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Our finances should enable and not dictate our lives

The most motivated and successful people take a problem, outline a solution, and relentlessly pursue it. This is a good model to achieve success. And following it creates momentum. It provides a sense of empowerment as obstacles are overcome. It is self-motivating as each milestone is achieved and each new one appears on the horizon.

The inherent flaw in this approach is that it assumes that the problem we are striving to solve will bring us the results we ultimately want. And we can lose that perspective during the relentless effort to make progress. We can fall into the trap of continuing to add new milestones in a misguided belief that if we can only reach them, we will achieve what we want.

We pursue wealth because we believe our problems will be solved by more money. And to be clear this is not the Communist Manifesto. I am not arguing against building financial assets. They can make a big difference in our lives. Having an emergency fund relieves the debilitating stress of living on the edge of poverty. Amassing wealth brings us material goods and experiences that bring us joy. But more than anything wealth buys time and freedom. Time to do what makes us happy. Freedom to dictate our own schedule and to walk away from jobs and situations that are harmful or make us unhappy.

In saying this I believe that after a certain level of financial security is established the thoughtless pursuit of a higher net worth is counterproductive. We shuffle through life attempting to add zeros to our bank accounts without pausing to ask ourselves if we are measuring financial success in the right way.

Not having ‘enough’

Kurt Vonnegut brought his good friend Joseph Heller to a party on Shelter Island off the coast of Long Island in New York. Shelter Island is a popular and expensive location for second homes of the wealthy. At the party Kurt Vonnegut commented that the hedge fund manager hosting the party made more money in a single day than Heller had ever earned from his hit novel Catch-22.

Joseph Heller turned to his friend and said, “Yes, but I have something he will never have – enough.”

This quote brings me back to one of those ordinary moments in life that we tend to mythologise into a defining occasion. What I am reminded of is the genesis of my financial philosophy.

I spent my high school years in a town named Greenwich which is a suburb outside of New York City. It was - and is - considered a desirable place to live and had the home prices to match. After I graduated Uni and started working, I had to commute to New York from my parents’ house one day. I found myself standing on the freezing cold train platform at 6am glancing around at my fellow commuters.

They stomped their feet to stay warm and prepared to charge onto the always crowded train in the hopes of finding a seat for the 40-minute ride into Grand Central Station. This was likely followed by a 20-minute subway ride to Wall Street.

I couldn’t help but think that the men and women on that platform had ‘made it’ in every conventional sense. They likely lived in expensive houses and had all the trappings of wealth along with the requisite high paying jobs needed to support that lifestyle.

The pathway those men and women took to that platform was probably similar. They worked hard to earn promotions and higher salaries. The higher salaries facilitated increased borrowing power. They financed a starter home and a car. Soon they had a bigger home in a better suburb with a nicer car in the driveway. Eventually they ended up in Greenwich.

Each step on this ladder meant more obligations. My interpretation of my brief time on that train platform and the myth I created in my mind was that these people were sacrificing freedom by not having ‘enough’. This may have been their dream and I respect that. My caricature of people I don’t know may come across as critical. But we can just as easily be motivated by what we don't want to become as what we do. And I wanted to follow a different pathway.

I saw the trappings of success simply as traps that kept those people coming back to that platform day after day. Buying the material possessions that denoted success including the big mortgage just seemed like a pathway to lock me into a life that I didn’t want.

What I wanted was freedom. And I wanted to convert my labour into financial assets that enabled that freedom.

How does not having 'enough' impact our investing approach?

Not having ‘enough’ means we haven’t properly defined our goals. And when it comes to investing our goals may be expressed in financial terms but they need to be aligned with our life goals.

I speak to a lot of investors. If I ask them about their goals, I repeatedly hear the same thing. They tell me they want to be rich. They tell me they want the most money possible. Fair enough. There are few people that would rather have less money than more money.

The issue is that when your goal is to have the most money possible it starts to dictate your actions. If you want the most money possible you should always be in the best investments. This mindset is counterproductive.

A goal of having the most money possible makes it more likely you panic when markets drop. It makes it more likely you fall victim to greed when markets surge.

It means you trade frequently because you are always trying to position your portfolio perfectly. It means you fall prey to recency bias and chase performance.

For most people the results are predictable. Returns are lower. Tax outcomes are worse. Transaction costs are higher. And ultimately this pursuit of the most money possible takes people to a very different outcome.

The larger issue is that this view of financial success drives the way many investors approach money. It ignores the true value of money as an enabler of security and happiness. Money and wealth are a means to an end. Treating it that way can change your relationship with money and the decision-making process for your own finances.

Why build wealth?

The real question for each of us is why we build wealth in the first place. And I had trouble articulating this for a long time. I just saw the pathway others pursued and I knew it wasn’t for me. Eventually I came to the philosophy that continues to guide my own investing and view of my finances.

Many investors tend to think the biggest problem is finding the right investments to buy. This leads people down strange paths. They stare at stock charts trying to manifest the direction of prices. They sell in May and go away. They nervously await signs of a Santa Claus rally with more excitement than a kid on Christmas morning. They search for clues in each utterance by a central banker. In short, they do everything possible to make sense of short-term randomness.

I’ve developed a different view. My view is not for everyone. That is because each of us is different. What isn't different is the need to align our investing and financial approach to the lives we want. Our financial choices should enable our lives. Not dictate them.

My investing principals are the following.

  1. My own vision of financial success is using my financial resources to enable freedom. To me this is freedom from worry and freedom from the burdens of committing time and efforts to things that aren’t important to me - it is the freedom of choice. This is not synonymous with growing my net worth.
  2. I focus on growing the portion of my salary going to discretionary spending. I don’t use salary increases to fund more fixed obligations and instead pay for experiences. I actively battle against lifestyle creep that doesn’t bring me joy and simply resets my expectations for a life I don’t want. This gives me choice over my spending which to me is true independence.
  3. I use my savings and investments to provide cash flow. The more cash coming into my bank account the more options I have. Those options provide freedom. And I spend some of this money now on things I love like travel. This is why I’m an income investor and the value of my portfolio is a secondary concern. This has made me a better investor. I don’t chase each shiny new ‘can’t miss’ investment. Building an income stream takes patience as the incremental impacts of savings, dividend reinvestment and dividend increases work their magic. It keeps me focused on the long-term, tax minimisation and low transaction costs.

I understand that this concept is different from what we are typically told. We are told to focus on our net worth. To use debt as an enabler of acquiring more assets. To find tax minimisation strategies involving negative gearing to sacrifice current cash flow for a lower tax rate. To focus on growth investing when we are young and only worry about income when we are retired.

We are told someday this will pay off. Someday we will be able to sell our assets to fund the experiences we really want now. That when we sell those assets, we will still be young enough to enjoy the experiences they buy. And on we trudge, buffeted by the headwinds, towards an unappraised mirage of financial success.

 

Mark Lamonica is Director - Editorial and Content at Morningstar.

 

18 Comments
David Williams
July 15, 2024

If we all framed our future better through longevity planning, then we would be much better placed to follow these wisdoms with a clear sense of our expected journey and what we are doing to make the best of it.

Kevin
July 15, 2024

I think it is important to keep a sense of humour about it.Be amazed at how quickly things happen,keep going in the same direction,turn off the noise and don't follow the crowd. Always keep it simple because it isn't complicated at all. The @#$&@ podcast that Graham had that put me back on the pitch with white line fever. APA did what they said,I hadn't noticed how far the price had gone down so bought more @ ~ $8.60.They went back up to around $11,I'm not good at all on the sell side so still have them.The back stop was they do pay a good dividend. Without that brief spell of white line fever again I wouldn't have topped up on CBA on a fall from ~ $112 to the low 90s.They didn't have the usual run up for the February report as people chased the dividend.I'd bought them on the dip 3 times prior to that,perhaps 4.Three dividends in ~ 13 months, Go for it,if they get back up to $112 five years later I'm happy.They pay a good dividend for the income needed in retirement. You've got to laugh , in a short period of time they are @ $130.How could anybody expect that to happen. I'll still be happy if they are at $112 around 2027.I'll be really happy if the go sideways and stay @ ~ $130 until 2027. The freedom of financial security,the freedom of never having to know what time it is,or what day it is. A lifetime of trying to do as little as possible and only make a few decisions.Let compounding work the magic,it's good fun.

Alan
July 13, 2024

Live within your means, Build a cash buffer early in life, insure your greatest asset - (your income earning capacity) in your prime years, Look to keep tax costs down & invest in growth assets. But most importantly enjoy the journey. Not everyone gets to old age.

Acton
July 13, 2024

I have the same three investing principles as the author. My aim is financial security, so as to enjoy life. I define wealth not in assets and bank balance, but in life experiences and contentment level. By investing in dividend shares and reinvesting and reinvesting ... I now have a greater income coming in compared to when I was working full time and commuting to a job of constant hassles, deadlines and fruitless meetings. So yes, the advice in this article and comments from readers are spot on and the reason why I enjoy First Links. As for me, I've just come back from a dog sledding and kayaking trip to the Svalbard in the Arctic. Happy to report the polar bears were numerous, well fed and doing fine.

TonyD
July 12, 2024

Live modestly and keep your family close, and you will be ready for a retirement where you children are your best friends, and hopefully you are blessed with grandchildren who love you and will remember you when you are gone. These are things you can't buy no matter how much wealth you accumulate.

Ian
July 12, 2024

As a wise person once said "If you don't fly business class, your children will"

Lisa R
July 12, 2024

I guess Kurt Vonnegut would have said that “enough” is somewhat of a Catch 22! As a retiree I’m learning to make a new habit: not of saving for the future, but of enjoying the present using the fruits of my past investments.

Bosco
July 11, 2024

Early years of life you sacrifice time to make money. In later years your utility from more money decreases and time becomes more valuable. My problem is that after years of saving and not spending on myself, it is hard to break the habit. I am working on it! The greatest benefit you derive from financial assets is that you have the option to do what you would like. It is very comforting to know you can cope with a money bill easily. The trick is to work out the trade-off between assets and the enjoyment you get from spending some of that money. At any point in time, you will have made the correct decision, after all, you are not silly. You may look back and wish you had chosen a different combination of money versus spending, but at the time of the decision, you have it correct if you are a reasonable person. The marginal utility from the last dollar spent or saved will be the same. Action needed: assess your utility from saving versus spending regularly.

margaret gillett
July 11, 2024

You have got to enjoy the journey along the way - and ride on the wave of compounding not fixated on accumulation.

Scott Andrews
July 11, 2024

Another wonderful article Mark. You are an engaging writer, and I'm sure the seeds are already planted for a book.

Mark
July 12, 2024

Thanks Scott. I really appreciate it. I will write it if you buy it!

David
July 14, 2024

Mark start writing it as I'll take a copy too...that will make at least 2 books sold!!
Just as an aside, I was listening into someone discussing the huge intergenerational wealth transfer that is supposedly coming and posed the question as to why this needs to happen at all. Why has this baby boomer generation worked, saved and invested but now not spending and enjoying the fruits of their labour? Has the wealth accumulation exceeded what is "enough" as the above article articulates? Maybe this generation is not educated about financial management (eg. Bucket strategy, safe withdrawal rates, asset allocation, importance of long term investing strategy etc etc) and thus suffers from FORO (fear of running out) excessively?

Davo
July 11, 2024

I have always lived below my means, regardless of my level of income. As a kid earning 50c per week pocket money, I'd keep it in a little box, and a few months later I'd have enough for a new soldering iron. Yay! As a retired adult with passive income just shy of $1m per year, we live well and travel well and donate, but still spend only a fraction of that income. The rest compounds.... because that's what you do, right?

Fast forward to a cancer diagnosis. Not as dire as some, but still one that causes you to think about how many functional years you have left. Is it 10? Is it 5? Maybe it's whatever it was before the diagnosis. Who knows.

It's surprisingly hard to "change gears" from living below your means, to living at least "at" your means. But the last year has caused me to change gears without using the clutch -- it simply makes no sense to concentrate on building the nest egg past a certain point in life. I think maybe people who have fiscal responsibility hardwired into their firmware (yes, I know, I'm a computer guy, that makes no sense) can sometimes lose sight of WHY we are doing it. A virtuous habit actually becomes counterproductive.

It's been a useful wake-up call, and one that it's conceivable to have even without a diagnosis.

MD
July 16, 2024

As a 36 year thanks for writing this and best of luck with treatment David.

David
July 11, 2024

Some great points mark - i do find it hard to turn my mind away from "I just want to accumulate more wealth". But i dont want a bigger house or a holiday home or a flash car. I value experiences over possessions. I have reaped the benefits of investing regularly in and out of super over my working life (I am in my early 60s). I have worked part time over the last 5 years and have had the time and money to travel when and where I want (other than covid). I have also been able to help out my children to get a home. I encourage more people to take on board some the lessons of this article.

Owen
July 11, 2024

Good logic Mark. As a society we need to improve our attitudes towards long term savings outside of Super. Most people lack any savings discipline perhaps? I always tell my students - spend less than you earn and invest the difference into income producing assets. This creates your second job/income. maybe 1% actually listen. Imagine having the insights of a 50 year old in a 20 year old.

Rob
July 11, 2024

"This is why I’m an income investor and the value of my portfolio is a secondary concern." Agree 100%. Retired at 53 (now 60) and could have worked and saved another $1m easy....but didn't want or need to in order to fund the lifestyle my wife and I enjoy. Have now started a super income stream from SMSF and we easily fund our annual "income" of ~$120k from dividends alone (mainly LICs). The portfolio keeps growing anyway, without any further investment from me. Ultimately, it's not rocket science but it's also not something you will generally hear from the super industry and financial advisors with vested interests.

Dudley
July 11, 2024

Pillar to post - revenge spending to revenge saving:
https://www.youtube.com/watch?v=cgn5mIw4G_0

 

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