Saturday, January 30, 2016

The Third Domino Falls: Risk

About 20 years ago, I used to work for a company that handled absolutely huge projects.  Because the projects were so large, there were all sorts of status reports and metrics to track our progress.

One day, my boss's boss's boss's boss (yes, 4 levels up) called me into his office.  As we never had any interaction with that level of management, I could only assume I was being fired or promoted.  To my surprise, he only wanted a status report from me.  I was totally confused.  Was everyone in my management chain on vacation at the same time?  I began to regurgitate the weekly status report for my group.  "No, no, no,"  he said, "I don't care about the numbers and spreadsheets. I want to know where the project really is right now.  How do you feel about it?  This is off the record."

I told him we were on track.  We had been really behind (although the official schedule had not shown that), but we had also caught back up.  Then I ask him why he was asking me this question.  He said, "Sometimes you need to throw out all the metrics and get a gut check.  Today, you are my gut check."

To this day, I still don't know why he came to me.  I asked around and he apparently did not come to anyone else in my immediate group.  Maybe he saw honesty or intuition, or maybe I was just a random sample of the whole project for that week.  I will never know.

Over time, I've also developed an aversion to an overreliance on numbers.  It's certainly true: sometimes you just need a gut check.  During the past weekend, I did that with my finances.  Setting aside all the numbers and all the targets, I asked myself how I felt deep down about our household financial situation.  Was I ready to move on to the next phase?  Was I finally ready to take new risks?  There was no hesitation in my mental response: the answer was yes.

Thursday, January 14, 2016

The Second Domino Falls: Income

With debt out of the way, it was only a short amount of time until enough productive assets were accumulated to reach my desired passive income floor: $40,000 per year.  This breaks down into $36K of dividend income and $4K of interest income per year.  Also, I have never disclosed this fact on this blog before, but I have an additional $10K per year of income that is reasonably consistent and completely unrelated to my employment, but is not strictly passive in nature.  This means I have not only $40K/year in passive income, but also $50K/year in total income unrelated to my job.

And no debt of any kind.

Clearly 2016 is going to get interesting...

Tuesday, December 22, 2015

The First Domino Falls: Debt

Our mortgage is now completely paid off.  And we have no other debt.  No car loans.  No HELOC.  No student loans.  No margin debt.  Nothing.  We are 100% debt free now.

Unlike some bloggers, I've never taken an extreme position either way with regard to debt.  I don't think debt is inherently bad and something to be avoided at all costs.  But I also don't think people should load up on debt to binge on consumer items or to play games with low-cost debt versus higher-return investments.

Debt is both a tool and a risk.  That is why most corporations have some moderate level of debt.  But corporations can operate in perpetuity; individuals have a fixed lifespan.  Hence, as people get older, it is natural for debt levels to fall towards zero if things are managed properly.  We just arrived there a little earlier than some others.

The elimination of debt was the first domino to fall.  The next one is on the way very soon...

Saturday, December 5, 2015

What Skiing Taught Me About Personal Finance

When I was in high school, I experienced downhill skiing for the first time at a local resort.  I immediately loved the experience of being on the mountain and the feeling of rushing down the hill.  After I had skied a few times, I decided that I enjoyed it enough to spend some money on private lessons.  Near the end of one of my lessons, I asked what things I still needed to know to advance to more difficult terrain.

His answer surprised me.  He told me, "You probably already know enough to become an intermediate skier.  But you must practice what you know for many more hours.  Lessons are really just to help you see and correct what you are actually doing."

And so became one of my first insights into understanding that some activities in life are primarily knowledge-based, while other activities are primarily skills-based.  Athletics and the arts are two of the more obvious examples of skills-based occupations.  Other occupations are primarily knowledge-based.

What about knowledge and skills with respect to finances?  We often see news stories about wealthy people who completely mismanaged their finances.  Intuitively, we can see why this happens.  Knowing how to make money is not the same as knowing how to handle money.  Someone who is very knowledgeable about physics or law or medicine may not necessarily be knowledgeable about finance.  And the field of finance is heavily knowledge-based.  But the problems often go beyond knowledge.

There is also a skills gap, which explains why finance professionals sometimes make the same poor choices with their money.  They know the right things, but they still do the wrong things.  This is because while finance is mostly knowledge-based, personal finance is mainly skills-based.

This is actually one of the great dangers in reading a lot of personal finance blogs.  Those of us who have some degree of influence with small children in our lives are always being reminded that children mostly pay attention to what we do and not what we say.  There are a lot of personal finance blogs (and books) where the author more often than not says the correct things about money, but also gives a lot of personal anecdotes where the author does otherwise.  Unfortunately, these bad decisions are not presented as mistakes, but rather with the typical behavior rationalizations that we all use whenever we violate our own rules in any aspect of our lives.  Most readers will remember these bad actions long after they have forgotten the good advice, and this tends to negatively influence them down the road.

Readers of personal finance blogs (including this one) should approach them as a critical thinking exercise, and not simply as entertainment and "facts".  Never assume that the knowledge and actions presented are sound ideas.  And especially don't assume the actions are consistent with the advice.  If readers did more of that, they would indeed end up more wise than the authors.

Saturday, November 7, 2015

Future Direction

It looks like most of my financial goals will be achieved in the next couple of months.  The first will be the mortgage: there is now only one payment left.  Other goals are likely to be completed shortly thereafter.  This means it will soon be time for action.

I've made decisions about many of the life direction issues that have taken me so long to untangle in my mind.  I finally have a tentative 2016 game plan for work, for leisure, for finances, for family, and even for how to end this blog properly.  In short, it's about how to change the trajectory of my life while I'm still in my late 40's.  I shall write about these ideas over the next few months as time permits.

Most of you are likely to be surprised by the details, and so I urge you in advance to keep an open mind.