Sweat the Small Stuff


Which are conditions that are all necessary for not thinking about small expenses?

  1. Your income covers your expenses.
  2. You are withdrawing less than 3% or 4% of your portfolio, every year.
  3. You are relaxed about your financial position, and have no concerns with investment volatility or surprise expenses when things go wrong.
  4. You feel that you are using your money in a way that maximizes your happiness.

Sweat the Small Stuff

You can skip this article if all of the following are true:

  1. Your total annual spending equals less than 3% or 4% of your stock portfolio, depending on its allocation. Make sure to include infrequent items such as car upgrades, roof replacements, uncovered medical expenses, and a long stay in a nursing home. You can deduct amounts covered by guaranteed lifelong income such as social security payments, pensions or inflation-adjusted annuities.
  2. You are relaxed about your financial position, and have no concerns with investment volatility or surprise expenses when things go wrong.
  3. You feel that you are using your money in a way that maximizes your happiness.

Since I still have your attention, this article may help increase your happiness. You probably know that big financial decisions have a meaningful impact on your finances. Buying a large house, boat or a private jet will have substantial impact given the initial price and high maintenance costs. Having a high paying job, or two sources of income for a household can have a big positive impact.

As you work on getting the big picture right, you may follow the advice “don’t sweat the small stuff”. Indeed, you don’t need to sweat the small annoyances in life, but you may benefit from sweating the small expenses, especially the recurring ones. Here are examples.

  1. Subscriptions that you don’t utilize significantly. This could be cable TV with many channels, various software & apps, credit cards with annual fees and infrequently visited clubs.
  2. Infrequently used appliances that consume energy and require maintenance, including various refrigerators, lights, and computer systems.
  3. More employees than necessary, including nannies for older children, cooks and various maintenance staff.
  4. Eating out in expensive restaurants that you don’t appreciate in line with the cost.

The list above is a random sample of expenses. The list of expenses that can be reduced without a significant impact on your happiness is personal. You have to go through your expenses and find out what doesn’t makes you happy in line with the cost. One person may greatly appreciate a nice restaurant, while another may take great pleasure in having plenty of choices for TV programs.

Quiz Answer

Which are conditions that are all necessary for not thinking about small expenses?

  1. Your income covers your expenses.
  2. You are withdrawing less than 3% or 4% of your portfolio, every year. [Correct Answer, but read below]
  3. You are relaxed about your financial position, and have no concerns with investment volatility or surprise expenses when things go wrong. [Correct Answer]
  4. You feel that you are using your money in a way that maximizes your happiness. [Correct Answer]


  1. Jobs can come and go, bonuses can be reduced, and businesses can have fluctuating revenues. Income from work typically provides only temporary security.
  2. It is true that you need to withdraw less than 3% or 4% of your portfolio annually, but there is a much stronger condition – the 3% or 4% should be your total spending, ignoring income from work. Also, this applies to a stock portfolio. Bonds don’t grow fast enough to support lifelong withdrawals at 3% or 4%, growing with inflation.
  3. Even if you are at a sustainable withdrawal rate from your portfolio, if you are stressed with volatility or surprise expenses, you should build your resources to the point of a relaxed financial life.
  4. If you are sustainable financially (explanation #2) & relaxed about finances, but feel constrained, and are not happy with what money can buy you, you can be careful with your small expenses to free up money for other spending that may improve your happiness.
Disclosures Including Backtested Performance Data

Client Story: TV without the Big Expense

At a time where saving money is more valuable than usual, a local client shared ideas for watching TV cheaply:

  • Free Network Broadcasts: For access to the major networks (CBS, NBC, ABC, FOX) and live television broadcasts, purchase an HD antenna.  I bought the 35 mile range model from amazon Amazon.com: AmazonBasics Ultra-Thin Indoor HDTV Antenna – 25 Mile Range: Electronics and it provides me with access to SD and LA broadcasts. ($35 – one time)
  • TV Shows, Movies on Demand over Internet: For access to thousands of movies and shows on demand, Netflix (Cost:$8.99/mo for HD), Amazon Prime ($99/year), and Hulu ($7.99/mo) offer excellent options.  Netflix and Amazon offer deeper catalogs with no ads.  Hulu has current shows with ads.  I currently only do Amazon Prime as it’s the best value with their Unlimited 2 Day Shipping, Music Streaming, and Photo Storage included. Netflix and Hulu offer the flexibility to activate for a month and cancel at any time.
  • Sports: NFL, MLB, and NBA all offer season packages that allow you to watch all games on demand, on any connected device.  I only subscribe to the NFL Gamepass package ($99/year) which has the downside of not providing live broadcasts. This is not an issue for me since I can almost never carve out 3 hours in the middle of the day to watch a game.  The functionality is ideal as all On-demand games are replayed with no commercials and there is even a “condensed” version that cuts out the video between plays, allowing you to watch a game in approximately 30 minutes.
  • Sling TV: For those that want access to major networks such as ESPN, FX, AMC, they can subscribe to slingTV ($20/month) which provides live coverage of these networks previously only available through satellite and cable vendors.  They also offer the benefit of subscribing and cancelling the service by the month.
  • Connected TV Devices: Most new tv’s have web-enabled “Smart TV” hardware and software built in.  If a TV does not, all of these apps are accessible via an Apple TV, Amazon Fire TV, Roku, Google Chrome, or connecting your PC to your TV.
Disclosures Including Backtested Performance Data

Tips for Handling Hard Earned Money, Won Money, Found Money & Inherited Money

Say you inherited $10,000.  Would you use it the same way you use $10,000 you got for weeks of work?  How about if you won it in a bet, casino, or found it on the street?  If you are more likely to spend easily found/won money because you didn’t work hard for it, you are not alone, and you are subject to a bias called Mental Accounting.  You associate different meanings to money depending on the source.  But, in reality, all money is the same, no matter how you got it.  Specifically:

  1. If you would save hard earned money, you would rationally save found money.
  2. If you would spend money you earned on overtime work or a bonus, you would rationally spend the same amount from an inheritance.

Here are some ways to avoid mental accounting:

  1. Put all money earned, found, won, or inherited into the same account (see exceptions below).  Now you can look at it as one pot of money, and forget about its source.
  2. Put any money that needs to be in a separate account for tax purposes in the account that fits the tax requirements.  Examples are:
    • Retirement:  IRA, Roth IRA, 401k, Roth 401k
    • Inherited Retirement: Inherited [Roth] IRA
    • Education: Coverdell ESA, 529
    • Different Individuals or entities: children, businesses.
  3. Do not use separate accounts for different goals, unless required for tax- or accounting-purposes. Set priorities for money.  Here is one potential ordered hierarchy:
  4. Set priorities for money. Here is one potential ordered hierarchy:
    1. Basic necessities, including: rent/mortgage, food, children’s education, cars, etc..
    2. Retirement/sustainability.
    3. Children’s education accounts.
    4. Discretionary (fun/non-critical) spending.
Disclosures Including Backtested Performance Data

9 Signs for a Misleading Article

I read many articles every week, and came up with ways to filter out misleading articles. This is critical for me, so I can keep my investment decisions rational and unbiased. Using the wrong article to affect investment decisions can cost you real money. Here is a quick checklist to uncover many of the misleading articles:

  1. Focuses on recent history without offering a long-term perspective.
  2. Talks to your emotions, without accompanying with data or logic.
  3. Presents recent history in present tense to imply that it will continue the same way (“stocks/bonds/pesos/you-name-it are currently out of favor”).
  4. Focuses on a narrow asset class (e.g., large U.S. stocks, the S&P 500, Japanese stocks, the BRIC countries) when discussing stock investments in general, or diversified asset classes.
  5. Presents only partial returns (e.g., index returns without dividends).
  6. Provides opinions of well-known people to give credibility, without hard data or logic to back the claims.
  7. Depends on traditions to back the claims, without providing logic (e.g. shift allocation to bonds with age, regardless of the total picture).
  8. Provides specific advice without any comments qualifying who this applies to (e.g. referring to a retiree without discussing their withdrawal rate).
  9. Offers a prediction of the near-term future of an investment (stocks, bonds, gold, etc.) with high certainty.
Disclosures Including Backtested Performance Data

2 Hidden Benefits of Emerging Markets

International markets offer a tradeoff of higher potential returns at the price of higher volatility, when compared to the U.S.

Emerging markets offer even higher potential returns, at the price of even higher volatility, when compared to both the U.S. and international markets.

While these characteristics are well publicized, emerging markets investments hold two additional benefits that are typically not discussed:

  1. Technology Leaps: The technologies developed in the U.S. and other developed countries are readily available to emerging markets, allowing for leaps to the newest technologies.
  2. Rotating Countries: The most advanced countries keep being replaced by less advanced countries in emerging markets funds. As long as there are countries that are not advanced enough to be part of emerging markets funds, we get a fresh supply of countries that can leap forward.

These benefits are the key for emerging markets investments sustaining a very high growth rate.

Disclosures Including Backtested Performance Data

Buffett Talks about Investment Options

Warren Buffett, the most successful investor in the world, and one of the wealthiest people in the world, writes an annual letter to the shareholders of the company he manages: Berkshire Hathaway. The 2011 shareholder letter (http://www.berkshirehathaway.com/letters/2011ltr.pdf) had a valuable section about the basic choice for investors. This section, almost perfectly, mirrors my view on investment choices1. Since he expressed our ideas so eloquently, I kept the quote with almost no breaks. I highly recommend reading the whole text slowly and carefully, even repeatedly, if needed. If you can get the many messages and nuances throughout the text, you may gain a great sense of comfort by the time you are done.


“Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.

“From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a non-fluctuating asset can be laden with risk.

“Investment possibilities are both many and varied. There are three major categories, however, and it’s important to understand the characteristics of each. So let’s survey the field.

  • “Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

    “Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.

    “Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”

    “For tax-paying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax that our investor probably thought of as his main burden. “In God We Trust” may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.

  • “The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17 th century.

    “This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

    “The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

    “What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while .

  • “Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency collapse fosters movement to sterile assets such as gold. We heard “cash is king” in late 2008, just when cash should have been deployed rather than held. Similarly, we heard “cash is trash” in the early 1980s just when fixed-dollar investments were at their most attractive level in memory. On those occasions, investors who required a supportive crowd paid dearly for that comfort.

    “My own preference – and you knew this was coming – is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.

    “Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce.

    “Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety – but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.”


    I hope that reading these messages from the most successful investor in the world, with no sugar coating, can give you some comfort in my strong focus on these principles.


    1 Our main point of divergence is his focus on a small collection of companies with a bias towards the U.S., versus my focus on global diversification with a strong representation of fast growing countries and companies.

    Disclosures Including Backtested Performance Data

Part of my Salary is only $10,000!

Please read the following statements:

  1. Part of my salary is only $10,000. My salary is so low!
  2. This car is really cheap – its doors and wheels cost only $3,000!
  3. My investments have done poorly. Over the past 10 years, part of the return was 0%.

Do you see a problem with these statements? They provide a judgment on partial information – a portion of a value. The full salary could be $100,000, the car could cost $50,000 and the investments could have doubled, in which case all of the judgments above are wrong.

While you may be confused reading such statements, the article that appeared on the front page of the business section of the Los Angeles Times, “The 3 Bears”, on January 8, 2012, made statements similar to #3 above.

I am not judging the quality of the referenced article as a whole (it had some good information), but a specific set of data that was presented in an eye-catching way in the beginning of the article.

The article showed 3 long time periods in which the price of the Dow Index did not go up much (or even declined in one case).

While the information is correct, it is not useful. The change in the price of an index or a stock represents only a part of the return to investors, since it ignores dividends.

The table below shows the calculated returns of the Dow Index based on the years presented in the article (price change only), compared to the total returns of the Dow Index (including dividends). The returns of the globally diversified portfolio offered by QAM, Long-Term Component, were added when available.

Period Length Annual Returns
Dow Index, no dividends Dow Total Return Long-Term Component
1929 – 1950 22 years -1.1% 4.2% N/A
1967 – 1982 16 years 1.8% 6.6% N/A
1970 – 1982 1 13 years 2.1% 7.1% N/A
2000 – 2011 12 years 0.5% 2.8% 8.8%

You can see in the table that the total return of the Dow Index was substantially higher than the price-only return that was represented in the article. These total returns are not spectacular, but are significantly higher than the near 0% that was mentioned in the article.

Furthermore, I would argue that both measures are not relevant to a practical investor. There is no reason to invest in a concentrated portfolio of 30 of the slowest growing companies (being very large) in a single country that is the slowest growing country in the world (a result of it being the most developed economically). Instead, you can invest in thousands of stocks, large and small, all around the world. An example of such an investment is Long-Term Component, and you can see the significantly higher returns during these tough periods.

Last, while the referenced article emphasized the long stretches of poor returns for the price (excluding dividends) of certain stocks, it failed to mention that these periods all started with very high valuations (P/E ratios). Today, the P/E ratios are below average, meaning that we are not likely to enter a long period of poor returns for prices, even when measured excluding dividends.


I encourage you to be very careful of biases that appear in some articles. While these biases may get the attention of readers, they can create great financial harm to you, if you draw the wrong conclusions from them. A specific bias to be wary of is presentation of partial returns that do not include dividends.

Disclosures Including Backtested Performance Data

How can you Plan in a World of Uncertainty?

After experiencing the 2008 recession, many feel it is difficult to plan for the future. The recent stock decline scared them, and now they are torn between preparing for (1) a similar decline in the future, and (2) the erosion of assets due to lifelong withdrawals that increase with inflation. This article provides principles that can help you prepare for an uncertain future.

A common instinct, after a severe decline, is to put substantial assets in cash and bonds, to be prepared for a repeat decline. This leaves the investor vulnerable to both longevity and inflation risks. While the psychological impact of a recent severe decline is far greater than all preceding gains, you should consider the likelihood and risk of each case. A rule I use is:

Plan for the most expected, and be prepared for the worst.

Most people live a long life, and the life expectancy keeps growing very rapidly. The investment that best supports income that grows with inflation is globally diversified stocks. By focusing your investments in stocks, you are prepared for the most expected, but may not be prepared for the worst.

A globally diversified stock portfolio can decline for a number of years. Here are ways to address this risk:

  1. A zero-cost solution is to limit the withdrawal rate from the stock portfolio. If you can limit your withdrawals to 3%-4%, depending on the portfolio, you are likely to fully recover from the worst of the declines. This is thanks to the limited negative impact of the declines to money you actually take out during the decline.
  2. If your withdrawals are larger than 3%-4%, you can defer retirement if possible. If you can defer to the point of limiting the withdrawals to 3%-4%, you go back to having a zero-cost solution.
  3. Alternatively, a limited allocation to cash and bonds can support the excess withdrawals during declines. Such allocation should be strictly limited to supporting withdrawals during severe declines. Otherwise, it compromises your preparation for the most expected – many years of withdrawals that grow with inflation. Determining the size of this allocation requires a very careful analysis by an experienced professional.
  4. In addition to the discussion above, you are subject to the risk of panic during declines. While you may survive a decline in stocks if you limit the sales to covering immediate expenses, most people (including professionals) panic during the worst of declines and sell stocks excessively. The solution is to find an investment advisor with proven iron discipline.

To Summarize

Individual investors face two main financial risks: (1) severe market declines; (2) lifelong withdrawals that increase with inflation. Given how painful severe declines are, some people focus on the risk of declines on the account of the risk of lifelong-withdrawals. A better solution is to plan for the most expected (longevity), and be prepared for the worst (severe decline). This can be done by an allocation to a globally diversified stock portfolio, managed by a disciplined investment advisor, with an optional allocation to cash & bonds that depends on the withdrawal rate.

Disclosures Including Backtested Performance Data

Can Money buy Happiness?

Many people believe that if they had plenty of money, they would be happy in life. Yet, so many wealthy people are no happier than when they had only modest means. This article provides a potential explanation, followed by ideas for using money to increase happiness.

When does Money not buy Happiness?

Despite the benefits of money, people often do not become much happier thanks to money. I believe that it is the result of their narrow focus on the most known benefit of money: material pleasures. Examples include buying nice cars, clothes, eating in nice restaurants, and owning a home, yacht or a private jet. When you use your money mostly for material pleasures, the following happens:

  1. The excitement fades. Compare your first ride in a nice car you bought to your daily commute to work a year after you bought it. Your mood that day is much more likely to affect your happiness during the ride than the nice car.
  2. The expense stays. While you are likely to be only modestly happier thanks to the repeated material pleasure, the upkeep never goes away. Furthermore, when it is time to replace your car (to continue the example above), you are not likely to feel comfortable downgrading. This is because the pain of downgrading is greater than the pleasure of upgrading.
  3. Your financial risk grows. Now that your ongoing expenses grew for the long run, your financial risk is higher. Since you did not use your money to substantially increase your savings, if you lose your source of income, you are in trouble. Replacing a $1M/year job is far more difficult than replacing a minimum-wage job.
  4. Your freedom declines. The need for high income to sustain the material pleasures you got used to, reduces your freedom. Now you are wedded to your job, even if you are unhappy with it.
  5. You have no extra free time. At best, you are stuck working the same amount in the long run. At worst, after the excitement from a material purchase fades, you seek other purchases. The need for further purchases can become an addiction – a very expensive one – that requires working harder and longer, leaving you with less free time.
How to Use Money for Happiness

If you can follow a number of principles, you can significantly increase your odds of becoming happier as you accumulate more money:

  1. Set an ultimate goal of sustained happiness, rather than simply making more money. Keep looking for what makes you happy in life in a sustainable way and pursue that. Make sure that money is not specified as the goal -it is only a means to goals. This will allow you to go against the statistics, and be much happier thanks to the extra money.
  2. Live below your financial means, and keep growing your investments compared to spending. When your income grows, don’t increase your spending until after saving from your higher income. Spend according to your increased savings, not increased income. This ensures that you are no more dependent on income from work than before the raise, and allows for growing happiness in all areas listed below.
  3. Continue growing your spending very slowly, until it can be sustained from your investments alone. Your investment advisor should be able to provide you with a withdrawal rate that is likely to allow the portfolio to keep growing despite extreme market declines (often in the range of 3%-4%). If you spend $100k per year and the sustainable withdrawal rate is 4%, keep the spending from growing much until your portfolio crosses $2.5M (or a higher amount if you increased your spending).
  4. Once your investments can sustain your spending, you can increase your spending in proportion with the growth of your investments. At this point, you can enjoy the increased happiness through spending on material pleasures, without sacrificing free time, financial security, family connections, and all other ways in which money can provide happiness.
Money can make life nicer in many non-material ways

Here are some ways to make life very nice using money, beyond material pleasures.

  1. Get protection from the unexpected. Cash reserves can be a lifesaver between jobs or when your business is hurt due to economic declines. They also help in case of an expensive repair or healthcare expense.
  2. Free up time for retirement. If you are able to save and invest your money responsibly, you can grow it at a high rate over the years, getting an unbelievable reward for delaying your gratification. For a hypothetical example, if you manage to save $200,000 by age 35, and keep that amount for retirement at age 75 in a globally diversified stock investment generating 9% per year (a rate that was surpassed using investments of globally diversified stock portfolios), you get rewarded with growth to $6.3M, or $2.1M after discounting the amount by annual inflation of 3%. This amount, along with social security, and can provide income to cover all of your expenses forever. At that point, you can use your time for whatever makes you happiest.
  3. Free up time gradually during life. Retirement doesn’t have to be a transition from working full time to not working at all. Once you accumulate substantial savings, you can work less and start depending on small & sustainable withdrawals from your investments. For example, if your portfolio allows for sustainable 4% withdrawals, you can start living off of, say 2%-3%, leaving some cushion for unexpected expenses + allowing the money to keep growing for the day you would want or need to work even less or stop working completely.
  4. Choose the job you enjoy most. The more money you have, the less you depend on work to cover your ongoing expenses, and the more freedom you have to choose the job you like, even if it provides a lower pay.
  5. Strengthen family connections. If you work less, or at a job you like more, you can become a more pleasant and balanced person that has more tolerance and time for family life. This can lead to an improved marriage, and a better connection with your children, parents and friends.
  6. Show appreciation. When you pay someone for a product or a service, you can feel good about showing appreciation for what they do.
  7. Do less of what you don’t like to do. Many chores in life can be outsourced for a fee. The more money you have, the more of these chores you can pay others to do. Examples include: cleaning, gardening, cooking, doing laundry, preparing taxes, and doing simple home repairs.
  8. Simplify shopping. The more money you have, the nicer you can make your shopping experience. You can seek the exact products you want, as opposed to focusing on the cheapest ones, making the decision process quicker and more enjoyable. In addition, you can hire professionals you appreciate most, as opposed to the cheapest ones.


Money makes life easier, and provides security, flexibility and freedom. By deferring most material purchases until after security, flexibility and freedom are achieved, you can turn your wealth into enormous happiness.

Disclosures Including Backtested Performance Data

Great Wealth: Step by Step

When you hear about a very wealthy person, you might try to learn what steps were taken to achieve the wealth, so you can repeat them to become wealthy. In most cases, you will fail, because you have different circumstances or because luck played a big role. This article presents a systematic way for maximizing your wealth, regardless of your circumstances.

The article does not mention ideas that depend on luck, tough predictions or that may be difficult to follow, including:

  1. Work for the next Google, start it, or invest in it.
  2. Buy real estate in a location that will boom in the next 10 years.
  3. Become a famous actor, artist, musician, or writer.

It also avoids ideas that are useful, but depend on your individual abilities, and some luck, including:

  1. Become the CEO of a large company.
  2. Become a highly paid professional.

As you may pursue some of the approaches above, this article focuses on things that you can control better. Given the limited space, it is not a comprehensive guide for maximum wealth, but it should steer you in the right direction.

Step 1: Live below your means. The first ingredient for systematic wealth generation is to save as much as possible from your income. It is easiest to be frugal if you are happy, because unhappy people are at risk of using spending to make up for the missing happiness. More importantly, if you are not happy, what is the point of becoming wealthy? Here are a few ideas for maximizing your happiness with minimal spending:

  1. Find a job/business/activity where you are appreciated. Start by finding your strengths and passions. If you can find work that you are both passionate about and is in demand, you are set. Otherwise you may have to find a compromise, or split your time between two occupations: one that makes you happy and a less ideal one to pay the bills.
  2. Surround yourself with people that you can connect with, whether family, friends, or people with a common interest. Prefer people that build up your energy.
  3. Help others. While official volunteer work is a clear example, you can find ways to help people around you at all times, whether it is a family member, friend, co-worker, client or a complete stranger.
  4. Fill up your time with cheap fun activities, for example:
    • Walk, hike or ride a bike
    • Watch the ocean
    • Read books from the library
    • Play games, do puzzles, socialize
    • Listen to music
    • Garden
  5. Don’t overwork for extended periods. While the extra work can increase your savings, you might get burned out, or simply overspend to compensate for the work stress.

Do whatever it takes to live within your means and save some amount regularly. Knowing that life is financially sustainable is critical for staying peaceful and relaxed. Since we tend to focus on changes in life and not the absolute position, knowing that you are growing your savings is relaxing.

For many people, this may be the toughest step, and may require creative actions, including:

  1. Obtaining new skills through a degree or some form of training.
  2. Making changes to the circle of friends or even moving to a different place, where there is less pressure to live at a certain material standard.
  3. Selling assets and belongings that are expensive to maintain, including houses, cars or boats.

Once you established expenses that are below your income, be very strong at keeping the expenses from growing much. For any increase in your income, use most of it for increased savings.

Step 2: Build cash reserves. Save several months of living expenses in a low risk place, such as cash in a checking or savings account. This may not be easy, because this money does not grow much. A big motivation is the thought about how helpful this money would be if there is an unexpected emergency expense or you lose your job.

Step 3: Save into a globally diversified stock portfolio, with no market timing and no individual stock selection. If done right, this step can be really fun. You have to educate yourself about the extreme volatility of stock investments, as well as the high long-term rewards and the reasons for them. Whether you invest on your own or with the help of a professional investment advisor, it is critical for the person managing the money to have iron discipline.

Step 4: Use money to make money. Once you started building an investment portfolio, there are several ways in which you can use your money to reduce your expenses or increase your savings growth:

  1. Count a small withdrawal rate from your portfolio as a part of your reserves for emergencies. While stocks are very volatile in the short run, they can tolerate a low withdrawal rate at all times. This depends on the portfolio, and can be in the range of 2%-4%.
  2. Increase the deductibles on various insurance policies, such as car, home and health. When doing so, make sure you are prepared financially and mentally to spend the money out of your own savings, and don’t do so if you are at a much higher risk than the average insured.
  3. Increase the mortgage on your home, as long as you can sustain the payments through low withdrawals from your investments, and you have iron discipline!
  4. Switch from a fixed mortgage to a variable rate, unless your fixed rate is very low. Fixed mortgages cost more to compensate the lender for interest rate risk.

The last two points require very careful analysis – I do not recommend doing them without the help of an experienced professional.

Step 5: Keep a watch on expenses. As you grow your savings and/or income, it can become increasingly difficult to keep the material standard of living from growing. A few ways of dealing with it are:

  1. Raise your standard of living with the growth of your income, but do so minimally and choose things that maximize the growth of your happiness.
  2. Instead of thinking about your low (and declining) standard of living relative to your income and/or assets, think about your growing standard of living.
  3. Remember that more money (beyond a pretty basic amount) typically does not make people happier. That is where a focus on happiness first can help.

Step 6: Financial freedom . Once your investments grow to the point where your annual living expenses amount to no more than 2%-4% of your investments (depending on the portfolio), you will achieve financial freedom! Now you can choose to spend your time in any way that will make you happy. As a huge added bonus, you can keep growing your spending whenever your investments grow to new peaks, without reducing your financial security.

Example : If you can save 10% of your income per year and put it into a stock portfolio with real long-term growth of 12% per year (nominal growth 15% minus 3% inflation), you can reach financial freedom (at a 4% withdrawal rate) within 31 years. Note: I assume that the growing income allows for an increased saving rate. This is a reasonable assumption because wages have historically grown about 1% faster than inflation in the long run.

For income of $100,000, and $10,000 saved per year, you may reach $2.5M in 31 years.

If you stop working at that point, and withdraw 4% of your portfolio per year, you may see your assets and available income double every 9 years, reaching $10M, 24 years into your full retirement.

Notes about the steps above:

  1. They are pretty simple. You don’t have to be very talented, lucky or smart to follow them. You do have to be strong and consistent. This requirement is what fails most people.
  2. They are not guaranteed to make you wealthy or happy. They are general guidelines. Stock growth can vary from its average for extended periods, and the average may change over time.
  3. They are not appropriate for everyone. Some people place greater emphasis on the present, and are willing to accept higher financial risk and lower future wealth. There is no right or wrong – it is a clear tradeoff.
Disclosures Including Backtested Performance Data