Cost, Schedule, Performance – Pick 2, Part I

OK all you engineers and project managers, you’ve no doubt heard the expression above, “cost, schedule, performance – pick 2.” What it means of course, is that there’s a trade-off between accelerating these three variables. All other things being equal, you can accelerate two of these variables to achieve a similar result, but not all three at the same time.

I suggest to you, that for your personal financial independence, you pick cost and schedule. Why? You have a lot of control over these two, not so much over performance.

Cost is the income do you need to meet expenses. Alternatively, it means how much do you need to invest every year. You have a lot of control over these factors. Your future expenses correlate with your future lifestyle. You have the final say about how much is enough. Alternatively, how much you invest each year is also up to you. Your current investment rate correlates with your current lifestyle. In other words, the cost of your financial independence is an expression of the cost of your current and future lifestyles. The more frugal you make your lifestyle, both now and in the future, the easier it is to reach financial independence. Duh. Just like an engineer, taking a whole paragraph to say the obvious.

Schedule is the time it will take you to reach financial independence. Alternatively, it means how long will your financial independence last when you start living off of your accumulated wealth. You have a lot of control over this as well. In principle, you can choose to work until you’re 80 years old giving you a very long time to accumulate wealth and a very short time to spend it. However, most of us would like to reach financial independence as soon as possible and be able to live off our wealth as long as possible. The choice to work as long as possible, is however (in principle) yours.

Performance is the rate of return do you need to reach financial independence. In other words, how fast does your invested wealth grow? Certainly, a higher rate of return is better than a lower rate of return. But think about it, with the U.S. economy growing at an average rate of 2% per year and an average dividend of 2% per year, your ability to increase your rate of return has a pretty firm ceiling. You can increase this slightly by choosing small cap, value, and emerging market equities but again, you have a pretty firm ceiling. Engineers and project manager are smart though, shouldn’t you use that intelligence to choose better than average investments, anticipate trends and invest in businesses that are going to do better than average in the future? Spoiler alert, some of the smartest people in world, with the best educations, with some of the largest paychecks known to man, are working 80 hours per week to identify those better investments. These people, of course, are in the financial industry and are bidding up the price of these better performing assets to the point that their higher cost balances their superior performance. The chances of you outsmarting them are vanishingly small.

The point is, you have a lot of control over your current and future lifestyle. You also have a certain degree of control over how many years you choose to work for a living. You don’t have a great deal of control over how much your investments return. Once you’ve optimized your investments for a given level of risk, your return has a very hard ceiling. More about optimizing investments in a later blog, but, believe it or not, it’s not that complicated.

As an engineer and project manager you ought to quickly optimize the variable over which you have little control (performance) and then focus on the variables you can control: cost and schedule. Managing your financial independence project is a lot like other projects. Manage your cost schedule and performance to reach your goal and manage your risks.