I wrote an article suggesting a focus on maximising wealth may not be a path to happiness. I offered three suggestions based on my own life experiences and the way that I’ve decided to manage my finances. They are:

  1. Create your own version of financial success and goals that matter to you
  2. Focus on growing the portion of your salary going to discretionary spending
  3. Use your savings and investments to provide cash flow

In this article I am sharing how I came to this way of thinking. There are several reasons I think this is helpful. Most investing and personal finance content is sterile and removes the element of human emotion and differing goals from the decision making process. In some ways this makes sense. We should strive to make rational financial decisions even while acknowledging complete rationality is impossible.

Yet a rational assessment of a financial decision can also miss the point. Rationality is another way of saying wealth maximising behaviour. To act rationally is to ensure that each decision we make maximises our wealth. The assumption is that having the most wealth possible is everyone’s goal as opposed to basing decisions around individual goals.

It also assumes that there is one approach that works. That isn’t true. Many different investors have used many different investment strategies to meet their goals. However, there are some commonalities to success.

Investing takes patience and it takes consistency. Going to the gym once won’t lead to results. Neither will spending a couple hours going through your finances. To be successful at anything takes more than a single effort. To sustain an effort over time you need to believe in it. You need to believe that the approach you are taking will yield results that may not be readily apparent for decades. You need to feel you are making progress along the way or you won’t keep at it.

In that spirit I’ve described my journey and how I came to my approach. You may agree with me. You may not. That isn’t really the point. Hearing about a different approach will make you think and challenge your own assumptions. It is a good outcome if this article strengthens or challenges your convictions.

We are quick to wax poetically about how life is a journey. Yet to benefit from that journey takes some introspection to gain self-awareness. Our perspectives are shaped by our experiences which positively and negatively influence our ongoing and future actions.

To continue any long-term effort we need to internalise the belief that it will yield results. Starting down a pathway because someone else believes it is the right thing will only last so long. The slightest hardship or challenge can cause the plan to unravel.

The stories we tell ourselves about how we’ve reached the spot we find ourselves in life may not reflect reality. They may be whitewashed to make them sound more intelligent and forward thinking. Our stories may dismiss mistakes as bad luck and transform good luck into intelligence. But how we view our journey so far will influence where we go from here and that is more important than anything else. Here is mine. Warts and all.

Lesson 1: Time closes doors—investing can open them up

I read a column by New York Times columnist David Brooks when I was in my early 20s about aging. And there was a quote in the article by novelist James Salter. He wrote, “For whatever we do, even whatever we do not do, prevents us from doing opposite. Acts demolish their alternatives, that is the paradox.”

Even with much of my life in front of me this struck me as incredibly profound. Part of the allure of youth is the notion of limitless possibilities. And the nostalgia for that time in each of our lives stems from the notion that it was a time we could have become anything. And maybe in reality that wasn’t true. We are limited by the circumstances of our birth and our own inherent abilities. Yet that doesn’t change the feeling youth elicits. An open road ahead of us and a world to be conquered.

That quote made me think about the doors that I had already closed off in my own life. And I thought about it in terms of my own finances. I desperately wanted to avoid squandering the greatest asset that any investor has—time in the market. It clarified and strengthened my goals of saving and investing as much of my meagre paycheck as possible to not close off more options in my future.

This occurred during a challenging time financially. I had recently gotten married and my wife was early in her PHD studies. We had years ahead of us on a single income. And it wasn’t a very big single income.

My aversion to spending money on ‘stuff’ which I outlined in the previous article was not born of some profound rejection of materialism. It was about not having enough money. Part of that was being young. But part of it was because I closed off my own opportunities to make more money early in my career by not taking my academics more seriously.

And in retrospect this drove my insecurity. And this insecurity manifested itself in a strange way. I took on a moral superiority by not buying things, avoiding debt at all costs and saving and investing everything I could. Did this make me a better person? Of course not. I couldn't win in a traditional sense so I changed the rules. 

My efforts would be hidden away in my investment accounts and not put on display by having a nice apartment, nice things or enviable experiences. In retrospect I couldn’t compete in a traditional sense so I rejected the conventional approach to life. In a way this wasn’t that different from what got me into this situation.

My situation was a result of my lacklustre academic results. They were not a result of not ‘applying myself’. I worked hard to not try. I didn’t go to class in university. And I didn’t just miss a couple of them. I missed almost all of them. I didn’t even bother buying the books for my classes. I would show up and take the exams and throw together the other papers and assignments at the last minute. I just figured that I was smart enough to still pass. And if I didn’t I could at least say I didn’t try. Somehow, I managed to graduate.

This whole 4-year episode is deeply embarrassing when I look back on it. I wasted the considerable expense of my tuition and the opportunity to learn something. It was entitled and in my early 20s I was suffering the consequences. Yet it gave me time to clarify what was important to me before establishing financial commitments that would be hard to undo. I was living frugally, and I was saving a lot of money. That would open doors later in life.

Lesson 2: Approach lifestyle creep deliberately

I’ve always been reserved and shy. And one of the advantages of a life spent gravitating to the sidelines is the opportunity to observe others. I went to private schools, grew up in wealthy communities and many of my peers came from privileged backgrounds. Most of them had more success early in the careers. And I watched what they did with their salaries.

I watched them strive to replicate the trappings of the life they knew before they were in a position to afford it. As a society we don’t talk about the financial foundations that underpin wealth. It is considered crass to talk about money so it is no surprise that so many people believe externally projecting the illusion of wealth is the same as having it.

I saw a familiar pattern among my friends. Each pay increase wasn’t used as an opportunity to become more financially secure. Instead, a pay increase was used to finance a better lifestyle—often through increased borrowing. Higher salaries perversely made them less financially secure and less financially independent. The ubiquity of available credit meant that more income increased borrowing power. And many of them jumped at it.

Projecting wealth was the priority and building wealth was secondary. And it wasn’t done deliberately. It just seemed to be a default pattern they fell into. Before many people figured out what they wanted in life they started to reduce their financial flexibility to pivot when they did. There is a difference between frivolous onetime spending and entering into a longer-term obligation. We often see the later as preferable since these obligations typically fund the purchase of assets. Sometimes they are. But those obligations can become a trap without sufficient foresight into future desires and future earnings.  

This approach to life works well until it doesn’t. When we are early in our careers we tend to have continual opportunities to make more money even if the growth is off a low base. Getting additional degrees, more certifications and more experience often leads to better pay. Yet over time this diminishes. There are a variety of reasons for this but all of us reach a point where our earnings capacity plateaus. This point is often only clear in retrospect. Some people move into high paying roles later in life which more than makes up for early financial mistakes and obligations. Some don’t.

While I didn’t make much money I could see how each tiny improvement in my living standards quickly transformed something I wanted into something I needed. We get used to new things very quickly and they become hard to give up. 

Lifestyle creep and using salary increases to fund higher future obligations seemed like a trap. I started thinking about my salary and spending differently. I wanted my salary increases to go towards buying assets that further increased my future cash flows. I did not want them to fund borrowing for assets that reduced future cash flows and didn’t bring me joy. In my case this included a house or a car.

I wanted to reduce the amount of each paycheck that went to fixed obligations like housing, transport and healthcare. I wanted more to go to discretionary spending that could be directed towards things that made me happy. There is of course nothing wrong with wanting or needing a house or car. The key is to understand the risk and financial ramifications of stretching to afford something beyond your means.

Perhaps part of my attitude was my natural contrarian streak. If what everyone else was doing seemed like a trap I was going to do the complete opposite. Yet it also seemed to make a lot more sense than traditional budgeting advice. Budgeting is about giving things up to accomplish a goal. And that is hard because giving up things we’ve become accustomed to is hard. My choice was never getting used to them in the first place.

I also rejected the arbitrary one size fits all approach to spending contained in many budgeting suggestions. They prescribe a certain percentage of spending allocated to wants. A certain percentage to needs. Even worse, many of these decisions are outsourced. The bank tells you how much of a house you can afford. The car dealer tells you how much car you can afford. They don’t care about their customers. They want to lend as much money as possible as long as they believe most people can pay it back. None of this made any sense to me.

The biggest influence on our finances remained my wife not making any money as she pursued her PHD studies. By necessity we were a single income household. We could only afford the lifestyle that my salary could provide. When my wife started to work our attitude about our finances and the life we wanted to live had already coalesced. This turned out to be a blessing. 

We didn’t use her pay to further our lifestyle and instead saved her entire salary. We had been forced to live on a single salary. Now we choose to be more deliberate about our spending and continued to live on a single salary. Being able to survive on a single salary is more difficult and very dependent on how much someone makes. We had to be very careful about our spending but we managed to continue this approach. 

Lifestyle creep is not just the natural process of spending more as you earn more. It is the process of structuring your spending and personal finances mindlessly and falling into a life that is not aligned to what makes you happy. Creeping is an apt descriptor. The definition of creep is to move slowly and carefully to avoid being noticed. And this is something that tends to happen to all of our financial lives.

Lesson 3: Focus on generating cashflow

When you are enrolled full time in university and don’t go to class or bother studying it creates a good deal of free of time. I had to do something to fill each day so I started investing. And it was an exciting time to invest because it was in the midst of the .com bubble. It turns out that investing is easy when everything goes up.

I did what many people did at that time and many people do today. I found shares to buy that everyone else thought were great ideas. I would find a superficially compelling narrative and buy a company I knew next to nothing about. I put no effort into interrogating the narrative. No effort into understanding the company. And I didn’t have the perspective to understand that if everyone else thought an investment couldn’t miss those expectations were already reflected in the share price.

When the .com bubble turned into a bloodbath I searched for something else. The myths underpinning the bubble that were exposed in the crash made me search for something tangible. And there isn’t any part of investing that is more tangible than a dividend. Many people gravitate towards an income strategy as they approach retirement. For me it started before I had a career. I became an income investor in university.

What mattered to me was cashflow. The cashflow needed to pay a dividend and the cashflow a dividend provided to me. By the time I graduated university dividends became my obsession. It was a way for me to measure progress in a way that made sense.

My account balance would go up and down as the market fluctuated. At first, I tracked my returns closely against an index. But there was something deeply dissatisfying about this method of judging my investment success. If the market fell by 10% and my portfolio fell by 8% it was a good result. However, it felt deeply detached from building a portfolio that would provide me with financial freedom. And that was my goal.

Growing my cashflow was a better indication of my progress towards freedom. I tracked the growth in my income stream. I looked at how much my income was increasing through dividend reinvestment, dividend increases, and new savings. This made me agnostic to market performance. Soon I found myself actually hoping the market would drop. It meant my dividend reinvestment and new contributions bought me more income because the dividend yield went up as the market fell.

I had inadvertently stubbled on a way to remove behavioural risk from my investing. Not only would I not panic during a market drop—I welcomed it. To this day I think it is one of my primary sources of edge or competitive advantage as an investor.

Income investing is not the right strategy for you. But everyone needs a strategy. The strategy needs to be aligned to your goals. It needs to fit your temperament. That means you will consistently follow it.

Lesson 4: Financial resources are a means to an end

My obsession with dividends and my fixation on saving as much as possible led to the final piece of the puzzle that shaped how I view my finances. And it started in a strange way. I started saving for tuition for my children through a tax advantaged account in the US called a 529 plan. The fact that I didn’t have any children inexplicably played no role in this decision. My fixation on saving was so strong that I was literally inventing new reasons to save. All I could think about was getting rid of a future expense so I would have more options later in life.

Years later my wife and I made the decision to not have children. Even I couldn’t invent a rationale to save and invest for children that weren’t coming. I obviously could have taken the money and just added it to other investment accounts. But I had finally come to the conclusion that I was letting life pass me by. My frugality was causing me to miss too many experiences. I didn’t care about the apartment I was living in. I didn’t want more stuff. I wanted to travel.

I took the money and opened a separate investment account and decided to spend the dividends on travel. At first this dividend income was very small. It would pay for a portion of a flight to a domestic location in the first year. The friends I told about this thought I was crazy. They couldn’t understand why I wouldn’t save less and just buy the flight. Yet it made sense to me. I was growing my income stream and my investment income finally had a tangible impact on my life. It encouraged me to keep saving when I was starting to experience savings fatigue.

As my travel income stream started to grow it was a tangible example of how my investments could contribute to my life. Not in the future. Right now.

I had already been judging my investment success by the income growth in my portfolio. Yet life is about more than investments. They are a means to end. And if the end result I wanted was to live my life in a way that maximized my happiness I needed to judge investment success in those terms.

Adding another zero to my net worth didn’t directly contribute to my happiness. It was too abstract. All saving and investing involves delayed gratification. You give and give and give with the prospect of getting something back years in the future. That is why it is so hard to sustain. For me to keep going meant I wanted to get something back.

This was an important lesson. I am proponent of saving and investing but life is about accumulated experiences. My commitment to saving in my early career has given me greater flexibility today. Yet I missed out on a lot of experiences that I'm too old for right now.

This isn't a call to spend money frivolously. It is a call to figure out a way that financial resources can contribute to happiness as soon as possible. For me that was an income strategy. I don't touch the principal and i keep saving. Yet i'm also spending some of the income my investments generate.

This is why I don’t own a home. I don’t want my assets locked up in a house. I don’t want my salary going to pay for maintenance and other costs associated with homeownership. To me an investment is one that generates positive cashflows. I don’t know what the best decision is to maximise my wealth. My guess is that housing price growth in the future won’t match the past. But I also don’t care. You shouldn't care if your dream is owning a home. I know the best way to enable the life I want to live right now and in the future is the approach I’m taking. 

Final thoughts

The definition of insanity is doing the same thing and expecting different results. Yet most people mindlessly follow the same path. And most people never achieve financial freedom.

The playbook is to get a job and use that job to borrow a bunch of money to buy things. The debt is justified by noting how much more expensive everything is and the notion that some debt is good. For good measure some gripping can be thrown in about how previous generations had it easier.

There are of course kernels of truth in this argument. Things—particularly housing—are a lot more expensive on an income basis compared to what they used to cost. Was this a conspiracy to inflate asset prices? Maybe. Lending standards have changed. It used to be 2.5 times income. It is now 4 times income. Is this prudent? It depends on each individual situation but I would argue it isn’t for most people. Especially since the average age of a first-time homeowner has increase to 36 from 24.5 in 2000. Future salary growth is much lower at 36 than 24.5 for most people.

What makes houses, cars, and all things more expensive is the collective willingness to take on more debt to buy them and the regulatory latitude to enable this level of debt. Borrowers take on these previously unheard-of levels of debt in the allusion that financial success is buying assets using debt.

One of our most sacred rights in a democratic society is free choice. We are all impacted in positive and negative ways by the circumstances of our birth. Those circumstances include the financial resources of our parents, our race and gender, our natural abilities and countless other factors that make life easier or harder. Yet we also get a say in the type of life we lead. We get a choice in how we spend money. We get the choice of saying no to things and not just reluctantly accept outrageous prices. 

This article is not a call to follow my pathway. My financial philosophy is designed for my life and my goals. It is partly based on deliberate decisions, partly based on non-financial decisions like not having kids and partly based on the circumstances of my life. Yours will be different. Go buy a house and a car if that is what brings you joy. Just be careful of the consequences if too much debt is used and the impact on future financial flexibility.

This is a call to develop your own financial philosophy that governs the decisions you make. Create a financial philosophy that aligns your salary and financial assets to what brings you joy in life. This seems obvious but many people come to this realisation when it is too late.

In investing following the herd often leads to poor results. And the same holds true with personal finances. We charge like lemmings over a financial cliff because we mindlessly follow conventional wisdom. And the whole time our actions demolish their alternatives and we are left with fewer options to get the most out of life.

To share any comments or feedback please email me at mark.lamonica1@morningstar.com