The benefit of creating a good position is you can choose not to leave it.
Each time I change strategy, I open the door for error.
A quick review, I calculate financial wealth as:
Net Family Assets [divided by] Annual Cost of Living
The formula spits out an answer in years, not dollars.
To figure out if an idea is “worth it,” I convert to years.
I also consider:
- Leverage: do I have to borrow, what’s the total dollar value of my exposure, how large/far can things move against me?
- Time: I have control of my schedule – might this idea change my ability to control my schedule?
- Ruin: reputation, relationships, finances, health… how does this idea change my exposure to ruin?
I have a lot of (bad) ideas. Thankfully, most don’t get through my filters.
These filters work with EVERYTHING… alcohol & drug use, mistresses, felonies, off-balance sheet financing, sleeping late, losing emotional control, binges…
How can I put “years” into family wealth without increasing my risk of ruin?
In 2009, we executed a four-year plan that put us in a better position.
A key part of that plan was downsizing, borrowing (30-years fixed at 3.25%) and pulling 65% of the equity out of our primary residence.
It was highly inconvenient to change and we expected the smaller place to be a step down. However, our minds adjusted and we love our existing place. The move paid off in “years”:
- Our current place runs at half the cost of our old house.
- The capital we withdrew, earns enough to cover the cost of our current place.
I looked at moving again but there wasn’t any benefit to us after taxes, commissions and hassle. So we’re going to wait and watch.
Remember, “doing nothing” maintains an option to (make a better) change later.
The Elephant(s) in The Room
Childcare and school fees have been a fixture of the last six years. It has been a big number – about double what we pay in housing costs.
Our youngest is in Grade One (yay!) and we just lost our favorite sitter (not so yay). The result is a big slice of the family budget gone.
My first thought was to replace help with even more help. I have a habit of throwing money and other people’s time at my problems. It’s a carryover from my days in finance – where I aimed for maximum subcontracting in my personal life.
Then I had a thought…
- Consolidate the kids’ schedules (we often have three in three different places)
- Help out in the afternoons (I’ve done nothing for a few years)
- Take over the cleaning (ditto on my lack of input)
It’s ~20 hours out of my week => prior thoughts on money and time.
The other elephant in the room is my cash flow deficit. It’s been rolling at 4% of assets for years. I’ve ignored it because our assets have been appreciating at a faster rate. My comfort with deficit spending reminds me of 2004-2008.
So I could “buy” the family a shift from a cash flow deficit to a surplus. Worse case, I crack a bit and hire local kids to help me out. I’ll still cut my cash burn by ~80%.
When I explained my plan to my wife she asked if my plan would make me happy. I said,
“I don’t expect to be happier but I noticed that being a better man never made things worse.”