I love sports, everything about them fascinates me. From developing a strategy, defining clear roles and responsibilities all the way to creating an environment of trust and team camaraderie … the list goes on and on. But what about analogies someone could derive from sports? Aren’t these endless?. If you believe that, then avoiding to capitalize on some of them could be a missed opportunity. Take it one step further and think more specifically about analogies in the context of personal finance. To me it’s pretty straightforward, it’s all about playing offense and more importantly defense.

Yesterday I was on a flight for business and I took it as an opportunity to read a book I got quite a few months ago … The Millionaire Next Door. I’m not even halfway through it but comments from the authors around how affluent individuals play offense and defense are just remarkable and worth sharing with a bigger crowd. As an athlete, I used to believe your best defense was offense but as it turns out the risk of using this approach is too high for somebody to make it a long-term sustainable strategy for winning a championship.

Playing Offense

Who doesn’t like to play offense? Even as kids that’s what it was all about. Scoring goals, touchdowns, hearing the crowds … ahh, the joy. But aside from those emotions offense is driven by creativity, innovation, setting specific goals and working your butt off to achieve them.

When I think about personal finance, I’d like to believe one can play offense on many fronts. Entrepreneurship and creating passive income are, of course, a few things that come to mind but for those of us who rely primarily on a paycheck, there’s still hope. In our case, our strategy boils down to setting clearly defined goals, staying disciplined and keeping emotions of our decision-making process to the best of our ability. Paying yourself first is at the core of what we do which basically consists in taking advantage of all possible investing vehicles at our disposal and putting everything on autopilot. The figure below illustrates our current setup.

For the past couple of years I’ve done most of these but for 2018 I’ve included a couple:

• Maximize employee sponsored 401(k).
• Maximize after-tax contribution per defined contribution plan limit in 2018 (new).
• Maximize employee sponsored HSA.
• Maximize personal and spouses’ IRA.
• Invest in taxable accounts.
• Contribute to state-sponsored 529.
• Pay mortgage (bi-weekly).
• Pay fixed expenses and credit cards in full at end of the month.
• A savings rate of at least 40% of my disposable income.
• Tax optimization via CPA (new).

I know you’re probably thinking: “dude, you probably make a lot of money but I don’t, so get off my back” or, “I’ve looked at my 401(k) and it sucks so why should I invest in it”. Last but not least … “right now is not a good time, I have a lot going on so let’s catch up at some other time”.

If for some reason you feel frustrated by exploring the idea of following some (or most) of all steps included in my offense strategy please don’t. I remember reading a post from a fellow blogger where she mentioned she was saving/investing more than 75% of her take-home pay. My first impression was … WTF … 75%?. This brought a feeling of frustration and lack of self-accomplishment. Think about it, here I am making all these “smart” moves and suddenly I’m nowhere even close to where some individuals are on the path to achieving financial independence. My lesson through this experience is you can’t compare yourself to anybody nor you should. You are who you are!.

Just because the steps I shared work for me, it doesn’t mean you have to follow them every step of the way. Personal finance, just as the phrase suggests, is “personal”, and the decisions you make should be driven by how much you know (information) about the choices you have and what you ultimately hope to achieve in life.

Playing Defense

This is an interesting one. Going back to my early comments from reading The Millionaire Next Door let me share a couple of things that really hit home for me.

“The affluent tend to answer yes to three questions: 1) Were your parents frugal?, 2) Are you frugal and 3) Is your spouse more frugal than you are?”

Often times people confuse frugality with being cheap or with experiencing some extreme level of deprivation. In my opinion, neither are true. Frugal individuals tend to be valuist and have chosen to live life with intentionality where the focus is primarily centered around investing in appreciating assets and/or experiences that bring happiness to one’s life. As I like to say, frugality is about collecting moments and not about collecting stuff.

Great offense in terms of both income generation and paying yourself first is a step in the right direction, but you can certainly lose the wealth accumulation game if your spending habits are out of control. As mentioned in the book:

“The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning“

If you want to budget you better start by understanding your spending habits. So this leads me to ask the following question: do you know how much you spend each year on fixed and non-fixed expenses? if you don’t, what the hell are you waiting for? go open up a free account at personal capital or mint and just get it done. In today’s world, there are a lot of tools like the ones I’ve mentioned that honestly can make your life easier. If you decide not to take action, then it’s totally on you.

As for my own defense strategy, we don’t tend to follow a monthly budget because we’ve done it for so many years that we’ve fine-tuned our model to the point that it’s pretty predictable. In addition, automation has given us the freedom and flexibility to minimize any kind of scrutiny on our disposable income. Every once in a while I’ll have a look at my expenses to make sure actuals are in line with expectations but honestly, this is more to give myself peace of mind more than anything else. For somebody getting started, I would recommend following a more conventional approach in which you track all your categories every month. In this case, being proactive instead of reactive will go a long way.

Now, planning is a whole different story. If you fail to plan then you better realize you’re planning to fail. As the planners we are, goal setting is key. Both financial and personal goals get tackled and agreed upon at the beginning of the year. Once the plan is in motion tracking is minimal but still necessary to make sure priorities remain unchanged and that progress is, in fact, taking place.

Final Thoughts

• Living life with intentionality is awesome. Like I said, we are all about collecting moments and not stuff.
• Great offense and a poor defense won’t go a long way. Remember you can still lose the wealth accumulation game if you can’t control your expenses.
• When it comes to offense, keying on your income is critical. Learn valuable skillsets to the business and position yourself for success.
• Please, please, please get to learn and understand your spending habits. Every dollar has a name and you should know what that is. Use tools like personal capital and/or mint and I promise you will not be disappointed.
• Understanding your spending habits is the first step, the second is being vulnerable and acknowledging what those are and making a plan to attach the areas that need your attention.
• Paying yourself first is an old but very powerful concept. Take advantage of all the options you have at your disposal and capitalize on bringing automation into your world.