Discount Rates

So are you saying to look at our new P3 Carbon and current account balance and say that "I have $10,000 invested/saved, this P3C is $4000, so that's 40% of NAV" and ask ourselves if it's really worth 40% of NAV to get that bike.

I've been in the habit of viewing things in terms of opportunity cost - ie given my expected return, spending $4,000 a P3C costs ~$100,000 (in 2005 dollars) at the age my parents are now...

I prefer to look at what things cost today, right now. Looking too far into the future can be a bit of a trap.

Let’s say you are earning $60,000 per annum, taking home about $3,350 per month after taxes. I pulled those figures out of the air but let’s assume. If you can save $600 per month then that implies monthly expenses of $2,750.

$10,000 in the bank is about 3.5 months of expenses and 17 mths worth of savings. $4,000 on a bike represents – 1.5 months of expenses and a half year worth of savings.

Now you’d need to consider it for yourself but in terms of return on investment in triathlon, you’d likely get a lot more performance from spending that money on six weeks of full-time training than a bike.

However, the bigger picture is that (based on my assumptions) you’re considering sinking six months work into a depreciating asset. Six months work is a heck of a lot of effort, now the bike will give you pleasure but is it really that much more pleasure than what you are riding right now?

When I was in my 20s my big goal was to get myself to the point where I could take an entire year off from work. I had various plans on where I’d spend that year (drinking in Greece; sailing the world; climbing the seven summits). The plans changed and developed as I did.

A few years back, I read that Bill Gates liked to hold one year’s expenses in cash on his company’s balance sheet. That really appealed to me because it was similar to the goal that I’d set myself.

These goals can be a trap in themselves because do we mean one year’s expenses…
…covered in capital
…covered in unearned income
…indexed, covered in unearned income
…indexed, adjusted for future dependents, covered in unearned income
…indexed, adjusted for future dependents, covered in unearned income, assuming market crash
…just like fitness, there is always more

I probably think way too much about this stuff but that’s the way I have always been about most things that can have a direct impact on my life.

We each need to decide for ourselves. Generally, most folks don’t get past that first line so it is an academic discussion. I joked with a buddy recently that the only people that truly understand discussions on sports psychology are the folks that don’t need it. Same with most fields – nutrition, personal finance…

Another trap is to build liabilities in line with assets – leverage is useful and having the skills to assemble/package assets is deemed valuable these days, because it enables folks to make money from packaging financial products around those assets. It is amazing, the premiums paid to folks in the financial services industry.

There is value from simply having control of a stack of assets – even if you are leveraged to the hilt. In certain market conditions, a company (or guarantor) is far safer being technically insolvent than having a lot of security cover. By having nothing, you’ve got nothing to lose – if you can live with that then there can be freedom there – quite a few elite athletes live that way for a few years. That life doesn’t work for me though because I value security and personal freedom very highly.

Thinking about it. There’s an element of being able to say “no”; or perhaps “not yet” in savings. Delayed gratification, or gratification from delay. Saving, eating right, going to bed early, under scheduling our lives – the pay off can appear to be later but, for me, is simply a more relaxed “right now”.

Anyhow, I got a bit sidetracked from the point.

Discount rates – in my life no purchase really mattered that much to me until I had one year’s cash flow saved in the bank. Once I had built the discipline to get myself to that point (in my mid-20s), I had the skills to manage my savings/expenditure so that I was always covered as I chose to increase (or decrease) my personal burn rate. Being a good administrator would be similar.

Now being a good entrepreneur is often completely different. However, entrepreneurs value the ability to work/create more than personal security. They are “winning” every day they are at the office. There is nothing that they’d rather be doing than working (only met a few guys in this league).

Motivation is something that I think about quite a bit because I always assume that other's motivation is similar to mine. That the world is seen through my eyes by others and that is mostly incorrect. Most folks see things totally differently. In fact, many (most) having too much going on in our heads to see much of anything outside ourselves.