Wealth Habits – Discretionary Spending

AX_BellaRecently, I met with a financial adviser and she said two things about her practice:

  • I never talk about spending.
  • Most my clients make so much money they don’t need to budget.

I had a physical reaction to those statements.

I felt sick.

Why?

Probably because not-spending in my 20s had a pay-off far greater than every investment I will make in my 40s.

Eventually, I settled myself down by writing this article.

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#1 – Mean reversion is tendency for natural systems to trend back to the average over time.

Our minds will forecast based on the last 1,000 days, rather than long-term averages.

Therefore, we must force ourselves to consider, what’s the long-term average of this natural system?

Why does this matter in families?

Because the highest-earning family member often lifts everyone’s spending aspirations above the family’s average earning potential. This sets up wealth destruction, as well as unnecessary emotional tension within the family.

The affluent often train their children to destroy wealth.

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#2 – Consider the transient nature of peak earnings and their relationship with time

A great quote from Mr. Money Mustache – “far wiser to earn your freedom while you are still fired up about working.”

I started out in finance, a field which gets you spending!

I managed to earn my freedom at 31 years old – most my peers hung in until their late-50s/early-60s. Their 15-30 years of additional commitment enables them to spend my current net worth on an annual basis for the rest of their lives.

We often make the mistake of spending with reference to current income, rather than current wealth.

As a guy that bought his freedom “too early” – it was worth it. I’m part of a small sample set – most people stick it out.

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#3 – Am I getting value for money?

Is your spending having it’s desired outcome?

The value-for-money discussion requires uncommon personal honesty about what motivates you.

Our motivations are not always noble!

Own your motivations and tailor spending to optimize these aspects of your life.

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There’s no greater impact on financial wealth than current spending.

How many years would your net assets endure based on what you spent last year?

Be most aware of how you spend your time.

How’d you spend your time last year?

There are valuable lessons available from every stage of your family’s life cycle.

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Where To Focus

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

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

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

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

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

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

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

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

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

Where to focus?

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

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

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

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

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

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

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SIDENOTE

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

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

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

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

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

Today, am I spending time on the right things?

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What I Know But Cannot Prove

sxm_beachI came across a finance blog asking about the limits of statistical proof in the world of investing.

It reminded me of an old surgeon who shared, “Half of what I learned in med school turned out to be wrong.”

So I ask you…

What do YOU know but can’t prove?

You may talk about your faith.

But for me, the lesson runs deeper.

What is the ONE thing of which I can be certain but can’t prove?

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I start by asking myself, what did my grandparents believe that we now know is false?

I came up with smoking and trans fats. You’ll probably get a more exciting list!

Anyhow, the lesson isn’t to switch margarine brands…

The lesson is to be skeptical with my own beliefs.

I can be certain that some of what I now know will turn out to be incorrect for my grandchildren.

However, I can’t prove which of my current facts are incorrect.

I can only be certain that some of my knowledge is wrong.

So I should be careful when I find wise people on both sides of an issue.

I might be best served by acting as if they were both right.

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This article influenced by Russell: Sceptical Essays (first edition 1928!).

The Lindy Effect is a good way to sort knowledge. The longer an idea lives, the greater its life expectancy.

Wins, Pain, Anticipation and Endings

grumpy_catLast Sunday, I was puttering around the house waiting for my daughter to wake up from her nap and caught myself in a thought-trap. I was thinking:

Well, here’s another ride that I’ll be missing

Note the connection I was making between a small loss (missed ride) and my daughter.

Not Good.

A habit of creating frequent mental losses is guaranteed to make us miserable.

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There are four areas I tweak to manage my mood.

Wins

Because bigger isn’t (much) better, spread ’em out.

  1. Each morning I wake up (win)
  2. Cup of coffee (win)
  3. Second cup of coffee, heck ya! (win)

Three wins before anyone is awake.

This morning, I tacked on a run. Four wins by 7AM.

Coffee, meals, workouts, articles, work assignments, chore completion => all of these make me happy, so I’ve made them smaller, and more frequent.

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Pain

The opposite of winning isn’t losing. It’s pain.

  • A whining three-year old => pain
  • The cacophony of three overtired kids in my car => pain

painI have four tactics that I use with pain. I’ll give examples as a father but I use them everywhere (work, athletics, family).

Temporary – everything ends, maintain perspective

Meaning – my behavior is an example I set to prepare my children to care for my demented future self

Schedule Myself – every day has at least two slots for me – a slot might be as small as a 15-minute walk around the neighborhood – I free myself to serve others by acknowledging that I served myself already.

Wins – see my pain as another person’s win // I prefer to deal with kid insanity on my own, rather than with my spouse => makes me feel like a hero because I am enduring to spare another

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Anticipation

  • Vacations
  • Bonuses
  • Performance reviews
  • Exams
  • Pitch meetings
  • Prospecting

The corporate world is filled with events where we can anticipate a win.

Anticipating a win feels good.

You can use this effectively within a marriage.

  • Step up to take a bunch of pain (send your spouse on vacation without the kids)
  • Sex dates
  • Date night
  • Couples retreats
  • Large purchases (works great even if you NEVER buy)

Remember that the win need not be large.

Anticipate small wins.

This is what makes Facebook such a powerful medium.

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Endings

If you pay attention to your pain memories then you might find that the most painful are ones where peak pain happened at the end.

  • Sports (Packers, anyone?)
  • Divorces
  • Bankruptcies
  • Life, then Death

With parenting, I need to allow time to unwind after things go crazy.

Previously, I would be in a rush to get the kids to sleep so I could get to bed. When things didn’t go easily, which was often with my oldest, I would be ending every single day with peak pain. It was exhausting. My oldest grew up and that worked itself out.

However, our middle kid started having difficulty with his bedtime routine. Applying a little behavioral psychology, we shortened his nap, napped ourselves (when required), and made sure we had 90 minutes awake after putting him to sleep. It made the same situation, seem a lot less painful.

Move the pain away from the ending.

Ideally, take it early.

pancake


These tactics work well and you can find more info in Kahneman’s Thinking Fast & Slow

Navigating the Jockstrap Dilemma

khumbu_yakA buddy has a magic jockstrap that he likes to wear ALL the time.

He claims it helps his performance and recovery.

Normally, his jockstrap would not be an issue for me. However, I’m one of his advisers and he asked me what I thought.

What to do?


We often find ourselves faced with a friend, client or family member that has beliefs we find ridiculous.

Here is what I do.

Pause

I know my first response with jockstraps is likely to offend my friend or, at least, create cognitive dissonance. So it’s better to wait and consider things carefully.

Give me a bit of time, I’ll need to do a bit of research on that… 

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Context

Is the jockstrap on the critical path? Is it the difference between success and failure?

Magical clothing, and other superstitions, are rarely the difference between success and failure.

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Action

What is the jockstrap’s impact on behavior?

My pal is motivated, thinks he’s performing better and not focused on something that might screw up his performance.

There can be adverse consequences from the effective treatment of superstitions!

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Can I Prove The Opposite?

I happen to think that jockstraps don’t impact performance.

Can I prove my point of view? Am I sure?

The placebo effect is real, and proven.

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One Thing

What’s the one thing, if addressed, will have a material positive impact on performance?

Focus on the “one thing” together.

Don’t spend time tweaking items that have no impact.

Use influence sparingly, then strongly.

The greatest influence on the world is via my own behavior.

My buddy can easily see that I don’t wear a jockstrap.

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Most importantly, after I didn’t call him out, I went for a walk and asked myself…

What’s MY jockstrap!!!

😉

What Can Go Right

NYE_2014Above is a picture of my beautiful wife at a New Year’s Eve party in the French West Indies. Strangely, quite a bit had to go wrong for us to enjoy this evening.

Last year at this time I had ZERO idea that event was possible.

If you struggle to shake your fears about what can go wrong then here’s an exercise to help you remain open to what can go right.

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Before your next date night, couple’s retreat or family gathering. Spend a little time asking yourself:

What can go right in my life? 

What I did was take some paper, turned it sideways and wrote two headings…

What Can Go Right // Related Questions

The topics I considered:

  • Asset Appreciation
  • Asset Sales
  • Time Allocation
  • Continuous Education
  • Expense/Income Balance
  • Family Health
  • New Friends and Family
  • Improved Traits

Considering the details opened up some interesting questions:

  • Should we trade out of luxury and low-return assets?
  • Reallocate capital and time towards opportunities for shared experiences?
  • What projects provide the opportunity for family members to work together?
  • What do we want to study?
  • Who is the best person to teach us?
  • Where is a fun venue for instruction?
  • What role does family play in health?
  • What traits are desirable to attract into the family?
  • How can we promote these traits in ourselves?

To hold myself accountable, I highlighted three traits that would make me more effective: be more fun; handle kid noise better; and react more slowly.

In my case, being fun is characterized by being open to new experiences and handling change.

Last year, we did the opposite exercise => What can go wrong => I might be “a little too good” at that kind of brainstorming!

Interestingly, the “wrong list” is full of external events and the “right list” is filled with items that are within our control.

This brought up an essential question…

Am I worried about the right things?

Maintaining Function and Independence

balanceHere’s an effective way to use a few of the hours I saved you with my email tips. It takes less than half an hour a week.

The session takes 12 minutes and will help you maintain your ability to:

  • get out of a chair
  • recover from a fall
  • pull yourself up from the floor
  • cope with your carry on luggage

The above are HIGH on my priority list for maintaining independence and dignity as I age.

Alternate between a lower body exercises and an upper body exercise. Aim for 12 sets total – 6-15 reps per set – I take a minute per set including rest.

  • Lower
    • Squat
    • Leg Press
  • Upper
    • Pull up
    • Dip

Back and forth (upper/lower), rest as you need but if you need more than a minute then reduce weight.

You’ll probably need an assist on the pull-ups and the dips – there’s a machine (below) in most gyms that will help you get going.

Use a wide range of motion – better to go lighter, and slower, with a full range.

dip

Goblet squat is great way to learn how to do the squat exercise. It’s a lot like sitting into, and getting up from, a chair.

The routine is simple but takes effort to do twice a week, every week, forever.

This routine is an effective way to reduce the speed that I will become frail. I’ve been doing some version of it since high school, over 30 years and counting!

When I travel, it can seem silly to pay drop-in fees for 12-20 minutes of exercise.

What gets the wallet out is understanding what I might lose if I take a bad fall late in life.

I also get really sore if I go more than a week without strength training.

So start light and have an expert teach you proper form.

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As an alternative, here is the NY Times’ seven-minute workout.