Learning From The Well Adjusted


I’ve been fortunate, to get a look under the hood at the lives of the conventionally successful.

Before we get into tactics for discretionary spending, it’s worth thinking about what our spending might bring us.

What’s the strategy? Where are we trying to get to?

Thinking back to last week => if you think about my childcare spending with this in mind… it makes much more sense. I wanted to maintain my ability to explore nature and create space for a little serenity.


My first boss was a very successful investor. He repeated his success multiple times, with different teams, across a long time horizon. I use what he taught me, every day of my life. A favorite quote:

It’s the first five million that makes a difference.

You’re going to read that line in your own voice. You’re going to overlay your own values. To understand, for myself, I had to watch what he did for a number of years.

He loved what he did and he didn’t like to be told what to do. He was living in London, with two kids, in his early 40s, with limited interests outside work… what money brought him was the freedom to leave any situation he didn’t like. To be his own boss.

Related from another self-made mentor, talking about a family member with cash flow, who left a successful firm, at a very young age.

Nobody ever goes back.

So, if your financial chase means you are beholden to your boss then you’ve missed out on a key benefit

  • the ability to control your own schedule
  • the ability to walk from unreasonable demands

Once you realize the underlying need, you will be able to address it with far less money than you think. The entire point of my financial writing.


What do successful people do when they’re not being successful?

My first boss used to read about accountancy! He’d head off on vacation with a large stack of Accountancy Age (or whatever it was called) and work through back issues. His partners got a kick out of that. If you wanted to learn about financial fraud, he was your man!

My lifestyle aspirations are a better fit with the smart folks I met through sport. There are a lot of high-achievers in masters athletics.

What did I see?

Mastery, novelty, competition, adventure, peril, connection, shared suffering… ideally, combined with heart beats in nature.

Adventure, beauty, variety – there is a ton of it within 90 minutes of my house.

No balance sheet required.

Family Spending Principles

West Ridge, Eldora

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).

Different Ways of Looking At Money

Yesterday morning at A-Basin. My son has developed a taste for narrow chutes.

I’ve had gigs that pay $500 per month. Let’s have a look at what that’s worth.

What is $500 per month worth over a decade?

  • 10 years, 12 months a year, $500 per month => $60,000
  • That’s straight math, no implied additional costs/benefits.

What if I swept the cash from my side gig into a Target Date Fund?

I estimate a 60/40 portfolio returned ~9.7% per annum across the last decade.

  • 10 years, 9.7% a year, $6,000 per annum => $94,250
  • So if I’d invested that money, each month, for a decade, I’d be getting close to $100K

10-15 clients at $500 per month, less a bit of overhead => close to $1M in a decade.


Flipping this example: my condo association charges me an extra $500 per month.

What kind of headwind does that put on my real estate investment?

  • We have an example from above, $94,250 per decade. $94,250 is an estimate of the cost to my balance sheet of sending money to the condo association, rather than a 60/40 portfolio.
  • However, there’s one more step because we pay expenses from after tax income.
  • Do you know your average tax rate? I use 25%.
  • $94,250 / (1 – 0.25) => $125,000 // this is called grossing-up your answer – to pay $500 per month, I need to earn $667
  • So a charge of $500 per month could drag your return down by $125,000 a decade.

Recap of the three ways:

Nominal => $500 per month is $6,000 a year is $60,000 a decade

Opportunity Cost => $6,000 a year not invested implies $94,250 in a decade if the assets earn 9.7%

Grossed Up Opportunity Cost => $6,000 not spent, and invested pretax (retirement account), has an opportunity cost of $125,000 in a decade

The exact numbers are not important. What matters is understanding the concept… repeating amounts become big money over time.

$500 per month is going to cost the family between $60,000 and $125,000 a decade.


Expenses avoided, small gigs (earned then invested), and holding costs… these can have surprisingly large impacts on your financial life.

Seemingly small gigs are worth more than they appear…

  • if they come with health insurance (my unsolved family budget line item)
  • if they come with discounted prices on goods you are already buying (part time work at a business you’re already spending with)
  • if you make a habit of sweeping the income into a Target Date Fund (side gig cash invested to benefit my future self)

Something I like to do in my financial life is look at the line items in my family budget and ask… “What’s it going to take to eliminate that cost?”

If I can’t eliminate then, “What work might I enjoy to mitigate the cost?”

The game being to get my net cash burn to zero, while sustaining a life with meaning.


This morning’s sunrise on top of Eldora Resort.

Enjoy 2021 – there remains a lot we can do, while remaining smart to mitigate COVID.

Live Free Recipe

This post is about creating the freedom to choose how you spend your weekdays.

Owning a place to live, and being paid to live there, will change your life beyond the financial benefit it brings.

What’s it going to take?


Capital

I outlined the educational aspects here.

The easiest time to build capital is in your 20s. You can live very cheaply because you’re either at work, or carousing. Your health insurance is peanuts and you don’t need to take on any dependents (free birth control saves lives).

Age is not a barrier. Use the recipe below and you can be living free by 2030.


Big Cities remain the best places to build experience, knowledge, contacts and skills.

When I made partner, a wise man took me out to breakfast and reminded me…

Get what you want, then get out

He didn’t tell me why I needed to get out. I learned that for myself…

  • You’ll be tempted to go private with educating your kids => $1 million you need not spend, or earn
  • You’ll be jammed into a little place and/or you’ll have your financial life tied up in a single asset – you won’t care about this after graduation, you will care about this when you have preschoolers!
  • It requires extreme luck to get yourself on the housing ladder before you’re 40 => get your timing wrong and you’ll feel trapped
  • You will be surrounded by social pressure to spend, spend, spend!

Megacities are filled with opportunity and excellent people to whom you sell your skills.

Megacities are a great place to start.

Just remember to leave.


Target Location

Having played this game three times, I think a small city is your best bet.

  • ~250,000 (pop.) in a county with ~500,000 (pop.)
  • Natural Beauty – clean water, clean air, the ability to exercise safely without driving
  • Climate – I gamed this by having a rental in the Northern Hemisphere and a low-cost Home Base in the Southern Hemisphere. Later in life, I moved to a place I didn’t need to leave (Colorado, Front Range)
  • Airport Proximity – needing to take a flight-to-your-flight will get old

Before my first kid was born, I worked in: Canada, England, Hong Kong, New Zealand, Bermuda and Scotland.

The skills to be happy somewhere are the same as the skills to be happy anywhere.


Target Property

My worst deals (financially) have been the most impressive (visually).

Buy space and let the next owner spend a fortune in renovations. The money I’ve spent beyond paint, carpets and replacing worn out appliances/HVAC has been largely wasted.

You’ve probably spent the last decade renting – your younger self is your target market. Choose a location that will be easy to rent (if you leave, if you need income).

Lock off basements, detached units, split floors… earn rental income, maintain personal privacy.

Margin of Safety – your land premium is “total price” less “value of the buildings” – the closer you get the land premium to zero, the safer your deal.

Coming out of the Great Recession of 2008, land premium was briefly negative – this was due to banks foreclosing and forcing the market down. Five bedroom houses, 15 minutes from Boulder, were selling at $75 per sq foot. Condos, apartments and houses in Arizona got even cheaper, under $50 per sq. foot.

Cheap will happen again.


Connection

It can be tempting to go remote. I feel ya.

Escapism is a recurring dream of mine, especially in times of stress. However, you need to be practical – friends, sexual partners, basic services, transport… the practicalities of life.

The purpose of setting up your low-cost base is to provide security within a life with meaning. Go to where there are people with whom you’d want to spend the rest of your life.

Shared values, within an active lifestyle.


Wait For The Fat Pitch

To get this done you’re going to need a trigger that makes the local property market seem cheap to YOU. It won’t seem cheap to the locals, who will be expecting further declines.

  • Recession combined with High Interest Rates (UK 1990)
  • Asian Crisis (1997)
  • Currency Crisis (NZD in 2000)
  • Global Financial Meltdown (2008)

I witnessed all of the above. There is ALWAYS a “next crisis”.

2020 was a boom year in real estate. When you’re living through a boom, your FOMO will be pushing you to take action.

One of the best things your first good deal brings you is a reduction in the pressure to do a deal.

To do great deals, you need to be comfortable doing no deals.

Family Financial Review: Portfolio Allocation


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.

Family Financial Review: Risk, Worry, Ruin


I ended Wednesday by asking, Am I worried about the right things?

It’s easy to get distracted by the noise surrounding our lives.

Do you know your key risks?

It varies between people and over time => focus on habits that might lead to ruin (leverage, lack of impulse control, smoking, substance abuse…).

See also my review from 2019.

Set your financial life up so it runs on autopilot.

Did you read the PDF from yesterday? Good reminders at any age, as well as an embedded reading list.

Things I focus on more than my portfolio…

  • Near-term: keeping up with my teenagers – what is it going to take to share the outdoors with my family when I’m 60?
  • Medium-term: personal engagement when my kids are gone – what will I do with more time, and less energy?
  • Health: poor choices increasing my risk for cancer and other health issues
  • End of Life: my body outlives my brain

My actions today reflect awareness of the real risks in my life.

My portfolio? Good enough is good enough. Avoid unforced errors and keep on keeping on.

Don’t assume these answers.

Do the calculations from Wednesday, reflect on your life, write it down, review annually…

Then get out there and enjoy 2021.

Family Financial Review: Time


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?

Family Financial Review: Winning


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 where you 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.

It’s going to take a while to get there. Here’s something I wrote in 2016 about the process.

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.

Family Financial Review: Set Up


The picture is what it cost to send a first class letter when I married my lovely wife. The 55c cost today (+34%) is a reminder that inflation ticks away one penny at a time.

When it comes to inflation/deflation, I like to maintain a neutral position. More broadly, I seek to avoid the need to pick winners.

I also avoid making predictions about an unknowable future. Most importantly, because it’s impossible (!) but also because I have no idea what my life is going to be like ten years from now.

What follows is present-focused.


Quantify Your Exposure

Start with your core cost of living – that’s what’s going to inflate and outliving your money is a key risk.

What’s in my Core Cost of Living?

  • Healthcare ($19,300 of premiums and $7,200 to a family HSA for a plan with a $14K family deductible) – this sector is ripe for disruption, I get little for my spending
  • Taxes, Utilities, Car Costs and Insurance
  • Food, Clothing and Kid Activities
  • Childcare – a massive line item 2009 to 2019, now a source of income for the family, our middle-schooler is a sitter
  • Mortgage, rent, car loans – my main project from 2010 to 2020 was getting this down to zero – once that was achieved, I went a step further and turned it into a source of income

Next, consider your sources of passive and active income. Rents, royalties, dividends, interest (at least in the good old days), consulting and any other forms of income. Write it all out.

Compare your Cost of Living with the Sources of Income and calculate your net burn rate, or your net annual surplus.

Net annual surplus gets routed to discretionary spending, luxury items and/or new investment capital.

The best investment decision I ever made had nothing to do with asset allocation. From 1990 to 2008, I routed 50% of my gross income to new investment capital.

In my early 20s – healthcare costs were peanuts, no childcare costs, living in a shared apartment… I saved a ton. Good thing, too. I had no idea how much my cost of living would pop when I had kids.

My 40s (2009 to 2018) saw unexpected unemployment combine with a big jump in childcare, healthcare and housing costs. This resulted in a burn rate that forced us to make a series of changes, and choices, which proved quite useful in hindsight.


Also write out your balance sheet – assets and liabilities.

Include a liability called “deferred tax and agent’s fees“. Estimate this liability as 6% of the gross value of all the real estate you own plus 25% of all the capital gains in your portfolio (exclude the exempt portion of the gain on your primary residence). Making this number real will help you avoid incurring unnecessary expenses by tinkering with your assets.

The best time to sell great assets is never.

Let it roll.

Middle Age in the Free Money Era

Controlling my greed is a useful first step.

But how does one do that?

Build a peer-group with better ethics, and less financial wealth.

Then let human nature pull me where I want to go.


Looking around, with my 1990s financial up-bringing, many popular assets look expensive at half their current values. That said, people are making big money and this can be tough to watch.

I work on creating a vibe that I can afford to miss out and seek to temper my envy.

I acknowledge I’ve done enough winning.

So. Much. Winning. 😉


Yesterday, I shared thoughts for my younger self. What about this time in my life?

I’m not young enough to earn it all back, nor am I old enough to lock-it-in and forego further capital appreciation. I checked our joint life expectancy and we’re 50/50 to get another 40 years.

Given that I’m debt free, I’m hurt more by a doubling, after selling, than a halving, and still owning.

Think that through – it goes against every emotion I have with regard to money (and I’ve had a lot of training).

Married, at 51, I need to be taking a 30-50 year view.


Accept the reality of my personal situation and remember the financial reality of near-zero rates.

  • Stay invested
  • Lean into severe downturns
  • Maintain options, and skills, to add value-added work
  • Stay debt free – while this is a great time to borrow against cash flow, borrowing against margin is nuts – at some point, the debt cycle will snap back and I do not want to get closed out in a sell off
  • Keep my spending choices in check – know that every choice I make sets a baseline for my kids to follow AND creates a cash flow requirement for the rest of my life

Here’s the key lesson from my early retirement => If I’d gotten spooked and sold out (I get nervous in rapidly rising markets) then I wouldn’t have had the capital to buy back my existing positions, which remain “good enough” for my needs.

In a Free Money Era, the risk many of us face is acting on our fears and being priced out of a portfolio we never needed to leave in the first place.

Control your risks by focusing on skills, spending, relationships and daily exercise. These are things I control. Global macroeconomic policy, less so.

Tomorrow, why the heck are people buying non-, and negative-, yielding assets at current pricing?


Sorry about the dud link yesterday at the bottom – it was the same as the one at the top of the page, which worked. Here is is again, it’s the link to a calculation which led to some major changes in my life. Putting a price on my time.