When I worked in retail, I witnessed no shortage of people buying luxuries on credit. Not using a credit card merely for rewards points or other exclusive perks, but because they didn’t have enough money of their own. They had to use the credit limit available or they couldn’t buy. Worse, some had to get extra cards, because they already spent the money available in their primary cards. This is only ~1/10th as bad as getting payday loans, or 3 times as bad as a line of credit. Even the best of the three is still bad.
You are sacrificing greater future affordability than you gain.
Most purchases lose their effect over time. Some rapidly, drugs*; others gradually, a new smartphone. Clever excuse artists may claim they only use their credit for bigger, more functional purchases, like a used car or a bike. This is deceptive compartmentalization. Using up all of your non-credit spending is what causes you to need credit for the other purchases. This includes unpredicted emergency spending. You better be a legitimate psychic if you can only afford the spending you expect.
Buying anything on credit means all of your spending is on credit.
While most discussions fixate on using the 4% rule to completely retire, the concept is equally useful for those looking to reduce their work schedules. In the diagram above, we can see how many days* we could safely eliminate from our work schedule. To get back a 2 month summer break, you would need a net worth of approximately $125,000, if you kept an annual spending rate of $30,000. Not only does this sound reasonable, but it would also make most work situations bearable, some might even become enjoyable.
As the 4% rule assumes that you are only drawing down from your accumulated net worth, a partial reduction is much safer:
This idea may already be implemented by some groups, and I missed it, but I’ve noticed an issue with many rewards programs:
There is near zero incentive to continue spending once nearing the end of an accumulation period, while far from the next reward level.
Take Westjet, for example. If you spend the $3000 to reach silver tier, but have no hope of spending enough to reach the $5000 gold tier, any trip near the end of the current period would contribute only to the companion voucher accumulation. If you delay until the next year, you get to fly with the silver benefits earned from the previous year, while also contributing to your silver status for the following year. This should be considered a significant risk as,
Delays in purchases could stack to the point of cancelling
Without contributing to rewards status, some consumers will lack incentive to purchase upgrades
Prematurely ending rewards perks leaves an opportunity for competitors to steal customers
This conflict of interest could be fixed with one simple change:
Since income is the active number in our lives, “I make 2000 biweekly,” it too often becomes the main focus for spending, “so I must be able to spend 2000 on average.” Some people get lucky, and the money keeps raining until they retire on the company +/- government pension, but most of us have droughts from time to time. There is another number that is similarly easy to track, one that forces a longer term view: Net worth.
Plenty of FIRE (Financial Independence, Retire Early) people are working their way towards some variety of saving to the point that annual spending is under 4% of their net worth. Even if you haven’t bought into the target, looking at your spending as a percentage of net worth is a profound shift. Being able to see continuous progress from income or spending improvements, or maintaining the good balance you already have, is ridiculously motivating. Since numbers alone are boring for most of us, I built a chart to show the spectrum of spending and net worth:
You can see some of the usual FI references, but I also threw in a couple new ones. Spending Rate defined as percent of net worth spent, annually. The list is formatted in an if/else-if style, but sorted in reverse. “Best” for last.
Till Debt do us Part (Negative Net Worth): The name of one of my favorite shows in high school. Most of the episodes featured people well below the bottom of this chart.
Near Debt Experience (Spending Rate >= 50%): If your life isn’t flashing before your eyes, it should be. At least it’d be an opportunity to review where you spent your money.
Sabbaticapable (Spending Rate >= 30%): You could afford to take a sabbatical. Barely. Probably.
FI Curious (Spending Rate >= 10%): You’re more independent than most, but aren’t FI enough to enjoy many of the benefits.
FUFI (Spending Rate >= 4.5%): Often referred to as FU money, this is where you have enough to feel confident leaving a job you hate, but will still need to work.
Pretty FI for a… (Spending Rate >= 4%) : Yes, an Offspring reference. Enough that a lucky, or adaptive, person wouldn’t need to worry about working for money.
Normal FI (Spending Rate >= 2.5%): You’re FI enough to retire in many scenarios.
Turbo FI (Spending Rate >= 0.8%): Now you can financially survive many of the more extreme scenarios.
Super FI (Spending Rate >= 0.4%): You could probably spend your time fighting crime or something else worthy of a movie.
Ludicrous FI (Spending Rate < 0.4%): You’ve probably gone to plaid by now…
3 Paths Through the Spectrum
With introductions out of the way, we can now visualize several paths commonly attempted. I have marked each with white lanes that people might aim to stay within, using a certain strategy.
I attended an interesting presentation today, where a problem of APQ was presented. As I understood the presentation, it is challenging to effectively implement APQ without over penalizing the more urgent classes. Using a healthcare example, it would mean an emergency department choosing a CTAS 5 patient (lowest acuity/urgency) with too short of an extra wait over a CTAS 4 patient. While I followed the concerns with standard APQ, I saw new challenges created with the proposed solution.
The presentation demonstrates delaying the accumulation for lower priority groups until a determined period has concluded. I see several related challenges:
If another lower priority patient arrives within the delay window, the priority alone would not be enough to sort/prioritize. We would have to include arrival order to sort, or wait until one began to accumulate.
This is only a problem if they end up at the front of the queue before accumulating.
This is further exacerbated by increasing numbers of categories. Would each group get a progressively longer delay? Then we could be faced with many, all in the case of no arrivals of top priority, zero priority patients.
CTAS 1-5
The solution requires an extra complication of tracking time before accumulation.
This may seem inconsequential, but I would argue it is more pronounced when comparing to the proposed solution.
To keep all of the benefits of delaying, without the 2 challenges, we simply need to flip the intervention. Rather than delaying the accumulation, start the lowest acuity at 0, while each higher acuity group gets a progressively higher starting acuity:
How does your spending compare to the alternatives? Rather than starting from abstract costs for any category, look at the actual options available. Every city is unique, so you may have different examples, but the cost differences should be similar. I have kept the example to 4 broad, but representative, groupings:
We learn many powerful lessons throughout life, but rarely apply the principles and practices to all relevant contexts. As mentioned in the video below, many appreciate and apply the concept of diversification to financial investments, but they apply equally to skills. The novelty of initial experiences can wear off, technology can negate any value, etc.
“Paralysis by analysis” is a risk with problems of all kinds. Consequently, people will often ignore issues or apply so-called band-aid solutions, which do little to address the root causes. Any problem will have multiple root causes, better represented in a tree diagram or fishbone. Unfortunately, these deeper analyses can be complicated and time consuming, when most situations require rapid action.
The solution: Find a single root cause, and address it. This is represented as the “5 Whys” in several frameworks. For any problem, ask and answer “Why?”, using each response as the next question; until you find an appropriate root cause, somewhere around the 5th round.
Owning a car can seem like a requirement in many regions. The necessity may be true at this moment, but several forces are reducing the need for, and cost of, car ownership. Even if you decide to buy a car, the following factors encourage spending less. The uses of owning a car are challenged by new alternatives, while the cost of future production faces downward pressure.
I have previously noted the harms of distraction, in more of a personal sense. This truth is similarly important in a workplace. Most people, including so-called supervisors, avoid any appearance of stillness, ending up distracted from many insights. Noticing a critical opportunity could easily double the productivity of a process. With a frequent process, one could quickly save thousands of hours of effort. A solution?
