Too lazy to work, too chicken to steal

Summary: This post tells a formula for deciding when to quit your day job.



First we define Enough money. It is the monthly sum, which allows you to buy most things you want, so that not working increases your standard of living more than extra income from your day job.

Mortgage is such a huge factor that we exclude it from Enough and account it separately as Debt Costs. It covers both interest and repayments.

Secondly, we assume that investments are the basis of your new income. Investing is the only way to pay once and get money back for the rest of your life with minimal effort, either as dividends, interest or rent. Historically 4% withdrawal rate has proven robust. Even after you spend 4% each year, your pot still grows enough to resist inflation. We also assume 25% tax rate, which is the average of dividend and capital gains tax rates.

You can quit your day job when:
Debt Costs + Savings / 12 * 0.75 * 0.04 + Side Income >= Enough
Debt Costs + Savings / 400 + Side Income >= Enough

Notes about the formula:

• You need to own 400 euros to get 1 euro of monthy income. 400 comes from multiplying the constant factors. Only with compound interest and lots of waiting is it realistic to get these kinds of multipliers.
• To get there quickly, you need side income schemes. For example €100 of monthly ad income from a blog corresponds to €40000 of savings. While writing interesting content is hard, it is probably easier than to save €10000/year for 4 years.
• Side income schemes also provide cover, if you have to explain, what you did for the past few years.
• Cheaper apartment speeds up the plan by years. There can be €100000 difference in apartment prices between Helsinki and Oulu city centers. If you value big city life, you probably prefer working to idle life in Oulu. Debt Costs depends very much on your lifestyle.
• If you are near retiring, you can withdraw more. Multiply your monthly pension by 400 to see how much less you need to own at retirement.
• If side income raises the sum past Enough, you should save the difference to gradually phase out the necessity of side income schemes. Otherwise, you either are not lazy enough for this plan, or have set Enough sum too low.
• Enough sum raises with inflation.

Still haven't bought any stock

Summary: This post tells a formula for deciding if you should postpone purchases in times of a looming crisis.

Update: Added a paragraph on probabilities.

After I finished reading Saarion sijoituskirja, the Arvopaperi OMXH index showed that Finnish stock prices had moved -10% since 1.1.2011. I postponed purchasing stocks because of the following calculation. It had two scenarios:

(1) Greece crisis becomes acute with probability P(crisis).
(2) Orderly recovery happens with probability P(recovery) = 1 - P(crisis).

Let the change in stock prices be C(crisis) or C(recovery). We should postpone purchases if

P(crisis) * C(crisis) + P(recovery) * C(recovery) < 0

When Lehman Brothers collapsed, the prices decreased by 40%. Let C(crisis) = -40%. By contrast C(recovery) = 10% - 20% since recovery is usually slower.

Avoiding probability estimates

We can pick stock price changes from historical data. Regarding probabilities, let's look at the equation at 0 when it doesn't matter whether we postpone investment or not.

P(crisis) * C(crisis) + (1 - P(crisis)) * C(recovery) = 0
P(crisis) * C(crisis) + C(recovery) - P(crisis) * C(recovery) = 0
P(crisis) ( C(crisis) - C(recovery) ) = - C(recovery)
P(crisis) = C(recovery) / (C(recovery) - C(crisis))

With C(recovery) = 15% and C(crisis) = -40%, the equation gives P(crisis)= 15% / 55% = 27%. This means that we should postpone investment, if we estimate that P(crisis) > 27%. We should invest now if we estimate that P(crisis) < 27%. It doesn't matter if we invest or not if we estimate that P(crisis) = 27%.

How it turned out

What in fact happened was that Greek crisis materialized but it was an orderly restructuring and prices collapsed only by 20%. The debt and the budget deficit are still simmering.

The situation now is almost the same, but the 'risk scenario' is 2008-style banking crisis. Only this time, goverments are part of the problem and no longer part of the solution. I'm still postponing investment.

If stock prices recover from current -30% to -10% in the next 3 months, then I suck at predicting and am better off investing to index funds. Stock traders divide profit to 'alpha' and 'beta'. 'beta' is the profit from market. You get beta profit from index funds, because stock prices on average rise with economic growth. 'Alpha' is the profit from skill. It is negative if you suck at predicting. Finding your own alpha by making successful and failed predictions is called alpha discovery.

Compound interest

Early retirement is not my goal, since I don't have these kinds of sums to spare. However, it is a common goal in many investment blogs and a fun scenario to speculate.

This calculation is from Coder's investment blog. You save 10000€ each year and get the historical stock market average return of 8%. It doesn't take inflation into account.

1. year: 10 000,00€
2. year: 21 600,00€
3. year: 34 128,00€
4. year: 47 658,24€
5. year: 62 270,90€
6. year: 78 052,57€
7. year: 95 096,78€
8. year: 113 504,52€
9. year: 133 384,88€
10. year: 154 855,67€
11. year: 178 044,12€
12. year: 203 087,65€
13. year: 230 134,67€
14. year: 259 345,44€
15. year: 290 893,08€
16. year: 324 964,52€
17. year: 361 761,68€
18. year: 401 502,62€
19. year: 444 422,83€
20. year: 490 776,65€

Notes about the series:

• In the end, the yearly gain is 40000€. The tax percentage is about 27% (assuming 1/3 dividend income with tax percentage 20% and 2/3 capital gains income with tax percentage 30%.) This is quite well-off.


• In the beginning, savings dominate. The faster you can save the first 100000€, the better. Speed up the process by living with austerity for some years.


• In the end, interest dominates. Around year 10, interest and savings provide equal boost to capital. At year 15, you might just as well stop saving and concentrate on researching means to increase interest.


• If you take inflation into account, you have to wait a few more years. A comment in the original blog suggests 2% inflation, which would require waiting 4 more years to get the same real income.


• After 10 years, you can already live on 1000€ a month. Then again, social benefits allow that much faster at the next round of layoffs if that is what you want to do with your life.


• At around year 15, getting laid off is a lottery jackpot. With income-based unemployment benefit and stock-market gains together, you earn the desired yearly sum much earlier while waiting the compound interest to work its magic a little slower.


• If you plan to retire to a low-paid meaning-of-life work, the right time to switch is around year 12. At that point, the main thing left to do is to wait. Saving has little effect. You might just as well start the lifestyle adjustment, as long as you don't touch the capital.


• If you are near retirement, you need less. After retiring, you only need to make (desired income - pension). Before retirement, you can eat on capital as long as you still have enough at the point of retirement.

Why this is not my way

Social deprivation and lack of externally imposed structure would drive me crazy. I experienced some of it during the two summers spent writing my own website. I talked to other people once a week and went to sleep at 6am. I am the kind of dog who needs a little whip sometimes.

This calculation horrifies me and falls to the category "be careful what you wish for, since you might get it."

Summary: This post compares stock investing to mortgage.

This week I've been reading Saarion Sijoituskirja and considering investing into stock market.

First some background. I can't buy a house now for two reasons. Firstly, I expect to be laid off during the next year into a tight job market filled with 1500 Symbian programmers from Nokia and a comparable amount from subcontractors. This may mean a move to another city or country, creating a "push factor" away from Tampere. Secondly, there is a "pull factor" as my two siblings have recently moved to Helsinki.

My first lesson in investing

In September 2008, HEX index had collapsed 35%. I was going to an offshore assignment. I decided to buy stocks when they are cheap and moved a small apartment nest egg to a stock fund. The next week Lehman Brothers crashed, wiping away 40% of my nest egg.

I concluded that stocks are too volatile way to invest a nest egg, no matter how great average ROI they offer in 20-year timeframe.

In the hindsight, I made the right move for the right reasons, and the nest egg has recovered most of the melted value. Only timing was wrong: I should have spaced the purchases in 6 month intervals instead of trying to guess when the downturn is at the bottom.

Comparing stocks and mortgage

The biggest revealation I've learned from the book is emphasis on dividends. In the long run, the value of the stock is the time-discounted sum of dividends (price is something completely different). Companies pay on average around 5% of their share price in dividends. Dividend perspective also catches growth companies; they typically pay increasing dividends each year. This changes the picture in the following ways:

• You don't have to sell the stocks to use them to pay mortgage. Instead, you can use dividends for mortgage payments. Typically you want to buy a house during downturn and sell stocks during boom. Dividends can bridge the time gap.


• Temporary nest egg wipeout is not catastrophical. Debt-free companies continue paying dividends. Others resume after recession. Prices recover. In fact, selling stocks is strictly optional for a long-term buy-and-hold investor who is in for dividends and mortgage-length (20-30 years) timeframe. Of course, it is great for your wealth if you can sell high and buy cheap, outsmarting seasoned professionals, but don't count on it.


• Both houses and stocks "pay dividends" and "increase in value". In house, the 'dividends' come from lower living costs. Value increases typically in pace with inflation, at good locations faster. Statistically stocks produce a little more in the long run; then again, in the long run we are all dead.

Additional factors attracting me to stock gambling are:

• They have cute little numbers you can play with. Simple back-of-the-envelope calculations are a second nature to me. I do them almost instinctively. For example I "annualize" all costs by estimating, say, how many times a month I eat out and what is the cost per meal and how large % of monthly income goes to eating out.
• It is a game of skill and luck. It is possible to raise your net worth faster than the statistical stock market average. For example for J it gives good profit per hours spent researching. Then again, J can invest in companies he has visited in his water engineering projects. I don't visit customer companies. It is unclear if there is any game of skill for me. The only way to find out is to try.
• It is more leniently taxed than salary income. For dividends, 70% of dividend income is capital income for which you pay capital gains tax. The final tax is 20% of dividend's value. This is less than half my marginal tax rate on salary (if I would get 100e more salary, the tax man would take over 40e). Now you may say that there is double taxation on dividend income: the company paid taxes and you pay taxes. However, there are also side costs for employing people. As a rule of thumb, salary + side costs = 1.6 * salary. The 26% corporate tax is smaller than side cost percentage.
• It makes you a better writer and person. Both J and Mangan invest, and their investment posts are consistently high quality: betting money on being right makes you consider your opinions. Investors have personal interest to know what happens in the world as it impacts their lives.

Money is a huge taboo, for example not a single person has ever told me his monthly salary. Outside immediate family, only two persons have ever admitted owning stocks. I am aware that writing about money is not necessarily wise in Finland, will be careful about not disclosing anything, and will stop as soon as I start to notice strange remarks in face-to-face discussions.