The Dictator in the Box

Vitalik Buterin, one of the co-founders of Ethereum, recently used a phrase that caught my attention.

He was talking about the advantages and dangers of concentrated power. A dictator can make decisions quickly. There are fewer committees, fewer negotiations and fewer people who have to agree before something gets done.

But, obviously, there is another side to that power.

Without boundaries, accountability and consequences, concentrated authority can become destructive.

Buterin described democratic capitalism as, in a sense, “putting dictators in a box” so society can capture some of the benefits of decisive authority while limiting its costs.

Then he asked a provocative question:

“What is a dictator in a box?”

His answer:

“It’s an entrepreneur.” 

It is an uncomfortable comparison.

And that is partly why I think it is worth thinking about.

You May Be Running a Bigger Enterprise Than You Think

Most of us would never describe ourselves as dictators.

But think about the amount of financial authority you have inside your own household.

A household earning $100,000, $200,000 or more each year has a significant amount of money moving through it over a decade.

• Income comes in.

• Bills get paid.

• Homes and cars are purchased.

• Debt is taken on or paid down.

• Retirement accounts are funded.

• Insurance decisions are made.

• Children are helped.

• Vacations are taken.

• Investments are bought and sold.

Major decisions involving hundreds of thousands of dollars may eventually be made.

If this were a business handling that amount of money, we would expect it to have some structure.

There would probably be reserves.

There would be controls.

Someone would look at cash flow.

Someone would ask whether expenses were increasing faster than revenue.

There would be some measurement of progress.

And important decisions would probably receive more scrutiny than ordinary ones.

Yet many households handle substantial amounts of money for 30 or 40 years without anything resembling that structure.

We are willing to be the dictator.

We just forget about the box.

The Problem Isn't Authority

The answer isn't giving up control of your finances.

Quite the opposite.

You should be able to make decisions about your own money.

You should decide where you live, what you spend, how much you help your children, when you retire and what matters most to you.

That authority has enormous value.

But authority works better when there are boundaries around it.

Think about an entrepreneur.

One of the advantages of owning a business is the ability to make decisions.

The owner doesn't necessarily need 14 people to approve every experiment.

They can recognize an opportunity and act.

But good businesses still have constraints.

There is only so much capital available.

• Payroll has to be met.

• Taxes have to be paid.

• Customers have to remain satisfied.

• Lenders have requirements.

• Regulators have rules.

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At some point, the numbers have to work.

The entrepreneur has authority, but the entrepreneur operates inside a box.

Your household needs one too.

What Is Your Box?

The box doesn't have to be complicated.

In fact, I would argue that simpler is usually better.

At PlanAssist, we start by asking three questions.

Is your lifestyle aligned with your income?

This sounds obvious.

But income alone doesn't create financial stability.

Two households can earn exactly the same amount of money and end up in very different positions.

What matters is not simply what comes in.

It is what you keep, what you commit yourself to spending, and what flexibility remains afterward.

A rising income can easily produce a rising lifestyle.

• The house gets larger.

• The cars become more expensive.

• Travel increases.

• Subscriptions accumulate.

• Helping family becomes routine.

None of those decisions is necessarily wrong.

The problem comes when they occur independently rather than as part of a larger plan.

The first wall of the box is simply knowing:

Does the lifestyle we have built fit the income supporting it?

Is your income diversified and resilient?

Most households depend heavily on one or two sources of income.

• A job.

• A business.

• Social Security.

• A pension.

• A portfolio.

• Rental income.

Different sources carry different risks.

The question isn't whether something bad is going to happen.

The more useful question is:

• What happens if something doesn't go according to plan?

• What happens if employment changes?

• What happens if markets fall shortly after retirement?

• What happens if inflation remains higher than expected?

• What happens if one spouse dies?

• What happens if a major expense appears?

A resilient household isn't one where nothing goes wrong.

It is one that has enough structure that something can go wrong without everything going wrong.

That's another wall of the box.

Are you making progress on both?

This may be the simplest question of all.

• Income can rise while financial progress stalls.

• A retirement account can rise while spending rises faster.

• A net worth statement can look impressive while liquidity disappears.

• Being busy with your finances is not necessarily the same as moving forward.

• So periodically, someone needs to ask:

Are we actually getting somewhere?

That question creates feedback.

And feedback is one of the things an unconstrained dictator rarely receives.

Liquidity. Safety. Growth.

There is another way we think about the box.

Every dollar has a job.

1. Some money needs to be available. That is Liquidity.

2. Some money needs protection from risks you cannot afford to take at the wrong time. That is Safety.

3. And some money needs the opportunity to compound and support the future. That is Growth.

Those aren't three investment products.

They are three jobs money needs to perform.

Without distinctions like these, everything can become one large pool of money.

And when everything is available for everything, the dictator has very few constraints.

A large purchase can come from retirement savings.

Long-term investments can become emergency reserves.

Cash intended for a future obligation can find its way into a market investment.

Today's desire can quietly borrow from tomorrow's security.

The box creates separation.

Not because you can't cross the lines.

Because crossing a line should require you to notice that you're doing it.

The Most Dangerous Decisions Are Often Perfectly Reasonable

This may be the hardest part.

Most bad financial decisions don't look ridiculous when they're made.

They usually come with a good story.

• We can afford the payment.

• The kids need some help.

• We've worked hard and deserve this.

• The market has been doing really well.

• We'll start saving more next year.

• We'll deal with retirement when we get closer.

Each decision may be reasonable by itself.

The problem is accumulation.

One decision becomes another.

Then another.

Lifestyle expands.

Obligations become permanent.

Flexibility declines.

And because there isn't necessarily an immediate consequence, nothing forces us to stop.

That may be the fundamental difference between managing a business and managing a household.

A business often receives relatively quick feedback.

• Customers stop buying.

• Cash gets tight.

• Margins fall.

• A lender asks questions.

  
  

A household can sometimes operate outside its box for years before the consequences become obvious.

Build the Box Before You Need It

Financial planning is sometimes presented as an attempt to predict the future.

I don't think that's its most important job.

• We cannot know exactly what markets will do.

• We cannot know what inflation will be.

• We cannot know precisely how long we will live.

• We cannot know what opportunities or problems our families will encounter.

But we can create structure around those unknowns.

That is the box.

It helps us make decisions when things are going well.

And, perhaps more importantly, it helps us make decisions when they aren't.

The goal isn't to surrender control.

The goal isn't to create rules so rigid that you can never change your mind.

And the goal certainly isn't to have someone else dictate what you should do with your money.

It is almost the opposite.

Most people don't need less authority over their money. They need a better box around that authority.

So maybe the question isn't whether you are the dictator of your household finances.

In one way or another, you probably are.

The more useful question is:

What's keeping your dictator inside the box?

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