3065: Personal Finance and The Long Game by Honey Smith with Get Rich Slowly How to Build Wealth

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[00:00:30] This is Optimal Finance Daily – Personal Finance and The Long Game by Honey Smith with GetRichSlowly.org When you think about it, personal finance is about playing the long game. Sure, it's about other things as well. It's about paying off debt. It's about spending less than you earn. But when you think about it overall, it's about making choices that are harder in the short term for the good of the long term. Here's what I mean.

[00:00:59] Saving for retirement. Saving for retirement, for example, means having less money to spend today. Having less to spend today can help avoid lifestyle inflation, which is generally regarded as a good thing. However, there are plenty of responsible things that could be done in the short term with that money. For example, you could pay off debt or give to a charitable cause that is meaningful to you.

[00:01:23] You could stash that cash in an emergency fund or eat organic foods and hire a personal trainer. None of those are necessarily bad choices. But you decide that taking responsibility for caring for yourself in the event that you are no longer able to work full time is more important. So you play the long game.

[00:01:43] Saving in liquid vehicles. Keeping an emergency fund in a high yield online savings account or even a few certificates of deposit doesn't provide nearly as good of a return as many other types of investments. Notice the sarcastic quote marks around high yield and even CD rates aren't much better at the moment. However, investments that typically provide higher returns are also riskier. That is, they don't always provide higher returns.

[00:02:12] In addition, keeping your funds and other types of investments may mean that they're not easily accessible if you need them quickly. By maintaining a reasonable balance in liquid vehicles, you decide that losing out on some dividends or interest is a smarter choice than paying interest to a credit card company when emergency strikes. So you play the long game. Being insured. Insuring yourself also means having less money to spend today.

[00:02:41] And sometimes it seems there's no end to the types of insurance we need. I have the following. Homeowner's insurance. Life insurance. Disability insurance. Short and long term. Long term care insurance. Health insurance. Dental insurance. Vision insurance. And auto insurance. And those are just the ones I can think of off the top of my head. I'm sure there are some I'm missing.

[00:03:05] In the short term, that is hundreds or thousands of dollars I'm losing each year to the mere possibility that something bad might happen. However, if something were to go wrong, I could lose much more. And that's what I'm protecting myself against. An event like a car crash, even if it isn't my fault, or a catastrophic illness or injury, could blow through even the beefiest of emergency funds in a single day. So I pay my insurance premiums and play the long game.

[00:03:34] Maintaining big ticket items. Think about the type of maintenance you've performed on your car. Changing the oil. Rotating the tires. And checking their air pressure. Changing air filters. Now think about your house. Changing the air filters. Tuning up your air conditioner or heater annually. Flushing the water heater. Pruning large trees. Why do we pay to take care of the things we own? It's because the better we take care of them, the better they will work.

[00:04:01] You may save gas on getting better mileage, for example. Not only that, but regular maintenance can help extend the lives of big ticket items. So you don't have to pay the much higher replacement cost. In this case, playing the long game can mean you'll be less likely to replace big ticket items at an inconvenient time. Replacing big ticket items. What? We just finished the section on maintaining big ticket items. Now I'm saying replace? Yes.

[00:04:30] Part of playing the long game is knowing how long maintenance and judicious repair are the least expensive options. And when replacement will actually save more in the long run. In the case of our HVAC, for example, a $1,000 repair on our 20-plus year old unit, coupled with electric bills that exceeded $300 during the hottest part of the summer, meant that replacement was the better option.

[00:04:53] We're paying just over $5,500 for our new unit, which is definitely a play for the long game. However, we anticipate saving enough to make that investment worth it, especially since we save for the purchase and won't be paying any interest. Paying off debt. Financing your life with debt is a tricky proposition. Not only do you pay more over the long run because of interest, in essence, you're also placing a lot of bets that are unlikely to pay off.

[00:05:22] You're betting, for example, that you'll always make as much money as you do now. You're betting that you won't retire, be injured, or get sick. That's pretty much the opposite of playing the long game. Fortunately, making more than the minimum payment each month on your debts can save some money you would have spent on interest. It could also get those payments out of your life sooner, so you can start funneling money into some other aspects of the long game. Financing big purchases judiciously.

[00:05:50] As I pointed out, sometimes it's cheaper to maintain or repair, and other times it's cheaper to replace. Similarly, sometimes it's cheaper to save and pay for things outright, and other times it's financially responsible to take on some debt. The trick is to be rational about these types of decisions if you can. Sadly, a relationship with money isn't always rational.

[00:06:13] For example, Jake's decision to take out student loans for three years to go to law school and gain a skill that would net him a six-figure salary was financially sound. My decision to spend eight years in graduate school accumulating an equivalent amount of student loans for degrees in English was not.

[00:06:32] To give another example, the combination of low interest rates and the value that homes in our area lost during the Great Recession led us to conclude that buying when we did was the better financial decision, even though we were unable to put 20% down. Waiting would have meant paying a higher purchase price and having a higher interest for an equivalent house, all while paying rent in the meantime. Priorities and the long game

[00:07:00] Perhaps the biggest trick to the long game is realizing that you can't do everything at once. As the saying goes, you can have anything you want, but you can't have everything you want. You have to establish financial priorities and create your own personalized long game. You just listened to the post titled Personal Finance and the Long Game by Honey Smith with GetRichSlowly.org. And now a word from our sponsors at Betterment.

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[00:09:33] This article reminded me of an Instagram post I saw the other day from an influencer named MoneyWithKaty. She said, quote, Wealth building is so cool to me because it's the only thing in life where you can front load all the effort and then reap the rewards indefinitely. It'd be like if having six-pack abs by 30 meant you'd be guaranteed to have eight-pack abs by 55 with no additional effort. End quote.

[00:10:01] This, to me, demonstrates the long game, but in a way that doesn't make the short-term sacrifice feel like such a hard choice. When I think about how I fully funded my retirement vehicles for four or five years and reached Coast Fi status, this feels like such an easier thing to do than spending the rest of my working years saving for retirement. I front-loaded the effort at a time when my income was high and it was much easier to save.

[00:10:30] Now that my income is much lower, it's more tolerable because my need to save is also much lower. So that financial decision has benefited me for the long term and also right now. When it comes to the long game, none of us knows what the future holds. We could be totally rolling in the dough or face a hardship that makes generating an income difficult. That being said, I think the best thing I've done for my long game is learning how to be happy living pretty minimally.

[00:11:00] By having very low fixed costs and knowing how to entertain myself without spending a lot of money, I feel confident that I can handle whatever life throws at me. That should do it for today. Have a happy rest of your day and I'll see you on the Sunday show tomorrow. Where your optimal life awaits.