The Geometry of Spending
Spending is
defined as, ‘to give (money) to pay for goods & services, or so as to
benefit someone or something’
There are three ways in which we primarily
spend our money – On
Ourselves, On Others & On Govt
On ourselves, for meeting all our basic needs, comforts and
luxuries – We can have complete
control over this. What to spend on & what not to spend on, is a complete
choice which we possess.
On Others, for meeting societal obligations, charity etc. -
We can have complete control
over this, too. What to spend on & what not to spend on, is a complete
choice which we possess.
On Govt., for paying the
mandatory taxes (You Earn, You Pay) – We will have no
control on any tax rates
applicable. It is a subject matter which is well within the closed
domain of the govt / ruler.
Yes, there is an argument that we can ‘manage
taxes’. We can, but still, we do not
control the applicable tax rates, either directly
or indirectly. At best, we can try tax efficiency, but still, the rates are not
controlled.
The concept of spending beyond these three vertices of a triangle, is probably alien.
Whenever there is a cash outflow from us,
it has to fall into the spectrum of any
of these categories, or a mix of them.
The problem is not with Spending itself, but
the way in which we keep going about it.
Of the three corners, we
can surely & sincerely control two of them, but alas, for most, it is beyond their actions.
Control the two vertices of the triangle base, and the
third one doesn’t pinch
much.
Well, exceptions set aside on the third
vertex.
Albert Einstein once said, Compound Interest is the eighth wonder of the world. Well, that is what is attributed to him.
Did he indeed ever say this statement?
I don't think for the reason; his IQ was far higher & would have probably made a statement like, "Compound Interest is the only wonder, on Investments"
I've enclosed the compound interest formula which details each variable.
While, all the 3 variables make a reasonable impact on the end result A (target amount); the most important variable which is under our control to a large extent but also, the least ignored is t (time)
We tend to focus primarily on r (rate of return), which is by all means way beyond our control; always and ever. Yes, the rate of return can be known in advance (when investing into fixed income deposit) but, can it be controlled? NO
So, why do we never speak of 15 / 20 / 25 / 30 / 40 / 50 years of investing time frames?
GREED; to make more money at the shorter end of the time frame & FEAR; yes, fear of unknown at the longer holding periods.
The unfortunate truth is - 'we are quite good at compounding GREED at the shorter end & compounding FEAR at the longer end of time frames, but never ever understand the impactful COMPOUNDING RATE OF RETURN at the long end
"GREED for shorter time frame & FEAR for longer time frames - dispense off with them, if COMPOUND INTEREST has to work in your favour"
FOCUS, where we need to FOCUS - the "t"
Note: Well, P the principal amount is also under our control, except when people get to play smart by leveraging. In which scenario, P is actually not "Our P"; it becomes a dangerous B (borrowing)
Every decision or choice we make in our Money & Life has a certain degree of RISK associated with it; & is reflected in the outcome of that particular decision, as a deviation (positive or negative) from the expected result
Sometimes, we can estimate this risk, but other times, we just don't have a clue.
Can we ringfence or control these 'risks'? YES & NO - e.g. we can possibly minimize the Income Risk / Investing Risk / Liquidity Risk but, can we do the same for Life Risk (eventually, all of us press the exit button) / Time Risk / Unknown Risks?
So, should we or should we not take Risks? – ha ha, there is no 'one' choice. Every decision made in the frontal lobe of the brain has 'a risk' associated with it.
Risks as I depicted in the above illustration -
Career Risk - Always at the mercy of a third party. Is this a necessary evil? an essential evil? or a habitual evil? At the end of the day, everyone needs Money & aspires to make a comfortable living. But, can we ringfence this?
Investing Risk - all that happens in the journey of investing. We keep discussing this all the time
Liquidity Risk - not having 'enough cash' at disposal, especially when needing it the most; is the worst possible situation for one to end up with.
Life Risk - "The Inevitable", but, when does this inevitable happen to us? That is the important 'time variable'. Can we ringfence our family against this loss? Can we ringfence ourselves?
Routine Risk - the daily grind risks. Apparently, an adult makes approx. 35,000 decisions in day. How do we handle these routine risks? Can we keep thinking about pros & cons for each of these 35,000 decision making points to continue with life ?
Time Risk - the ability to not do the right thing at the right time, Money or Life decisions. Time Never Stops, but, "the risk of not doing is far greater than the risk of doing something positive in Money & Life decisions"
Unknown Risk - "The Never Known", it just hits us from any direction, in any way, onto either our Money or Life, or as a package. Nicknamed, black swan, blue swan or grey swan etc.; our life is shattered, if one is not mentally prepared for this.
Succession Risk - 'Time in our Life is converted into Money', & then, that Money is not distributed as it needs to be. What is the plan here? Let it get squandered? Let it get decided by the whims & fancies of agencies / other people/ entities / law etc.?
Health Risk - anything to do with the 'not so' normal functioning of any human's external or internal systems. Health is Wealth, too.
Income Risk - Wake up one morning to find that, there is 'no income' coming from this day, week, month? Have we designed a contingency plan? Is it executed? How long more do we need to struggle for the daily rat routine of finding the cheese?
Bottomline, Nothing in Life is worth without taking risks. As I came across a speech made by the Hollywood actor, Denzel Washington - If you fall, fall forward & Aspire to make a difference & not to just make a living.
Risk - Known or Unknown - One has to face it & handle it (with care)
Whether one tracks their investments or not, they should definitely track their _*SPENDING*_
Yes...this is one of the foremost impact variable in Money tracking, that has quite a serious repurcussion on one's future Money & Life.
The enclosed table depicts a very simple exercise to make visible & then introspect on some facts from our lifestyles.
_*Am I above the Spending line*_ (serious introspection needed) 🙄🤔
or
_*Am I below the Spending line*_ (better lifestyle management needed) 😊
or
_*Am I comfortably 'on' the Spending line*_ (just keep going, managing to spend with wisdom) 😌
An illustration depicting the same 👆🏼
_Returns can accrue to an investor during any phase of the holding period_
Sometimes, they start to accrue immediately after one invests, some other times, during the middle phase & in some instances, they accrue only during the last phase of the holding period.
Does it really matter when these returns are accrued, as long as the average CAGR return is achieved?
It doesn't 😌
_What matters is the end result_
All that happens along this journey is an experience in itself.
_*Stay the course*_
_*Stick to the holding period*_
_*Keep the journey intact*_
_*NO TIME, LASTS FOREVER*_
The illustration I depicted above, showcase *the Known Assets & the Unknown Variables* 👆🏼
The _*Unknown Variables*_ are the _black pieces_ & _*the known variables*_ are our own good white pieces.
White pieces make the first move against the established rank of the unknown black pieces.
_*Objective of the game is to win....else, at best, to end it as a draw*_
The game starts with the opening of our _*Earnings & savings Pawn*_'….oh yes, the rule says, we can make the first move with the _*Real Estate Knight*_ as well, but what's the plan, here? 🤔
_*Earnings & Savings Pawns move, One Step at a time*_, but create a phenomenal opening space for the movement of the stronger pieces, behind - Lets start with the pawns 😊
The _*Golden Rook(s)*_ Asset of Gold, moves horizontally, Inflation adjusted or has sometimes has a growth oriented upside move... up the 'files' (column) on the money board. It's quite powerful & potent in many parameters of an Asset Holding (free liquidity to move, strategically positioned on the board corners, has a direct emotional connect with the King (self) via a mode called, Castling ☺️
The _*Real Estate Knight(s)*_ keeps jumping forward & backward (over other assets as well 😀), but always within a restricted “L” shaped movement. The only asset to play with 'leverage' but is also severely constrained in movement as it can never move more than 3 squares at a time. _The doom happens when its 'landing squares are blocked' - Liquidity is vapourised and the piece is lost_
The _*Fixed income Bishop(s)*_, also come with restrictions, but a combination of tax free (EPF/PPF) & taxable (all other options), makes them a nice option to have a smooth ride on the board. _Both the bishops combined can be a wonderful liquidity weapon to have in hand_.
The _*Equity Queen*_, is considered the most important piece on the Asset Board, after the King. Can move in any direction. Strategically, maybe the last to make a move, but the most efficient resource on the Money Life board. _When it makes the definitive move, it does deliver quite a statement. Works as the main protector of the King against Inflation, Interest Rates down spiral etc. It's only focus - destroy as much as the enemy lines, protect the king in the long haul_
The _*Money Life King*_; alas, _*we can Never Ever lose him*_. If so, the game Is lost. _When we get into a _*check position*_ _by the 'unknown variables', all our other assets ensure that the King will be out of this position, even by sacrificing themselves for saving the king_
The ultimate aim is to _*not get checkmated*_; that's losing the Money & Life game. _*If we can’t win, at least end up with a ‘draw’ and salvage something on the board. We’ll still be standing*_
Well, there is a possibility that _the King can get checkmated with all his Assets in place_, but; _*are they in order to not get the king into such a messy situation? PLAN WELL ON THE ASSET MOVES*_ 😀👍🏼
The _*Unknown Variables*_ are never known in advance except that, we need to _make a thorough study of the historical perspectives under which these variables made their moves. If this was the situation?, how did they move or which square did they move to?----that is the _*historical memory*_ we need to build & be ready with, though; *Every time its different*; but, the underlying moves will most likely be similar_
The best thing is..... _*Enjoy playing the game & it's better to be safe than be sorry*_
_*STAY ON THE BOARD*_
