Personal Finance: Recognizing Control and Using Your Time Efficiently

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Morgan Housel wrote a post called The Biggest Returns which really resonated with my outlook on investing and personal finance. The main idea was that you should consider the impact of your efforts in relation to the time and energy spent.

The idea that reducing your needs has the same impact as increasing your income – but the former is more certain and in your control than the latter, so it has a higher expected value – is as true for someone spending $15,000 a year as it is someone spending $15 million per year.

The hard part is becoming satisfied with spending less. […] For me it’s been realizing that what makes people happy is having options – doing what you want, with who you want, when you want, where you want. And options come from savings and assets, which are the opposite of spending.

Stock returns: Limited control. I decided on an asset allocation and invested my money in low-cost, low-turnover investments. Learning about investing and asset allocation initially was a good investment of time, but I still have limited control of the outcome. More importantly, this gave me the conviction and patience that it will work out in the long run. But I still might lose money in any given year, and I can’t just put in more effort and improve that return. I only check in on my portfolio quarterly.

Cash returns: Moderate control. About 1/3rd of my portfolio is in high-quality bonds, which in my definition includes cash and certificates of deposit. Here, I have some more control. For example, if I put money into a 5-year CD at 4% APY, I have high confidence it will do better than a 5-year Treasury bond at 2.50% yield. Sometimes there are such opportunities for the individual investor, sometimes there aren’t. Therefore, I track the best interest rates monthly.

Income: Moderate to significant control. Income is obviously important, and I while would rate it as more important than spending, that doesn’t mean spending in not also very important. There are plenty of people who earn $250k and spend $250k per year, while a $85k earner could spend $60k and save even more. But that same 250k earner has the ability to “see the light” and have their saving explode over the next few years. Unfortunately, there are no easy, foolproof ways to earn a high income. Of course, you should invest in yourself and improve your marketable skills and thus increase your human capital. Some people can move up the corporate ladder, others will do better with a more entrepreneurial route.

Personal spending: Significant control. Managing your spending is all about priorities, but there are two simple ways to attack your spending. First, you could start from the bottom and get rid of the more questionable “wants”: Expensive food habits (coffee, alcohol, snacks), monthly entertainment subscriptions, gambling, etc). Second, you could start from the top and pair down the big “needs”. I could have gotten a mortgage approval for a 3,500 sf house in my neighborhood. I live in a 2,000 sf house. I could pay cash for nearly any vehicle on the market. I bought a used minivan. I could have had fewer kids… Oops!

Credit cards, bank bonuses, and other “found money”: Significant control. You won’t get rich solely from taking advantage of credit card sign-up bonuses, maximizing your cash back, or picking up $10-$100 here and there each week, but I estimate that it adds up to $3,000+ each year for our household. $3,000 is a 5% increase to a $60,000 income, or a free annual vacation. You should pick and choose what works for you; for example I refuse to drive around town (to buy gift cards, redeem coupons, buy and resell, etc). I prefer deals that can be done with just clicks.

This is also a good reminder that even though I might not write about them repeatedly, your biggest returns on effort might be: get a better job, relocate to a city with greater relative opportunity (income vs. cost-of-living), move into a smaller house, and buy a cheaper car (or find cheaper transportation). On a daily basis, the things that catch my eye (and thus what I write about) are actionable ideas where I have control of the outcome.

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  1. Frank Lessa says

    Um, no. If you are spending $15,000 a year you probably don’t have much low-hanging fruit to cut from your spending.

    Worse, if your budget is that limited, you might be experiencing diseconomies which force you to spend more than others with more money.

    For example, I pay more to rent a room than my friends pay to own houses, and, short of becoming homeless, there isn’t anything I can do to cut that inflated expense.

    • I don’t claim to know your personal situation & some of what I am going to mention may not apply to you.
      But some people in your situation room with friends or bunk in with their parents/families to save for a down payment on a home.

  2. Good article and my approach for the last 17 years. But the mind set of spending less is not how you should be thinking about it. Since 2008/2009 its obvious that its easier to save a dollar then to make a dollar. So its re-prioritizing away from media induced mindless consumption and buying what you need and is satisfying or functional enough as opposed to some flagship product. The second part is to set up budget goals for the entire year and try to beat them. I can go back 15 years and see every dollar I made and spent. I think most people have no idea what they have or what they spend until its too late. People are sitting comfortable or in dire straits today because they’ve taken responsibility for their performance and results in life or not.

  3. Jason Boxman says

    I’ve been picking up about $500/yr in account bonuses. I don’t spend nearly enough for any of the credit card bonuses to be attainable. I looked this year and most of the new checking/savings deals seem to require 10k+ for $200+ bonus, so this approach may no longer be tenable. Great while it lasted, though.

  4. Excellent points. The one thing I would note is on your CD to treasury comparison. You also need “high confidence” you won’t need access to that money for 5 years. Treasuries are very liquid, whereas CDs impose a high cost for accessing the money early.

    I believe that liquidity premium is a large part of why CDs pay more.

    • I think liquidity is part of it, but I think it’s more about volume. It’s telling that the best certificate deals are from credit unions, where the membership is limited to individuals (supposedly on a restricted group) and NCUA-insured only up to $250,000 per ownership title. If a foreign country, pension fund, or Warren Buffett wants to buy $100 million of 5-year bonds, they can. But a 4% APY 5-year CD is only going to be open to a few hundred (maybe thousand?) individuals, at most.

  5. Also credit. Treasuries are backed by the full faith and credit of the U.S. Treasury, which is essentially the taxing authority vested in the federal government. They won’t miss a coupon payment let alone default on principal. FDIC insurance on CDs covers principal and interest accrued (up to a limit to Jonathan’s point on volume) up to the closing date of the issuer. So the return of the CD is not guaranteed for its entire life the way a Treasury is. In other words, you would have reinvestment risk if the CD’s issuer went bust. In the case of a Treasury security, you always have the option to hold to maturity and receive the interest rate over that full period unless the Treasury defaults–which is less likely than an individual bank going under.

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