This is a follow-up to my 2019 article, “How I money”.
Some important notes
Don’t treat this as a guide. It’s illustrative only. What is right for me will not be right for you. Everyone’s circumstances, needs, objectives, values, and priorities, are different.
The title of this article is “How I money” but it should really be “How we money”, since my wife and I are a team. What’s mine is hers, and vice versa.
My wife and I have a family trust that we settled a long time ago. Some of the assets I mention aren’t ours, but are held as trustees on behalf of the beneficiaries of the trust. To keep things simple I’ve treated all assets as if they’re owned by us, even if this isn’t strictly accurate.
Recording and tracking assets
At a high level, I still categorise assets as either “stuff”, “house”, or “investments”.
I’m not going to focus on “stuff” at all, such as furniture, gadgets, bikes, cars, etc. (Actually, I talk about cars in the “dirty laundry” section later on.)
With respect to “house” and “investments”, I maintain a spreadsheet that includes a balance sheet and snapshots of various metrics each time I update it.
The balance sheet is similar to what you’d imagine, setting out the value of our house (or a conservative proxy for its value), plus the balance of various other assets (mainly financial assets).
The metrics I keep track of include:
- Net worth
- Total assets (that are quantifiable on a balance sheet)
- Liabilities
- Equity in our home (ie, the value of our home less all liabilities secured against it)
- Funds that are locked away (ie, KiwiSaver and Australian superannuation funds)
- What these locked away funds will be when my wife turns 65, assuming a constant annual return of 5% and no further contributions. (More on this later.)
Some of these go back well over 10 years, and if I dug the figures up I could probably go back 15 to 20 years. I put all of these metrics into line charts. Seeing our progress over this time has been really rewarding, validating, and motivating.
Assets
Our home
Our most valuable asset is our home. As I wrote in 2017, we own more house than we need. We made this decision with open eyes, fully aware of the trade-offs and the risk that we’d end up worse-off financially due to higher servicing and maintenance costs.
It has been an expensive asset. Last year we had to re-roof it, and along with some other work, the cost was over $120,000. We have lots of other projects lined up, including a bathroom this year and a new kitchen next year. Those will probably add another $250,000 to our cost of ownership. Landscaping is to come. If you ever buy a large, older house that has deferred maintenance, remember that it can be expensive!!!
Another thing worth noting is that if you own a large house, it’s probably easier to be tempted to buy more stuff because you’ve got more space to store it. And it costs more to heat. And decorate. And furnish. And takes longer to clean.
Despite all of this, the value of this property has increased substantially since we bought it. Even with these expenses, we’ve so far ended up better off than if we’d bought something less expensive. This is due to having higher leverage on the property (ie, a larger mortgage against a larger asset).
One benefit of owning more house than we need is that it’s likely that we will be able to free up capital at some point in the future – even if it’s when we’re in our 90s. This wouldn’t necessarily be the case if we had a more modest home.
Funds locked away for retirement
My KiwiSaver is with Kernel’s High Growth KiwiSaver option. My wife’s KiwiSaver is with Simplicity’s Growth KiwiSaver option.
I am self-employed. Every June I deposit the minimum amount necessary to maximise Government contributions. (Technically, I usually round up a few hundred dollars, but the key is to maximise Government contributions.)
With my wife’s contributions, we always maximise employer co-contributions. There are also periods of time where my wife contributes more than necessary. She recently took on a new position, and for that role she selected KiwiSaver contributions of 10%. This may not be ideal since we could invest these funds in essentially the same way and have access to them at any time rather than in a few decades’ time, but at the end of the day, the extra amount is likely to go towards our retirement anyway.
The other key factor is behavioural. We don’t like budgeting. Because of this, locking funds away before we can touch them is arguably rational for us. You don’t spend money you never see.
We also lived in Melbourne, Australia for 10 years. Over this time we accumulated a fair amount in Australian superannuation. When we moved back to New Zealand, we decided to keep our Australian superannuation in Australia rather than bring it over to KiwiSaver. We’re both invested in widely-diversified, low-fee, index-based growth funds.
Earlier this year I investigated setting up an Australian self-managed superannuation fund (SMSF) and using our Australian superannuation funds as a deposit for a Melbourne CBD apartment, with an eye to making additional contributions (if necessary) to ensure the mortgage was repaid by the time we retired. This was partially as a hedge, in case we – or our children – wanted to spend extended periods of time in Melbourne in the future, to manage against the risk of being priced out of the property market. I didn’t end up pursuing this. Partially this is because we’re likely to have more than enough indebtedness in the coming years, and I didn’t believe we want or need to take any more on. Partly it’s because I don’t think the risk of being priced out of the central apartment market in Melbourne is especially high, nor is it central enough to our goals and priorities in life.
One of the metrics I keep track of is how much money we have locked away. This consists of the combined balance of our KiwiSaver and Australian superannuation accounts.
As it stands, the amount we have locked away wouldn’t be enough for us to retire. However, you may have noticed that I keep track of another metric related to these funds: how much these funds will be if they generate a constant annual return of 5% per year between now and when my wife turns 65. Assuming these funds continue to compound over this time, we’ll have enough to sustain a reasonable quality of life, even without additional contributions between now and then. This provides us with an enormous amount of of peace of mind.
Other financial assets
We have several bank accounts, across different institutions, which are for various purposes. (We probably have more accounts than we need, but c’est la vie.) Some have higher interest rates than others, but we rarely hold enough in these accounts for it to be worth spending time and energy maximising interest. (2% extra on $10,000 is only $200 per year. From my perspective, it’s not worth the time.)
We have a SuperLife Conservative Fund and deposit a set amount into this fund each fortnight. This is something of an “emergency” fund, although we’ve cleared it a couple of times in the past few years for house-related expenses that weren’t strictly emergencies. We’ll probably do that again soon.
In terms of emergency funds, we don’t tend to hold as much as we “should”. It’s never been close to several months’ worth of living expenses. There are a few reasons for this. For one, we can draw down up to $20,000 on our credit cards, and with each of our income/employment prospects and insurance arrangements, we’re pretty confident we’d be able to work out how to pay that back. But if I’m really honest, it’s partly because we have plenty of people in our close orbit who are likely to be willing and able to help us out if we were in a sticky situation (and vice versa!).
I also hold a fairly large amount of money on behalf of myself and four high school buddies. I keep a significant portion of this in Simplicity’s Conservative Fund.
When it comes to investing for longer time frames, I remain an advocate for investing in widely-diversified, index-based, low-fee managed funds. It’s what I’ve done in the past, and what I’ll do in the future when we’re not putting our money towards other things, like repaying debt.
Liabilities
Over the past several years, our net worth has increased by quite a bit. However, our borrowing has increased as well. This reflects renovations and land purchases, plus a couple of vehicle purchases with money that could otherwise have lowered our debt.
Over time, I’ve become a lot more sanguine about debt. In large part this is because I’m more confident about the stability of our household income.
I’ve also become more open to leverage as an investment tool. Yes, there are risks involved. But when used judiciously, it can also magnify positive outcomes. I’m not as gung ho about leverage as many people, especially those who promote property investment, but I think it can be a good tool for the right people at the right times.
Something that has been fairly formative to me is that I’ve seen quite a few people who have repaid their mortgages and… not much has changed in their lives. For a lot of people, repaying the mortgage seems to be one of those “before enlightenment, chop wood and carry water; after enlightenment, chop wood and carry water” sort of things. That’s not the case for everyone, but I think my wife and I share something in common with these people. We’ll celebrate being mortgage-free, and then continue living the same lifestyle. This being the case, the idea of being mortgage-free has far less resonance for me.
Another thing that encourages me is that if we needed to, we could liquidate our property(ies) and end up with enough capital to buy a modest home without a mortgage.
One concern I have with our level of indebtedness (or future indebtedness) is that it will reduce our optionality. In particular, my wife might want to buy into the practice where she currently works, and that might require additional debt. I’m sure we could manage it, but we would be getting to the point where I’d be a little uncomfortable.
Non-balance sheet assets
My wife and I are in our early 40s. We still have two or more decades of productive work ahead of us. (For me, I hope it’s another four decades.)
Our most valuable assets aren’t on our balance sheets. It’s our human capital. The question is whether and to what extent we translate our human capital into income and other forms of capital as time goes on.
This has implications, which translate into concrete decisions:
- We continue to invest in our human capital. As I type this, my wife is out of town attending a conference. Over the next few months, I’ll be completing a graduate certificate. Next year I will probably start working towards another credential or two.
- We insure ourselves!!! More on this below.
- Sustainability is important. My perspective is that it’s counter-productive to work to burn-out. It’s also counter-productive to ignore our health. It’s important to get some degree of balance. It’s also worth investing in our health: putting all of the other benefits to the side, from a narrow, financial perspective, if it means we can bring more energy to our work and work for longer, it’s a valid investment.
One thing that is worth noting is that my wife is utilising her “human capital” in a relatively consistent, low-risk way. I am taking a riskier approach that is likely to be more tail-ended (ie, I’m likely to have low lifetime earnings relative to what I could by taking a more traditional path, or I’m likely to have higher lifetime earnings. I’m probably not going to fall in between).
Income and expenditure
Income
Our household income is higher than most households. This is mainly because my wife is a hard-working health specialist.
My income through Fairhaven Wealth is currently pretty low. This is because I don’t have a lot of time to dedicate to the business. (Last year I wasn’t taking on new clients because I had too many clients. This year I’m not taking on clients because I’m largely mothballing the business.) My wife and I are in “sandwich” mode: three generations live in our house, and we are the middle generation. We have two young children, with their own delights and challenges, and members of the older generation, including someone who is experiencing significant cognitive decline. I spend a lot of time and energy keeping the household running. My biggest contribution from an income perspective is that I play defence so my wife can work.
From a “getting ahead” perspective, my expectations for this phase of our life are pretty low. Life has many seasons, some with headwinds and some with tailwinds. We are going through a period where we are facing financial headwinds.
Having said this, my wife’s income is enough for us to get by, and get ahead. We might not be in a position we’d be if we both prioritised generating income, but this is a set of decisions we’ve made that are in line with our priorities.
On this note, we are very happy to sacrifice financial velocity for quality of life. We don’t want to maximise our income at the cost of our lifestyle. Over 10 years ago I started working 4 days per week at one of my legal roles, and many of my positions since have involved 4-day weeks. With the exception of this year, my wife has also tended to work 3-4 day weeks.
Similarly, it’s worth mentioning that we’re not super interested in “early retirement” in the way that’s often envisioned by FIRE advocates. Personally, I want to die with my boots on – I’m hoping for another four productive decades. My wife doesn’t quite share that sentiment, but she also isn’t ready to retire any time soon.
What’s more important to us is to have decent balance during our working life, and to do work that we both enjoy and find meaningful. To put it another way: if given the choice to work exceptionally hard in order to retire in five years, or working in a more sustainable and enjoyable way for an extra five or ten years, we’d choose the latter.
It is remarkable how much financial pressure this removes. Early retirement is expensive: every year earlier you choose to retire is one less year of saving and another year you need to support out of investment income and capital.
Expenses
We don’t really budget. Judge us as you may.
The best I can say is that we structure our financial affairs to ensure we don’t spend everything we earn.
When it’s tax time, we often look at our household income and wonder “where does it all go!!?”.
Every now and then I run an “audit” of our historical spending. I’ll collect CSV files of transactions from all of our bank accounts, collate them, and categorise them. This can be useful. It’s often the case that it doesn’t change our spending habits much, but at least makes me/us feel a bit more validated that we aren’t being as wasteful as I/we thought.
I haven’t done this for the past 12-18 months. My heart tells me that we’ve let our spending has out of control. However, my brain tells me that I always feel this way, and that I’m always proven wrong. Also, our spending has been high, but a lot of this has been on one-off items that aren’t characteristic of our day-to-day living costs. We’ve upgraded from a practical car to an even more practical car, bought a wildly impractical car, and started catching up on a lot of deferred maintenance around the house. We’ve also “invested” in quite a few items that relate to health (eg bikes) and improving our capabilities (eg computer and photo/video equipment), but even these purchases are bought on sale or second-hand, and are very rarely top-of-the-line.
(The fact that I put “invested” in quotes above shows how counter-intuitive this can be. But I genuinely consider these purchases to be investments that will generate returns over the long-run. Head versus heart.)
One other thing that bothers me is that we don’t give enough to good causes. I am currently working through how to legitimately take the “Giving What We Can” Pledge to Give. This includes convincing my wife!
Playing defence
It’s one thing to focus on what you want to achieve. It’s another to think about what you don’t want to happen, and manage these risks.
The reality is, my wife and I are likely to be fine financially – so long as nothing goes wrong. We like our lifestyle, and we’re on track to support a good lifestyle over the long-term. For us, the defence is probably more important than the attack.
Insurance
Insurance is a tool for managing certain types of risks. As I’ve mentioned many times before, it doesn’t cover all risks, and even the risks insurance can help help to address can be partially managed in other ways.
We pay a lot of money for various types of insurance:
- House insurance.
- Contents insurance.
- Car insurance (comprehensive for all three; although we’re considering third-party for our least valuable car).
- Travel insurance (where applicable).
- Life insurance.
- Trauma/critical illness insurance.
- Total and permanent disability (TPD) insurance.
- Income protection/mortgage protection insurance.
- Health insurance.
- Professional indemnity insurance.
The last time I did a back-of-the-envelope calculation, my estimate was that we currently pay somewhere between $20,000 and $30,000 per year in insurance premiums. My guess it’s at the higher end of that range.
Is that an enormous amount of money? Yes! Is it worth it? Yes!
This is even though the most likely case scenario, and best case scenario, is that we will pay a lot of money in insurance premiums, and not get much back.
We are likely to retain some of these insurances indefinitely. This is the case with our general insurances (eg house, contents, cars).
Our life, trauma, and TPD insurances will reduce and probably fall to zero over our working lives.
We are likely to retain our income protection and professional indemnity insurances for as long as we continue working. (We may reduce the level of cover for income protection at some point in the long-run, and it’s possible it will fall to zero before we retire, but it will be the last of the personal insurances we cancel.)
Health insurance is new. We recently reviewed our insurances and decided to purchase health insurance for everyone in our family for the first time since moving to New Zealand. There are various reasons for this, mostly personal to our own circumstances, goals, and priorities. It’s quite likely that we’ll retain this for quite a long time.
One thing worth noting is that when our children are young adults, my wife we are likely to fund premiums for several personal insurances, such as income protection, trauma, and TPD. One of the reasons for this is because their risks will be our risks. If they end up being unable to work, or are diagnosed with a critical illness, or becoming totally and permanently disabled, it’s likely to be us who wear the cost. Once they are established in their careers we will pass the obligations (and squeaky-clean policies with little to no exclusions) back to them.
Other risks
Insurance doesn’t cover all risks – financial or otherwise!
We may have insurance to help manage the financial fall-out of dying early, being diagnosed with a critical illness, or being unable to work for an extended period of time. However, it’s also important for us to reduce the probability of any of these things happening, even if we can’t stop them from happening.
As such, we spend money on maintaining our health. Spending money on things that help us be more active may be easy to think of as expenses, but in a way they have a double purpose of being investments and a form of risk management.
Similarly, relationships are important. Time and energy spent on cultivating relationships with loved ones is important to us. The value of having good relationships doesn’t show up on a balance sheet, but they have an enormous positive impact on well-being. It’s also nice to have people who will be willing to help out if things go wrong (and vice versa).
There are also professional risks. If I’ve said it once, I’ll say it a million times. One of the biggest financial risks that people overlook is being displaced from the workforce. If you have to retire early because you lose a job and can’t find another one that is roughly equivalent, then that can have an enormous impact on your financial trajectory.
This is something I’m especially mindful of. This might be influenced by the fact that in my twenties I was in two roles that were made redundant (due to the organisations winding up), and because I’ve had people who are close to me go through the shock of losing a job and struggling to find consistent work.
It’s one of the reasons I’ve developed quite a diverse array of skills and knowledge: so I can be valuable in a variety of positions. There are costs to this strategy. If I’d continued specialising in financial services law, for instance, I’d probably be able to earn significantly more than what I can right now. However, I feel more comfortable now in my ability to find work if and when I need. (I also have more flexibility with my time, cognitive bandwidth, and I’m enjoying life more!)
The other benefit is that I have a very unique set of skills. If someone is looking for someone with practical experience in banking, financial services law, trusts and estate planning, and financial planning, with credentials in economics, entrepreneurship, and professional coaching, and strong skills in Excel and public speaking, etc etc etc, then there aren’t many other people out there. So at the same time as managing risks, I also believe I’m creating opportunities.
Pursuing upside and creating opportunities
The way I see it, there are some domains where it’s worth putting your time and energy to generate superior risk-adjusted returns (“alpha”) and there are domains where it’s not.
In that spirit, I don’t have a lot of time for trying to “beat the market” with investments in financial assets like publicly listed shares (or funds that invest in publicly shares). I am going to focus on areas where there is scope for generating alpha.
These are areas where markets are inefficient, and where I actually have control. This includes taking advantage of my human capital, and focusing on ventures (or potential ventures) in which I have some control or special access.
At the end of the day, I believe that my wife and I will be fine financially. To an extent, any income or wealth I generate is a bonus – partially for our benefit, and for the benefit of our loved ones. But in all likelihood it will mainly be for the benefit of charities and causes we care about.
I am in a position where the “rational” thing to do is to pursue expected return – and this includes pursuing projects and ventures where the probability of success is low, but the potential outcomes are enormous.
In other words: I should be trying to hit home runs, regardless of whether I strike out. In a lot of ways, my job is to seek and seize opportunities.
Our dirty laundry
We don’t budget, and our cash flow situation is rarely great
We’re quite feast-or-famine when it comes to cash flow. This often makes us feel poor.
I often look at our money spreadsheet and will observe that we are the “richest” we’ve ever been. But at the same time, my wife and I will feel poor because we don’t have a lot of cash in our various bank accounts.
This lack of cash is ultimately by design. If we have cash, we tend to spend it. I guess we could budget and have lots of cash on hand. Maybe that would make us feel richer. To date, however, budgeting in the way that many people advocate just hasn’t worked for us.
We don’t always pay our credit cards in full each month
Guilty as charged. However, it’s rare for us to go too long without getting to zero, and our balance is never unmanageable. The interest rates on these balances are terrible, but the amount of interest we pay in absolute terms isn’t so bad.
We own three cars
My wife and I own three cars. This includes a wildly impractical two-seater that brings me disproportionate joy. I won’t bore you with all the rationalisations.
We’ve bought some land on the West Coast and it will probably be a terrible financial decision
We’ve also purchased some land on the West Coast. We will probably build a small holiday home on this land over the next few years.
Is this a good financial decision? Almost certainly not! In fact, the more I try to “flawcast” our financial trajectory the more I wonder whether we should actually build on the land, and look at divesting. The cost is fairly high, unless we can set the bach up to pay for itself and/or it experiences significant capital growth (which I don’t ever like to rely on).
At the moment my feeling is that we will wait two or three years to see what our situation is at that time (especially after upgrading our kitchen), and what is happening with land and building prices. The flip side of this is that if we have a bach, I want to have it while our children are still young, so I do feel a sense of urgency.
If we end up building, it may not good financial decision, but will it be a good lifestyle decision? We hope so!!
Final thoughts, and our evolving concerns
I feel like I’m in a privileged position.
This is despite the fact that my wife and I have less financial wealth than most of my clients, and less than a lot of our peers who have prioritised building financial wealth.
However, this is a reflection of the “bubble” we live in. I am extremely mindful that the people I deal with, personally and professionally, are not representative of the country or world at large.
Ideally, we wouldn’t have a mortgage, yet we still have a mortgage that is sizeable and will get larger in the next couple of years, with a kitchen renovation and a potential new building in the works. However, we are in a position where we feel confident we can cover any mortgage payments without too much stress. If we were mortgage free, that money is likely to go into investments anyway and I don’t think our lifestyle would change much. The other consolation is we also have a decent amount of equity in our home, so that if we needed to sell and downsize, it’s likely we’d be able to do so, and have enough equity to buy something modest and be mortgage-free. In fact, that is an option we could take, but it’s not something we’re prepared to do.
Similarly, the amount we’ve already locked away in Australian Super and KiwiSaver could be higher, but is likely to compound enough so we can retire comfortably. Anything extra we contribute over the next 20 years or so is a bonus.
From a purely selfish perspective, all we need to do is cover our costs of living between now and sixty, and we’ll be fine. If we can save more for retirement and pay more off our debts then that simply means more home equity and more options in retirement.
All of this leads me to think that our life is on “easy mode”. Extra income or windfalls are likely to go towards more expenditure now and in retirement.
Or to loved ones and causes we care about. Which leads me to a final observation.
Our concerns are bigger than us
Our major financial concerns are less about whether we can support our lifestyle over the long-run, but about ensuring that we can provide opportunities for our children, and contributing to loved ones and causes we care about.
With respect to our children, we want to help with tertiary education and with getting on the property ladder. We also want to have a buffer for if and when they have children, so we can help the next generation, as well (especially with respect to education).
Just as importantly, we want to provide them an inheritance of rich experiences, a happy childhood (to the extent we can!), and a sense of security from being in a loving, engaged family. These things can cost money, either directly (“it’s coming out of their inheritance”), or in the form of opportunity costs (foregone income).
Having said all of this, I don’t think it’s especially healthy to give our children a free ride. We want to raise our children to be productive members of society. Nor do we want to build intergenerational wealth that means our children and our grandchildren don’t need to work. That doesn’t reflect our values or our view of the society we want to live in.
(I sometimes say that my two aims in life are to be so wealthy I can write an autobiography complaining about how hard it is to spend all my money, and also to ensure my children’s children’s children can skip the line at douchey nightclubs. But in truth, both scenarios sound dystopian.)
We’ve worked hard. But we’ve also been born in a time and place where our talents are rewarded, and where we’ve been able to take advantage of them. Our situation isn’t entirely predicated on our own efforts or abilities.
I’ve mentioned that there are lots of ways of investing “off the balance sheet”. These include investing in yourself. It can include investing in your health. It can include investing in relationships.
You can also invest by contributing to your community, and society at large.
At the end of the day, I want to leave the world better than I found it. Whether that’s continuing to earn money and giving to charity, or dedicating own time and energy in ways that take advantage of my own unique talents and inclinations.
As time goes on, and we get more comfortable about our financial futures, I find that my attention becomes less about our own situation, and money in general, and on we can make the most of our resources and talents to make the world a better place.
With all of this in mind, I have two thoughts:
- I wish everyone could be in this position; and
- It makes me even more motivated to sign the pledge to give, and commit at least 10% of our income to effective charities. If you’re in a similar position to us, I’d love it if I could motivate you to do the same!!