“Money is not to be wasted on things that bring you happiness and joy! Money is to be hoarded, until you have enough money that your money makes more money.”
A recurring theme in the FIRE movement brutally distilled into two sentences of cartoon wisdom.
It was four in the morning. My younger son chuckled over a Teen Titans Go! episode. Acid wit and delicious irony combined with the occasional personal finance lesson.
He was unable to sleep. The holiday villa was hot. No breeze. Uncomfortable beds. Unfamiliar surroundings. In the spirit of “misery loves company”, that meant I was not destined to sleep either.
With our overseas summer travel plans cruelled by the pandemic, we found ourselves spending a long weekend at a holiday park somewhere in middle England. “Spending” was certainly the operative word! Between high season price gouging and randomly changing public health guidelines, the vacation cost roughly the same amount as our planned adventure around the Balkans, despite the much shorter distances and duration involved.
While my son watched cartoons, I reflected on just how “personal” the personal finance subject is.
The lessons are both few and simple. Often repeated yet seldom heard.
Only absorbed once we have reached a place and time in our lives that we are receptive to them.
They don’t resemble puzzle pieces, that must be correctly assembled in the right order to win the game. That would be easy.
Rather, they are more like random pieces of Lego without a set of instructions. Able to be assembled into infinite combinations. Limited only by the knowledge and imagination of the individual player.
Some combinations are world-beating. Others suboptimal.
Fun, when used correctly. Inconvenient if lost. Capable of self-harm if left neglected on the floor.
Many of the personal finance lessons I have learned can be attributed back to books I have read.
The Richest Man In Babylon taught me:
- spend less than I earn
- differentiate between needs and wants
- pay myself first, not save what is leftover
- maximise earning potential by investing in myself
- the road to wealth is paved with recurring income streams, preferably passive ones
The Millionaire Next Door taught me:
- save more by spending less, don’t buy stuff I don’t need
- millionaires don’t live like “millionaires”, people who do generally aren’t
- housing costs are our first or second-largest expense category, choose living location wisely
- the Bank of Mum & Dad yields a lifestyle that cannot be supported by personal income alone
- beware of survivorship bias, most subjects interviewed made their millions via small business ownership, yet in real life the majority of small businesses fail
Rich Dad Poor Dad taught me:
- assets generate cash flow, anything that does not is a liability
- aim to replace my salary with recurring investment income streams
- employees are taxed on earnings, business owners only pay tax on profits
- invest in wealth generation, savings used for anything else is just deferred spending
- manage risk, don’t avoid it
From 0 to 130 Properties in 3.5 Years taught me:
- assess the value of potential purchases in terms of hours effort expended to pay for them
- successful businesses are cash flow positive, profitable, scalable, and sustainable
- investment outcomes involve trading off anticipated rewards, potential risks, and timescales
- wealth can be manufactured by creating more in perceived value than actual cost
- focus on what will attract paying customers
The 4-Hour Workweek taught me:
- identify the important things, then do them well
- value is based on what was delivered, not how much time has been invested
- assign a price to my time, then outsource tasks which create less value than they “cost” to perform
- ideas are unproven until they generate income, actions speak louder than words
- selling is hard, focus on high margin and high-quality to minimise the number of sales required
The Intelligent Investor taught me:
- “Mr Market”, the avatar of collective investors, is irrational, prone to overreaction, and stupid
- doing the thinking ahead of time means I already know what to do during times of uncertainty
- put a plan together, put it into action, and then stick with it
- consistently achieving safe and steady returns is more reliable than swinging for the fences
- reduce risk via diversification
The Little Book of Common Sense Investing taught me:
- in the short term, being good is indistinguishable from being lucky
- in the long term, being able to consistently pick winners is highly unlikely
- slow and steady returns generated by passive index trackers have historically outperformed market timers in the long run
- fees and taxes erode investment returns, so minimise them
Collectively, these lessons provided a framework of personal finance ideas and behaviours, that when combined with some good fortune, have helped me to achieve the semi-retired lifestyle I enjoy today.
The uncomfortable truth behind that cartoon quote is that personal finance does involve a spectrum.
At one end sits happiness and joy. Hoarding money and doing the work can be found at the other.
The elapsed time required to achieve our financial goals is largely determined by where we aim on that spectrum. The more leisurely the approach, the longer the journey will take. Anyone telling you different is trying to sell you something!
How successful we are at achieving our financial goals is largely determined by how sustainable that targeted position is over the long term. Too little happiness and joy, and we will be miserable and quit long before the game is won. Too much, and we are unlikely to ever reach our desired destination.
The cartoon finished as the first hint of dawn crept over the horizon. A badger ambled past the villa’s patio window, then moments later ran back the other way, pursued by a protective deer.
Neither knew the slightest thing about personal finance wisdom.
Their blissful ignorance positioning them at the happiness and joy end of the spectrum. Where there is no safety net, and every day is a struggle for survival.
Style over substance
Our day was full of fun outdoor adventures. Archery. Cycling. Swimming. Waterslides. Late in the afternoon, my batteries were flat, so I lured the kids back to the villa with the promise of pizza.
As we sat around the outdoor table, feeding our faces and playing “Go Fish!”, a peacock strutted past.
Impractical. Unable to fly very far. Or for very long.
A triumph of style over substance.
By the time the sun set behind the trees, the empty pizza boxes had been replaced by screen time.
My Feedly contained a handful of summer filler posts. A lazy listicle with a clickbait headline promised to reveal the “best budgeting and personal finance apps for 2020”.
Suspecting I must be nearing the end of the infinite scroll, I skimmed the article. Each review consisted of a couple of screenshots and a hundred word summary of what each app did well.
I couldn’t help but notice how alike many of the apps looked.
Big colourful charts. Lists of account or category balances. Lots of white space.
Each seeking to solve a similar problem via a unique hook or dubious gimmick. Few were compelling.
Rapidly scrolling through the list of screenshots created a kaleidoscope of colours which mirrored the plumage of the peacock. Acorns. Mint. Personal Capital. Robinhood. You Need A Budget.
I couldn’t help wondering whether these too were a triumph of style over substance?
Few of the personal finance lessons I had learned were tangibly addressed by the apps.
Budgeting apps allow us to lie to ourselves about how good we are going to be with money.
After the fact, spending trackers then tell the story of where that wishful thinking went wrong.
All the apps attempt to use technology to solve what is fundamentally a people and process problem.
Few admitting the only way that approach can succeed is by removing fallible humans from the equation.
Benedict Evans once eloquently called bullshit on the line of thinking that “computers are for creating, mobile devices are for consuming”. His theory went that initially new tools are created to fit the old ways of working, but over time the nature of those new tools change the way in which the work is performed.
In some cases, the need for the work may be automated or eliminated entirely.
Manually entering bank transactions, foreign exchange rates, or stock prices. Classifying expenditure based upon merchant name, arbitrary judgement, or prior experience. Unitising investment portfolios.
Once the job of spreadsheets running on traditional computers with proper keyboards. Impractical and no fun at all to attempt on a mobile device.
In other cases, new technical capabilities lead to new features we quickly embrace and adopt.
Automated payments. Contactless. Notifications. Realtime fraud alerts. Rule-based decision making.
Handy and useful on a mobile device you carry around in your pocket.
Sometimes a changing competitive or regulatory landscape leads to new possibilities.
All relying upon automation and interfaces that allow computers to seamlessly talk to one another.
The right tool for the job
I wondered why the current generation of personal finance apps were such a poor fit for those timeless lessons? And if that were the case, how had some of them become so successful?
Most successful apps are one-trick ponies.
Simple by design. Near zero learning curve. Involving no friction in their user experience. Require little time investment to use. Usable by both sugared-up toddlers and self-important CxOs.
The current generation apps resemble individual tools in a toolbox. Each purpose-built to solve only one problem well. Budgeting. Expenditure tracking. Saving. Investing. Wealth management.
Desktop personal finance applications of old, like Money and Quicken, were more like Swiss Army knives. A single tool that was capable of performing many functions. Doing few of them well.
While far from perfect, they offered the user one thing that the modern generation of mobile apps does not: a holistic view of their finances.
Which may be why in this era of “mobile first”, many people continue to use hand-rolled spreadsheets to manage their money.
Each app focuses on a narrow set of short term tactics and immediate gratification, that are essential to capturing and retaining a slice of the mobile user’s fleeting attention.
Yet looking through those lessons above, personal finance is really about developing and executing a strategy that will succeed over the long term. Creating a design that answers the questions of what jobs need doing? In which order? Using which tools to solve each problem?
The way the work gets performed has certainly evolved with the new tools. For the most part, these purpose built apps are better at their chosen task than the old Swiss Army knife applications ever were.
However, today those single-function apps do not support the seamless exchange of data required to provide that holistic view.
This is unsurprising, as there is no commercial incentive for them to do so. A budgeting app doesn’t care which shares I invest in, any more than a wealth management app cares how much I spend on holidays.
And yet their users absolutely do care about all those things.
That overarching perspective is vital for making well-informed decisions. Something not easily accomplished when information is scattered across a multitude of disparate and inconsistent siloes.
A case of misaligned commercials. Inconsistent goals.
Like happiness and hoarding.
How do you manage your personal finances? What apps do you use? What gaps and shortcomings do you find yourself manually working around?
Update: This post is generating some interesting reader feedback, so I’ve included a quick chart summarising the responses.
- Bannister, R. (2020), ‘Open Banking explained’, Money Saving Expert
- Bogle, J.C. (2007), ‘The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns‘, John Wiley & Sons
- CB Insights (2019), ‘We Analyzed 8 Of The Fastest-Growing Personal Finance Apps Of All Time To Figure Out The Secrets To Their Success — Here’s What We Learned‘
- Clason, G.S. (1926), ‘The Richest Man in Babylon‘, Berkley Books
- Corpus, J. and Dove, J. (2020), ‘Best budgeting and personal finance apps for 2020’, Tom’s Guide
- Evans, B. (2017), ‘Creation and consumption‘
- Ferriss, T. (2007), ‘The 4-Hour Workweek‘, Harmony Books
- Graham, B. (1949), ‘The Intelligent Investor‘, Harper Business
- Information Commissioner’s Office (2020), ‘Right to data portability‘
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- Stanley, T.J. and Danko, W.D. (1995), ‘The Millionaire Next Door: The Surprising Secrets of America’s Wealthy‘, Gallery Books
- Teen Titans Go! (2015), ‘Two Bumble Bees and a Wasp‘
- McKnight, S. (2003), ‘From 0 to 130 Properties in 3.5 Years‘, Wiley