# What is the value of \$1?

One day my brother and I were discussing a referral rewards plan with my mobile provider, Public Mobile. I was explaining how good the rewards were for loyalty, autopay and referrals. When I told him each person I referred to the network, I would get \$1/month off my bill.

My sister in law piped up asking, “Why do you guys bother talking about \$1 a month? It’s just a dollar.” The truth is, it’s not about the money– I just like the feeling of finding the optimal solution because efficiency is the most noble virtue.

But what is the value of \$1 per month is in terms of assets? Conservatively, if \$1 is equivalent to a return of 4% of principal in perpetuity, then what amount of principal does that represent?

Here’s the math:

\$1/mo * 12 mo/year = \$12/year

Principal * 0.04 = \$12

Principal = \$12/0.04 = \$300.00

So, every dollar you PERMANENTLY reduce your spending per month is equivalent to putting \$300 into your retirement fund.

Having trouble coming up with \$300 every month to put into your retirement fund? Then permanently reduce your spending every month by one dollar. Remember– this only holds true if it is a permanent reduction in spending.

# The 3 stages of financial independence

Stage 1: Birth

Goal – Self-sufficiency

2. Teenager – Your family pays for your living expenses, but you are able to pay for your own entertainment.
3. Young adult – You are able to pay for 100% of your ongoing expenses without help.

Stage 2: Enlightenment

Goal – Creating and executing a plan

1. Awakening – You’ve made it to \$0 net worth (or more)!
2. Discipline – You never borrow money for consumption goods (credit card balance) and never finance depreciating assets (vehicles)
3. True self-reliance – You not only pay for your ongoing expenses, but you have a plan to generate income when you are unable to work that doesn’t involve selling or borrowing against assets.

Stage 3: Transformation

Goal – Transitioning from active income to passive income

1. Potential energy – You’ve invested enough money that even if you stop making contributions, your retirement fund will grow enough by itself to hit your retirement target before you are incapable of working. You aren’t financially independent yet, but it is only a matter of time.
2. Kinetic energy – Your retirement funds generate income equal or greater than your expenses. You’re almost there.
3. Perpetual motion – Your annual expenses are less than 4% of your fund’s value. Your fund can pay for your living expenses indefinitely.