Ronald Read

I love every reminder I can get about the story of Ronald Read.

Ronald Read worked as a gas station attendant and janitor at JC Penney’s. He was known to be a frugal man. After losing his wife at 50, he lived alone for the rest of his life and enjoyed chopping wood.

After his death, folks in his community realized he had left two million dollars to his stepchildren and an additional six million dollars to local library and hospital.

How? He consistently invested his savings in (an eventual portfolio of 95) blue chip companies whose businesses he understood and held their stock for the most of the rest of his life.

There are many fascinating lessons from his story – making a life by what we give vs. get, the importance of savings rate, time in the market vs. timing the market, etc.

But, to me, one that always stands out is the transformative power compound interest can have in our life. Small consistent investments in all important areas of our life – health, money, learning, relationships – compound in magical ways over time.

Here’s to making one such investment today…

5 personal finance notes – volatile economy edition

I share notes on personal finance every few months. Given recent events, I thought I’d share a few notes that are top of mind.

1) A penny saved > a penny earned. Best to tighten up and watch those expenses extra carefully at this time. Also, it is likely a good time to defer any major planned purchases for a while.

2) Ensure you have an emergency fund that enables you to sleep peacefully at night. Most investment advisors will say you should lock in 6 months worth of expenses in cash as an emergency fund. If you’re able to manage that, that’s great. If you think you need more than that, that’s also fine. Whatever it takes to sleep peacefully.

3) Beware selling stocks. If you own stocks, beware selling them unless you desperately need the money in the next 6 months.

4) Consider buying into the market more. Is now the best time to buy? Nobody has a clue. What we do know is that today is a better time to buy in than 2 months ago when prices were sky high. So, if you’ve been consistently been investing in the markets, now may be a good time to bump up your monthly contributions with your savings (see 1).

5) If you’re comfortable and have enough to get by, consider keeping an eye out for small (or large) ways to help folks who need. Even small things such as being a regular patron at your favorite restaurant can go a long way.

PS: For folks graduating in the class of 2020 and for anyone else looking for a job right now, it is hard to keep track of which companies are freezing hiring and which aren’t. Here’s a great live resource from the Candor team for job seekers to understand which companies have announced hiring freezes.

Preliminary closing of the books

One of the activities that is part of the new year reset is a preliminary closing of the books for our household. While the final closing happens after tax season, we have enough information now to tally our income, expense, tax contribution, and savings.

All of these help me look at two sets of ratios –
1. Expenses %, Taxes %, and Savings % of total income
2. Growth in Expenses, Taxes, and Savings since the previous year

(example in this sheet)

The next step is to take a look at the breakdown of expenses to understand the biggest changes during the year (illustrated in the sheet linked above).

Doing these two steps answers 3 important questions –

1. How well are we doing with saving our money?: I pay more attention to the rate of savings than I do raw savings amount. The latter can go up simply by means of income going up. However, the savings rate doesn’t lie – it tells us how quickly our lifestyle is getting upgraded.

It is important to acknowledge here that it is okay to upgrade our lifestyle. It is just important to do it in a thoughtful way. Doing so in “category 1” expenses often mean we are climbing the hedonic treadmill (better home, better car, etc.  – this has long term consequences). And, doing so in “category 2” expenses means it is easier to cut back since this is in the bucket of guilt free spending. In either case, this is a good time to take stock of these expenses and ask ourselves if they are indeed making a difference to our happiness.

The other benefit of savings rate is understanding how much attention we need to pay to our expenses in the coming year. If the savings rate is between 0%-20%, I’d recommend paying a lot of attention. Budgets may be helpful. If it is between 20%-40%, some amount of regular attention is good. And, if it is in excess of 40%, you are in a decent spot.

Regardless, you’ll want to spend a bit of time looking at which categories grew this year. In my experience, there isn’t much insight to be gleaned here – if you’ve been reasonably plugged in, there should be no surprises here.

Finally, there are two reasons to not worry about temporary dips in your savings rate. The first is a jump in your tax bracket – this is a side effect of a good thing and you’ll be able to readjust next year. And, the second is a temporary expense – e.g. sending two kids below 5 to childcare. The only important caveat here is to beware marking too many expenses as temporary. There are always going to be surprises and unexpected expenditures.

2) How are income, expenses, taxes, and savings growing every year?: This is a very important piece of the puzzle – every one of these numbers tells us something.

Income growth tells us how we are doing in our career/business. It may lead to important questions like – do I need to pivot careers? do I need to re-negotiate my salary? do I need to quit this job and go out on my own or vice versa?

Expense growth, tax growth, and savings growth all have an effect on each other and lead to different insights. For example, it is vital that expense growth stays lower than income growth. If this is not true, there better be good reasons.

And, second, if tax growth has been rapid and is increasingly a big part of your mix, it may be time to hire a tax consultant to make sure you’re not making any mistakes.

3) Are we being thoughtful about investing what we save?: This takes us to the next sheet and is about ensuring we’re getting the basics right. There isn’t a right answer here as it depends on your goals. But, it is an important to check to make sure you’re being thoughtful about what you are holding in cash vs. investing.

The preliminary close of the books is an important part of the yearly financial reset. If all is mostly going well, then that’s great. But, if not, it is important to plan some concerted effort toward improving our processes.

Our finances are a foundation for long term happiness and are a reflection of both the privilege and the career and lifestyle choices we make. As a result, they can help point the way to making better choices to make our financial engine work better.  When this engine is working well, it acts as an enabler and gives us opportunities to increase our day-to-day and year-to-year happiness.

When it isn’t, it messes with our heads and our relationships.

It is worth paying attention to.

The Joys of Compounding and How to think about investing

Jana, a colleague + wiser friend, conducted a learning session on personal finance and investing for Executive Admins at LinkedIn. He shared these presentations on his blog and I thought I’d share them with you.

I love the simple presentation style and was grateful to him for reinforcing 3 important lessons –
1. Compounding is both magical and backloaded
2. The hedonic treadmill is likely getting in your way of saving for the future
3. Keep investing really simple – after paying off your debts and setting aside an emergency fund, max out your 401(k), and invest in low cost index funds.

2/10 effort for 8/10 outcomes | Personal Finance

The list of areas I seek to optimize has become fewer and fewer over time. As I reflect on the year that’s gone by, I’ve come to realize that this list is down to just two areas – work and family. As much as I’d like to include self-care/fitness on the list, I can’t do that with a straight face.

For everything else, I’ve operated with what I consider the satisficer credo – expend 2/10 effort for 8/10 outcomes and make peace with the fact that these outcomes will never be a 10/10.

In practice, this means accepting that, in areas like personal finance or travel, I’ll likely not have the best credit card or flight deal. Instead, I work with a collection of simple solutions that I don’t need to change very much.

So, I thought I’d document these solutions in a series of posts – my hypothesis is that there’s a series in here that culminates in a post with an updated set of life principles/mission statement (this might not work :-)).

And, I thought I’d get started with Personal Finance. The tactics in this one will be most applicable to folks in the US – that said, I’m hopeful the principles will hold. Also, I choose I and we interchangeably to mix it up – in our case, all “I” decisions have been”we” decisions since we got married.

1. One primary credit card – Chase Sapphire Reserve. I use one primary credit card – as of this year, it is the Chase Sapphire Reserve. Some optimizers I trust said it is among the best credit cards out there and I can see why – I have been impressed by the rewards. I was loyal to AmEx for nearly a decade – especially as they were generous with credit limits when I first came to the US. But, their rewards weren’t working out for us and I only have place for one primary credit card. I took a 20 credit score hit when I shut that card down. But, that’s the price I pay for simplicity. I’m sure it’ll work out fine in time.

2. Secondary credit card Amazon Prime Rewards Card. This was a 2019 experiment as it seemed like a no brainer to get 5% back on Amazon purchases. It is here to stay.

3. 2 bank accounts – a physical and online high yield savings: We set up a Bank of America account when we first moved – this remains our primary physical bank. We added an online bank account for high yield savings – Marcus by Goldman Sachs. This is another in the no-brainer category. 

4. Treat equity like a Cash Bonus: Many companies offer equity compensation. I choose to treat equity compensation as I would a cash bonus – rationale as explained here on the Wealthfront blog.

5. Simplify long term investing – 401(k), backdoor Roth conversions, and automated transfers for investments with Vanguard Advisory Services: We max out our 401(k), use backdoor Roth conversions, and automatically transfer the rest into Vanguard Advisory. Vanguard helps us  to help us with investments at a low cost ($3 for every $1000 under management). I’m not expecting them to help us beat the market and generate jaw dropping returns. But, I’m expecting them to help us save us from ourselves and do an 8/10 job in the long run.

6. 1 Google spreadsheet for all the math: As I’ve shared before, we maintain a simple Google spreadsheet to keep track of all our expenses and investments.

Now, here’s the interesting part – there are ways to optimize every one of these steps. You can have many credit cards which accumulate points in fascinating ways. You can do the same with a myriad of bank accounts. If you receive equity compensation, you can aim to buy and sell in ways that maximize your gains. And, of course, the biggest optimizations come in the area of investing – there are literally millions of possibilities.

But, there’s also limited time in the day and infinite ways we can spend this time. So, we are left with no perfect decisions. All we can do is understand the trade-offs and thoughtfully choose our path.

Implicit to the decisions we’ve made above is an acknowledgment that we’re not going to measure our lives by the amount in our bank accounts. We’re not going to be the folks with impressive year-over-year growth rates on our savings and investments. We’re also not going to be the folks who made millions of dollars with simple investments in crypto/insert-cool-new-thing.

Instead, the goal is to do the essentials, avoid stupid mistakes, and use the money we earn from our work to create the sort of life experiences that maximize quality time spent with loved ones, learning, and a positive contribution to problems that we consider meaningful.

This gets to the power of pursuing simplification in all but a couple areas in our lives. It helps us avoid time spent optimizing the things that don’t matter so we can create space for the things that actually do.

Credit card fraud

Our approach to saving has been consistent in the last decade. We chose not to maintain budgets – instead, we’ve adhered to a principle of “conscious spending” and targeted saving 40%+ of what we earn.

As part of staying true to this principle, we’ve consciously entered every expenditure into a spreadsheet. It is simple, low tech, and ensures we’re making conscious spending decisions.

The other benefit of this approach, as I learned yesterday, is that it also helps us quickly catch credit card fraud. I had a few notifications of expenses that I was about to enter into the spreadsheet, found one I didn’t recognize, and called Chase to confirm that our credit card had been compromised.

It was a nice reminder to schedule an end-of-year security audit. If you haven’t scheduled one, this practice comes strongly recommended. 3 things to check in on –
1) 2 factor authentication on all your key accounts
2) Notifications on all your credit cards so you know when expenses are made
3) Set up monitoring of your credit and account details using services like CreditKarma and SpyCloud.

Stay safe out there.

PS: In case helpful, I’d shared a couple posts last year on our approach to personal finance. As part of that, I’d shared the simple spreadsheet we use and how it has evolved over time.

Filing tax returns

As we get to wrapping up filing our tax returns for the year, I am left with one checkpoint and one reflection.

The checkpoint is the annual exercise of making the final update on the box on our accounts sheet that calculates savings for the year from Income – Expenses – Taxes. It is helpful to reinforce where we landed for 2018 and how each of these is trending from one year to the next.

The reflection revolves around everything these taxes pay for – including the infrastructure that I often take for granted. The quality of a society’s infrastructure determines the overall productivity. And, I’m grateful for the opportunity to contribute – in a small way – toward making the baseline a bit better for everyone.

The trim dashboard

One of my favorite product experiences as a user in the past year has been with Trim. Their value prop is simple – you connect your cell phone and cable accounts – and they negotiate a better rate every few months.

As they serve thousands of customers, they have the data at hand to negotiate effectively on your behalf. So, I find myself smiling every time I receive a heads up text from them that says “we’re negotiating on your behalf.” Their latest negotiation (not yet added to the dashboard) seems to have saved me another $180 for the year on my Comcast bill.

And, that’s on top of the ~$600 in savings they’ve negotiated in the past year. I’m happy for them to take 33% of this as revenue as it still means $400 in savings.

Their dashboard, thus, is a weekly reminder of the value they’ve added to my life.

As someone who attempts to build valuable products for a living, the Trim dashboard is a great example of this gold standard user experience – the ability of a product to clearly demonstrate the value it delivers.

Spending money where we spend our time

One of the better pieces of advice I’ve received when it comes to spending money was – “Money well spent is generally spent either on experiences or where you spend your time.”

The second half of the advice has been particularly helpful over the years as we’ve made purchase decisions. Investments in a nice mattress, comfortable daily wear clothes and shoes, nutritious food, and ergonomic work equipment tend to have a high return-on-investment.