Why learn about personal finance? Why pursue financial independence?
We were inspired by this video illustrating the inequality of wealth within our country from 2012:
Some of our guiding principles
- Not enough people know the rules of the game
- Live within your means and invest or share the rest
- When people are financially free, they can engage in more meaningful pursuits
- Wealth inequality is a problem; we would rather build people up than tear others down
- Solving a problem for society can be unrealistic; solving it for a person can be easy
We don’t really care how you define your freedom. We just want to help more folks get closer to their personal freedom. That makes us happy.
Our approach might be a little different from other F.I. bloggers. We believe that knowledge accumulates through intentional action…not just passively reading. Our primary goal is to create a platform where folks can learn the principles of effective personal finance interactively.
Yes, we will have a blog. We will be on social media. These are necessary tools in the modern era. But, make no mistake: our passion is to create an effective learning environment modeled more on the Athenian model rather than the Spartan. Learning for its own sake is the reward.
Modeling Helps Us See The Future Without Waiting For It To Arrive
Let us quickly dispel a rumor: we are nerds.
Data, statistics, finance, tax: you name it; we’re guilty of diving into details and reading arcane information that would make most normal humans roll their eyes and turn back to watching Real Housewives.
Wherever possible, we try to understand a system and make a model of it to convince ourselves we understand it. Once built, the model informs our decisions, providing a valuable tool to capture our own growing knowledge, test different assumptions, and make predictions. To illustrate, let’s look at one of the most basic tenets of personal finance and investing: exponential growth.
Exponential growth is a pattern that increases faster over time (Investopedia)
Exponential growth is all around us. Even if most people think linearly, Nature thinks exponentially. This Wikipedia animated GIF of bacteria multiplying exponentially is a great place to start. Tree branching is another example. Coronavirus cases are a third. Another is human population growth. And, of course, The point behind exponential growth is that not only does the total quantity increase over time, but the rate of increase also grows.
Exponential Growth of Net Worth
If measuring a thing helps us focus on it, then measuring our family’s progress towards financial independence should help us focus on attaining FI. Therefore, every month, I track our net worth. Somehow, I have been tracking our net worth monthly for over a decade (Yes, I know this makes me a super nerd). For the longest time, I used the linear trendline fit within Excel. In the pictures, every green dot is one month’s total net worth. The blue line represents the best fit linear regression model.
For the first few years, it was a pretty decent fit. But, as time passed, the fit worsened. In this case, this is a good thing: our net worth was growing faster than the linear model could explain. See that standard error of ~34k? That is a measure of fit. In this case, the number itself is not as important as its size relative to the standard error in our next model.
Next, let’s look at the same data but this time fitting an exponential model. Pay attention to the standard error!
Here, the standard error is ~$9k, or about 25% of the linear model. Now, we have a more accurate model, and it’s a much better story: our net worth in increasing more rapidly than I initially believed. Let’s hear it for exponential growth!
On a philosophical main page, why risk people’s eyes glazing over with math!?
Exponential growth is the engine that keeps my financial independence aspirations alive.
Through a combination of asset growth, business income, rental income, dividends, and interest, we’re working diligently to directly provide a better life for our families.
In the case of the exponential growth model above, now I can start to evaluate different investing approaches. What if we move from a 60/40 stock/bond portfolio to something more aggressive? What if we invest more heavily in real estate? How do these decisions affect our future finances?
Our day jobs involve lot of, you guessed it: math, statistics, modelling, and simulation. Why not apply our 9-5 skills in a domain where we have lots of passion and a chance to help improve others’ lives.