Spending Discipline

Spending discipline is not just a personal decision. Choices have consequences. It is much easier to be “harsh” or stoic, if it is just you. The yogic idea of Tapas is the opposite of a holiday. “Tap” means “to be hot”, but the practice is embracing difficulty in order to gain comfort in it. Where the heat births inner strength. Holidays are normally where we release the pressure built up in a 5-day work, 2-day recovery cycle. Something we look forward to, and use as a reward. With Tapas it is in the other direction. You remove the pleasures and complexity, and when you return to real life you suddenly see the flavour and joy. 

Much of what we spend is habitual and deeply intertwined with our community. “Nothing kills an activist like a mortgage and school fees”. The more extreme measures of cutting back expenses (in order to build buffers of emergency funds and capital to support you in difficulty), become challenging when money going out is not a voluntary pleasure. Fixed expenses are things you no longer make decisions about. They just happen. Like living in a particular area because that is where the school or job is. Moving would have real consequences. Real trade-offs. So even when there are cheaper options, they are not your options. 

When you start the journey of financial planning by writing a list of how you spend, there will be steady outflows that are fixed and regular, and bursts that variable and voluntary. There will be items that feel like your choice and others that feel chosen for you. Every journey towards more autonomy and consent, starts with “where are you”. 

Write that list. See where you are starting from.

Support Structure

The original Marshmallow experiment looked at whether you could predict future success based on the ability to wait for a sugary treat. The skill of delayed gratification. More recently, a study controlled for socio-economic factors like parent’s education and early childhood development support. Once that was taken into account, waiting for the marshmallow had almost no predictive power about future success in school or life. Waiting is a core part of wealth creation. I do believe it is something you can learn. Something you can build into your habits. Spending has rhythm. Daily, weekly, monthly, yearly. You can pay attention to the things you consume regularly. You can pay attention to unsurprising surprises you can plan for, so they don’t regularly force you to start from scratch. Then, if you have fundamental faith in the future, and your place in it... you can allow the space and time for reinvestment. Where wealth isn’t what you consume or display. Wealth is the systemic structure that supports creativity.

Gothic Quadripartite Cross-Ribbed Vaults

 

Two Marshmallows

I don’t like being the bad guy. I don’t think most people like that, but I don’t subscribe to the “it doesn’t matter what other people think” philosophy. You can only make purely independent decisions if you are a hermit. If relationships matter to you, then connections and consequences matter. Yet there is a balance. Your interests matter too. One behaviour that creates capital is delayed gratification. If you are living purely in the now, then every decision is about the now. You are not building space. You are not building time. You are not building capacity. Because everything is about now. There is a story (controversial in its scientific rigour) about putting Marshmallows in front of children. If they can wait for the researcher to return, they get two. The test was meant to evaluate the ability to take charge of your emotions. A powerful life skill. The controversy is over whether this an innate or learnable skill. Imposing delayed gratification on others isn’t fun, and building capital is a team sport. We make many of our financial decisions together. Our joint decisions are the key to whether we consume what is created or whether we act as custodians and reinvest. Building space, time, and capacity.

 

Part Owner

If you love chocolate, and eat too much, it is easier to not have chocolate in the house. The danger as an investor in the Stock Market is that you can always sell. The price is a quote of what someone will pay you if you do. It’s the chocolate. It is not what the ownership is worth. As a Fundamental Investor, you are a Part Owner. Viewing yourself as an owner, who believes in the product, believes in the management, and believes in the business, changes the way you think about the dips in price. Unless something fundamental has changed, ownership gives you a vested interest in the venture and stakeholders surviving and thriving. Even if something has changed, if a genuine problem is being solved and the business has the capacity to continue solving it, you remain an owner in something of value. It makes bumps and dips part of the texture of life. Perhaps the biggest part of being an investor is self-awareness. Self-analysis. Self-correction. Even though your behaviour and the business are separate. If you have a fundamental belief in what it is you are building, it is easier to see through immediate noise. To keep your head even when instant gratification is always available.

About You

Time, Delayed Gratification, and Demonstrable Value Creation. 15 years. Half of what you earn. Reinvesting Real Return. There is nothing sexy or clever about my prescription for how to create Capital that can work for you, so that you can make choices that aren't constrained by money. It doesn't even solve the "Catalyst Question", which is harder. How do you get an income?

I grew up in Apartheid South Africa. Many of the foundational stories I heard came from the hard times in the Bible, and the frontier stories of self-sacrifice (like Rachel De Beer and Wolraad Woltemade). No get rich quick schemes to solve problems. Time and hard work.

If someone promises you Financial Freedom in a few months, you are probably the product. Be careful when the music stops. I know my two cents sounds like a wet blanket. It often is. When people have a good few months, or a good year, I am probably not the best person to celebrate with. I am interested in good decades. In underlying sustainability. In what is going on beneath the surface, and does it have the capacity to carry on carrying on.

Rather than a clever idea or thinking outside the box, my own approach was to lean into my Privilege. I was good at maths and exams. STEM subjects provide barriers to entry because the jobs they create require the time (and money) investment. Open secrets. I did a Business Science degree in Actuarial Science because not many people could, and it paid dependably well. I also did it because an Insurance Company was prepared to fit the bill in exchange for working for them afterwards. I followed up that degree with professional qualifications. A profession is a ticket to a set of skills others can't just say they have. A barrier to entry. The definition of in-the-box thinking.

I really can't provide great advice to people who aren't on a similar path (e.g. studying Actuarial Science, or another high paid profession). Starting small businesses is hard, and the Corporate World and regulations are biased towards the big players. LinkedIn (networking), Amazon (logistics), and other platforms (Uber, AirBnB etc.) are providing interesting new angles, but I still think it boils down to developing Skills and Knowledge that solve problems. It is true that you don't need University to develop real skills and knowledge that solve problems people are will to pay for.

Whatever that source of income is, then the steps I mention do kick in. Time, Delayed Gratification, and Demonstrable Value Creation. For me, I invested a significant portion of what I earned for a long period of time in businesses that were creating real value. Nothing clever. Because of Equity Funds and Stock Markets, the public can get their money jobs in the way individuals struggle (your money doesn't need a CV). A dollar from me, from you, your plumber, or from Bill Gates is all exactly the same. Our skills and knowledge no longer matter.

The whole point of Engine building is that it doesn't have to be about you. You don't have to be constrained by the cards you are dealt. Except we are. Until we build the Capital to release us, our stories will be all about us.

There is a whole world beyond that. A world beyond people being productive assets. 

Graduation

Start with Half

The point of an Engine is to finance your life. Not everything we do makes money, nor should it. Without an Engine, you need an income stream to finance your spending needs. Building an Engine aims to replace your role (completely or partially) as a productive asset. To give you permission to release the filter of “how will this make money” in your decision making. Three things matter. 1) The Real Return (after everyone has fed – tax, costs) 2) The Time you allow your money to grow unmolested (In which the Real Return is reinvested. Reinvestment is the pumping heart of compounding growth.) 3) The Share of your income stream that gets put to work rather than spent. The “5-15-50” method is one target model. Unmolested, I believe well invested Equities put to work for a long period (i.e. 15 years) have a good chance of earning an average 5% real return. 50% (one for me, one for you) is a super aggressive savings rate. But recognises that nothing gets built if everything gets eaten. If an income is sufficient to finance your consumption and investment in this way, and you get the 5% return for 15 years… you will have built an Engine capable of continuing to finance that income stream. Capital to release you.

Start with a Half

Have your Cake

I have always struggled with the concept of “covering reasonable expenses”. Reasonable is in the eye of the beholder. Even if people are told to “spend roughly what they would have spent on themselves” anyway. I am a cheap bastard most of the time. Spending money is firing money. One of the best magic tricks of Capitalism is to convince people that it is better to “have their cake, but not eat it”. Then, instead of cake, they get a number that grows. Many of the super wealthy we look at are super wealthy “on paper”. They fire (draw salaries to spend) at different rates. Another rule of thumb for reasonable is “think like an owner”. But an owner knows not eating their cake means it gets bigger. An employee isn’t an owner. So expenses are often considered part of the remuneration. If you want to see entitlement, don’t look towards the poor. Look towards senior management. Actions normally follow incentives. Reasonable completely depends on how you look at the world and what drives you.

The Intelligent Investor

My introduction to investing was fairly late. I was always a good saver, but saving and investing are different (though related) things. The youngest of three brothers, I was determined to be the last to have chocolate left at Easter. I also took as much advantage as possible of the family incentive scheme. If we saved up for something, it was matched. I was still saving “for” something, rather than putting money to work. I chose to study Actuarial Science because I didn’t like money controlling me, and that seemed like a safe way to secure a good income with the skills/privileges I had. Through that, and further investment studies I ended up at an Asset Management firm. The book I was then given to read was “The Intelligent Investor” by Benjamin Graham, and a shorter one, “The Little Book of Value Investing” by Christopher Browne. Saving is primarily about discipline and delayed gratification. Investing is about making sure the money is working. That through the noise of numbers and opinions, something of value is being done.

Engine Repair

Endurance allows you to build something significant over the very long term. Resilience protects the things that matter from being destroyed by the things that don't. Endurance and Resilience simply provide the container for Creativity. What we do matters. That is where meaning is created. The container for that meaning creation is essential. There are good ideas, and there are good business ideas. Breadwinning and Homemaking. The Bread creates the container, but the home creates the story. I don't believe we all have to make Bread. Building Capital creates Engines that can power good ideas that aren't good business ideas. That requires some pretty harsh reality checks. If your Engine is an oven that bakes bread... and the bread stops coming, or not enough comes... you have to roll your sleeves up. Look at the menu of options, and make a choice.

Team Sport

Delayed Gratification is a powerful investment tool. Warren Buffett talks of multiplying the price of anything by ten to see if it is still worth buying. This is because spending money is functionally equivalent to firing it. if you think of money as Capital you are a custodian of, rather than your spending budget. Spending money means it can’t grow. Buffett backs himself, given enough time, to turn a dollar into ten. There is some pleasure in this kind of discipline. Seeing the number grow. You don’t “get” anything, but the “score” gets bigger. It is obviously much much easier to be harsh on yourself in this kind of way than on others. This is why building and investing is a team sport. It is easier to spend less if your friends and family are spending roughly the same. Otherwise the self-discipline required multiplies because the choices take on emotional content. Conspicuous Consumption is a particularly dangerous virus to spread. Conspicuous Consumption is a stupidity tax. That’s fine if you have cash to burn, but not if you are just starting on the path of wealth creation.

Working for You

There was nothing particularly clever about my path to Financial Security. I did my 12 years of schooling in the 80s and 90s in South Africa for next to nothing. Both my parents have two university degrees, and both my brothers are Medical Doctors. I chose my career pragmatically. Old Mutual paid for my University studies in exchange for a commitment to work for them for 1.5 years for each year they paid for. I did a 4-year Business degree in Actuarial Science. While working, I followed that up with professional studies as an Actuary, in financial planning, and in financial analysis. I then invested roughly half of whatever I earned, until I had enough Capital to pay myself a Basic Income. In 2014, I stopped working for money, and let my money work for me. More brute force than a bright idea. No one but you has the answer to how you will build Financial Security. No one has your Menu. I believe in empowerment. Supporting people and communities to develop their solutions. Finding stories, sharing stories, and building stories from common ingredients and unique combinations. All advice is more valuable as a question than an answer. Stay curious.

Not Sexy

I built myself an Engine. This is Capital which acts as my breadwinner so I can be a homemaker. I didn’t do this through a quick fix. I picked off the menu with the skills and privileges I had. I studied hard at university for a degree I knew would get me a well-paid job. A degree an Insurance Company was willing to pay, and to support me through my studies with mentors, for. I then did further professional qualifications and invested half my earnings. I tapped out early because I prefer time and relationships to money, and cut back dramatically on my expenses. There is no magic here. I don’t know what other people’s menus are. My special talent is (often excessive) delayed gratification and self-discipline. I create (sometimes ridiculous) made up rules and stick to them. Not sexy. But it did free me up eventually. This isn’t a choice everyone would want to (or can) make, but I suspect there are rhyming decisions people can make to build the kind of life they want to live.

Corporate Trev

Hard Thing First

When I finished school, I didn’t know what I wanted to “be”. Top of the list were Teacher or Architect because I thought they combined my interest in Learning, Art, and Mathematics. Both my brothers were at Medical School, and three sets of fees was too much of a push for my parents. The UK offered a two-year working holiday visa. I worked as a waiter to save for the plane ticket, and then got a job as a gap student at a prep school in Chichester. While there, I saved my Pounds like a hamster, and plotted what to study. On trips to London, I felt “poor”. Look, but don’t touch. I decided to be deeply pragmatic. It was easier to make a career out of Maths skills, and a hobby of Art, than vice versa. I chose Actuarial Science, which topped the list of many surveys of the best professions. Hard, but safe. If I busted a gut for a few years, then I could do the stuff I wanted. Do the hard things first was very much the way I had been deep soaked growing up. Gratefully, Old Mutual also had a bursary scheme. This meant the money issue was taken off the table, in exchange for working for them after my studies.

Working as a Porter in the English School Holidays

Work Your Marshmallows

There is a psychological experiment where they test children’s capacity for delayed gratification. I name my Financial Freedom strategy after it. Multiplying Marshmallows. In the test, a child is offered one marshmallow now, or if they can sit and wait, two in a little while. Patience multiplies marshmallows. The same is true of the difference between hand-to-mouth living, and investing the gap between your hand and mouth. Consumption fires your money. Investing puts it to work. If you are able to invest 50% of a stable income for 15 years, and that money earns 5% real return (50-15-5), the Engine you build should be able to continue paying that stable income forever (if the Engine continues to earn 5%). Eat one, invest one. Live life. Build life.