By Brad Beckstrom
“Have a small nut; that’s the key to life.”
What’s an aging rock ‘n roller to do, the once big recording contracts, the limos, seven-figure tour revenue all start to trickle away? Graham Parker, a British punk rock pioneer, knows exactly what to do: enjoy life, have a great time, and keep making music. Graham’s quote “Have a small nut; that’s the key to life” sums up one of the core principles of financial independence. The small nut he’s referring to is not assets, but monthly expenses. Rock stars, athletes, entrepreneurs, everyday folks all hit the same wall. We hear these stories all the time, from the extreme, like Mike Tyson blowing through $400 million and ending up homeless, to the highflying salesperson that overextended themselves, justifying their current expenses on future income fantasies, only to be chop blocked at the knees by a corporate reorg or downsizing.
Professional athletes know this story all too well. The average career in the NFL is about four years. In major league baseball, it’s a little over five years. Knowing this, it seems crazy when you see young athletes, blowing their entire signing bonus, borrowing against it before they even get a check. The secret is to do the opposite, save the entire bonus along with any windfalls, and keep your monthly expenses to a minimum.
Some professional athletes get this, like John Urschel NFL Guard Baltimore Ravens, Daniel Norris MLB Pitcher Detroit Tigers both have multi-year contracts worth seven figures. What they have in common is that they keep their expenses low, really low, about $25,000 a year. Norris takes this even a step further by living out of his camper van when the team’s not on the road. These guys have discovered the secret of having a small nut. By a small nut, I’m referring to personal monthly expenses. Instead of blowing their high salaries on expensive cars and homes, they saved that money allowing it to support them for the rest of their lives, regardless of the direction of their careers. These habits are much easier to establish when you’re young, before you have a family and others that depend on you.
You don’t need a professional athlete’s salary to minimize recurring expenses. Most of us will be in our chosen line of work significantly longer and won’t need to suffer from the peer pressure of pulling a 15-year-old Honda into a parking lot full of new Ferraris and Cadillac Escalades. You don’t need to live in a camper either, unless you want to. You could work under the radar like I did. Helping fix up up an old house and having several roommates, right up to the day I got married. Maximizing any company benefits that were offered, including matching retirement plan contributions, automatic paycheck contributions, stock purchase plans. Saving everything from cost-of-living adjustments, auto allowances, health plans, expense reimbursements. I also made sure I banked any bonus or raise and invested it in balanced portfolio of stocks and mutual funds, later switching to index funds.
When many people get out of school and enter the working world, one of the first things they do is go out and buy a new car. They carry expensive student loan debt that is bigger than some people’s mortgages. They spend like “a professional”, like their coworkers, like their bosses — overpriced lunches, hand crafted cocktails, gas and time sucking long commutes in that oversized new car. They carry this debt into their marriage and kick it all off with an expensive wedding, honeymoon, moving into an oversized home just in case they need the space. They blink their eyes and they’re 40, often still carrying much of this debt.
What if you had different plans? What if by the time you were 40 you had enough money saved to do whatever you wanted to do? It wouldn’t matter how many touchdown passes you caught last year, or whether your company considered your position to be redundant. You’d be ready.
The best way I’ve found to achieve this goal is to think of your finances like a small business.
If you think like a small business, then having a “small nut” means one thing, low overhead. Overhead is any on-going essential expense to run the business of you. Think of yourself as the primary investor in this business. So, if this business spends its money on class A deluxe office space, oversized SUV limousines, and borrows money for things like the finest furniture and decorations for the office, all of a sudden a few bad months or a really bad year won’t just set them back, it may end them permanently. Instead, think of that same business running out of a garage or small office in a paid-for house, no fancy furniture, or SUVs, just a simple quality workspace.
As you’re setting up the small business of you: Think about your largest expenses like housing, transportation, utilities, food, health care, clothing, and entertainment. Those first five comprise the majority of the overhead in your life. And just like the small business, you need to keep that overhead low. The number one reason for this is so you can create a new non-negotiable monthly expense called Savings. Most people are great at spending money on needs and wants but terrible at savings. And in the real world, many of us don’t have huge windfalls or Wall Street bonuses to bank. It takes a slow and steady approach. The sooner you start, the quicker you finish. In their book “All Your Worth”, Elizabeth Warren and Amelia Tyagi layout a simple formula for achieving financial independence by putting savings first and breaking all of your other expenses into wants and needs.
They help you break down those expenses into a balanced money formula that includes only three categories: Needs, Wants, and Savings following the 50/30/20 rule. I like to call that 20% to savings a must. If you follow this rule and automate your savings and minimize your overhead, you’ll start to see the true benefits of having a “small nut.”