Inculcate

He lounges back with icy cold beer in hand. Laughing with easy confidence at the smart banter being traded across the outdoor table. Surrounded by a dozen or so friends. Legally adults now, for the most part. Taking a brief but well-earned break from the madness that is studying for terminal exams, before finishing their school careers and scattering on the winds of fate.

I’m proud of the person he has become. What all of them have become. More than a little envious of the adventures they are about to embark on. They have survived secondary school intact, and largely unscathed. Of their 250 student cohort who started the journey, there have been no deaths. No (admitted) overdoses. No babies. Only one custodial sentence. Amazing!

These kids have outgrown their childhood ambitions to become an astronaut or ballerina. Firefighter or fairy princess. Professional footballer or social media influencer. Recognising that were destined to happen, they would be well on their way towards it already.    

Some are bound for university. Cambridge. Oxford. Bristol. Manchester. STEM subjects all.

Already caught in the rat race.

Do it younger.

Get there faster.

Succeed or die trying.

Endlessly competing.

Not yet figuring out nobody is watching. That they race only against themselves.

Several will take gap years.

Backpacking Southeast Asia or South America. Interrailing Europe. Working surf beaches and ski fields. Funded by lowly paying, lowly skilled jobs. Barista. Bar staff. Bouncer. Construction. Delivery driver. English language instructor. Nanny. Personal trainer. Retail. Teaching assistant.

The motivations behind taking a year out are interesting. Adventure seeking. Postponing adulthood. Often a salve for bruised egos. Putting a positive spin on grades that were not quite good enough to take them where they wanted to go. Familial social networks not quite influential enough that the rules for outsiders don’t apply to them.

Unwilling to attend the “other” Oxford, Bristol, or Manchester universities. Not yet, anyway.

None of these kids have the connections to pursue the bright lights and big money of the City. A tour of duty in an investment bank, before graduating to Private Equity. Not yet, anyway.

None aspire to be management consultants. Cannon fodder for the Big 4. Not yet, anyway.

None yet surrendering hope for pragmatism. Dreams for a big mortgage in a commuter town.

On his 18^th birthday, my son received control of his “junior” ISA.

Actually, that is a lie. On his 18^th birthday my access to his ISA automatically ceased, but it took six weeks of chasing before he overcame “know your customer” bureaucracy and assumed control. Welcome to adulthood!

A valuable life lesson in persistence and processes not designed with success in mind.

I had to smile at the feeling of déjà vu I felt on that day.

When I was born, my father took out a life assurance policy on me. His new father fantasy was to provide future me with life insurance options, should I one day work in bomb disposal, as a stunt man, or a test pilot. If not, I could cash it out and use it as a house deposit.

18 years later, the only form of mortal peril I experienced was attending a rough school specialising in vocational classes such as car stealing, drug dealing, and teenage pregnancy.

Unfortunately, nearly two decades of inflation combined with compounding high fees saw the value of that policy amount to roughly what my student shop assistant job earned in a month. An amount that, when he purchased it, would have purchased 5% of my father’s house.

Now, here I was, equally well intentioned, yet repeating my father’s folly. I appreciated the irony.

The grand reveal for my son wasn’t an ISA full of untold riches. Bitcoin proxies. Thousand-bagger meme stocks. Unicorn start-ups bought for peanuts long ago, but now worth millions.

Instead, it contained a five-figure portfolio of low-fee global index trackers. Better than a hat full of rabbits, but hardly the life changing head-start I had once naïvely fantasised of providing.

My son was grateful, and somewhat humbled.

After doing the maths, he determined it might make him a paper millionaire sometime in his 50s. Which sounded impressive, until I got him to adjust for purchasing power and he realised that by then a million would be as underwhelming as my father’s gift had once been to me.

To his credit, he decided to leave the ISA alone, and let it ride. His choice, it was now his money.

Money he has access to while he is young enough for it to make a difference. Perhaps do some good. As opposed to an inheritance or pension plan that, unless he has made a real mess of his personal finances, by the age he eventually receives it, he should no longer have a need for it.

That thought gave me pause to reflect on my own evolving beliefs, words, and deeds when it comes to managing money. If I were starting out today, how would I approach things?

Once I believed that business ownership was the most likely route to riches. Creating wealth. Profiting from my efforts, and those of my employees.

I still believe that, but no longer run my own business. Exposing a blind spot. Meaning I’m either a hypocrite in the “do as I say, but not as I do” sense, or not currently living true to my values.

My investing first principle has long been the importance of cash flow. The margin between earning and spending representing how wealthy I feel.

Early on, I naïvely embraced the purity of “natural” income streams. Enjoying the feeling as investment income began to cover my recurring lifestyle costs one bill at a time.

My simple plan was to eventually replace my earned income entirely, buying control of my time.

In time, I learned that prioritising cash flow over capital growth was a form of financial self-harm. Fast growing companies like Amazon, Alphabet, Facebook, and Netflix didn’t pay dividends. Neither did slow but steady giants like Berkshire Hathaway.

It was total return that really mattered.

This led to a further lesson: the importance of considering total returns after tax.

Capital gains are typically subject to lower rates of taxation than dividend or rental income. A second benefit is the timing of gains is usually chosen by the investor, while the timing of dividend or rental income is chosen for them.

The tax tail should never wag the investment dog, but being cognisant of the tax rules and available work arounds can make a material difference to our investment cash flow and returns.

For a long time, I embraced the power of leverage to buy property using other people’s money. Capital gain plays, where the real money was made on the way in. Identify locations about to boom, then play landlord to offset holding costs while waiting for my bets to pay off.

I still appreciate the merits of investing other people’s money, but recently disposed of the last of my directly held investment property portfolio. The excuse I tell myself is that the regulatory risks of being a landlord have significantly increased over recent years. The reason has more to do with age: leverage is a young person’s game.

Once we acquire wealth, our fear of losing what we have starts to exceed our desire for more.

This creates some cognitive dissonance.

On the one hand, I recognise that I only got to where I am financially today by regularly planting money trees starting some 30 years ago.

On the other hand, I am conscious I have been chopping down those same money trees at a faster rate than I have been replanting them. Not in a financially suicidal “living beyond my means” sense, but rather by trading the accessibility and flexibility of leveraged investments for the trapped (in many senses of the word) equity of home ownership.

Which might make sense, for those striving to own outright their “forever” homes. Trading future investment capital growth prospects in exchange for reducing their recurring housing costs. By in doing so, reducing their need for future cash flows to support their living costs.

Except I’m not one of those.

The money trees I do plant today are generally locked away inside pension wrappers. Much like formerly wild animals who now find themselves trapped inside aquariums, pet stores, or the zoo. Featuring bold warning signs to the public, demanding they “look, but don’t touch”.

A wise man once said: behind every warning sign is a lawsuit, behind every lawsuit is a story.

Intellectually, I know the accumulated pension funds should be waiting for me later in life.

Impatiently, I also know that those accumulated pension funds can’t be used to buy my groceries today.

Instinctively, I have little faith that governments won’t have changed the rules and moved the goal posts by the time I reach pension accessibility age. Is it still paranoia if they really are out to get you?

I’m conscious I have used the word “trapped” twice in half a page. If accessible cash flows made me feel wealthy, its opposite leaves me feeling trapped.

Reversing the buying control of my time.

Pushing me back the other way, towards being dependent upon salaried income.

Recurring lifestyle costs funded by pay cheques. Just like all the other suit wearing lemmings trudging dejectedly out of the underground each morning, selling off their lives by the day.

I used to be better than that.

Which tells me I’ve taken the after-tax part of the total return equation too far.

And also that I have “too much house”.

But that is something we already knew!

Some lessons in life, like not going to the toilet straight after chopping up chilli peppers, can only be learned by doing.

Something my son and his friends are about to discover for themselves, as they venture out into the world to start their own lives.