Personal Prospectus: How to Set and Use Personal Spending Guidelines for a Life Well Lived

In finance, when a fund manager is at the onset of launching a fund, they typically draft an investor’s prospectus. An investor’s prospectus is a written overview of the fund explaining its purpose, breakdown of assets, expected returns, how it's managed, when the manager plans to buy and sell, etc. 

The philosophy behind an investor’s prospectus is to remove emotion out of the equation. As Ray Dalio, billionaire investor and founder of Bridgewater Associates, the largest hedge fund in the world, puts it, “Because most people are more emotional than logical, they tend to overreach to short-term results; they give up and sell low when times are bad and buy too high when times are good.” The purpose behind an investor prospectus sets a guideline on when to buy and when to sell so decisions are made by logic rather than emotion.

When it comes to money, it’s easy to make emotional decisions. The desire for a flashier car or newest tech gadget has the capability to overpower the rational part of the brain, especially if money seems limitless. 

It’s why you have individuals with multiple yachts, exotic cars, private jets, homes, etc. None of these things are inherently bad as long as you remember things are things, they neither carry good or bad weight. 

That said, I think it’s always important to look at something as more than just a “thing" but also gauge the personal intent in why it was purchased in the first place. 

I’ve been blessed with tremendous opportunity for my age, and I know that my drive, determination, and vision will continue to create opportunities in the future. There’s always a chance my situation will change, which I’m perfectly content with, but all things examined, there’s a high possibility my monetary wealth will increase. 

What I’ve recognized at this age is that it’s important for me to establish intent behind what I do. How do I want to be spending my money? How do I set restraints so that I steward my resources well? And most importantly how do I set them up in a way where the areas I allocate money are unclouded by emotion or rash decision making — that’s where the trouble often comes in.

What I did last year was begin to put together my own investor’s prospectus, a personal prospectus. It stays true to my values but also helps mitigate purchasing urges. I think every person should have one.

Here’s what I’ve included in mine so far:

  1. Extends learning opportunities for myself
  2. Extends learning opportunities for others
  3. Creates an experience that allows me to better care, serve, and love others. "Experience" does not always equate to “stuff"
  4. Creates an investment opportunity to increase time, money, and other resources for the future
  5. Does not take away from the minimum 10% I tithe or give to charitable organizations (this percentage will increase as I get older)
  6. If I already have an alternative that can perform the same quality task and/or service at 80% efficiency, I don’t need the new item.

What does this look like?

As an example of a recent purchase I ran through this framework, I got a 23&me kit over the holidays because I wanted to learn more about my ancestry and genetic breakdown. Is it necessary? Absolutely not. But I warrant the expenditure because of the learning opportunity. 

I will also purchase books for myself and others without batting an eyelash. Books, in my opinion, continue to be the best way to learn and provide access to the most brilliant minds; it makes sense to buy them. I spent well over $1,000 on books for others and myself last year because the knowledge from reading creates greater opportunities for ROI.

Now my personal prospectus also gives me a framework for things I shouldn’t be buying. 

For example, I was admiring a new topcoat recently. It was a beautiful coat, both elegant and warm, and fit like a glove. That said, I already had a winter coat that was still in perfect condition. Did my other coat look as nice? No, but it kept out the cold and got the job done. When I assessed the decision, as much as I wanted this new coat, I didn’t need the coat. Nor would it provide the things I truly value — like learning, experiences, and/or investment opportunities. I ended up passing on it. 

While these examples may seem like small decisions, the framework helps prevent me from making rash bigger decisions. I want to be in the practice of turning away poor $500 purchases now so I won’t make poor $500k decisions in the future.

How to draft your own prospectus

If you’re interested in drafting your own prospectus, here are a few questions I asked myself when I crafted mine. I suggest you write yours out.

  1. What are the things you value the most? (ex: learning, caring for people, giving, etc.)
  2. What are purchases you made in the past you regretted?
  3. How do you want to be remembered by your purchases? Will they speak to who you are and what you represent?
  4. At what amount will this prospectus apply? (ie: my prospectus is for all purchasing decisions >$100)

Certainly, the personal prospectus is not meant to be governing law. There will be times when a decision does not fall within the guidelines but can still be made. 

Live life the way you choose to, but certainly find and understand the intent behind what you do.

 

Wesley FangComment