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Friday, July 10, 2015

How Important is Money Anyway?

It is hardly possible to go through life these days without hearing money being talked about as a focal point of our culture, both in the earning and spending of it. How often in a month do you hear talk of:

1. The Greek debt crisis and the effect on the world economy?
2. How interest rates are sure to rise because they have been too low for too long?
3. How real estate prices are unsustainably high and are sure to crash?
4. How people have too much debt and are not saving enough for retirement?
5. People feeling that they must take at least one expensive vacation to some exotic destination every year?
6. People talking about how much work is needed on their houses to ensure that their kitchens and bathrooms are "up to date"?
7. People talking about how the "market is doing?", i.e the stock market.

I would wager that some of you probably hear about at least two things on the above list per month, whether it is listening to friends and family talking about them, hearing them discussed in the news, reading about them in the newspaper and so on. If you mingle in professional circles like I did for so many years, you have probably heard them all, every month.

What is the effect of all this talk about money on our collective psyche? It's a good question that deserves some probing thought.

What I have noticed as a Chartered Professional Accountant, is that we have become completely obsessed as a culture with money to the point that we have completely forgotten what its purpose is: a medium of exchange to enable us to pay for goods and services that we need. I have over the years observed the following manifestations of this obsession:

1. I worked in an office where the spouse of one of the tenant accountants went on MLS every week to see how much money her house made. It made me wonder how much she actually appreciated and enjoyed the 5,000 square foot house that her husband was working until 2 am seven days a week to afford. She did help him, but only a few days a week for a few hours each.

2. I regularly watched young working couples lock themselves in 25 year mortgages for houses costing $500,000+, with only the minimum downpayment of 5%. These couples felt that they "had to get into the market before it goes up and we can't affford to buy". As I will explain in a future post, they couldn't afford it now, unbeknownst to them.

3. Nearly all of my co-workers at the office drove a more expensive car than I did and I knew that it was a huge expense compared to their income. I have never yet run into a professional I worked with who drove a car that wasn't either an Audi, a BMW, Mercedes or some other high end car. I often heard them justify the expense with "having to maintain a professional image". I have owned the same 2006 Toyota Matrix since I bought it new in late 2005.

4. 20-25 years ago, annual vacations were for the rich. Most working people were content to go on local road trips or camping in national parks. If they did go abroad, it was the sort of thing you did once every 5 or 10 years. With the advent of all-inclusive resorts in  places like the Dominican Republic, Mexico and Cuba, annual and sometimes bi-annual vacations have become the norm among working professionals - especially couples without children.

5. When I was still married to my ex-wife, we lived on a street in Toronto where literally every second house was bought by a young couple who then proceeded to rip out the bathrooms and kitchens to remodel. My ex worked at Habitat for Humanity's Re-Store, which accepts donations of ripped out kitchens. You wouldn't believe how beautiful and still perfectly functional most of these kitchens were, and many of them weren't that old - maybe 10 years at the outside.

6. Most of my clients in their late 60's and 70's had accumulated vast sums of wealth  in stocks and retirement savings that were vastly in excess of what they needed to fund their lifestyle during their remaining years. Just from my observations of their behavior during my time as their accountant, I
noticed that the reason why they had accumulated so much wealth was that they worked extremely hard at their chosen profession, worked until they were forced to retire and were extremely frugal during that time. Only a handful of these clients were doing what they loved. How do I know this? From judging their reaction to the news that I was leaving.

Of all the above examples that I give, only the first and last ones seem like a valid examples of a loss of perspective regarding money. In all the others, it looks like people have maintained their perspective because they are enjoying their money. However, it only appears that way. Such would be the case if the people involved were paying for everything with cash and had enough money in the bank that they could stop working for a few months if they needed a break. But of course, nearly all of this consumption is being financed by debt, and the ability to service that debt is dependent not only on continued employment, but on continued promotion up the organization ladder.

What if you decided, as a thought experiment, that you would make a list of all the things that truly bring you joy; things that you would like to have in your life on a regular basis. Then next to those things, note how much money is needed to pay for them. At the end of that exercise, you would have an estimate of what your true cost of living is. Now, one thing that you do need to bear in mind is that this experiment will depend very heavily on your age, because your age and what your stage of life is will dictate what goes on this list.

When I was younger, the things that I valued the most were more material, precisely because I had so little money and was anxious to prove my worthiness and make my mark in the world. But I find as I get older, the things that matter change. They become the non-material things that money cannot buy, and they became important at the same time that I was at my peak earning capacity.

I'll tell you what some of the things that would go on my list would be:

1. Having a good meal with the Steph's family at the end of the week. Not a rushed meal, but a 2-3 hour affair in which I can connect with those that I love and learn about what is going in their lives.

2. Hearing about how my son Sequoia is doing out in BC as he attempts to forge his own path as a young adult.

3. Having a nice cup of coffee on my back porch in the morning before I start work.

4. Regular walks in nature admiring the greenery and the waterfront of Lake Ontario.

5. Living in a cozy, clean house, in a safe area of Toronto that is within walking distance of the downtown core and other neighbourhoods that host many of the festivals in the city.

6. A membership at a good gym that allows me to stay fit and healthy.

7. The freedom to drive anywhere that I need to go in the city.

8. Having enough fresh food in the fridge to eat three fresh, home cooked meals a day, trying something new every day for a period of weeks before repeating the cycle.

9. Having lots of time to spend with Steph enjoying said walks and discovering new neighbourhods and attractions in Toronto.

10. Being able to stay in regular contact with my friends and acquaintances, and being able to meet my friends for the occasional pint of beer and game of poker.

What does a life like that cost? Well for item 1, I need to bring a bottle of wine for dinner.. So about $40 a month. Item 2 requires a working internet connection - something I need for work anyway. So $80 a month. Item 3 is less than $0.50 day, so say $15 month. Item 4 is basically free - maybe I spend $20 a month for parking if I take the car. The house, we rent and all in with utilities is $2,440 a month - the most expensive item, but still way cheaper than if we owned, where the same house would easily cost $3,000 a month. If you don't mind living in an apartment, you could easily find a decent place for half this, but this was our splurge if you will. Item 6 is just shy of $60 a month at Goodlife, which is a decent gym that has good equipment, and isn't too crowded even when it is busy, and opens really early. Now that I don't drive to work, and given that the car is paid for, my car cost is about $50 a month for gas, $135 a month for insurance and about $20 a month for maintenance. Groceries average $520 a month little more than average because everything is fresh and fresh food is more expensive). The last two items are free.

So what is the total? $3,380 a month, or $40,560 annually. That's it. You will notice that I make no allowance for retirement savings. Why? Because if I can make this business viable, I will never have to retire unless I get sick. So maybe in another year or two I'll buy critical illness and long-term disability insurance to provide an income in the event that I cannot work. I already have a life insurance policy in my company so that Steph is looked after if anything were to happen to me.

So how important is money? for Steph and I, up to $40,560 a year, it is vitally important, and our job over the next 18 months as a couple is to figure out how to make my new stamp business viable to the point where we can sustainably generate that much income between us after taxes. Its not going to be easy, but I do believe that it is doable. After that amount, it is not so important, and I would only be prepared to work harder to generate more of it if doing so did not require me to give up any of the seven things that I listed in my post about the value of time.

After doing the same exercise, how important is money to you?

I will explain in my next post, quantity of life versus quality of life, and how this relates to the above topic of money and the previous post about time.

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