Last week I received the following message:
I’ve decided on a bit of a different financial strategy. My first priority is paying my housing. After that, I can figure out how much I have left for anything else.
What’s your take?
Anonymous
I think there is a lot to unpack with this question. Not because the answer is complex, but because I believe there is a consistent theme. As the number of questions we receive increases, the patterns that exist in our community become increasingly evident. The issue here is one of intentionality.
In future articles, I will dive deeper into the topic of intentionality, but to start off I want to give two excerpts from my conversation with this particular family.
Everything can be changed.
Everything can be challenged.
Every perspective can be rethought.
It’s as though someone comes to me with a BMW payment, right?
They have a BMW they pay $800 a month in the BMW payment.
They say, okay, well this is my payment today.
I have to figure this out, Right, okay, you’re telling me to invest but I have a payment I need to make.
So what do you mean?
Well, we have to zoom out and have the conversation, what makes sense?
Does this payment make sense?
Right?
Does it make sense for this person to be driving A BMW?
Let’s figure that out.
Let’s look at the numbers.
Let’s run the simulations, let’s figure it out.
Let’s make it intentional, right?
If that person really wants to BMW I need to show them how valuable and how much it costs them in the long run.
And to actually show them with real numbers this is what’s changing about your life because you wanted the BMW.
And do you want to accept that?
And if they say yes, *then* it becomes a payment.
They need to prioritize.
But then you need to then if you want to pay that bill, you have to redo all your other numbers.
You have to figure it out.
Okay, okay, well I have to invest this much and I have this payment, and therefore: one of us is changing careers, one of us is doing this, we’re gonna have to figure something else out. I have to change jobs, I have to sell something else. I have to have one less payment somewhere else.
But if you’re making that decision, you have to balance it out somewhere.
The main point I am trying to hit home here is to not look at current expenses as a given world that has happened to you. Most expenses, with obvious exceptions, are a product of decisions we ourselves have made. Mortgage payments that are twice the price of what the average family pays in rent in your community are no exception. These are financial obligations families need to take upon themselves with full intentionality. I am not advocating for people not to buy their dream homes. Quite the opposite. I am advocating for people to see how the purchases they make impact their future and their families.
⚠️ The next paragraph is a contrived example merely used as a demonstration of the idea. We are assuming all but one variable remains the same for the sake of simplicity. ⚠️
A quick math break to show you the impact of decision when you plan using the “working backward” method that I am proposing. A lot of assumptions will be made, but that is okay as this isn’t intended to be a deep dive. Take a family in a low-cost-of-living area. They plan on living off of a 60k salary in retirement. In order to do that, they are aiming to live off of a 4% withdrawal on a $1.5M portfolio, starting at age 65. Rewind 40 years. The young couple is 25 and buying their first home! A member of the frum.finance team calculates that they are able to afford a maximum of a $2000/month mortgage payment. The family decides to buy a house with a $2100/month payment instead. That decision isn’t necessarily a bad one if they understood the impact it will have and they were intentional. This is what I would present to them so that they could make an informed decision in order that they can be intentional. The $100 less they are investing a month would drop their 40-year portfolio projections down by $300k (assuming 8% returns). It comes out for this situation that they would either (1) need to retire at 68 instead of 65, working an extra 3 years, or (2) live off 48k in retirement instead of their 60k expected retirement salary. If they are okay with either of those two options, then perfect, buy the house!
You can either plan your financial life looking forward and hope that things work out in the long run, or you can plan your life backward and then scramble to pay for things today. It is my belief that it is far more reasonable to expect people to be driven by immediate expenses, and therefore, have to use the “leftovers” for today’s expenses. If the metaphorical economic fire is lit right in front of you, you will be much more creative to figure out a solution (side hustle, cutting expenses, starting a business, changing careers, etc). On the other hand, if the danger is off in a distant land 40 years in the future, you don’t feel the heat. If you don’t feel the heat, you won’t make economically impactful out-of-the-box decisions to increase your net worth. 40 years in the future when the problem has finally materialized, it is usually far too late for the number one wealth builder in history, compounding, to take effect.
In this last voice note I sent that night, you can see how I share this idea of the two different financial views.
There are two ways of thinking about the problem:
1. I have my expenses today and I have my income and whatever is left over I invest, that’s what most people do – and that’s the failure.
It’s the opposite!
2. I have my investments and whatever is left over, I get to spend.
Your investments are detailed by your long-term goals.
Right. The goals you can change, right?
So if you need to spend more today, you change your long-term goals.
Or you change your income.
But it needs to be the other way,
It is not, it will never be, I will spend what I have and whatever is left over, I will invest because there won’t be what’s left over.
And you’re not being intentional about it.
You’re not planning, you’re not creating kelim for what you actually need.
You’re not thinking about the bar/bas mitzvah, you’re not thinking about investments when you’re buying the steak. You’re not thinking about this stuff.
So bring all those goals.
Figure out: what do I need to invest every month today?
Let’s say I tell you you have to invest $1500 a month for you to meet your goals.
So if that’s the case, what do you need to change about your life?
It’s not the other way around.
If you would plan it the other way and you have your goals and you only spend what’s left over, it forces you to rethink your decisions because you have to invest that amount.
You have to, and if you don’t, you’re done.
So we have to work backward from that amount and then from there you figure out, okay, how much can I spend today?
At this point you might be asking, how do you calculate expenses in the future and budget for them today? Well, that is the topic for a future article, but in the meantime, I would recommend joining our slack where we discuss topics exactly like this and how to run the numbers!
Do you like this inline voice note format? Let me know baruch@frum.finance
