Make vs Spend

Sorry, just want to make sure I understand - you are saying to evaluate the financial opportunity cost in terms of (a) percentage of your personal Net Asset Value - ie. the impact that this decision is likely to have on one's long-term wealth, both in terms of capital draw-down and lost income to invest and (B) in terms of the ability to maintain one's standard of living (or at least a reasonable one).

When I left Hong Kong I knew that my income was going to fall _a lot_. However, my expenses were going to fall as well. What I didn’t realise was the magnitude of the change.

What happened was that I was spending less than 10% of my Hong Kong rate even while traveling in Australia/New Zealand. I was also able to buy a house in Christchurch for about one-year-HK-rental equivalent (early 2000, a nice time to buy property just about anywhere). Now not every VC is willing to live on couches and with the parents of adult friends while he figures out what he is going to do. Still, it worked for me.

On the income side, I took advantage of some coaching opportunities. They didn’t bring in a lot of cash but… they brought in a lot of cash relative to my triathlon cost of living. So while they wouldn’t make a good use of my time when I was in Hong Kong, they made a lot of sense when I was on the road.

The result was that once I subtracted my tri-life expenses from my tri/coaching/unearned income, I realised that I had a much larger multiple of capital available to finance myself. I’d based my initial estimate on Hong Kong expenditure but I discovered that by leaving Hong Kong I was able to eliminate nearly all my overheads.

Most people have no idea where they are really spending their money. They simply spend until they run out each month.

Also, beware of the trap of mistaking “standard of living” for “quality of life”. Most folks ratchet up their standard living (expenditure) in line with (or ahead of) their income. As a result, they are never able to accumulate any capital and are held captive to their perceived income requirements.

When you start to evaluate expenditure relative to NAV, rather than income – it can change your view on whether things are “worth it”. Folks that aren’t good at saving don’t really like to face this method of personal accountability. I know some folks that spend a multiple of their NAV on traveling to races (or clothes, or vacations, or whatever) each year.

Scott once told me that it’s not what you make, it’s what you spend. As with many things he told me, good advice.