Financial Modeling


If I were your financial therapist (yes, that does exist), one of the first things I would want to know would be about your parent’s relationship to money.  And when you get married, you learn real fast about how your spouse was raised with regards to money.

These lessons from our parents are passive, and deeply ingrained.  But now that it’s our turn to ingrain that money ethos into our kids, let’s do it mindfully.

Set clear spending priorities as a family: “No, you can’t have that toy, because we want to use our money to take a vacation this summer” is WAY different than “No, you can’t have that toy because we can’t afford it.” You switch from a mentality of want, to a mentality of abundance.

Be consistently generous: Kids regularly come face to face with poverty and homelessness, and your reaction to this need is their model.  You can’t fill every ask, so having a structure to your giving offers your kids something solid to hang onto: “we give a % of our income to xyz,” or “we volunteer at the soup kitchen every month,” or whatever it is that inspires you.

Be confident: When you see that others have more or less than you, how do you react?  If you are confident in your own financial position, you have the space to be happy for those who have more that you, and compassionate towards those who have less.  This plays out on a big scale: when you get passed by a Maserati do you admire the car or curse his greed?  And on a small scale: when your cousin buys a vacation home are you excited to visit or agitated by his success?  On the flip side when your cousin loses his job are you compassionate or do you blame his laziness?  See what I mean here?  Your kids are watching these reactions to learn about how to react to relative wealth.

I wrote an article for over here exploring these issues more in depth, if you’d like to read more.

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Where Does Your Money Go?


I read The Soul of Money by Lynne Twist over the weekend.  I have a few nuggets of wisdom from this kind of heavy-handed book to share with you guys.  One passage that stuck with me was this:

If you want a clear picture of your priorities in life, who you are and what you care about, look at your checkbook, your credit-card bills, and bank statement.  That’s where you can see the flow in black and white.  (…)  We can witness how money comes to us, how we spend it, save it, invest it, give it to others, and in this personal financial fact-finding mission begin to see the flow as a representation of our values. (…) Without a judgement of good or bad, when you know the flow, it gives you the necessary self-knowledge to make conscious choices that align your spending with your vision of yourself and your highest commitments.

Maybe you look at where your money flows and really find that it largely resonates with who you are that it supports the world you want for yourself and others.  Or maybe there are some gaps in how you see yourself vs. how you use your money.

This thought has given me pause over the past few days, as I think before I spend “is this who I am?  Is this what I care about?  Because this is where my resources are flowing…”

Beyond little purchases, though, the bigger changes that an outlook like this might spur aren’t changes that happen overnight.  We set up our money edifice and it is strong and complex. We have a mortgage and a standard of living and deeply held habits – none of which are easily changed or even examined.  That is exactly why most of us feel like we don’t have a choice about where our money goes or where it comes from.  We feel like our money flow is a reaction, not an action.  But if we take a few more steps back we are the ones in charge of what our financial obligations are.

[gif by Geoff McFetridge] 

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The Grocery Budget + Reusable Bags


I am in complete awe of people who spend less than $1,000/month to feed their families.  I have TRIED.  I have shopped at Safeway.  I regularly serve rice and beans for dinner, and oatmeal for breakfast.  I am militant about not wasting food.  We eat very little packaged food.  I make everything from scratch.  I buy organic produce selectively (organic berries, conventional potatoes, etc).  Our main snack is popcorn, for crying out loud.  Popcorn is basically free.

What am I missing??

There are some luxury foods I would never give up, mainly REAL of the following: parmesan cheese, maple syrup, bread, chocolate, coffee.  But come on, that’s not a deal killer, is it? And we do feed our fair share of neighborhood children and have friends over for dinner regularly. But I’m not supposed to give up on a life worth living just for the sake of a grocery budget, right?

I think I might have hit on part of my problem tonight as I was reading The Economist.  The headline was “when people feel good about themselves, they do bad things” which caught my attention.  I think food is virtuous: feeding my family, baking from scratch, making favorite recipes from my childhood, adding parmesan to everything, hosting dinner parties, pouring drinks.

The article referenced a few studies that illustrated what psychologists call “moral licensing: the tendency to indulge yourself for doing something virtuous.”  In one study, researchers tracked American grocery shoppers in one store for two years.  The shoppers who brought their own reusable bags were more likely to buy candy, ice cream, and chips.  In another study in Massachusetts 150 apartments were divided into two groups: half were given water saving tips and weekly updates on their water usage; the other half was a control group and were given no information.  The apartments that received the water saving information decreased their water usage by 6%, but their electricity consumption ROSE by 5.6%.  The effect of moral licensing was so strong it basically neutralizes the virtuous act.

If I have a cart-full of raw veggies that I am going to bust my ass chopping and sautéing, you better believe some gourmet caramels are going in the cart too.  I think this might be the hole in my bucket…I feel good about buying food.

[image here]

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Stop Getting Fleeced


[protect your money from the fat cats.  you got this.  do you need this coat first, though?]

Warren Buffett’s criticism of the financial industry is scathing, and his annual letter to shareholders this year was no exception.  Buffett, like John Bogle of Vanguard, is adamant about low fee investing and not paying for money managers.  In fact, these are Buffett’s instructions for what should be done with the money he is leaving to his family upon his death:

“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

That…is really good advice.  Put your money in a very low cost index fund.  That’s it!  But too many people instead outsource their investing to professionals and in the process sacrifice a ton of money.

Investment advisors get paid commissions when they put your money into mutual funds with high fees.  So naturally, these high-fee funds are chosen because the advisor is getting compensated for choosing them, not because they are high performing funds for you.

When you pay an investment advisor you are losing three times over: your money is going into a poorly performing fund, you are paying high fees to the fund, and you are paying an advisor to put your money there.  Lovely.

If you put your money into a low-cost index fund, and don’t pay for anyone’s advice to do it, you are coming out 1-3% ahead just on fees alone of someone who has their money “actively managed.”  This doesn’t even take into account the fact that low cost index funds usually outperform expensive mutual funds.

Obama has been trying to reform a sliver of this industry by passing a law that managers of IRA retirement accounts would be required to put their clients interests ahead of their own, a.k.a. fiduciary responsibility.  Seems reasonable, right?  I mean, you are paying an investment advisor to make good investments for you.  But as you might imagine, the pushback from the financial industry has been fierce – they want to be able to continue to prioritize their commissions over your returns.  Not classy.  Not classy at all. .

Do not get fleeced by the fat cats.  I’m begging you.  Put your money in a low cost index fund with Vanguard, and leave it there.  K thanks.

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What Is: Inflation


Why is inflation so important?  And how does it impact our economy?  Wondering why we should care about the consumer price index, or the Fed’s interest rates?  It’s not complicated, give me three minutes and you’ll get it.  Here’s the basics on inflation:

What is inflation? Inflation causes each dollar to buy less.  (Deflation causes each dollar to buy more).  You can look at inflation as the changing value of a dollar, or as the changing costs of items.  Inflation is why one dollar used to be worth something, and why gum used to cost a penny.

What causes inflation? One theory is “demand-pull” which says if there is more demand (money) then supply (stuff), prices will increase.  The other theory is “cost-push” which says if a company’s costs go up they raise their prices.

The Consumer Price Index is how inflation is measured.  It is a survey of the price of a bunch of different goods and services (gas, clothes, cars, etc) and how that cost has changed. When the consumer price index goes up, that means prices in general are rising.

When interest rates drop, loans are cheaper, and consumer spending increases, which in turn causes prices to rise (demand-pull theory, remember?).  So the Federal Reserve sets the interest rate as a way of controlling inflation (raise interest rates to lower inflation rates / lower interest rates to raise inflation rates)

Are we pro or anti inflation?  Apparently a developed country wants to have 2-3% inflation per year.  As a consumer and investor, you have to factor this into your income (a stagnant salary is actually a decreasing salary since your life costs 3% more each year) and you have to factor it into your investments (a 3% return on your investments is actually a zero return, since your money is worth 3% less each year)

too much inflation is bad because:

1) your tourism and exported goods become too expensive.

2) People living off of a fixed income have decreased spending power.

3) Uncertainty about how fast the prices will rise makes people and companies not want to spend.

too little inflation is also bad, because:

1) It means the economy is not active.

2) Inflation encourages investments (which grows the economy) because holding onto cash means losing wealth since the value of your cash is decreasing.

3) When the economy goes into a downturn we need room to maneuver the interest rates down, which we can’t do if the interest rates are already at zero.

I think that’s it!  Did I miss anything?  Do you get it?

[image here]

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I don’t know if you saw in the comments here, but there have been a few bids to switch #moneymonday to #financefriday.  The problem is, I don’t give two shits about anything by Friday afternoon.  Except pizza.  So I am going to persevere on my Monday plan, which is today.

We are going to errand our hearts out today: the grocery store and the hardware store and the dry cleaners.  We are going to plan, strategize, and worry about our money today. Lists will be made, bills will be paid, and I will look at our budget (which always looks great on the first on the month!).  But then, tomorrow, and for the rest of the week, we won’t do any of that.  Can you compartmentalize your finances, and only worry about it one day out of the week? I’m going to try.

Also, if you are bummed about being back to work this morning read this: how to love your job even if you don’t like it.

[image here]

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Moral Investing


There is a debate on the investor side (which I touched on here), of whether you are leaving money on the table if you choose to only invest in companies that are aligned with your morals and priorities.

I made the point, which I still stand behind, that if you are investing in individual stocks you are taking a gamble.  If it were a sure bet that bad-guy stocks were going to make a big return than I would say yes! Invest with the bad guys!  But that’s not how it works.  And sometimes, it’s quite the opposite…

Here’s what Tim Cook, CEO of Apple said at a public shareholder meeting last year: “If you want me to make decisions that have a clear ROI, then you should get out of the stock, just to be plain and simple.”  Wha-what?  He said they make decisions because they are “just and right” and they “advance humanity.”  Ok, this is from the CEO of the most valuable company in the world.

The quote above is drawn from Fast Company’s coverage on what they call “Generation Flux,” which is a group for whom “purpose is at the heart of their actions…a mission is the essential strategic tool”

The article put Ells, of Chipotle, in the same boat as Cook, and says they “represent a rising breed of business leaders who are animated not just by money but by the pursuit of a larger purpose.  Their motivation may be personal, emotional, and, yes, moral, and yet their idealism is rewarded in the marketplace.”

The caution as an investor is that when you are investing in companies you believe in you can start to feel loyal to them.  As an investor, you have to be willing to cut your losses when you have made a bad investment, and to sell at a peak when you think the ceiling is close.

[A valentine Tim Cook deserves, here]

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