Money has been on my mind recently. I’ve been interviewing for new positions, and if the right opportunity came along, I’d certainly be willing to make less money than I do now – happiness and a challenging/rewarding position can trump a more lucrative dollar amount any day of the week if the big picture family finances are sound. I also recently met with a financial planner that we’ve known for a few years. Now, he’s going to try and sell me products, but I’ve already told him my philosophy of lowest fees possible and index fund investing. What he does offer is various tool kits to assess where we are at and if we are on track for our goals, and I believe they do offer competitive Term life insurance which may be something we may purchase more of if we need it. I think we are on track, but we’ll see.
Yesterday after Thanksgiving dinner, I had a chance to talk finances with my Father-in-law. He’s a man I respect a lot, and my wife insists he was a millionaire when he retired in his late 40’s. Whether that is true or not, I’m not sure, but I know he has investments. So we got to talking a little, about my recent visit with the Financial Planner dude, and if he worked with one. He did, but was ready to go somewhere else because returns weren’t as good as he’d hoped and his dude was charging him 3% per year to run his portfolio, this on top of any fees the funds charged. My mouth dropped. As I was getting our info together for another meeting with the guy I met with, Holly and my cumulative expenses across all IRA’s and 401(k) investments were 0.18 percent (I have one sizable chunk in an IRA with a total expense ratio of 0.08% which is outstanding). I explained my philosophy of low expenses, of the unlikelihood of actively managed funds regularly beating the market, and the fact they have to beat it by that expense percentage over and over to simply beat the market compared to a low-fee Index Fund. For Christmas, I’m getting him both The Bogleheads’ Guide to Investing and The Bogleheads’ Guide to Retirement Planning, two books that should be in anyone’s personal finance library. It’s somewhat surprising that with basic understanding of key investing principals, we can know more than our parents or about 80% of the population that are getting a death by a thousand cuts by their broker or financial adviser. Or even worse, not investing or saving due to the intimidation factor.
I’m not wealthy, and we’ve made a lot of mistakes along the way, but we are on a path to building wealth. You can read about our transformation here. With so many variables and desires in life, far be it for me to say exactly the best way to build wealth for anyone. With that said, a few things that worked for us, for those that are in position to take advantage of these (or can change their life situation to step back, and restart).
- Cut back on spending. After the bare necessities, a big strategy we employ is thrift store shopping. Kids get bigger, wife’s taste change, maybe your size changes. Instead of the GAP or Banana Republic, or Old Navy (nice deals there sometimes), go to the local Thrift Shop and find nearly new clothes for pennies on the dollar. Other ways to cut back spending is make your own coffee and lunch, spend some time and make dinner with fresh meats and veggies (stop, or minimize, restaurants that are filled with shitty oils and MSG and carbs), and maybe make your own gym. The payback comes sooner than you think (if you spend $1000 on a well equipped gym, and spend $100 a month for two memberships, and you actually use your home gym, after 10 months you are working out for free. This doesn’t work for everyone as some people need that social aspect, or need to get out of the house. Your results may vary). The big ways to cut back spending though are A) buy a reasonably priced car for cash or the shortest loan possible (meaning, you buy a MMM Scion or other top ten cheap cars) instead of a new Lexus B) buy a reasonably priced house, which brings me to the next point:
- Buy a foreclosure, or fixer upper with cosmetic issues, or smallest house in the best neighborhood as possible. We’ve done this option a couple of times now. We bought a foreclosure across the street from a lake (you know – we overlooked the $1 million lake homes, had lake views, but paid about 10% the cost and much less in taxes). We fixed up that house, finished a basement and sold it for about twice what we bought it for (10 years later). After selling that house, we bought a house in the bottom 10% in size in the best neighborhood we could. We live next to the developer of the subdivisions’s house, which probably has the largest, or close to it, square footage in the neighborhood. I don’t expect you to score similar deals, but if you are looking to make an investment, finding a the cheapest house in the right location can make a huge difference in setting the table for financial success while enjoying the perks that come with it (good schools, close to work, low crime, parks, etc.)
- Save and Invest – To build wealth you must save, you must invest. It sounds intimidating, but it really isn’t. The folks at Vanguard (who I am NOT affiliated with by the way, they are simply awesome) will walk you through anything. Build a $1000 emergency cash fund at a separate bank than your normal service as a start (helps you sleep well at night), then after that, start saving. If you company offers a 401(k) it is retarded to not put in at least up to your match, even with fees (you get 100% return on company match which is essentially free money. So if they match 50% of your contribution up to a max of say, 4%, then if you put in 8%, you really are getting 12% of your salary being saved for retirement). Not going to get into the Traditional versus Roth 401(k) or IRA debate, but if you go traditional, you lower your taxable income. For us, we hedge our bets and have both, though weight it towards reducing taxes today. If you hope to retire early, having money to last before you can access Social Security (assuming it is still solvent) or your retirement accounts will be necessary. Again, Vanguard (or other brokerage firms) can open a taxable account and you can start socking away money in there. Don’t be intimidated by this. It is really not that complicated. Doing something is always better than doing nothing.
- Eliminate Debt – with the overarching philosophy of saving and cutting back on spending you naturally come to the third leg of the stool which is eliminating debt. Obviously, consumer and credit card debt offers nothing. Pay that shit off ASAP. Other debt is still a drain on real income (student loans, mortgage, car payments) but are often less interest. Mortgage and student loans you can deduct on your taxes so depending on their rate, it may be merely psychological to pay them off early (which still may be worth it). At 4% interest rate, you may be better off investing and possibly getting 7% or more. Car payments should be as short as possible. My wife and I won’t enter into a loan longer 2-years, and eventually we’ll be paying with cash. But the real killer are the credit cards. The best financial play is to pay your cards off before investing, but I still think you need to invest (at least in a 401k even if you have CC debt) to get the ball rolling. We were putting 10% of our salaries into our 401(k)’s even when we had CC debt and that move eventually paid off. At this stage, we are debt free except for mortgage, with two paid off cars (2007 and 2013 Hondas). It helps you sleep at night to pay off debt.
Those are really the key things. Take the long game, be frugal, don’t compare yourself to others, and simply grind your way towards building wealth. You don’t have to live like a pauper, but take advantage of different activities that cost less – camping, hiking, local swimming, day trips, nature, canoeing, library, hunting, campfires with friends, volunteering versus Mega-Vacations each year, New Cars, iPads for everyone, fancy dinners, happy hours, golfing, lots of fucking consumer shit. Change your perspective and you can build wealth.
I have 60 pages of financial discussion in my Book which includes 12 Pillars of Personal Finance for those that want to read more (and get more perspective on marriage and life as well). It is really not that hard. I don’t have time for staying up on the stock market. I am not a tax specialist. And if I can figure out a consistent way to build wealth, so can you. It just takes a little time, and a little effort.
Finally, if you like motivational speakers, and money matters, check out Tony Robbins’ new book. It’s not perfect, but has some basics and is a fun read (I admittedly like TR, and love to listen to his audiobooks. They are motivating and have a very positive mindset. This book is no different.).