Creative Strategy in Personal Finance
If I can't scuba, then what's this all been about?
One thing I still haven’t quite cracked is what terms to use in distinguishing being “creatively strategic” from being “strategically creative”.
What I mean is, there is a difference between these:
Thinking creatively while doing strategy (issues & insights).
Being strategic about creative ideation (ideas).
If I say “creative strategy”, it could mean either. In fact, when I say things like “I used to lead creative strategy for Netflix in Asia-Pacific”, I am mostly referring to the latter. But whenever I think about doing strategy creatively, I kind of want to call it “creative strategy” too.
The difference is that doing strategy creatively is about exploring non-obvious ways of framing and approaching a situation, while strategy-led creativity is about coming up with non-obvious executional ideas within some framing/approach that could be either obvious or not.
The two can be integrated into four possible combinations:
Non-obvious ideas from a non-obvious framing/approach (the goal of most agency creative briefs)
Non-obvious ideas from the obvious framing/approach (good enough for many creative briefs, good for product development)
Obvious ideas from a non-obvious framing/approach (good for entrepreneurial business strategy, Blue Ocean strategy)
Obvious ideas from the obvious framing/approach (good for rigorous application of best practices)
All are valid and more effective than the non-strategic non-creative approach, which is to do whatever seems obvious from an unexamined obvious perspective.
But to explain these distinctions better, I find it useful to give an example of non-creative (obvious) executional ideas from a creative (non-obvious) framing of a situation. And the example I use is Vicki Robin’s book Your Money or Your Life.
Personal finance is typically one of the most straightforward obvious examples of colour-by-numbers strategy. Let’s colour between the lines:
You have an objective – say, to save as much money as possible before retiring at 65.
You have various factors which impact this objective – income and outgoings.
You can research and quantify these factors by going through a year’s worth of bank statements.
By disaggregating the outgoings into sub-groups, you can identify some as more influential on the objective (higher versus lower costs) and some as more influenceable (necessities versus luxuries).
So, what do you do to increase wealth?
You increase income as much as possible, through education, career advancement, side gigs, and through investment of your savings.
And you decrease outgoings as much as possible, by cutting out all the spending on luxuries and only spending on necessities.
Right? Very logical and straightforward. This is what I would call obvious colour-by-numbers strategy with obvious recommended actions (obvious ideas). And look, it would work. If you increase your income as much as possible and decrease your outgoings as much as possible by eliminating spend on luxuries, you will indeed retire at 65 with the highest possible amount of money. The difference between this and entirely unstrategic budgeting is that a comprehensive review of expenses might yield opportunities for saving you wouldn’t have otherwise considered.
I’m going to mythologise Vicky Robin’s story a bit here. It’s true that she and her friend Joe Dominguez retired young and it’s true that people asked how they were able to do that and it’s true that those conversations eventually became the book Your Money or Your Life. I’ll take some licence with how those conversations went.
The first thing to note about Robin, I just mentioned – she retired around age 24 on a modest inheritance from her grandmother. (When I say modest, I mean the kind of inheritance that most people would receive, maybe use as a down payment on a house and then continue working for another 30 years.)
The second thing is that she was able to do so by living very frugally, keeping her outgoings extremely low. This is in line with the obvious strategy above. But when people she advised tried to do the same, they struggled to say no to spending, the way people often do on a diet. At the moment of decision, people just wanted that luxury more than they wanted more money at retirement three decades in the future.
The combination of these two observations – her own early retirement and others’ motivational challenges in keeping to a budget – led her to recommend several innovations in how people do budgeting.
To communicate the true value of retirement, the true cost of work and so the true price of luxuries, she had her students calculate what she called their effective hourly rate. They would take their income, subtract any additional costs incurred by their job (e.g., professional clothes, transport), and then divide the result by the total number of hours demanded by employment (including overtime and commuting).
She then had them convert their household spending from dollars into hours. So, for example, a night out with cocktails went from being described as $100 to described as 5 hours of work.
On those budgets, she had her students basically rate every expenditure on how happy it made them. So, staying with the example above, they were now comparing how happy 2.5 hours spent on cocktails made them, versus how happy they were made by 2.5 hours spent on books.
And finally, she set a target for retirement based on spending, not age. That is, assuming you can average a 4% per annum return on savings, you can live forever off a nest egg of 25 times your annual expenses. Obviously, this number goes up if you spend more and goes down (retirement gets closer) if you are happy spending less.
After all of that, the basic scheme was simple: for any purchase, ask yourself if the happiness you get is worth the time it takes to earn it. Cut spending down to the things that bring the most happiness per hour worked. And save towards a goal that reflects being able to live like that forever without working any more.
A big part of the success of Robin’s method is psychological, because many of the problems with the colour-by-numbers budgeting approach are also psychological. People aren’t robots. However rational it might be to prioritise future happiness over frivolous spending now, most people are naturally terrible at it.
Strategically, the first thing Robin did was question the objective. We’re generally handed this idea of retirement that happens around a particular age, sometime in your 60s or 70s, at which point you stop earning and live off whatever you have saved. That generally makes saving a maximisation objective – have the biggest net worth possible. Robin instead proposed a threshold objective – the goal was a certain amount as quickly as possible, rather than a certain deadline for as much as possible, and it was a certain amount that varied depending on lifestyle.
The second thing Robin did was question the evaluation of contributing factors. Typical budgeting approaches look at different expenses in terms of size and necessity. Robin observed that two equally unnecessary expenses of the same size can actually be quite different – e.g., the payoff from $10 spent at a cafe compared to $10 spent at a secondhand bookstore can be very different for different people, even though both are luxury spending. So she introduced happiness as a third factor for evaluating spending.
These two things together kind of shape the objective further with an additional mandatory or guardrail to reach that retirement goal in as enjoyable a way possible, balancing the happiness of spending now with the happiness of freedom later. Arguably both the new threshold retirement objective and new guardrails all ladder up to the real objective: maximise happiness per hour worked.
The third thing Robin did was present the same information in a clearer way when it came to how money is spent. That is, by translating expenses into working hours, she both clarified the value of retirement and made it easier for options to be evaluated in line with the budgeter’s actual objectives and values.
Now, having done all of that, the actual actions taken are very obvious. There’s no need to get creative with ways of applying this framing and approach – the ideas that are made obvious by the framing are good enough for success. Cut spending on low-happiness items and be motivated by that retirement date being pulled ever closer (both by the saving and even more by reducing the target by $25 for every $1 saved).
Creativity in ideation wasn’t needed, once creativity was used in reframing the challenge.
I’ll briefly contrast this against what other strategy/ideation combinations might look like for personal finance.
No strategy at all – undirected spending cuts based on gut feels (which might still be fairly effective but run the risk of missing opportunities).
Colour-by-numbers strategy with non-obvious (creative) ideas – still identifying the biggest expenses by size/necessity to save the most by age 65, but coming up with creative ways to do so, like turning a costly hobby into a profit-generating side business or sharing the costs of power tools among a group of neighbours.
Non-obvious strategy with non-obvious ideas – Robin’s above reframing of a threshold objective and spending based on happiness, but with really creative ways to squeeze happiness out of time spent, like working from home in Thailand or turning off-the-grid living into an enjoyable hobby.
Which is “best”? Well, “best” is evaluated in terms of effective outcomes, which are themselves evaluated in terms of what the actual objectives are. If it’s true that the objective is actually happiness and not money, and it’s true that the obvious frame of reference favours money over happiness, then the obvious frame of reference will almost always produce results inferior to a frame of reference that recognises happiness as the objective.
If that can be achieved with obvious ideas off the back of Robin’s reframing of the challenge, then that approach is probably best – in that it gets the desired results without the added effort required for creative executional ideas. Though it’s worth noting that for many people, the traditional approach to finance – save regularly throughout your working life and retire at 65 – has resulted in lives they would describe as very happy.
So that’s an illustration of this difference between creativity in strategy and creativity in executional ideation.
And with that clever reframing of the challenge, Vicky Robin and her colleague Joe Dominguez basically founded the “Financial Independence Retire Early” (FIRE) movement in the 1980s. (That movement was more recently popularised by the wonderful Mr Money Mustache and various copycats.)