I've made some bad decisions around money (Money Code Part 1)
This post is part of the Money Code series.
When COVID broke out in 2020 and I lost the last job I’m ever going to have I had about $100k in savings. In the 4 years since I’ve burned through all of it - almost entirely on basic living expenses.
I have an unwavering belief in my future ability to generate revenue from my business experiments, but I’ve seen a lot of ups and downs on this path and I haven’t reached escape velocity yet. So maybe my unwavering belief is misguided? Maybe my “money code of conduct” is full of holes and rooted in false premises?
It’s time for me to take a long hard look at things. And if you’re up for it, you can take a look at your relationship with money along with me.
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Do you have a code of conduct you follow for managing your finances?
I'm talking about a set of basic rules about making money, spending it, investing, the balance between taking care of present wants vs. future needs - a set of rules of thumb you follow without question and without deep thought.
Do you have something like that? Or do you consider every financial decision independently? Or maybe you just wing it and hope for the best?
I've been working through a series of recorded lectures by Harry Browne called Rule Your World and he puts a lot of emphasis on having a well thought out code of conduct like that for different aspects of our lives. The goal is both to make sure our decisions align with what we are actually trying to accomplish and to avoid overthinking every little thing. His approach is to take it one topic at a time - such as money - think deeply about it, and arrive at that code.
I'm going to attempt to do this here, both for my own improved understanding and possibly as a starting point for you to ponder on your own "money code".
The impetus for this came from the fact that I haven't updated my budget in a couple of months (I use YNAB - an absolutely outstanding piece of software) and this has been causing me some discomfort. I simultaneously was resisting the "shackles" that tracking my budget put on me, and felt very insecure from not knowing where I stood.
As a starting point for this exploration, let's start with some of the decisions I've been living with that I might need to reexamine:
I don't put aside anything for retirement.
I'm not paying for any kind of life or health insurance beyond what Canada provides by default.
I'm not counting or even thinking too much about small expenses (probably under $50).
I manage my solo business finances in the same bank account as I do my own personal finances.
I've been avoiding some significant expenses for a a few years (car needs fixing up, house needs maintenance, avoided preventative dental care for a while).
Questionable, aren't they?
I've been living with most of these decisions for years without looking too closely at them, but they do represent something about my values and have profound consequences for my life - both in the present and in the future. Looking at these decisions closely is an uncomfortable and vulnerable exercise that forces me to confront my own priorities with what other people (especially my parents) would think is "prudent".
This tension, and the decisions that arise from it seems to be an inseparable part of growing up and discovering who we truly are.
Here are some more facts about my financial world for context:
Prices are rising.
I currently make less than I spend and after erasing all of my savings have started to slowly go into debt.
Most of my business revenue comes from coaching and consulting contracts (some with individuals and some with companies).
For the first time in 13 years I manage my own funds without Yael, my wife, (we've separated our bank accounts and finances) and I can actually take the time to figure out my personal money code - that may turn out to be very different from hers.
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The next step is to take a closer look at some of my beliefs (or rather biases) around money.
I have a deep belief that my consulting business will take off in the near future, but to be honest I've held that belief for about 4 years during which I've burnt through almost $100k of savings. I may need to acknowledge that I could be misguided here.
I absolutely, totally, never want to work as an employee again - and I'm willing to pay quite a steep price for that freedom.
I suspect that having my back up against the wall financially will allow me (or push me?) to make decisions that I otherwise wouldn't have made. I also suspect that the above might be a self-fulfilling prophecy 😳.
I believe I was limited in my ability to generate revenue by my living arrangements (living with my wife and kids in close quarters, the intense emotions of everyone involved, etc). I now live in a separate basement suite with a lot more freedom and ability to focus.
I believe it's more important (and easier) to generate revenue than it is to save on expenses. I'm not sure the above is actually fully true - and this is part of what I want to explore here.
I believe I only buy what I absolutely need, but I recognize that might not be fully true either.
Accumulating funds over time in "envelopes" seems ridiculous when revenue fluctuates a lot. However, my actual business model is of ongoing contracts so maybe things don't actually fluctuate as much as I think they do.
Whew, that's one long list.
If you're following along and thinking about your own relationship with money, you might want to take a few minutes and make a list like this too. I'm sure it will be very different from mine, but as long as you're honest with yourself it should provide some clarity.
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Now we can turn to a list of questions that should help me form a set of rules I’ll be able to follow more or less blindly. You may have different questions that you need answers to, and your answers are definitely going to be very different, but this list could be a useful starting point.
Here are a few questions I started with:
What do I consider essential purchases?
What would I never skimp on?
What do I think is OK to avoid paying for?
Under what circumstances (if any) I'd lie, cheat or steal?
What is a good reason to use debt? Are there any exceptions?
How much risk am I willing to tolerate? How does it balance with potential gain?
What kinds of risks are appropriate for me to take on? What kinds aren't?
Am I fundamentally optimistic or pessimistic? What about? Are there any exceptions?
I made a more complete list of questions for you to consider at the Money Code Questionnaire page.
I also set up a Happy Money chatbot on poe.com that will ask you these and other questions one at a time to help you construct your own “money code”.
Let's dive into my own answers to some of these.
What expenses are essential?
That's a hard question to answer actually because everything seems essential. This is also tightly related to what I wouldn't skimp on.
So let's start with groceries. I really don't want to skimp on groceries. I tried that once and really counted the number of peppers or pears I got but it was very stressful and only resulting in maybe $200-300 saved per month. The impact on my mental well being is too severe.
Obviously rent or mortgage or any other living arrangements. This includes having my own space separate from the family. Again the absence of that is detrimental to my well being and consequently to my ability to generate revenue.
Actually that may be the fundamental principle here - I don't want to skimp on anything that creates enough mental discomfort to distract me from being able to work and product revenue.
And it's part of an overall theme of prioritizing making money (which is potentially limitless) and money saving (which is very limited). Let's say for the sake of argument 80% attention to making money and 20% attention to controlling expenses. At my current level of revenue I don't want to think about anything under $20 - too much stress for too little gain. So let's say for the sake of argument than anything under 1% of my monthly revenue.
I still want to track it in my budget to make sure it doesn't balloon out of proportion, but I don't want to think about it on an expense by expense basis.
This is especially important around eating out, coffee and snacks for the kids. I may have reservations about what they eat from a health perspective, but I don't want to tell them I can't get them ice cream or fries because it's expensive.
What's a good reason to take on debt?
Conceptually I'm willing to take on debt to grow my business. But I've also never done that, because I always feel like there is risk with any business project. So my current point of view is that I can take on debt to grow my business if there is a high likelihood of a good return on the investment. A high likelihood is close to 100% - so I'd invest into expanding something that's already working but maybe not in experiments. So maybe something like 90%?
On the other hand, and as I mentioned above, I'm willing to take on debt to make sure my living arrangements are optimal for my productivity (e.g. spending an extra $1200 last month on Airbnb so I could have serious solo focus time for work).
Looks like it falls under the same umbrella as investing with a high probability of success - investing in my own wellbeing and in clear focused work time is very likely to generate results. Maybe not direct revenue, but at least significant progress.
What does the future look like?
On one hand I think the AI revolution is going to change everything. Most jobs and professions are going to change including my background as a software engineer, business/life coach, and marketing consultant. I'm fully expecting mass layoffs, riots, perhaps a major war in the near future, likely big turmoil in the financial system, attempts by governments to stabilize the economy - that ultimately backfire, all the lovely jazz. So the future seems fundamentally unsafe and unpredictable, which is pushing me away from typical investments in retirement funds, education funds, etc.
On the other hand I do believe in outsized returns for people who notice and are able to take advantage of unexpected opportunities. This is what I've been working to develop in myself during my transition from an employee to a businessman over the last 4 years - the ability to create businesses out of opportunities.
On the third hand (is there such a thing?), I haven't been very successful with this so far. I've made some money, but less than what I've spend on day to day life. I've noticed some opportunities but none were massive. I feel like I'm making progress and getting closer to the ability to do that but I have no way of knowing when it will be "enough". I see myself as a future very successful businessman with multiple revenue streams and opportunities everywhere, but I'm not there yet.
If I already was an accomplished businessman with a good track record I could reasonably say that I don't want to invest in anything like a pension fund because I know my skills can carry me through anything. As things stand right now, I only have my faith in myself.
You know what? That's the principle here. My investment in my future is investment in my skills to be able to survive anything. Learning how to market, how to sell, how to notice opportunities, how to work with other people to form businesses, how to create revenue out of things that aren't in my skillset through organizing business activities but not by providing the services myself, etc. I have a sort of roadmap that I can draft in how my own skills evolve towards the goal of freedom and anti-fragility.
I very much believe that this is the only way to survive what's coming. I only hope I can make the transition quickly enough.
What is "enough" money?
The first thing that comes to mind is the standard $10k MRR ideal of indie hackers. I don't know where this number came from but it does resonate with my personal experience. We were reasonably comfortable when I was making $85k before tax here in Canada. $120k would be nice indeed, especially if it's just me making that and my wife Yael is making something similar to cover her own needs and wants. In our small Canadian town this should allow for a reasonable middle class life.
The biggest expenses I see here are adventure toys - skis, bikes, hiking gear. These things aren't ridiculously expensive but new gear is beyond our means right now for the most part. Beyond that I'd like the ability to travel on a whim, especially to visit my parents in Israel. It's a $2k flight which is a significant expense right now and I don't want it to be.
I also want to have a few months off during the year.
All things considered I think I'd be very VERY satisfied with $20k income per month or about $250k per year. Honestly, I'm not sure what I'd do with more than that. I imagine new appetites will arise, but this should be more than enough for a good, comfortable life.
But revenue isn't enough - I'd want to have a cushion for sure, something I don't have at all right now. A good cushion is about a year of runway invested in some sensible way - probably an S&P 500 index.
I'm roughly following Nassim Taleb's barbell strategy with my business endeavors being the high risk edge and the index investments the low risk. I think Taleb would consider the index fund to be too risky for the non-risky side of the barbell and perhaps the business risks not speculative enough, but this is as far apart as I'm willing to go right now.
So a year of runway at $10k MRR is about $120k and at $20k it's about $240k.
To incorporate or not to incorporate?
That's a hard one. I haven't separated my personal and business finances at all yet. The only place where I keep track of what's personal and what's business is in my budgeting app YNAB. I have separate categories to track business expenses (both subscriptions and one off expenses) but in practice I just look at them as any other expenses.
This actually deserves some thinking. I think I might want to create more separation between the business and my personal finances. I once read a book called Profit First that advocated setting up separate accounts for business revenue, expenses, profit and taxes and allocating funds between them. Every account like that costs $16 per month because of my low revenue numbers so it seems wasteful.
There's also the matter of setting up an LLC and the cost of doing that, hiring an accountant for the taxes, and all the complexities involved. This also seems to be a question of revenue sizes. I'm pretty sure that by the time I reach $250k it will make sense to have an LLC and full separation between business and personal finances for organization and tax purposes. I think that I have an intuitive threshold of when a separation starts to make sense, but it's not a clear one, and I've never considered it in depth until now.
Looking online, it seems that the threshold is much much lower than I thought it would be.
The corporate tax in Canada is significantly lower than income tax - and I think this is true for many other countries. I live in BC, and the corporate tax for a small business under $500k revenue is 2% for BC and 9% for federal, so 11% in total. Self employment tax is more complex, but for $100k a year it comes out to about 27%, for $200k a year it's 33%, and for $500k yearly it's a whopping 45%!
Even for a meager $50k per year revenue, the self employment tax is 23% - more than twice the corporate tax. On top of that it seems that dividends (the standard way for a corporation to pay its owner) are taxed at a much lower rate than a salary (about 7.5% for $100k and %0 (!) for $50k).
It seems that everything is set up to make corporations pay much less tax. The only problem is that corporations are somewhat harder to manage and perhaps require legal and accounting guidance.
A guiding principle here is that I'd like to pay as little in taxes as it is legally possible for me. And from that and the estimation above it seems that if I my business is my main source of revenue and I can survive off it (i.e. making more than $50k per year), I should incorporate!
And maybe you should too.
How do you expect to make money?
This is a loaded question that sounds almost like something my parents would say to me.
It's particularly loaded because I have a certain marketable skills that I don't want to make money with anymore: I'm a very experienced software engineer but I don't want to do that kind of work anymore; I'm also getting much better at sales, but I don't want to do sales for other people; And I'm a pretty good coach with a therapy slant, but again, that's not something I want to do directly anymore either.
I do want to make use of my background in all of these things but what I mostly want to make money doing is what I'm currently interested in. Gary Hendricks called it the zone of genius in his book The Big Leap - that thing that at any given moment excited me the most and what I'm most passionate about.
This by necessity means that I want to make money from something I'm not yet especially good at. My saving grace is that I have a lot of experience in a lot of different things and I bring all of that experience, credibility, and skill into every new topic I tackle .
With all that considered, I love teaching. In particular, I love teaching small groups of people allows me a direct connection with them. And the thing that I most enjoy teaching these days are business skills - marketing, sales, mindsets - especially to software engineers transitioning from employment to business.
My ideal business (as far as I can see today) is an online school with a mix of live courses, recorded courses, one off workshops and other materials. This is taking a long time to build up and I can't rely on it as a main source of income so I'm offering my marketing and sales consulting services to tech companies - startups and software agencies. This is a workable solution as I do feel like I'm growing through this work, but it's not something I'm terribly passionate about.
One of the consequences of always working on the outer edge of my skills is the constant companionship of impostor syndrome. Another consequence is that I'm never making as much as I could have with something I have already proven my worth with.
These I think are prices I'm willing to pay (and have always been willing to pay) for the benefit of living a passion-fueled life.
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Alright.
This is already pretty long, so I think I'm going to call it a day and continue in part two.
You're welcome to do your own exploration either by yourself or with the HappyMoney bot - it's totally free and should be very helpful.
And let me know how you think about your money. I'm curious if anything I wrote here resonates or is in any way relevant to your path.