When I moved to the US, I went from a 5 to 30% tax rate.
Because it saved me money.
Taxes are one slice of your family budget
I used to live in Hong Kong, a low-tax part of the world. Thing is, it’s a high cost location – especially for school fees and residential housing.
Landing in in the US, I chose a part of the country with an excellent public school system. With three kids, that choice saved me a lot of money.
But there are trade-offs.
I grew up in Canada and my family’s basic healthcare needs were covered by the provincial government.
Not so in the USA.
My insurance, HSA contribution and dental cleanings mean I pay $25,000 before anyone’s gotten sick.
I run the $7,000 HSA contribution down against my family’s $14,000 deductible.
Anybody breaks a leg, I’m quickly over $30,000 for the year.
In my last year in Hong Kong (2000) I was living in a place that cost $100,000 per annum to rent. The senior partners paid 3-5x that amount.
School fees: friends pay up to $50,000 per kid, per annum. Mine go to public school, a $75,000 saving.
Taxes are the price we pay for living a wonderful life.
Clean air, pleasant climate, easy access to nature, an ability to avoid traffic.
As a friend pointed out, all those Californians moving to Austin are going to find out something… they’re still complaining about taxes, it’s hot as stink, they’re sitting in a traffic jam AND they lost the benefits of living in Cali.
The ability to escape tax policy is 100% in our hands.
Here’s the game.
Take your tax bill and divide it by your net worth.
In my mid-20s, I worked in London. I earned $75,000 and paid $18,000 in taxes. My net worth was $20,000. My tax bill represented 90% of my net worth.
A change in tax policy, or a move to Hong Kong, would have a material effect on my family finances.
Most of us, can’t change hemisphere’s for work.
Many of us, can work remotely from a lower cost location.
My former self, he saved 50% of his take-home pay from 1990-2008.
I’m going to write this in the context it arises in my life. I have a hunch it applies more broadly. A variation pops up at least once-a-week in casual conversation.
Ten years ago, a wise preschool teacher shared a quote with me. I liked the quote so much, it’s been on my fridge ever since.
I have used the quote to guide my life for the last ten years.
Give time, not money.
Share experiences, not spending.
There’s another aspect of the quote… If you run into an adult who’s childhood emotional needs were unmet… assets, and spending, will not fill their void.
The void cannot be filled from the outside. This is an area where we need to heal ourselves.
Go further… to the heart of addictions…
Quite often, the attempt to “be a good provider” for these folks, makes their emotional problems worse. Further, they are going to feel crazy because they will be miserable while surrounding by conventional “success.”
Let’s step back from the underlying emotional issues and discuss how parents, and spouses, can guide family spending and investing.
First, we need to sort ourselves.
My spending sets a floor above which everyone will operate. This might sound backwards but it’s my observed reality. My choices anchor “down” everyone around me.
INVERT: constraining myself is less likely to trigger resentment.
I’m the most powerful (spending) role model in my children’s life. I do them a lifelong favor by setting a consumption standard they can easily attain.
Second, be brutally honest with yourself… Am I meeting the emotional needs of those around me?
When you are already a good emotional provider, it is very difficult for someone to trigger your need to be a good “financial” provider.
Rather than a high-stakes bargaining session… discussions about money end up closer to a 7th-grade math problem. An example… the ski-place…
20-25 days spread across five resorts
Total cost of hotels/airfares ~$15,000
Shows the folly of seeking to “save” money in a single location by locking up capital
Clothes => let’s start by wearing everything in our existing wardrobes first
Cars, Furniture, Art => is there a more effective way to scratch this itch?
Recreational assets, out-of-town commitments, 2nd homes => …are you sure you want to give me an incentive to be away from you and the kids?
On and on and on… think past the purchase to overall incentives, habit creation and the impact of repeating the action for the next 5-10 years.
Third, the “what are you going to do with the money” argument.
Related to, “but we can afford it…”
Ability to pay is probably the toughest one to control. It’s hard not to spend money in your checking account.
SIDE NOTE: this is a good argument to move cash out of places where it’s easy to spend. This was a (somewhat bizarre) benefit from a choice to STOP earning so much money when I was a young man. Financial success was making it harder to be who I wanted to be.
Here again, pause and consider,
What game do my actions show I am playing?
What is the game I want to be playing?
What game would move us towards “better” five years from now?
If you have kids then these questions usually point towards up-skilling independence via parental investment of TIME, and modeling behavior.
Fourth, after you’ve done 1-2-3. Sit down and talk it over with the key people in your life.
If you are unable to convince them then have the humility to consider the possibility (albeit remote) you may be wrong!
In family systems, I’ve found it’s better to wait for a consensus to arrive than pulling rank.
Bonus: slower decisions are usually better decisions.
Finally, related to the what will you do with the money discussion…
If you are focused on sharing time with the one’s you love then, hopefully, you will favor “experiences with them” over “making more money for them.”
We are living through boom times in our local real estate market. Houses are selling quickly, at the equivalent of 50-100x annual rent.
Everything, other than debt pricing, looks expensive to me. So… I’m looking to move, borrow and increase the assets in my portfolio that generate cash flow.
A simple way to view this… (a) split the equity in your existing house in two parts; (b) borrow 30-year fixed and buy a new place with one part of the equity; and (c) place the other part into a rental property.
The explanation follows, with a 25-year overview at the end.
In 2010, I purchased two rental properties as a hedge. Specifically, I wanted to hedge against the risk of my family being priced out of our home market. I thought I was protecting my kids. Turns out I was protecting myself.
The idea was to get paid (via rental income) to hold: 3 units, 10 bedrooms and 20,000 sf of Boulder land. The locations were excellent, the properties dated.
The 2010 purchases worked out well, not just because they performed. The purchases put significant cash pressure on me. The pressure improved my spending choices and motivated me to sort a business which was hemorrhaging cash. In a sense, having tight cash was a form of forced savings.
In 2013, we downsized, borrowed and moved across town. By staying in the same type of neighborhood, and borrowing modestly, our equity appreciation in the smaller house ended up the same as what we would have earned in the larger, unleveraged house.
My ego likes headline numbers and struggles to accept this reality. Something about real estate => the gross, headline numbers are more emotionally salient than the net cash flow reality.
Once again, I’d like to free up time, and reduce admin, by moving. The price I’m going to pay is time/hassle from the move, bringing some deferred taxes forward and agent’s fees.
With the run up in asset values (2015-2021), my family has a much larger allocation to “dead assets.” Dead assets are assets that cost money to hold => for many readers, this is the house they live in. Given recent capital appreciation, the cash cost to hold has been ignored by many.
Downsizing, and locking in 30-year fixed debt for a portion of the new purchase, enables me to keep the amount of “dead assets” modest within the family portfolio.
My ego is tempted to size up, and add a ski place. The better financial move is to improve the quality of our rental portfolio, while reducing my housework and driving.
30-year fixed debt on the family home is one of the best deals going. Given the borrower’s option to repay, it’s a one-way option that could be worth big $$$ in the future.
A word to the leveraged.
Now, like 2005-2007, is a great time to be heavily indebted. You will take comfort in your ability to unwind any financial difficulties.
You are correct.
However, if you truly “need” to unwind financial positions then we are likely in a market like 2009, unpleasant.
So be cautious with opting-in to risks that don’t add to your long-term strategy. Most particularly, any arrangement where an outside party has the power to force a sale. While I am seeking to borrow, total debt will remain modest relative to assets and cash flow.
Breaking it down, building wealth across decades.
Resist the urge to up-size your life, particularly by adding negative yielding assets.
Rather, seek to build up 2-4 rental units. Pay attention to location, lot size and bedrooms.
Unless you want to get into the hotel management business, rent unfurnished to long term tenants. Inverting I have learned… furnished, short-term rentals bleed expenses, emotion and time.
For your long-term rentals, use a local property manager – their cost as a %age of capital value will be tiny compared to the value they add, and the hassle you avoid. This frees time to make money in a field where you have an edge => whatever you were doing when you built up the $$$ to purchase rental properties. Side Note on taxes: tax bill as a %age of net assets is a number you should track.
Use your personal home for shelter, as an entry in the best public schools in your state, as a cheap source of fixed rate debt and a tax-favored investment. If this asset appreciates to the point where you have “too much” invested in non-yielding real estate then downsize, get a new mortgage and repeat the cycle.
Aside from the roof and HVAC… spend no material capital on any of your properties. Instead, spend time with the people you love (and buy more assets that generate cash flow).
If you start the above when you get married then you’ll have 1-3 moves by the time you are empty nesters. At that point, you’ll have built yourself an inflation-proof, tax-effective retirement annuity. You can constrain your spending and pass it to your grown kids OR run down the assets as you see fit.
That’s the financial overlay. You also have the ability to use trust structures within this strategy. I’ll get to those in a future post. Put simply, when I say “you” it’s possible to put a trust in “your” place. That can protect your assets from the unexpected which, over a 25 year time horizon, is nearly certain to happen.
Ideally, you graduated debt-free from college and made a habit of maximizing your retirement contributions in the first 10 years of your career. Don’t be in a rush to get into real estate, I’d been working/saving for a decade before I had the capital, and geographic stability, for a purchase to make sense. While a favorite form of security for lenders, real estate is chunky, a pain to manage and expensive to sell.
I view my negative emotions as feedback and, when they persist, I change my approach.
My summer had some unpleasant moments. Moments which spurred the resolve to reach for better.
The first thing I noticed…
If I am going to do something mean then it’s going to happen at home, after spending the day alone.
I can’t remember a single unforced error happening after a day outside. The errors I do remember start with a slow boil starting at my desk!
I have stickers facing me while I type away on my screens…
Whatever I truly need… it’s not to be found in a chair, looking at screens.
Another lesson I’ve learned, this time about marriage.
Schedule time to enjoy each other.
I don’t know if we’d gotten “too busy”, or complacent.
Either way, when I’m getting jealous of swim meets then it’s a sign we need to increase our us-time.
Tuesday – train together (outside), then lunch
Thursday – starting after Christmas break, ski together
Saturday – date night (and our oldest can handle the sitting)
Three opportunities for “together” each week.
Have fun together and avoid forming a habit of preparing a list of grievances for each encounter, yes I have done this.
The Thursday means we need to help. When I first raised the idea, it was…
I want you to get childcare so I can take an entire day off. Every. Single. Week.
My wife had no idea what, or why, this was important.
Nothing happened, for months.
When I explained the downstream idea (ski together each week), help was found within 12 hours.
Good ideas do better with effective communication.
These ideas were put together with an understanding of enduring drivers of satisfaction in my life…
Being outside, together
The three “weeklies” put me in my best environment, so my wife isn’t interacting with me in my worst environment (the house after a day alone).
We had a bit of an issue with restaurant selection so we rotate choice, by week, with a no-veto policy.
John Hellemans notes there are three plans in any athlete-coach relationship. I goes something like this…
The plan the coach believes the athlete is given
The plan the athlete actually does
The plan the coach believes the athlete did
It’s a reminder to be cautious with assumptions, and pay attention to clues that point to reality being different than expected.
A version of this extends to all things in life…
What you think you need
What you actually do
What you think you did
What I think I need to spend to make myself happy [A]
What the family is actually spending [B]
What I think my family wants me to spend [C]
The punchline here is TIME.
When you are enjoying each other, your family will enjoy inexpensive hobbies.
INVERT => no amount of spending can overcome a lack of meaningful connection
What’s been bothering me, quite a bit as it turns out, was the ratio of B to A. The $5 of family spending that follows each $1 I find useful in my own life.
I dug deeper.
What I’ve arrived at is equity. Equity of contributions and benefits. We’re working on it. A simple change, that is difficult to implement…
I will not burden myself with the task of removing the consequences of another’s choices.
Basically, if someone calls an audible, repeats a bad habit, makes a poor choice… then I’ll limit myself to polite emotional support, while calmly showing the connection between their choice and the consequence.
Then I’ll move on.
Getting What I Want
With the money I think my family wants me to spend… I just smile at myself.
First, because my wants are driven by my peers, my values and the advertising industry => my family is the solution, not the issue.
A bit of effort with my media filter dials down my greed, and dials up useful traits. A simple change… unsubscribe reduces useless spending.
Second, my “wants” are transitory. They come and go, just like moods. I don’t need to take them seriously, they change all the time.
A better question:
What’s it going to take to raise my kids, the way I want, and set myself up for the next stage of my life?
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…
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.
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.
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.
What is the underlying goal of childhood financial education?
=> Self-generated, lifelong financial stability
I’ll run through to tools we use to equip the kids to pay their own way in life.
Allowance => simple formula: weekly deposit into an account with the Bank of Dad, deposit is $1 for each year of age, and the deposit balance earns 10% per annum.
Many families view the purpose of an allowance to teach a kid how to spend.
The purpose of an allowance is to create a positive emotional association with the power of compounding.
Our oldest has been rolling her allowance since Kindergarten. She now earns $7 per week from compounding and $13 from being 13 years old.
Compounding is an ever growing sum. When they enter high school, I’ll run through the math behind it. I have a spreadsheet by week.
In time, I will let them know I grew my net worth by 15% per annum for many years, mainly by saving half of what I earned. This habit bought a lot of time.
To put off the discussion of “why am I saving?”, I have them pointed at “saving up for a car.” When we get closer, we will sit down and look at the impact of swapping their earnings (from doing nothing) with a set of bills for owning a car (insurance, maintenance, taxes).
Uber is going to look VERY attractive against 10+ years of compound interest. That lesson plan might be: keep depreciating assets variable and stay invested.
Earned Money Is Their Money
To effectively learn about spending, one needs to earn the money being spent.
This is because spending other people’s money feels different.
Sometimes really different…
Spending other people’s money, with a credit card where you don’t see the bill, feels better than free!
Don’t hook your kids on this form of pleasure. We tell ourselves all sorts of BS to self-justify this situation.
Our greatest financial achievement in 2021 happened by accident. We got our oldest off the payroll. She started babysitting and stopped asking us for money, for anything!
This opened her up to the real world of: lending money to friends, spending paycheck-to-paycheck, buying poor quality goods on impulse…
…and because it was HER money, she learned very quickly from her errors, and her friends were not (indirectly) placed on our payroll.
Self-Earned Money + Scarcity + Freedom to Err = Learning
Also… “if you want to buy friends then you’ll have to do that with your own money. Your choice. I think you are a star.”
Our other kids aren’t old enough to babysit, yet. They get assistant sitter gigs, and do yard work in the neighborhood. The work pays well in kid-terms. I supplement with odd jobs.
This is enough to make the whole family “kid rich” => rich enough to buy whatever they want, from their own money.
Quite often, what they wanted was LEGO and it was tempting for me to use my own money to “make them happy” thereby facilitating consumption.
One of our family values is we each pay our own way. Elders are to avoid facilitating consumption. With this in mind, I made a choice to reward my kids with time and I remember…
When you are spending other people’s moneyyou can easily get trapped into dreaming of more, more, more.
This is because we are chasing something stuff can never buy. The journey of adulthood is about discovering our personal “what.”
With the shift towards their own money, supplemented by Christmas, birthday and summer reading prizes… they noticed…
New stuff is fun, but only for about a week, then it sits on a shelf.
I let it sit on the shelf, for years, then one day…
I never play with my Legos, they are kind of a waste of money…
So the current lesson: we buy luxury goods at retail and sell them at wholesale (if we are lucky!).
Thanks to a very kind cousin, we are in the process of converting Lego sets to cash. Lesson to come will be comparing “cost to buy” against “net realized value from sale”.
“If you want an iPhone then earn the money to buy it”
In 2020, our oldest sold 200 masks, at $5 a mask, to earn the cash to buy herself an iPhone. No social media on that phone and we financed the sewing machine and materials. She handled marketing and mask production. She shut down the “business” the day after she had enough for the phone!
Allowance creates a positive association with compounding
Earned money is their money
Listen to their errors, give time and positive attention to their lessons
Celebrate “getting off the payroll” => they also make their own lunches, another big win.
Let scarcity teach and create incentives to reward work.
A valuable lesson for them, weekly humility training for me…
We split the house into Five Zones:
Cat Room (dirtiest room in house, done by our youngest)
Fortune’s Formula by Poundstone was recommended inside Safe Haven. The book touched on a number of questions/issues I’ve been pondering since attending Taleb’s seminar in October 2019.
Very helpful book!
What follows are a bunch of points I’m writing down so I can refer back later.
Insurance proceeds: Will I be able to access my money when I need it? Applies to everything, especially exotics.
All families are sellers, eventually.
This is an important point because crashes are most damaging when one is forced to sell into them. Ironic point is many (most?) of us choose to sell into them (or in fear of them).
Recently, I came across an article about CalPERS selling billions into a dip – even smart people make poor decisions, most often when they are custodians of other people’s money.
Most institutions have shorter memories than families. Keep reminding yourself of your mistakes – you probably paid a lot to learn your lessons.
Train yourself, and your kids, to be able to tolerate bad news. It saves time, money and emotion.
Payout => who’s on the other side of my insurance trade and are they going to need a bailout to pay me? If my insurance company might need a bailout then am I really insured?
I’ve done my best deals when all buyers have disappeared. A delay in payout can have a huge opportunity cost to me.
Skill => reading financial history, I notice the people on the other side have… better analytical skill, superior computing power, faster capacity to execute, better (and inside) information, favorable leverage terms, assistance with “techniques” to defer/avoid/evade taxation.
These folks are on the other side of everything I do.
Steer clear of most bets where there’s a chance you could lose all your money. Many useful examples in the book.
This doesn’t mean to avoid all loses inside a portfolio. Highly volatile bets can make sense when limited in size.
This does mean avoid creating a portfolio (or lifestyle!) with the potential for total loss.
I do not have faith in my calculations of the probably of real-world outcomes. For me to use Kelly, I need to have a feel for the odds of various outcomes.
Using Kelly weighting (even fractional) runs the risk of fooling myself about the total amount of risk I am taking on. There’s probably a way to work backwards and see the implied odds within various prices – I do not have confidence in my capacity to compete with experts in the arbitrage pricing domain.
That said, the key point I took from the discussion, “never bet an amount that results in a chance, any chance, you’ll be removed from the game.” This calculation is simple to calculate and easy to execute.
Downturns & Drawdowns
With this in mind, there’s an important point about investing for long-term wealth. The likelihood of a major drawdown and the cyclical nature of exponential growth.
Put simply, most families, using a long-term wealth maximizing strategy, will spend a lot of time being “less wealthy than they used to be”. Page 228 of the 1st hardcover edition.
BIG POINT: many families trade a ton of return to avoid this reality // OR // over-bet in the short-term in an effort to avoid normal downward wealth fluctuations.
Worth emphasizing! Most people trade long-term return or increase their risk of ruin to avoid natural fluctuations in wealth (and fitness, for that matter).
Very few people have the emotional make up to roll with the punches when it comes to volatility.
One way to hedge yourself is to maintain the capacity to cut spending so you maintain your “net worth / cash burn” ratio. I write about this a lot because it can give you an emotional edge during a crisis.
OK, you say to yourself, I don’t understand how to tail risk hedge so I’m going to use an outside expert to do it for me.
Not so fast!
Focus on your day job. Be really excellent at what you know well. In your financial life, be extremely conservative.
In every field I’ve gotten to know well…
As a class, insiders consume the excess return for themselves.
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