Today I’m going to touch on a topic I’ve never written about before – personal finance… I am writing about this not so much for you, devoted reader, as for my children. My four and twelve year old girls are probably too young for this discussion, but my eighteen year old son, Jonah, is on the verge of needing to know.
When I got married in 2000, one of the best gifts I and my fiancé Rachel gave me was a dinner with my friend Mark Bauer. Mark and I became friends when we were at the University of Colorado – he has always been a reliable partner in my studies. He is ten years older than me, which at the time meant that he was twice my age (I was twenty-eight).
A few months before our wedding, Mark asked if he could have lunch with me and Rachel. Over lunch, Mark explained that many marriages fail over money.
Mark told us:
“A tool that was very useful to me was family budget… At first glance, this sounds simple – you plan your “income” (for your family, this will be your salary: yours and Rachel’s), and then deduct your expenses, and this will be your net profit. If you have money left, then you have savings, and then you can afford to spend money on whatever your heart desires. “
At that moment, I was a little disappointed with Mark’s wisdom. I was months away from completing my CFA degree and that was at the top of my master’s degree in finance. To be honest, the simplicity of his advice offended me somewhat.
Mark read my indifferent expression, but continued:
“The problem with a normal budget is that while it does a good job of capturing ongoing daily expenses like mortgages, cable bill, groceries, etc., it ignores future spending. Take your car, for example. They pay for it, which is great. But five years from now, that car will need to be replaced, and “suddenly” you find that you have a one-time expense of $ 20,000, which shouldn’t be sudden and are actually anything but one-time expenses if you don’t plan to drive. this car for the rest of its life. But the car is just the beginning: you will take vacations, buy furniture, your kids will go to college, and then retirement will come. “
Now this discussion was getting more and more interesting:
“Sit down together and define all your expenses, current and future. Once you have identified your future core expenses, create reserve fund“.
He explained about reserve funds:
“I learned this term from my wife. She worked for United Airlines. The airline is a very cyclical business, but United knew they had to repaint their planes every few years. They set aside a certain amount of money to repaint the plane, in both good and bad times. When it came time to repaint the plane, they had money in a segregated account. It didn’t matter if their business was flourishing or not – the planes were repainted.
Think about reserve fund as about a box that connects the future with the present.
Let’s take your car as an example. If in five years you need to buy a new car for $ 20,000, you can probably get $ 5,000 for your old car, and therefore, you will need to pay $ 15,000 extra. This means you need to save $ 3,000 per year or $ 250 per month. That $ 250 a month should be a line item in your budget, and that $ 250 should go to a separate account. Or you can use one savings account and set aside reserve fund in a spreadsheet, but some banks will allow you to create separate savings accounts. You can get creative and estimate the rate of return, but unless I am dealing with expenses that will come at least five years from now, I ignore the compounding increase. Take approximately correct approachthan completely wrong…
Once you define your future expenses, create your budgetand I guarantee that you will find that your real income is much lower than you thought. The fact that these costs will occur in the future does not make them less real.
What Happens to Many Families That Don’t Plan future expensesis that they are surprised at it and have to borrow money. Borrowing makes everything exponentially more expensive because the cumulative interest goes from being your friend to your enemy – you start paying interest on interest and the rat race begins. “
At this point, I was eager to get home, launch Excel, and start budgeting. While Rachel and I worked out our monthly and future expenseswe had to call her and my parents. We both lived with our parents and did not know how much it all cost. Once we figured out how much we were going to spend on repetitive things like utilities, groceries, car insurance, clothing, and so on, we started thinking about our future spending on big items. All of a sudden, there were a lot of unexpected things on the list: furniture, car insurance, a new TV (big TVs cost a lot of money back then)… and it was all before we had kids.
As I reflect on this nearly two decades later, I see that Mark’s advice on budgeting have turned our spending from meaningless, often impulsive, to deliberate. It was great tool prioritization. Rachel and I deliberately allocated our limited income to what was most important to us, at the expense of what was less important to us. Including all current and possible costs in our monthly spending budget, we got rid of unwanted surprises. Also, when unexpected things happened – a car accident, major home renovations – since the money was saved in reserve fundand they came from another savings (and mental) account, writing a check was much less painful.
Over the years, I realized what Mark saw then: our needs are limitless and will always exceed our income. No matter how much money you make, be it $ 100,000, a million or ten million, without a system your insatiable desires (if not controlled) will always outpace your income. Do you think that if you double or triple your income, you will be happy, you will have enough money? If you don’t keep your spending at the same level, which most of us won’t, then you won’t have enough. As we make more money, we seem to develop a taste for better wines, more luxurious cars, and bigger homes in more expensive areas.
We will always have neighbors and friends who have more fashionable things than we do. If we let them magnetize our inner compass, we are guaranteed a life of poverty, since our income will always lag behind our envy, and we will be doomed to endless rat races. Warren Buffett says that envy is the stupidest of all deadly sins, at least you get some pleasure from other sins.
As you can imagine, in the investment industry where you communicate with multimillionaires and billionaires (whether they be your clients or colleagues), it is very easy to let your inner compass go out of order. Over the years, when our (mostly mine) impulses got worse than us, my wife and I looked into the budget and saw what we would have to give up if we chose a new car or a big house. Is a new home worth wintering without skiing or a Florida vacation?
We realized that material things – houses, cars, etc. – were at the bottom of our priority list… We found that four categories are important to us: health, experience, time and education. It’s not that we don’t have a budget for these categories, it’s just that the budget is larger and much freer.
Let’s start with health. Without health, nothing else matters. A personal trainer may seem like an unnecessary luxury, but without it, all my attempts to train have failed. (I have been constantly training with a trainer for over a year now). Food also fits into this category. We just don’t pay attention to the prices of tomatoes or meat at the grocery store.
Education: Apart from paying for our kids’ education and their extracurricular activities, we place no restrictions on how much money they (and we) spend on books. The same applies to our own education, whether it is paying for seminars or trainers.
Experience: As my children grow, I am acutely aware that we will only have limited time with them. Family holidays, skiing in winter and day trips are very important to us. Whenever I travel for business, I always try to take a family member with me.
And then there is time. Time Is the ultimate asset we have. My thinking on this topic has changed over the past five years. It always bothered me when my investor friends used helpers to schedule calls, or when their helpers answered emails I sent them. I misunderstood that this was their way of telling me that they considered themselves more important than others. However, as I got older, I realized that money buys time… Timewhich I save by not doing low-value tasks (for example, looking through my inbox, answering emails that my assistant can answer, scheduling calls, making an appointment with a doctor or booking flights), I can do research, talk with clients and yes, chat with family and friends.
I am not sure if money can really bring happiness, but I am sure that lack of money is a source of great unhappiness. At first glance, this sentence may not pass the logic test because it lacks linearity, but it is still true. Oxygen doesn’t make you happy, but lack of oxygen will make you unhappy very quickly. It’s the same with money. (Although we all disagree on what “lack” means).
Happiness Are reality, not expectations. When you are in control of your budgetyou control your expectations.
When you consistently spend more money than you earn, after you gobble up your savings (if you ever had any), you run deeper into debt. Therefore, in order to maximize health, education, experience and time and still live within our means, Rachel and I had to give up things that were less important to us – a huge house and brand new cars. My wife drives a 13-year-old car, and I would still be driving the 10-year-old car that I owned for eight years if it hadn’t been stolen. We have lived in the same, not very modern house in a safe but not trendy area for 15 years.
Over the years, I’ve found that I absolutely hate the feeling of helplessness – the feeling that occurs when you have no control over life or circumstances. I know control is an illusion, but I don’t give it up voluntarily.
Living within our budget (and I’m sure thanks to a lot of luck), Rachel and I never had to argue about money (we had a lot of other topics), because we were on the same page since we both created our budget…
I was lucky that Mark was my friend, who made my life richer and easier in just one lunch. I hope that with this article I will do the same for others and my son Jonah, I hope you read this too!
CEO of IMA, is the author of Active Value Investing and The Little Book of Sideways Markets. The books have been translated into eight languages. Forbes magazine called him “the new Benjamin Graham.”
(Translation: Vitaly Merkulov, “Shareholder of the XXI century” – myinvestpro.ru)
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