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.
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.
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 email@example.com