The Wealthy Barber Returns, page 9
A few prominent actuaries have recently argued that some people can save less because their modest retirement-lifestyle plans won’t require too significant an income. They point out that many people living on retirement incomes of only 50 percent of their last working-year’s pay have adjusted and often seem quite content.
As a pushy pro-saver, it pains me to admit that’s true. I can’t be a hypocrite here — I’m the one who believes all our spending isn’t closely correlated to our happiness. Less consumption doesn’t necessarily mean less joy.
However, it’s also true that there are a tremendous number of people in that income situation who aren’t content. They can’t afford to take any trips or spoil their grandkids or fully enjoy some of their favourite hobbies.
They’re constantly stressed over their tight financial situations and, with no margin for error, very worried about the return of higher inflation or living “too long.”
Exercise caution here. When you’re in the saving years, especially the key early ones, there’s no way to know definitively what kind of retirement lifestyle you’ll want. Best to assume you’ll be like most of us and want or need the traditional 60 to 70 percent of your last working-year’s income.
Hey, ending up with more than enough isn’t the worst problem. Too little, on the other hand, well….
The final exception to the savings rule is also an exception to an earlier caveat. On occasion, some people do know, beyond any reasonable doubt, that they’re going to inherit a ton of money before, or in the early part of, their retirements. For example, about a decade ago, after a speech I gave, a relatively young woman approached me with the following scenario: “I know you said we should all be saving, but my grandfather is very ill and doesn’t have much longer to live. He’s recently sold his business and my share of the estate will be around $15 million. What should I do?”
We’ve been married for nine years now.
I’m joking, of course. She said no.
Seriously, I told her to go ahead and spend her entire salary...if not more. And you thought I was obsessed with saving and not a fun guy. Wrong. I’m crazy!
It’s important to repeat, though, that very few of us are going to inherit huge sums of money. Tremendous uncertainty around inheritances is the norm.
By the way, one of my editors wants to know what kind of geek has a favourite economist.
I’ll be misplacing her invoice.
Emergency Fun(ds)
Many ideas in the world of personal finance sound great in theory and appear to be logical and well thought through in books, but seldom work in real life.
Exhibit one: emergency funds.
Financial writers love these things. And for good reason. We live in unsettled and unpredictable economic times. Bad things happen. What idiot wouldn’t recommend saving at least six to nine months of after-tax income to carry us through rough patches?
This idiot.
Why? Because for 30 years I’ve watched people, even disciplined people, expand the definition of “emergency” whenever they see something they really, really want and they have the money in the bank to buy it.
Few emergency funds stand a chance against society’s innate skill: the ability to rationalize. We can convince ourselves of anything if the result is short-term gratification. It can’t be a coincidence that “rationalize” sounds like “rational lies,” can it?
All too often, I’ve seen the situation that follows (and worse!) played out in real life:
Look, I have no problem with Mike personally. In fact, I wish he lived next door. I do have a problem with his financial plan, though.
Book after book has told Canadians that accumulating several months’ worth of income should be our top savings priority. Only when that’s accomplished should we move on to RRSPs and other vehicles that can help us reach our long-term goals.
The issue is that the vast majority of people never hit their target of six- to nine-months’ income before the funds are diverted to a not-so-emergency emergency. They “go all Mike” on us and have to start the process over again. And again. And again.
Meanwhile, their RRSPs sit in perpetual waiting.
Frankly, my own advice in The Wealthy Barber was probably even worse than the conventional wisdom I’m criticizing. I argued that instead of saving to have an emergency fund available, people should just set up a line of credit for the appropriate amount. That way they could direct their savings to more productive areas than low-interest, fully taxable investments and avoid the temptation of a swelling bank account.
Whoops. We’ve now seen how most of us manage our lines of credit.
It’s funny, but even after all these years of studying people’s financial plans, I’m still not at all sure how best to deal with emergency funds.
Many experts agree that waiting to build an RRSP until an emergency fund is fully established is foolish. They push us to do both simultaneously. Prudent, definitely. Realistic, doubtful.
One intriguing idea I’ve seen a few people use successfully is to set up a line of credit where a second signature is required to gain access to the funds. A parent or ultra-responsible friend is recruited and instructed not to co-sign for any borrowing unless the credit holder loses a job or suffers another legitimate setback. Third parties tend to have a stricter definition of “legitimate,” thankfully. Of course, this approach is far from perfect. Involving another person always complicates matters. And let’s be honest, asking someone to co-sign for a line of credit that you’ll borrow against only if you’re financially desperate is a bit of a tough sell. In those circumstances, he or she might end up on the hook.
Whatever approach you try, your job security and overall financial situation should play significant roles in determining what emergency-fund amount makes sense. Obviously, two married teachers (married to each other, I mean) with no mortgage probably don’t have to worry much. A single, new homeowner working on commission in a highly competitive industry — well, that’s a different story.
OK, I’ll admit I might not have been a whole lot of help here. But the key point I want to finish with is this: The best way to be prepared for an emergency is to consistently live within your means and keep your debt levels well under control.
Yes, I know it’s an ongoing refrain, but aggressive borrowing truly is its own emergency. And it’s one, unfortunately, where the alarm often doesn’t sound until a second crisis arrives and by then, it’s too late.
Money Is Time
When I dispense financial lessons from the stage or the page, it’s tough to know what’s going to stick. Some ideas that I’ve really liked have fallen on deaf ears — or, more likely, not survived the all-important test of mixing with human nature. Others that I didn’t really think would resonate have been put into practice and made a difference.
The adage “A dollar saved is two dollars earned” is a good example. Heck, I thought so little of this maxim that I gave it all of one page in The Wealthy Barber.
Mistake. I should have pushed it more aggressively — people who apply this knowledge swear by it.
Remember, when you earn an extra $2 at work, you probably keep only about a buck. There are deductions for taxes, Canada Pension Plan, Employment Insurance, union dues, benefits and so on. It all adds up.
Judicious shoppers often “re-frame” the cost of an item by figuring out how long they would have to work to earn the money, post-deductions, to buy it. Not only does executing that thought process buy them a minute or two for their “lizards” to calm down, but it also makes them more aware of an important concept: When we buy something, we’re really spending time, not money.
Say what?
Well, initially we traded our time to get the money and now we’re trading that money to get the whatever. So, actually we’re paying time for the whatever.
Know what you make per hour after deductions, do a quick calculation and ask yourself before a purchase, “Do I really want to work x hours to pay for this?” Thinking this way will truly help you exercise more restraint and be more discerning.
It will make you a wiser spender.
As Cicero noted, “Most men do not understand how great a revenue is economy.”
Some Experience Required
Earlier, I talked about how neither I nor any financial advisor can tell you where best to spend your money. You have to follow your passions and “invest your spending money where it gives you the best returns.” That, of course, will vary widely from person to person.
Now I’m going to completely contradict myself and tell you where to spend and not spend your money — only in a general sense, though.
Spend more on experiences and less on stuff.
That’s it. Follow that one simple guideline and you will be happier. Both anecdotal evidence and formal studies verify that you’ll get more emotional bang for your buck.
Elizabeth Dunn, a social psychologist and assistant professor at the University of British Columbia, explained to the Boston Globe: “Just because money doesn’t buy happiness doesn’t mean money cannot buy happiness. People just might be using it wrong.”
She and other psychologists and anthropologists are advancing an interesting theory on society’s traditionally weak wealth-for-happiness exchange rate: Our wiring, dating back to prehistoric times, leads us to value stuff over experience and ourselves over others. Our ancestors’ struggles with scarcity and its first cousin, survival, have programmed us to instinctively emphasize things over all else. The spending that seems to make us happiest, though, follows a completely different path. It’s a trade of money for rewards less tangible but much more valuable: excitement, memories, good feelings and camaraderie.
Most things we buy in modern times not only don’t help us survive, but don’t even help us thrive. Why? Well, one of the big reasons is our old friend, declining marginal utility. When sensory cells are exposed to the same stimulus repeatedly, they get bored and stop firing.
Our new fridges, watches and cars go from “wow” to “whatever” remarkably quickly.
Our rather odd conventional response? “Hmm, more things didn’t make me happier — I should buy even more things.”
Ah, the materialism treadmill.
On the other hand, many experiences truly bring lasting joy to our lives. Leaf Van Boven, an associate psychology professor at the University of Colorado at Boulder, summarized his studies: “We generally found very consistent evidence that experiences made people happier than material possessions they had invested in.”
That makes sense for many reasons. First, experiences don’t grow mundane; they don’t create habituation. In fact, it’s quite the opposite — they offer us a break from the same old, same old. They rescue us from routine and, therefore, excite us.
They also tend to be social by nature and we’re at our happiest sharing good times with friends and loved ones. Heck, we’re often extremely happy even reliving (and embellishing, of course) the experiences over and over again. We love stories, and experiences create them — and not just any stories, but unique ones where we’re the stars.
Van Boven also noted that our experiences don’t lead to the inevitable can’t-win comparisons that our stuff does. Our new large-screen TV may lose its lustre when our brother-in-law trumps us with his eight-seat home theatre. But the great times and cherished memories of our family trip to Florida aren’t at all diminished by our neighbours’ vacation to Paris.
I think another important part of the “experience experience” (pardon the expression) is the incredible joy of anticipation. It’s motivating and uplifting to know that a great dinner out is only a week away. Or that you’ll be taking your son to his first NHL game next month. Or that soon you’ll be meeting your best friend in P.E.I. for a golf trip. I love that stuff — or should I say that non-stuff. Heck, being excited during the time leading up to an event is one of the best parts of the whole experience. Anticipating a fun time is a fun time!
Let’s be clear here: I’m not advising you to become a spendthrift and blow all your money on experiences. You still have to save. But with the money you can truly afford to spend, you may want to adjust your stuff/experience ratio.
I could drive this point home with thoughts from some of the best minds in history, because everyone from Plato to Churchill to Franklin to Buffett has offered wisdom on remembering what’s genuinely important and letting that guide your spending. However, my favourite quote on the matter comes from a bumper sticker I saw in Saskatoon: “The best things in life aren’t things.”
A Final Reminder
I recognize it’s extremely bad form to quote a book within the very same book but, hey, when you say as few insightful things as I do, it’s important to repeat them:
One of the most damaging misconceptions in personal finance is that saving for the future requires sacrifices today that lessen people’s enjoyment of life. Surprisingly, it’s quite the opposite! People who live within their means tend to be happier and less stressed. That’s true not only for the obvious reason — they know their financial futures look bright — but also because they’re not consumed with consumption. They’re not in the emotionally and financially draining race to acquire the most stuff they possibly can. A race that, it should be noted, has no finish line and thus no winner.
Although I’ve made my share of money mistakes, as you’ll see in the next section, trying to buy happiness isn’t one of them. I live a very modest life. My house is 1,300 square feet, including the basement, and there’s no garage. I don’t need one — nothing to store. A few years ago, a couple of teenagers broke into my place while I was on a speaking tour. Boy, they must have been disappointed. I have visions of one turning to the other and pleading, “Hey, go back to our car and grab this guy a stereo or something — he’s obviously struggling!”
Yet my friends will tell you that despite my humble lifestyle, I’m one of the happiest guys going. Interestingly, I would argue that my positive disposition doesn’t exist “despite” my humble lifestyle, but instead partially because of it.
I’m never stressed about keeping up. I truly couldn’t care less what others have. I don’t need the latest and the greatest. My wardrobe proves that I’m not image-conscious. When not working, I’m focused on the more important things in life like my hockey pool, my daughter’s choice of boyfriends, crushing my son in tennis or cheering on my beloved Detroit Tigers at my mom and dad’s place.
Speaking of my mom and dad, they totally get it. In fact, they’re even happier than I am — it’s annoying. They don’t have a flat-screen TV, granite countertops, a walk-in closet, an iPad, a fancy car or hardwood floors. Yet miraculously, they’re upbeat, well-adjusted people. How can that possibly be? Don’t they realize that today’s society is all about materialism?
What do they have? Well, an active social life. A loving family. The world’s greatest dog. Cryptic crosswords. An addiction to bridge. A strong desire to help. An endless supply of Cadbury Mini Eggs. Reasonable health. Loads of perspective. And each other (a much bigger asset for my dad than for my mom, I might add). They also have the one thing that many of my “wealthy” friends will never possess: They have enough.
Jean-Jacques Rousseau (the Swiss-born French philosopher) understood the psychology behind my mom and dad’s contentment, long before their births. In 1754, he argued that wealth is not an absolute; instead, it is relative to desires. When we covet things we can’t afford, we grow poorer regardless of our incomes. Conversely, when we’re satisfied with what we have, we are truly wealthy.
By the way, my mom and dad aren’t cheap. They’re not even what I would call thrifty. They go out for dinners, spoil their grandkids, take trips and, on occasion, buy even a luxury item. But they live within their means. They control their desires not through rigid self-discipline — that’s tough to sustain — but through an awareness of what should be obvious to us all: Happiness flows from relationships, health and making a difference, not from a $1,000 solid-brass kitchen faucet.
American theologian Hosea Ballou once noted: “Real happiness is cheap enough, yet how dearly we pay for its counterfeit.” Don’t make that mistake. Be like my mom and dad and live well within your means — you’ll be richer in every sense of the word!
Random Thoughts on Personal Finance
Common Themes
I have to admit that this part of the book is a little different. In fact, I’m not even sure exactly how to describe it.
It’s kind of all over the map. Actually, not “kind of” — it is all over the map. Some big-picture stuff, some minutiae. Some conventional wisdom, some offbeat perspectives. Some numbers, some psychology. Some fluff, some depth. Some dos, some don’ts.
I guess it’s really a collection of a few of my opinions and observations on the world of personal finance. Certainly not all of them will apply to any one reader, but I’m hopeful that you’ll find the vast majority interesting and that together they’ll help you think more wisely about your money.
Despite the word “random” in this section’s title, there are a couple of common themes running through many of the pieces that follow.
