Category Archives: Personal Finance

It’s Not the Ratio, It’s the Delta

I sometimes see a misconception regarding living in a high-cost vs. low-cost of living (HCOL v. LCOL) area. It goes something like this: “I make 2x more, but my expenses are 2x more, so it’s a wash.”

This is not true. If you make 50k and spend 30k, you save 20k. If you make 100k and spend 60k, you save 40k. Since increasing savings is the easiest way to change your future net worth, this is big deal. I started my career in NYC, so I know what this did to my savings account in my 20’s.

Just because you live in an HCOL area, doesn’t mean you have to have a high cost of living. I paired my NYC salary with a low rent (the 2023 equivalent of $900-$1,400) and no car, which are the easiest ways to save money in an HCOL.

Not all expenses are higher in an HCOL—mostly it’s housing and dining. Commuting (for me) was a lot cheaper. Other expenses, like travel, clothes, and “stuff” are pretty much the same where ever you live, so living in an HCOL means that you have more money to spend on those things. HCOL areas themselves are usually desirable travel destinations, and you can do that for free.

So, when planning where you live, if you are deciding between HCOL and LCOL, use the delta, not the ratio. Of course, if you can, working remotely and pairing an LCOL home with an HCOL job can give you the best delta.

Put Aggravation (and Joy!) in the Spreadsheet

When I am trying to figure out if something is worth the cost or how to charge for something, I might build a little model in a spreadsheet. All the things that can be expressed as a number probably end up in it. What usually makes the difference though, is when I force myself to express my mental costs and benefits as a number too.

For example, I like my apartment, but sometimes I think of moving. Maybe get a condo instead of renting. But, when I put the numbers together, if I make line items about my “feelings”, I see that I can’t justify the cost difference. I just don’t value what I’d get and I personally find some parts of home-ownership very aggravating.

The same kind of line items also show up when I am trying to price my consulting services. I price in my feelings. I want to be neutral to the customer’s choice. It’s the standard “say no with a number” advice, but this is how I get to that number.

My Third Lesson in Personal Finance: Optionality

My early career was in writing financial options software, so I’ve been around the concept for options for a long time. The general characteristic that’s important to understand is that it has a fixed, low cost and a (low-relative-probability) of very high upside.

My ex-boss, Philip Brittan, wrote this piece about optionality back in 2014 on an internal blog and recently posted it publicly. It goes over the technical details, but generally, when I read it I was reminded about the power of the generic concept of options when applied more broadly.

He ended: “In general, you should be on the lookout for situations that naturally make you long options and give an asymmetrical (‘unfair’) advantage”. (being “long options” means you have options — as opposed to short, where someone has options on you).

Applied broadly, there are many things that “have optionality”. For example, renting instead of buying. But, for now, let’s concentrate on optionality in compensation.

At the time I read this, I was consulting. The kind of optionality that consulting offers is options on opportunity and freedom. You can easily change what you are doing or when and where you work. You can stop and start at will, comparatively. But, in consulting, pay is mostly tied to work and does not have options-like returns.

Before that, and for most of my career, I worked for startups that had some kind of optionality in the pay structure. My first job had an unlimited profit-sharing bonus pool that was literally a percent of profit that was not capped. At other times I had equity-like instruments, options, or RSUs. I also did limited work for free for a share in future profits.

My personal finance plan was just a normal compounded returns and high savings with an exponential curve, but when I look at what actually happened, there are these moments of step-wise lumps when one of these options paid off. I was lucky, for sure, but also, I took a lot of shots.

The key was that my options mostly felt free to me. I was completely satisfied with the job and guaranteed pay, so the option was extra. It might be true that I could get more elsewhere, but I was satisfied.

My default plan would still work.

I think of optionality in compensation the way some people think about playing the market with “play money”. I’d be ok if the options expired worthless. It’s another way I think programmers can “beat the market” with labor instead of by picking stocks.

The Downside of Saving

I have written a few posts lately to convince you to increase your savings rate.

Increasing your savings rate is the easiest lever to pull in increasing your net worth. To do that, I mostly suggest increasing your income:

If you increase your income and mostly save it, that effect will compound on itself and with the market. The end result is significant.

But, surely there’s a downside, right?

When you save money, you are forgoing whatever benefit you could have by spending it now. That spending could be considered investment or consumption.

If the spending is truly an investment, then I think it’s worth considering. I am not talking about Bitcoin or $TSLA, I am talking about

  • Books in your industry
  • Coaching
  • A course
  • Equipment (a laptop, a smart phone, a cricut) if treated like factory equipment
  • A conference

A lot of this stuff is deductible against business income (see my taxes post). If you could deduct it, then I’d say it qualifies as investment or a worthwhile expense. I’d also extend this to serious hobbies and fitness. Of course, you need to keep it in line with your income.

In spending that is for consumption, I would follow Ramit Sethi’s advice to spend on things you love and cut mercilessly everywhere else. Also, he says to ask the $xx,000 questions (e.g. saving on a mortgage) and not the $x dollar question (e.g. lattes).

Spending that is an investment pays off in some way over and over. This doesn’t need to be money. If you spend on fitness, your improved health gives you benefits. If you learn an instrument, you will get enjoyment from playing for the rest of your life.

Consumption is more about enjoyment in the present. You absolutely should do that, but this is where you need to be careful as we’re built to value short-term pleasure (see The Pleasure Trap book or watch the TEDx talk).

Having money in the bank is good, but ultimately, you do need to spend it to get any benefit. But, please don’t use that as an excuse to waste money.

How I Used the Net Worth Estimator


How I used it

Fifteen or so years ago, my wife and I built a spreadsheet model for ourselves that is a lot like this but tweaked for our specific situation. It was very simple.

We played with it until we found a savings scenario that was both doable and would help us reach our goals. We kept market return expectations low because that drove us to be serious about savings. The fact that we’ve been in a long bull market helped us, but we didn’t count on it.

Then, each year, we plugged in actual numbers. The model was a kind of benchmark—we could see what we needed to do in order to reach our goals.

When the market tanked in 2008, we could see what the eventual effect was. And, also we could see how the recovery brought it back in line.

So, use the model more as a benchmark or goal and track your actual numbers against it.

Once you have something you think is good, move the inputs around to see how sensitive the results are to each number. The main thing to notice is that there’s an inflection point where your savings grow or shrink after retirement.

My suggestion is to try very hard to get to the point where it grows. You can see that this is possible at a range of salaries, not just 6-figures, but requires that your expenses are in line.

I will also say, that being aggressive early and then adjusting later is a good strategy.

If the market tanks early, you are still in the mindset of low-expenses, so you get to take advantage of the dip and historically, it comes back. If the market out-performs, you had more money in it.

We looked at it once a year to see if we needed to adjust anything.

Disclaimer: I am not a financial professional and this is not financial advice. I don’t know your specific situation. Get professional advice from a fiduciary who will look at your specific situation.

Beating the Market Addendum: Taxes

A few days ago, I wrote about how programmers can beat the market in their investments

The key is to invest in yourself and either increase your value in the labor market or sell products. If you think of the extra income you earn as “market return”, then you can easily add a few percent to your overall return with minimal risk of downside.

But the astute among you might have realized that income is tax disadvantaged vs. capital gains (from stock returns). And, that if you buy and hold stocks, then you can defer taxes. But if you make income, you need to pay taxes immediately.

And since I am advocating you getting side income or raises, this extra income is at your highest income tax bracket.

DISCLAIMER: I am not a CPA or financial advisor and even so, it is May 2021, so everything I am saying is possibly not true if you are reading this in the future. Also, this is US only. Check with your accountant to see what the effect is to you personally. Also, I am intentionally simplifying some things because the actual tax law is way more complex than this.

Also, my original article and this one assumes you are a programmer, which is why my salaries in the example are 100k and over 140k. A lot of this math doesn’t work unless your salary is in that range. At lower income, long term capital gains tax is 0%.

For this analysis, I am assuming you are single. The numbers are different if you are married, but the idea is the same.

Here’s an example:

Let’s say you make a salary of $100k, and you get $10k of extra income. If you are single, that $10k has federal tax of about 24% and FICA of 7.65% (you may also have state taxes). If you get this money via consulting or selling products, you pay another 7.65%. The total rounds up to 40%. (BTW, I know it’s more complicated than this, but this number is approximate)

But if you buy and hold stocks that go up an extra $10k over the market, your tax bill is $0. You only pay tax if you sell stocks. So, eventually, when you do sell them, it will probably be 15% long-term capital gains. Again, it’s more complicated than this, and in 2031, when you sell, who knows what the tax law will be, but 15% is our current best guess.

So, of the extra $10k, you keep about $6k if it’s side income, $6.8k if it’s a raise, and eventually $8.5k if it’s market gain.

Now, if you day trade stocks or bitcoin and don’t hold your positions for a year, then the gains are taxed at the same rate as wage income, so 24% in our case (no FICA). So you keep $7.6k instead of $8.5k.

You still pay less tax trading, but the good news is that it’s not that simple. 

I’m ignoring state tax, because mostly that’s a wash, but you need to check because in Massachusetts, short-term gains get taxed at 7% more than wage income (12% vs 5%). I live in Florida, which doesn’t tax income or gains. So, it could make a big difference depending on where you live.

The biggest tax savings are from maxing out your social security tax.

I used $100k base salary, but in 2021, if you make $142.8k, you max out your social security tax and only pay the Medicare portion on your side income, so that’s 2.9% instead of 15.3%. Your tax bracket is about the same, so now you pay 27% of the total vs. 24% for a day-trader. If the new income is a raise, then you pay 1.45%, so a total of 25.45%.

If your new income is a raise, you can further lower your taxes by increasing your 401k (or other tax deferred) contribution. If you get a $10k raise, and can put all of that in the 401k, then your tax rate is 1.45% for Medicare. 

To be fair, as long as you have enough wage income, you could effectively do this with your market return by contributing the equivalent amount of wages, so it’s a wash. But I want to mention it because it’s the first thing you should consider doing with extra income no matter how you get it.

If you make the money on the side, you can lower your taxes in ways that don’t apply to market returns.

There’s a QBI deduction of 20% on net business income. So, you only pay tax on $8k of the side income. So it’s an effective rate of ~22%. 

Now we just beat the day traders who pay ~24%. 

But what about the stock pickers that buy and hold? We still have to make $11k for each $10k they make (again, that’s not hard).

Even if you max out your 401k, you can put 20% of your net business income in a solo 401k (or other business tax deferred vehicle).

So, if you make $10K, you could put $2k in the solo 401k, deduct $1.6k (QBI) and only pay the 24% tax on $6.4k and another 2.9% on the $10k. So your effective take-away is about $8.2k, with an effective tax of 18%.

Remember, this is all approximate, I am not a CPA and there are more things to take into account. For example, you eventually pay tax in retirement on the money in the 401k.

Also, I didn’t take any normal business deductions into account, like home-office, computer, tech books or courses, business group membership fees, etc. If you can deduct about 5% of the income, your effective tax rate on the side income is lower than 15%.

But the takeaway is that you can get your tax bill in the same range of the day traders with extra wage income if you already max out your Social Security contributions. It’s not as tax-disadvantaged as it seems at first.

The traders pay something between 15%-24% depending on how long they hold, and you pay something between 18% and 27% if you max out Social Security at your day job. And you can get it even lower with business deductions.

You do need to add another 12.4% if you don’t max out SS—so go get a raise to get you closer to maxing out.

Of course, you lose the option of negative tax that comes from stock picking losses, but we can live with that.

Using Market Data in the Python Net Worth Estimator

When I first made the python version of the net worth spreadsheet, I used a function like this:

def netWorthByAge(
    savingsRate = 0.18, 
    startingNetWorth = 10000,
    startingSalary = 40000,
    raises = 0.025,
    marketReturn = 0.06,
    inflation = 0.02,
    retirementAge = 65

You could pass in parameters, but only constants. This is how the spreadsheet works as well—each cell contains a constant.

The first thing to do to make it more flexible is to use a lambda instead for the marketReturn parameter:

marketReturn = (lambda age: 0.06),

Then, when you use it, you need to call it like a function:

netWorth = netWorth * (1 + marketReturn(age - 1)) + savings

We use last year’s market return to grow your current net worth and then add in your new savings.

The default function is

(lambda age: 0.06)

This just says that 0.06 is the return at every age, so it’s effectively a constant.

But, instead, we could use historical market data. You can see this file that parses the TSV market data file and gives you a simple function to look up a historical return for a given year.

Then, I just need to create a lambda that looks up a market rate based on the age and starting year:

mktData = mktdata.readMktData()
for startingYear in range(fromYear, toYear, 5):
  scenario = networth.netWorthByAge(ages = ages,
    savingsRate = savingsRate, 
    marketReturn = (lambda age: mktdata.mktReturn(mktData, age, startingYear = startingYear))

And this will create a scenario (an array of doubles representing net worth) for each year in the simulation.

You can download and run the code to play with it. Here’s a sample chart it generates:

There are lines for starting the simulation in 1928, 1933, 1938, 1943, 1948, 1953, and 1958. This gives you an idea of the expected range of possibilities.

How Programmers Can Beat the Market

In my last few posts I’ve been trying to model net worth over time as a function of savings. In my last post, I used real historical market data instead of a constant 6%. Looking at a few scenarios, the market returned more like an average of 9.5% over those time periods.

I still think you should use 6% in your plans (if it’s actually 9.5% in the next 60 years, then that’s good news—you can make adjustments every decade if you are way ahead of plan).

Reminder: I am not a financial advisor and this is not advice. I don’t know anything about your personal situation. Talk to a fiduciary if you want advice.

But, you might think: “I bet I can beat the market—I understand tech/bitcoin/stonks better than most people.”

It’s not likely.

S&P keeps a scorecard of actively managed funds against their benchmarks. In a single year, active funds may do ok against the market, but go to page 9 and look at their longer term performance. 75% don’t beat the S&P 500 over 5 years, and 94% don’t beat it in 20.

These are funds with professionals with a staff who spend all day, every day thinking about this and are paid based on performance. You can beat 94% of them by just putting your money in an index fund.

But, then what do you do with all of that free time?

To beat the market, remember that you are also a player in a market. If you work full-time, you are in the labor market. You could also create products and sell them (in the market).

Look at your current net worth. To pick a random number, let’s say it’s currently 100k. If the market returns 6%, you’ll have 6k more at the end of the year. If you try to beat the market by picking stocks, and get 10%, you have made $4k more. Let’s say your net worth is $500k. Working to get that 10% return will get you an extra $20k.

Is this really the best way to make an extra $4-20k? It’s not a sure thing—you might not beat the market (like over 50% of active managers each year). You could lose money.

So, instead, invest in yourself.

To “invest” in the labor market, you could take courses to make yourself worth more and then either ask for a raise or change jobs. You could raise your profile with an open-source project, writing, or by giving talks. You do not need to be “famous” to do this. Your projects or work don’t need a million followers. You could beat the market with a few dozen.

Outside of your job, you could seek side-income. If you make $100/hour, you only need 40 hours of consulting (less than 1 hour/week) to “beat the market”. Technically, you beat the market in your first hour.

Or with your first sale.

And there aren’t a lot of costs to consulting, e-books, or software (other than your own time). But, at least you know that the time spent will net a positive return. Even if you make no sales, it’s pretty likely that you have made yourself more valuable.

If you spend 40 hours and make $4k in the market, that’s a one-time effect. You haven’t made yourself more valuable, and it’s unlikely you can do this year after year. If you get a $4k raise, your salary is $4k higher the next year too. Beating the market is automatic and you can build on it.

More good news: the less you money you have, the more “return” you can make this way. If you have $10k in the bank, making $10k on the side doubles your net worth. Getting a $5k raise is like a 50% return.

You can’t beat that picking stocks.

Adding Market Data to the Net Worth Spreadsheet

I found some historical market data on an NYU business professor’s home page. I put the first four columns on a new sheet in the Google sheets version of the net worth estimator.

I also put a sample portfolio that you could play with. It’s 70% stocks and then a mix of bonds.

Then, on the main sheet, I use the portfolio return column instead of the fixed 6% return.

Historically, a portfolio like that returned more than 6% — more like 9.5% on average. I showed three lines, one for starting in 1928, one for 1948, and one for 1958. Since I am trying to simulate 60 years, that’s about as late as I can can start. But, for planning purposes, being conservative is still a good idea in my opinion (which is worthless as I am not a financial advisor and this is not advice).

There are many things wrong with this model that I’ll address soon. The main issue is the the post-retirement spending model seems way too low. I am also using a constant inflation rate instead of historical data. Finally, wage inflation has not necessarily kept up with inflation, and certainly in down market years, we could expect wage freezes or temporary unemployment.

All of these things are a lot easier to model in python.

FIRECalc only simulates net worth after retirement, so it can do many more simulations (because of the shorter duration). Still, there are more than 40 possible scenarios in this data.

Next, I’ll add this data to the python version and try to draw more scenarios.


In my net worth estimation spreadsheet, I used 6% as a default market return and recommended that you keep it conservative. If the market happens to be better that that, that’s good news. If you estimate it too high, then you might not save enough.

Another way to model this is to use historical market returns year-by-year.

The site FIRECalc does this for understanding post-retirement spending vs. expected market growth. It takes your portfolio size and starting expenses as input and then draws a line on a graph for each possible retirement year using real market data. You get an idea of what would have happened in all possible historical scenarios and what percent of the time you would not have had enough in your portfolio.

If you want to do a more sophisticated analysis, there are advanced versions on the site. For example, it assumes constant (inflation-adjusted) expenses, but if you want to do something more sophisticated than that, it offers a few spending models. You can also adjust your portfolio stocks v. bonds balance.

Doing this kind of analysis is the kind of thing that’s fairly easy to do in a program, but not as easy to do in a spreadsheet. It’s not impossible, but you would need a couple of columns for each scenario. In my version, to show 30 different saving scenarios, I need 60 columns, plus a few columns for the actual historical data.

I’ll work on updating the spreadsheet to show a few scenarios to give you an idea.