Don't Bounce the Check: Deposits Before Withdrawals

Episode 007: Investment Accounts of Life – Deposits & Withdrawals

Synopsis

In this episode, Jared moves from mindset to mechanics by exploring the Investment Accounts of Life. Using a personal story about a bounced check as a cautionary tale, Jared explains that you cannot make a withdrawal from an account you haven't funded. This episode challenges the "myth of neutral," explaining why everything in life—from your metabolism to your marriage—is either compounding or decaying. You will learn how to identify overfunded and underfunded accounts, the reality of sustainable withdrawal rates, and a powerful 90-day diagnostic tool to determine the true health of your life portfolio.

Detailed Sequential Outline

I. Introduction: The Roadmap Ahead

(0:17) Laying the Foundation: This episode kicks off a series on key investment tools including Diversification, Rebalancing, Benchmarking, and Asset Allocation, applied primarily to life.
(1:21) Beyond Money: While money is a part of the portfolio, it is often the least important part of how we invest. Life covers "a lot of important things" that deserve professional-grade management.

II. The "Bounced Check" Warning

(3:38) A Professional Embarrassment: Jared shares a story of bouncing a check to a charity early in his career. The money existed, but it was in the wrong account.
(5:08) Common Account Issues:
1. Not making deposits at all into critical accounts.
2. Trying to withdraw from an unfunded account.
3. Funding accounts with the wrong "macros" (e.g., trying to buy health with only money).
4. Hesitancy to withdraw even from overfunded accounts.

III. The "No Neutral" Law of Entropy

(8:51) Stasis is a Myth: In life, there is no such thing as "neutral" or "static." Things naturally move toward disorder (entropy) unless effort is applied.
(9:57) Maintenance as Action: "Maintenance" is actually a series of small deposits and withdrawals. If you stop touching an account, it usually shrinks.
(11:18) The Backburner Fallacy: The backburner is still turned on—it’s just on low. Skills (music, sports) and relationships require constant input just to stay at "neutral."

IV. Compounding and Self-Sustaining Accounts

(13:51) Reaching the Threshold: When an account is funded for long enough and at a large enough scale, it takes on a life of its own through Compounding.
(14:17) The Financial Example: Jared’s high-net-worth clients often live on millions of dollars in annual withdrawals, yet their portfolios continue to grow because the underlying assets (quality businesses) are working for them.
(16:15) Resilience as a Buffer: A large account balance serves as a buffer against life's volatility. A "well-funded" health account handles injury better; a "well-funded" relationship account survives crisis better.

V. The Reputation Account

(17:40) The Most Important Asset: Reputation is the combination of trust, credibility, and follow-through. It is the "benefit of the doubt" you receive from others.
(19:15) High Stakes: Unlike money, the reputation account can be zeroed out by a single, small, poorly-judged withdrawal (e.g., a breach of trust or professional theft).

VI. Sustainable vs. Unsustainable Withdrawals

(19:44) The 4% Rule: In finance, withdrawing 4% annually is generally considered sustainable. Jared applies this logic to life: no account is bottomless.
(20:48) The $10 Million Example: Having a large balance doesn't make you "set for life" if your withdrawal rate is too high. Even billionaires go broke by overspending or investing in "crap."
(22:15) Intentional Depletion: There are seasons where you should make withdrawals (e.g., retirement). Spending takes practice for those whose default is saving.

VII. Case Study: The Home Building Project

(25:13) Purposeful Negative Cash Flow: Jared is currently building a house, leading to a negative savings/investment rate for the first time in 20 years.
(26:44) Seasons of Sacrifice: While it "bothers" his identity as an investor, the withdrawal is for a specific purpose. 20 years of positive deposits created the balance necessary to withstand this season of heavy withdrawal.

VIII. The "Someday" Strategy and Negative Balances

(30:04) The Danger of "Someday": Putting off health, retirement, or family deposits because "it’s not a good time" leads to accounts that cannot support the withdrawals life eventually demands.
(31:41) Relationship Capital: Unlike time and energy, relationship capital and money can go Negative.
(32:30) Starting Below Zero: Debt or a bad reputation means you aren't starting at rock bottom (zero); you are starting in a hole that requires massive effort just to reach neutral.

IX. Metabolic Investment (Avoidance vs. Pursuit)

(34:30) The Holiday Scale: Most people enter the holidays in "starvation mode" (chronic calorie restriction/avoidance), leading the body to hoard extra calories as fat.
(36:00) Pursuit Mode: An "invested" metabolism—built through muscle (deposits of lifting) and intentional movement—allows the body to use extra holiday calories to build, rather than just store.

X. Warning: Relationships are Not Ledgers

(38:30) Avoiding Transactional Accounting: While relationships have balances, they should never be treated as scorecards.
(39:35) Fostering vs. Tracking: You invest in relationships without the expectation of a withdrawal, creating a resilient bond that can weather storms when withdrawals (hard times) inevitably occur.

XI. The 90-Day Diagnostic Tool

(43:00) The Honesty Test: Ask yourself: "If I stop investing in this account for 90 days, what would happen?"
- Collapse/Sharp Decay: The account is likely already negative or underfunded. You are just "feeding the hole."
- Resilience/Growth: You have built a positive balance through meaningful deposits.
(45:10) Two Choices for Underfunded Accounts: 1. Change your investment strategy (rebalance the macros).2. Close the account (e.g., a toxic friendship or a dead-end project).

XII. Closing and Sign-off

(47:47) The Final Word: Withdrawals aren't failures; they are part of life. Failure is pretending the balance is there when it isn't.
(49:21) Diagnostic Homework: Apply the 90-day question to your health, marriage, career, and money this week.

Quotes to Remember

"There is no such thing as neutral. What looks like stasis is actually a series of small withdrawals and small deposits. Without effort, things move toward disorder."

"Maintenance is not a neutral word. It is a word that describes action."

"If you stop investing in an account for 90 days and it collapses, you don't have a balance—you have a hole you’ve been feeding just to stop the bleeding."

"We don’t just invest in what we care about; we care about what we invest in. But when it comes to relationships, if you treat the account like a transactional ledger, you won't have the relationship for long."

"Reputation is possibly the most important thing you invest in during your lifetime. It is the buffer that enables you to deal with volatility."

"You can always figure out a way to run an account dry. Even billionaires can run out of money if their withdrawals exceed the rate of compounding."

Next Episode: Diving into the first major concept of life portfolio management—Diversification.

Full Transcript:

Good day, investors.

007 - Deposits and Withdrawals

Full Transcript

Opening: The Investment of Time

(0:16) Good day, investors. Welcome. Thank you for investing your time today.

Setting the Stage: Key Investment Concepts

(0:33) Because we know that time, our most precious and limited resource, is being invested all the time. We are going to invest our time and attention into diving deeper into the concepts that make up the philosophy of Everything is Investing. We've spent the past three episodes on Wealthy vs. Poor Mindset, and here is what we are going to do from here. We're going to continue laying the foundation. For the next number of episodes, and really for the foreseeable future, I'm going to be taking us through a number of key investment concepts and tools.

Applying Finance to the Portfolio of Life

(1:09) Yes, applied to money investing, but mostly applied to life investing, as we do. Those concepts are things like Diversification, Rebalancing, Benchmarking, Asset Allocation, Opportunity Costs, Tradeoffs, Liquidity, Risk, Asymmetric Return Profiles, Time Horizon, a few other topics, many subtopics of those. I hope that that sounds as exciting to you as it does to me.

(1:39) And if they sound like boring finance things, I think that you'll be pleasantly surprised about how much they apply to life beyond money. Because even somebody like me, a portfolio manager of money, has to admit that money is not the most important part of how we invest. It is a big part of it. It's important. But all this investing we talk about applies to life. And life covers a lot of important things.

The Core Mission: Clarifying Intent

(2:09) Last time I checked. We are going to focus on the purpose of investing well. Because we know how important it is to ask the question, for what purpose? And the purpose of these upcoming episodes is to continue learning and setting the stage of what all this is about.

Roadmap: Future Explorations in Life Investing

(2:29) And interspersed with all these groundwork laying episodes will be some fun side tangents. We can't just talk about asset allocation and benchmarking diversification for episode after episode. Well, I can.

(2:44) And I would have fun doing it. But we will also have other topic based episodes that will cover some fun areas. We will cover what we should spend our money on.

(2:56) Yes, I have advice for you on that. We will talk about the waste of the wealthy. Scandalous opulence.

(3:04) Oh my. We will talk about how we approach change and challenge as a threat or as an opportunity. We're going to dive into how to achieve financial security.

(3:16) It may not be what you think it is. I'm planning at some point to talk about my vested take on artificial intelligence. That will be an interesting one.

(3:27) And many more as we go. My goal with this next phase over the coming weeks and months is that we learn, we have fun, we are inspired, we're better equipped, and we have the confidence to invest. To invest more and better in the areas of life that we really care about.

(3:47) And if I do this well, you'll learn a whole lot about financial concepts and portfolio management tools and strategies. But not just because I'm talking about money management the whole time. But because we are applying it to life.

Confession: The Bounced Check Story

(4:02) Everything is investing. We are going to continue making deposits in that direction. Speaking of which, I need to admit something.

(4:12) I have bounced a check. Just one. Not recently.

(4:17) It was many years ago. I know. I know what you're thinking.

(4:23) How the heck do I still have my job? Yeah. I wondered that myself. That sort of infraction should preclude me from ever having anything to do with anyone else's money.

(4:36) How I am still a portfolio manager is a surprise. To you and to me. It must not have been reported to the SEC yet.

(4:45) Yes, I am pretty embarrassed about it. Please give me a chance to explain. I wrote a check that I did not have the money in the account to fund.

(4:55) Actually, that's not true. My wife wrote the check. But I asked her to.

(5:01) Believe me, if I could find a way to throw her under the bus for this. But that wouldn't be fair. And to make matters better and worse, it was a check to a charity.

(5:15) We were giving money away. I should rephrase that. We were trying to give money away.

(5:20) It didn't work. The check bounced. And of course, we got a call from the charity letting us know that the check bounced.

Withdrawals from Unfunded Accounts

(5:28) And by the way, can you imagine being the person that has to make that call? Put yourself in their shoes. Hey, uh, Mr. Cheapskate, that donation you made wasn't actually a donation and just caused a problem for us and makes you look bad. That's not what they said.

(5:47) They were very kind in my remembering. But here's how it happened. We had two checking accounts at the time.

(5:55) And we wrote the check from the smaller account. We had the money. It just wasn't where it needed to be.

(6:02) We tried to make a withdraw from an account that we hadn't funded. We got it corrected. The charity got their money.

The Investment Accounts of Life

(6:10) And it gave me a story about the only check that I've ever bounced. And that is what we're going to talk about today. The investment accounts of life and the deposits and withdrawals that we make in and out of those accounts.

(6:24) I see a number of common issues as it relates to our investing accounts of life. I see people who are not making deposits at all into important accounts. I see people trying to make withdrawals from an account that was never funded or not funded enough.

(6:42) That's what happened when I bounced the check. I see people trying to fund accounts with the wrong kind of deposits. And I also see people who are hesitant to ever make withdrawals from accounts.

(6:54) Even from accounts that are very well funded or even overfunded. And to be fair, I see some of these issues in my own life sometimes. In episode 2, we discussed that everything we do with our time, our energy, and our money is an investment into or out of an account.

Operating the Life Portfolio

(7:12) Every part of life that we direct those resources toward or get those resources from is an account. And today we're going to focus on how all these accounts actually behave. How they are grown or shrunk over time.

(7:25) Our life is a group of accounts that makes up our life portfolio. That is an easy thing to say, but it's much harder to actually live as though that is true. It takes practice.

(7:37) So I want to give you tools and mental frameworks to help you treat life as a series of accounts that we are making deposits into and withdrawals from. And I want to provide more specific examples and tie-ins to life and life investing in order to accomplish that. Alright.

The Reality of Life Accounts

(7:55) I'll say it again. Every meaningful area of life can and should be understood as an investment account. Health, relationships, career, our knowledge base, our reputation, our leadership, and the influence that we have. And of course our money. Saying that everything in life is an account is easy to do, but it's cheap. Because what actually matters is treating them that way.

(8:21) Operating this way. Actually treating life as accounts and collectively as an extremely valuable portfolio to be managed intentionally. And it can be uncomfortable to consider because it puts us face to face with the size of those accounts.

(8:35) It puts us face to face with the direction of those accounts. The overall mix of the different accounts which ultimately result in the direction that we're going in life and the returns that we eventually get. And yeah, most people conceptually agree with the idea of the accounts of life.

The Myth of Neutrality and Entropy

(8:53) But at the same time, most people live emotionally and make deposits and withdrawals haphazardly. Not on purpose. And most of the results that we're going to get in life are not random or chance or mostly impacted by other people.

(9:07) They are impacted by the investments we ourselves have or have not made. And I think that it's an important thing to note that there is no such thing as neutral when it comes to our accounts. There's no such thing as static in really anything in life. We can't just leave an account and expect it to stay exactly as it is. What looks like maintenance, what looks like stasis, is actually a series of small withdrawals and small deposits. A little bit of growth and a little bit of decline.

(9:39) Progress and regress. That is how we stay in neutral in something. Leaving something alone, not touching it, putting no investment resources toward it, does not mean that it is going to stay in that exact position.

(9:53) And that is just part of life. Without effort put in, things move toward disorder. Entropy.

(10:01) A common phrase that's used is you put something on the backburner. Well, the backburner in that analogy is still turned on. It's just on low.

Maintenance vs. Stasis in Relationships and Skills

(10:11) It's still getting some sort of input. Even skills that we have built over time, let's say in music, whether that's an instrument or singing. Maybe it's in sports, like hitting a golf ball, shooting a ball into a basket, dribbling a soccer ball with our feet.

(10:27) Those are skills that are built over time, but they need to be maintained just to stay at a static level. They require input and practice just to stay at neutral. Relationships are similar.

(10:39) You cannot make huge strides, advancements, progress in a relationship and then put nothing into it and expect it to stay the same, to stay static. An exception may be a certain variety of adult friendships. My wife and I each have friends that we haven't seen for years or even bothered to send a text message to in either direction, to be fair. But the next time we see them, we pick up exactly where we were years ago, as though we didn't skip a beat. That's interesting to me. That tells me that there probably are accounts and there exist investments that are probably much more stable, they have more staying power, and are more static in an untouched state than other areas.

(11:22) And if someone comes to mind when I talk about that, be a better friend than me and send them a text or give them a call. That alone might make this episode worth it. But as we think across the different investment accounts of life, it should not be difficult to identify that most of those accounts need maintenance just to be maintained.

The Mechanics of Growth: Macros In, Macros Out

(11:44) Those words fit together, don't they? Because maintenance is not a neutral word. It is a word that describes action, and of course, the way that we maintain or grow or shrink an account is the direction of and combination of our investment macros of time, energy, and money. Macros in means the account is growing, and macros out, or uninvested, means that the account is shrinking.

(12:10) Any account, depending on the balance, depending on what we have invested toward leading up to that point, if we no longer touch it, is not just going to stay static. Most of the time, in that case, it's going to shrink. But, depending on the deposits that we've made, and the account balance that is there, it could continue growing.

The Power of Compounding and Self-Sustaining Accounts

(12:33) See, stasis not existing in the absence of deposits and withdraws does not just mean going down. It could also mean continuing to grow. Because if we have made deposits into an account for long enough, and grown that account large enough, that account takes on a life of its own. That is called compounding, and that is achieved in a positive or a negative direction, depending on the deposits and the withdraws that we make. An account can get to a point where it can support itself and sustain itself with very little additional deposits from us, maybe even no additional deposits. And, it is possible to build an account so large, that it compounds so much, that it can support ongoing withdraws, even in the absence of subsequent deposits, and even keep growing. The easiest and most direct example of this is with financial portfolios. Most of my clients, who are all high net worth, wealthy people, do not make deposits into their accounts, because most of them are living off of the financial portfolios that they have built. And despite that, all of those portfolios are still growing.

(13:44) Not every day, or every month, or even every year, but over time. And many of my clients are living on millions of dollars per year from their accounts, from their portfolio. And their accounts are not just able to support that, but they are able to support that and continue growing.

Dividends in the Life Portfolio

(14:01) Often, substantially grow, year after year, even though millions of dollars are being pulled out. And that is because those accounts were built to a substantial size, by being invested in for long enough, and with enough resources behind them, to get them to that level, to be able to support ongoing large withdrawals. And the key here is not just that those accounts were built to a large size, but that the balance of those accounts remains invested, and remains invested in the right things.

(14:32) In this case, mostly quality businesses, where the work is still happening behind the scenes. It's not just a pot of money. It's a pot of money that is working for them, because it is invested in appreciating assets.

(14:47) And my clients don't have to do any of the work anymore. And I believe that this compounding reality and possibility is not just unique to money. I believe that the same account balance that can be grown and achieved to the point that it can pay dividends and continue to accumulate through appreciation of those investments made, and support ongoing withdrawals, exist in other areas of life.

Accounts as Buffers Against Volatility

(15:11) I have seen those accounts that exist in areas like our physical health, in our relationships, the very important account of our reputation. And a large account balance doesn't just provide you with resources. It gives you an incredible amount of resilience and the ability to weather downturns and volatility.

(15:30) We can see, or at least imagine, this pretty easily when it's applied to money. A bigger account can handle the ups and downs better than a smaller account can. And this is powerfully true in other areas of life.

(15:43) A health account that has been invested in consistently, deposits of exercise, healthy nutrition, will be able to weather the downturn of an injury or an illness much better than an account that has been underfunded. Our relationship accounts that get consistent investment, mostly deposits of time and energy, can better handle the ups and downs that come with relationships. Volatility exists as a matter of course in life.

(16:10) It is going to have ups and downs. The balance of an account in life and how it is invested is why two different people can make the same mistake or have the same crisis, and one of them can recover easily and the other one implodes, doesn't recover, and experiences loss after loss after that. Accounts that are properly invested are a buffer against volatility. It doesn't prevent it, it enables us to deal with it. To touch on this more, one of the most important investment accounts that we have is our reputation. Not just our expertise or our success, but the trust and the credibility that we establish.

The Reputation Account: Trust and Credibility

(16:51) Our reputation is whether people know that we can do what we say we can do. Whether people know that we can be relied on to follow through. Whether people know and believe that we are a good investment of their resources.

(17:05) Whether we get the benefit of the doubt. Whether or not people know that they can count on us to follow through. Whether they know that they can count on us to be honest and treat people well.

(17:17) Our reputation is possibly the most important thing that we invest in in our lifetime. I'm fortunate that it seems like there are situations that come up all the time in my life where I have to dive in and address problems. And I do consider that a fortunate thing.

(17:35) Problems are either problems or opportunities. And the solutions and approaches that I come up with are largely supported by those around me without batting an eye. Because I have a reputation of following through, giving good advice, solving problems, and thankfully, overall success.

(17:54) Not in everything, but consistently enough in most things. And there are many examples where I've had to help people navigate through scary times in the market. That has happened many times in my career.

The Sensitivity of the Reputation Balance

(18:08) And having gone through enough of these situations, those people that I help know that when I say, you should be worried or you shouldn't be worried, they know that they can trust me on that. That reputation is built. It is invested toward.

(18:22) Our reputation is also one of those areas, unlike money, where even a small withdraw in the wrong direction or with the wrong kind of deposit can be disastrous. That is an account that we have to manage carefully and purposefully. All these things, how we make our investments, and the account balances that we build, all factor into our reputation.

(18:45) And those accounts, tended to properly and invested in well, they can weather through volatility, and can even support a withdraw when necessary. And even in hard situations, maybe especially in hard situations, can result in more growth over time. And with that said, I think there's an important clarification that needs to be made.

The 4% Rule and Sustainable Withdrawals

(19:05) There is no such thing as an account that is bottomless. Even the strongest account is finite. There are no accounts in the real world that can be tapped forever at an unsustainable rate without consequence, no matter how large it has gotten.

(19:22) The examples that we already talked about, our relationships, our physical health, our expertise, our reputation, and our money, all those apply. We cannot build an account to a point where we can do stupid things with it without consequence. In the financial world, there are rules of thumb that some advisors apply to determine a sustainable withdrawal rate.

(19:43) A common one is the 4% rule. The 4% rule states that within a normal range of asset allocation, from relatively conservative to relatively aggressive, a portfolio can distribute around 4% of its assets every year, on average, and still maintain its value over time. This is a rule of thumb, not guaranteed, and not everyone agrees with it or uses it, but for the sake of our discussion right now, it's fine.

Managing Large Balances Sustainably

(20:11) Now let's consider an example. Let's say that you have a $10 million portfolio. Congratulations.

(20:19) There are two primary ways that you can spend from that, sustainably or unsustainably. Sustainably would be around that 4% range, and that would be about $400,000 per year. A very nice lifestyle, to be sure, unless you live in certain parts of California or Manhattan. Then you're barely above the poverty line. Unsustainably would be how most people would handle $10 million, spending it like it is their job, and it is a fun job until it runs out. Most people assume that with $10 million they would be set for life.

(20:59) They could be set for life, that is a large account, but the withdrawals still need to be sustainable. It doesn't matter how large your account is if your withdrawals are too big. Even a large account, an account balance that has been built to a very big number, and $10 million is a big number, that still does not mean that they cannot run out of money.

(21:20) Or, said not as a double negative, they can run out of money, and many people figure out how to do that pretty easily and pretty quickly. You may or may not be surprised to hear that blowing through $10 million isn't actually that hard. If you withdraw beyond the sustainable draw rate that an account can support without eventually slowing that down, and ideally making deposits into that account again, it will run dry.

How to Run an Account Dry: Overspending and Poor Allocation

(21:46) So I want to make sure that we don't fall into this idea that an account can be built so big that it can never run out. We can always figure out a way to run an account dry. Even billionaires can run out of money if their withdrawals exceed the rate of compounding in that account, to the point that it can't keep up.

(22:05) And the other way that we can run an account dry is to invest it poorly. Yeah, you can spend your way through $10 million, even a billion dollars. I've seen it happen.

(22:18) You've probably seen it happen too. Examples of famous people, celebrities, professional athletes that live well beyond their means. And you've probably seen the news stories on someone who's effectively destitute, even though as an athlete or an actor, they've made tens of millions of dollars or more during the course of their career.

(22:37) But going back to what we were just talking about, there are two primary ways that we can run those accounts dry. We can overspend, or we can invest poorly. We can invest them in the wrong things. And that in most cases is a much faster way to bring an account balance down to zero or even below zero. With my own portfolio, or with the portfolios that I manage for my clients, if I start speculating, changing the way that I approach portfolio management and invest in a bunch of crap that goes down in value quickly, it doesn't matter how wealthy they were. And were being the operative word here. If I make bad investments, those accounts are going to go down. And they're going to go down fast. And that of course is also true with investing across life.

The "Game Over" Decision: Zeroing Out Accounts

(23:23) All the accounts that we have are finite. Even if built to an incredible size. We do not have bottomless accounts that can be tapped into forever without consequence.

(23:35) And we do not have accounts that are big enough to withstand being invested poorly in the wrong things. Even a huge account can be completely wiped out, brought to zero with what may seem like one small withdrawal. For instance, someone in my position who manages money professionally, getting caught stealing any amount of money.

(23:56) It didn't matter that it was a little or a lot. That is a withdrawal that brings an account balance of trust, of the ability to credibly do that job to zero. And in those cases, usually the account going to zero is soon followed by even worse consequences.

(24:12) Prison, bankruptcy, company failure, yeah. The same can be true when it comes to relationships. One breach of trust, one promise made and then not kept, one act of infidelity, one betrayal of confidence, can bring an account that was legitimately large down to zero.

Purposeful Choices in Account Depletion

(24:32) And so it's also important, especially important, in managing our accounts of life, that we avoid those game over decisions. And they are decisions. Those things do not accidentally happen.

(24:47) We do not need to walk around being worried about stumbling into these situations. Those are deposits or withdrawals that are intentionally made. And we shouldn't be surprised.

(24:58) Those zeroing out of accounts seemingly overnight are invested toward because they are chosen. They are a purposeful choice of how we allocate our capital. Let's not make those poor investment decisions.

The Retirement Inflection Point: Transitioning to Withdrawals

(25:13) But sometimes there are situations in life when withdrawals need to be made. Even where large withdrawals need to be made that will bring the account balance down at least for a time. And these withdrawals, even large ones, can be survivable or even be a good thing if used for a specific purpose.

(25:34) There are times when we need to purposefully make that choice to make that withdraw for a specific reason. Because we're targeting a specific outcome. And we can responsibly deplete an account for a period of time.

(25:47) We are allowed to make withdrawals when needed. Especially if we have built an account balance up to that point of being able to handle it. But those withdrawals need to be on purpose and for a purpose.

(26:01) And then we need to get back to letting that account grow. And that's only possible if the account was big enough to begin with. And when it comes to money, we can get accounts to a point where they can support ongoing withdrawals in the absence of deposits indefinitely.

The Practice of Spending and Sustainable Withdrawal

(26:17) That is what successful retirement looks like. Being done earning money but still having plenty to live on. But that can be hard for people to do.

(26:28) Make withdrawals from accounts that have only ever been funded. One of the most challenging and disorienting times of life for many people is when they go from working for pay to living on their investments. That inflection point is a big one.

(26:44) I and those I work with at my company have been in the position of helping many of our clients transition from working for pay to living on their investments. And disorienting really is the word I would use to describe it. Habits are built over time.

(26:58) And for the vast majority of my clients, their habit has been to work, to save, and to invest. Not withdraw. But they have to get comfortable with that. Because that's what it's there for. Otherwise, why did they build that account up to such a strong balance? It is a time of transition. And spending, or more accurately making withdrawals, can actually take practice, believe it or not.

(27:40) Spending or saving. And what we practice persists. My clients fight over money.

The Purpose of the Balance: Accumulation vs. Impact

(27:48) I should say some of them do. Most don't, from what I can see. Rich people are people too, despite what you may hear.

(27:57) And they have disagreements over money, even when there is an abundance of it. But, you might be surprised at what they fight about. Because often, what they fight over isn't spending too much. I would say more often, it's over not spending money. Usually, one of the spouses wants to use some of their money to solve what they see as a legitimate problem. And the other spouse is against it, just based on the principle that it will cost money.

(28:26) And, you know what? That 23-year-old suburban runs just fine. Or, that dated kitchen from the 80s still cooks food just fine. And that tendency to avoid spending, avoid making withdrawals, is part of who they are.

(28:41) In many of these cases, it's a big reason why they have all that money in the first place. They didn't spend it. That is their natural bent.

(28:50) To not spend money. And that can be great. That is great, during a certain phase of life.

(28:56) But it can and does cause problems at times. But, we have to ask ourselves, and this is what we try to help these people with, what is the point of this account? What is its purpose? Is the point to build and have a big account balance? In most cases, I would say no. The point is to serve a purpose, either now or in the future.

Case Study: Building a Home and Negative Cash Flow

(29:21) And an example of this that is very front of mind for me right now, is that my wife and I are building a house. It has been quite an experience, a really wonderful experience, to work together on something like this. We designed this house together. Every single thing in that house that exists was specifically not just chosen by us, but placed there by us. Designed to be that way. And it has been so cool to do it together.

(29:49) But it's also been, and I guess this happens when you build a house, it's been really expensive. And for the first time in my life, for the first time in our lives, our savings rate for this year is going to be negative. And by savings rate, I mean the difference between what I earn and what I spend.

(30:09) Which is not just saved as cash. Of course, the difference needs to be invested for it to be powerful. But again, for the first time since we were in college, this year, our investment rate is going to be negative.

(30:22) We're pulling more money out than we're putting in. And those withdrawals have been planned for. And considering that this is a home building process, there will undoubtedly be things that I don't see coming.

Short-Term Depletion for Long-Term Purpose

(30:35) There already have been. There are going to be unexpected expenses, many of which have already come up. I have assumed that there are going to be expenses that I don't even see coming yet that are going to slap me in the face.

(30:49) And I have to admit that the fact that my perfect track record of positive savings rate, positive investment rate, is about to come to an end. That my streak is over. And that bothers me. Apparently, I'm finding out that that was something that I had attached a level of value to. Some of my self-worth was attached to the idea that I invest. I have a positive investment rate every single year, no matter what.

(31:15) But, the point is that these withdrawals are for a season and for a specific purpose. And it is not going to be something that happens with any level of frequency. Especially when it comes to building a house.

(31:30) My word! That is not going to happen with any level of frequency going forward. There is a decent chance that it never happens again. Again, amazing experience. Not sure it's one that I want to repeat. And even if our investment rate goes pretty sharply negative for the next number of months in the short term, it is short term and it is for a reason. It is for a purpose.

(31:54) And we'll get back to positive cash flow once it's all over. Once it's settled. And the roughly 20 years of positive cash flow that has been invested inconsistently has resulted in the situation that can withstand a year or more of negative cash flows without being terribly disruptive.

Impact over Balance: "For What Purpose?"

(32:12) Because it's not going to stay negative forever. And the account balance was there to be withdrawn from in the first place. Sometimes withdrawals are going to happen. They're necessary. Whether by our choice or not. And by our choice is certainly the better scenario rather than it being something that happened to us. But whether it's intentional or not, withdrawals are coming. Expensive things happen. Hard things happen.

(32:39) Life circumstances happen. Ideally we're choosing those things. But sometimes we have to pay bills.

(32:46) We have to pay costs that are unexpected. Not just with money, but in other areas of life resulting in us having to make withdrawals. And the accounts that we have built should be able to withstand those if we have invested well.

(33:00) And if we do what we can to limit that to a season and get back to making sure that those accounts grow and compound. So we do not need to look at the accounts of life as though they are something that we can never touch. That we can never make a withdrawal from.

(33:15) Because as I've said before and I will say again, the point is not necessarily to have a big account balance. The point is to build a portfolio to have resources to actually do something with. That all important question: For what purpose? For the purpose of having a big account balance is actually a pretty poor purpose. But for the purpose of being able to weather unexpected situations, yeah. For the purpose of being able to do something extraordinary outside of our regular everyday approach, yeah.

(33:50) For the purpose of having an impact, for influencing people in a positive direction, for helping someone that we know is in need, for supporting an organization that we care about, yes, absolutely. That should be the purpose of building these big balances. With money, with reputation, with ability, with skills.

The "Someday" Trap: Delaying Essential Deposits

(34:13) Building that investment account of health so that we can do something with it. Be there for our family. Go on those adventures. Build relationships. Yes to weather volatility, but more important to be able to intentionally achieve the outcomes that we are shooting for. Not just have big accounts that we can look at that can make us feel good.

(35:20) And for right now, for my wife and I, building our home falls into that. Although I will say that having account balances that are well built across relationships, across health, across business, and of course across money, those do help us sleep better at night. That comfort level is an important thing, and I think that that is a very worthwhile side benefit of those investments that we've made and the account balances that we have grown. But we all have accounts that we know we should be making deposits into, but we struggle to do so. And a very common trap I see, and this applies across wealthy and poor in all sorts of areas of life, is that people will say, I'll invest in that account someday. I'll do it eventually.

(35:20) I know it's important, I know that I should be doing it, but it's just not a good time right now. But those accounts of life that we know are important, and we know should be getting investments, that strategy of someday is dangerous. Because we know that those accounts should be getting deposits now.

The Danger of Underfunded Accounts

(35:40) And the ones that I see and hear most often are the common ones. I know I should be saving for retirement, but I'm going to put it off until later. It's just not a good time. We don't have enough margin. I know I should be investing in a healthier body, but I'm just too busy right now. I'll do it someday.

(35:57) I know I should be investing in these important relationships. I should be investing time, energy, money with my wife, kids, but I'm going to put it off. I'll do it later.

(36:09) I know I should be giving to the organizations that I care about, and supporting them with my time and energy and money, but I just don't have enough right now. The someday investment strategy does not have good returns. Not just because the account may stay at or near zero, but because life happens, and withdrawals are going to be required at some point in many of these accounts.

(36:34) And if there is no account balance there, there's nothing that can be withdrawn from. Those account balances will not be able to fund a withdrawal. It won't have the capital to support what is needed.

The Negative Compounding of Relationships

(36:48) Or, even worse, the withdrawal does happen, and the account goes negative, and then starts compounding in the wrong direction. And this happens, not just with money, but probably more commonly with relationships. I think relationship capital is one of those areas that is very similar to money in this way.

(37:09) Money is unique in that unlike time and energy, money can go negative. It can go below zero. Relationship capital can also go negative.

(37:20) And a zero balance isn't always a bad thing. If you are listening to this, and I don't know you, our account balance is zero. At least from my perspective.

(37:30) Maybe because you've been listening to me, and you're going to continue to, I'm starting to build a bit of an account balance with you. But if I don't know you, our account balance is probably zero, and that is not a bad thing. It just is.

(37:44) It might be great to build an account balance with you, but there has to be that two-way directional investment in a relationship for that to happen. So having a zero account balance does not necessarily mean it's bad. But, when you know someone, when you are in a relationship with someone, I don't think that a zero account balance exists.

Overdrawn Balances: Digging Out of the Hole

(38:06) It is either positive or it is negative. And you can probably come up with examples of those pretty quickly. If I ask you to think of somebody that you don't like, I would guess that for the vast majority of us, someone's name or face very quickly comes to mind.

(38:21) That person has a negative account balance with you. It is not zero. The point that I'm making is that with accounts that are important to us, but are not getting deposits, those accounts are underfunded. And there will likely be a time when withdrawal from an important account is going to be necessary. At that point, there's either not going to be the resources there to support it, or it's going to go below zero. In some cases, that attempted withdrawal is going to bounce.

(38:53) But in the worst scenario, the account will be overdrawn. And if the account goes negative when that withdrawal happens, that will put the account into negative territory, which makes it harder just to get back to zero. And if that negative number gets big enough in the negative direction, it starts compounding on its own. And it will take a much greater effort to bring you just back to neutral. We do not want that. When it comes to money, we may think that starting at zero is rock bottom.

Zero is Not Rock Bottom: The Cost of Negative Debt

(39:24) It is not. Starting tens of thousands of dollars in credit card debt, that is closer to rock bottom. In that case, starting from zero would be wonderful. We all have a reputation. If you have invested toward a bad reputation, and you want to turn things around, you are not starting at zero. You're starting with a negative balance.

(39:47) In business, this applies just as directly. Starting from zero is when you start at the beginning of your career, or when you start a business, or when you're just out of school. That's a case where zero is actually a great place to start.

(40:00) But an account balance that has been invested in, in the negative direction, just trying to pull that up from below zero is much, much harder. Let's look at how this applies on the physical health side. Let's talk specifically about our metabolism.

Metabolic Investing: Starvation Mode vs. Growth Signals

(40:15) That's an area where, depending on how we have invested over a long period of time, it can either handle regular or large withdrawals, or it can't and will result in negative compounding in the wrong direction. Now let's imagine the winter holidays. Let's say you go through Thanksgiving and Christmas and New Year's, and you come out the other end 3 or 5 or 7 pounds heavier.

(40:38) Well, first of all, it definitely could have been worse, couldn't it? Let's be honest. Some people might get to the New Year with the scale only up 5 pounds, and they jump for joy. Well, they may not jump quite as high because of that extra weight.

(40:55) I'm going to get myself in trouble. But still, it's a minor win. It could have been worse, right? That is a common occurrence for a lot of people. It's almost par for the course in many cases. Many of us are in or have been in situations where we've made poor deposits into our health account. Being sedentary. Too many or too few calories. Let's explore the too few calories side. Something that isn't talked about as often.

(41:24) Being chronically calorie-restricted because we think it's the right thing to do. But that has sent a starvation signal to the body, which our metabolism is incredibly adaptable to. So therefore, the metabolism slows down as a result. And results in a situation where we are undernourished, but still overfat. Because we're not sending the signal to our body to build and to grow and to adapt. Because we're sedentary and we're poorly fueled.

(41:52) We're sending the signal to our body to be in starvation mode. And try to hold on to anything that we give it. And most of the time, we're giving it poor quality nutrients.

Managing the Metabolic Account Balance

(42:02) Let's take a look at what happens as a result of the investments that have been made in that direction. When extra calories hit the system, let's say during a time like the holidays, we have trained our body to be in starvation mode. And our body has nothing else to do with those calories.

(42:19) Because we are not moving intentionally, we're not sending the proper growth signal, so it just grabs everything that it can and stores it. As fat. Whoops. Not what we wanted. And this is often the case with people who are chronic dieters. Who are always trying to restrict calories.

(42:39) Maybe they're eating very, very little on a daily or weekly basis. But since they've not taken the right steps, that has resulted in a situation where when they do get calories, their body will hoard them and do what it can to store them as fat. But when it comes to investments that we make in the accounts of our metabolism, it is possible, and it's within reach, to build a body that can tear through Thanksgiving, Christmas, New Year's, all the desserts, all the extra calories, and look and feel about the same in January as it did in November.

Building a Resilient Physical Account

(43:16) How? That account is built over time. Through building quality muscle. Through intentional movement. By eating the right amount and quality of food. And that is both not too much and not too little. And approaching the holidays with some moderation.

(43:27) There is a difference between feasting and gluttony. Again, for what purpose? There are habits that result in a metabolism that is high and adaptable because you've established habits of movement and lifestyle that give your body something to do with those extra calories other than just store them as fat. And those deposits are made through miles walked or jogged or biked.

(43:49) Those deposits are made through weight that has been lifted. Those deposits have been made through quality meals that appropriately fuel your movement and build a strong body as a result. A body that has been intentionally invested in, in the right direction. Sending a signal to your body to build in the right way, not just store in the wrong way. As a quick callback to one of our wealthy vs. poor parallels, pursuit vs. avoidance. Even our bodies respond in this way. Building for a purpose vs.

Warning: Relationships are Not Simple Ledgers

(44:21) storing to avoid starvation. With the right investments made, you can throw all sorts of holiday food at it. And having made those investments, in many cases, you can come out the other end about the same or even having built a little bit more muscle.

(44:36) Because your body was taking advantage of those extra calories and then using it to build in the right way because you sent the right signal and you laid the right groundwork. You've built an account balance that has resulted in the right kind of return rather than disaster. And that would be pretty awesome, right? Hey, it's been a little bit since I've talked about nutrition and fitness. And don't we all feel better now? Okay, it's important for me to give a critical warning about tracking balances. We can treat fitness and food as a ledger, pretty simply as deposits and withdrawals. We can and should treat money as a simple ledger, ins and outs, deposits and withdrawals.

(45:19) But, there are areas of life where we should not treat our accounts as ledgers. And one of those places is relationships. We should never treat those simply as a ledger or a scorecard.

The Danger of Transactional Scorekeeping

(45:32) Transactional accounting, if you will. If we treat relationships simply as a scorecard, we are probably not going to have those relationships for very long. Or, they're not going to be very high quality.

(45:45) Transactional relationships will progress into a shallow or negative direction. That is not what we want. Someone like me, talking about investments, deposits, withdrawals, can make it sound like we just need to track it all, keep score. If we put in deposits, we should be able to expect withdrawals. Relationships are built over time. Like everything else through deposits and withdrawals, yes.

(46:10) But we should not treat those accounts as a ledger. These accounts should be fostered and cared for. We should be asking, do I consistently, intentionally invest in this? Not expecting withdrawals. Not expecting to be able to make withdrawals, but knowing that they probably will happen. Knowing that hard times are going to come. And those accounts of relationships are built without expectation of being able to benefit from those in the future.

Relationship Capital: Resilience Through Selfless Investment

(46:39) It is amazing to see people who have built their marriage, their work relationships, friendships, that are resilient, that can withstand volatility even when large withdrawals are required. But that is intentional investments that they and others have made that allow them to weather through the storms of life. And when it's done that way, it can result in amazing things.

(47:05) The whole time that we have been married, my wife and I have lived a long way from immediate family. And there have been times when we've been going through hard times, even in crisis. And there have been so many friends that have shown up for us in our time of need.

(47:22) We have invested in relationships to the point where we know several people who would drop anything to help us if the need became known. Just as we have been there for others in their time of need. And it is unbelievable how fortunate and how blessed we are in that respect.

(47:40) Especially for a family like ours that doesn't have immediate family nearby. We have intentionally invested in that direction, but again, not in a way that is about keeping score. And this applies to many areas of life.

Business Rep: The Account of Credibility

(47:55) Let's talk about the business front for a bit. Often something that we think of just from a transactional ledger standpoint. I invest a lot of time and effort on the business side.

(48:07) I do quality work, but sometimes my results are not stellar. And when my results fall short for a period of time, that is seen by the people I work with as what it is. A season. A blip on the radar. A bump on an otherwise pretty straight path. But that is because I and those I work with have an account of trust and reputation that precedes us and that we continue to invest in.

(48:34) Related to that as well, and maybe even more specifically, we have a track record of pretty good returns. A history of strong investment returns in the market in the portfolios that we manage. As the portfolio manager for my company, we have built a strong track record over many years, but not every year.

The Benchmarked Track Record

(48:53) We are, for instance, measurably behind benchmarks about one out of every three or four years on average. And yes, that means that we typically do do better than the benchmarks in most years, but not always. But our clients know about our track record and the value that we bring and the long-term focus that we have. Our steady hand in turbulent times. The way that we are laser focused in helping them in any way that we can. Our focus on the right things that really matter in investing.

(49:25) Which eventually translate into strong returns and have translated into strong returns up to this point. And even in a year where we underperform or are negative, most of what we hear from our clients is the same as what we hear in strong years. Which is thank you for the great work that you do for us.

(49:43) And that is not just handed out. That is earned. That is built and invested toward over time.

(49:49) And we take earning that and building that very seriously. Those are accounts that we are constantly striving to make deposits into. Because sometimes, a withdraw is going to need to be made.

The 90-Day Diagnostic Exercise

(50:01) Such as, in a year where we don't perform as well. And as we wrap this up, I want you to consider what is something of a diagnostic question. Consider the accounts in your life that you care a lot about. That matter to you. Then ask, if I stop investing in this account for 90 days, what would happen? Would it collapse? Would it just decay a little bit? Or would there be no noticeable change? Or maybe even, would the account continue to grow? And I believe that that question forces honesty. It can also reveal the size of an account balance that has been created. And in what direction that account balance is going in. Positive or negative. If there is already a level of compounding that has been achieved in either direction, it can be revealed in this exercise.

Identifying Healthy vs. Toxic Accounts

(50:56) I would encourage you to repeat this across all the categories and the accounts that we've talked about. Health, marriage, career, faith, friendships, money. Sometimes we are in a situation where we are constantly just trying to dig out of a hole. And the question of, what would happen if I stopped investing in this for 90 days, if that account balance would very sharply compound and veer into the negative territory, that probably has a negative account balance right now. Sometimes all we are doing is feeding an account as much as we think we can, just to stop it from going sharply negative. That is a clear sign of a negative balance.

(51:40) And, if an account would instead be resilient, continue to grow, or at least maintain very well, in the absence of investment, that is a sign that you've probably built a positive account balance through meaningful deposits, and that you're getting returns in the right direction. I hope we all have those kinds of accounts. And when we have identified an account that is well built, that is an account that deserves our continued attention and investment.

(52:09) Tend it well, because the returns from those accounts are powerful. And those accounts that were doing everything we can to hold up, but would likely very sharply veer in the negative direction if we stopped investing, we usually have two choices in that case. What we tend to do is keep throwing resources at it, hoping for better outcomes.

Changing Strategy and Closing Accounts

(52:31) But that probably is not going to work. It hasn't worked so far. Our two choices are to change our investment strategy, or to reallocate elsewhere.

(52:43) Consider our discussion on investment macros from episode 3. Maybe we're investing the wrong mix of macros, and our mix has to change. Or, we need to close the account. A project that should have been canned months or years ago.

(52:58) A friendship that just zaps the life out of you. An organization you volunteer at that refuses to get its act together. Sometimes, we need to close the accounts and stop funding them.

Closing: Earning Security Deposit by Deposit

(53:12) Okay, we spent a good amount of time today talking about accounts, the balances that we carry, the investments that we make, intentionally or unintentionally, positive and negative compounding. Our account balances must be built before they are used. Withdrawals are part of life. They are going to happen. Withdrawals do not mean that we have failed. It means that we're alive.

(53:36) Failure, in those cases, is pretending that the account balance is there when it's not. Or, more commonly, not investing intentionally to build the account balances that we know we should be building in the first place. We do not get there by accident.

(53:51) We earn it over time, deposit by deposit, intentional withdraw by intentional withdraw. In the future, we'll talk more about how to measure these accounts, how to rebalance these accounts, how to make more deposits into the right ones and stop funding the wrong ones. But until then, consider that diagnostic question as it relates to your important accounts.

(54:16) What would happen if I stopped investing in them for 90 days? Okay. Thank you for investing in yourself and in those around you. I will talk to you next time.