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…

ūüėČ

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.

+++

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.

+++

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.

+++

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.

=====

Further Reading

What I Talk About When I Talk About Building Wealth

SuperGirl

When people ask me about asset allocation, I guide them towards family wealth.


Over your life, you will see things blow up.

  • Jobs will be lost
  • Divorces will happen
  • Guarantees will be called
  • Companies will fail
  • Investments will go to zero

Certain habits make us more prone to blowing up:

Debt – fixed obligations can ruin you in bad times.

Lack of emotional control – this runs deeper than, say, anger management.

People who make a habit of rationalizing a lack of control in one domain (elite sport, closing a sale, acting in a client’s best interest) rarely have the capacity to control themselves across domains. If you might get caught, then you’re fragile.

Substance Abuse – it’s more than the cost of sorting yourself out – it is the lost opportunity of a life well lived and the impact on the rest of your family, especially your kids.

Spending vs Cash Flow – personal spending, burn rate and fixed costs => the more spending you have relative to cash flow, the more fragile your finances.

The above is a long way of asking, “What aspects of your life might blow up?

Which is a polite way of saying, “I’m not sure asset allocation is the most pressing issue in your life.

If you work in an ethically-challenged field, have a lot of borrowings, have a high burn rate or are surrounded by peers with issues…

…then tweaking portfolio construction is a lower priority item than immediately removing what might ruin your life.

I’ve done it. You can do it. It’s better on the other side.


How large is your current portfolio when compared to your lifetime portfolio? – AKA you might have more wealth available in your career than your portfolio.

Investing is different at 25, 40 and 55 years old.

The nature of “different” depends on your personal circumstances.

#1 => Consider your Core Capital. The single best thing I did out of college was save four years of personal living expenses, $100,000 in the mid-1990s. It sat in a bank account, while I worked my ass off at my career.

Having that money enabled me to choose better and choosing better became a habit.


Very, very, very (!) few people can be professional investors РAKA can I get rich by beating the market?

Take an honest look at the people that you know in finance. How many of them “got rich” from their own money? Remember these are the experts.

In finance, most people get rich due to the rules of their game and collecting pools of other people’s money (your money, by the way).

With your portfolio, keep it safe, simple and low-cost. A target-date fund makes a nice core holding.

Having my Core Capital enabled me to take more risks in my career path, and life experience => not with my Core Capital.


Once-in-a-lifetime opportunities happen once a decade – AKA great deals happen when credit markets are shut

Here are the assets I own and why I own them:

  1. Index funds => long-term, diversified, not linked to my home real estate market
  2. US Treasuries/Core Capital => 5 to 10 years family expenses
  3. Boulder real estate => A relative value play against California, a cost-effective way to raise a family and a fantastic outdoor life. Think very carefully before locking yourself into any location. As a young man, my lack of ties enabled me to jump at great opportunities.
  4. Cash¬†=> my early retirement was funded by three deals I did coming out of the last credit crisis. Once you have your Core Capital (say, five years living expenses) then building up a pool for “great opportunities” is a consideration.

Starting out? Read this PDF.

Be wary of home bias => you can see it in my portfolio => even more risky is having your balance sheet, retirement and job reliant on the success of your employer.


Switching Costs – AKA think carefully before you sell good assets

I have assets in my portfolio that I would not buy at today’s prices. Financial theory tells me I should sell these assets.

  • I have zero confidence in my ability to predict the future.
  • If I sell assets then I pay taxes and commissions.
  • After selling, I have to figure out where to put the capital.
  • I doubt any “new” plan will be better than my current plan, which is simple and low-cost.

Release yourself from constant optimization => good enough is good enough.

Put your efforts into being a better version of yourself.

 

What To Do

2019-09-23 08.07.06-1Between summer day camp and the school year starting mid-August, I’ve had two months of a relatively quiet household.

I used this time to re-read Taleb and Munger. You can find my full notes here.

My initial purpose of re-reading was to figure out “what to do.”

It is far easier to be certain about what NOT to do.

Do you know what can ruin your family’s life?

I do.

  • Racing, especially high speed downhill => physical ruin leading to a downward mental spiral.
  • Alcohol use => historically, my average daily consumption is either: (a) zero; or (b) slowly trending upwards.
  • Anger => if I am going to screw up a key relationship then it will be when I act on anger.
  • Death by Accident or Avalanche

What is your list?


Assets and spending do not create a life with meaning.

My true job is keeping our cost of living down so we maintain the ability to control our schedules.

  1. Be wary of adopting the preferences of others. It’s easy to sign yourself up for millions of lifetime spending that won’t mean a thing to you late in life. Worse yet, you will pass these values to your kids and they blow whatever you leave behind.
  2. Pay attention when you notice “better” doesn’t make a difference. “Wasn’t worth it” happens to me a lot.
  3. Pay attention to the cost you pay in time and emotion => it costs me a lot of worry and stress to get more money. Way easier to spend less.
  4. Once you are beholden to a third-party, you’ve lost.
  5. A lot of times “worse isn’t worse.” We adapt very quickly to setbacks.

We discuss case studies at home. Housing, vacations, cars, the endless “needs” my kids and I dream up.


So while I’m removing things that can ruin me, and beating down my hedonistic tendencies… What to do?

Wait for the fat pitch.

A key benefit of a good position is being able to wait until the credit cycle swings in your favor.

The longer we have to wait, the better the opportunities. Cutting rates, running trillion-dollar deficits at the top of the economic cycle… there will be great deals eventually.

I’m not excited about any asset class right now.

  • The bond market is telling me that we’ve pulled 5-10 years of returns forward.
  • Net yields are under 1% for real estate that I’d like to buy.
  • The rest of my balance sheet feels like “enough” exposure.

I’ve decided to make no material new investments. We are going to periodically rebalance and I am going to reduce my cost of living.

What to do?

Enjoy nature with my family and pass my value system to my kids (by living the life I wish for them).

Years, Leverage, Time and Ruin

2019-09-10 07.55.51The benefit of creating a good position is you can choose not to leave it.

Each time I change strategy, I open the door for error.

2019-09-10 06.08.38A quick review, I calculate financial wealth as:

Net Family Assets [divided by] Annual Cost of Living

The formula spits out an answer in years, not dollars.

To figure out if an idea is “worth it,” I¬†convert to years.

I also consider:

  • Leverage: do I have to borrow, what’s the total dollar value of my exposure, how large/far can things move against me?
  • Time: I have control of my schedule – might this idea change my ability to control my schedule?
  • Ruin: reputation, relationships, finances, health… how does this idea change my exposure to ruin?

I have a lot of (bad) ideas. Thankfully, most don’t get through my filters.

These filters work with EVERYTHING… alcohol & drug use, mistresses, felonies, off-balance sheet financing, sleeping late, losing emotional control, binges…

2019-09-07 06.15.45

How can I put “years” into family wealth without increasing my risk of ruin?

In 2009, we executed a four-year plan that put us in a better position.

A key part of that plan was downsizing, borrowing (30-years fixed at 3.25%) and pulling 65% of the equity out of our primary residence.

It was highly inconvenient to change and we expected the smaller place to be a step down. However, our minds adjusted and we love our existing place. The move paid off in “years”:

  • Our current place runs at half the cost of our old house.
  • The capital we withdrew, earns enough to cover the cost of our current place.

I looked at moving again but there wasn’t any benefit to us after taxes, commissions and hassle. So we’re going to wait and watch.

Remember, “doing nothing” maintains an option to (make a better) change later.

2019-09-05 19.33.32The Elephant(s) in The Room

Childcare and school fees have been a fixture of the last six years. It has been a big number – about double what we pay in housing costs.

Our youngest is in Grade One (yay!) and we just lost our favorite sitter (not so yay). The result is a big slice of the family budget gone.

My first thought was to replace help with even more help.¬†I have a habit of throwing money and other people’s time at my problems. It’s a carryover from my days in finance – where I aimed for maximum subcontracting in my personal life.

Then I had a thought…

  • Consolidate the kids’ schedules (we often have three in three different places)
  • Help out in the afternoons (I’ve done nothing for a few years)
  • Take over the cleaning (ditto on my lack of input)

It’s ~20 hours out of my week => prior thoughts on money and time.

The other elephant in the room is my cash flow deficit. It’s been rolling at 4% of assets for years. I’ve ignored it because our assets have been appreciating at a faster rate. My comfort with deficit spending reminds me of 2004-2008.

So I could “buy” the family a shift from a cash flow deficit to a surplus. Worse case, I crack a bit and hire local kids to help me out. I’ll still cut my cash burn by ~80%.

When I explained my plan to my wife she asked if my plan would make me happy. I said,

“I don’t expect to be happier but I noticed that being a better man never made things worse.”

When Assets Become Liabilites

noodlesThis Q&A with Warren Buffett is packed with gems like the following:

Money has no utility to me anymore as I am very happy with what I have but it has enormous utility to others in the world. More possessions to me would actually be a liability than an asset.

I don’t know Mr. Buffett but I am friends with a well-adjusted member of his demographic.

Last spring, I asked my wealthy friend if I could store a bike in the garage of his 22,000 sq ft house and he shared…

You know, I already have way too much stuff in there. So best if you keep it at your place.

For what it’s worth, my pal’s garage is less full that my own!

What’s going on here?

Another story… last year, I was helping a friend put together a financing for his business. The money was raised and I was invited to a lunch with the key investor. The investor is about twenty year older than me. He’s a fascinating guy with a son that’s in private equity. We had a lot in common, including enjoying health and wellness.

Over the course of the lunch, I learned he had a house locally, a cabin in the mountains, an ocean-going yacht and a winter home in the Southern Hemisphere. In 2005, I was trying to create his life situation for myself!

So what’s it like?

He said with a laugh…

We travel the world repairing things.

 

Wealth Habits – Aspirational Spending

bunny_gGrowing up the following fell somewhere between normal and aspirational:

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

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

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

Is there another way?

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

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

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

Time & health.

True wealth.

True luxury.