Tag Archives: family governance

The Village in my Sienna

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mobileMonday’s article touched on a trait that makes me an effective investor: the capacity to see the options inside the deal.

My ability to see second and third order effects isn’t limited to finance.

Last week, Mr. Money Mustache published an article about the cost of buying more assets than we need.

I confess that I am an expert at living above my needs.

The fact that I have earned the “means” does not change the reality of my choices.

A story!

Our local hospice has a partnership with an organization in Tanzania. One of their joint projects is building houses for widows and orphans.

It costs $600 to sponsor a house.

These days, I drive a 2011 Toyota Sienna AWD van. The Sportsmobile (pictured above) was sold when my kids arrived.

$600 is the semi-annual cost to insure and register my Sienna. Two houses a year.

Last week, I spent a house on new tires!

The good people at Mint.Com tell me that my Sienna is worth $21,499.

Swapping my Sienna for a cargo bike, would net 30 houses and save my family 6 houses annually, forever.

Over a decade, this choice could help 500 people with the loss of their spouse or parent.

I have been to Tanzania and these are good people to help.

The cost of this change is inconvenience when the weather isn’t great and a reduced ability to go on driving vacations.

The benefit would be knowing that hundreds of kids ride with me each day.

I told my wife that I’m going to wait a year on selling the Sienna.

However, the cargo bike arrives this month. I financed it by selling items that I put to one side last spring.

Change slowly.

Elder, Mentor, Adviser

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foxy_ladyMy youth, my 20s and my 30s were characterized by a lack of charm.

Fortunately, I had some habits that smoothed the waves I left in my wake!

What habits smooth relationships?

  • I’m on time
  • I do what’s asked of me
  • When I can’t do something I tell you
  • I express myself clearly

If we invert those points then we arrive at a list that will ensure you move away from success…

Chronically late, inability to complete simple tasks, no/slow replies and indirect communication.

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About clear communication… it takes trust to have the courage to speak clearly and directly.

It also takes emotional depth to be able to receive honest feedback.

Two things that I’m working on here:

  • Be conscious of my effect on the world
  • Stop when I am triggered and search inwards, rather than attack outwards

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I was chatting with a member of my family council about the best fiduciary we know.

What makes our friend outstanding?

It’s not his capacity to execute, his technical knowledge or his connections => all of these are excellent.

He has three characteristics that are rare to find in a highly competent individual:

  1. The ability to sit, listen and observe
  2. The capacity to entertain points of view that are outside his preference and training
  3. A willingness to inconvenience himself to do the right thing.

+++

I’ll share with you that my idea of active listening is forcing my mouth shut while I struggle to hold a list of “to do” items in my head. When a gap appears in the conversation, these pour out of me.

Like me, you might be prone to the mistaken belief that you have to fix every thing you touch.

My friend, a world-class non-executive director, is effective by listening, considering alternatives and being open to small acts of assistance.

Wealth Habits – Aspirational Spending

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bunny_gGrowing up the following fell somewhere between normal and aspirational:

  • Private education from Pre-K through Graduate School
  • Winter ski vacations
  • Summers spent at a waterfront cottage
  • International trips to tropical and European destinations
  • Two family cars, bought new, every five years
  • A walk-in closet filled with wonderful clothes and shoes
  • A garage packed with the finest sports equipment

Depending on where you live, you are signing up for $3,000,000 to $20,000,000 of aspirational spending.

…and you haven’t bought a bag of groceries!

Is there another way?

Save half of your after-tax income until you have ten years living expenses banked.

Then cut your living expenses and work part-time, so you can…

  • Spend thousands of hours with each of your kids before they graduate high school
  • Live where you don’t need to leave
  • Encourage your family to actively participate inside your community, and outside your demographic
  • Cultivate inexpensive passions (mine are reading, writing, forest walking and cycling)
  • Share simple, local experiences with your spouse (love, holding hands, serenity)

Time & health.

True wealth.

True luxury.

Understanding Your Family’s Risk of Ruin

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nightwalkIn my previous piece on effective wealth, I made the case for linking wealth to spending.

  • Individual wealth => 5 to 10 years cost of living
  • Generational wealth => 10 to 25 years cost of living
  • Multi-generational wealth => 25 to 40 years cost of living
  • Surplus (excess?) wealth => beyond 40 years cost of living

Spanning 25 years and a range of industries, my careers have had one thing in common… clients can sustain significant losses.

Early in my working life, permanent financial loss didn’t concern me.

  • I had limited assets
  • I was an employee
  • I was insured by my company
  • I was indemnified by my clients

Over time my exposure changed and, eventually, I realized that I had a significant risk of ruin.

My definition of “ruin” has changed over time. It’s worth writing out your own and discussing within your family.

For example, “losing everything I own:”

  • didn’t concern me at 25 – I had a small balance sheet relative to my future earning potential
  • would have been a huge problem at 35 – I had limited earnings, moderate personal leverage and a balance sheet containing more than 15 years cost of living
  • isn’t a problem today – low leverage, small personal balance sheet, greatly reduced cash flow deficit relative to my young family’s assets

Today, ruin consists of adverse events with my family’s human capital.

While I run our family structure, it’s a very small piece of what I do.

Because… the purpose of getting family structure correct is to enable a focus on what matters – human capital and shared experience.

  • marriage
  • kids
  • family
  • health

Get the structure right so that you can focus on things other than the structure!

  • Simple
  • Straightforward to manage
  • Cost-effective (time, expense, future flexibility)

Consider:

  1. Are you worth suing?
  2. In what capacity could you be sued?
  3. What’s the nature of the losses that could be sustained by any party?
  4. What can go wrong outside of lawsuits? Personal disability, for example.
  5. Can financial, or legal, structuring reduce these risks?
  6. What’s the cost to insure these risks?

Brainstorm the answers and schedule consultations with:

  • an experienced litigation attorney – quantify and understand how you will be ruined 🙂
  • an experienced trust and estate lawyer
  • a fiduciary with experience advising families similar to your own
  • a family that has managed two successful generational wealth transfers – what does success look like when you’re gone?

Write out your notes from these meetings, discuss with your family counsel and reach a rough consensus on your family values.

Here are reading resources to help you understand family wealth.

  • Consult widely
  • Seek out smart people that disagree with you – you’ll both benefit
  • When family members disagree, pause
  • Change slowly

More on the specifics of my own journey in a future installment.

Allowance 3 2 1

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amigosMy six-year old has been hounding me to buy her stuff:

  • Pink iPhone
  • Pink Mermaid Tail
  • Pink Guitar

Rather than entering into a philosophical debate on consumerism with my kindergartener…

I decided to put her on the payroll.

We’re starting at $6 per week and I told her that she’d get a raise of $1 per week on her birthday.

$6 also makes the math easy for what I want to teach her.

I gave her three envelopes. I wrote on each…

  1. Save
  2. Spend
  3. Donate

My weekly recommendation was to save three dollars, spend two dollars and give one dollar away.

She asked if she had to do it my way.

Knowing that the purpose is to create ownership, embed good habits and learn from errors… I said it was up to her.

So far she’s saving 100%.

She asked if she had to do any extra work.

Hoping that a reasonable allowance might reduce lying and petty theft, I said that it didn’t rely on anything.

My wife felt that $6 per week was a lot. Looking at a CPI calculator, it’s the equivalent of $2.50 when my wife was six and $1.25 (!) when I was six.

Seems reasonable and the round numbers made it easy to introduce the concept of allocating income (Save, Spend, Give).

Saving half of everything I earned before 30 was the best financial decision of my life.

It will be interesting to see the unintended consequences.

Structuring A Family Pension

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Ax_iglooThree questions for your next family meeting, or your financial adviser:

  1. How long of a retirement should we plan to fund?
  2. As a couple, what is our joint life expectancy?
  3. As a family, how do we invest considering our collective life expectancy?

Today, I’m going to take you into the future of your retirement, your children’s retirement and your grandchildren’s retirement.

++

Retirement

If I make it to 63 then my wife will be 55. At that point, there is a 50% chance that at least once of us will last another 31 years. Here’s a calculator that you can use.

It’s worth repeating – as a couple we have a joint life expectancy of 31 years when I reach 63 years old (17 years from now). Today, my wife and I have a joint life expectancy of 47 years.

That’s a heck of a long time for inflation to act on our cost of living.

Inflation of 2.5% for 47 years brings each $10,000 of current expenditure up to $31,917.

In other words, despite being middle aged, our core cost of living is likely to triple across our lifetime.

++

Children

The joint life expectancy of my daughters (6 and 2) is 90 years. Their cost of living is going up 8-10x over their lives.

Can I insure against the risk that my surviving children run out of money late in life?

Let’s look at a case study.

At the end of last year, I was considering an expensive vacation. I couldn’t justify spending the money on myself and the calculation that follows is part of the reason.

As a family, we can make the decision to invest $10,000 per annum. There would be no impact on my quality of life.

What could it do for my children?

  • $10,000 per annum, invested for 47 years, 5% rate of return is $1,781,194
  • $1,781,194 invested for an additional 13 years at 5% is $3,358,707
  • Over $3 million in 60 years from redirecting my vacation budget

Let’s talk in 2015 dollars. I have no idea about future inflation, let’s assume 2.5%.

  • The $3.4 million will be worth a lot less in 2075 than today
  • $3,358,707 discounted back to 2015 at 2.5% is $763,379

In case I’ve lost you.

  • The cost is foregoing $10,000 of annual expenditure for the rest of my marriage.
  • The benefit is my survivors share a 30-year retirement income with a current purchasing power of $49,658 per annum.

The payment is calculated with 5% rate of return, over 30 years, with $763,379 starting value.

It’s never “too late” for compounding to work for your family. I’m closing in on 50 and can leave a valuable form of insurance to my children by changing my current habits.

++

Grandkids

Run the exact same scenario except I have 85 years to grow the capital.

  • Invest $10,000 per annum for 47 years
  • Roll up for another 38 years (85 years total)
  • Discount back 85 years at 2.5%
  • How much income for the surviving grandkids (in retirement)?

30 years of $90,705 per annum in 2015 dollars ($1.4 million of present value, 5% rate of return).

It’s worth the effort to learn finance and tweak your wealth behaviors.

++

This post inspired by Nick Murray’s book, Behavioral Investment Counseling

Link to a google doc that let’s you tinker with my assumptions. Make a copy before editing.

Quarterly Update – Q1 2015

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winterFebruary contained the most (winter) laughter since my kids were born.

Much better than a gradual slump into seasonally-maladjusted depression!

Rebalancing & Asset Sales

  • No changes in asset allocation.
  • Small purchases to rebalance to target allocation.
  • No year-end tinkering for tax purposes.
  • Cash and short-term treasuries will fall to 6% of our family balance sheet once we make 2014 retirement purchases before April 15th.

We decided to take three non-yielding assets and put them on the market => a vacant lot, a piece of jewelry and a painting.

  • These sales could free 10-15% of the family balance sheet.
  • We expect to save 5-8% of our core cost of living by reducing taxes payable and insurance expenses.
  • A low tax basis on the vacant lot means there will be capital gains payable. However, we own the house next door and the capital increase on the house (as the neighborhood is upgraded) will mitigate the tax bill from the sale.

Simplification

The biggest change is with my working life. I’ve cut way back with non-family work.

Six years ago, I had over 60 third-party clients. Currently, I work with 3 families. The result is a significant change in weekly time allocation:

  • Kids/Spouse => 35 hours
  • Third-party Work => 5 hours
  • Family Work => 5 hours
  • House Work => 5 hours
  • Exercise => 15 hours
  • Open => 20 hours

The “open” time has been transformative.

I have time to read, write, think and unwind => none of these focus on external achievement, another change.

I also have a lot of flexibility for quick trips and short-term projects. My working life is bursts of focused effort with most projects being 2-10 days long.

Kids

2011-2013 were tough. I’ll write more in a separate post – 2014 was a transformative year for the family.

The Do-Something Investment

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Ax_snow1I saw that Clinton’s son-in-law took some big losses at his hedge fund by making bets on Greece. People are speculating that the Clinton family lost a lot of money in the deal.

While the scale might be different, I see this error in every family that I get to know.

We err by making an investment to help someone “do something.”

Some examples from my own investment history:

  • I’m self-employed and have often been tempted to buy myself an office so I can have a place to do something
  • I’ve offered to back friends in start-ups so they can have the funds to create a business and do something
  • I backed myself in a low-return business, where I didn’t understand the market, so I could have something to do
  • I guaranteed the debt of a friend’s business so he could borrow additional money for his start-up
  • I purchased a property so a friend could have a job acting as my property manager

To limit the damage, I have two questions that I ask.

First: What is the purpose of my family balance sheet?

  • Maintain independence and dignity of elders
  • Educate the kids
  • Share experiences with each other
  • Produce a growing stream of cash flow to fund my future living expenses
  • Support a feeling of security and freedom of occupation

You might have a different list. I’d encourage you to write your list down because the checklist might help prevent expensive errors.

Second: How well have I done with predicting my life on a ten-year prospective basis?

While my life has been rewarding, it’s path has been unpredictable on a ten-year rolling basis.

The unpredictability of life means there is value in maintaining a straight-forward balance sheet that isn’t concentrated in any individual, geography or company.

Put plainly, I’m nearly certain to continue to get the future wrong – especially when I try to predict my family’s needs, desires, location…

+++

Let’s say an investment can get past those two questions.

It is time to keep it real.

#1 – Are we backing the best members of our team?

The best people don’t need the help of connected parties.

Because…

There is plenty of money available for good people with good ideas.

Therefore, by definition, most family investments are focused on the weakest members of the team.

Don’t do it.

#2 – Can we afford to lose our maximum exposure immediately?

Concentration kills.

If you can’t afford to lose your full exposure, immediately, then don’t do it.

+++

If you’re struggling to say “no” then

  1. say “yes” to spending time to help raise funding from a third party
  2. lease instead of buy
  3. focus on enjoying each other’s company, rather than investing together
  4. make an introduction to an expert in the industry to facilitate a working apprenticeship
  5. pay for expert instruction

These options have had a great rate of return in my life.

The Body You Want

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When my wife was a teenager, she really wanted curves.

coach_monsyThings worked out.

My teenage desires were different, but common. I wanted to be jacked.

gordo_crunchThat worked out too.

By the time we both got exactly what we wanted, we wanted something else.

We wanted to be whippet skinny so we could run fast.

We wanted to look like tall, but ripped, 14-year-olds!

G_WhipThat worked out, again.

I spent twenty-five years only to get right back where I started.

I noticed that there is an enduring feeling of my body being slightly unsatisfactory.

Once I noticed this pattern with my body, I saw it elsewhere.

Personal safety, other people’s driving, my house, my finances, my life situation… In many situations, there is a slight feeling of unsatisfactory.

I’m always striving to attain satisfaction that’s is just-out-of-reach.

As a young man, I might have seen striving as a good thing. My drive for improvement, my competitive urges, a desire for self-improvement… we have lots of names for the feeling.

Some cultures call it misery.

See what it feels like for you.

++

When I work with others, we use a simple technique.

  • Write down what will make you satisfied.
  • Write down what will make you less afraid.
  • Write down what will make you feel secure.

Out of your list, choose one thing and work towards it.

Work slowly, pay attention, write things down.

Give yourself at least 1,000 days.

Ten years might be better.

You might get there quicker.

With my body, I didn’t start to notice my pattern until I’d been at it for twenty-five years!

With finances, I was lucky, I saw my pattern after a decade, took a leave of absence and enjoyed my first retirement.

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The fact that the lesson took a long time was helpful.

Good things happen slowly.

It’s tempting to short cut the process via cosmetic surgery, performance enhancing drugs, or cutting corners (fraud, tax evasion, deception).

Short-cuts rarely work because we fail to notice the slightly unsatisfactory feeling is following us everywhere,

My victories didn’t work, either. My successes left me wanting more and the feeling followed me around.

++

So I tried enjoying myself…

Pleasure can temporarily mask the unsatisfactory feeling and many use drugs, alcohol, fatigue and other techniques.

The trouble is… the associated hangovers are increasingly unsatisfactory as I age.

What to do?

If you can see the unsatisfactory nature of things then you might ask “who’s not satisfied?”

Once I could see the “unsatisfied person” it was easier for me to decide he wasn’t going to run the show.

At least, some of the time.

😉

Where To Focus

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2015-01-23 12.03.51-1My piece on What Can Go Right prompted Mark to comment that “Worry isn’t Work.” Lots in those few words — the link is an HBR article on the subject.

Mark’s comment reminded me of two aspects of a meaningful life.

#1 – sharing experiences that require an effort to overcome ourselves

#2 – enduring positive change happens via nudges at the edge of our control

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In 1993, I nudged myself out the door for a walk. My walk was the first of many micro-choices that brought me to my current life.

As a result of decades of better choices, I was able to manage through the adverse events that hit my family => addiction, divorce, fraud, obesity, excessive spending, insolvency, infidelity, death.

Your family’s list may be similar, or different, to mine. Each family has its own set of risks that repeat through time.

Note, that we didn’t avoid the risks, we managed through them.

As Mark was pointing out, we waste valuable energy on remote risks => terrorism, air travel safety, ebola, child abductions, common core. This energy is better spend on useful “work.”

Where to focus?

Focus on small nudges away from the real risks facing your family. My nudges:

  • Choose: AM/PM exercise, shared experiences with people that love me
  • Moderate: booze, sugar, calories, spending
  • Avoid: leverage, drugs, binges, investment concentration

These ten nudges (all of which I control) will give the family the resilience to manage through the setbacks that will continue to arrive:

  • Addiction/Alcoholism
  • Excessive Spending
  • Leverage & Financial Recourse
  • Fraud
  • Abuse
  • Health
  • Mental Illness

It is a surprising challenge to maintain a focus on the little things!

It is much easier to give into the habit of fear and worry.

+++

SIDENOTE

Each year I like to try one, or two, new things.

I had a mindfulness streak going in 2013 and let that slide. Matthieu Ricard’s Jan 2015 TED talk on altruism discussed the benefits of mindfulness practices for preschoolers.

The results (for the preschoolers) kicked in after four weeks of 3×20 minutes per week.

February has 28 days so it’s a good opportunity to give it a shot.

With all the time I saved from better email management, I have the ability to try new nudges.

Today, am I spending time on the right things?

2015-01-22 08.52.26-1