Melt Up


My inability to remember facts does not remove the ability of the past to influence my choices.

I want to move closer to my kids’ schools. The idea is to free up time, enable them to socialize with their pals at our home, and cut my annual car-hours.

Win, win, win.

Thing is… my local real estate market is not acting appropriately.

  • Median prices up 35% year-on-year (sustained upwards price momentum)
  • Lowest inventory on record before…
  • We lost 1,000 homes due to the recent Marshall Fire (constrained supply)
  • Mortgage affordability at multigenerational lows…
  • With a near-term expectation of increasing rates

It’s a perfect storm and creating a frenzy of FOMO-driven bidding.

It’s not just in real estate.

Three-year total returns on SP500… 31%, 18%, 29%… a dollar invested at the end of 2018, now priced at two dollars.

If you rode that wave at 2:1 leverage then you’re up 4x. Nice work, especially if you’re taking a share of profits on other people’s money.

The above puts 7% inflation in its proper context.

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I need to allocate capital in 2022. I’ve asked a wide range of contacts for ideas. One buddy responded with a series of questions:

  • What did you do the last time you had to make this decision?
  • What did you learn from your prior choices?
  • What is the impact of being wrong, both today and in the future?
  • Where are the sunk costs, and FOMO, in this decision?
  • You have time to make these choices, be wary of collapsing your decision timing, maintain your freedom of action as long as possible.

The questions above are the value for you. The next section is notes for my future self.

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At the last peak, just before the 2008 credit crisis, I bought a really big house (about triple the size of what we needed). I over-bought because I felt flush, after a liquidity event. Fortunately, I held a chunk of my investment capacity in reserve and was able to buy into the recovery (2010-2012).

It would be nice if a “buyer’s market” was around all the time. Life doesn’t work that way. In my lifetime, buyer’s markets happen six months per decade. Families need strategies that work for the other 95% of the time.

One of my goals is to avoid strategies requiring directional calls. In our case this means we will sell an investment property, before purchasing a new residence.

Downsides with selling: (a) the potential to “miss out” on the continued run up; (b) crystalizing tax liabilities; and (c) being priced out of the market if there’s another 35% pop.

The downsides are real but they don’t have any impact on our quality of life. This is a lesson. Identify fears, concerns and risks… write them down, make then real and ask… what are the true costs associated with them and does that matter to what the family is seeking to achieve.

Accepting the downsides enables us to avoid things that would impact our lives: being over exposed in a downturn and risking a future cash squeeze.

Also, think about family “problems” from a non-ownership point of view. Having “ability to own” creates a bias towards ownership. Many goals can be reached without deploying capital.

Take my desire to reduce time spent driving the kids around… $9,000 per annum buys me a lot of driving support, Looking at the problem in terms of money and time, I’m $25,000 away from having a third driver (our oldest) living with us.

I also know that I don’t need to remove a problem to feel a lot better… $100 a week worth of driving support is going to make me feel a whole lot better. So $10,000 of spending could solve a “problem” that’s nudging me to move across town.

…and I don’t need to place a large, new bet

…and I don’t need to go through the hassle of moving


Related to my story about solving problems without capital / ownership…

  • The joy from “being a coach” is different than the role of running a coaching business.
  • The satisfaction of teaching is different than the reality of running a school.
  • Purchasing assets nearly always constrains freedom of future action, in a world that’s constantly changing.

If you are a skilled practitioner then be wary of placing yourself in an administration role.

You don’t need to own it, to benefit from it.


Something about this melt up… Family net worth has exploded upwards but there hasn’t been big changes in family balance sheets.

Put simply… real estate is worth a lot more but it’s the same addresses, it’s the same assets.

The capital stock is the same, all that’s moved is the price.

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Another way I look at wealth, cash flow. Take the SP500… it’s doubled in price.

  • End 2018, $100 generated $2.14 in dividends.
  • End 2021, the $100 is now worth $200 and generating $2.54 in dividends

The 100% increase in price, is associated with a 19% increase in cash flow. One could argue that 80% of the increase in “wealth” has been a price move.

Using earnings yield, the numbers are different but the message is the same. There’s been a large price-driven move across our portfolios.

I see the same thing with real estate, a disconnect between price and cash flow.

When we look to the crypto-bros and think their gains aren’t connected to reality… humility could be in order.

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Here’s a boom-time risk assessment you can do…

Consider risk in terms of time (more detail here)…

  • Look at family assets in terms of years current spending.
  • Re-price those assets on a lower-multiple of cash flow, then see the impact on time (measured in years current spending).

You still OK?

Consider: What might this choice cost me, and my family, in terms of time?

My best decision of the last 20 years was moving away from a path that could wipe out my (enviable) lifestyle. I was in the middle of the 2005-2007 boom so the risks seemed very remote.

I made two changes: (a) banked the equivalent of ten years family spending off the table; and (b) removed all personal recourse funding from my life.

Then, as now, I didn’t have to make radical changes. I made adjustments to limit the downside from external financial circumstances.

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My points…

  • Consistent upward price moves are impacting our collective psychology.
  • These moves are mostly price driven.
  • Because price moves can happen in both directions… consider risk in terms of how much time you lose with an error.

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Finally, raise your prices!

If you can generate recurring cash flow (for yourself, or others) then there’s never been a better time to re-price your services.

$100,000 of cash flow is being priced at $3-5 million by many markets.

Kids and Spouses

Christmas in Mexico

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.


If you are triggered about things, or money, then look around for the unmet (childhood) emotional need.

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.”

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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.

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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.

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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.

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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.

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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.”

Trustees, entrepreneurs, managers, exemplars, fiduciaries, parents, students, citizens…

We care for what we’ve been gifted by circumstances and pass it on.

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As a package, incorporating this process into your life results in a better allocation of time AND capital.

The expectation “we each take care of ourselves” is a good one. Even better when the parents model the behaviors required, and pass along the skills required to pull it off.


Let’s pull it together…

  • Sort myself first
  • When triggered, pause and look for the unmet emotional need
  • Smart leaders set the anchor with intention => I anchor those around me via my effort, personal standards, emotional control and personal spending.
  • Within family systems, remember my role is to meet emotional needs while teaching/modeling how to be self-sufficient financially.
  • Have the humility to see: (a) when helping-isn’t-helping; and (b) my own capacity for error.

Family Financial Strategy – December 2021

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.

“Less” is a useful process!

Boom Time Real Estate

Some quality kid-art, right there!

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.

Kid Rich

Summer reading prize – read aloud challenge.
I had to offer his older sister a “bonus”…
If your boss offered to pay you, AND send you on a vacation, then would you do a 100-day training program that required a mere 12-minutes per day?
When she said “hell, ya”, I pointed out that she needed to get the reading challenge done before I would be paying for any out-of-state swim meets.

Dressed up and out of the box!
Pre-, and post-, flight COVID tests enabled us to enjoy a normal wedding in Cali.
So great.

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.

We don’t.

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.

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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 – this has resulted in a house full of Lego

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.

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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.”

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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 money you 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.”


Quietly, I watched nothing happen with the birthday present…

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…

Jackpot!

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”.


Breaking down the sets and preparing for 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!


To recap

  • 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.

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Basic Cleaning

A valuable lesson for them, weekly humility training for me…

We split the house into Five Zones:

  • Kitchen
  • Carpets
  • Cat Room (dirtiest room in house, done by our youngest)
  • Sinks, counters, baths and showers
  • Toilets and floors

Same zone each week, no excuses.

The Car Off the Lot



Just finished another great read by Poundstone, Priceless.

For the families I work with, the information inside is probably worth an additional ten years of self-allocated time. Ten years, the parents could allocate to their kids, rather than building assets. Or even allocate to yourself.

If we slide into the investment world, the information is worth tens of millions. Just sit and listen to any executive who controls a budget over $250 million, or listen to the debates within your city council. Boulder city budget creeping up to $500 million for ~100K pop. Down the road, City of Denver has a ~$1.3 billion budget.

Unforced errors are easy to spot when watching others. More valuable is to teach yourself to notice how you are being pulled into spending more. Personally, my top unforced error is $275,000 and I’ve come across mistakes in excess of $1 million.

Our emotions can lead us astray. Be particularly wary of having sadness triggered… “I wish I could have that…”

Whenever I notice that feeling, I stop!

My first line of (emotional) defense is slowing down the process.


What’s the car off the lot? It’s the deal that gets you onto the lot.

I’ll compress three trips to the dealership and a month of research into a story…

When you arrive, the first thing you see is the anchor.

Or, in the case of fashion, it’s the purses/dresses in the display cases with discreet (but astronomical) prices displayed.

It’s the jacked up Denali Super Max Monster Truck, blacked out, with 48-inch tires, that’s driven onto a rock and visible from the street…

Locally, our Toyota dealership puts out a PRO and prices it $10,000 over MSRP. Thereby setting a $60,000 anchor in your mind. Each year, this car comes out with a unique color scheme, and a special type of roof rack, so connoisseurs can instantly ID the driver’s status.

While they’d be very happy to sell you the PRO, it’s not the lead vehicle. What they really want to sell you is one of the four (!) OFF ROAD parked right beside it. They have $10,000 worth of options and are priced at $49,999 (-ish). They are lifted, with gleaming knobby tires and they have swapped the decal so it is badged “PRO.”

With that $60,000 anchor in my mind, the sexed up OFF ROAD certainly felt like a deal. I could “save” $10,000 by buying it, it was right there…

But where was that basic OFF ROAD that I saw on the internet?

We went into the salesman’s office and pulled up the dealership inventory.

G: Sort the OFF ROAD trims by price for me, thanks.

Salesman: The system won’t let me do that.

G: OK, I’ll just have a look.

Salesman: Sure

G: What about that one?

S: It’s not the color you wanted.

G: That’s OK, let’s have a look at it.

S: It’s at a remote lot.

G: That’s OK, I’ll wait.

30 minutes later, it rolls up. Homeboy was not in a rush for me to see this vehicle!

Eventually, I’m out of there with an extra $20,000 in my pocket.

By the way, the dealership still did well. I was emotionally tired and didn’t haggle the last $$$s out of the car and my trade-in.

Three trips to the lot and a month of thinking it over. Slowing myself down is the best defense against emotional purchase errors. These techniques, and much more, included in Priceless.

In my financial life, I have a system to slow myself down => a disinterested person sits on my investment committee and oversees every proposed change in strategy.

The remote, disinterested mentor => valuable!


Three things to notice in all purchase domains…

  • What’s the high anchor?
  • What do they really want to sell?
  • Where is the “car off the lot” => their best deal?

These three things exist in every purchase offering: Anchor, Target Sale, Hidden Best Deal.

  • Multi-unit apartment complexes
  • Home appliances
  • Luxury retail
  • Jewelry
  • Hotel rooms
  • Ski passes
  • Groceries
  • Show homes…

See it for yourself, and always take the initiative to set the anchor.

…then teach your kids.

Yes, you can afford the high anchor. However, your family system will do far better if you invest the money you save, buy yourself time and improve your human capital.

Also remember, every beneficiary, and dependent, sets a low anchor on the value of unearned money.

Unfortunately, we can’t change the reality of being influenced by knowing about it! The only thing that works is building systems around our human nature.

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.

Marriage Money

The progression: Magna Tiles, Legos then Erector Set. So far, Magna Tiles were the best money spent. The kids love them after many years. I’m told Meccano is a new level of complexity. He’s loving the challenge. I bought the Meccano as a consistency prize for daily Spanish Duolingo.

It’s tempting to think that more money will result in less financial conflicts. However, I haven’t found that to be the case.

The habits that lead to conflict follow us up, and down, the socioeconomic ladder.

Similarly, if I can make a habit of de-escalation in one area of my life then my approach will follow me into other areas.


Earlier this year, my wife had her eye on a very nice jacket. For some reason, I became obsessed with the cost of this jacket.

Where did my feelings come from? I have no idea but I knew my feelings were unproductive. I knew because of the filter I apply to my marriage, “Where are these choices likely to take me, and my marriage?”

I knew it would be helpful to move on but I wasn’t able to shake my opinions.

So I funded the jacket.

Actually, I funded 7x the cost of the jacket.

That jacket was a massive write-off…

😉

I placed the money into an account that is invisible to my internet banking.

I asked my wife to pay cash so I would have no ability to track her spending.

I felt better immediately.

It was one of the best deals I did pre-COVID.


I’ve been running my financials since I was 16 and managed to save 50 cents of every dollar I earned from 16 to 40 years old.

My first job out of college was in finance. My mentors made two observations about spending that stuck with me:

  • From the Managing Partner, “We could keep a better eye on the small stuff but that would make this place a lot less fun to work at and it wouldn’t make any difference to my financial life.”
  • From a Young Up-and-comer, “If you ever want to get someone then start by auditing their expenses.”

Apply these to myself

=> make sure my choices can survive an audit (by anyone, but especially my spouse)

=> being a stickler for fine detail will make the people around you miserable (especially if you have a life that can’t survive an audit)

As a leader, what does that actually mean?

In 2009, unexpected unemployment left us facing a financial crisis. I started by cutting my personal budget by 80%. I laid that out to my wife and said we needed to cut our family budget by 50%.

We made a budget, we implemented the changes and we went on with our lives.

Good enough was good enough.


Endless optimization makes everyone miserable.

Often there is a fear-based motivator that is driving our attention to fine-detail.

It can be near impossible to transcend fear-based habits!

Two things that might help:

1/ Set a “give a hoot” threshold.

Each year, I set a dollar-amount that is my “give a hoot” threshold. If something is below that threshold then I promise myself that I_will_not_give_a_hoot.

My total spend in the “give a hoot” category is ~2% of my total budget. The 2% spend cuts 90% of my external annoyances and gives me a lot of internal credibility when I say “we don’t have the money for that.”

Not getting wrapped up in the little stuff makes my internal life better and gives me the authority to direct the big stuff.

This policy is a bargain (but letting go is oh-so-tough).

2/ What about when the threshold is triggered?

When something big pops up, I like to pause and distance myself from the decision.

I’ve set my financial life up to create friction in my ability to spend money. The friction gives me time to ask…

What’s the goal? => How does this choice benefit my family, my marriage, myself…

If it won’t make a difference then wait.


Another filter => Am I willing to spend this money on someone other than myself? If not then wait, again.

Investing and spending => I do a lot of waiting and that’s OK because anticipation is often better than reality.

I spent yesterday afternoon at a car dealership and traded my car for a newer model. The new car will be “my wife’s” and I’m going to roll in the oldest car we own.

Knowing that my family is seeing me roll in the “old car” will make me at least as happy as a new car, which I can always get later.

Here’s why…

Your spouse, your kids, your unborn descendants… all will be impacted by the choices you make with regard to spending and investment.

Financial values scale across generations.

Chose wisely.

True Wealth in the Time of COVID

Peppy on top of Grays – Happy Birthday, my love.

You’ve probably read me asking…

What one thing, if it happened, would change everything?

Well, if you’re a family then your “one thing” might be having your kids achieve the capacity for independent living. We achieved it, briefly, this past week.

Wake up, sort breakfast, clean up, do home school, snack then light housework.

The kids were occupied long enough for me to do a classic Colorado hike and get back for lunch. This is big because it frees us from needing our school district to open => to provide childcare.

The kids, working together, can educate and feed themselves.

What’s this worth? As much as 20 hours a week, every week, until a vaccine is deployed.

Spend time to get time => the process was 8 weeks, involved 3 tutors, ~$6,000 and a lot of project management from yours truly.


Waiting for my O-sats to recover, that’s Torreys across the saddle. This is what I look like when I’m totally gassed.

COVID is a binary life for me – I am either on my property, or in the backcountry.

Five days a week, I’m inside two square blocks.

This is not my first choice for the next 25-75 weeks!


On the traverse to Torreys, I kept sorting my gear until I was left behind.

I perked up on the way down. Smiling under the mask. Torreys is above my head and Grays is the highpoint on the left. Masks on the trail are like flashing lights on a bike => most people have a reflex reaction to get out of your way.

The kids tested out of their next grade-level math, which gave them a confidence boost.

I don’t see how they will be able to mix into a higher grade’s math class but that’s a problem for the future.

For now, we’re basking in a job well done!

Knowing the kids are ahead makes me feel more relaxed about how the fall will play out. School districts across the US are delaying their re-openings.


Finding the win!

The above provides me with a case study to share a high-performance mindset with you.


In personal planning => use time to create time => life is about time. If you are surrounded by people that think otherwise then you should change your situation!

It cost me eight-weeks of effort to free as many as 1,000 hours.

This is a highly valuable option => especially in terms of removing the fear, and horror, of a full academic year worth of online learning!


In performance => we need to think clearly to perform at our best => placing yourself in a position where you have the feeling that you have already won will calm your mind and enable your best to flow through.

Now, I certainly don’t feel that we’ve won against COVID (unforced errors aplenty at the Federal level) but it is clear our household is doing well => just need to keep myself out of the hospital.

I am chipping away at the crisis’ ability to disrupt my life and clawing back my ability to direct my own time, within the constraints of the reality of the virus (masks, social distancing, closures).

Create the life you want to live.

How Wealth Endures

2020-02-11 12.19.27

Over time, human nature does far more to address income inequality than the policies of your favorite politician.

Families that succeed across generations have certain traits we can learn from. While you can’t control your birth situation, there is a lot you can do to influence family wealth.

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My great-grandfather was one of the wealthiest men in Canada and I have an early memory of seeing him on the cover of Fortune magazine. Down my branch of the family, the magazine cover endured longer than his finances, which found their way back to society within two generations.

On the other side of my family tree, my great-great-grandfather was wealthy, but not cover-of-Fortune wealthy. A small amount of his money will eventually pass through to my children. I get a kick out of this as he was born in the mid-1880s.

Living rich is different than living well and it takes generations for this difference to become apparent.

2020-02-09 14.12.13

A favorite quote, “there has never been a more expensive time to be rich.”

Dropping this gem will likely get you a smirk and an eye roll from most young people. However, it touches on a truth of our time and provides a warning to wealthy families.

Over the last 40 years, a billion people have been lifted out of extreme poverty. Lifting the bottom of the wealth curve has impacted the top of the curve.

While we were lifting hundreds of millions out of poverty, “the rich” started to live differently. Morgan Housel’s article touches on these changes and reminded me of a valuable legacy from my great-grandfather (the one on the Fortune cover). A non-financial legacy that made it four-generations down my family tree.

Camping.

The fondest memories of my childhood happened at a YMCA summer camp. A camp largely unchanged from when my uncles attended 20 years before me.

40 years on, I ask myself:

Am I willing to constrain myself to get a better outcome for my children’s future selves?

Somewhere between childhood and adulthood, you may develop “requirements” that increase your baseline cost of living. Your “requirements” are your business. However, know that your luxuries will become your children’s baseline.

These cultural baselines have unintended consequences in family systems. The kids who can keep up with their spending aspirations have a greater risk of neglecting their families in favor of money. The kids who can’t keep up are more likely to reject you, to protect their self-identities.

I’ve known five generations of my family and have witnessed this pattern across each generational transition => the increasing spending of the ascendant, and the pain as the descendant fall out of their childhood demographic.

I believe there is a better way.

I’m going to offer three areas for you to consider.

I’ve made mistakes in each area. Having kids later in life (highly recommended), the main people who have had their values skewed by my errors are my wife, and myself.

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The three areas are vacations, housing and education.

Your first filter is to ask: Are we living well, or are we living rich?

To keep yourself honest, search for your reaction when other people live a certain way.

2020-02-09 10.39.37

VACATIONS

Cultivate interests that hedge your need for cash flow.

Camping, driving distance from home, has a very different long term cash flow impact than Surfing in Kauai, via private jet.

I’ve spent a small fortune trying to make family trips work (catamaran charters, seaplanes, traveling staff, ship’s captain with deckhand).

Everyone had a blast but what did I achieve?

I increased the hedonistic baseline for my wife, my kids and myself. Not a big deal to make a mistake. However, if I create a habit then what happens when three kids, and five grandkids, scale my choices across their lifetimes?

Simple, one-on-one trips in nature is where I focus these days.

We will come back to the scaling effect.

2020-02-09 07.54.22

HOUSING

Housing is the most consequential capital purchase most of us will make and it’s a tricky one because of the changes happening in many of the places where we grew up.

My wife and I went to high school in cities (Boulder/Vancouver) where many of the graduates are unlikely to be able to afford to live in their childhood homes. The winners of global wealth creation have bid up local real estate values.

My notional share of my great-great-grandfather’s estate is about $100,000. Money that would have proven very useful if I had chosen teaching, rather than finance, for my first career.

If you ask my seven-year old what type of house she’d like to live in then she’ll describe something that looks a lot like my grandparent’s homes: 1,500 sq ft per person, swimming pool, grounds… you name it. She’d put us into a 7,500 sq ft mansion with seven bathrooms.

She’s not alone. As soon I as I had the cash, I bought myself a monstrous house. Buying at the top of the market, I was lucky to avoid financial disaster.

Am I willing to constrain myself to get a better outcome for my children’s future selves?

Yes I am.

Coming out of the last recession, we downsized and bought two rental properties in our school district. I’m positioning the family to do a similar thing coming out of the next recession.

The kids were disappointed to learn that the next house was going to be smaller but I’ve been watching what they do, rather than their aspirations. When my kids can pick, they want all of us jammed into a bunk room => they love a seething, noisy mess!

Beware of the preferences of others and pay attention to where you are happiest, rather than what you think you should like.

What you don’t see when you “get the house” is the life you don’t lead as a result of living there. The time you don’t spend together, the energy spent managing a large asset you don’t need.

Once again, these lost opportunities for connection scale across time for your grown children and grandchildren.

2020-02-07 12.30.10

EDUCATION

Graduate debt-free with skills enabling you to get paid

This implies a few things:

  • working in high school, and for a long time thereafter
  • public education, as long as possible
  • parents who are willing to let you fail, experience poverty and learn from your own mistakes

Unless your family is exceptionally wealthy, or you are an outstanding student, you are going to be much better taking the bulk of your family’s education dollars and investing them over a 20-25 year time horizon. The goal being to enable your family to (continue to) live in a great public school zip code.

For example, the Boulder Valley School District isn’t (yet) priced out of reach. BVSD just built a school in the eastern part of the county and we have strong political support for local investment in education.

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Are you seeing how all of this fits together?

  • Moderation of spending, regardless of being able to afford it
  • A modest allocation in personal real estate assets
  • Over time, yields long-term capital within the family system
  • A focus on helping the family stay local and avoid shackling themselves with education loans
  • When graduating debt-free, young adults repeat the cycle

This works so long as everyone pays their own way, for the way they wish to live.

Collectively, the family system avoids subsidies towards personal consumption.

Each branch, and generation, of the family defines their values, and lives with the consequences of their choices.

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Further Reading