A Little Economic History

2018-10-31 07.52.14It is much easier to position your life before, rather than during, an economic crisis.

It’s also truly amazing how fast a credit crunch can sweep across markets.

This month, a decade ago, was the mid-point for the toughest 90-day stretch of my financial life. Taking it back to October to December 2008…

  • My prospective earned income went to zero at a time when…
  • My Business/Personal cash burn rate was $10,000 a week. Simultaneously…
  • My net worth dropped by 67% and…
  • I was facing a potential claim 20x in excess of what remained. The one bright spot was my family life…
  • Our first child was born and we were very happy within our marriage.

The only reason I didn’t follow a friend into bankruptcy was a pre-crash restructuring. I had been scared by four events :

  1. The US was offering loans without income verification.
  2. The UK was offering loans without bank covenants.
  3. Down in New Zealand, I used both of the above and borrowed to pay my living expenses at a time when…
  4. I had a personal guarantee outstanding that covered most my assets, and all my net worth.

There is a line in Fooled By Randomness about Russian Roulette. It goes something like…

Even if the gun has a million chambers, there are some games you don’t want to play.

I was enjoying my life and didn’t want external circumstances to force a financial reboot at 40-years old. So… 2005-2007 was a time of significant change.

The restructuring took three years (2005-2007). It prevented ruin, but still resulted in a lot of pain when credit markets slammed shut in 2008.

At the time I was working in the UK. The entire chain of my business life went from Great-to-Insolvent in 180-days (bank, joint venture partner, developer, general contractor, sub-contractors, employer, CEO).

Just like that.

Gone.

2009-2012 were spent clawing back.

Key steps:

  • Downsized family home, spending and aspirations. Embrace Your Hubris!
  • Invested the downsized capital into a Downtown Boulder rental property. Two units, where the little unit’s rental income would enable us to live for “free” in the larger unit.
  • Invested our remaining funds in a redevelopment opportunity that I could hold FOREVER, because it was debt-free and cash flow positive.
  • Turned a loss making triathlon hobby (draining $75k annually) into a cash generating consulting business ($4,000 per month).

By 2013, we achieved cash flow break even. We were so blasted from our young family (up to three kids) that I don’t remember appreciating the significance of what we achieved.

Within my financial peer group, our story is not unique. Lots of people had a similar ride. However, they don’t necessarily blog about it.

Financial memories are short.

Remember.

You don’t get killed by prices falling — price volatility is emotionally painful but not financially fatal.

Companies, Your Personal Ethics, Friends and Families… All can get crushed by running out of cash in a banking crisis.

Where’s your cash flow statement?

A Million Dollars of Education

What first got my attention on education was realizing that a month of my daughter’s pre-school was costing more than a semester of my finance degree at McGill University. Digging a little deeper, the long-term cost of education blew me away when I ran the numbers.

Like most parents, we believe our daughter is a gifted genius and we want the best for her. Since I’m the CFO of my family, I’ve been approached to share my thoughts on private education.

What’s the default option with private education?

  • We want the best for our kids
  • Private education costs more so it must be better
  • I can afford it, today
  • Therefore, let’s start down the path

Duscussing education with parents I see the full range of human misjudgement. We all want our kids to succeed so our most-human tendencies manifest. I won’t give specifics as my sources are good friends. Just ask around and you’ll see what I mean.

Similar to our discussion on housing, let’s run some numbers using actual education costs in 2012 dollars. The first figure is Colorado and the second is California. These are figures for the private track:

  • Pre-school: $6,000/$12,000
  • Elementary/Middle: $15,000/$25,000
  • High School: $25,000/$50,000
  • University: $50,000/$62,500

I did a little research on education inflation and it’s been running at 6% per annum. I created a spreadsheet to look at the cost per kid at a 5% inflation rate, which also matches my forecast portfolio return if I don’t spend that money on education. If you want to play with my assumptions then make a copy of the spreadsheet (file/make a copy).

Depending on where you live, the private track has a future value of $875,000 to $1,375,000 per kid.

Knowing that we won’t be rational when we look at our own kids, think about the brothers and sisters of your peers, spouse’s family and your cousins (that’s your reference group). Would it have been a good investment drop a million bucks (each) on all of their educations?

The questions are worth asking but most of us don’t ask, we default:

  • I love my kids
  • Private is better
  • I can afford today
  • I’ll do it

Stack the education default on top of the housing default and many of my peers are looking at $3-8 million worth of expenditure. That kind of money can make a lasting difference in your city when directed wisely.

Likewise, if you think carefully about your goals (and frame broadly) then you might discover alternative uses for those funds.

…you might enjoy working less and teaching your kids what you know

…you might have superior ethics because you haven’t placed pressure on yourself to earn millions over the next two decades

…you may be a better spouse without all that pressure

…your kids might do better if you back them financially as adults

…if you’re in a weak public school district then your relocation budget might be bigger than you think

A very successful friend of mine always wondered why his father refused to pay for any of his education. My friend got himself through MIT and, as it turned out, didn’t need help from anyone.

Perhaps his Dad ran the numbers.