Meaningful Returns

Farhad Manjoo, the inimitable tech-writer at the New York Times, wrote a wonderful piece last week about MailChimp, the tech company responsible for helping lots and lots of small businesses do email marketing. The title of the piece is “MailChimp and the Un-Silicon Valley Way to Make It as a Start-Up,” and it’s worth your time.

The piece clarified something for me that I think about a lot, something that has pretty much nothing to do with MailChimp, but perhaps a lot to do with you and me. What I think about a lot is how it seems many people–people in different careers, displaying different values, and with varying amounts of income and wealth–tend to make eerily similar financial decisions on eerily similar timelines for eerily similar reasons. Why is that?

At a really high level, it’s probably a feedback loop of a couple of factors: 1) Our tendency as humans to look for the easiest way to do something, and 2) Our tendency as humans to look at the way other people do things and want to copy it. But if either of these factors turns out to signal behavior that ends up being detrimental to us in the long-run, we ought to at least be willing to reconsider whether we pay attention to them, right?

The point of Farhad’s piece on MailChimp is basically: Pretty much every successful tech start-up you’ve ever heard of does things a certain way. They take on a bunch of venture capital funding, spend lots of money (typically more than they make), and put their offices on the most expensive real estate that our vast country has to offer. And, maybe there’s not anything inherently wrong with this pattern for a tech start-up, but as Farhad says, it’s not the right pattern either, and MailChimp has done things in a way that seems to be much healthier for their owners.

And you find the exact same dynamics happening with real people, like you and me. There seems to be a formula for being a successful person spending money that revolves more or less around doing these three things the same way other people are doing them: 1) School and cars, 2) Cash flow, and 3) Home-buying. And maybe the formula works for some, but can the same formula possibly be healthy for so many people? I really don’t think so.

So let’s look at each of them in turn:

1. School and cars. Going to a great school for four years seems great, but what if you can’t afford it? Are the two years you spent at Chapel Hill or NC State paying tuition for classes like BIO 101 worth tens of thousands of dollars more (in tuition and interest) than two years at a community college taking those same classes? Maybe. But maybe not. You get the same piece of paper at graduation regardless of where you took those gen ed classes. And with cars, I mean, again, driving the late model Tahoe or Odyssey or Silverado or X5 is great if you can afford it, but would a reliable 10- or (heaven forbid) 15-year-old car work just as well and free up hundreds of dollars a month in cash flow? School and transportation are, of course, incredibly important. But let’s be careful that a certain level of school and transportation is not required.
2. Cash flow. I’ll keep this short: Margin is the single most important asset you could own. It’s not your house, your 401k, or your baseball card collection. It’s the difference between the lifestyle you could “afford” living paycheck to paycheck (lots of people with high salaries do this) and the lifestyle you are contentedly living. That margin lets you build other important assets, but you shouldn’t forget that the margin itself has incredibly significant intrinsic value.
3. Home-buying. I’ve written about this before. People with money are perhaps never more like a herd of cattle than when it comes to buying a home. It’s truly astonishing. But here are just three things: 1) Real estate does not “always go up,” and in general a home doesn’t function well as an investment. 2) Renting is not evil or financially stupid. 3) You can live quite well in a much smaller space than you think you can by buying fewer junks (saves space), buying things that you intrinsically value (increases happiness), and also not watching so much HGTV.

Doing things in this un-usual way is a bit weird. But it is potentially a bit healthy, too.