How much optimization should you do?

It’s tempting, of course, to say “as much as possible”. Optimization comes with costs, though. Time, if nothing else. And, for me, it often costs in mood and anxiety as well. If I obsess about optimizing something, it doesn’t make me happy, regardless of the ultimate results of my optimization. Furthermore, in most if not all areas, optimization is a process of diminishing returns.

I tend to be a big believer in the Pareto Principle – namely that you get 80% of the results for 20% of the work. And I think this applies to optimization many times as well. I can get 80% of the way to optimized in a given area with 20% of the work. And to get that last 20%, it can take a lot more work. I have a clear memory of a moment of realization after a particularly grueling bout of middle school perfectionism — I could do like 10% of the work and aim for B+’s and A-‘s, or I could keep killing myself trying to get 100% on everything and never look back. For better or worse, I kept that philosophy all the way through my schooling, a consistent 3.6 student who didn’t work very hard at all.

Three Types of Millionaires

In Quit Like a Millionaire, Kristy Chen proposes that there are three types of millionaires – hustlers (who focus on increasing their income), investors (who focus on maximizing their investment performance), and optimizers (who focus on maximizing their savings). Another way of articulating this would be to say that millionaires tend to try to optimize either their income, their investments, or their savings / expenses. And, in her model, each of these types of people tends to neglect the other two financial areas — so hustlers tend to pay little attention to investment performance and savings, etc. While I recognize that all models are imperfect, I do find this to be a useful approximation of the dominant schools of thought I’ve encountered in the world of personal finance. It also got me thinking about where I fit on this.

What I’m NOT is easy. I am definitely not a hustler. I bristle when dealing with salespeople, and find entrepreneurs unrelatable. Early in my adult life, while teaching English in Taiwan, many of my friends opened schools or taught lots of (high-priced) private lessons. I did neither — I taught my classes, and earned plenty of money, but certainly not as much as I could have. And I knew that, if I were the business owner, I’d be thinking about that business all the time, and I didn’t want that. I wanted to clock in and clock out, and that hasn’t changed. And as my career progressed, I certainly did not always make the choices that would lead to the highest salary. I chose majoring in English over majoring in computer science, and then got into education on top of that. I’ve taken some opportunities over the years, and earn good money (relative to where I started, certainly) but I’ve also turned down opportunities because they felt like they weren’t a good fit, even though they paid better.

I’m also not so focused on investment performance, although I do have a bit of experience with that. In my early investing days I tried picking stocks, and also picking actively managed funds, but I ultimately came to believe the research that says that this is very hard to do reliably. Once my focus had shifted to index funds, I certainly tried to get my fees to be as low as possible. I have also kept an aggressive asset allocation (90/10) throughout. And, over the years, I’ve flirted with taking a more aggressive factor-based approach (which I’ve so far resisted). So, while I wouldn’t describe myself as someone who spends a lot of time researching investments to maximize performance, I do try to optimize my investments in a few simple ways: use tax-sheltered space, minimize fees, and focus on equities rather than bonds. I think this simple approach falls well within a Pareto approach to investment optimization.

Similarly, I don’t know that I’m super-focused on optimizing my savings. My wife might disagree on this one, but one of the biggest arguments against my being a big savings optimizer is that, until we moved to Canada, I have never tracked our spending. Not even a little bit. And I only started after we moved because I had a sense that we were very close to our FI number and I wanted to check. All along, though, one of the big benefits of living well within our means is not having to track where every single dollar goes. This is not how optimizers think. At the same time, I will confess that I am a very reluctant shopper and will spend a lot of time hemming and hawing over purchases. I’m also very willing to spend time travel hacking. Again, I think this falls within the 20% work for 80% reward portion of savings optimization, although the truth is probably more like 50% work for 85% reward.

The Pareto Millionaire

So perhaps there’s a fourth type of millionaire — a Pareto millionaire, who does 20% of the work in all three of these areas (income, investment, savings) which, at least in certain countries nowadays, is enough to get you there. To be clear, I’m not coming out against optimization. If it makes you happy, do it. I definitely get much more joy out of collecting credit card bonuses or re-balancing our investments than many other people would. At the same time, though, when it doesn’t bring you joy, recognize that perfect optimization is impossible, and that good enough is good enough.

How do you develop discipline?

This may seem like a strange question for a blog about financial independence. What I’m attempting to get at here is the idea that my first impulse when facing many of the “good for me” things that I need to do in life (financial and otherwise) is to NOT want to do them. I know I should, but I don’t want to, at least not initially.

Take exercise, for example. I exercise almost every day before lunch, typically either running, doing TRX, or using a spin bike. I like exercising, but if I’m honest, many days I don’t feel like it. When it’s time, I think “I could just make lunch and watch something on TV” or something like that. And yet, I almost never skip a workout. How is that?

1. Just do it.

I don’t try to think my way into wanting to do something, I just start doing it. In other words, when I have that thought of not wanting to exercise, I don’t try to think my way to wanting to exercise. Instead, I just put on my sneakers and my exercise clothes and walk downstairs. The whole time, I might be thinking that I don’t want to exercise. I don’t get into an argument with myself about it. I just take the next action towards making it happen.

On a very small scale, I do the same thing with the telephone. I don’t really like to talk on the telephone. So when I have a phone call to make, I don’t try to think my way to wanting to make it. I just start dialing, knowing that when the person picks up, I’ll talk to them.

2. Count it, no matter what.

Another trick I use is to count the thing as long as I start it. I encountered this idea in an article about running — a run counts as long as I lace up my shoes and step outside. I continue to count workouts that same way. Some days, it is much easier to say “well, I’m just going to start and see what happens” than to commit to a full workout. And, if I’m honest, I finish the vast majority of the workouts I start.

I take the same approach with meditation. I often have a voice in my head saying that I don’t have time, or that there’s something else I should be doing, but I just start the timer and sit down, regardless of what my thinking is saying. And I count the session as long as my butt hits the bench.

3. Set yourself up for success, don’t rely on will power.

I don’t think my will power is particularly strong, so I try to make it as easy as possible for me to do the right thing. If I’m trying to exercise, I set up a routine where I do it at the same time every day, and I lower the barriers as much as I can. For me, that means doing it at home (or from home, when I run outside). For others, that might mean joining a group, or committing to a membership.

Similarly, if there’s a behavior that I’m trying to avoid, I make it harder to do. If I’m finding a website to be distracting, I block it. This isn’t irreversible, but it works because it interrupts that first impulse. If I want to eat less ice cream, I don’t keep it in the freezer. If it isn’t in the house, I eat it a lot less.

So what does this have to do with personal finance? I take the same approach there. When I need to cut my spending, or invest more, or rebalance more often, or tune out some bad investment advice, I use the above methods. I don’t try to think my way to wanting to do these things, I just do them, and I set myself up for success (and make failure harder) in whatever ways I can. This can mean automating my contributions to an investment account, automating rebalancing, blocking sites that hype questionable investment or offer tempting purchase, and so on. Perhaps most importantly, it means realizing that I don’t need to listen to the voice in my head. I can hear that voice, whatever it is saying at the time, and still take the appropriate action regardless.

In a way, I regard discipline and willpower in the same way I understand courage. Courage isn’t the absence of fear, but taking the action in spite of the fear. Similarly, discipline isn’t always wanting to do the right action, it’s taking the action even when you feel like not doing it.

As I said, I don’t consider myself to be any great shakes when it comes to discipline or will power. I think folks around me would consider me to be pretty disciplined, though, because of what it looks like from the outside. I use these techniques to get me there.

What works for you? Please let us know in the comments!

How do you account for uncertainty?

In Buddhism, there’s a concept called the eight worldly winds. The idea is that these “winds” blow through worldly life in a way that is unpredictable and, ultimately, unimportant. Because they are fundamentally uncontrollable, fixating on managing or avoiding these “winds” is a source of suffering. The eight worldly winds are typically expressed in four pairs, the first of which, gain and loss, is central to financial independence.

The idea of financial independence is, fundamentally, a false premise. There is no such thing as “enough” money in the sense that there is no amount that guarantees that you will never run out. Uncertainty is a fact of life, and it is important to keep this in mind to help moderate our fixation on guaranteeing successful outcomes. For me, this is part of why I always look at FI numbers as a soft target. Safe withdrawal rates (i.e. the 4% rule) are guidelines, not guarantees. We do not know how the wind will blow. We can prepare as well as we can using the information we have, but the future is ultimately unknown.

This uncertainty can be frightening, but it can also be freeing. If it is impossible for me to prepare for every possible negative outcome, then I don’t need to obsess over trying to do this. Years ago, I found myself starting to veer into “prepper” territory, imagining all the different ways things could go sideways. In addition to saving money, I started gardening and learning about off-grid living. While there is nothing wrong with these interests in and of themselves, this was definitely not a source of happiness for me. The more I prepared, the more potential gaps in my preparation I saw. I’ve found much more peace accepting the uncertainty, and just doing my best based on the information I currently have at hand.

True financial independence, to me, means not worrying about money. This has something to do with how much money you have but, in my experience, it has more to do with your orientation to money. I found that, even after hitting our FI number, I continued to worry about money. In some ways, I worried even more because we were finally there and I didn’t want to lose it.

Reflections

There are a number of ways in which I try to cultivate a more financially independent state of mind:

  1. Remember that uncertainty is a fundamental fact.
  2. Remember that my wife and I are both competent, resourceful people who have handled challenging situations in the past and will be able to handle them in the future.
  3. Intentionally keep my material standards low. In other words, avoid hedonistic adaptation.
  4. Reflect on the fact that material things don’t bring happiness.
  5. Intentionally bring more non-material pleasures into my life.

Luck

The truth of uncertainty has other implications as well. Because gain and loss are fundamentally out of our control, we want to be gentle with ourselves and others in terms of how we respond to them. Part of the reason that my family has financial independence is hard work and good choices, but part of it is also luck and privilege. And even the hard work and good choices are the results of countless influences throughout our lives, rather than innate qualities that I can take credit for. And, of course the same is true of folks that are struggling financially or making “bad” financial decisions. In other words, luck is an undeniable component of everyone’s financial situation. Remembering that helps me be less judgmental, both of myself and of others.