Friday, January 22, 2016

First Things First: Basic Principles

All financial success stories should come with a caveat: at the time written, the author enjoyed success--but afterwards, what happened? Was he or she still successful, or did a fatal flaw later emerge in the success plan? Did the author celebrate too soon? Did the author of "How I Made Millions" have to write a sequel, "How I Frittered It All Away?"


So before you jump in, reader, do your homework! At the time you discover this blog, you should find out if Alex and Barbara Szabo are still enjoying their financially independent retirement, or are they in the poorhouse now because their plan was inherently unsound?


April 2013: we assayed to blog at this time, but never posted it. What follows is the text of what was written then, posted now in January 2016.

Here we are, at a milestone time in our lives, and milestone times are always good times to summarize the past and lay out plans for the future. After 2 1/2 years on the market during the recession, our New Mexico home just sold (freeing up a good chunk of cash), and after 8 1/2 years working for MIT Lincoln Labs Alex just retired, ending a great flow of income. We have now got an investment portfolio worth one million dollars, and look forward to a regular “allowance” of spending money for the rest of our lives, without materially touching the principal. Nice milestone!


So. How did we get here? What did we do to turn from poor students into retired millionaires? How can we assume with confidence that our pot of money will remain intact, and generate enough for us to live nicely on for, say, thirty more years, without any further earned income, without its getting eaten up by taxes, and while still tithing ten percent to our church? Will you see yourself fitting into the patterns we have lived, or will you find that our method is not for you after all?


I hope to explain what we did and why, clearly enough for you to make your own informed decisions.


First Things First: The Setup


Alex and I had acquired differing financial habits growing up as children in our different families. I was a lot lazier about keeping track of money, and didn’t understand budgeting and planning as well as Alex did. I didn’t find the idea of counting money very creative or interesting, at the beginning. But I learned from him, and over the years I have taught him some things, as well. For instance, once I learned to enjoy seeing money pile up, I was much more loath to risk it than he was!


Getting married entailed adopting wholeheartedly one supreme financial principle and that was this:
We are a single economic unit.


There was to be no “his” and “hers” accounts, no dividing of wealth, no hoarding of hidden secret funds from each other. My father had hidden money from my mother, and then he left her. Not good! Although my parents (meaning, my mother and her second husband) didn’t save up cash in the bank as much as they leveraged it in real estate, risky tuna-fishing schemes, stocks, and some bonds, whatever income they each earned went into one pot, and whatever financial decisions they made, they made them together.


Alex’s parents both fully embraced this single-economic-unit principle and they were doing well when I met them, just as Alex’s dad retired. They were from Europe, went through World War II, and believed in paying cash for everything, and had saved up a huge wad of it and kept it entirely in money market CDs. Alex learned that if he wanted a new telescope, he had to save for it and THEN he could buy it, out of his savings. He worked through school. He had several thousand dollars in a savings account when we married.


We are a single economic unit.


It is not easy to adopt this financial assumption if you are selfish, as I was. What if one person works harder or earns more money for his labor than the other? What if one person doesn’t work at all? The “single economic unit” idea sounds a lot like communism. Actually, it also sounds like the Mormon law of consecration. What astounded me is that when we married, Alex was willing to give up “his” hard-earned savings account to pay off a mortgage that I had obtained on a house I “owned.” But he saw, rightly, that he merely transferred his savings from a liquid form into a real estate form, into something that we could both live in and enjoy. And without paying one single cent of interest to a bank for the privilege! As I say, I was more selfish in this regard (thus my astonishment at his generosity) but quickly learned about the benefits of pooling our assets for the common good.


Here is an example that makes this vital principle easier to comprehend: first, if you as parents have a burly teenage boy and a smaller five-year-old girl you already know that the one eats at least twice as much food as the other (or maybe, without children yet, you find that the husband eats twice as much as the wife). Do you begrudge the hungry one that extra quart of milk and all the leftovers? Do you make him pay extra for it? Probably not! You already understand that it is perfectly reasonable to let the burly hungry one eat more from the stew pot than the rest of your family. Where there is love, there is understanding and allowance. So it must be financially in your family. Everyone’s earnings go into the one pot--no matter how much or how little--and everyone’s expenses come out of the one pot--no matter how much or how little. Money is just like food, or shelter, or clothing--your family shares it.


Another vital financial principle right up there next to the first one will help you swallow the “all for one and one for all” financial philosophy. It is something I learned from my mother, and insisted that Alex and I adopt in our family budget: each of us must have a “personal allowance”--even as adults--that is sacrosanct; and it is imperative to agree that


We don’t have to justify to each other what we do with our personal allowance.


If we want to throw ours away on something the other feels to be useless, so be it, and NO NAGGING! The size of our personal allowance, and whether it includes or excludes, say, clothing, is something you discuss in your family and come to an agreement on beforehand. This allowance may go up or down over the years, but the main idea is that this is an escape valve in what might otherwise seem to be a rigid financial pressure cooker. I can tell you that it really helps!


An example: when we go on vacations together, this vacation money comes out of our common pot. But there was a time Alex had to go to Massachusetts for a week of work, and I thought it would be nice to go treat myself to a spa for a few days. I used “my” money to go do that, and enjoyed it without any guilt that I was spending “our” money frivolously on myself while my husband was slaving away trying to build our money up. We don’t have problems of guilt or resentment, but I understand that many couples might; and this concept will be invaluable to you if you have ever felt guilt as the spender or resentment as the earner:


We don’t have to justify to each other what we do with our personal allowance.

These two basic principles of family financial life (stated twice each, for emphasis) underpin all the saving, budgeting, and resource deployment suggestions in the rest of this blog:

1.We are a single economic unit.
2. We don’t have to justify to each other what we do with our personal allowance.

No comments:

Post a Comment