Over the years, I’ve been very fortunate financially, which allowed me to get richer and richer. Yet, in 2022 I was feeling poorly about money much more often that I should.
Even though I was at a peak of my earnings and net worth. It was due to problems with my mindset and some tactical mistakes.
Over the years, I’ve been very fortunate financially, which allowed me to get richer and richer. Yet, in 2022 I was feeling poorly about money much more often that I should.
As long as you don’t actually live in poverty feeling rich and financially safe mostly has nothing to do with either your income or accumulated wealth.
And no, it didn’t even involve comparing yourself to others, a well known thief of joy. So what happened?
I felt rich early in my career
When I was 22, I went abroad to do an internship in London and I got hit by a surprise tooth issue. I didn’t have dental insurance. I paid for the visit and moved on.
My internship host asked me if the expense stressed me out, but I said that I had a rule that I would not stress about any expense below 1000 pounds as I could easily handle it.
The guy was shocked.
Me, poor intern, a student, being financially unbothered? He seemed much more financially stressed than me, even though he was much further along in his career.
My reasoning back then was that I had savings and if I had to use it, then fine, I would build them back. As long as I actually had money, it was no big deal. I was sure that my earning potential was pretty good and I wasn’t too attached to the actual value of my bank account.
Yet in 2022 I made myself feel poor
I never had as much accumulated wealth or earned as much as in 2022.
But I made myself feel poor and financially constrained. The market downturn aggravated that.
Here are some of my mistakes:
- Giving myself a budget that was way too tight
- invested almost all my liquid cash
- made a net worth projection that I couldn’t meet based on assuming the stock market can only go up
Keeping the budget too tight
My income is pretty variable due to a big part of it being in stock, but I estimate that I save 80%+ of my post tax income.
There is a big chunk of my income that I actually never see. That would be my retirement contributions and my stock grants that vest on regular basis.
What is actually get into my account is my salary after heavy taxes, retirement and charity contributions.
And from that salary I would put money towards savings, bills, mortgage and I would also try to invest a big chunk. Leaving myself a pretty small discretionary spending budget, something about 500 a month.
And that budget in 2022 proved to often be too small. My fixed expenses are very manageable but I was investing a lot into books, side projects and experiences and I live in an expensive city.
I ended up stressing about 10-50 euro expenses as they would bring my checking account below my comfort level.
Which to be honest, didn’t make sense, as it was no big deal. I could just invest a little less the following month or transfer some money to checking from savings.
Investing additional 200 Euro per month is literally drop in the bucket for me. It’s not nothing, but at this stage of my wealth building, it’s not significant at all. And that additional 200 could extend my discretionary budget by 40%.
It was a great example of losing the track of the bigger picture.
One useful framework for thinking about spending worry free is based on your existing net worth. The rule is as follows:
Any one off expense smaller than 0.001% of your net worth should not take your mental bandwidth.
So if your net worth is 50k you don’t have to worry about 5 euro or less purchases, if it’s 500k then it’s anything below 50 euro, and if it’s 5 million then your worry free single purchase would be 500 and so on.
This makes sense as each individual contribution to investments becomes a smaller percentage of what is already there.
This is especially visible if you follow the market.
The market can go up and down a lot more within a day that you can sometimes contribute within a month if you are further in your journey.
Spending money on one offs, either life improvements or experiences, is totally fine, as long as they don’t lock you in in the expensive lifestyle.
Low cash supply
I’m relatively used to having a pretty big emergency fund or in other words a reserve of liquid cash. I would usually keep it at 20-30k and it would help me weather any sorts of big expenses or even pay big additional lump sums to my mortgage.
But in 2022 I overinvested, I invested from my savings and then I planned to replenish them with selling other stocks. I was planning to sell that stock, but the order didn’t come through because the price dropped too much. And that diminished my cash reserve to below 10k.
Over last couple years (~2017-2021) I was very lucky with the company stock grants. Not only I got a good chunk of stock this way, it was also consistently going up and up.
I learned to depend on selling my vested RSU (restricted stock units) whenever I needed an influx of cash.
In 2022 year my company’s stock dropped almost 40% in value.
Turns out I really don’t enjoy selling stocks at a loss.
I also don’t like accumulating cash from my paychecks when I could be putting this money into stock market when stocks are at a discount.
Which means that I struggle to accumulate cash the boring way. But I might still need it.
Lack of cash at hand, when the market was low made some things like home renovation expenses more stressful than they should be. Getting new curtains was 4k, a bathroom renovation cost us 18k! That’s loads of cash. A lack of liquid reserve combined with tight discretionary spending was not helping me feel at easy about this.
But I managed, I reduced some of my investments anyway and still sold some stocks with some small losses, but decreasing my concentration risk.
Failing to hit net worth growth projections during stock market downturn
Turns out that the market doesn’t always go up. Obvious? Yes. But it’s so easy to get used to your net worth to go up the same way!
And the more invested you are the more your net worth depends on the current state of the stock market!
I have seen dips before, like in the March 2020, when my net worth dropped by quite a bit. But 2022… there were multiple months where I was doing everything right, investing, being frugal, getting stock grants and my net worth was decreasing steadily month over month.
It’s fine but it’s so easy to be disappointed this way if you were just planning for steady growth over time by extrapolating the past performance. I was in for a disappointment.
A bit of financial planning can go a long way, but it’s foolish to base your happiness on hitting numbers you have no control over. I am still planning to keep my net worth and log in to all my accounts monthly, but I will steer away from aiming for any particular number for a given month.
Hopefully things will average out over the long term.
Summary
There is no substitute for experiencing things first hand. My mistakes above are pretty simple, but the stress caused by them was pretty real.
Now I’m smarter and more resilient about it. The truth is that stock market downturns are a gift for people at the wealth accumulation stage. You can buy the same companies, but for cheaper. The market was growing steadily, but it was becoming more and more heated.
So, let’s avoid unnecessary stress and focus on the benefits of the current situation.