A Path with Space

One path to superficial financial freedom is a bigger salary. That can open the door to borrowings because most loans are a multiple of income. Spend first, pay later. A deeper level of financial freedom comes at it from a different angle. Goals and spending. Pay attention to what you find fulfilling. Pay attention to the sources of joy and meaning available. Our lives are path dependent. Lots of our decisions are made for us by default. If we don’t choose consciously, life chooses for us. Normally we cast our eyes on those earning more. This means we miss all there is to learn from those earning, and spending, less. Price is just a clearing device. How much is there? Who wants it? Meaning a high price is a better indication of scarcity than value. If you can improve the skill of finding value in things that are abundant, you are on the path to financial freedom. If you can get a gap between your earning and spending, you can start to build capital. A deeper path to financial freedom is creating space to breathe. One step, inhale, another step, exhale, and repeat.

Find a Path

Minefield

I started my career at a tumultuous time for advice givers. I explicitly didn’t (and don’t) give advice, but I gave technical support to those who did. I get uncomfortable about the risk transfers that go on in advice giving. The person paying thinks their job ends there. Releasing responsibility for their decisions. The regulators jump in with frameworks that oversimplify what risk is. The advisor is stuck in an odd space trying to make the economics work in a minefield of conflicts of interest. The industry was changing from a model where product providers paid up-front commissions to a fee-for-advice model. A “Polis Smouse” (policy hawker) would simply try and sell investment and risk products, and then churn them by selling another a year or two later. Fees are supposed to encourage independent, objective, advice. The challenge is that is expensive. Good advice is bespoke. It is a relationship. It doesn’t simplify risk into high or low. It sees the person and risks as the complicated beasts that they are, and cares. This is still an unsolved problem. The economics of transactions simply don’t work when the product is a relationship. My view is the answer lies in building financially secure communities. Empowered Local can handle complicated.

Feeding the Beast

Debt is the dark underworld of Engines that empower financial freedom. The Stranger Things of the idea that money can work for you rather than you working for money. I think of money as a “Mini-Me”. If it is in cash, it is sleeping and waiting. Getting wrinkly and losing muscle mass (inflation). With almost zero interest rates, there is no incentive for others to pay you a reasonable amount for short term access to your Mini-Me. Bonds are when you loan your Mini-Me out. That is where “Good Debt” sits. If someone can put your Mini-Me to work, and pay you the salary. Equity (a share of a Business) is when your Mini-Me works for you. “Bad Debt” is a Stranger Things Mirror-Engine. When you borrow to spend or survive a big knock. When the interest rates are so high, it can quickly swallow the whole amount you initially got… and take on a life of its own. Demanding to be fed. Step 1 to financial security is getting an income. Unfortunately, for many… even that step may simply be to feed the beast.

Lost in Abstraction

When children think milk comes from the shop rather than the farm, perhaps we have taken abstraction a little too far. The same is true of investments. However you wave your wand, there is a “look through”. Numbers are meaningless in and of themselves, unless they represent something. Fundamental Investing is the attempt to break through the noise and see what is actually happening. I like to think of it as getting my money a job. Listed Equity provides the opportunity to buy a slice of a real business. To become a part owner. I aim to get my money 20-25 jobs. In the same way as a person would do it. Find companies doing something well where you can buy in at an attractive price. Then give the money space and time to get the job done.

Money Problem

Ideally, personal finance decisions are about allocation, rather than about catch-up. There is a fundamental difference between having the money, and deciding how/if to spend it, and deciding/discovering what you want/need and then figuring out how to finance it. It is the difference between treading water, and swimming. There are good ideas, and there are good money-making ideas. Tying the two too closely adds a “but how does this make money” filter onto everything. Sorting out the generic “money-problem”, and then deciding what to do with the money the Capital generates is a completely different gig. Capital can be an Engine. A small Engine provides a Base. It covers what you need to survive. A bigger Engine can become a Muse that can power you through the waves. In the direction of your choosing. A large Engine can empower a Community. Turning the waters we face from something we struggle against, to something that connects us all.

Creating Custodians

The primary driver of Financial Independence is your level of satisfaction with the situation are in. Satisfaction, or a different definition of abundance. An ability to find pleasure and meaning in the abundant rather than the scarce. 

We live in a world that has a minimum price tag. You can no longer choose to go off the grid and live off the land. This means you either need to have Capital that can generate what you need, or you need to have a source of income. Just to make it through each day with food in your belly, breath in your lungs, and a regular heartbeat free of fear. This basic amount provides you with the capacity to participate in the world.

Then you need to find a source of income. A job is like a mortgage for a home. You get the security of a roof-like monthly income. Both a mortgage and a job commit you to a specific place and company. Most jobs are full time. This means you are selling your labour. In most cases how much you get paid will be determined by how much it would cost to replace you with someone who can do the same job. In the same way as the price or rent of a house is determined by the neighbourhood, rooms, amenities, and not by the quality of life that is lived there.

For the majority of people, once you have a source of income, your lifestyle expands to fit the box. A job and a mortgage exchange that commitment for security and a steady stream of financing. In turn, for most people, "how much" becomes "as much as possible". Credit Cards and other forms of debt may allow you to expand that lifestyle even further, in exchange for a commitment to pay off the debt.

Debt is the opposite of Capital. It is a productive asset for someone else. In truth, if you borrow... you are the engine of the productive asset. 

The problem with expanding your lifestyle to fit (or be bigger than) your income, is the primary driver of your financing decisions is the hand-to-mouth financing of your consumption. There is never space to grow. Financial decisions making simply becomes how you slice the cake. Your job chooses the cake.

The most powerful investment factor is time. An investment can return 20% a year, which gets eaten. Another investment could earn 10% a year. If only 5% was fired/eaten/consumed, and the other 5% was reinvested... it would take just under 30 years but it would catch up to how much that 20% was making. That is generational thinking. Growing the Engine rather than growing the Income.

Ignore the numbers and think of fruit trees. Imagine one person ate all the fruit of a productive farm, and the other planted half the fruit on a less productive farm. It would just be a matter of time until the positions swapped. Trees make fruit. Fruit only makes Trees if you plant them. The secret is reinvestment.

All of us are under pressure. The grass is never greener. Find someone who thinks they are Rich? Most of those shouting "We are the 99%" in America are certainly not the 99% in Global Terms. Around $32,000 a year is what is required to put you in the "Global 1%". Stating the obvious, if you earn more than that, then 99% of people are consuming less than you.

One definition for Financial Independence is when your financing decisions stop being about consumption, and start being about being a custodian. Step to the other side of that, and add time. 

Reinvestment

Holding the Reins

My guess is that significantly more than 90% of us live hand-to-mouth. What that means depends on the size of the hand and the mouth. Someone can be Financially Independent, and living on just R10,000 a month if they have world-class control over their mouth. Someone else could be on the brink of collapse and spending £1,000,000 a year, if their mouth has world-class control over them.

For the majority of people, gaining control of the reins simply means finding a source of income. How big the income is will determine how much can be put in our mouths. If we get more, we can spend more. The pressures on us are always more. A bigger house. A better school. Another holiday. More freedom to entertain and be entertained.  Financial Planning then becomes largely about financing our dreams. Financing our chosen life. Finding the money to spend.

When you snap the connection between consumption and finance, the game changes completely. You don't have to rein anything in. Consumption becomes a rounding error. More than 99% of Warren Buffett's fortune was made after the age of 50. His financial planning has absolutely nothing to do with financing his lifestyle. He sorted that out long ago. For years, it was all about reinvestment. That was Adam Smith's real magic word. Not Profit. Reinvestment. That shifts the Rich from living a life of Conspicuous Consumption because every dollar you consume is a dollar you fire.

We all sleep (if we are sleeping well) for around a third of our lives. You can only have one bed. We all have a limited appetite, and some of the best food is plentiful. It is fancy (read scarce) that costs.

Imagine a world where what you did wasn't driven by financing your life. Where what you did wasn't driven by what you consumed. It was driven by what you wanted to create. 

Less about the mouth

Calm in Context

Most people's financial decisions are probably made for them. Instead of awareness of the options, and conscious decision making, they just take the next step on the ladder. Depending on the bubble they are born into, the people who surround them, and the menu they are offered. Busyness is part of the problem. Taking the time and making the mental space often requires a big catalyst. A death, a baby, a broken relationship, a move, a lost job, or some wake-up call that makes you look wider. Daniel Kahneman talks of Narrow vs Broad Framing. There is a level of calm to knowing each decision we make is just one of several. There is calm in context. There is calm in listening to other people's full stories. In not comparing yourself as "not good enough" in oversimplified I am here, and you are there, contrasts. The struggle isn't necessarily not knowing the answers. It is in being aware of the right questions. Orientating yourself so that you know where you are to start with.

Kids and Mortgages

Bosses love it when a Breadwinner buys a house and has a baby. There is nothing that kills activism like a roof and a kid. If you are living hand-to-mouth, both a mortgage and a child share the characteristics of a long-term fixed financial commitment. In the UK, you can even get 35 year mortgages. Some kids don't leave home till 35. 

Salaries also have bond like commitments. Particularly if there is a 'job-for-life' culture. If you work in a job where you have to do something pretty bad to get fired, and the company doesn't take too many risks. This means you can match a job to the life-style you have become accustomed to.

As the Breadwinner, you become a vital cog in the wheel. It is the reason people take out life-insurance. Since if you die, it isn't only an emotional loss. If you die without insurance, the people under the roof will have a big problem.

The rules are different for people with Engines. If you have an investment that earns more (on average) than you spend - you can take more chances. There is nothing stopping you from working. The story is just slightly different. If you want to retrain and do something else. You can. If you want to take a chance at starting a new business. You can. If you want to stay at home with the kids and dog. You can.

Obligation is a great incentive. Sometimes you just do what you have to do. For most people in the world, this is what drives our decisions. Get a job. Pay the bills. Provide. There is however another option. Gradually you can build up a Buffer. If you can get a gap between your spending and your income. If you can put that money to work. If you can let it grow.

Beyond Financial Security is Freedom. Beyond Freedom is Fulfilment. Fulfilment is a better incentive than obligation.

Lifemaker

I regularly talk about building Engines. I believe Capital and Labour are lovers, not fighters. Capital can set Labour free. Not all good ideas are good business ideas. Monetising is a process of creating supply and demand constraints. A lot of good ideas thrive without constraints... and are terrible business ideas. But we need money. 

If you break the trap of living hand-to-mouth, and start to focus on building Capital (i.e. building yourself an Engine), a world of good ideas are released along with you. Your money effectively becomes your breadwinner so that you can be a lifemaker. That doesn't mean you can't make money, it just means you don't have to let money be the primary driver.

Why are you driving?

Debt can support Engine building. Good Debt is like an employee that makes the company more than the company pays them. A business also has to be very cautious of committing to employ too many people. It has to meet Payroll. Businesses use Debt well if they realise they can put other people's idle Capital to work, and make more than they need to pay. Without putting the whole business at risk if they can't pay the salaries.

Debt can, and more normally is, the opposite of an Engine. It isn't an employee that is put to work doing something productive. Bad Debt is usually consumed with nothing to show. Eventually you still owe interest (the Debt's Salary) even though nothing productive is being done. It is like having to pay someone a salary even though they aren't doing anything.

I don't believe in using debt to buy stuff that doesn't work for me. Save for things you want to buy. 

Warren Buffett always multiplies the price of anything he buys by ten. A can of coke doesn't cost $1, it 'costs' him $10. This is because every dollar he spends is being fired. Put to work, that dollar could grow. Eventually, that dollar could be receiving a salary of a dollar. Spend that.

Apply the same rule to money you don't have, the picture gets ugly. Fire a dollar that isn't yours, and if you don't keep up the interest payments, eventually you could be paying that dollar for nothing. Again. And Again. And Again.

Build an Engine. Avoid a Debt Trap like the plague.

Plague Flea

Financial Security

I studied money because I hated money. Hating money is pointless, because it is not a thing. What I really hated was the fights money caused, how it distracted people from other things, and how it seemed to constrain me. Studying money was a way of controlling it, so it didn't control me. So it didn't control those I loved. Fortunately, I am curious and love people and how we connect. Making money is effectively problem-solving. I enjoy that. One problem that needs solving is that we need money to survive. However, not everything is a problem. People are not problems that need solving. Achieving Financial Security allows you to move beyond problem-solving. Financial Security lets you breathe, and observe. It empowers listening. Money making is transactional. Life building is relational. The way things are... we have to start with Financial Security. Then, the world opens up...

People as Productive Assets

Many middle-income people consider their home, or car, their greatest asset. If they own one. In most cases they are wrong. A productive asset is something that generates an income. For most salary earners, they are their biggest asset. It sucks thinking of yourself as a cash machine. Most lower and middle-income people have to work because they live hand to mouth. Even if and as their income gets bigger, their mouth just stretches to accommodate. Your house and your car can't feed you.

I like to think of investing as a way of emancipating labour. Freeing our time from the constraints imposed by having to make money. If somehow you can break the tie between what you spend, and what you earn, then there is a path towards this kind of freedom.

It starts with controlling expense. Living within your means. Then, being able to build a Buffer. That provides the breathing room to be able to think beyond the next meal or the bills that are due. You can't plan ahead if you are fighting fires. This is why I am a Universal Basic Income activist. I believe everyone should have sufficient income that the option of reflection is available. Even if it is basic. Everyone should have the option to press pause, and plan.

Once there is sufficient to live, then you can start to build an Engine. An Engine is like a Mini-Me. It starts small, and grows as you feed it and find it work. Unless you are born into wealth, it is unlikely that your Engine will be able to earn more than you to start. With time, that is a possibility. There is no magic wand, it does take time and sacrifice. Delayed Gratification. You have to choose to build your Engine rather than improving your house, getting a better car, or living it large. No one can see your Engine. You won't look wealthy.

Eventually, your Mini-Me may grow to a size where it earns more than it costs you to live. The less it costs you to live, the smaller the Engine required to set you free. At that point, the magic starts. You become someone who is working because you want to. The money becomes a bonus. You may even choose to do work that doesn't pay well, but is rewarding in other ways. What you want to do, and why you want to do it become the key questions rather than how much it pays.

People are more than Productive Assets.

Start with a Buffer

There is what you can do, and what you do do. In between, there is the stuff that gets in the way or helps. That stuff in between is resilience. It determines whether you are fragile and break, or anti-fragile and benefit from the noise in the world. I am a big believer in 'building buffers'. What you can do takes a lot of time to build. What you do do is a collection of deeply wire habits. Changing those habits also takes time. The buffer is where you can be micro-ambitious. The buffer is where you start.

A Financial Buffer may be saving one month's salary, so that you aren't living payday to payday. A slightly bigger buffer may mean you have a few months salary in case you lose your job. Then you can start investing. Grow it a little and you may be able to voluntarily leave a job to train for a better job. Grow it a little and you may be able to have a stab at building your own business. Grow it more and you can build an Engine, so you are freed to work because you want to, and not because you have to. A Buffer doesn't tell you what to do, or how to do it, but it gives you the freedom to have a go.

Emotional Buffers are similar. I don't think there is any point in arguing with someone you don't like. Relationships need a buffer of kindness and respect. Start with that. Once you like each other and can find a few solid points of agreement to work from, only then can you start exploring differences. Grow that through context and understanding and you start to give each other the benefit of the doubt. You start interpreting what people say in the best possible way. Grow that and you have love. Love doesn't tell you what to do, or how to do it, but it gives you the freedom to have a go.

Buffers are about looking after yourself. Looking after others. They are a recognition that the world can be random, confusing, harsh, and unfair. They are a recognition that even the best-laid plans can just be a set up for a cruel joke. They are a recognition that we are wrong more often than we are right. That what sets us apart is our ability to learn. Buffers let us listen and adjust.

Start by building a Buffer.

Build a Buffer to absorb the shocks

Burn

When we think of inequality, we often mean difference in income. Normally within a particularly Nation State, ignoring the rest of the world. This hides all manner of evils, and (as is the case with all numbers) is a better question than it is an answer. On top of your Income, how much you earn each month, there are a few other useful ideas. Your Burn is how much you spend each month. Your Buffer is if you have enough invested to stop earning for a bit. If you aren't living hand to mouth. Buffer/Burn gives a rough number of months breathing space. A Buffer becomes an Engine when your investments sustainably earn more than your Income and your Burn.

Someone with a very large Income may have an even higher Burn which is debt-financed. This is the opposite of an Engine - the debt means they have to work to pay the interest! Any (poorly designed) estimates of wealth inequality would say they are in poverty. Except, normally to borrow money, you need to prove you don't need it. Debt just keeps people working.

A Swami living in an Ashram with no Income and a very small Burn may have a modest Engine that makes this life both sustainable and fulfilling. The Swami doesn't have to do anything.

In some ways, people with a very low Burn are best positioned for Financial Independence. Cutting back is emotionally difficult. 

Burn

Little Lasting Longer

A large income can be a sign of less, rather than more, Financial Security. One way to think of how big your Buffer is, is to divide the Capital you have working for you by how much you spent last year. This gives a very rough idea of your breathing room. Too many people connect what they earn, to what they spend, too closely. Adjusting to salary increases by spending more. Someone earning a lot may have lots of fixed expense they have to meet. They may have committed to a large mortgage, maybe even a 30-year mortgage in some countries. Financial Security can be achieved more easily with those who gain comfort with very little. By gaining control over your ins and outs.

Financial Freedom can come through spending less

rather than making more

Build Your Own

If you built an engine to fund your own Basic Income, how big that engine would need to be would depend on what it was doing. Building your own engine would mean you took control of your own protection. If you build a big engine (a muse), you can be your own patron. The engine would be the breadwinner, and you can focus on other things (if you want). A basic income engine would top your income up, or provide a buffer if that income disappeared for a bit. The return on capital is like its salary, or what is left over after salaries and costs are paid. You only know the return in advance if you lend the money, not if you invest it. If you lend it, it works for someone else... so it gets a (known) salary. Bonds and  Fixed Income are lending. If it works for you, you get the profits (or losses). You can't remove risk. You can manage it. You can control what jobs your money gets, and that matters. Even a little engine, working hard... can.

Buffers v Engines

There are tight constraints on where the rules of money making work. Money is not an indication of value. Value is intrinsic, and deeply personal. Price is a clearing mechanism. Without interference, the only two things that matter are supply and demand. How much there is. How much is wanted. Parenting is the best example of this. You can't put a price on how much someone raising a child 'should' be paid. It is priceless and there is no market for it. I believe in creating buffers and engines. 

A buffer is a mini-engine or shock-absorber, that can't last forever, but can let you look up long enough for the panic to subside, so you can make better decisions. 

An engine is a muse. It can free how you spend your time from the rules of monetising. Not all good ideas are good business ideas. 

The shock-absorber and engine aren't the point of the car. They are however necessary in order to go on a journey. Sometimes we do what we have to do. Sometimes we do what we want to do. You can't always rage against the constraints. Understanding constraints is a better way of dominating them, so they don't dominate you. Build a Buffer. Build an Engine.

Then drive.

Three Engines

I believe in building engines (to power the things that matter) and buffers (to protect the things that matter). A friend of mine who works with business owners has a similar philosophy which he calls the 3 Fs (Financial Security, Freedom and Fulfilment). Not all good ideas are good business ideas. Some times we do what we want to do, but first we do what we have to do. First we deal with scarcity, and then we work within abundance. The order of the 3 Fs matters.

I am working on three key engines. The first was my own. I 'declared independence' almost three years ago when I felt I had sufficient marshmallows. I had delayed gratification sufficiently to shift focus from engine building to living. If you have control of your ins and outs, and have shifted from a relative to an absolute enough, then you can live sustainably as a custodian.

The problem is independence is an illusion. We are interdependent. 'Problem' is the wrong word, because this link is where the beauty comes in. I believe we are the connections we have to each other and to the world we engage with. Conversation. Touch. Action. How we listen. Who we love. What we build. The way we empower each other.

'Umphakathi' is the Zulu word a friend used to describe what it is I would like to create. He says it is 'a very evocative word, gives the image of innerness, of people sitting around a communal fire and being part of "each other".'

The engines I want to be a part of building are those fires. Not much fun sitting at a campfire by yourself.

First, you need to look after yourself to be of use to anyone else. Second, you need to be an active part of your local community to exist beyond yourself. Third, you are deeply connected to the world as a global citizen. Freedom and Fulfilment need three engines.

Living Annuity

An Annuity is a fixed/known sum of money, paid out to someone over a known period, or for the rest of their lives. A Living Annuity is one in which the amount is not guaranteed, but is dependent on the performance of the underlying assets. The thing making the money. Guarantees cost money because someone is taking on the risk. A Guaranteed Annuity groups people, so those who live longer are 'cross-subsidised' by those who don't. The seller also has to guess, in advance, how much money it thinks it can make to make sure the payment is sustainable.

A Living Annuity means that if something goes wrong/right, the person receiving the money is affected. It will have to allow for the fact that it is much harder to guess how long one person is going to live, than to guess how long most people that age/gender etc. live (The law of large numbers). You don't want to 'run out of money', so the more uncertain you are, the bigger the buffer you need.

If a Universal Basic Income (UBI) was funded by Capital, it matters whether it is financing one person, or one of a group. A Community Wealth Fund like the Norwegian Sovereign Wealth Fund is big enough that it smooths out the risks you would have if you are dealing with just one person. One person can be (un)lucky. Two people can be (un)lucky. A billion people requires something to have changed structurally.

I like the idea of being Micro-ambitious. I would like to figure out how to finance 150 UBIs. It seems the simplest way to do that would be to start with financing one. Counter-intuitively, that is harder in some ways. 

If you go it alone, you need a much bigger buffer. A capital funded UBI for one person is similar to a living annuity in the risks it faces.

Going Alone

150 UBIs

How much is enough? More. Or Less. Two and a half years ago I 'declared independence'. Later, I thought 'interdependence' was a better aspiration. Towards the end of last year, I decided to go back to work in order to help build engines to empower others to have independence too. I don't want to be a hero. I want to be a half-hearted fanatic, so I am not going back to a normal job. I would crack. I am interested in how to partner with people to help each other with whatever purpose we choose. The goal I have, is to set up a community of 150 people who each receive a Universal Basic Income. Eventually I would like this to be powered by a Community Wealth Fund. But, I subscribe to being micro-ambitious, so my first goal is to figure out how to finance one. Then two. I will think aloud, so please feel free to copy, contribute, critique and collaborate. We have to start somewhere.