I once listened to a megachurch sermon where the pastor mentioned the idea of behavioral and moral guardrails. He used the analogy of the guardrails on winding mountain roads to keep cars from falling off the edge, or to keep vehicles from drifting into vehicles in the oncoming lane. Where these get placed and why are a design decision when people build roads. He was talking about it in a religious context, for deciding to be more conservative on certain behaviors just to keep yourself on the straight and narrow. Sure, you do technically actually have more behavioral range, but why risk your immortal soul?
The idea of guardrails stuck with me and I'm bringing them up now in the context of personal finances and risk. Each of us has a risk assessing capacity and we apply it to our financial decision-making and behaviors. For example, I know how the math and probability works out in gambling: in favor of the house. So while I can know this and go to Las Vegas or a casino with friends, I can know that I will lose over the long game if I gamble. But there's no harm in spending some money to gamble if I view it as a leisurely activity everybody around me is doing anyway. I can see it as an entertainment expense instead of a way to hack the system. I can know that I have not studied or practiced Black Jack enough to win many games against the more experienced players, and again, the house always wins in the long game. I also know my personal tendency for addictive behaviors with video games involving repetition. Being self-aware of this, I know I am extra vulnerable to gambling. So my personal guardrail has been... set a budget for the trip to a gambling house, and decide up front how much of that budget is going towards the activity of gambling. I also won't go to such places unless my friends are going too. Then it's an extra layer of accountability and protection from my getting into a bad habit alone. When I plan ahead like this, it's usually $0-50 for slot machines. Then, when the money is spent, it's done.
Similarly, I do this for retirement planning. I anticipate that I'll be less healthy than my parents and grandparents because I was born in the United States. Sorry, America, but we're pretty unhealthy and I can already see the health divergence for me personally. I plan to be sicker earlier and more often. Likewise, I read somewhere that women have a harder time finding jobs as they age. Many are forced into an early retirement when they start to appear like they're 50. It's just harder to find a job when there's age discrimination, and it's difficult to prove it's happening. Plus, I'm Taiwanese American... while I'm white adjacent, I'm not white. So again, another factor influencing how many opportunities I will get in life. If I use historical data in my career as an indicator of my ability to hold down jobs, I'll be the one making the choice to leave a job 50% of the time. And if I use personal historical data again, I will spend about 4 months between jobs and do that a few times a decade. So, I need guardrails to buffer these natural swings in life and still get me steadily to retirement.
Many retirement planning calculators use 25x your annual expenses as the total amount you'll need to enjoy 30 years of retirement at that same level of spending. But what if you plan to live large when you aren't working? After all, my hours are spent working when they could be spent spending! Likewise I can plan to live more cheaply once I stop working. After all, many of my expenses are there because I work: professional clothes, lunches out, car maintenance, the maid, childcare, etc. I also like the idea of early retirement, and I like it more when I am not having a nice time at work. The idea of being free from needing a job is very appealing. To empower myself towards that, I'd need 30x my living expenses.
Consistently budgeting for retirement, putting it first in my list of "must spends" is my guardrail. No matter what my income, I always save and invest at least 10% of it towards retirement. This is just 3% higher than the American average of 7% in 2019. I then figure out how to live on the rest. Again, with budgeting guardrails.
Most people's next largest expense is housing. Early on, my dad told me to keep it to one third of my income. When I was fresh out of college and earning $22,000 a year, that meant I had a $550 per month budget for housing. To my dismay in San Diego, that meant I needed to share a room. I didn't know too many people who could get a private bedroom on $550 a month. I learned then that living alone was a luxury and people were paying a lot for the privilege.
My dad's criteria for limiting housing costs to one third of income was a very important and protective guardrail. He insisted on it for my moving home after college too. I figured that if I was going to pay rent no matter what, I might as well be free and out of their house. It forced me to find roommates and to live within my means from there.
When you live with roomies, you find ways to be creatively synergistic for sharing expenses, or else you all learn to live separately within your own means. We all did a lot of brown bag lunches, or got rich boyfriends. Haha.
Slowly from there, my parents upped the ante for my financial independence. They pointed out that I should get my own car insurance. Then it was the cell phone plan. Then it was a credit card, which prior to that was a credit card linked to my dad's account. Then it was, people often have car payments so... the next car you get is your responsibility to buy so start saving! After a few years, I was paying for everything myself.
At some point, I started dreaming about being able to afford being a stay at home mom. I had no boyfriend in sight, but I was already thinking about being in a position to stay at home during the first few years of my future child's life. I wanted to give my future husband no way to stop me: I would be able to cover my living expenses as though I was still working so he wouldn't have to feel the pressure of being a breadwinner during that time, and wouldn't be able to give me a hard time for staying home. I began a budget for funding that option: 5 years home with my baby means I need 5 years of my living expenses saved up to spend down when that time comes. If I save for the next 5 years, I might have my savings meet my timing if I meet a boy, date him for a year or two, marry for a year or two, then pop out a child.
I remember at one point one of my roomies was negotiating rent-splitting terms with me and used the argument that she was saving up for a wedding as a reason she needed to pay less rent. I fired back, "So am I!" Her face was quite surprised because she had a long time boyfriend and I was single. Still, here I was planning for people who didn't yet exist in my life. I just had an outline of a spouse and potential children in my future. Every now and then I'd hear about how expensive children are... so I looked up how much I'd need to budget for one. A quarter million to a half million until they're 17 years old, not including college savings? Great. Time to start setting that aside so it's less painful when they get here. I spoke to my dad about how he saved $100,000 for my brother and I each to go to college. He said he just set aside money each month from when we were babies, and invested it as he went. If you do math like an average person, you're taking that monthly savings and multiplying it by 12 to find the annual amount set aside, then again by 18 years to find out how much will have been set aside over 18 years. That works out to a much smaller number than you may need, and it'd be wrong. Compound interest and investment gains need to be included in the math, so you need to use a compound interest equation or one of those online compound interest calculators that let you plug in the variables and play around.
Financially planning for a future meant I was well-positioned when I did finally meet my spouse and child. The financial guardrails I put in place in my twenties are paying the whole family dividends today. Even if I somehow end up a single mom, I would still be well-positioned to take care of my child financially. Be today the person who your future self will thank, by putting up guardrails to ensure that future self is happier, healthier, and wealthier.