Blessed by the Potato

Preet Banerjee has a new book out called “Stop Over-Thinking Your Money!” (subtitled “The Five Simple Rules of Financial Success”). It’s at the pay-down-your-debt, balance-your-budget level of personal finance, so if you’re a regular reader here it may not quite be your speed. It is very approachable and light, so if you do need to find a first introduction to personal finance, this is a good choice. Preet starts off talking about what you need to get an “A” in personal finance vs an “A+”. I’m an academic so that kind of thing appeals to me, but from many of my students I think he maybe should have pitched it as what’s needed to get a “C+ and drunk”. And I do mean talking: he has a very conversational style, and encourages readers to tweet him as they go through the book. That’s also going to make it easy for a beginner to get into it.

I really liked this part on debt:

“Something to consider when you borrow money from a bank is that you aren’t ultimately borrowing money from the bank. You’re borrowing it from your future self. The bank is just the middleman between the two of you, and it charges interest for its services. […] Think of borrowing money as negotiating a pay-cut with your future self.” [emphasis as published]

Preet’s a car guy. Back when he had a regularly updated blog he’d often post racing videos, including a few of himself zooming around a closed track. This comes through in the book, as every other metaphor for life, spending, budgeting, or getting out of debt is related back to driving a car (or owning a car, or a car loan). If you are also a car guy then this is a great choice: you will find it extremely relatable, enjoyable, and relevant. If you are not a car guy, it will still be relatable — it’s not a terribly obtuse metaphor — though like me you may notice the prevalence of cars.

With a minimum of spoilers, the five rules break down to:

1. Disaster-proof your life.
2. Spend less than you earn.
3. Aggressively pay down high-interest debt.
4. Read the fine print.
5. Delay consumption.

In my book, I start off with a disclaimer that you should have these basics down (or something like them) before getting into the investing part I write about. Before I get into the more critical part of the review you should know that I’m going to add Stop Over-Thinking Your Money to the list of books to read before mine. So yes I liked it, but years of science and editing have hard-wired my brain into reviewing critically. Though Preet sent me a copy for free, it wasn’t to “blurb it”.

Disaster-proofing your life is a great place to start a book on personal finance. But in this initial a chapter on disaster planning, Preet spends 19 pages talking about insurance, and 5 pages on emergency funds. That’s a lot of focus on insurance, especially relative to emergency funds (and nothing on cash, lines of credit, or bottled water). This is something I should break off into its own post because I’m something of a bete noire of life insurance in personal finance blogging, so I will stop there. For all my quibbles on the relative emphasis of disaster-proofing components, Preet does an excellent job talking about insurance in this chapter. He goes into the issues with underwriting, with getting insurance at a young age and having the option to renew, and powers of attorney — all without it becoming a total snooze-fest (seriously!).

The other simple rules were inconsistent in the detail provided: Rule 4 was just 6 pages with one detailed example, and another brief one called up from Rule 1. I liked the discussions in Rule 5, particularly about renovations, but thought there was a lot of ground left to cover when it ended. In debt reduction he talked about methods like the snowball, but didn’t really go into much detail, just recommending Gail Vaz-Oxade’s book. He does mention the point he made in his TEDx talk about how people magically manage to run a balanced budget as soon as their ability to borrow more goes away, but it’s not made nearly as elegantly or persuasively as it was on the stage.

The 5 rules are just the first half of the book to get you ready for the investing part, which occupies the second half. I found the second half a little inconsistent in the level he was explaining things at. He fully explained the “all your eggs in one basket” metaphor (seriously: “If you have six eggs all in a basket and you drop that basket, then all your eggs are ruined. But if each egg has its own basket, then your chances of dropping and destroying all your eggs declines dramatically.”). But then he uses terms like standard deviation without defining them and only obliquely defines stocks and securities (several pages after starting to talk about them).

“Generally speaking, people put too much equity in their portfolio.” I haven’t really seen that myself, I’m usually trying to talk people into higher equity allocations — there’s so much risk aversion out there and stocks are tainted with the stigma of being unknown and weird. That might just be our different experiences: I tend to interact with young people just starting to learn about finances and investing, or else those from the research and health care fields, while his experience in the finance world (at Scotia with dimensional funds and Pro-Financial Asset Management) may have been with more serious investors. I loved his viewpoint on the investor risk questionnaires, how some people try to pick what they think the “correct” answer is to being a good investor, rather than what their actual risk tolerance is. Of course, it’s also just that you think you can tolerate a lot more risk when things are calm, only to panic when TSHTF.

A long chapter called “insurance 101” with graphs and percentages covering how payment leveling works and how the insurance company makes money off the arrangement concludes the book. I had trouble understanding why it was included — there’s already a really good, detailed section on insurance up front. Why so much granular detail on insurance, when nearly everything else is glossed over?

There are a number of comparisons to weight loss and dieting in the book. There is a lot of merit to that analogy: meeting a budget is fairly similar, whether it’s a calorie budget or a dollar one. The concepts and the math are not difficult, it’s just a matter of discipline. However valid it is, I don’t think it’s such a helpful comparison to make. Eating right and staying in shape are notoriously difficult in practice. I don’t think finances and saving are nearly as challenging — a point Preet himself makes on page 3 — so hammering on this metaphor may demystify finance but make many lose hope for actually managing to stick to the principles.

Preet makes the case that you don’t need to put in a ridiculous amount of work to get an A+ in finance if you can stop over-thinking your money to get an easy A. The book is a breezy read and hits the major points so it’s easy to recommend for beginners. But I’d say that “easy A” is a B- at best: many how-tos are missing, which is odd given the bang it started off with on insurance detail; core areas of personal finance like taxes, downpayments, RESPs are not mentioned at all; and Kerry Taylor gets as many mentions as retirement (pensions/CPP: not at all). There’s such a void in this segment of the personal finance education: there are a metric crapton of books for those who are in debt to their eyeballs, and even more investing tomes for those who have the basics figured out, but not much for those just starting out and needing a gentle introduction to getting their house in order (indeed, really the only other one I consistently recommend is The Wealthy Barber Returns). So despite all my (hopefully constructive) criticism above, there is a group of people out there who have an unmet need for a book like this.

Giveaway: Preet gave me a review copy, which I will pass along to someone in gently used condition. Between Feb 6 and 15, I’ll randomly select from comments below that:
1. Say which city and province they’re writing from [Canadians only; GTA-north or Discovery District-area people will get it hand-delivered because I’m too cheap to pay for shipping if I can avoid it and Preet didn’t bribe me even a little bit for the review].
2. Include a 20-200 word discussion on what state their finances and/or financial knowledge and/or that of their friends are in now and/or what simple rule of financial success you would have put in the book [this will be your skill-testing question and human filter].
3. Indicate whether they want the book for themselves or a friend.
4. Are received by 11:59pm on Wednesday February 5th, for whichever time zone my blog server decides it wants to be in that day.

A quick update to my 2013 active investing summary. Because Michael James put together a neat graph of his investing history, I thought I should make one as well. I don’t have as much history as he does (and I didn’t have a year so positive I needed drawing tools to break the line) so it’s not quite as impressive. My benchmark is a 50/50 mix of the Canadian and S&P500 e-series funds (all my rest-of-world exposure comes in through the passive portfolio). Like him, I had losses a bit worse than the benchmark in 2008, snapped back very strong in 2009, and lost a bit more in 2011. At this point you may notice I’ve had three out-performing years, and three under-performing years. Except for the fact that the magnitude of the out-performing years was (much) higher than the losing ones, this would look very depressing. As it is, it looks much like a coin-toss. It’s quite possible that I have no skill and this was a matter of luck. To defend against that I do passively invest (my RRSP and now Blueberry’s RESP are totally indexed), and it’s the approach I recommend for everyone¹.

I also forgot to repeat my brief approach summary: I try to capture some of the benefits of a passive approach by trading as little as possible. In 2013, my equivalent MER from commission costs was 0.15% (this was helped along by the lack of savings while Wayfare was on mat leave for the first half of the year). Because I know that I am the easiest person to fool, savings from 2014 will go to the indexed portfolio (even though, as Wayfare pointed out, this is the equivalent of performance-chasing — I’m ok with that because I don’t have any buy ideas now anyway).

1. Well, practically everyone. Everyone who isn’t willing to take some accounting courses, read balance sheets and all the footnotes until 2 in the morning on a work night, or suffer through volatility and downturns — and call it fun all the while. Oh, and stuff their puny human emotions into a box and jettison it into space. So yeah, everyone.

There is no authoritative body or ISO standard that defines what “generational” label applies to a given group, or what the age barriers are. When I saw the label “millennials” extended to those born in 1979¹, I thought it was going too far. I personally use the definitive year of 1982. Those born after that point were too young to have the formative experience of watching Orson Welles’ greatest and final film in the theatre: Transformers.

Now, my use of Transformers: the Movie is partly to be funny, and partly to highlight that part of what defines (or perhaps should define) a generation is the shared formative experiences. I find the broad, broad range of ages that many people throw into one “generation” makes this really hard to accomplish. The baby boomers are fairly easy to define because you can see quite clearly the massive up-swing in birth rates following WWII.

But GenX? By some people’s reckoning, people my age are the tail end of GenX, and then after that are the “Echo” of the baby boomers, often also called GenY (though I am myself, as are many GenXers my age and even a bit older, the child of baby boomers). Other than “not baby boomers” I’m not sure precisely what should define GenX. Cable TV, NES, and synth in our music? It’s hard to say what, exactly, people my age have in common with 50-year-olds to join us together in a generation.

After that was supposedly Gen Y, those born around 1980 through to sometime in the 1990’s. Children of the 80’s we used to call them, though in Ontario the last OAC cohort might also be a good grouping metric. Then those born in the 1990’s had their formative years in the new millennium, so they’re “millennials” (though some will hold that the term applies to those born in the 2000s). Except the start date for “millennials” keeps getting pushed back by different sources, until the point now that they’ve completely merged with the Echo generation.

One issue is that we can’t even decide how long a “generation” should span. Again, the baby boomers are relatively well delineated across a nearly 20-year span. But by no means does that mean that all following generations should be 20-year spans, that’s ridiculous (and a big source of the disappearing Gen Y). For some teenage mothers, two biological generations would fall within the same meme generation. More generally, it’s so tough to have shared experiences across that timespan, and the demographic pig-in-the-python factor just isn’t there. So ultimately, it’s an arbitrary label.

And the damned problem is that as useless and ridiculous a notion of dividing up “generations” is, it’s not going away. It’s so much easier and cuter to refer to “millennials” or “GenX” in a column than “young 30-something adults” or “those kids now pouring through high school and undergrad.” And we can forget enitrely about disposing with the human propensity to generalize and engage in ageist stereotyping. We could at least agree on what the delineations for the generations are so we can speak the same language about it. But because it is ultimately completely arbitrary, there are numerous definitions out there. And there is no good choice for who the standard-setter should be (StatsCan won’t touch it, though several academics have tried).

So, to make the definitions less arbitrary but the source more so, here I present Potato’s Definitive Generational Breakdown. There are multiple potential labels for different groups depending on how you want to split them up, with justifications for each.

1910-1927 – The Greatest Generation. This label has been around long enough that it is in common use.

1927-1945 – The Silent Generation. This label and range has been around long enough that it is in common use.

1946-1965 – The Baby Boomers (“boomers”). Defined at first by demographics and then by a shared love of cars, suburbia, and pop music (and by definition, anything the boomers listened to en masse became popular).

1965-1976 – Generation X (“GenXers”). Some people extend it right into the 80’s, but not me. These people cherish memories of when MTV (and Much) played music videos and still can’t ever quite feel like they belong. Also, thanks to global warming weirding, 1976 was the last year someone could have been born and still experienced an average year for global temperatures: each year since has been above the long-term mean.

1977-1981 – Echo Prime (“primers”). A narrow band of responsible, upstanding citizens raised on a steady diet of Mattel and Hasbro role models, particularly including giant transforming robots. Old enough to remember a world without technology, but young enough to have adapted to it. Their formative years were spent in a world where the Matrix of Leadership was a solemn burden carried for the good of all, and opened only in the most dire of times. A world where you had to work hard, scraping across the surface of the earth to get ahead (and not a universe where everybody could fly because flying is cool and gravity sucks). A world where you had to transform yourself into another shape and behaviour to fit in amongst earth culture and stay safely invisible².

1982-1994 – Children of the Eighties, Echo Boomers (“echos”). Growing up with GUIs most of them don’t remember the horrors of DOS or 640k of system memory. With their boomer parents well-secured in their careers before spawning, and controlling the world (as boomers do), they are spoiled beyond belief. The positive messaging they’ve lived with in their sheltered little lives has meant that even when they do hide their true face, it’s still some unrecognizable, unique-and-beautiful-as-a-snowflake-space-hovercraft thing, making no attempt to fit in at all. Or gorillas and dinosaurs living together, with no sense of scale. For them there’s no respect for the Matrix of Leadership, and a crisis worthy of cracking it open can include any time a rave’s lightshow needs a little something extra.

1995-2010 – Millennials. Too young to remember what the fuss and fear was over Y2K, or for that matter Terminator, they think computers are their friends and live on their smartphones. Language capabilities are nearly completely atrophied: if u tlk 2 dem yul c. Sometimes the children of boomers, they are just as likely to be the organic, free-range kids of GenX. That cross-over point happened (and thus marked the end to the “echos”) around 1995, adding further credence to a separation between millennials and GenY/echos.

2010-2025 – Children of the (Zombie) Apocalypse (CZA or tentatively “GenZ“). The zeitgeist and humanity’s collective imagination clearly indicate that the zombie apocalypse is coming soon, but it is a bit too early to definitively label this generation with the “Z”. It could be any one of a number of apocalyptic scenarios that defines my daughter’s generation. For instance, a robotic uprising is still in the cards, and despite recent disarmament treaties the world still has more than enough nuclear weapons to bring about a Fallout-esque end, complete with skin-eating mutants.

2026-2050 – New Empire Citizens (“We have evolved beyond such arbitrary titles”or “Neckers“). A span even longer than the baby boomers, and an even more prolific demographic bump, these children of the survivors grew up in the New Empire and all its technological marvels. Writing and typing skills have completely atrophied in the wake of telepathic implants, and they have never had to face death at the hands of the shambling hordes and/or robot stormtroopers. Their food comes fresh from “farms” and the bountiful ocean, and the spoiled brats wouldn’t eat a 10-year-old can of cat food found in a basement pantry of the bombed-out house they’re sheltering in — not even on a dare — representing the greatest experience gap a generation has ever experienced from their parents’ time.

1 – Via this post at Boomer & Echo.
2 – I’d just like to say at this point that I’m even impressing myself for milking the crap out of my Transformers analogy/joke. Of course, I only had 3 hours of sleep last night so who knows how that actually comes across to a rational, rested mind.

Let’s think of financial planning as taking a voyage across the ocean. I appreciate that this is likely a poor choice of metaphors as I am not a sailor and neither are you, but let’s work through it.

You set off with some destination in mind. Checking the map and detailed charts with the typical winds and currents ahead, you draw a line to plot your course (with the help of some basic high school trigonometry to factor in the wind and current). A glance at the stars to be sure, you set your sails and put your back into the oars. The journey of a lifetime!

Within minutes you find you’re off course: a particularly larger than average wave has just moved your bow a degree off course and slowed you imperceptibly (though your instruments can give you the course deviation to two decimal places). No matter, a quick calculation, a pull on the oars and an adjustment of the rudder has set you right again. Then another wave. And a gust of wind… which then suddenly dies.

The conclusion is obvious: you simply can’t adjust for every ripple, it would drive you mad and lead to needless effort trying to compensate for tiny effects that may just cancel themselves out anyway. But you can’t very well cross an ocean without making a few course adjustments, otherwise when you do hit shore (if you hit shore) you may find out that you’re way off target. Ending up in Bangor, Maine is way worse than ending up in Newfoundland. Have you read Stephen King’s documentaries on the horrors plaguing Maine? Some kind of compromise has to be reached that will let you respond to the important changes so that you can get back on course, without over-correcting to everything.

You can play it by ear, and try to feel your way towards a happy medium, but that might involve some white-knuckle moments early on as you over-react to every tiny ripple along the way. In physics we (by which I mean Michael James) might put a low pass filter on the response function, or perhaps a hysteresis, to make the input-adjustment mechanism work better. When sailing you might only check the stars once a night, and hold the tiller steady against the waves.

To leave the metaphor and talk about financial planning, for problems like this there are lots of other practical solutions. You could just limit how often you check when you’re off course (once a year, say), or act only when you’re off course by some threshold (like when your asset allocation is off by more than 5%). Many of these adjustments will be minor if the perturbation is small: normal fluctuations in return or expected lumpiness in your monthly spending. Some will come on suddenly: though you may model and anticipate inflation as a continuous, steady percentage, you may find instead that your bills are perfectly flat through the year until March when your utilities jump 7% all at once while Mac & Cheese goes from $0.99 to $1.29 without hitting any of the intermediate values.

Some adjustments may be more major, and require much more of an effort to correct for. Like disability, losing a job, or a major global market crash. They’re also usually highly emotional times, which can lead to less-than-optimal decision-making. The midst of a market crash is the last time you want to be re-evaluating your risk tolerance and end up selling low, and while you’re sick may not be the time to rework your financial plan. So part of the planning process should, ideally, involve sketching out your course corrections in advance.

I don’t much care precisely how you go about it or what your contingency plans are, just that you think about it and come up with some. Don’t want to dictate how you make your course adjustments, just that you do. Thankfully, Michael James had a recent post on coming up with a formula for adjusting spending in retirement based on changes in portfolio returns. A generalized scheme might have two relatively simple components:

1. Identify, in advance, points where you will assess your progress. Decide how you will measure that progress, and what deviation would call for corrective action. What events are worth responding to, which aren’t?

2. Decide what action you will take while things are calm and you have your background research front of mind. Write your contingency plans down. You don’t want to be making those decisions while emotional after realizing that your plan is not working out, or trusting a plan from years earlier to a foggy memory.

For example, if you find after 5 years that your savings rate has lagged (perhaps because you can’t stay on budget, perhaps because of several emergencies/unemployment/etc), how would you get back on track? What would you do to your budget, how would your investments change? If equity returns were lower than planned for 10 years, would you put more into equities because you expect some mean reversion, or less because they’re losing and dumb? This is one area where your answer in advance might be different than your emotional answer later, and where you get into sticky questions of whether the data that led to your expected values was simply wrong. Would you stick with your asset allocation and adjust your budget?

What if things were looking better than planned: you had more money saved thanks to good budget discipline, luck, or good equity markets. Would you relax your budget and let yourself spend more, or would you remove some risk by shifting your asset allocation? Perhaps you’d prefer to stick to the original plan and keep the extra headroom — if there continues to be a surplus your heirs can have it, or you can retire early.

There is uncertainty in the world. This makes people deeply uncomfortable. The solution is not to pretend that the uncertainty is not there, but to prepare for it.

I’ve been a Bell home phone user forever. With two multi-day power outages in the last decade, and multiple 8-12 hour outages with loss of cell reception in the last year, the sheer reliability of plain old telephone service (POTS) is a feature I like and am willing to pay for over digital IP options. Plus the quality — I can’t stand talking on my cellphone and will call people back if I’m at home (or at my desk at work) and they try my mobile.

However, Bell is expensive, and has a ridiculous notion of inflation. For a service that has not really required any capital investment on their part or high marginal costs, the rate has gone up by about triple that of CPI over the last decade, and with a 7% increase this year on our bill, it was one straw that made me want to cancel. They’re also more expensive than their competitors (like Teksavvy), but we know Bell — as much as I may hate having to call their telemarketing department, the service just works and we can rely on it to continue to work. That should be the case for a POTS reseller as well, but we were willing to pay a few dollars more per month to stick with Bell. Yet the gap was significant at around $10-20 per month, so we used the old trick of calling to complain and got a discount to bring it closer. A $10/mo discount for 12 months was a small price for Bell to pay to keep us happy and loyal, and make the price a little more fair. And when that would expire we’d call back and renew it, often missing out on a month in-between without a discount.

This has been the routine for years now. It’s tiring and I keep asking if they can just put a permanent reduction in the rate to make it competitive, but the constant threat to cancel with discount is just their mechanism. It’s how they do business, so that’s the game plan we follow. Yet this year when I called in, they wouldn’t give it to me. They would give me a “great” rate on internet and TV if I switched everything over to them, but that’s not happening (Bell: you burned too hard on UBB to try to pretend you have an affordable unlimited service now). As a phone-only customer, I could take my business elsewhere: they didn’t want it.

What really set me off though was the incredibly awful and shady accounting practice they had for the end of the discount. Rather than immediately seeing that the 12-month discount had expired, they continued to put it on my bill, and charge me the reduced rate. Then in a later month they retroactively took it back and hit me with a massive one-time bill. Likewise, on the first bill with the new, 7% higher (in a year when inflation is less than a percent) rate, they retroactively applied it to the previous month. That is needlessly infuriating. In essence, it’s a billing error. I shudder to think of the damage that could be done with such practices for someone living closer to the edge in their budget, with multiple services with Bell, opening their bill one day to see a (one-time) double payment required.

I finally had enough of it and have switched. I tried Teksavvy first — great prices and I love them for internet — but they wouldn’t take my money. For whatever reason, Teksavvy has put in a “stop sale” on home phone service. Even though it’s still advertised on their website, they won’t take me as a phone customer. Primus would however, so off I go (though they are a touch pricier than Teksavvy’s unobtainable teaser pricing).