A Stress, But Affordable
When money is tight, more income is welcome, but often not a long-term solution. With greater income/revenue comes greater opportunity for being undisciplined. Sometimes, one of the best things that can happen is living paycheck to paycheck for a period early on in your life, forcing habits that lay a foundation into the future.
There are a bunch of money lessons imbedded in this story.
"F.C. Barcelona has, for much of the last decade, had the look of a sporting and commercial colossus. This century, its on-field success and its off-field wealth have made it the envy of even its most bitter rivals.
It is the first (and only) team to surpass $1 billion in annual revenue. It employs arguably the finest player in history, Lionel Messi. On matchdays, the cavernous, iconic stadium it calls home fills with almost 100,000 card-carrying, dues-paying club members.
But Barcelona has been living on the edge for much of its recent history, a consequence of years of impulsive management, rash decisions and imprudent contracts. For years, soaring revenues helped paper over its worst mistakes, but the coronavirus has now changed the math."
Even an insane amount of revenue won't necessarily overcome reckless spending. If your own financial situation can be categorized as 'a stress, but affordable', consider Barcelona's predicament. One of the most iconic organizations in sports, a money making machine, in a difficult place because their burn rate was out of control. Operating to a degree as if revenues would rise in perpetuity, limiting margin of safety, and making them more susceptible to an external event.
"Moix admitted that Bartomeu and his board made mistakes, but he is convinced that it was an event outside of their control that finally tipped the club off its high-wire."
Not so, says Nassim Nicholas Taleb.
“Not seeing a tsunami or an economic event coming is excusable; building something fragile to them is not.”
Yes; Barcelona's size and stature still provides resources that many individuals won't ever have. But there are lessons to take away when considering your own personal finances.
Be accountable. No one's coming to save you. Do not blame money problems on external circumstances, and make sure there are considerations as to what could go wrong. I don't particularly enjoy paying a lot for disability insurance, life insurance, an estate plan, or the 'cost' of having a savings account earning nothing. But the consequences of assuming life will go perfectly can be devastating.
Don't live within your means. Live below them. And work over time to widen that gap. "Bread for today, hunger for tomorrow."
In select cases, low interest rates have encouraged poor spending decisions. Why wouldn't I borrow more to buy my house with a 3% note. Especially when my home appreciates in value each year. You mean I can finance that entire car at 0%? Free money! Be careful with this mindset, especially if you're spending at the expense of saving and investing an amount that's less than ideal.
Even if debt is serviceable, it by definition will always limit future opportunities. No mortgage is antifragile. Constantly rolling debt can be fragile.
Stay disciplined and be willing to walk away. Barcelona had their version of FOMO below.
"On a sweltering late summer afternoon, Barcelona’s executives had come to one of Monte Carlo’s most exclusive hotels to strike a deal with the German club Borussia Dortmund for one of the most exciting young prospects in Europe: the French forward Ousmane Dembélé.
Barcelona had decided on its strategy, and its price: Dembélé, in Barcelona’s eyes, was worth $96 million, and not a cent more. No matter how hard Dortmund pressed for a higher fee, the men from Barcelona would hold firm. The two executives steeled themselves as they headed to the suite the Germans had booked. They embraced before knocking on the door. And then they stepped inside, only to find that Dortmund’s executives had decided on a strategy, too.
The Germans told their guests that they had a plane to catch. They had no time to exchange small talk, and they were not here to negotiate. If Barcelona wanted Dembélé, it would have to pay roughly double the Spaniards’ valuation: $193 million. The price would make the 20-year-old Frenchman the second-most expensive soccer player in history.
Barcelona’s president, Josep Maria Bartomeu, was stunned. But he did not walk away. He quickly agreed to pay almost the entire amount, settling at a fee of $127 million up front, with a further $50 million in easily-achieved performance bonuses. For all his intentions of playing hardball, he felt he did not have a choice. Only a few weeks earlier, Barcelona had seen one of its own crown jewels, Neymar, plucked by Paris St.-Germain. Bartomeu could not risk disappointing a fan base still reeling from that blow by returning home empty-handed. He needed a marquee signing, a trophy, a trinket. He had to pay the price."
Income is not wealth. Consumption (house, car, etc.) is not wealth. Wealth is everything you don't see, everything you don't spend. But it's hard to impress people with this mindset. Living isn't expensive; showing off is.
We mostly plan for optimization. Maybe we should thinking more about resiliency. Consider this viewpoint with your own financial planning.
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Sources:
Barcelona and the Crippling Cost of Success (The New York Times)
Antifragile (Nassim Nicholas Taleb)
The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.
