Grieving statue

How Grief Affects Your Spending Decisions

After our recent personal tragedy, I have been experiencing feelings I thought were a thing of the past for me: Strong and sudden impulses to spend money mindlessly, and without any particular rhyme or reason to it. In keeping with our strategy for coping with our grief, I shared these concerns with my better half, and it after airing them out, I discovered that this is a typical reaction in times like these.

My partner, who has a consumer-facing role in banking, could tell me, as I shared my thoughts and proposed that we buy a new car, that she had many encounters with people in dire financial straits who confided that their troubles started in similar situations. Whether it stemmed from unfathomable grief such as the loss of a close loved one, or seemingly less severe adverse events like not doing well enough in some aspect of life, people had pointed to events like these as the catalysts that put their finances in a tailspin. Why is it that I just proposed to my partner that we hire someone to remodel our entire house and that people tend to make poor money decisions in hard times?

Control and Rewards

There is no one definite and correct answer to the question posed above but based on my own experiences I have, through much introspection, some reflections on the matter. At the most base level, I believe we humans make poor decisions, especially as it relates to money and spending, in hard times to gain perceived control. When we feel down, it is more often than not the result of events outside our control. There was nothing I could do to affect the events that lead to my daughter being given a mere week to live. Similarly, there is little one can do to regain their job after a firing, or to restore the trust in someone who has committed a profound betrayal.

Struck by unexpected misfortune outside of our control, a whole range negative emotions take hold. Left without power to alter the adversarial outcome, we feel defenceless and paralysed at best, or worse yet, disenfranchised and impotent. Painfully aware that there are no quick fixes for grief, sorrow or loss, and that overcoming these feelings is a long and windy process, we look for quick fixes. We become desperate for something we can control, an outlet where we can force immediate changes simply by saying, doing, or buying.

Further compounding this urge to reclaim a modicum of control over our situation by spending money, most of us raised in Western societies associate spending money with rewards. In our childhood, we finally get to buy that new bike after dutifully saving our hard earned allowances for months or even years. As we transition into adulthood, this is further reinforced as we work hard for bonuses, and the opportunity to spend more money. The act of spending money has become a societal reward, and because doing good leads to both feeling good and buying things, many of us subsequently conflate buying stuff with feeling good.

Is it any wonder then, as we find ourselves at our lowest point, that we turn to mindless and irrational spending in an attempt to make ourselves feel better, and to reclaim control over our lives? In my sorrow, I have gained not just an understanding of my personal psychological shortcomings, but humility and empathy for those who find themselves in financial difficulties after going through personal tragedies. While I previously would be prone to carelessly brushing such circumstances off as a lack of discipline, I now realise that were it not for my incredible spouse; I would find myself in the same situation before long. I did, of course, follow up that realisation with a suggestion that we buy a brand new house, because, I argued, surely we deserved it after being forced to go through something like this.

How to Control Your Spending While Mourning

We all grieve in different ways, and not everyone will be inclined to mindless spending to dull their grief. For those of us with that particular inclination, my most important advice would be to work on alleviating these penchants before they come to the fore. It is of particular importance to dissolve the mental connection made between spending money and feelings of joy and happiness. By abandoning the hedonic treadmill, we can mitigate the urge to spend money when we life lays us low. I believe that the changes in my mindset which I have worked to implement over the past few years are an important contributing factor to why I have been able to avoid going on an all out irrational spending spree this past couple of weeks.

Another way I have been able to kerb detrimental shopping in these difficult times is by looking at the cause of why I want to spend money and try to achieve relief through other means. Realising that I wanted to spend money in an attempt to reassert some control over my destiny, I quickly decided that I could exert control by reallocating funds in a way beneficial to myself and my family, instead of buying meaningless stuff. In other words, instead of buying crap, I took the leap and made some investments I had been eyeing up for a while.

Grieving person
Don’t let grief and sorrow dictate your spending decisions. Photo by eflon.

In the name of transparency, I would be remiss if I didn’t mention that I did, in fact, give in to my impulses at some points in the last few weeks. As there is nothing quite like reading fantasy for escaping the real world, I loaded up my Kindle with fantasy books that featured on my to-read list. And one day, this one especially full of self-pity, I splurged and bought a new guitar. But wait, don’t condemn me yet! Instead of going all gung-ho and acquiring the exclusive and expensive Gibson model I had my eyes on, I made the sensible choice and bought the far cheaper Epiphone equivalent. Once I have reached my goals for guitar practice, perhaps I will allow myself to upgrade.

My point here is that if there is a time to afford yourself certain allowances outside of what you usually would contemplate, that time is when you are down and beaten. Straying from the norm and giving yourself some leeway can help ease some of the constant pressure of grief, if only for a moment. And, as long as you do it a constructive manner, I am convinced that it will be of benefit in the long run.

What’s Next for Abovare?

In my previous post, I mentioned that I was unsure of what the future of Abovare holds. While our wounds are still fresh, I believe that my partner and I have progressed a little in our grieving process since then. We are taking some time together, without the pressure of tasks and to-do-lists, to allow ourselves to feel the loss of our girl. And, in time, we hope that we will rediscover joy and happiness of normalcy and everyday life.

Until then, I will not be making any promises about the activity level here at Abovare. I have, however, found some relief in reimmersing myself with the subject of personal finance in the last few days. And, as long as it is something I am doing because I want to, you may find me sharing some of the most interesting articles I have read on Twitter, participating in the Rockstar Finance Forums, or even publishing new posts here.

Lastly, I want to thank every one of you who reached out to me after my last post, whether it was in the comments of the post, through email, twitter or elsewhere. I know it’s hard to find the words to share with someone suffering a personal tragedy, but everytime someone reaches out, it feels as if they take a small of my sorrow and makes it their own. And that helps. All the kindness I have experience from friends and strangers alike has made me more hopeful than ever, even as I am going through the most difficult period of my life. And I intend to pay it forward, every chance I get and let that be my daughter’s legacy.

Header photo by Marcela.

Mother and child hands

Grief and The Unimportance of Money

A week ago, my partner and I were forced to face the shattering news that nobody ever wants to hear. Our newborn daughter, our first child, our baby girl, who had arrived a month early, would not be going home with us when we eventually left the hospital. A day later, the hospital staff disconnected her from the respirator that helped keep her alive, and a few hours after that, she took her last breaths while resting in her mother and father’s arms.

Devastated by grief, we travelled home from the hospital with the realisation that no matter what the future might bring, our world will never be the same. The weight of missing our firstborn, our baby girl who we’ve been waiting for, planning our lives around, can and will never go away. All we can do is to try to learn and become strong enough to live with the sorrow.

The wound is still fresh, and it is difficult to extract financial wisdom from experiences like these, especially while you are still processing. I find myself at an inflexion point where I feel it necessary to examine every part of my life, leave no stone unturned, to see what matters and what does not as I desperately search for meaning in a world which currently feels devoid of any such thing. Is there a point to me throwing my words about personal finances into the vast void of the internet, or is as meaningless as life without my little girl currently appears?

I don’t have any answers at all at this point, except for this: I would have traded every nickel and dime I ever had and will have, to give my daughter a fair chance at life. All the money I have accumulated could do nothing for her, and now it does nothing for me. No matter what your money situation looks like at the moment, take a look at your life, the things that truly matter, and count yourself lucky for every person you have in your life that truly matters.

Scrabble pieces spelling "failure"

Understanding Why We Fail Financially

A couple of months back I reiterated my goal for the year of publishing an article per week here at Abovare. Today, the merciless calendar shows us that the date is June 3rd, while the most recent article here shows May 8th as its publication date. Where did the month of May go, and why did I fail so spectacularly so shortly after restating my commitment to this goal, and how does this tie in with failure when it comes to building wealth?

The Secret Ingredient of Success

Every single failure is, of course, unique, and has its own set of circumstances and explanations behind why it came crashing down. However, I a firm believer that in the vast majority of cases where we fail to reach the goals we set for ourselves, the number one reason is the lack of one key ingredient behind almost every significant success: Persistence.

The importance of persistence is perfectly illustrated by this old quote, by former American President Calvin Coolidge, recently featured in the movie The Founder, which details the early days of the McDonald’s fast food empire:

Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.

As a society, we so often misattribute success to “Eureka!” moments and motivation. But if you listen to anyone who has succeeded at something talk about how they got there, you will rarely hear them talk about how it was that one great idea that pulled them over the line. Nor will they be telling you how supremely motivated they were throughout the endeavour, to the extent that working on their thing felt like playtime. No, good ideas are a dime a dozen, and motivation is what will get you started. But what keeps the tough going when the going gets tough is persistence, and that is a matter of fact whether we are discussing writing with a particular frequency, or building wealth.

At this point, it is easy to step back, throw your hands in the air and say: “That’s it! Persistence is a character trait which eludes me, so I can’t build wealth or achieve anything else of note.” But before you throw in the towel, let me fill in some additional tidbits of information regarding my month of May, and my failures. Remember how I also aimed to do a fair bit of running this year? I am crushing that goal, currently on track to do double the mileage I targeted for 2017. And more importantly, despite spending hardly any time thinking about money, I am still on track to meet my financial goals for the year.

If persistence, which is, at least to some degree, a character trait, is the most important ingredient for realising your ambitions, how can it be that one person can reach some of his goals, and fail miserably at other targets? Can people be persistent in some matters, while susceptible to quitting at the first hint of friction in others? Probably, but the key is how we spend those precious days or weeks at the beginning, where motivation is plentiful. While planning on everything we aim to achieve, we also set ourselves up for either success or failure. And if persistence is key, we need to emulate it somehow.

How To Fake Persistence

As illustrated by my failings featured in the opening anecdote, I am not a particularly persistent person, if we measure character features. That fact hasn’t stopped me from completing quite a few feats throughout the years that, from the outside, seem like they could only be pulled off through perseverance and grit. The secret? Habits, and systems devised to form them.

Tiger facepalms
Even the coolest cat experiences the odd facepalm-moment on account of their failures. Photo by Tambako.

Motivation, as mentioned earlier in the post, will only get you so far. Once that initial burst of excitement fades, it is persistence which will pull you through, but you can fake persistence by making it as easy as possible to complete whatever it is you aim to achieve. If we once again consider my own, featured mistake, it is easy to see where I went wrong: Eager to read new and inspiring content from other sources, and write and publish new content myself, I made no clear, set schedule for when I should be writing the content. Given the fact that I am a person of no particular endurance as it pertains to completing lofty goals, my productivity decreased as soon as my burst of motivation waned. A month later, here we are, and I have to pull myself up by bootstraps in a what feels like a grand fashion to write another article and get back on track.

Contrast this to the area where I did succeed, running, and what I did differently: In addition to setting concrete goals for what I wanted to achieve with my running, I also created specific plans for how to do it. My training plan detailed when I should be running, for how long, at and which intensity. I alleviated myself of the burden of having to consciously contemplate when, how and what I should by doing to reach my goals, and as a result significantly increased my chances of reaching the goal. Before long, the runs in my plan became a habit, something I looked forward to doing. And then the real magic happened because the progression from following my original plan motivated me to push further and harder, and I was able to build on the established habits to throw in additional sessions to reach my goals sooner.

Create Your Financial Plan Now!

Given that you are reading this right now, it is reasonable to assume that you are motivated, to some degree, to make changes in your financial life. You have likely already thought about what you want to achieve, and perhaps some of the steps you can take to get there. But don’t stop there! I’m not saying that everyone is as devoid of persistence as I am, but why take the chance when it concerns something as important as your finances, your future, and your freedom?

If you haven’t already done it, sit down and get to work on creating a concrete and actionable plan for how you are going to achieve your financial goals. Detail what you are going to do, when you need to do it, to make sure that you save yourself from having to figure that out each time.

How much money do you have available to spend on buying fidget spinners? These are points you need to cover in your plan, and if you are out of funds in the relevant category, then no spinner until you refill that lot. How much money should you be saving each month? So many people make the mistake of thinking that they will just save whatever’s left at the end of the month, meaning that every purchase decision they make has to be weighed up against saving. It requires ridiculous mental strength and restraint to be sensible every single time you’re forced with a decision between “fun and awesome” and “boring and safe.” That’s why you need to make a plan and decide right now that you should be saving $x every single month. Make a non-negotiable commitment to yourself, so that you don’t have to rely on your sound judgement.

If you are unsure where you should start when making your plan, I covered the basics of how I set myself up for financial progress in this post titled How I Learned to Stop Worrying and Love Saving Money, and it is a good place to start. After you’ve finished that, leave a comment if you have any questions or need assistance. I will welcome the distraction from sitting down and figuring out my plan for how I will be reaching my goals for Abovare from here on and out.

Title photo by airpix.

Football team in a huddle

Five Lessons To Learn From Athletes Going Broke

For most people, the earnings of professional athletes at the top of the game in the most popular sports are ridiculous and without meaning. And that is if you break them down into monthly or even weekly sums. Cristiano Ronaldo, the best-paid footballer in the world in 2016, made $82 cool million last year. That’s just shy of $7 million per month, $1,6 million per week, $225,000 per day. Or, put another way, that is $2.6 every single second of every hour of every day, the entire year.

Of course, these kind of numbers are outliers, and not the norm, even at the highest levels. Still, according to The Independent, the average salary for the around 400 players plying their trade at the highest domestic level of English football, The Premier League, was around £30,000 per week back in 2013. That equals about £1.5 million annually, which is around $2.0 million, and the numbers are likely to have increased significantly since those days. The 2016-17 average salary in the NBA is $4.6 million, while the average MLB salary is estimated to be $4.3 million. NFL players, on the other hand, only earn on average $1.9 million yearly.

Or, put another way, professional athletes at the highest level tend to make more money than ordinary people do in a decade, or even a lifetime. However, the truth is that these same athletes go broke shortly after retiring. 60% of Premier League footballers declare bankruptcy  within five years of retiring, with the same estimate circling for NBA players and even worse numbers for NFL players. How is it possible to go bust so quickly after earning these kinds of figures, and what can we learn from their mistakes? Let us take a look at some mistakes our high-earning heroes would do well to avoid, in order to stay clear of dark and troubled financial waters.

1. Don’t Try To Keep Up With The Kobes

Being a professional athlete at the highest level in the most competitive sports means there is a good chance of you being more competitive than the average person. Unfortunately, for many, this often translates to life off the court as well, where they will try to keep up with the appearances of those whose compensation is an order of magnitude higher. While Kobe Bryant, Cristiano Ronaldo and the other stars at the very top of their game can afford to buy a $50 million home and a $5 million car, the person that is pulling $5 million per year can’t. Leading luxurious lifestyles can drain the most well-funded bank account.

Kobe Bryant smiling
Kobe is smiling because he can afford it. That doesn’t mean you can!

“Comparison is the thief of all joy” goes the saying, and this doesn’t just apply to athletes. Stop looking at your neighbour to determine where you should be spending your hard earned money. You can only achieve financial security by spending within your means, and getting there involves making a personal and informed decision about what matters in your life. And that’s before we even consider the fact that your neighbour is probably swimming in debt, barely staying afloat, to finance the big house, those brand new cars and all those nights out. Never let anyone else’s appearances be the basis for your financial decisions.

2. Don’t Abandon Control

Being an athlete at the highest level often means extreme focus and dedication to your trade. Some athletes take this focus one step too far, outsourcing every part of their financial life to others. It’s not uncommon to hear stories from athletes in their late twenties who have never paid a bill or even checked their account balance.

While a narrow-minded focus can be beneficial, you need to show some degree of involvement in your personal finances. If you believe this advice doesn’t apply to the regular guy or girl, think again. Far too many people are happy to let their spouse do the whole money thing, and stay completely out of it themselves. Your money is your future, your freedom and your safety, and while soliciting advice is OK, abandoning all control of your finances is not.

3. Don’t Take Advice From The Wrong People

A bad advice-stand.
Be advised that not all advice is good advice.

The dumb jock is a typical stereotype applied to athletes, and their money management skills, or lack thereof, are often used to perpetuate it. A more nuanced story is that most athletes, especially in football (soccer), are brought into the game and start making money at an early stage. At this point, it is easy to rely on the advice of people who haven’t necessarily been properly vetted. Far too many athletes have ended up losing their money by taking malicious advice from people looking to enrich themselves, or people with good intentions dishing out poor advice.

Deciding on whose advice to act on and whose to ignore is among the most important decisions one will make with regards to their finances. While there are no guarantees, the first step to differentiating between good and bad advice is to educate yourself. The more you know, the more critical you can be when assessing potential advisors. References and introductions from real life persons that you know and trust are additional ways to tilt the odds in your favour.

4. Don’t Fail To Plan Ahead

Athletes’ careers are short, and in most sports, an athlete will reach the end of their career in their mid to late thirties. And that’s if they don’t suffer career-ending injuries, the yips or similar threats that can cut an athlete’s already short career. Failing to plan for what comes after is a surefire way to financial ruin because once the deposits stop landing in your account, the funds will be depleted before you know it. Even a healthy $2 million savings account will only last you four years if you’re spending $500,000 annually, which is not uncommon among the rich and famous.

If you think about it though, none of us has any guarantees. Your employer could go bankrupt tomorrow, and you’d be without a job and a regular income. Or you could be faced with unexpected medical expenses. In these situations, just like the athlete when his career ends, it is an awkward position to find yourself in unless you have planned ahead. But to build wealth is to create freedom for yourself, and by saving and investing in a way that puts your money to work, you will be far better equipped to handle life’s curveballs.

5. Don’t Be Stupid

It is the sad truth that in addition to poor spending habits, lack of knowledge, poor advice and planning, some people just tend to be stupid with money. That goes for athletes, but there are enough examples out there of ordinary people making extraordinary stupid money decisions. Advice under this headline is of the sort that everyone knows, but some just won’t heed because, well, they prefer to act stupid.

Don’t gamble and don’t spend money you don’t have (credit) to finance consumption. If someone offers you a quick and guaranteed return, grab your wallet and run, and generally just try to stay away from investments you don’t understand. If you only follow this advice, you are unlikely to slip further than you can comfortably recover from with a bit of grit and hustle.

And when you inevitably end up doing something stupid, because we all do, far more often than we will admit, do not let it define you. Pick up your tools, start working at correcting your mistakes and live life on your own terms.

Coins of different currencies

Collecting Small Wins for Big Financial Gains

Talking about giving up your daily latte, and pocketing the money instead as a road to financial success has become a bit of a cliché in the literature of personal finance, to the point that it is easy to make fun of all the people parroting the same advice. Nevermind that the average American spend just shy of $100 per month on coffee, and cutting that one expense could grow to more than to $16,000 in 10 years if you invested the money in the market instead. Those thinking about the specifics when it comes to the “Latte Factor” are missing the point because the actual value comes from learning to collect small wins.

Slow and Steady Doesn’t Crash and Burn

There comes the point in every person’s financial awakening where one will throb with restlessness, fervently trying to uncover the easiest way to make a lot of money as quick as possible. Most of us have it in us that once we start working on something, we want to see immediate results. It is human nature, and this impatience is at the root of much good.

When it comes to your money, however, impatience of this kind is not a friend. When someone joins a Ponzi scheme after hearing all the potential upsides, or invest loads of money in a penny stock, it is because they let their impatience take the wheel. And when you let your impatience control your finances, you might just find yourself just ruined by currency speculation, or just having lost after putting it all on red, in hopes of getting a quick and big win.

No, when it comes to building wealth, slow and steady is the name of the game. It might not win you the race, but you will be minimising the chance that you crash and burn. Financial success is all about extracting the best possible returns with the least amount of risk, and it takes time and patience to identify the risk associated with financial moves, not to mention familiarising yourself with your personal tolerance for risk.

Small and Sustainable Improvements

It is a symptom of a performance-centric western culture that we tend to focus too much on the desired end-state, rather than the process that we underestimate the difficulty of making drastic changes. Many websites writing about personal finance do it from the aspect of building enough wealth to retire, which, while doable, is a massive undertaking. I am conscious about this here at Abovare, and instead of talking about reaching Financial Independence and Retire Early (which amounts to the highly memorable acronym FIRE) I try to focus on building wealth to increase your freedom to live life on your terms.

But wait! It seems unreasonable to exonerate myself when the topic of the very first article published here at Abovare was to start your financial awakening with defining your desired end state. While I still believe it is important to be clear about why you want to do something, and what success looks like, I am now here to tell you that it’s OK not to do it all at once. Building significant wealth, especially of the size that allows you freedom to choose how and where you want to live your life, takes time, and you don’t have to do it all at once.

Snail ornament
Slow and steady might not win the race, but it will get you where you want to be. Photo by Bruce Guenter.

In fact, I would argue that attempting to do it all at once is a surefire way to assure that your motivation will flare out before long. And once that happens, it won’t be long until you find yourself living the same way you did before starting your project of change. A better way of approaching such a massive task is to focus on small, achievable and sustainable changes. The type of changes you can pull off without having to make radical alterations to your lifestyle in the short term. The sort of changes like, say, skipping your daily latte, that are entirely doable and leave you with $16,000 invested a decade from now.

Many Small Pieces of a Big Pie

The beauty of minor changes is that, possibly after some initial discomfort, they barely register. The magic of this is that, after a period of settlement, you are free to identify the next change you want to make. Perhaps that is cutting your cable which cost you $80 per month, possibly leaving you with another $13,500 in your investment account after those ten years. And then, instead of watching TV, you start cooking your food at home, saving another $200 per month. That can result in an additional $35,000 invested after ten years. By making some small, but lasting changes to your life, you were able to rack up $65,000 in your investment account.

For some, that will be enough. Others again want to continue adapting their life, step by step, until they lead a lifestyle that aligns with their financial goals. The point here is not to discuss what is or should be enough, but rather, to illustrate that focusing on small wins can yield significant financial gains over time. And, just as important, to remind you that it is OK to take it one step at a time. Even if your savings rate is not at a point that will let you retire anytime soon, that is fine. The important thing is that you are moving in the right direction.

Big arrows pointing up

Revisiting Our Goals for 2017

Goals serve two primary functions: They act as maps, saying something about where we want to end up at a particular point in time. And, more importantly, they give us the required information to create our itineraries and evaluate our progress compared to the plan as we go along.

While setting objectively good goals is important, creating goals only to see if you reached them at the specified time is akin to travelling blindfolded. Sure, it is possible to end up where you want to go, but it is much harder than it would if you just removed the blindfold. And when it comes to our personal goals, we rid ourselves of the blindfold by regularly measuring how we are progressing compared to the plan.

As we are heading into the Easter weekend, I find it is a perfect time to take advantage of the peace and quiet that usually accompanies the holidays to reflect on how I am doing so far concerning my goals for the year. It is barely a couple of weeks since we closed the door on the first quarter of the year, and I find evaluating your progress quarterly a fine way of balancing the lackadaisical forgetfulness of my personal goals even existing against the compulsive thinking about them far too often.

In the post Better Goals for A Better Year I outlined my personal goals for 2017, and I will go through them one by one, and share my thoughts on how I have been progressing through the first quarter of the year.

Personal

Read at least 20 books from cover to cover: I barely read at all through January and February, but thankfully I was able to get back into the habit in March. According to Goodreads I am more or less on track to meet my goal after completing five books so far.

Write at least 50 posts for Abovare: I published ten new articles in the first quarter of 2017, putting me on track to publish only 40 posts throughout the year. Here, I am quite clearly lagging behind if I still aim to reach my goal. Given that I want to spend more time marketing and promoting the site over the summer, as well as exploring other ideas for the site in addition to just content production, I need to act. I will be using the next couple of months to build a reserve of finished, but not published posts. Doing this will allow me to spend time elsewhere later on, but still publish new posts according to my set schedule of about once every week.

Practice the guitar four days of the week: I failed. Miserably. Not much more to say about this one, other than that I have had to come to terms with the fact that I just haven’t been willing to prioritise putting the required work in to become a better guitarist. I consider this goal more or less on hold at the moment, and I will at some point reevaluate whether I truly want to pursue this further, or instead just want to pick up the guitar whenever I feel like it.

Health and Fitness

Complete at least 120 workout-sessions: Throughout the first three months of 2017 I completed no less than 37 training sessions, putting me on track for nearly 150 sessions in 2017, and well ahead of schedule. The vast majority of these sessions were running, and I have been thoroughly enjoying measuring the progress I have been making and feeling my capacity increase from week to week. Unfortunately, I have not been able to do as many strength sessions as I wanted, and with the cross country-skiing season coming to an end, I can only admit that it was a paltry season for me this time around.

Run at least 1,000 kilometres: Strava tells me I am no less than 137 kilometres ahead of pace already, so barring any unforeseen events, I am confident of reaching this goal.

Blue skies and ground with snow
Running during winter, even in nature and on trails, is easy in conditions like these.

10K and Half-Marathon Race Goals: I am hoping to complete a 10K in less than 40 minutes, and a half-marathon in less than 1 hour and 40 minutes. Currently, I am pretty certain that I will be able to reach the latter goal, whereas the former will require some more specific pace-focused training.

Finances

Increase year-over-year net worth growth with 50%: This goal is a bit of a dark spot, because, as I’ve mentioned several times before, our family is extending come summer, and I am not entirely certain how that will affect my financial situation. Overall, I would consider myself well on track to reach the goal after the first quarter of the year, but I suppose I will only know towards the end of the third quarter how I am really doing, and what the effect of having a child has on my finances.

Invest 10% of my take-home pay in the stock market: Because of the family expansion taking place this summer, I have been hoarding up on cash with reckless abandon, investing the bare minimum every month. Whether or not I can realise this goal very much depends on the unknowns listed in the above point, but as it stands right now, I am planning to invest significant portions of my cash reserves towards the end of the year. Does that count as being on track?

Establish a concrete plan for building a new source of income: This goal was set from a long-term point of view, and I am grateful to myself for that. I keep working away at Abovare, without having any concrete plans on monetizing the site through ads or otherwise at the moment, but towards the end of the year, I should be able to formulate a coherent plan for turning using it as a springboard for a new income stream.

Those were my goals and a status report on how I’ve progressed throughout the first three months of the year. All in all, I am giving myself a job pretty well done so far. I have been enjoying the start of the year, and if I can continue the year in the same trajectory with regards to goals, 2017 should end up being a good year. And I have a feeling that the birth of our firstborn child will add to that as well!

How have you been doing so far in 2017? Are you meeting your goals for the most part, or have you identified that you are way off track and need to take corrective action? Be sure to join the discussion by leaving a comment below.

Title photo by Qubed Steak.

Decorative illustration of diminishing returns

Diminishing Returns in Personal Finance

Some people are never able to satisfy their need for more money and will sacrifice everything else as they continuously increase the speed of the hedonic treadmill on which they spend their days. If we are to avoid this trap, it is important to ask ourselves what is enough. But, can we ever really get enough? Of course, we can. But, to get there, we need to liberate ourselves from the shackles of consumption, and the mindset that happiness is a function of how much money you spend.

Learning From Those Who Came Before Us

You don’t have to take my word for it, however. Instead, let us look at what those who already allocated the precious little time we get on this planet, and learn from their professed mistakes. Palliative nurse Bronnie Ware chronicled the most common regrets of dying people and recounted the top five regrets in this article by The Guardian. Do you think not working enough appears on the list?

It doesn’t. In fact, the second most common regret among the dying people Ware encountered, was “I wish I hadn’t worked so hard.” Every single male patient Ware met, that was close to death, had this regret. Here’s what she had to say regarding that particular regret:

This came from every male patient that I nursed. They missed their children’s youth and their partner’s companionship. Women also spoke of this regret, but as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence.

In fact, we can interpret all five most common regrets as people wishing they had been more conscious about what truly impacted their lives in a positive direction, and less time living up to the expectations of a consumer-centric society. I previously shared some thoughts on why more money in exchange for less time is a losing proposition for me. Although the inflexion point may differ from person to person, I believe this is phenomenon holds true for everyone, and that we can use a concept from economic theory to explain it.

The Law of Diminishing Returns

A fundamental concept in economic theory, the law of diminishing returns, relates to production processes and states that at some point the marginal increase in output will go down if we keep adding more of one production factor while maintaining all others constant. In other words, let’s say you produce small trinkets and sell them on Etsy for a living. Put simply, your one and only factor of production are the hours of labour you put in. Starting out, you improve your precision and efficiency as you put in more hours, and you can produce more and more trinkets per hour you work. Your marginal output is increasing.

Poorly drawn chart illustrating decreasing marginal output.
Marginal output, represented on the Y-axis, decreases as you apply more of a single production factor, here labour, represented on the X-axis, while keeping all others constant.

Eventually, you reach your maximum efficiency, and you are not able to improve the effectiveness with which you produce your trinkets any further. Conversely, you instead find that by adding more working hours, you produce fewer gadgets per extra hour worked because you become tired, and make more frequent mistakes. You may want to object and say that you can circumvent the law of diminishing returns by adding another pair of hands to your operation, and scale it up while at the same time avoiding the problems of fatigue. And, sure, you could, but how much space do you have? At some point, the “factory space” in the back of your garage will get cramped, and your subordinates will get in the way of each other, and marginal output will decrease. The law of diminishing returns will impose itself on your operation, sooner or later.

Does The Law of Diminishing Returns Apply to Personal Finances?

It may seem arbitrary to pick a concept from economics and apply it to personal finance. However, there is research indicating what looks like the law of diminishing returns imposing itself in personal finance. Before presenting what constitutes evidence in support, let us investigate the logical argument to see if it even makes sense to ask the question.

Consider our lives an operation, with the objective of producing a particular output. It is not up to me to tell you what your output should be because every person has different goals and objectives. For some, it may be happiness or contentedness, while others target wisdom or enlightenment. One of the very few wrong answers to what your output should be is the one that so many of us spend our lives chasing: Money. Coin only has value as long as it helps us achieve what we pursue. Or, put another way, if our lives are a factory producing an output, money is not the output, but rather a factor of production. One part of the many factors we use to “produce” happiness, wisdom, or whatever it is we pursue.

Starting out with no money, acquiring just a little of it gives tremendous results. We can purchase food and shelter, and if we get enough, we can cover all our base needs. Sorting out our core needs is of course extremely beneficial to our roles as factories trying to produce contentedness because it allows us to focus on the task at hand, rather than worrying about food and shelter. Our marginal output increase with every bit of money we acquire.

As we reach the point where comfortably cover our base needs, we will quickly find that throwing extra money into the production no longer yields incredible marginal increases in output. Yes, buying more stuff is awesome, and going for a swim in your cash pile every morning, Uncle Scrooge-style is pretty awesome. But it rarely adds lasting increases in our production of whatever we have defined as our purpose because money is just a factor of production with limited marginal returns in the long run. And, in most cases, there is a double effect to this, because money often comes at the expense of another of our production factors: Time.

As mentioned, several studies have uncovered results that seem to indicate the law of diminishing returns at play in personal finance. A study from 2010 by Nobel Prize winners Angus Deaton and Daniel Kahneman, as recounted in this Business Insider article, found that “everyday contentment” starts to level off after your income surpasses $75,000 per year. Other studies have found different numbers, while Financial Samurai has made a case for $200,000 being the optimal yearly income for happiness. Regardless of the number, all of these findings point to the fact that the law of diminishing returns is at play in our personal lives as well.

The Implication of Diminishing Returns

Two paragraphs back, I casually mentioned time as another production factor of what producing what it is we want from our life. In fact, I would argue, it is the most important factor of all. Unlike money, time is the one thing of which we only get a finite supply. While nobody can tell you exactly how much you will get, the only certainty of life is that at one point your time is up.

Realising, and internalising, this is important, especially when we consider the relationship between time and money, the perhaps two most important factors of production. One often comes at the expense of the other. With this in mind, consider the inverse implication of The Law of Diminishing Returns. If adding something you already have a lot of will result in decreased marginal output, the value of something you are in short supply of will be that much higher. Said in other words: If your life is a factory producing happiness, and time and money are the two factors of production, earning more money if you are already busy will not result in more happiness.

Illustration of relationship between the marginal utility of time and money
Money and time are inversely correlated, and as you increase the amount of money, the value of each extra dollar declines, while the value of time increases.

I have tried to draw the results of the above realisation in the illustration above. (I’m sure you’re wondering why I didn’t pursue a career as a graphic illustrator at this point. The short and long of it is I find numbers more interesting!) On the horizontal axis, we have money and time at our disposal. The further to the right, the more money, and less time. The vertical axis represents the marginal value of acquiring one more unit of money or time.

As we can see, and agreed upon earlier, as you are strapped for cash, it makes sense to sacrifice time for money. The marginal utility of acquiring more money to cover your base needs is higher than that of having extra time at your disposal. However, before long, the curves intersect, and it becomes clear that past this point, it is more beneficial to your purpose to take control of your own time, rather than focus on accumulating more money. We have seen that research results support this thesis. Unfortunately, as we know, most people fail to change their mindset at this point and continue to prioritise money over time.

Where Do The Curves Intersect, or: What Amount Of Money Is Enough?

Despite the best efforts of media and academics alike, nobody but yourself can answer this question for you in any meaningful way. Some people value resources and money higher relative to time than others, and that is fine. What is important, is to maintain a conscious relation to why you prioritise as you do, and never forget that, while covering your vital needs is pivotal, time is the only truly scarce resource in the production mix of your life.

Person jumping with joy in sunset.
Focus on discovering what truly impacts your life, instead of accumulating stuff.

Define your own purpose, and from there on do your best to balance between prioritising time and money. And don’t forget that by figuring out what really affects your happiness or contentedness (it is not more stuff!), you can increase your savings rates, and put more money to work for you, giving you more freedom to allocate your time as you see fit. If you haven’t already, be sure to read The Basic Principles of Personal Finance to learn more about this.

Header photo by Rabelais.

Rainbow in Iceland

Running on Treadmills, Chasing After Rainbows

If you were anything like me when growing up, you probably went looking for the end of the rainbow at some point. Yes, you did pick up the addendum of it only being a myth after hearing about the pot of gold, not to mention the fact that it’s quite difficult to find the end of the rainbow. But, still, no smoke without fire and nobody else probably bothered to try to find all that gold, because they readily dismissed it as fairy tales. But you knew better, and off you went when the rainbow showed its colours.

Flash forward a couple of decades, and most of us would be remiss to admit that we went chasing rainbows with the hoping unearthing treasure. Now, we think, we are older and know much more about the world, and wouldn’t even contemplate wasting our precious time chasing a mirage, a mere pipe dream. Despite all the wisdom we’ve acquired through the years, so many of us never stop and take a step back, and realise that the difference between our current selves and the young version chasing rainbows is negligent. The only real difference is that now that we are grownups, we don’t put drop our hopeless dreams when the next distraction comes along, but instead we dedicate our entire life in pursuit of the pot of gold at the end of the rainbow, which none of us will ever find.

The Hedonic Treadmill

Even if you don’t know the concept by name, I am confident that you will be intimately familiar with what it describes. Remember back to a time when you had less, and you told yourself that if you just got that one pay bump you would be able to afford all you need, and you could finally be happy and content. Or once you were able to upgrade to that big house with the beautiful backyard, everything would change, and you would finally allow yourself to enjoy life without longing for more.

How did that work out for you? Unless you are very different to most people, you probably overestimated the effect that raise or that newer and bigger house would have on your happiness. And if you are like most people, it probably had little lasting impact on your happiness at all. Sure, it felt great when you got the first pay cheque or the day you moved in, but after a while, you were probably back to thinking about if you just made a little bit more, you would be set. Or if you were just able to afford a similar house in a slightly better neighbourhood, with an ocean view, everything would be perfect.

That is life on the hedonic treadmill for you. It is brutal, and there’s but little room for rest. Why is it that so many of us spend our lives chasing arbitrary artefacts, thinking that they are the pots of gold at the end of the rainbow that will bring us happiness and contentedness? The theory of hedonic adaption, also known as the hedonic treadmill, states that major positive, or negative life events, have little lasting effect on our levels of happiness because we adjust our expectations and desires as soon as the changes occur. Or, put another way, we believe that we will get off the treadmill once we can run a little bit faster, but instead, our minds adjust the speed of the treadmill according to the pace we run at.

The concept is not a novel one. In Discourse on Inequality, which was published nearly three centuries ago, the Swiss-French philosopher, author and musician Jean Jacques Rosseau wrote:

Since these conveniences by becoming habitual had almost entirely ceased to be enjoyable, and at the same time degenerated into true needs, it became much more cruel to be deprived of them than to possess them was sweet, and men were unhappy to lose them without being happy to possess them.

For most people this will not be a new concept, and, as mentioned before, nearly everyone will recognise what it describes. “Life on the hampster wheel” is a familiar trope in popular culture as well. So, why am I writing about the concept, if is familiar to most already, and I have no new revelations to add? Simply to state that we are all destined to spend our lives in futile pursuit of happiness we can never achieve, pots of gold we can never reach?

Jump Off The Treadmill and Take a Run Outside

It so happens that despite most people being vaguely familiar with the concept, very few take it in, process this knowledge and try to figure out what it means for the lives they have and continue to work so hard to build. Instead, we think to themselves “well ain’t that the truth!” before going to bed a little too late, feeling a bit of guilt because we know we won’t be able to perform to our full potential at work on too little sleep. And that’s a crying shame because our boss has indicated that if we just go the extra mile a couple of more times, we’ll be a shoo-in for that promotion. And the extra money from that promotion would go a long way in covering the bump in our car loan payments from a slightly more expensive car, which we desperately need despite our current car doing the job just fine. Because if you don’t drive the right car, you’re unlikely to get that next promotion after that because, as we all know, appearances do count for something. But, at least we realised the folly of it all and felt enlightened, if only for a brief moment, after skimming the headlines of one of the long reads articles we saved to Instapaper a couple of months back.

A row of treadmills
Will you ditch the treadmill, and go for a run outside instead? Photo by Jeff Blackler.

The point of writing this is to tell you that there is another way of life. Knowledge, and a conscious approach to the choices we make and how they will affect our mental, and physical, well-being gives us another way. Regularly reminding ourselves to take a step back, and examine why we make the choices we do, and if they truly will provide the happiness we are looking for, means that we can combat the effects of the hedonic treadmill, and make actual progress towards a more fulfilling life.

The added side effect of liberating ourselves from the hedonic treadmill is, usually, a better grip on your finances. Because, while not many people are consciously aware of how the concept of hedonic adaption shapes and influences their decision making, consumer-facing companies base their business model on hedonic adaption. Apple is counting on being able to appeal to your need for just a little more pace on the treadmill by marketing an only slightly upgraded iPhone for a seemingly fair price. Automakers are utterly reliant on you reaching the decision that getting from A to B just isn’t the same unless you do it in style. Couple that business model with a population that isn’t conscious with regards to why they feel the need for an upgrade, and lo’ and behold, you get an entire society built around rampant, unchecked consumerism. A world where nothing is valued higher than the next high that comes from acquiring something to adds no discernible value to our lives.

Adopting a more conscious lifestyle does not need to entail moving to a cabin in the woods and embracing the life of a hermit. All we need to do is remind ourselves now and then that particular psychological aspects influence us, and large enterprises are relying on us to let those aspects guide our decision making. But by being conscious about what truly adds value to our lives, we can spend our time, our energy, and our money in the areas that truly add to the life we want to lead.

Try it, and I promise you your wallet will thank you for it. And don’t forget to subscribe to our mailing list, so that you can read the upcoming articles about how to put all that extra money to work for you.

Header photo by Sindre Skrede.

Wall art of a t-shirt with the text failure is cool

The Path to Financial Freedom is Full of Failures

A few months into my first real job after graduating, I was flying high. The early onset imposter syndrome was starting to recede after a flurry of positive feedback, and I was starting to get comfortable in my position. That feeling didn’t last particularly long before I, in horrible screw-up, managed to publish our entire customer list to every single one of our customers. My world came crashing down, and I was inconsolable.

After a while, people forget all about that mistake, and while I’m sure my bosses had to smooth talk and cajole to avoid any fall outs, my mistake ended up not being anywhere near as bad as I thought. When it comes to personal finances, the reality is much the same. While you can structure your life, and your habits, in a way that lets you minimise splurges and unnecessary spending, you will end up spending money you didn’t plan to spend. And you can read page up and page down regarding the risks and rewards associated with every single investment opportunity that comes along, but you will end up making bad investments.

When each of those things happens, and they will, along with a whole host of other mishaps that impacts your path to wealth, that in hindsight could have been avoided, you will feel terrible. And it is fine to do so, but only for a little while. Because, and I am going to dig deep into the vault of cliches here, we have only failed if we fail to learn from our failures.

We have only failed if we fail to learn from our failures.

I recently finished reading the book Creativity, Inc. by Pixar head honcho Ed Catmull. In the book, Catmull lays out his approach to leading in a creative environment and highlights the methods that he believes have helped Pixar grow from being a division of Lucasarts into the most successful maker of animation movies. A recurring theme throughout the book and Catmull’s career is the importance of failing, and handling failure in a productive manner.

Catmull states that there are two meanings of failure: One that we screw up, learn and grow, and, two, we are idiots because we failed. The key to handling failure in a productive manner is to “recognise both the reality of the pain and the benefit of the resulting growth,” says Catmull. He frequently puts forth the example of Pixar director Andrew Stanton’s philosophy and catchphrases to exemplify their company philosophy towards failure, like “fail early, and fail fast” and “be wrong as fast as you can.”

Funny plan for life by kid, which includes failure
A good plan should account for failure, like this one. Photo by Beth Kanter.

I am highlighting the way they approach failure at Pixar because I want to illustrate that even big, successful corporations not only fail, the rely on failures to discover the path to success. And I believe that unless we consciously prepare ourselves to handle failure in a productive manner, we are likely to let our failures weigh too heavily on us. Another adverse effect of failure, unless we process it in a productive matter, is the tendency to overcompensate to avoid making the same mistake over again. As the old saying goes, once bitten, twice shy. Sometimes we fail because circumstances weren’t right, and avoiding similar opportunities because we failed once before can be both irrational and costly.

Another adverse effect of failure, unless we process it in a productive matter, is the tendency to overcompensate to avoid making the same mistake over again.

One of my favourite stories about failing in the context of personal finance is Miss Mazuma’s brutally honest recollection of the rise and fall of her real estate empire. It is a fascinating read, and the important takeaway here is that Miss Mazuma didn’t let her ill-fated decisions decide her fate. She got back up, did what she had to do, and rebuilt her wealth to the extent that she is now enjoying financial freedom beyond what most people ever get to experience.

So, in-between making all your plans for how you are going to build your wealth, I want you to take some time to plan your approach to failure. Because, as mentioned before, you will fail. But, like Pixar, one of the most revered creative companies in the world, you should incorporate your failures into your solution.

Header photo by Nicolas Nova.

Picture of Swedish statistician Hans Rosling

Remembering the Number Magician Hans Rosling

A few days back, the news broke that statistician, and epidemiologist Hans Rosling had passed away, far too soon, aged only 68.  While Rosling gained a fair bit of fame in his later years, after, among other things, appearing on the BBC show “The Joy of Stats,” there are still far too many people out there who are not familiar with his charismatic style of communication and ideas.

Rosling was a pioneer when it came to illustrating and communicating with data in a way that is concise, accurate and to the point, while at the same time entirely understandable for absolutely everyone. As someone who works with data, and attempts to incorporate it into presentations both professionally and otherwise, I consider him to be the one who set the bar. Just take a look at this video, a 2009 clip from the above mentioned BBC show “The Joy of Stats” in which Rosling explores the relationship between wealth and life expectancy, and how it developed over the past 200 years:

If you are currently thinking that anyone can present numbers representing five different dimensions in a clear and intuitive fashion, as long as they have the technological know-how of the BBC to help them out, I want you to take a look at this next video. As a true master of his trade, he gets his point across in the same understandable fashion using the high-tech aid of… boxes:

Understanding numbers and how to use them to support your arguments is certainly relevant for those of us looking to build wealth and freedom, that is not the primary reason I want to share with you the legacy of the Swede. Rosling was, in my mind, first and foremost a proponent of independent thinking. He frequently argued against letting media headlines dictate your worldview, and he used numbers as an aid to understanding the world.

As we look to manage our personal finances in a way to lets us build wealth and give ourselves more freedom of choice to live our lives the way we want, we must continually question the established. We must go against the prevailing narrative in a number of ways when it comes to what you need to live a full life, and what defines to be successful. Very few experiences have given me more confidence regarding challenging the general perception as perpetuated by the media, as seeing Rosling disprove one myth after the other. That is why he was a role model, and one of my heroes.

I leave you with a final video clip, from Danish TV, in which Rosling is explaining over the course of two minutes why you should not use media to understand the world. He is speaking Danish, but there are subtitles, and I hope that you take the time to watch it. If you want to see more from Hans Rosling, I recommend starting with the TED talk he held with his son in 2014 aptly titled “How not to be ignorant about the world.