I’m back on Twitter, daily – sharing ideas about living better. The focus is health & wellness with financial education for you and your family.
It’s a good place to ask me Qs on my writing.
Capital over and above the needs of current adult family members can be considered multigenerational.
When I was younger, I focused on building net assets. I started saving out of my first paycheck. If a young adult aspires to a family leadership position then this is where they should start.
Looking backwards from 53, the big gains have come from moderating personal choices, particularly associated with assets that don’t produce cash flow. Being an exemplar, here, is the role of senior family leadership.
A better way of viewing financial wealth…
Assets “divided by” current-year spending => gives you a figure expressed in “years-spending”
$2 million of net assets means something very different when…
There’s $2 million of debt sitting on top of it vs being debt-free
Baseline spending is $125,000 vs $250,000
Average age of the earning membership is 35 vs 55
Context matters
Time Horizon also matters!
Family is a dynamic process. I visit for a limited period of time. I change continuously while I’m here.
Years-spending can be compared to life expectancy of senior members and working-life expectancy of earning members.
Each adult member pays their own way.
This is HUGE for long-term returns.
First, because there are no “bad” deals in the family system.
Second, because the high-earners are free to live their lives in a way that most benefits the family system
HINT: teaching young members about life generates a higher return than creating more unearned capital within the family system.
Often overlooked => years left until the youngest members take over their own living expenses. Family is a dynamic process with clear generational shifts (deaths, retirements, careers, graduations, births).
Families don’t need to budget for taking care of everyone, forever. When I started my kids’ allowance, I began teaching the concept of pay-your-own-way. They’ve also been raised with an expectation that they will move out. Living nearby is OK!
As a family, you need to decide the split between future-focused and present-focused capital. Until I was 52, I was totally future-focused. A change we are gradually making is shifting some capital towards present enjoyment. I like to call this capital “recreational.”
If you are going to deploy capital in a “recreational capacity” then consider the nature, and likely impact, of a mistake. Mistakes can come in many forms. Here’s what we’ve learned.
Multiple, smaller bets, with the minimum capital deployed to solve the issue.
Make sure you factor in the cost of ownership, forever. A high cost of ownership can turn a gift into a burden. I know families who spent many years unwinding the financial legacies of wealthy elders.
Remember, the highest form of endowment is the TIME of a parent. How will this choice impact the family member’s time? Don’t tie down your most effective members with admin!
More than comfort, consider how you might be able to deliver “time” to future family members. What is it going to take to assist my children in having the time to be great parents?
Related, my children will have a range of financial “success” in their lives. Constraining myself, today, reduces lifestyle friction in the future (at no cost to their nature-loving Dad).
The role of the family is to support its members in living the lives they choose to live, not to facilitate consumption. My current choices will become the (unconscious) baselines for my grown children.
Adults have a preference for individual family utilization, over collective utilization.
From my dentist, “My kids will use my ski place a lot more… when I’m dead.”
From a friend, “They like to visit… when we’re not there.”
Single geographic locations, with separate living arrangements, have proven a popular way to strengthen families.
From a friend, “Close but not too close.”
Choose peers, and location, with intention.
Our environment exerts a powerful, often invisible, influence on our desires and actions.
Vegas, Aspen, Global Financial Centers… these locations strength traits that lead me astray
Far easier to reach-for-better in Boulder, than struggle with my past.
Where will this location, this choice, take our Human Capital?
What sort of people will we meet?
Availability heuristic, in all things – friends, choices, life partners
Zillow & AirBnB enable families to quickly compare capital-to-own with fully variable access.
I did a quick check for Edwards, CO => $5 million homes available for $7,000 per week in August, the summer peak.
The same capital in VTSAX yields $60,000 per annum.
The smallest real estate mistake is usually 10% in-and-out costs. Even a “money-back” error on a $1 million house has a true cost of at least $100,000 (because you might have to have to hold for a decade).
Wise allocation of time is what grows human capital.
Assets are often a distraction from what needs to be done.
Specific tactics, I’m working on in 2022.
SELL an investment property to enable a market neutral move into an asset the family will use for shared experiences.
At 40, I had too much runway left to finance to make this choice.
At 53, I don’t want to wait until I’m old for (some of) my assets to better serve my life.
It might be tempting to borrow and defer the tax/agents’ fees => recourse leverage is a risk we don’t need to take.
Pre-kids, rolling Nevada with my sweetie. Mobile, flex-time office space that enables me to share experiences with those I love.
An aside… at the back of my mind, I want to purchase an all-season van. I used to own a Sportsmobile and we had a lot of fun.
I worked for a guy who loved cars and a wise investor noted, “It’s better for Ferraris to be bought from carried interest than management fees.”
If you’re going to do something indulgent then: (a) pay down debts, (b) take some money off the table, and (c) limit the size of the outlay.
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BUY equities at a reduced weighting.
At this stage of my life, I tend to balance “current enjoyment” with “future protection” on a 50/50 basis.
I’m nervous about current valuations. That said, I’ve been that way, FOREVER!
So… stay invested, at a reduced weighting => buy less.
In March 2020 I increased equity allocations to 72% of my Vanguard portfolio.
Allocating additional capital in 2022, I made a reserve for “an investment that benefits the present”…
…then rebalanced to 60% equity allocation.
This reduced the size of the new investment and got me past decision paralysis, driven by a fear of near-term loss.
“Buy less” got me to “stay invested.”
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HOLD quality local real estate
Years ago, my family purchased a quality piece of real estate where my kids are growing up. Holding the asset, for 10-20 more years, would help my kids get on the property ladder. It’s also a good-enough hedge for an uncertain future.
As I wrote a couple weeks ago, the main financial deliverable for my kids is debt-free education.
If I can hang onto to the real estate asset then they will get a bonus above the debt-free educational start in life.
Simple decisions, good-enough decisions, can free your thinking.
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WATCH
Be patient, change slowly and focus on sharing experiences with those you love.
Tuesday mornings together. Storm skinning at Eldora Mountain, above Boulder.
January is the month where I pull together financial information and think strategically about how I allocate time, and money.
One of the most useful tools for understanding what’s really happening… as opposed to what we think is happening, or what we budgeted to happen… is an operating account.
I’ll illustrate with a range of examples.
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Cash movements matter.
If you’re going to get ruined, financially, then it will be due to running out of cash.
So, how to track the cash?
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Family Joint Account — every dollar that runs through my household leaves via a single checking account.
Annually: I do a 12 month search on every credit entry into that account. Where did I get my cash?
Monthly: I check total outgoings in the account. How much did we burn this month?
This gives me an understanding of the big picture. While figuring out how to save 20c on a gallon of gas makes me happy (CostCo FTW)… gasoline could be free and it wouldn’t move the needle for my family spending.
Knowing the big numbers, keeps me from making my family miserable by distracting us with the little stuff.
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House Account — From 2008 to 2012, we lived in a very big house.
Aside from the time spent taking care of the place (65 bags of leaves each October!!!), I was curious what this place actually cost me. So I opened a checking account, gave my wife a checkbook and took one for myself. Every-single-thing connected to the house went through there.
Monthly, check the out-goings. Boom, you know exactly what the asset is costing.
You can do this for RV, boats, second homes, you name it.
By the way, the real costs were time, emotion and opportunity cost. We fixed that in 2013.
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Nanny Account – When the kids were little, we spend a ton on childcare. It was the best money we’ve spent since being married. Always remember to structure your childcare so it benefits the marriage.
Preschool, while part of childcare, is where I give consideration to what benefits the child. Everything else runs through the filter of strengthening the marriage.
Get a debit card for the account, run payroll and all other expenses through the account.
Making the cash easy to track saves many ethical mistakes.
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Business Checking Accounts
#1 // When I was running my athletic coaching business, I had a habit of blowing cash that was in the company account. I’d use it for “business related expenses.” When there is a tax deduction, we can justify a lot of marginal spending.
To give myself better spending discipline, I set a target of paying MY WIFE’S account $5,000 a month.
Worked great. The year I started to focus on cash generation, the business saw a $100,000 swing in profitability.
#2 // These days, in my fiduciary services business, I have a brokerage account at Vanguard. Right now, the account invests in a money market fund (VMFXX). To see what the business is _really_ making, I check the account balance at December 31, 2021 vs a year prior.
The business has two checking accounts. I keep the minimum balance in those accounts for free checking, and sweep the excess to Vanguard. The Vanguard balance tells me how things are going.
#3 // I sit on the board of an investment company in Hong Kong. All operations related expenses flow through a single account. Monthly, quarterly, annually… we check the outflows against what we think the operation is costing us.
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Virtual Accounts
#1 // My kids have accounts with the Bank of Dad. These spreadsheets help me teach them the power of compounding (BoD pays 10% per annum).
The first entry into these accounts is October 2016. It’s been a useful teaching tool. I break out the “earnings” component of their weekly interest and they are amazed at the “free money” they earn from investing with me.
#2 // My own Dad lives outside the US and has me pay things from time to time, we have a simple spreadsheet we use to track (Item, Amount, Date, Reference).
We’ve been rolling it for three years. So, much better than when I used to run QuickBooks to track family spending outside my household. We check the total at the start/finish of the year and we know the cash outflow.
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Cash Tracking
Rather than making myself miserable with (endless) low-value bookkeeping, I do a monthly review of every account where money can leave my life.
I enter the closing balances for everything. I compare account balances, and totals, to the prior period. One page.
I also run a monthly cash flow projection (March to February) so I remember to make lumpy payments. One more page.
Federal / State / County Taxes
Insurance
Retirement account investments
All of the above by legal entity, subsidiary and currency
When I create the forecast, I insert calendar reminders (7 days ahead) to make sure I haven’t swept the cash away.
I nearly bounced a payment to the IRS this month, so the system isn’t perfect but it’s better than jamming my head with dates and payments.
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All of these systems let me quickly get a feel for the key numbers in my life. They let me know what’s happening with a minimal investment of time. With accounting, it is easy to spend hours (and hours, and hours) bookkeeping, while generating zero useful information.
The overall system quickly shows me when my expectations are out of whack with reality.
Everyone completed the “summer” reading challenge! Across the time period, our oldest became a teenager. I’m probably done trying to “push” her at anything. Although, there has been discussion of a cash prize for getting to know the local transit system via 100 bus rides to middle school. 🙂
Like all my stuff => this is not advice to your family. Speak with local experts before making tax, legal and portfolio changes in your life.
Iñaki asked, “what to do when the world seems crazy?”
I build my life so I don’t need to be right.
Related, I want to be able to unplug for 72 hours, without worry, whenever I feel like it.
This strategy is based on knowing that I’m prone to error and don’t want to spend my life connected to the matrix.
Further, even if you have 100% confidence in yourself, your kids/spouse are going to need something robust for when you’re gone.
Across 2019, I wanted to lean into equities but there wasn’t an event that gave me an opportunity. So I rolled along, rebalancing and living my life.
In March 2020, the pandemic created an opportunity. Personally, I leaned in (fairly hard) by increasing %age exposure to equities, at a time when rebalancing alone would have triggered buying.
In a fiduciary capacity, we only leaned a little. Two members of my investment committee, with wider views of the world, advised caution. Using the principle, most conservative view rules, we were conservative with allocation.
Both decisions made sense at the time and worked out.
Time matters. “Good enough” becomes more powerful the longer your time horizon.
Returns across generations are driven by a famous Munger-ism => “just try not to be stupid.”
The family’s position, 10 years past every generational transition, is impacted more by what you burned than what you earned.
At the end of 2021, given the whacky stuff I’m seeing around me, I don’t plan in leaning in at the next correction. Rebalancing will be good enough.
Recreational Capital and Associated Spending
A dominant focus on return/allocation in your financial portfolio, misses an important source of value creation => efficient use of “recreational” capital, and associated spending.
Recreational capital is any asset that’s held for non-financial reasons. This is a material slice of many balance sheets:
Boats, RVs, Cars
Offices
Second homes, vacation properties
Sizing up personal residences
Renovation projects, furniture, collectibles and art
Charters, vacation spending, travel spending
Any asset with a negative yield
You’ll see I included a line for the expenses associated with those assets. Some assets, when bought, lead to more spending.
By way of example, INVERT and consider…
When you sell all your assets in a remote location then… the spending associated with the location will plummet. Now that we spend our summers “at home” vs commuting to/from Canada, we cut spending by a big number.
Even if you don’t buy… for skiing, we stopped renting a condo in Vail. Our 2021 ski season cost will be less than what my last rental cost me. Skiing is a choice with a stack of associated spending, and negative-return investment opportunities.
It would be nice to think that these decisions were driven by being smart. That would be a mistake! The Canadian exit was driving by local tax policy and COVID forced a change in approach for skiing.
We did not realize the true cost of our “recreational” choices. We had to remove them, and watch for a couple years.
The choices above:
Create a larger working portfolio
Reduce annual spending
Increase the flexibility to change one’s mind
Don’t involve admin, maintenance or exit costs
In our financial portfolio, conservative nature means we “missed out” on much of the run up. However, because we adjusted our recreational capital, and associated spending, we greatly increased wealth over the last five years.
The wealth gain, from shrinking the recreational portfolio, is locked in. These gains are hidden from conventional metrics, that your advisor might show you.
Now we move along to KC’s questions
GB: total debt will remain modest relative to assets and cash flow
KC: How do you define “assets” and “cash flow” here? Completely paid off asset or total value of asset? All assets – or just the assets on the investment side (excluding primary home?) Cash flow from all sources after expenses? What do you define as a modest target?
I have a spreadsheet that shows me… gross asset value, deferred taxes, tax basis (as at last tax filing year) and deferred agent’s fees (for real estate). So I can quickly look at real estate from gross to net after-tax realizable value. I compare those figures to gross rental income, and net cash flow (from my tax return).
I’m conservative with gross asset value on real estate, a discount from Zillow and my real estate agent’s estimate on value.
I assume 6.3% cost to exit, from real estate gross value, then tax the realized value at 25% of the gain over basis.
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Cash Flow
I look at… total debt service, core cost of living, total cost of living => each of those numbers gets a little bigger, and I have less control over delaying payment/spending.
Then I look at the inflows by source…
real estate (net and gross — consider vacancy risk)
employment (by role and client — consider concentration)
passive (royalties, dividends, distributed gains)
I want to understand my concentration in expenses (what I can cut/control) as well as income (where the risks lie). I never want to be placed in a position of being a forced seller.
My total family debt stays under 10% of net assets. Assets calculated net of all taxes and agent’s fees.
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The Role of Time
My thinking in my work, and family, is multigenerational… I look at assets, leverage, cash flow and spending at many levels…
What I actually own, owe, control, earn => me
Family level
Family & Corporate level => me, my family, my business
Multi-generational level => consolidated, over time
I think about expenses, earning power, saving power, asset utility (what benefits members) over time. I have a spreadsheet that projects the age of all living family members over time (2021, 2035, 2050). This helps me consider family asset strategy and consider when generational transitions are going to occur.
KEY for assets and cash flow => When generations stop working/saving, when kids start working/saving?
It’s not just “what you own.” It’s also when you own it, and when you sell it.
I see many people buying assets they will HAVE to sell in ten years time, mainly real estate. Now, if it’s your main home, then I get it. See below for the option value in the mortgage.
In this market, Boulder up 30% this year, it’s easy to convince yourself that you are silly not to supersize your balance sheet.
But if it’s a secondary market…
10% in/out cost for the real estate
vs…
Less than 1% cost to go variable (AirBnB, Hotels.Com)
Total flexibility with capital (you don’t deploy into a low-occupancy, negative yielding asset)
No admin hassle (I really dislike organizing maintenance and cleaning)
Why are you doing it?
If you want to dazzle peers, suppliers and key relationships… …then you might be better off with a high-end club membership.
Your mind may try to convince you the joining fee is a waste of money. Note that the club joining fee is usually < 5% of a condo cost, and club dues run <10% of the condo’s cost to own.
With leasing we compare to “do nothing” => most people with ready finance will “do something.” If you’re going to do something, regardless, then something smaller can be a better option.
Your mind doesn’t see the rest of your portfolio performing better, with less hassle, by not owning an asset that’s a drag on return.
And… my mind at least, doesn’t remember how much I hate cleaning and dealing with remote maintenance issues!
KC: Tax bill as a %age of net assets-Where do you think a healthy range should be?
Every year, I look at the tax bill relative to net assets on a consolidated basis. This lets you consider the impact of tax policy on your portfolio – smart savers free themselves from exposure to changes in tax policy. Taxes paid, as a percentage of net assets, should trend downwards over your working life.
I don’t think the taxes vs net assets number, itself, is important. What matters is trending down and asking yourself if you are worrying about the right things in your life. Lots of (wealthy) people fail to recognize how little impact the Feds have in their financial life. Others could use a nudge to save more, spend wisely.
GB: At that point, you’ll have built yourself an inflation-proof, tax-effective retirement annuity
KC: Can you help me understand the inflation-poof aspect of this strategy? Is it the income producing asset that is locked in at an low interest rate? How is RE more inflation-proof than other assets?
Real estate isn’t “more” but it can be “different”.
Local rents are influenced by local real economic growth. I like the prospects of Boulder, the Front Range and Colorado.
Local real estate values are influenced by macro (national interest rates, credit cycle) and local (replacement cost, demand) factors.
So a slice of local real estate can create an element of hedging between national, regional and local conditions. There are some other benefits…
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Hidden Options
Here in Boulder, Colorado, I believe our real estate values have a hidden option. There is a chance the best neighborhoods explode upwards towards the highest valued parts of: the Rockies (Vail/Aspen), California (Bay Area) or NYC.
Now, I don’t have the $$$s to own trophy properties, but I don’t need to. As I wrote in The Next Doubling, it’s good enough to be nearby. For the option to pay out, we don’t need to get to the highest prices per sf => we merely need to close the gap, a bit, over time. That sort of option doesn’t exist in an index fund.
Another hidden option => we own a two-unit rental. We always have the option to move into one of the units and “live for free” by renting out the other unit.
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Option Value of Fixed Rate Debt
30-year fixed rate debt, with an option for the borrower to repay, is a valuable (oneway) option in an uncertain world. Unlike margin debt, the lender can’t call the loan on a whim.
Long rates have been declining for 40 years, so the value of this option is overlooked by many. In an inflationary environment, having a multiple of my core cost of living in low-cost fixed rate debt is a useful position.
A mortgage on a personal residence seems like a good deal to me……and if it turns out to be a bad deal then I exit via repayment or refinance.
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Saving 2% p.a. and giving Goldman an option to close you out…
Quick note on margin debt, even at <1% p.a. cost, seems like a very bad idea.
Smart people borrowing money they don’t need, to make money they are unlikely to spend in their lifetimes. Everyone figuring they will be able to unwind their financial structure before anything bad happens to them.
This strategy never ends well and only makes sense when you are playing with other people’s money.
A general principle, some things only make sense when you ignore the rebound. Fasting, margin debt, intensity-bias for endurance sport… I have found one gets a better long-term result from building smarter habits.
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Optimize over time. When I started paying attention to myself, I realized I needed a whole lot less spending, which implied less capital, which gave me much more time.
INVERT that last sentence => spending you don’t need, increases the capital you think you need, to spend more time doing what you want. I broke that cycle in 2000, got wrapped back up in it in 2005, got tossed back out during the 2008/2009 recession and, these days, cycle in/out depending on my moods!
Nearing 53, I laugh because “less” is being forced on my physical life, by time.
In my early 40s, “less” happened due to kids and a nasty recession.
In my early 30s, “less” felt liberating, and made time for a lot more self-directed time.
A good question to consider with major assets in a portfolio…
Would I buy at current prices?
Like most real estate in Colorado, Boulder capital values have been on a 7-year upswing. According to Zillow, the capital value of where we live is $2.5 million, up 36% since the start of 2020. The only way to describe how this value feels is “too high”.
One way to consider capital values is to express them in terms of cash flow and time => with real estate, the proxy is cost to rent.
With our current address, comparing rental costs with gross capital value…
$3,000 per month rental => 69 years equivalent
$4,500 per month rental => 46 years equivalent
$6,000 per month rental => 35 years equivalent
With the run-up in prices, homeowners have been rewarded for properties that are larger than their needs. Like-for-like rental, doesn’t look too crazy right now. However, we could easily fit ourselves into a location that’s 40% smaller than where we live at present (implying a gross yield of less than 2%).
On to the next example…
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In 2021, some friends exited the Boulder real estate market. Their net sales proceeds (after taxes and agent’s fees) equate to ~100x their first year rent in their new location.
Worth repeating: they are taking a century of rental-equivalent off the table.
Put another way: by selling into this market they can do the following (in current dollars):
Cover their future cost of living on a joint-life expected basis;
Put their kids through college;
Buy an apartment as a hedge against future rental rates; and
Treat future earned income as fully discretionary.
Compelling, especially if your house is the primary asset in your balance sheet.
They aren’t “set” by any means: inflation, illness, increased spending or investment losses might derail their plan. However, the asset sale greatly reduces their financial stress and buys them a tremendous amount of time.
Stress, time and the risk of ruin.
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Another example, vacation properties.
The house we rented in Vail (2019/2020) is valued at more than 100x the rental we paid. The condo we rented in 2018/2019 sold for 50x annual rental.
There’s never been a better time to rent assets you don’t need. 😉
If you own assets in secondary locations, or are considering buying, then the above calculation is a useful one to consider. The numbers above are using gross rental figures. From the landlord’s point of view, the net rental income would be tiny (relative to capital).
Also consider the benefits of being variable…
Rather than lock in a single location for the winter, I’ve decided to try an AirBnB season. I booked in 22 days of skiing, the dates tie to school holidays => Vail, Telluride and Jackson.
Adding a bit of airfare, gas and mileage… total cost will be $15,000 to use properties with an average value of ~$1 million. VTSAX dividend yield is 1.25%.
By not owning, it was cost-free to change strategy.
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Other questions I like to ask:
Assume things go well and this asset doubles in price (again), who’s going to buy?
What’s going to drive the next doubling in value?
Where’s my family exposure: (a) benefiting from the next doubling; or (b) harm from the risk of a halving?
Who’s going to buy? A smaller place in a great neighborhood is much easier to sell than the best place in that neighborhood. The top places in Boulder are now selling for around $5 million. Who’s going to buy when the market goes to $10 million? Might “ability to purchase” create headwinds for appreciation in the market?
Prime Colorado real estate benefits from buyers coming from “even more expensive” markets. Boulder remains a great place to land from one of our coastal Metros. City-based housing markets benefit from local economic growth.
Vacation-markets, at 50-100x gross rental income, are reliant on continued balance sheet appreciation for the Top 1% of society.
A comparison I follow in Colorado… Boulder rental property (house with land, no HOA) vs Vail vacation property (condo w/o land rights, HOA). In the last recession, I tracked this comparison in Arizona – unfortunately, I bought condos down there instead of houses.
What’s going to drive the next doubling? See the chart at the top of this post => there’s been a multigenerational tailwind due to declining interest rates. Every store I enter, and every manager I talk to, gives multiple examples of tight labor & inflationary pressures.
Negative real interest rates might keep the party going for a bit. With Social Security COLA adjustments over 5%, it seems nuts to buy into property that’s trading on 50-100x rental income.
Family exposure. For me this is kind of like the “who’s buying” question.
If you’re a double-income family with a diversified portfolio then sticking 10-15% of assets into a vacation market is a different choice than a single-income family with 90%+ of assets tied up in a mortgaged home. The context of the choice is worth considering.
One final point, despite living at 5,500 feet (and training year round up to 14,000), I don’t sleep well above 9,000 feet. For many, ability to sleep at altitude changes as we age.
Climate, altitude, neighbors, convenience, community, quality of local schools/governance… good reasons to rent locally before you buy.
An observation that I am trying to pass along to my kids.
My never ending desires are rooted in a false idea of what will make me happy. I have a clear idea about the structure of the days that are “better.” Achieving better is easier, and more rewarding, than chasing pleasure from purchases.
To help me achieve “better”, I have a series of principles.
1/ Visible spending for wife, first // This works on a number of levels.
Don’t buy something for yourself that you wouldn’t buy for your entire family.
It easier to be value conscious when I remove myself from the purchase equation.
It’s just good policy.
2/ The minimum outlay to meet the underlying need
Strangely, I got this via Joe Friel on coaching masters athletes => the minimum, and the most specific, training to get the desired physiological adaption.
Capital takes time to acquire and is easily squandered (spendthrift heirs and lottery winners are common examples).
A default to the minimum reduces the scale of my (inevitable) errors and increases the ability to change my mind later.
3/ Do not sweat the small stuff – set a Give A Hoot threshold (links to Marriage Money article)
Set an annual plan, track the cash quarterly and promise you will not sweat the small stuff. Good people are made miserable by tracking every nickel.
Stay out of the weeds so your mind is able to think and get the big things right.
4/ Avoid Choices That Have A Material Cost to Hold => this applies across domains (assets, leases, friends, family, commitments, Facebook/eMail). The math from yesterday.
There are many ways to find yourself over-extended… debt service, cash flow, emotion & time.
Exit bad decisions => they crush you on all levels.
Mark Allen on pacing…
just because you’ve made a bad decision, doesn’t mean you have to continue it
Combine these principles and you’ll find the sum is worth more than the parts.
Dropping into West Turbo. Pali Chair, A-Basin.
My son asked about the last big purchase I made, other than real estate.
My off-the-cuff answer was “we don’t spend much money” but that didn’t line up with what I know about our cash flow statement.
So I spent January thinking about it. Next time, the best financial choices I’ve made across my marriage (16 years this summer).
Thursday, I shared my thoughts on the real risks I face. That’s where the action happens in my life.
Still, this is a financial review, so it’s the right time to consider asset allocation.
Having spent 30+ years locking in my Core Cost of Living, the main choice I face is how much cash/bonds/no-return assets to hold.
Here’s how I approach that topic.
There is a cost to holding cash, especially today. Zero, or negative, yield.
Cash is exposed to the “ravages of inflation” – on one side.
Cash earns nothing, while you watch bitcoin, prime real estate and other asset classes skyrocket – on the other side.
Against those costs there are benefits. The three biggest (for me) are:
a call option to benefit from a future crisis
serenity
cash/bonds dampen the volatility of my portfolio.
Now, here’s the questions I ask..
1/. How many “years” do I need to feel serene? This will depend on your psychological make-up, earning capacity, earnings diversity and age.
Getting my net-cashflow-burn down is the only way I’ve been able to feel serene. I just don’t have the psychological make-up to soothe myself via luxury spending, more assets or more income.
2/. How many dollars might I need to capitalize on the coming apocalypse? Being able to buy real assets in a down market will make you happy for a long, long time. I’m still happy about a couple purchases I made in 2010.
My financial assets provide me with an opportunity to get out there and live my life. Financial assets provide very little inherent satisfaction – this is a good thing as I can remain (mostly) detached in downturns.
Our actions in the real world provide satisfaction => share experiences (ideally in nature) with people you respect and love.
BTW, here’s a 2019 article I wrote about wealthy people talking about cash. Back in 2019, many wanted to be in cash. Roll forward to 2021, some of the same folks want to be out of cash! Personally, I’m about the same. I spent the intervening period paying off my mortgage and clearing my car loan.
Tuesday’s post ended with the observation that I pay myself in time.
So, how much time have you got?
Let’s find out.
Scale It => Relate Your Exposure To Your Balance Sheet
I recommend you look at things a few different ways. Print this out and write your numbers on the page.
Make it real, especially if you’re financially fearful.
Gross assets / Core Cost of Living = years
Net assets / Core Cost of Living = years
Net assets / Net annual cash movement = years
Net assets / Net annual cash movement (excluding active income) = years
Cash / Core Cost of Living = years
Cash / Net annual cash movement = years
Cash / Net annual cash movement (excluding active income) = years
Cash / Gross assets = percentage
Cash / Net assets = percentage
I include bond holdings in cash. I focus on the BOLD, while considering each line.
Armed with the above, you can get a feel for how much time is available to you, based on how you are living today.
It’s easy to get fixated on income/spending and lose track of time. The best investments I made in my 30s involved trading money for time.
We tend to over-value money vs time => you can do great deals for yourself once you prove your worth to your firm.
Related => it doesn’t take much time to greatly increase the quality of your personal life. As a triathlon coach, I’d get my athletes to carve out one weekday morning per week where they’d start work late. This would enable us to make Sunday life-focused and spread their training load.
Discretionary/Luxury Spending – will fall outside your Core Cost of Living. My advice here is “pay yourself first” – slice your investment program off the top of each paycheck before you get a chance to spend it.
Don’t borrow any money (personally) until the first credit crisis after your 30th birthday. Then, borrow modestly to purchase real assets that are being priced down due to a banking crisis.
Across the 40-50 years of your working life, you will not miss luxuries not purchased.
As for overall strategy, there is a great PDF here. As the PDF will explain, don’t get distracted, by those who want to profit from complexity!
Focus on what matters: (1) spending vs new capital saved; (2) learning to think in time, not money; and (3) good enough is good enough (low cost, persistent investment, across long time horizons).
Maybe I should add #4… the best stuff in my life happens between people – shared experiences with those I love.
People, not portfolios.
To get ready for tomorrow…
Ask a confidant… When I talk about money, what do you hear?
With your financial concerns… Am I worrying about the right thing?
Monday’s post here – tomorrow we will start using the data you’ve prepared.
Before we get into the analysis, let’s discuss the game.
My game is NOT won by building income, assets and spending.
Something I hope to teach my kids about money:
Any choice made to appear rich has an underlying effect of reducing family wealth.
My game => increase discretionary time while getting the net burn to zero.
I’m willing to wager you will not feel free, or serene, until you get close to that point.
“That point” being whereyou can sit back and not care about the ups and downs of the world. Being able to sit with equanimity will improve your thinking, and your relationships.
I hope you read the link – I chipped away for 31 years and am a better man, on a smaller balance sheet.
The main thing to remember is each time you get an attractive opportunity to lock in a piece of your core cost of living, take it.
Pay yourself in time.
Philosophy of Status
Don’t think I have transcended my human drive to compete for status.
What I’ve done is (try to) channel it away from external approval, virtue signaling and consumption.
Needing a place to allocate this drive, it goes into my writing, marriage, quality of thought and daily actions. For a long time, my drive went into my sport.
Redirection is a whole lot easier than transcendance.
Feel The Byrn 
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