Necessity of Discipline & Money
Success with your personal finances often hides behind boring solutions and underused basic insights.
Being disciplined with the fundamentals is not cool or sexy - it just works.
Discipline is less about being overly rigid and more about knowing what is essential and what is not.
What do you focus on & what do you ignore?
How far do you push & when you do pull back?
You control this - no one else.
For this reason, discipline isn’t restraint - it’s an opportunity to exercise virtue.
An opportunity to evaluate how you spend and save.
An opportunity to pay tax now (to pay less later).
An opportunity to remain steadfast to your investment strategy in a world of chaos.
Using Your Spending & Not Letting It Use You
Spending is one of the greatest contributors for joy and pain.
The problem is not that you spend money - the problem is that you spend what you don’t have, to get things you don’t need, at a price distant from the cost.
“Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t”
What do you love spending money on?
Write down a list of as many things as you can.
Next, circle 20% of the items on that list that matter most to you & focus your spending on those items.
Finally, rather than trying to live within your means, then save the rest, save what you need first, then spend the rest.
You can’t get out of spending less than you earn, but you can get more out of what you spend.
Align your spending with what you love & cut costs on what you don’t.
Discipline makes this possible.
Regardless of the magnitude of discretionary spending you have, discipline provides spending freedom.
Playing the Tax Arbitrage Game
Reducing your tax bill isn’t always about reducing your income each year.
Manipulating the timing of recognizing income or taking advantage of a low income year are opportunities to pay less in total lifetime taxes paid.
When it comes to your income, it’s not about what you make - it’s about what you keep.
Utilizing roth conversions
Making roth contributions to your retirement plans
Harvesting capital gains in your taxable account
These are all ways accelerating your income may actually reduce how much total tax you pay over your lifetime.
Roth conversions offer a way to pay income tax on pre-tax retirement funds today in exchange for future tax-free growth and withdrawals.
You don’t want to complete a roth conversion every year because one of the goals of a roth conversion is to achieve tax arbitrage.
If you can pay tax today at 12% but withdrawal it out later when you’re in the 24% marginal bracket you achieve two things:
A tax savings of 12%
Tax-free growth
Without the discipline to wait until a period of low income, you could end up paying more in taxes today to the detriment of withdrawing funds in the future at a lower tax rate (exactly the opposite of what you’re looking to accomplish).
Making a decision of pre-tax or post tax contributions can be thought of in a similar light.
If your lifetime earning trajectory is linear, then earlier in your career Roth contributions make sense because you’re in a lower tax bracket than you’ll be when you’re in your mid-late career, at which point would make sense if you made pre-tax contributions.
Harvesting gains in your brokerage account can make sense in two scenarios:
If you happen to find yourself in a low income year in the 12% marginal bracket in which case, you can realize gains at a 0% rate.
You’re sitting on a large realized loss
It takes discipline to see the bigger picture and pay taxes sooner than you have to.
Listening to Signal & Ignoring the Noise
There’s over 2,000 books on amazon about how Warren Buffett got to where he is.
The answer is far more simple than the details written through 2,000 books.
Time.
Warren Buffett is successful because he’s been investing for three-quarters of a century.
We forget the wonders compounding can do for you over time.
We overvalue timing the market and we undervalue time in the market.
Timing the market is meaningless. Time in the market is everything.
Investors like to believe they can outguess the market & spend countless hours researching ways to gain even the slightest edge over the market.
“Money is like a bar of soap, the more you use it, the less you have”
It takes discipline to adhere to your asset allocation when the crypto markets or newest tech stocks are generating outsized returns for investors.
In The Matrix there’s a scene where Morpheus takes Neo through training where Neo gets distracted by a woman in a red dress.
After Morpheus asks Neo if he’s listening, he asks Neo to look again - at which point, he sees Agent Smith pointing a gun at him.
The hottest stock picks, crypto coin, or analyst predictions are like the women in the red dress.
They’re distractions away from what truly matters.
As you grow in your ability to be a successful investor, the woman in the red dress doesn’t go away, she just becomes more and more seductive & you must upgrade your discipline to adhere to what works and not get distracted by shiny objects.
You’ll never be immune to the consequences of ignoring discipline.
It’s never going to get easier to do what is required of you - the only thing you can do is train for hardship.
You do not win by throwing in the towel - if you do not quit, you cannot lose.
Keep going.