Tuesday, February 7, 2012

The Forty Dollar Sandwich - Making a Living

I'm going to take a different approach to these money posts from here on in. I think they've suffered from being too general. So from here on in, I'm going to make them about me and my plans -- just like I do with everything else on this blog.

So here goes:

Let's Start With A Reality Check

Most aspiring writers are never going to be able to quit the day job and write full time just from their writing income. I'll even go so far as to say that I suspect that most aspiring writers won't make all that much side income from their writing either. I say this not because I think those writers aren't good enough (at writing or business) or out of any social or creative judgement. I'm just pointing out what, in fact, happens.

Here's the thing: there are too many factors which aren't in your control. Persistence will eventually get you past all those things. However, we have no way of knowing how long you'll have to persist. A year? Ten years? Will you become famous and successful posthumously?

My philosophy is that you don't chase the things you can't control.

So, a long time ago, when I did the "Aunt Una Exercise" my focus was finding a sustainable lifestyle that I could have right now. Not a year from now, not if I sold a book or a series. The reason I decided this was because I got two glimpses into What It Takes: one was the internet came along and allowed me to talk to writers who had the career I thought I wanted, and they were barely making it.

The other was a book I read called Your Money Or Your Life. The basic thesis of that book is that if you want to reclaim your life, you have to build up assets and retire early. It's not a great financial book really -- more of a philosophy thing. What that book did for me was give me a different perspective on things I already knew about finance. Although it doesn't have good investment advice, it gave me an investor's perspective, and a sense of how to measure the task of becoming financially independent.

And what I saw was that neither path would work for a writer. You could throw yourself into writing, to the detriment of everything else in your life, and even if you made it, you'd still have to sell your soul to the company store -- and for ten cents on the dollar.

Or you could sacrifice everything to get your financial independence -- stop writing and commit your efforts to minimizing expenses and maximizing income and grow that nest egg big enough to retire really early. But to do that effectively, there would be no time or energy left to write.

I couldn't do that. I have to write.

So I was stuck with Option 1, but I could use the principles of Option 2 to create a life which would allow me to write, and to keep me happy even if I never sold a single book. A life which would allow me to turn down any offer I didn't like. A lifestyle I could maintain for the rest of my life.

So for me the Aunt Una Exercise is all about finding what I need to be happy - what do I need with my job? What do I really need financially? You could say it was luck that I have a part-time job that covers my needs, but I didn't fall into it by luck -- I've had lots of other jobs which did not suit me. I kept the one that did, and I have fought for the aspects of that job which make it work for me.

I have a flexible schedule, enough responsibility to keep me engaged, good people two work with, a sense of making the world a better place, and sufficient cash flow to sustain me. But we've also (off and on) had hostile leadership, internecine warfare, and we're located in a very depressed state, where education is a popular thing to cut....

So the day job is not secure. And that's true of any day job these days. Nothing is guaranteed.

You know what the day job actually is? I mean looking at it from the investor's standpoint? It's a way to convert my most valuable asset -- my work skills -- into cash.

You can't sell work skills for cash value -- not like you can, say, a house -- but you can set a price on them as an asset based on the cash flow they give you. And when you take the wages and benefits and all that together, my work skills come to about a million dollars in equivalent capital assets.

That's my "number" by the way. One Million Dollars. (It used to be 600,000, but interest rates have gone so low that you need more assets to have the same amount of cash flow.)

What's Your Number?

The point of the Aunt Una exercise was to figure out what you need in life, and then figure out how much it will cost. That will tell you how much cash flow you need. A good way to get a ballpark estimate of that figure is to just figure out what you want to change in your life, and add or subtract that form how much you're making right now. (It is a good idea, though, to actually sit down and do a budget once in a while.)

My first target is $30,000 a year of cash flow. This would maintain my current lifestyle, and allow me to pay for the benefits I would lose if I quit the day job.

So, to put a value on the assets I need to get that, I calculate it in terms of 30-year treasury bonds. There are assets which produce better returns, but they are riskier, and this is a good baseline. Currently the rate of return on those is 3 percent, therefore my main number right now is:

$1,000,000 in income producing assets.

Because I know that number, I don't get excited when I hear people say "what if a publisher were to offer you $150,000?!?" Sure it's a lot of money, but it's not enough to change my life. (Especially since you won't get all of it, and payments will be spread out over a long time.)

When I hear that, my thought is "Hmmm, 90k take home, probably paid in chunks of 30k, I might be able to buy two to three bonds a year, for a cash flow of $600-900 bucks building up to maybe $2500 a year later on. And they wouldn't offer that much on a book that wasn't making a thousand or more a month, so that's ten cents on the dollar.... No thanks."

A lot of people measure a windfall in terms of cash flow -- that is the immediate power of the money to buy stuff. You have to have a certain amount of cash flow to survive, and golly, $150k will support you for almost five years! (Except that if you think of it as cash flow, do you really think it will last that long?) Still you'll note that in the calculations I made above, I considered that, I wouldn't necessarily put it all into the bonds. With 30k I might buy three, or I might only buy two -- because I might need some of that money.

But as long as my day job covers my cash flow needs, I don't need to fritter away any extra cash that comes my way. I can invest it all in my Roth IRA. Or I can put it into the business (buying Adobe Design Suite Premium, for instance).

Or I can do something else with the money, something more akin to quitting that day job (even though I just said that even $150k is not enough for me to quit the day job).

I can buy back time.

The Forty Dollar Sandwich

The only reason I would turn down a publishing contract for $150k is because they wouldn't offer that much if the asset wasn't already worth at least $500k. Publishers have a lot of overhead. It will cost them too much to convert that asset if they don't pay me a fraction of what it's worth as an asset.

I want you to keep that in mind while I explain this:

Generally, in most personal finance circles, they'll tell you not to just spend a windfall on your day-to-day expenses. It'll disappear that way and you'll have nothing to show for it. For most people, that money is the only way you can acquire assets. For a convenience store manager or a nurse, a penny saved really is a penny earned. Most people are better off scrimping and doing things like packing a sandwich to save a buck on lunch, and investing every penny they can save.

But writers are in the business of creating assets.

We don't have to buy them with money. We can buy them with time.

Therefore the time and effort involved in brown-bagging it to save a few bucks on lunch could cost you in terms of your ability to write a book. I did a calculation once that the time and effort that goes into making a bagged lunch -- shopping, fixing and cleaning up -- costs me about 500 finished words of writing time, and if I valued that book at $5000 in bonds (5k being an average advance I could expect to get for the book) the darned bagged lunch cost me $40.

I have opted, for the past few years, to "invest" some of my income by not acquiring income in the first place: that is, I have the option of cutting back my hours over summer. I have less money to put into investment, but I figure that I lose about $3000 a year, and if I can convert that to an additional book, it's a great investment.

If I can convert it.

Spending money wildly to buy yourself some time won't do you any good if you don't then spend the time on creating assets. And let's face it, you can't always write in the time you'd make a sandwich. If not, that may be money you save to put in your emergency funds. However, in my opinion, time is where to look for the real value is in terms of getting ready to quit the day job.

(And just a reminder: $5000 in bonds would give me a yield of $150 a year -- which is only a few sales a month. So that's a low value to put on a book.)

A Quick Review-Overview

So, for me the plan goes thusly:

  • Get myself into the life I want NOW -- where I don't have to have a penny of success at writing ever (because I never know when it's going to happen).
  • Day Job provides cashflow. Cashflow includes minimum investment in safety net -- ROTH IRA, emergency funds. (Because even a good day job is never guaranteed.)
  • Put all resources above that into creating assets. ( I.e. - books.)

I am not worried about return right now. I have sufficient cash flow. If a book doesn't turn out the way I like? Oh well, neither did my investment in that real estate investment trust. I'm still getting dividends from both, though. And I think both have a good shot at turning around a few years down the road. But more importantly, the next book could turn out like Chipotle stock and make up for everything else in a down market.

Next week I'm going to write about Outsourcing, in a letter to Aunt Una. (And though we can't all afford a personal assistant, we all do have small opportunities for outsourcing.)

See you in the funny papers.


Melissa Yuan-Innes said...

I think you are brilliant. I love hearing what you think, even if I don't always completely understand it, like the push/pull theory of the Internet (all I took away from that is that I don't have to market, yay).

So even though you "shouldn't" be writing these blogs, thank you for educating writers like me about finances and the way the world works.


Melissa Yuan-Innes said...

P.S. I think I've done pretty much the same thing:
I've got the life I want now, via the day job, and spend my spare time on writing and on my family.

Part of my wishes I'd had the guts to just leap into writing after high school or university, but I also know that potential starvation would make me anxious and angry, which is not conducive to good writing. This way, I can write what I want, with a roof over my head, and I can afford to support other writer/artists I admire.

The Daring Novelist said...

Thank you, Melissa. I'm glad if it helps you! Yes, finding the right non-writing life is the secret to a great writing life, I think.

(And here's a nutshell version to the difference between push and pull marketing:

In push marketing, you limit the consumer's choices to what you want to sell, and push them to take what you give them.

With pull marketing, you offer the consumer everything and let them choose.

So yes, the result is, you don't have to market.)