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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.