Effective resource planning: a how-to guide

Setting up the problem

As mentioned in previous posts, I have developed a love for internet radio. It is a quick-fix cure for someone like me when the stimulus craving kicks in, especially when I have an anxious desire to multitask and do something else at the same time. Which happens. 

There is a particular show that I listen to regularly where a caller raised a very interesting point the other day. A young man dialled in and told the host that he is working his way through a college education which is very expensive because it is the best in the region. His field of study was accounting. The host told him that he was wasting his money as he could study accounting at many other universities for a lower fee and that it wouldn't make a difference to the eventual outcome, which is becoming an accountant.

Boom. Does he even know about the can he just opened? We are not just talking about university degrees now. Everything is coming into play. What are you paying for when you purchase a widget? What utility does the prestige price of the widget have and does it have a valid and measurable ROI? What other hidden costs are there in a price that make the widget completely arbitrary and bring the utility into focus?

Breaking down the problem

Okay, let's walk before we run here. Stay with the university degree story. I want to study accounting and I have several options. Out of my options there are several different prestige categories. Assume I am eligible to study at any university of my choice and that I can afford any of them, but want to make sure I still get the most value for the money that I spend. 

I rank my choices in terms of cost to get one list, prestige to get another, and outcome to get a final list. Outcome can again have two sub lists. The first would be the salary that I would get after obtaining the degree and the second would be the opportunity that I would be afforded with my particular degree. This is because some folks would probably sacrifice money for the opportunity to reach another goal.

You can see a system emerging with a very unique mid-section which needs to be taken into account, the ROI of prestige. The input would be the cost of the degree and the output would be the salary and opportunity. What needs to be considered is if paying more for prestige changes the output. 

To decide on this you would have to take a sample of accounting graduates from each university and see whether or not the salaries prove the theory right, and if so, how long until you break even with your initial investment. Would it really be worth it if the difference in median salaries was so small that it took you twenty years to break even? You can become even more clever here and see whether an expensive/prestigious education is more valuable at high school or university level, or whether it is a combination that yields the best outcome. For measuring opportunity it could be slightly tougher as this would be Boolean problem, measured by candidates who reached their goal and who did not, given their different choice of university.

After this a second question would have to be considered which challenges the assumption of eligibility and the candidates themselves. Do more prestigious institutions draw more ambitious candidates, perhaps with tougher entrance requirements? Would the students own hutzpah be the explanation for the higher salary and not the institution? Again you would have to take a sample of top performers at a few prestigious schools and some at less prestigious schools and see if the outcomes show a difference to determine causality. 

At this confusing stage, I personally feel challenged and, if I am honest, a bit duped. As consumers, when we make a purchase decision with the resources we have, how much do we over or under pay for the utility of the widget? More so, do I regularly consider my own value when I make a purchase to determine the value of the widget? Which one counts more or do the two factors energise each other to a logistic-equation-type of saturation point?

A problem of waste

Ultimately, this is probably a matter of waste reduction. A good way to look at waste reduction is to start at the end and then work your way backwards through the pipeline so you can identify your inputs within your parameters. 

What do you want? Pick a salary, a goal, a company you want to work for, a place you want to live, a function you want your widget to perform, a price you want the widget to sell at, etc.

Now when you look at the options you eliminate those that are not able to provide this outcome. Keep moving backwards step by step until you reach your short list of candidates that are able to get you to your predetermined outcome. At this stage the focus shifts towards your resources.

Rank the candidates by cost and rank by effort. In our previous example, we would consider a student with lower ambition/grades to be high on the effort list. Whip out the maths and find the optimal value for minimising cost and effort and you have your winner! Successfully you have eliminated wasting time on effort and money on cost. It goes without saying that if effort is all the same, then least cost wins, vice versa. 

An interesting parallel

Before I conclude, isn't it cool how the word parallel has a pair of parallel lines in it? There's should be a word for when this happens.

Malcolm Gladwell writes in one of his books (I think that it's Outliers?) that Nobel Prize winners are not always the most clever out of their group of peers in terms of IQ measurements, but that they were clever enough for the outcome of a certain Nobel-prize-worthy discovery, given the inputs of hard work and opportunity. Essentially, and rather humorously, a waste here would be extra IQ points, since they weren't necessary for the outcome. At least they don't cost anything!

To answer the question of school's, here is a great article that gives excellent insight into this specific problem. Take note, however, that for the spending of finite resources there is always an opportunity cost or trade off that has to be taken into account for a complete answer to the questions. 

What to do with your first salary

Why I am writing this post? Well, to be honest, this budget stuff gets me going. My motivation is simply that I really like it. Is that okay? If you really like to bake then maybe you just find yourself hoping to run into a friend who you know will enjoy a conversation about baking. Later on you'll take these new ideas into the kitchen and whip up a muffin batch that could bring the king of Persia to his knees. No one asked you to, but you just wanted to because you love it. Good for you. So that's how I feel about money.

Now that I have received a few salary cheques in my life I can look back and ask, "What if..."

Never do that if you are emotionally unstable. I am not asking this question with tears in my eyes. I am looking back at my education, which has been by experience, and wondering how it would have played out if I had the education before I had the experience.

Back to the story. A lot of money has flowed through my bank account over the years and, even though I consider myself a rather financially savvy individual, I wonder if I really did the best that I could with this particular resource. I'm not talking about being entrepeneurial and that I should have invested it in the next Google, but simply looking after money then the way that I am looking after it now. 

By going through my failures and successes; maybe it'll help you or maybe you're just curious what other people do. Either way, read on and see if you can draw something from these experiences.  

To start, what did I do which was bad?

Well, I bought a car that I couldn't afford.

I needed a car, but I spent the little savings I had on a deposit and the loan I took out exceeded 50% of my annual take home pay! What a dumbass! Tip number one - don't put yourself in the hole straight off the bat. If you need a car, buy a car. But try to do it cash. If you can't do it cash, then take out a for loan less than 30% of annual income and pay the rest cash. If these parameters mean that you can't get the car, then realise that you can't get the car. Don't put yourself under that kind of pressure. Drive a scooter or take the bus, I don't care. But the fact is that if you buy things you can't afford then you are building a house on a very shaky foundation. You will only be one salary cheque away from bankruptcy every month. Don't do it. This isn't necessarily a first salary problem, but it is a mistake I made with mine and only learned later on how bad it was. By the way, to generalise, it doesn't necessarily have to be a car either.

Next up, I had no savings plan.

I did volunteer work, studied music and held odd-jobs for my first two and a half years out of university, and my first career-like job was as a maths teacher at an all-boys school. This is where I got my first real salary. It included a contribution into a retirement fund, but in the beginning I had no amount set aside each month simply for personal savings. Some months I had more and others I had less. I needed savings for many reasons. I needed to have an emergency fund in case the S hit the F. I could have started to put money away into unit trusts (which I now love). I didn't save for holidays, car repairs or anything else. Bad move. Why? Because, inevitably, S is always being flung at F, and it happens. I had to fix things I didn't expect needed fixing. I made plans for holidays but needed to come up with the cash from somewhere. I needed clothes when I realised I was inches away from people handing me a sandwhich when I walked down the street. I fell in love and proposed to the girl of my dreams and then had to magically make wedding money appear! 

Strangely, I found the money... most of the time. Luck? Not really. The real way to look at it is that I lost money to other things that for the life of me I cannot recall. When I realised I needed money for these things, I started to get my financial house in order and take control of money that was being lost. So from there comes tip number two - don't wait for your first flat tyre to make you aware that you need to have a spare at all times.... 

What did I do with my young salary that was good?

Like I mentioned, I'm not a total idiot when it comes to money. I'm a quick learner and soon realised that plans needed to be made. Here be tip number three. Learn. Once I realised debt was way too easy to get in to, I made sure I stayed as far away as possible. I had opened some clothing accounts, thinking it would help me build up a credit record. Once I realised I was buying things with money that I don't have (even at zero percent interest), I made sure to pay what I owe and cancel the accounts. I started to build up savings in a different account that was hard for me to access once funds were put away. This eventually helped me pay for our wedding and honeymoon without having to sell anything on the black market. 

What did I do with my salary that was grey?

I spent it on travel. But not any kind of travel. The girl of my dreams was a good eight hour drive away, and trying to make a long distance relationship work takes more than love. It also takes money. Why do I call it grey? I need to explain this, especially if my now wife reads this posts and wonders why I didn't call it the best thing I ever did with my money. The reason it's grey is simply because a relationship should be a great thing to spend money on but we could have done it better. In the beginning the travel and our time together swallowed so much of our money and we failed to plan completely on how to manage it. Only a few months down the line did we come up with a plan and a budget. The budget was built on how long we could go without seeing each other without going nuts. If we were apart for too long we discovered that our relationship took strain. The key period decided upon was three weeks. Once that was in place we could start planning far ahead and budgeting accordingly. Words of wisdom tip number four - invest in good relationships with your money, but do it wisely. Don't buy love, but take it out to dinner from time to time and let it know you're not reckless. Chicks dig stability.

What would I go back and change if I could?

I wish I had bought a cheaper car. It would have taken a lot of pressure off of the next few years and I would have had much more wiggle room in my wallet and a lot less stress.

I wish had started investing earlier. Few things to me are more exciting than putting money away and watching it grow. Investing in Unit Trusts are incredibly easy. I was stupid enough to try and buy my own shares and speculate with very unstable financial products long before I thought of putting funds in an account for long-term investing. We need a good saving habit almost as much as we need a hate for being in debt. Saving about 10% of your salary every month should not be hard. If it is then you either need a bigger income or you need a better budget. 

At the moment I have three main accounts. I have a extra-budget account, or an emergency fund as it is more commonly known. This is slowly built up to look after the things that I can't fit into our monthly budget. The second account is my bank account in which I only leave enough money every month to fund a well-planned budget. The third an last account is a Unit Trust account where I try and build up money for a house deposit and for our retirement. I wish they would teach these three accounts as a rule when you start to work and earn! It's not fool-proof but it has made my life SO much more manageable! Damn son, I actually think I'll write a post just on these three and why I have decided to live on them and them alone. 

Lastly I wish I wish I had won the lottery. Can't win if you don't play right? Okay that's a joke. I am not advocating stupid tax here. My point is made with sarcasm, and it is this; there are better things than winning the lottery. Not needing to win it. I wish I had a money mindset instead of a poverty one. This was something I identified early on and then took to change immediately. I am no longer money's angry jealous cousin but I feel like money is a good and trustworthy employee, doing what I want it to do.

Am I stinkin' rich? Hells no! I am not a millionaire, but I do think I will be some day. Is it because I am earning bajillions per year? Hells no again! It's because I've watch small amounts grow into bigger amounts, encouraging me to make to smaller amounts bigger so that the bigger amounts can get even bigger! Well, how do you make smaller amounts bigger? For starters, try and pay yourself what you are now paying the bank! One of my first goals was to replace my debts payments with Unit Trust payments. Works wonders I tell you! Don't pay off one debt and then think you can now afford another! 

So getting practical. 

Get the salary. Don't rush into anything. Look at what you earn every month and what you need to get by. Assess whether this salary is matching your living standard. Should you scale down or are you getting by comfortably? Make a budget that comes to less than you earn. Make sure to include medical aid (even if it's just a hospital plan) and car insurance into that budget. Why? Because as much as it sucks, something can happen with in either of those areas that could take to you right down to square one, or God forbid, even lower. Avoid debt. If you already have debt, made it your first goal to get rid of it as soon as you can. Put some money out of reach to fund things that won't fit into the budget (5% or more of your monthly salary, plus whatever extra pops up). Do this until your emergency funds eventually sits at about 3 months worth of expenses. Start replacing the money you would throw at debt to long-term savings. Try and see if you can get this up to about 15-20% of your monthly income, so that eventually what you have put away can replace your incomes in the golden years. Be disciplined and don't touch these funds. If an emergency comes around you'll have your emergency savings. The long-term savings can only be for a house deposit and act as a supplement to your retirement. Don't feel pressured for household insurance if the most expensive thing you own is a waffle machine. Don't pick life insurance if you are young and you don't have any dependants. Don't take out a retirement annuity yet if you aren't sure which country you'll be retiring in (rather put these funds in the third account for now). Don't be a scrooge and forget to have fun within your means. You only live once so make it good, but do it wisely so that you make the goodness last.