Finance Smiths

Haha, I read with much interest My15HWW’s post about us – A Household with $350K Annual Income Can Still Be Financially Struggling? It’s a great case study of how a Dual Income With Kids household can get themselves into financial trouble by making just a few too many bad lifestyle creep, spending and investment decisions at one time. While I won’t revisit the well-thought-out analysis, I reckon it would be useful to share what I was thinking at the time and how it backfired on me later on.

Paying more for convenience because it saves time

If I had to trace the root cause of the higher spending levels, it would come down to having the belief that I’m paying more for convenience because it saves time. That’s how I convinced myself to buy the private property in a good location that is close to transport nodes, amenities and schools. Just look at how much time I’m saving by being able to get what I need or get to where I need to be so quickly. Of course, it’s not enough to have buses and trains. A car is even better and faster at moving my family around. Time savings multiplied by the number of people in the car. A slippery slope way of thinking once I started overdoing it.

Because there is always a premium on convenience. And when I started increasing our level of convenience, it also raised our level of associated costs. Kind of like overbuying all kinds of insurance, maximising the cover and paying the higher premiums. The problem with paying more for convenience is that it’s so easily justified when I look at how it benefits the family. Unlike insurance when overpaying only works in my favour when the trigger event happens (hopefully never or not often). Overpaying for convenience works in my favour because the trigger event happens all the time.

High dual income encourages high investment risk taking

Even with a high level of spending, it’s still possible to save on a high dual income. I start thinking I should have a higher investment risk appetite since the upside (multiples of capital) is so much more than the downside (loss of capital). Why? Because my capital replenishment rate is high as well. As long as the monthly salary income flows in, my cash on hand gets replenished consistently. When I keep making the same capital allocation decision regularly, I unknowingly start to take more investment risk to chase higher returns. An unconscious bias against having too much cash on hand because I’m going to have more cash the next month anyway. The problem is I started getting more careless with financial losses knowing I can absorb the hit more easily with our income.

Sailing right into a perfect storm

Keep in mind what’s happening to me at the same time as I went through 2021. Paying more for convenience translated into greater time saving which I channeled into all sorts of positive outcomes. This is on top of my bank maintaining a flexible work arrangement so I was barely going into the office since I had been there long enough to be able to do my work comfortably from home. My investments were doing well and the high risk ventures were doing even better. The mental, physical and financial welfare of my family took a leap forward and that’s why we bought the private property and decided to have another kid towards the end of 2021. Thinking 2022 would be an even better year. An amazing high I have to say that totally justified everything I have done and all the risk I have taken.

Got to admit. Life couldn’t have picked a better time to start punching me in the face. The downward spiral starts slowly at first, a few setbacks here and there. Some within your control, some outside of your control. But I keep thinking I can take the hits because my foundation is strong with ample buffers. So I don’t sell, don’t change my approach and just keep going. I also remember the last time this happened in March 2020 during the Covid crisis and how I did the same thing. And got rewarded with the progress my family made in 2021.

Somewhere along the line when things start to blow up one after another, the sequence of negative events have evaporated my buffers. A series of what I thought were good decisions at the time have backfired on me at the same time. That’s when I realised I was in a perfect storm and it really is different this time around. I’m in a much deeper hole than I thought and still sinking fast. Because I had gotten so used to attacking play that I forgot how and when to play defensively. It’s amazing how long it took for me to figure this out and by then, it was too late to react.

A good example is the timing of when Hodlnaut announced they were freezing withdrawals and my funds have been stuck there since. Did you know that was also the time when my 2nd kid was born? I had been so busy preparing for his birth and was planning to look into reducing my Hodlnaut exposure after my family had time to settle into his arrival. Essentially, I got timed out because my personal life decisions caught up to my financial decisions and I was not in a state of mind to clearly distinguish which ones were more important for me to address first.

Learning Points

If this had been a jobs recession causing widespread layoffs by now, the damage would have been far worse if even one of us lost our jobs. At one point, the negative cycle was accelerating so quickly that I didn’t even know where I should be defending from. The system I built relied so heavily on a dual income that there was no room for failure. Not a single defensive point I could use to make a play from. So I hunkered down, put on life vests and could only wait for the worst of the perfect storm to be over. A helpless position to be in and one I will remember for a long time.

Because that is important for when I survive this perfect storm. A vital lesson in everything about life. That one thing affects the other and knowing how to play the game defensively is just as important as knowing how to play it aggressively. The key is in the balance and using good times well to hedge against the bad times. I didn’t get knocked out this round and survived with my foundation intact. Which means I still have something to build on and I will do it differently this time. More risk management, not just financially but in overall decision making as well. More prudence, not just spending wise but in the way I consider trade-offs. And perhaps down the road, I hope this becomes a lesson in how to recover well after taking big hits in life.

Wow, I can’t believe it has been about 5 months since my last post in June. All I can say is, what a crazy time it has been. So much has happened to me and my family that I can’t even begin to describe what we went through. I’m going to summarise the big life events and their impacts. So you can imagine all the subsequent stuff that happened afterwards.

Birth of my 2nd kid

Let’s start off with the biggest life-changing event so far. There has been an addition to our family – 2nd kid (another boy) and he’s about 3 months old now. My wife is on maternity leave and it has been good for her to be able to stay home and take care of the baby. Of course, with my older boy (now 3 years old) running around, it gets loud with plenty of noise, tantrum-throwing in our household. Plus his antics wake up the baby (sensitive to sound and doesn’t sleep well) so there’s even more crying to go around. When my wife goes back to work next year, I reckon she may work from home initially since she has been in the job for a while and in the bank for a long time. Hopefully she can stabilise the household and head back into the office eventually. I would think she wants to catch up with her colleagues in the city as well and get away from the mess at home from time to time.

Change my job

I’m usually a bigger supporter of my wife in household matters but it has been difficult for me to be more present at home recently. Reason being I changed my job right after the birth of our 2nd kid. Yes, I know, not the best timing (an understatement in itself). I wouldn’t have considered doing something crazy like that if not for the pay rise, promotion and a chance to work in a competent team in a global bank. While it has been a positive experience in my new job so far, I have to put in more effort and longer hours at work. Because expectations are higher and I can no longer cruise like in my previous job. This means going into the office a lot more and being away from home. Hopefully I can work from home more next year after I get the hang of things just so I can help my wife out. Right now, she’s managing close to everything and that’s not sustainable long-term.

Big financial hits one after another

Not going to sugercoat how terrible my financial situation is now and it just keeps getting worse. Bad things really do snowball and it feels like I’m taking one big financial hit after another. It started with Hodlnaut going under and me writing off our BTC and ETH holdings there because I’m assuming zero recovery. Then the US tech stocks tanked because of the Federal Reserve raising interest rates to combat inflation. Followed by the rest of the global stock markets falling as well. Now the crypto industry is in trouble again because of what’s happening to FTX and the contagion effects. I thought we were well-diversified until I realised what it truly means to have the prices of all asset classes going down at the same time. Incredible times as I feel like there’s no safe place to take refuge in financially.

Our core portfolio of ETFs remains intact so I’m hoping that can act as the building block of our recovery plan. It doesn’t help that our cash level is low because of our private property purchase last year and continued Dollar-Cost Averaging into our investments this year. Next year, both our rental and mortgage expenses will increase significantly as we renew our lease and housing loan gets repriced. Plus we also have to buy a new car that is big enough to drive the family around in as the COE of our current car comes to an end. Not something I look forward to with COE prices going through the roof. Every other major expense (childcare and medical for example) will also be going up. Talk about a perfect financial storm. There are so many learning points that I just have to survive and put them into use. So our family can be more resilient financially the next time there’s a crisis as we mature and get older.

How are we managing it?

Just barely and it’s taking our combined monthly salary income to hold the fort. Even with the higher monthly salary income at my new job. I’m slowly rebuilding our cash buffer, setting aside cash for higher cost of living expenses, allocating cash into automated and manual Dollar-Cost Averaging for investments. I realised it’s a lot more difficult to repair our battered financial situation with a family. And so much tougher to recover from financial hits since I have to be more conservative to reduce risk-taking so it doesn’t blow our family up. When it’s probably a better time to be aggressive and take risks to take advantage of opportunities.

I don’t think my wife can search for and find a higher paying new job after returning to her current job from maternity leave. Not when she has her hands full managing the household. And I doubt next year would be a good time to move given the worsening recession we are in is causing staff headcount budget cuts that are being planned currently. This year is a better time to move as the staff headcount budgets were planned last year when the environment was more positive. And I have already changed my job to take advantage and that’s enough risk-taking on the job front for now. In short, she has to protect her job and keep the monthly salary income flowing in until we are in a safer position to take more risk. It feels like we are living on the edge and I will continue to provide updates here when I have time.