Personal Finance Advice That Changed My Life

When i got married in 2000, one of the best gifts given to my bride Rachel and me was lunch with my friend Mark Bauer. Mark and I became friends when we studied at the University of Colorado – he was always my dependable study partner. He is ten years older than me, which at the time of that fateful lunch meant he had double my maturity (I was 28).

A few months before our wedding, Mark asked if he could have lunch with Rachel and me. At lunch, Mark explained that many marriages come to ruin over money issues.

Mark told us:

A tool that has been very helpful for me is a family budget. On the surface it sounds easy – you project your revenue (for your family that would be your combined salaries) and then subtract your expenses, and that gives you your net income. If you have money left over then you have savings, and then you can afford to spend money on whatever your hearts desire.

At that point, I was a bit disappointed in Mark’s wisdom. I was a few months away from completing the Chartered Financial Analyst (CFA) designation, and that was on top of my master’s degree in finance. The simplicity of his advice was frankly a little insulting to me.

Mark read my unimpressed facial expressions, but continued:

The problem with a normal budget is that though it captures well ongoing daily expenses like a mortgage, the cable bill, groceries, etc., it ignores future expenses. Let’s take your car, for example. It’s paid for, which is great. But in five years this car will need to be replaced and “suddenly” you’ll discover that you have a one-time $20,000 expense, which should not be sudden and is actually anything but one-time unless you are planning to drive this car for the rest of your life. But the car is just the beginning – you’ll take vacations, buy furniture, your kids will go to college, and then there’s retirement.

Now this discussion was starting to get more interesting:

Sit down together and identify all of your expenses, current and future. Once you have identified your future major expenses, create a sinking fund for each one of them.

He explained about sinking funds:

Think of “sinking fund” as synchronizing the future to the present.

Let’s take your car as an example. If in five years you’ll need to buy a new car for $20,000, you’ll probably be able to get $5,000 for your present car, and thus you’ll need $15,000. That means you need to save $3,000 a year or $250 a month. This  $250 a month should become a line item in your budget, and the $250 should go into a separate account. Or you can use one savings account and track sinking funds on a spreadsheet, but some banks will allow you to create separate savings accounts. You can get fancy and start assuming rates of return, but unless I am dealing with an expense that is at least five years out, I ignore compounding. Take the vaguely right approach rather than the precisely wrong one.

Once you’ve identified your future expenses, create your budget; and I guarantee that you’ll discover that your true income is much lower than you thought. Just because these expenses are going to happen in the future doesn’t make them less real.

What happens to a lot of families that don’t plan for future expenses is they get surprised by them and are forced to borrow. Borrowing makes everything exponentially more expensive, because compounding interest turns from being your friend to your enemy – you start paying interest on interest and the rat race begins.

I could not wait to go home and fire up Excel and start budgeting. As Rachel and I were guesstimating our monthly and future expenses, we had to make calls to her and my parents. We had both lived with our parents and were oblivious as to how much things cost. Once we figured out how much we’d spend on recurring items like utilities, groceries, car insurance, clothes, etc., we started to think about our future big-item expenses. Suddenly a lot of unexpected things showed up on the list: furniture, car insurance deductibles, a new TV (that was when big TVs cost a lot of money)… and this was all before we had kids.

As I am thinking about this almost two decades later, I see that Mark’s budgeting advice turned our spending from a mindless, often impulsive endeavor into a mindful one. It was a great prioritizing tool. Rachel and I intentionally allocated our limited income to the things that mattered to us the most, at the expense of things that mattered to us less. By bringing all current and eventual expenses into our monthly spending budget, we got rid of unwelcome surprises. Also, when unexpected things happened – a car accident, a significant repair to the house – since money had been saved in the “emergencies” sinking fund and it came out of a different savings (and mental) account, writing a check was a lot less painful.

I realized over the years what Mark saw then: That our wants are unlimited and will always exceed our income. No matter how much money you make, without a system your insatiable wants (if not controlled) will always outpace your income.

You think if you double or triple your income you’ll be happy, you’ll have enough? Unless you keep your expenses the same, which most us of will not do, then you won’t have enough. As we make more money, we seem to develop a taste for finer wines, more luxurious cars, and larger houses in pricier neighborhoods.

“Wealth consists not in having great possessions,
but in having few wants.”
Epictetus

We’ll always have neighbors and friends who have fancier things than we do. If we allow our internal compass to be magnetized by them, we’re guaranteed a life of misery, as our income will always lag behind our envy and we’ll be destined for the never-ending rat race. Warren Buffett says that envy is the stupidest of all the deadly sins – at least you get some pleasure from the other ones.

As you can imagine, in the investing industry, where you rub shoulders with multi-multi-millionaires and billionaires (be it your clients or colleagues), it is very easy to let your internal compass get out of whack. Over the years, when our (mainly my) impulses were getting the worst of us, my wife and I would go to the budget and see what we’d have to give up if we were to opt for a new car or a bigger house. Was the new house worth a winter without skiing or a Florida vacation?

We realized that material things – houses and cars, etc. – were on the lower end of our priority list. We found that four categories were important to us: health, experiences, 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 looser.

Let’s start with health: Without health, nothing else matters. A personal trainer may look like an unnecessary luxury, but without him every attempt I have made to work out has failed. Food fits into this category as well. We simply don’t pay attention to the price of tomatoes or meat at the grocery store.

Education: On top of paying for the education of our kids and their after-school activities, we put no limits on how much money they (and we) spend on books. The same applies to our own education, be it for seminars or coaches.

Experiences: As my kids are growing up, I have become acutely aware that we’ll have only a limited time with them. Family vacations, skiing in the 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: My thinking on this topic has changed over the years. I was always bothered when my investment friends used assistants to schedule calls with me or their assistants replied to emails I sent them. I incorrectly perceived that it was their way of telling me that they were more important than others. However, I realized as I got older that instead of time buying money, money should be buying time.

The time I save by not doing low-value tasks (e.g., going through my inbox, replying to emails that my assistant can respond to, scheduling calls, making doctor’s appointments, or booking airline tickets), I can spend doing research, talking to clients, and yes, hanging out with family and friends.

I realize that this may sound a bit pretentious, so here is another example. I used to spend an hour on the phone, calling some credit card company to dispute an erroneous $6 charge. Today, I would not do that.

Health, education, experiences and time are categories of spending that are important to my family, and as a consequence, our budget for them is very loose. But just because they are important to us does not mean that they should be important to you as well. Not at all. We are all different. We have different values, different financial situations, and are at different stages of our lives. My categories were examples of my family’s conscious (key word) choices.

Here is another example.

I have a friend. He is divorced and has a 21-year-old daughter he is very close with. He is a personal trainer and chooses to work 20 hours a week. He lives in an apartment that is slightly bigger than his car, which he shares with a roommate (his daughter lives on her own). He doesn’t eat out much and generally leads a very modest day-to-day lifestyle. But he loves traveling. A couple times a month he takes a three-day trip with his daughter to a new place in the US. They stay in cheap, $60 motels. I get the feeling that spending time with his daughter is the main reason why he loves to travel. He also enjoys the experience of driving and, despite his modest income, leases a new car every two years.

I doubt that he intentionally sat down and wrote out a budget. But he made a budget through intentional prioritization of his spending – elevating things he values and enjoys like travel and driving – and deemphasizing things that are less important to him, like food and size of his dwelling. At this point in his life, he chooses to work just enough to cover his very limited needs. And here is the best part – he is incredibly happy. Our personal budget should follow our values. We need to figure out what matters to us (our values) and calibrate and prioritize our spending accordingly. After all, money buys the most when it buys things we actually value.

I am not sure if money can actually bring happiness, but I am sure that the lack of money is a source of a tremendous amount of unhappiness. On the surface, this sentence may fail a test of logic as it lacks linearity, but it’s true just the same. Oxygen doesn’t make you happy, but a lack of oxygen will make you unhappy very quickly. So it is with money. Although we’ll all disagree on what a lack means.

Just as a reminder: happiness = reality minus (properly calibrated) expectations. When you control your budget, you control your expectations.

When you constantly spend more money than you earn, after you chew through your savings (if you ever had any), you’re getting deeper into debt. Therefore, to maximize health, education, experiences, 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.

By living within our budget (and, I am sure, thanks to plenty of good luck), Rachel and I have never had to argue about money (we had plenty of other topics), because we were on the same page, since we both created that budget.

I was lucky to have Mark as a friend who, with just one lunch, made my life richer and easier. I hope that with this essay I’ll do the same for others – and Jonah, Hannah, and Mia Sarah, I hope you’re reading this!