NWP Monthly Digest | February 2024
Every now and then, the universe really starts to push me in a direction of what I should be writing about. Writing, you see, is something that is a useful tool for sharing ideas, but also has a very selfish side to it. More often than not, I need to write about something so I can solidify what I think about that subject. If you don’t do it regularly, I recommend it.
There is a major affinity in the world for simplicity. Simple is a goal for many, myself included, and simple has a lot of advantages. One thing that simple IS NOT, however, is easy to do. Losing weight, at its core, is simple. Reduce your calorie intake and exercise and you will very much lose weight. The data, of course, proves that this is not an easy thing for most Americans to do.
Personal finance is the same. Spend less money then you make (or have) and you will have no problems. I often joke with clients that 90% of personal finance is spending less money or making more of it, a line I’ve stolen from my writing hero, Morgan Housel. Cash flow management, or budgeting, is the blocking and tackling of personal finance. Without it, you will accomplish absolutely nothing at best. At worst, you will go bankrupt.
Mike Bellotti, former head football coach for the University of Oregon and now a football analyst, once famously said he could figure out who would win a football game simply by watching the line of scrimmage for the first few series. He wouldn’t pay attention to anything except how the big boys on the offensive and defensive lines were fairing in knocking the snot out of each other - not how the quarterback was reading defenses, not where the ball was going - just the basic blocking and tackling.
Our lives at Noble Wealth revolve around analyzing the game of personal finance, and I know that both Grant and I can tell a lot about a client by simply working through the blocking and tackling of their cash flow management.
The Viral Tale of the Family Strapped for Cash on $500k Per Year
There was a story that resurfaced on CNBC last week, originally from 2019, that got the X (formerly Twitter) crowd up in arms, and it revolved around the household budget of a family that was making $500,000 a year but felt pinched for money and like they were failing the “money game”.
There is a lot to unpack here. First off, this family is doing really well! They are not average in the least. They are saving a lot of money every year for retirement, they give a lot to charity, they are able to pay their debt obligations, and they take three vacations a year. That’s awesome and 95% of the country would trade places with them tomorrow. But…
When you make a lot of money, unfortunately, you pay a lot of taxes. Most likely, earning a joint income of $500,000 a year means that this family is in one of the larger urban centers in the country, which means that their city and state tax rates are most likely very high, as well.
There is definitely a “keeping up with the Joneses” vibe here, too. They seemingly chose to live in a neighborhood where colleagues and others from the industry chose to live, which meant having a very expensive house. The BMW and the Land Cruiser are most definitely not “necessities”, and three vacations per year is not something anybody is entitled to, no matter how much money you make.
I could sit 10 of my clients down in a room and show them this and get 10 very different responses. Some would take issue with the cars, some with the cost of their home, some with the vacations…but there would also be areas that they would completely understand, and those would vary, too.
‘Everyone can spend money in a way that will make them happier, but there is no universal formula on how to do it. The nice stuff that makes me happy might seem crazy to you, and vice versa. Like many things in finance, debates over what kind of lifestyle you should live are often just people with different personalities talking over each other.” ~Morgan Housel
My only issues with the budget, for what it's worth, are the charitable donations (especially to the college that they’re still paying student loans for), the car payments, and the number of vacations they’re taking. I would like to see the savings rate be much closer to 20% than the ~9% they’re at now before they are actively giving money to charity and such high discretionary spending. This family’s expenses will increase as their kids get older and go to college, not decrease, and they need to make a lot more room in their lifestyle to handle that.
Most importantly, to be able to sustain this level of spending when they retire will require a very hefty sum in their retirement accounts, and the math just isn’t working for them with that savings rate.
The Prof G Podcast
The beginning of the year is a time that a lot of American households are taking stock of their financial situation, and the media will definitely follow these narratives to drive eyeballs. The CNBC/Twitter dust-up of the “average family” above was the first item I noticed, and then the Prof G Podcast “Office Hours” episode this week had an anonymous gentleman call in complaining about how hard it was to “get ahead” these days.
The story from Anonymous from Undisclosed, as he was called, was a family earning a healthy, six-figure combined income, both spouses objectively successes in their field. After contributing to their 401k, paying taxes, paying their bills, and paying their mortgage, there simply wasn’t enough left to save additional funds that they felt were required of them to help pay for the kids to go to college and to feel secure.
Scott Galloway, or “Prof G”, gave some difficult advice, and he said there is no magic wand that you can wave to make these types of changes in your life. They require serious and hard conversations, sacrifices to be made, and the spouses to be on the same page.
As unsatisfying as that is to hear, he’s right. You can have anything you want in this world if you work hard enough, but you can’t have everything.
Learning to Know Your “Enough”
And then, right on queue this morning, the extraordinary Carl Richards, famed behavioral finance guru and New York Times “sharpie” artist, came through in his regular email newsletter with the subject line “Getting Ahead vs. Having Enough”.
Getting ahead is overrated as a goal. In fact, it might even be just plain stupid. The problem with getting ahead is that it’s a zero-sum game. There’s only one winner. And in this game, it’s possible that even the winners are losers. How many of us want to be remembered as the person who spent their lives striving to get ahead of everyone else?
Instead of fixating on getting ahead, what if we simply focused on having enough?
Turns out, you’re allowed to do that!” ~Carl Richards
My theory on this is pretty straightforward. There is so much “financial advice” floating around today that people get from their parents and grandparents, as well as friends, colleagues, and social media. Everyone is in our ear every single day telling us what we should be doing with our money, and making us feel like we’re failing if we’re not keeping up with some arbitrary benchmark. This is troubling for a lot of reasons, but mainly because the world already gives us enough things to make us feel stressed and anxious.
Here’s a fun exercise. Let’s take some “rules of thumb” on personal finance you might read in a blog or on Instagram and apply them to a hypothetical family of four. A married couple with two kids. This hypothetical couple makes a combined $200,000 per year, both successful in their careers earning six-figure salaries. If they…
Purchase an average home with a 20% down payment and today’s prevailing mortgage rate* (P&I, taxes, insurance, maintenance) = $36,000/year
Have an effective tax rate of 25% (federal, state, local, payroll) = $38,500/year, after removing the 401k contributions
Both max out their 401k plans = $46,000/year, pre-tax
Save enough for each child to fully pay for college (we will use $650 per child, per month to their 529 plan or another vehicle) = $15,600/year
Have two cars, totaling $1,200/month for car payment/insurance/maintenance/gas = $14,400/year
Have some student loans left to repay of ~$30,000 total ($600 per month) = $5,000
*The median home price in Indiana is $250,000 and in California it’s $780,000. We’re going to be using $450k for this home they’re purchasing with a 6.5% 30-year mortgage.
While my hypothetical family ends up with a very high savings rate of ~31%, they have less than $4,000 per month left over after the above “rules of thumb” and big ticket items are paid for. That’s not just money that’s left over for all of the fun things they want to do, because they still have other bills to pay (cell phone, internet, utilities) and need to put food on the table (groceries will easily be $800 to $1k per month). If the kids participate in extracurricular activities like dance or sports, that’s another big chunk gone. And they purchased a very, very modest home.
All of this is to simply say, “I get it”. Personal finance is not easy and there is not one-size-fits-all approach to being successful. That’s why I try to help my client’s focus on things they can control, like their savings rate while they’re accumulating wealth and their withdrawal rate in retirement when they are spending it. Nothing is more important than those two metrics.
“If you can’t find a way to be satisfied with enough, you may never be satisfied with anything.” ~Carl Richards
Used with permission from Carl Richards and The Behavior Gap
Noble Wealth Pro Tip of the Month
Hopefully the start of the new year has inspired you to get your financial house in order. Something we don’t talk enough about in this space is credit, specifically our credit report. When was the last time you looked at your credit report? Yeah, I thought so…
We’re all entitled to look at a comprehensive and free personal credit report every year. I suggest you do that this month. Review each account on the report and verify if you still have it open or need it open. Make sure that nothing appears fraudulent, and report anything that is right away. Also, please avoid using the paid credit monitoring services and go straight to Annual Credit Report.com.
Another thing I recommend to almost all of my clients is placing a voluntary freeze on your credit with every agency. This will keep anyone who has gained unauthorized access to your personal information from opening a line of credit under your name. You have to establish the freeze with each of the three main credit vendors:
The downside to a credit freeze, of course, is that you have to “thaw” or lift your freeze every time you apply for a new line of credit, even when you start new cell phone service. While it’s a minor nuisance, I fully believe it’s worth it for the piece of mind.
Things We’re Reading and Enjoying
A Few Thoughts on Spending Money, by Morgan Housel (blog post)
Hopefully, you all went out and bought his new book. Another timely piece by Morgan hit the internet yesterday. It’s enlightening (as usual) and very quick and easy read.
The more money you have, the harder it becomes to know how to spend it in a way that will make you happy. And that confusion sets in at fairly low levels of income. Luke Burgis writes: “After meeting our basic needs as creatures, we enter into the human universe of desire. And knowing what to want is much harder than knowing what to need.”
The Prof G Podcast, Office Hours: Why Scott Doesn’t Have Health Insurance, How Gen Z and Millenials Can Accrue Wealth, and What Scott Does to Stay Healthy, by Scott Galloway
Scott can be irritating and he is very aware of his wealth and privilege, but he’s fun to listen to and provides amazing stories that make the world a little easier to understand.
Scott gives his thoughts on companies offering cash in lieu of healthcare benefits, speaking to why he likes it and why he doesn’t have health insurance. He then offers tips on how younger people can accrue wealth, including living a stoic lifestyle, diversification, and selecting the right life partner. He wraps up with a breakdown of how he prioritizes sleep, exercise and nutrition.
Chop Wood Carry Water: How to Fall in Love with the Process of Becoming Great, by Joshua Medcalf
Guided by “Akira-sensei,” John comes to realize the greatest adversity on his journey will be the challenge of defeating the man in the mirror.
This powerful story of one boy’s journey to achieve his life long goal of becoming a samurai warrior, brings the Train to be CLUTCH curriculum to life in a powerful and memorable way.
Some things you will learn…
—No matter how it feels, you are always building your own house.
—How and why you must surrender to the outcome in order to be at your best.
—Why you never want to have your identity wrapped up in what you do.
—Why your strength lies in faithfulness to the little things.
—How to develop a heart posture of gratitude.
—How to use the biggest challenges as a training ground for greatness.
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” - Ernest Hemingway