Thursday, February 6, 2014

Six rules for my financial bliss

Really there's only one rule: make more money than you spend. Much more, if possible.

These rules work for me and are not to be construed as investment advice. They based on three components: basic knowledge of finance, good understanding of economics, and expertise in marketing (in other words, the art of making others spend money – knowing it is like being inoculated against it). Some people might get ideas for their own rules from these, so without guarantees of any kind, here they are:

1. Investment assets should produce income (yes, they could produce a capital gain instead, but I'm not a fan of counting on capital gains as a life strategy); an "asset" that produces a need for income (for example, a house bought with a mortgage) is more correctly defined as a liability. The best investment asset I can acquire is expanding my skill set, and the interwebs have made that almost free. (I'm weary of leverage, even for income-producing assets.)

2. There are many things I'd like to own that I don't really need. Using a total cost of ownership model, including the space and time cost, rather than simply looking at the price, and comparing with alternative uses for money and alternative sources of happiness, I generally stop myself from buying anything but consumables. For example: books, once one of my largest like-driven expenditures, I have all but stopped buying. I rely on libraries for most and have set a rule not to buy more than five books a month, avoiding paper books when possible.*

3. Exceptions to rule 2 are: small luxuries and a monthly "slush fund" of $100 for impulse purchases, with the proviso that they have to be physically small, require no maintenance, and enrich my life in the long term.

4. Proper maintenance and care, coupled with high-quality purchases to begin with, are key to asset longevity. Bespoke suits physically last longer and look stylish much longer than designer suits, so their yearly-amortized cost is much lower. (Is it noticeable that I aced all MBA accounting and finance classes, despite being in a marketing and strategy concentration?) I avoid any assets with planned obsolescence paths if I can and never buy anything for identity reasons. (I do buy some experience products; there's no real defense against those except no-exceptions thrift.)

5. When earnings increase, I feel no obligation to increase spending in fact fight the temptation to do so. (Note that I live a very comfortable life, with no privations; this rule would not apply to someone just muddling through.)

6. Long-term forecasts of economic variables are about as reliable as long-term weather forecasts. I trust estimates of growth and inflation for 2030 about as much as I trust today's rain and temperature forecast for San Francisco on Jan 3, 2030.

Yes, these rules are like the way to lose weight: control what you eat and exercise diligently. There's one extra rule, though, for people who are disappointed by the lack of a magic solution to financial problems:

7. If something sounds too good to be true, it probably is. Money-wise and otherwise.

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* During three separate decluttering events in the last 8 years, the hardest part was getting rid of books: in the first one, I only got rid of outdated textbooks; in the second one I didn't touch the books at all; in the third – radical – one, I went from a little under 2000 books to just below 500, but took weeks doing that, while the selection of around three cubic meters of designer clothing for donation took but a couple of hours. Electronic and library books will spare me further trauma.