Historical article note: This article was originally published on 2019-12-19. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Some people think the term 'financial freedom' has no real meaning. The world's richest people are already free, so why are they still making money or figuring out ways to donate? Is there really anyone in the world who sets a limit for themselves, saying once they earn a certain amount, they'll do nothing and travel the world? Recently, I found a book by Taiwanese author Zeng Wanling, Winnie, titled 'Money Even Without a Job,' and realized that there are indeed people who experiment on themselves and their own children, living off the interest generated from investments. They started traveling the world at 33, and when their child was just 5 months old, they were already living a carefree, roaming lifestyle. To this day, they have no job and no fixed residence.
In her book, Winnie breaks down 'financial freedom' into: financial independence + lifestyle freedom. She breaks down 'investment and wealth management' into investment and wealth management, with wealth management further broken down into: frugality + working hard to earn money + working hard to save money. Winnie, her husband Lao J, and their child 'Biscuit' are traveling the world, with financial support coming from savings accumulated over 10 years of hard work, invested in stock index fund ETFs, generating investment returns. From 2013, this lifestyle continued, and by the publication of this book in December 2016, the investment principal had not been used. The couple are typical 'second-generation poor,' self-made, never ran a business, never struck it rich, and all their income came from working jobs. Like most people, they are workers who discovered that regularly investing in index funds is a safe and feasible investment method; what sets them apart is that they are money-saving experts, with a monthly savings rate as high as 70%, believing in and daring to practice the 4% rule—that is, spending only 4% of their investment portfolio each year, which would last a lifetime.
01 Uniquely Frugal
How long can you live if you save 70% of your after-tax income? Winnie and her husband have lived like this for ten years without change. Their principle is: do not increase expenses as income increases. Simply 'saving' is definitely not enough. The largest expenses are housing, followed by transportation, and finally food and clothing. How can these expenses be saved? The author does not say whether they have read 'Rich Dad Poor Dad,' but clearly states their viewpoint: 'When we realized that the house we live in and the car are not assets, we sold the house and the car.' They spent most of their time living in the United States. Living in a country on wheels, it’s hard to imagine living without owning a car, yet they spent their time in the U.S. taking buses and riding bicycles. No owned home means no mortgage to pay, but if rented houses are too expensive, it’s impossible to save money. They once lived in a $400-per-month rental in the 'Chinatown' of their city but moved out because it was too unsafe and unsanitary. The most frequent housing they rented was school dormitories. Cutting down on housing and transportation expenses relied on the willpower to delay gratification. If you can’t do this, whether you want to rent a big house or buy a big house, you won’t be able to save money. How they saved money on food and clothing can be found by listening to the audiobook on the Himalaya app; I will not repeat it here.
02 The Amazing Savings Rate
The purpose of saving is to accumulate wealth. With their remarkable ability to save, the Winnies' savings rate reached an incredible 70%. A 70% savings rate means that 70% of their after-tax income is saved, and only 30% is spent. The savings rate in Canada is astonishingly low, only 3.2%, in the United States it is 7.8%, and in China it is 36.1%. Canadian households spend an average of 96.8% of their after-tax income, basically not saving at all. Canadians have too much confidence in social welfare, even more than Americans. Readers who have gone through the previous 98 articles know my point: Canada’s high welfare system has been misunderstood for a long time. Social security has a wide coverage, not high amounts. Mankiw's economics textbook once gave a figure: if social welfare exceeds $22,000 per person per year, people would save, and no one would work anymore. Therefore, the social welfare systems in the United States and Canada will not exceed $22,000 per year; otherwise, they would become places full of laziness. To live a decent retirement life, you must consume more than $22,000 per year, which requires managing your own finances and investing yourself. Chinese people in Canada should not follow the locals in spending everything, borrowing, or overdrawing to maintain their consumption level. We should still adhere to the Chinese tradition of a high savings rate of over 30%.
Winnie has given us mind-opening insights in both investing and financial management. Their book mentions a topic comparing the savings rate with the investment return rate. According to their calculations, there is a significant discovery: the savings rate is more important than the investment return rate. What does this mean? Your household has a savings rate of 30% and an investment return rate of 10%; Winnie's household has a savings rate of 40% and an investment return rate of 5%. Which household would take longer to accumulate one million in assets? Their conclusion is that compared with the investment return rate, the investment returns are weak; the most important factor in achieving financial independence is the household savings rate. Therefore, knowing how to invest may not be important, but saving money is most important.
Another explanation they gave for the savings rate also convinced me: a 50% savings rate means you can retire after working only half the time. When you think about it carefully, it makes sense. Many people say that with inflation, a 50% savings rate can't actually save half of your working time because money loses value. I wonder if anyone has noticed that since the global quantitative easing policy starting in 2009, everyone has been saying there is too much money and central banks are printing without restraint, yet there hasn't been hyperinflation, of course, except in China. The money printed worldwide hasn't flowed into consumer prices, so where did it go? It went into assets. When the U.S. stock market is doing well, U.S. stocks rise, and the value of whoever owns U.S. stocks rises (or it's called a bubble); when Canada's real estate is doing well, Canadian housing prices rise, and the value of whoever owns Canadian property rises (or it's called a bubble). In the past 10 years of money flooding the market, it hasn't caused inflation—amazing, right? What it caused is a rapid widening of the wealth gap: whoever holds assets in bubbles gets richer. Japan is an even better and more extreme example: it has had no inflation for 20 years. Japan's quantitative easing started in 2001, and no matter how much money they issue, there's just no inflation. In the future world, inflation will be a fortunate yet rare occurrence; having inflation indicates that people's material desire is still at a low level. In countries like China without inflation, they have already entered an advanced stage of material civilization, and the highest is Japan's 'danshari' state of minimalism. Other countries can't compare to China in terms of inflation; China's potential for inflation is unparalleled in the world. This is not only because the people have just been freed from material scarcity, but also because tech companies are stirring everyone's buying desires. Nowadays, the shopping amount on Singles' Day in just one day equals China's entire GDP in 1979. According to P=MV/Y, prices equal the money supply times the velocity of money divided by the total goods. The reason prices (P) rise in China is that technology has made the turnover of RMB (V) far faster than in any other country, and of course, the People's Bank of China has also been printing plenty of money (M). Rising prices in China should be credited to tech companies like BAT and to the people themselves for their crazy online shopping. After all, the main contribution of China's tech development over the past few decades has been to facilitate various kinds of buying. Inflation is no longer the terrifying concept in textbook economics. In a country where consumption is at an advanced stage, inflation is unlikely to exceed 2%, so an investment return of 2% can completely offset the effect of inflation. With a savings rate of 50%, you really can reduce your working time by half.
03 The Money-Saving Magic of Office Workers
Most young people in the world start relying on their parents financially as soon as they enter the workforce. How can they save money? Winnie and her husband are both wage earners. Besides extreme frugality, the efforts they made to increase their income are also very worth learning for today's young people. Old J is an IT engineer, and his way of increasing income is simple: 996, working from 9 a.m. to 9 p.m., six days a week. The more he works, the more experience he gains, the more he is appreciated by his boss, the more opportunities he gets, and the higher his income. The 2008 version of China’s Labor Law protects employees too early, just like in developed countries. Employees not only want to work less but also want to earn more; even when leaving a job, they squeeze the company for extra benefits. This kind of work attitude is actually slowly leading to self-elimination in the workplace. I am also an employee, also working a job. My work experience is: in capital-intensive fields, the wage for labor is high, meaning employees’ salaries are high. If an employee just happens to be in this industry, they need to work 996 every day because once the capital withdraws, there isn’t even money to make for 996. Deep work is paid learning; if the work is not deep enough, you can’t learn anything and sooner or later will be abandoned by this world. ‘Should we oppose 996? Yes; should we advise others not to do 996? Yes; should we do 996 ourselves? Yes’ — Xue Zhaofeng. Many young people do not cherish the opportunity of 996, which falls under the saying ‘If the young do not work hard, the old will regret it.’ Winnie’s experience is even more touching. She only knows how to teach English, but hearing that the IT industry is capital-intensive, she tried every way to get in and let capitalists exploit her. Eventually, she successfully became an administrative staff member in the IT industry. The couple achieved, after their 10 years of workplace struggle, an annual income upon exiting that was four times their initial starting salary. Readers, reflect on yourselves: do you practice deep work? At your peak income, did you give your all? Have you eagerly sought the richest capitalists to exploit yourself?
04 What kind of investment can salaried workers engage in with peace of mind?
Earning money and saving money can be done with just self-discipline and effort. Investing, however, is different; if not done properly, you could lose all the money you worked so hard to earn. Forget about retirement—you wouldn't even find a temple to cry in. The Winnie couple, after a long period of exploration, found their own safe investment path. First, they don't entrust others with investing; they learn it themselves. Second, they look for the safest investments, ones that cannot be completely lost. Finally, they cultivate a steel-like investment mindset.
When starting out with investing, you should find professional asset custodians to guide you. From Charlie Munger's many interviews, we can see that the performance and commission systems in the asset management industry have led to many problems, mainly because the conflict of interest between investors and asset management professionals has not been well resolved. Munger has always been pessimistic about the development of the asset management industry. Currently, only hedge fund asset management professionals have commission income tied to the growth of investors' assets; other asset managers’ incomes are not aligned with investors’ interests. This conflict frequently results in losses to investors' assets. The Winnie couple initially also hired professional financial advisors to invest, but after consciously learning from their advisors and mastering a certain amount of knowledge and principles, they started investing on their own. This is very important—only by investing yourself can you avoid high fees and reduce conflict of interest issues. I have recommended this book many times, and I wonder if readers have read "Get a Salary, Make 6 Million in Your Thirties." This book was written by a Canadian high school teacher. Its English title is "Millionaire Teacher," and the translation "Millionaire High School Teacher" is more appropriate. Among the practical financial advice for ordinary people written by Canadians, this is the only book that has been translated into Chinese, and it discusses experiences similar to the Winnie couple, who are salaried workers learning to invest by themselves. Toronto's Skybookstore has "Get a Salary, Make 6 Million in Your Thirties" in stock, and major bookstores’ finance book sections carry "Millionaire Teacher." I recommend everyone buy it and study it.
For salaried workers, what kind of asset has absolutely no risk of total loss? The Winnie couple eventually discovered stock index fund ETFs. These funds buy all the stocks of the companies included in an index according to their weighting. If a stock in the index is replaced, the fund also makes the corresponding replacement. General Electric (GE) was originally a component of the Dow Jones Industrial Average, but on June 26, 2018, it was removed from the index, and the index no longer included GE. The Dow Jones ETF also sold GE's stock. Therefore, investors in ETFs are always up-to-date and will not buy stocks that may be delisted, so they will not lose all their investments. There is a sentence in the book 'The Long-Term Secrets to Short-Term Trading' that struck me greatly: as long as capitalism exists, the stock market will exist. As long as investors buy the entire stock market and do not use margin, there is no possibility of losing their entire wealth. The investment strategy of the Winnie family was decided happily and simply in this way. In his later years, Graham’s advice to ordinary investors was to buy index funds; Buffett’s advice to ordinary investors is to buy index funds. There is a simple principle here: diversifying risk and obtaining average returns is the victory of a defensive investor. Buffett’s own investment philosophy is concentrated investing, that is, putting heavy bets on high-probability events, but his advice to ordinary investors is to diversify risk. In Buffett’s own words: diversification is the best protection against ignorance. Compared to Buffett, everyone else on this planet is indeed ignorant when it comes to stocks, although he never took the CFA exam in his life, he is far wealthier than financial advisors who constantly show off their certificates to others.
Did the Winnie couple live happily ever after after buying ETFs? Haha, you actually believe in fairy tales. When the fund price went up, they didn’t sell because their investment goal was just to live off the dividends; as long as the goose laid enough golden eggs for them to live on, why would they kill their own goose for nothing? What about when the fund price dropped? They had two options: 1. If they had money, they would buy more; 2. If they didn’t have money, they would turn off the computer and never look at the stock market again. This is the steel-like investment mentality: only buy, don’t sell, hold long-term. There are two kinds of investing in the world: one is investment, and the other is speculation. What’s the difference between investment and speculation? Ten thousand people would have ten thousand different answers, and there is no definite answer. My favorite answer comes from a satirical booklet written by a Wall Street insider called 'Where Are the Customers' Yachts?,' where the author says that investing with the hope of turning a little money into a lot is speculation, while investing with the goal of preserving a lot of money is real investment. If you have 50,000 yuan and instruct your financial advisor over and over: 'Make it 100,000 for me,' the result is speculation, not investment. The Winnie couple’s investment is the most typical defensive passive investment: preserve the principal and just take dividends. They are not in the stock market to gamble, let alone to lose money. Yet some people, who only have a few ten thousand yuan as emergency savings, insist on trying to get lucky in the stock market, engaging in active aggressive investments, and are determined to beat the market. Beating the market means earning higher returns than half of the investors—what gives them the right or ability to think this way?
05 Do you dare to believe in the 4% rule and try it yourself?
The thing that amazes me most about Winnie and her spouse is not traveling around the world, but that they believe in and practice the 4% rule. This rule was derived by a mathematician and had never been tried before. Specifically, it goes like this: you estimate how much income you will need each year after retirement, for example, 80,000, and divide that amount by 4% to arrive at a total wealth figure, for example, 2 million. According to the 4% rule, you only withdraw 4% of this wealth each year, which can last you until you pass away without running out. I don’t understand math, but I know that once you believe in the 4% rule, an unexpectedly long life can become a problem: the person is still there, but the money is gone. As far as I know, Winnie’s family is the only one who believes in and dares to practice this rule. On the day the money runs out but the person is still alive, one cannot go back to the workforce to make a living. I am grateful to the brave Winnie family for personally putting this chalkboard-derived rule into practice, and let’s look forward to the success of their experiment together.
Conclusion: 99% of young people do not have as deep an understanding of investment and financial management as Winnie’s family: financial management is the foundation of investment, and it includes saving, budgeting, and increasing income; investment is about preserving large sums of money, not speculating with small amounts to make big profits, and making money still relies on deep work. The rules of investing are very simple—what’s important is to stick to them. The mindset of investment determines the result; those who are constantly anxious, eagerly waiting to see investment results, will never see them. If the work we are doing is our source of happiness, we can work until we die without feeling tired; if not, then we should finish our work quickly, achieve financial independence, and go do what we love. Only in countries with lower levels of material desire is inflation the biggest enemy. In post-consumption-era countries, it’s hard for inflation to exceed 2%, so households with high savings rates in countries with low inflation can achieve early financial independence and retirement. If one day I achieve financial independence, I still hope to have a stable and comfortable home, wanting to return home early after every trip, as I definitely couldn’t handle long-term wandering. Here’s a thought-provoking question for readers: after you achieve financial freedom, what would you most like to do? Please share in the comments.