Saturday, February 25, 2012

How to Give a Compliment

"A compliment is verbal sunshine."

- Robert Orben

A long time ago, a mentor explained to me why compliments are much more powerful when given indirectly through another person.  Think about it for a minute.  Which seems more powerful to you:

(A) Your boss tells you that you're doing a great job.


(B) You hear from a coworker that your boss has been saying what a great job you've been doing.

Let's try another scenario.  Which is the stronger compliment:

(A) Your daughter tells you that you are the best parent in the world.


(B) You meet one of your daughter's friends.  She says to you that your daughter is always talking about how she has the best parents in the whole world.

Are you getting the idea?  We all tend to discount direct compliments.  In the back of our mind, we suspect that our coworkers need something from us, our friends expect reciprocity, and even our family members may simply be using expected cliches.  But when we indirectly hear that someone has been saying good things about us, we have far less reason to doubt their sincerity.  It is like anti-gossip.

I don't find this concept to be mere theory.  There were a few times in my life when I eventually found out that someone had been saying very positive things about me to other people, and it did indeed carry far more weight than if they had said it to me directly.

Giving is not just about money.  You can give your time, your energy, your wisdom, and many other things.  You can also give encouragement.  And if you want to give a very special gift of encouragement, consider occasionally giving it indirectly as illustrated above.  It may take a little longer, but the end result may be spectacular.

Thursday, February 23, 2012

The 3 Axioms of Risk

"It is the nature of all greatness not to be exact."

- Edmund Burke

I've spent an enormous amount of time in the past 20 years studying and thinking about risk.  I've read management books that created taxonomies of hundreds of different kinds of risks, and I've read philosophical books that couldn't even agree on a definition of risk.  I've also read financial books that equated risk with variance and built complex mathematical ideas on top of that assumption.  And perhaps most importantly, I've observed how people and companies react to risk.

Everyone acknowledges the importance of risk.  It's one of the universal themes of life, yet it's hard to define exactly, and it's harder still to understand how we relate to it.  One moment we avoid it, and the next moment we seek it out.

Unlike my budgeting series, I'm not going to get sucked into writing a series about risk.  Instead, I'm going to take the complete opposite approach.  I'm going to attempt to distill everything I know about risk into three axioms, which means I will deliberately need to overgeneralize.  I hope you will reflect on them for a bit and attempt to think how they might relate to your investments and your life.

1. Risk can never be created or destroyed, only transformed.

2. Leverage potentially increases investment returns; leverage always increases investment risk.

3. Risk is ultimately a relative measure of information.

Wednesday, February 22, 2012

Dream Team

Charles Barkley
Larry Bird
Clyde Drexler
Patrick Ewing
Magic Johnson
Michael Jordan
Christian Laettner
Karl Malone
Chris Mullen
Scottie Pippen
David Robinson
John Stockton

- 1992 United States men's Olympic basketball team (a.k.a. "The Dream Team")

The Dream Team of basketball assembled an almost frightening array of talent and went on to defeat its Olympic opponents by an average of 44 points per game.  In its particular sport, there has probably been nothing like it, before or since.

Did you ever wish you could assemble a "Dream Team" of workers?  At each company I've worked for, there has been one or two individuals that really stood out far above the hundreds of others.  Occasionally I've thought to myself: what if I could bring all of these stars together in one company or one project?  I feel as if there would be nothing we could not solve, nothing we could not accomplish.

I don't have these thoughts very often, maybe once or twice a year.  But I've continued to have these thoughts year after year for many years.  I'm not an entrepreneur or a hiring manager, so I'm not sure why this train of thought persists.  Sometimes I wonder if my subconscious is trying to tell me something important about my career.

Tuesday, February 21, 2012

Penguin Logic

"If we increase the size of the penguin until it is the same height as a man and then compare the relative brain size, we now find the the penguin's brain is still smaller.  But, and this is the point, it is larger than it was!"

- Monty Python, Penguins
I'm going to coin a new financial term: penguin logic.  The name comes from a Monty Python skit where a quack professor postulates that penguins are smarter than humans.  He first notes that penguin brains are much smaller than human brains, but chalks it up to the fact that penguins are much smaller in height.  He then produces drawings where a penguin has been enlarged to the size of human, but unfortunately the penguin brain is still smaller.  Undaunted by the data, he excitedly remarks that the brain of the enlarged penguin is larger than it was!

In the last few months, I've read quite a number of financial articles that were based on penguin logic.  Start with a sensational headline.  Then build up an argument only tangentially related to the headline.  Eventually back off the original claim, but still declare victory based on the fact that the argument itself was interesting and parts of it were true.

Most of these articles employed a fairly subtle use of penguin logic.  But the other day I read an article that was totally blatant.  The headline was about consistently achieving 20% annual returns in the stock market.  Initially the article made out like the author was easily going to achieve that and encouraged everyone else to do the same.  The article then went over the math about how much money could be made over time with a 20% return, and how much more money that would be than 15% or 10% returns.  Near the end, the article finally acknowledged the fact that almost no one achieves these returns and that the author had no real advice for achieving it, but ended with the conclusion that it was still much better to try for 20% than 10%.  (I am not making this stuff up.  This was an article written for a very well known online financial site.)

Enjoy the video clip below and beware of penguin logic in your financial readings.

Monday, February 20, 2012

Absolute Savings

"Things are not always as they seem; the first appearance deceives many."

- Phaedrus

Sometimes it's helpful to evaluate potential savings or investment returns in absolute numbers.  Relative numbers are very useful in many contexts, but in some scenarios, we can easily be lured into thinking that the relative differences between two choices are much more significant than they really are.

For example, my broker charges $8.95 for trades.  I receive many solicitations from competing brokers with cheaper commissions.  Some brokers charge only $5.99 per trade.  At first glance, this looks like a huge difference.  The commission is one third less.  Who doesn't like to buy things with a "1/3 off" tag?

In my case, however, I usually make only about a half dozen trades per year.  Is it worth switching brokers to save $18 a year?  Probably not.  Similarly, I see a lot of people trying to find a savings account paying 1.25 % instead of 1 %.  While that is a 25% increase in income, it might be quite small in absolute terms for many people.  If you only have $4,000 in the account, then it's only $10 more in your pocket each year, which may not be worth the hassle of researching options and opening another account.  Other scenarios where the significance may be questionable include credit card rates, ATM fees, and store coupons for a certain percentage off any single item.

In all of these situations, the key is to determine whether the relative savings are applied in a large enough scale to make it worth your while.  Differences in ATM fees are significant only if you make a lot of ATM withdrawals.  Differences in commissions are significant only if you make a lot of trades.  Interest rates on savings accounts and credit cards are important only if you maintain a large balance.  Store coupons are material only if you are already planning to buy items from that store.  Calculating your actual dollars saved is a sanity check on whether relative savings can translate into something truly meaningful to you.

Saturday, February 18, 2012

Don't Make A Fist

"Take these hands
Teach them to carry
Take these hands
Don't make a fist"

- U2, Yahweh
I always understood the reference to the fist in Bono's lyrics above to be a symbol of violence.  In other words, learn to help, not hurt.  But as I listened to that song last night, I wondered if perhaps a different meaning was intended.

For the clenched fist is also a symbol of clutching on to what we have and not letting go.  Everyone has heard the expression "tightfisted miser".  Before we can give, we first need to unclench the fist.

Friday, February 17, 2012

Big Things or Little Things

"Take care of the little things and the big things will take care of themselves."

"Don't sweat the small stuff."

Our culture is full of these contradictory cliches that tell us that big things or little things are more important than the other.  I suppose there is truth in both points of view.  The gravity of each big item vastly outweighs each small item, yet the discipline and attention to detail of the minutia of life perhaps ensures us that we are prepared to properly handle the big things.

When it comes to saving, we see the same paradox.  Refinancing a mortgage might save tens of thousands of dollars and will utterly dwarf the cost of one latte at Starbucks.  We are wise to pay attention to the big things first.  Yet the morning latte each day for 30 years may indeed be in the same ballpark as our mortgage interest.  Unchecked, the little things tend to become big things over time.

Thursday, February 16, 2012

How Much for a Greeting Card?

"Every man has his price."

- Unknown

My wife really appreciates greeting cards, and so I buy them for her from time to time.  Although several dollars does seem sort of steep for a piece of printed paper, I've never really complained.  I've bought a lot of cards over the years that were $4.99 or $5.99, and I've never balked at paying for them before.

The other day, however, I was walking up to the checkout counter and turned over the card I was about to purchase.  It was $8.99!  This was not any sort of special card.  It wasn't oversized and didn't play music or anything like that.  It was just an ordinary card like most of the others.

For the first time in my life, I said no.  I wasn't going to pay nine dollars for a simple card.  I went back and found something else for $3.99.  I guess everyone has their limit; I had just never reached mine until last week.

So how about you?  Have you ever balked at the price of a card?  What is the most you will pay?

Wednesday, February 15, 2012

Retirement Plan Reset

"The price of inaction is far greater than the cost of making a mistake."

- Mesiter Eckhart
So the first thing I need to do is to stop procrastinating about small things that can be started now and don't need to wait for retirement.  This includes more exercise and travel.

Second, I need to change the order in which I'm pursuing things.  I was never such as fool as to want to sit on the beach all day after I retired.  I always knew I would do something productive and something much better than my current job.  I was never simply running away from my career.  I was always running toward something else.

But the problem was that I didn't know what that something was, and I thought I didn't have time to figure that out until after I accumulated enough money to stop working.  Hence, the order of the plan was:

1. Save enough money to stop working.
2. Figure out what I really want to do.
3. Do that.

Any first year management student can tell you that schedule is not optimized.  Why wait until step 1 is completed to work on step 2?  Steps 1 and 2 can be done at the same time!  At the very least, I could be figuring out what I eventually want to do so that by the time the money has been accumulated, I could get right to it.  And it's also possible that I might be able to get started with it before the money accumulation is finished.

You are probably way ahead of me by now.  Yes, the supreme irony here is that if step 3 also produces money, then step 1 was perhaps partially or wholly unnecessary.  Wow.  Let that sink in a little.

It's still a good idea to have financial discipline and save lots of money.  The financial concepts I've always espoused in this blog are sound and I intend to keep following them.  What I'm questioning is the idea of waiting, waiting, waiting for your retirement magic number to be hit before proceeding with your post retirement plans.  There's not going to be a deus ex machina that comes along and solves the plot to the rest of my life for me.  I'm transparent enough to admit this was a huge mistake on my part, and I'm excited to start planning properly during 2012.

Tuesday, February 14, 2012

Retirement Plan B, C, D, etc

"Planning is bringing the future into the present so that you can do something about it now."

- Alan Lakein
As I mentioned in my last post, my original retirement plan didn't work out by age 45.  It's time for new ideas.

Plan B - Coast

The most obvious fallback plan is simply to try another 5 years. Starting from a higher net worth and being 5 years older, the chances of success are much higher. And unlike most people in the United States, I also accrue an old style defined benefit pension from my current employer. So continuing to coast is the path of least resistance, and if I was certain this approach would work in 5 more years, it would definitely be the route that I would take.

But success is not guaranteed, and I question whether my psyche could handle another five year plan where I might ultimately end up back at the same place. I don't want to go through 10 years of life and have regrets that I wasn't proactive. Plan B is straightforward and a good bet, but I don't think I can take the risk of potentially still doing what I'm currently doing at age 50. I need another alternative.

Plan C - Reduce Hours

It has always irked me that I cannot simply scale down hours.  After my wife and I had children, we learned to live on one income.  Over time, as my income grew and our spending did not, we learned to live on one half of my income.  Now that we have accumulated a fair sum of money that also generates income itself, we could actually live on one third of my paycheck!  You can imagine the frustration here.  If I could just work 4 months out of the year at the same pay, I would be totally set.  Not only would I have 8 months to do others things, but in all likelihood, I wouldn't mind working such a schedule for the rest of my life, which would mean we've already overshot on our savings because we wouldn't be drawing on it at all.  There was a time when I thought this was how my career would eventually work out.

Alas, Corporate America does not like this idea at all.  I have yet to find a company that would be interested in having me work 6 months of the year for half the wages.  Now you may be wondering if the answer is contracting work.  Trust me, I'm well acquainted with this line of work.  Employers, contracting companies, and headhunters do not like gaps.  If you haven't worked in 8 months, they won't even look at your resume because they are convinced you must be a bumbling idiot to be out of work that long.  And once you start a contract, there is tremendous pressure to keep working.  When you don't work, contracting shops don't get paid, and they take offense when you decide to walk away from work.

Plan D - Back To School

A number of people have figured out that going back to school is a great way to avoid gap issues.  I actually did this several times early in my career.  I got sick of working, quit my job, and went back to school for a year or two.  It gives you a different pace of life, including summers off and other long breaks.  You also keep your skills sharp, and everything is easily explainable to your next employer.  Some people might be horrified by this approach because they don't like school, but I didn't mind the studying.  The problem is that I'm running out of degrees that would make sense for someone to accumulate in my field.

Plan E - Career Change

It has occurred to me to simply switch fields.  Something different would make it more interesting, at least at first.  There are also fields such as teaching where the work is not always 12 months each year.  Since we're able to live on a lot less than my current salary, I could also try to find something I really like doing that doesn't pay nearly as much.  While intuitively this approach seems like a good idea, I am skeptical.  I know idealistic people who have quit their corporate jobs to pursue a "cool opportunity", or a nonprofit job, or other things off the beaten path.  But even if the work was rewarding, you often find out that there are still schedule issues, unwanted travel, personnel squabbling, and much more that can overwhelm the rewards.

Stepping Back

Your job and your career can be a trap, where you pour your time and life into something that in the end is probably irrelevant to you.  But retirement goals can also be a trap.  You can only live in the present, and if you always concentrate on the future, you might find that life is passing you by.  I read so many blogs where people say that after they retire, then they will finally have the time to play with their kids, exercise, eat right, organize their clutter, start a business, help others, and basically do everything they've always wanted to do in life.  But it's almost as if their life is on hold until they can stop working.  For many people, I believe retirement goals have become an excuse to put off doing a whole lot of things.

And you know what?  I've come to believe I am one of those people!  And that needs to change...

Monday, February 13, 2012

My Retirement Plan: Near Miss or Epic Fail?

"And you may ask yourself did I get here?"

- Talking Heads, Once in a Lifetime

Based on blog traffic and feed statistics, I can tell there's been a small group of people who have stuck with this blog almost since the beginning, and I thank you for your continued support. I also assume that many of you continued to read this blog because you were curious about my early retirement progress. In light of the recent blog name change, I feel I owe it to these original readers to give a more complete explanation of why I didn't end up retiring at 45.

The Plan

I started this blog about 5 years ago when I had a "5 year plan" to retire at 45. At the time, I was 40 years old. Now I am 45, and clearly I did not make it. Our net worth is slightly over one million dollars and growing. While that may be enough for some families, that is not where we need to be to feel comfortable about retirement.

What Didn't Go According To Plan

Market Downturn. Our net worth declined by about $250,000 in one year - 2007 to 2008. In the short run, it's hard to recover from such a large hit.  You can see our net worth history at the Net Worth page of this blog.

Life Events. We had a number of financial items we thought might work out over time. We didn't think any of them were a sure thing, but we assumed a few of them would probably work in our favor. None of them did. For one thing, I had over $100,000 worth of (unvested) company stock at one point. I never counted that in our net worth since it wasn't vested, but I assumed it would eventually be worth something material. Unfortunately, my employer is now on the ropes and by the time the stock was vested, it had almost no value. Secondly, my wife and I often talked of moving to a smaller town, settling down to life in the slow lane, and pocketing the housing difference of several hundred thousand dollars. However, as many others have learned, it's not so easy once you have children in school. We will probably stick it out in inner suburbia, which is an expensive place to live. There were several other personal events where it looked like we had the chance to pick up a substantial amount of money, but nothing came through.

Health Care. Five years ago, I really thought that by 2012 there would really be some clarity around the health care situation in the United States. Unfortunately, that did not prove to be the case. I'm not looking for a handout from either my employer or the government, but I need to know the rules of the game when it comes to coverage, pre-existing conditions, portability, and other issues. While health reform laws were enacted, they have proven to be complex and didn't fully address many issues. Additionally, the legislation is being challenged in the courts and there is posturing from both political parties that they want to change everything around. Hence, I have no idea what I am getting into should I drop out of the labor force now.

Risk Aversion. I always tend to stay away from arguments such as: "Is one million enough to retire?" Unless the amount is extremely low (e.g. $20,000) or extremely high (e.g. $50,000,000), I don't feel a yes/no answer is meaningful. While it's true that future spending patterns and investment returns are uncertain, the bigger factor is probably risk.  Within reason, no amount of money is a sure thing.  Things can always go wrong, and each individual situation carries a different risk profile.  Even if two people have the same spending level and the same investment portfolio, they may need different amounts to retire because their life itself carries more risk.  A person in great health who works in a booming industry with many social contacts and extended family close by may be comfortable with more risk because if things go wrong, he or she may feel it will be easy to bounce back and find work again.  Other people do not fit that profile and may need more money to compensate for that risk.  Throughout life, that risk level also goes up and down for a lot of people, and for me, it's gone up a fair amount in the last five years.

Charitable Giving. This one will probably surprise some of you. I certainly don't regret the amount we gave to charity, but my initial plans did not factor in giving this much money away.

Near Miss or Epic Fail?

I don't believe it was an epic fail.  We still have a million dollar net worth, a house that will be paid off in five years, and a pension worth $15,000 a year that I can draw at age 57.  On the other hand, it was not a near miss.  A couple more months of working and saving will not get us there.  So the results are mixed.  It was a good effort, but I fell short by a considerable amount.

I never viewed retirement at age 45 as some sort of pass/fail in life. It was a goal, and I didn't meet it, so now it's time to revise my plans. Truth be told, achieving the goal in five years via my current job and my current savings rate was only Plan A. In the back of my mind, there has always been Plan B, and Plan C, and so forth if things didn't work out.

I will write about my future retirement plans in my next post.

Sunday, February 12, 2012

Budgeting: Part 40: Series All Done!

"All things are bound together. All things connect."

- Chief Seattle

I'm not really sure how I got here, but 40 posts and more than 50,000 words later, I'm finally finished with this budgeting series!  The entire series together ended up being about the same length as a medium sized book.

As I was writing, I felt like most of the articles were usually just based on something I forgot to include in the previous article.  But looking back, I was surprised to find an overall organization to the whole mess.  I've created a summary that seems much better to me than the individual parts.  Truly all things are bound together.  All things connect.

I've decided to make the summary into a static page, which you can find here:

Thanks for reading, and good luck with your budgeting!