3 Personal Finance Stories (…and a way to avoid emotional depletion)
In my experience, people that have initial conversations with a financial planner often feel uncomfortable about past mistakes, like regret over a previous investment gone awry, unnecessary big purchases, never getting around to funding a Roth IRA, or just generally feeling like they've lingered too long with an impaired financial setup.
We, as agents who can make seemingly embarrassing mistakes around this deeply intimate topic (i.e. money), often find it hard to open up about this stuff. It leads many people to never seek out a second opinion about their finances and investments in the first place.
It's unfortunate. Because everyone stews over this crap, at least to some degree. We all share money regrets. So essentially, some people muster up all this courage to share theirs, not realizing that they are just like everyone else — and while we can't change the past, we can evolve from harboring some of its accompanying anxiety.
My own finances were severely suboptimized for most of my 20's. I'm 38 now.
For me, the best part of (now) having a robust financial setup actually has little to do with finances.
“You make enough mistakes by mistake, don’t make one on purpose.” Gene Fama, Nobel Laureate in Economics
It's because it enables a mindset that is robust to errors from other parts of life, and accepting of these mistakes elsewhere (where errors are more understandable). If I know I will stub toes, misunderstand directions, and spill milk, must I also waste energy and emotional capacity on having a suboptimal financial setup?
An obvious comparison is tennis.
Elite, beautiful tennis, Roger Federer tennis, still has unforced errors. Great players will inevitably hit it long, short, or wide, sometimes. To win a great tennis match, it's not a matter of "if" unforced errors — but "how few" unforced errors?
Finance is different. Unforced errors aren't necessary.
Effectively managing finances is not rocket science, it's just engineering:
Structural design (e.g. a risk-appropriate portfolio, reasonable life expenses, etc...)
Implementation (e.g. portfolio rebalancing, autopay your bills, etc...)
Proper engineering dramatically reduces unforced errors, and can lift tremendous mental and emotional burdens. If you're like me and have rued stupid financial mistakes, you know this stinging regret. It can make for challenging, sometimes prolonged periods of shame, even if it's small shame or small dollars.
I want to think that stupid mistakes are easy to overcome because they are stupid. But because I've done it, I know that unfortunately, that's the very reason they're hard to stop fretting over. So avoidable. So unforced. And so stupid.
But I've moved on. All it took was a different way of thinking about money.
As a financial planner, I particularly understand the probabilities going forward — and of course, I have a front row seat to the context that so many don't have...everyone I meet has money regrets. There is a potential solidarity that few seem to realize.
Yet while everyone has some past financial blemishes, look how financially successful so many people are! It should be empowering to those who may need to course correct, or should seek out a second opinion. The hard part is being willing to open up, address, and adjust.
In addition to the right engineering, I am clear about my current and future financial decision-making:
I make the best decisions I can with the information available. And I don't stir if I have a bad outcome due to random, unforeseen factors, as long as the initial decision was high quality.
To live mostly unencumbered by financial anxieties, I focus on three things:
Having enough money to cover unwanted, unexpected expenses that pop up
Current assets and liabilities are optimized to the best of my ability (e.g. how we pay off my MBA loans, no late fees on bills, investment strategy, etc...)
Future dollars coming in are similarly effectively deployed, and mostly automated
And the last two items strengthen my ability to not care about the unwanted, unexpected expenses that arise from the first item — to embrace something my dad has repeated to me over-and-over, my whole life, about determining if a roadblock is really a problem.
His dad had repeated it to him:
If you have money, and money can solve it, then it's not a real problem.
And that's an overlooked gift that money provides — financial flexibility to not be emotionally depleted from errors or bad outcomes elsewhere. Don't waste energy stewing over shattered cell phone screens, fender benders, and rug stains. Yes, you could have avoided it. But you didn't. Now pay to fix it and move on. You have earned a margin of error to not let it ruin your day.
You won't find this in finance textbooks or MBA programs:
Not giving a shit because you can afford unforced errors is a first class life-hack.
The mistakes I'm about to share are ones where I've learned a lot about myself, but these are not exhaustive of the mistakes I've made. I also spent years not funding a Roth IRA and not maxing out a 401K. I once bought a Range Rover only to return it months later realizing it "was so stupid" and "wasn't me" to own a Range Rover. I've held too little cash in an emergency fund and had to ask my parents for help. I've traded individual stocks without much concern for tax consequences.
I am like most other people.
Why these three stories?
The first story is just an example of how silly we can be when we want something, and the dark corner of indebtedness that a combination of financial illiteracy and human desire can put us in. And during this first story, I really knew nothing about personal finance.
The last two stories occur since I have been financially literate (i.e. "had my shit together"). They are purchasing mistakes, not quite explicit personal finance errors. I knew what I was getting into, I just poorly weighed the costs and benefits. My analysis wasn't complete.
They are lessons on optionality and joy.
But first, a story of idiocy...
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When I was 23, I financed a flat screen TV from Best Buy costing $1,999, with a 5-year loan term, and made minimal monthly payments.
I really wanted this TV, and the total, financed monthly payments were just low enough to not bother doing the math on the interest I was paying. That's how they get you.
Four years in, recognizing how silly it was, I decided to pay it off entirely. In addition to four years of monthly payments (including interest), the final payment was just slightly higher than the original $1,999 cost.
It's a sharp lesson about opportunity costs, and for one very comical reason.
If I had not bought the fancy TV, and instead invested the money (let's stay in global stocks), I would have returned 245%, or a $4,900 portfolio balance (and that's just on the $1,999, not including the interest payments I would've saved!).
Here's the comical part: if you want to really assess "opportunity cost" — you can't forget that I own the TV. The true opportunity cost is what I could have done with the money MINUS what I can sell the TV for today.
Because if you bought a $300,000 home in cash 15 years ago, you don't just say "Rats! I could have made 245% on that $300,000!" — you need to compare it not to zero, but to how your home purchase worked out (not bad, for most people). That's opportunity cost.
Same goes for anything (things or experiences)…was it meaningful enough to justify what else you could have done?
If I could sell the TV today for 300%+ higher than I bought it in 2007, then maybe it wasn't just a flashy purchase, but actually a decent investment (like a home might have been).
Unfortunately, despite that the last 15 years have been an inflationary environment (where nearly everything costs more), TV's are one of the only things that have decreased in price.
An expensive purchase (especially relative to my earnings at the time) that didn't meaningfully improve my life. I never even watched the TV that much...with unnecessary interest payments, where I avoided addressing the ongoing financing costs b/c the monthly fee was insubstantial, and I never considered the opportunity costs because my brain didn't work that way at the time.
And the actual opportunity cost, looking back today, is, well, quite comical: compared to 2007, TV's 5x as nice are essentially 5x cheaper.
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When I was 32, I bought a $460,000 condo in Los Angeles.
It's reasonable to think that real estate will appreciate over time (even condos, although houses tend to do better). Like any similar investment with a positive expected return, the longer timeline you give it, the higher probability that you can realize your expectation.
But my life was in shambles. I had lived with an ex-girlfriend and we had a messy breakup, and instead of taking some time to figure life out, I moved out and quickly purchased a condo. I wanted the independence that I thought being a homeowner would provide.
But it was awful rationale, an awful decision, and it wrecked me.
Over the next few years, my now-wife Emily and I got engaged and married. Los Angeles never felt like home anyway, and so with none of our immediate family there, and both with siblings and better career opportunities in Austin, Texas, we moved.
At age 35, I tried to sell this condo.
But no one wanted to buy it. So I lowered the price, and still nothing. Months later, now already in Austin, newly wed, in a new city, and stressing over the finances of potentially having two mortgages, one for a home we were trying to buy in Texas, and the other vacant in Los Angeles, seemingly unsellable, with an ongoing mortgage payment and $600 monthly HOA.
Right around this same time, I had the chance to moderate a discussion with Bob Merton, Nobel Laureate and Professor of Finance at MIT. He's famously the "Merton" of the Black-Scholes-Merton Options Pricing Model (which is a complex financial model that you do not need to master).
But I assure you — you already know the idea.
The model tries to value an option contract, which gives an investor the right (but not the obligation) to do something.
Apple stock trades at $140 per share.
What would you pay for the right to be able to buy Apple at $150 at any time for the next 3-months?
If you think it's going to go meaningfully higher than $150 over the next 3-months, this might be interesting. This Apple option contract actually exists and it trades at about $7 today. It's like a cheap lottery ticket...you only have to pay a small amount to play the game (whereas if you want to buy actual Apple stock instead, you need to pay $140).
So you can buy a contract for $7, and if Apple goes past $157 in the next three months before it expires, then you're in the money...pay your $150 for the share, plus the $7 fee. Everything above $157 is pure profit (and it's therefore limitless to the upside). The worst downside is just $7, which is things not working out and you not executing the contract — again, $7 purchases the right to buy Apple at $150, not the obligation.
You can imagine the distribution of possible outcomes is quite skewed ($7 floor on the downside, but limitless upside), plus the impact of time...as the potential to make money, to see the stock go above $157, decays toward the 3-month expiration mark. All these factors are why the model is incredibly complex.
FWIW — the equation looks like this...OOF!
Anyway, so I'm interviewing Bob, and this complex equation is a major thing he's famous for, and one of the attendees asks something about why all this matters.
And Bob chuckles and says:
Because options have value.
The entire equation is just to show that having the option, but not the obligation, to do something, is worth something. That it's not worth zero, and Bob's work is a pricing model to help figure out what that might be.
This is life. You don't need to know the exact equation: just be cautious about reducing optionality. And the Los Angeles condo eroded so much optionality for me at a time when I needed just that, and it impacted Emily and my ability to seamlessly integrate into a new life in Austin. I could have just rented for a bit.
The benefits of home-ownership are long-term in nature, and require time.
What I really should have optimized on was short-term flexibility.
I eventually sold the condo for the same price that I bought it (not including realtor fees). It added undue stress on myself, my move, my marriage, and my new career opportunity. A complete drain.
Decision-makers need to identify what we should be optimizing on. It's easy to overlook.
I'm rather convinced that while we can essentially eliminate personal finance errors, purchasing mistakes never go away. So many different lessons to learn.
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When I was 35, I bought an $11,000 white couch.
When we settled into Austin, we bought an expensive white couch. I should say upfront that while I had (and maybe still have) sticker-shock, I'm not embarrassed by the amount. Emily and I happily spend money on stuff that we will love and use a lot. We aren't financially overextended: we don't have a huge home, we share a Subaru, we avoid the alluring dark pit of seemingly endless monthly subscription services, and we set boring, buzzkill budgets for fun things like gift-giving and personal care.
We do the harder things, and that allows us to spend on stuff we expect will meaningfully improve our happiness. Of course, expectations can differ from reality.
So we justified paying up for the couch. It's the centerpiece of our home, and if we had to describe a perfect evening: it's lounging on a couch eating Indian food and drinking red wine together (err, at least I would say this, and I think/hope Emily would say this).
And I do love our couch. It's beautiful.
But I hate who I am around the couch. I am a monster.
Despite what I envisioned, we don't actually drink red wine nor eat Indian food on it. I didn't realize, before we bought it, that I would become too skittish over spills and stains. When we entertain, I am endlessly nervous.
Why does that person think it's okay to have food near my couch? What the hell kind of place do they think this is?
And so now we have this expensive purchase, because we thought we were optimizing on enjoying being around/in/on this beautiful furniture piece (it's 40 inches deep!), but instead I am a neurotic wreck, and the couch is entirely misused. I'm insufferable.
Wish I had known.
And some day I'm sure we will replace the couch with something that will be, undoubtedly, NOT WHITE, but because it was expensive, it's tough to justify. Sunk costs are seemingly hardest when they're costly.
I hate this beautiful, expensive couch.
Don't buy things that will turn you into something you're not. I'd always thought that meant flashy things like gold watches or big motorboats...that you are chasing something inauthentic to yourself. Emily and I were actually chasing something very reasonable — deep enjoyment of our common space at home — but overlooked that having nice things, and wanting them in really nice conditions, has additional, non-financial costs.
$11,000 is a lot, but it's cost us even more.
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