?  Life Assurance policy.

Hi Elizabeth. I think this is a fantastic column, and I don't agree at all with the comment that everyone on this site will already be financially sorted. Those who are new to rethinking their finances have to start somewhere, and this will be the 'somewhere' for some of these people. Besides which, a lot of the complainy-pants type comments on this site show just how much some people focus on (often exaggerated) financial impediments instead of on solutions. Keep it up - can't wait to read more of it!

need both ends of the stick. The warnings to keep people on their toes, and the opportunities and hints and starter information to give people hope. So much of the "good news" is just from interested sources (eg sales blurbs) or from sites that are policed by administrators that just remove any complaints/bad press.

Finances are one of those things that we should always be checking. Just because the modern world is convenient and instant gratification the real world is a jungle and there are more than a few business folk who think being complacent is the same as being a fat rabbit.