A new member to the family: Daisy. She is a rescue from the humane society. Best estimate is a mix of yorkshire terrier and dachshund. I like to call it a Dorkshire Terrier. Less than 10 pounds, full of attitude, about a year and a half. The picture doesnt show her looong dachsie body.
Thursday, November 9, 2006
Saturday, November 4, 2006
Lets start with a few definitions of what I am talking about:
- pretirement - a period BEFORE retirement where you take time to pursue other interests. This may imply you still work -- and probably at a lower income.
- retirement - a decision to stop "work" entirely. Like pretirement, this doesn't mean you are not doing something productive. It means you are not getting a traditional paycheck.
- financial independence (aka FI) - a level of net worth that allows you to decide whether or not you WANT to work. This is determined by both your net worth and your expenses. In other words, maintaining a 5000 square foot house and an always new car may take a net worth of 5 million... while living on the cheap might be maintainable with MUCH MUCH less.
PICK A GOOD PARTNERThis has to be the absolute most important thing for me. When it comes down to it, marriage is nothing but a legal business partnership. Granted you may be sleeping with the boss (or one of you is) but from a legal standpoint, it is important not to over romantasize or over religiousize. (Hey, look, I made up a new word.) If you want to pretire or be financially independent, you had better pick someone that also has that goal. The opposite of financial independence is to be in debt. If you compromise between the two, that just means you have zero equity and you live paycheck to paycheck. You have got to be on the same page if this is your goal. If you have a bad business partner, your business wont be profitable. If you have a bad spouse/boyfriend/girlfriend, you wont reach independence. Financial dependence means more than debt, too. It points towards all sorts of self esteem issues. If you notice someone is bad with money, that is probably a big warning sign in other parts of their life too.
LIVE BELOW YOUR MEANSThis is just simple math. If you want to be FI, you have to spend less than you earn. Its like going on a diet: calories in has to be less than calories out. There is no quick plan or easy way to do it. My savings rate varied month to month. And there are always unexpected expenses (like foundation repair!) I cannot stress enough that spending (or not spending) is more important than your income level. It is not how much you make, but how much you keep. My savings rate was pretty consistently 50% or more.... sometimes peaking as high as 80%... and yes, sometimes it bottomed at zero. And yes, I tracked this -- even graphed it automagically. More on that later.
AVOID DEBTThis sort of follows with living below your means, but some folks dont get it. What I mean here is: if you do not have the cash, do not buy it. Do not put it on a credit card and expect to pay for it later.
More than that, this means do not go to the BMW dealership (or Ford for that matter) and buy a big expensive car that will take you 7 years to pay off. If you cannot buy a BMW outright, then it just isnt the right time for you to have one. This means you have to buy a car you can afford, even if it is a 10 year old Ford.
If there is something you want/need (that BMW, for example) then start paying for it BEFORE you buy it. Pay that $500 a month to yourself into a savings account (or money market or CD or T-bill or ...). When you have the cash, buy it outright.
This may be a little harder with a house, so it is probable you will have to get a loan for that. But -- quite honestly -- it is in the realm of possibility to buy a house the exact same way as that BMW: save up and write a check. The belief that you can buy it now and pay later -- and that it wont catch up with you -- has got to be one of the biggest irrational mistakes Americans make. It is pervasive from the bottom consumer all the way up to the Federal government. Just look some day at how much GWB has run up the national debt. And when taxes go up in the future to pay for it, that will of course be someone else's fault!
By "required funds," what I mean is: what different accounts you will need. Basically, this means: you have to start really looking at what you are saving and where that savings is going.
- first and foremost, you need an emergency fund. This is what keeps you from having to put those unexpected large charges on your credit card. This is also an insurance fund that lets you live if you lose your source of income. This should be in some sort of liquid asset: like a savings account, money market, rotating CDs, etc. In my opinion, you need a year's worth of expenses.
- secondly, you need retirement savings. Lots of it. If your company matches 401k (or 403b), then put every penny there up to the match point. Do not get suckered in to putting the max percentage here (unless you are going nuttier than I did on savings.) There are better places to put your money. Remember, you are putting pre-tax dollars into a 401k and you WILL BE TAXED at whatever the going rate is when you take it out. If you look at how the government is currently writing checks it cannot cash, you can assume that the tax rate will go up.
- Roth IRA. Max out this puppy. If you are married, then max out 2 of them. This is the greatest tax scheme you will ever find. You WILL NOT BE TAXED on the principle or the interest when you start withdrawing. Given the previous assumption of a rising tax rate, this is the best deal going.
- HSA. These are really new and so far, the pickings are slim. But if you were to get you a very high deductible health insurance policy that is HSA compatible, you can contribute to an HSA. This sounds like it will one day be as good a tax scheme as the Roth IRA. You can roll unspent funds forward and eventually use this as a retirement account. And if you plan on pretiring, you are going to need health insurance anyway.
- Pretirement fund. Lets face it: you cannot really take anything out of any of the above funds without serious tax implications. What this means is that if you want to pretire (or early retire) you are going to have to have a big sack of cash that you can get to before you turn 65. Way before you turn 65. So you have to save a big chunk. I might suggest mutual funds. Find a low cost online broker and start investing in no load funds. Index funds are the dummy's friend. The price is computed off an index. Instead of being managed by a highly paid manager, it is managed by a low paid computer.
OWN A HOUSE
By "own" I do not mean "go through a realtor and buy a house." I mean: OWN a house. Get a house you can afford, negotiate the absolute shortest length of a mortgage you can find with a fixed interest rate and pay it off.
If you need a 30 year mortgage to afford it, you cannot afford to buy it. If you need an 80-20 loan, you cannot afford it. If you need an interest only loan, you cannot afford it. That doesn't mean dont buy a house. That means dont buy THAT house.
Imagine for a moment how much you are paying in monthly mortgage payments and imagine that money going straight into a retirement or pretirement fund. Imagine the interest payments that YOU pay the bank being reversed and that the BANK pays YOU. At $1000 (or $2000 or $3000) a month, you could save a LOT of money. Fast.
Now, I cannot tell you how many folks will argue that you want a big payment so that you get an income tax deduction. That has to be the dumbest argument ever made. That is like saying you will give me a dollar to buy 3 shiny quarters. Paying a lot to save a little doesn't make sense. True, if you legally have deductions, you should do what you can to maximize them... but spending money in one place for the sheer purpose of saving (and saving less than you spent!) does not make mathematical sense.
NEVER RENT WHAT YOU CAN BUY. NEVER BUY WHAT YOU CAN RENT.
What I mean here is: if there is something you are going to use -- really use -- dont rent it. I do not care if the car salesman tells you it makes sense to lease a car. It doesn't. Oh sure, he can show you how your monthly cost is lower. Whoopie. But look at the cost of ownership. Isnt that really what matters? Furthermore, as I mentioned above, if you have to finance a car then you cannot afford it. I know that flies in the face of 99% of all Americans. I know they always finance. But a car is a constantly depreciating asset. Outside of a few highly collectible cars (which does NOT include Triumphs) you will never make money on a car unless you are a car salesman.
This means: buy what you can afford to buy outright. If you cannot afford to buy a car, this means you are going to have to buy a real clunker. Then make "payments" to yourself. That car fund will pay for repairs to your clunker and will eventually pay for a real car -- once you have saved up enough to buy one. And once you buy one, drive it until the wheels fall off. (If it is a Triumph, you are allowed to drive it PAST the point where the wheels fall off.) Do not tell me that it costs too much to repair a clunker. It costs less than a car payment.
And to never buy what you can rent... For me, the big draw here is tools. I collect tools the way chicks collect shoes. I have the urge to buy big tools to get a particular job done. I finally had to make myself a rule: If you are going to rent it 3 times, buy it. Otherwise, rent it. This, of course, applies to the midsize tools. Larger tools will have a longer payback.
LISTEN TO ADVICE, BUT CHOOSE YOUR ADVISERS CAREFULLY.
This boils down to "emulate success" -- but with a corollary: evaluate your criteria for success very very carefully. Driving a Beamer and living in a beautiful house may look successful. But if the balance sheet has a net value of zero (or negative) it is NOT successful. My first real lightbulb moment with this was reading The Millionaire Next Door where the author does statistical analysis of real millionaires. They are NOT Donald Trump. They are every day working stiffs. They do NOT drive Beamers. The statistical majority (by a huge margin) drove 10 year old Ford Pickups. Seriously.
Ellie Mae got me to read Millionaire. And she also got me listening to a variety of radio/TV talk shows. Each of them has something to offer and most have a common theme. They are all common sense people.
- Suze Orman - She is a harsh mistress. I like her "tell you what you need to hear, not what you want to hear" style. She is a little too worried about "whats my FICO score," but if you can ignore that part, she is pretty good to listen to. Really: If you are financially independant, who cares what your FICO score is? FICO is just a measure of whether someone wants to loan you money. Wouldnt it be better if you didnt NEED to borrow money? Her show is on CNBC on Saturday night.
- Dave Ramsey - Dave's main thing is debt and how to get rid of it. He is also very into personal responsibility for one's actions. He is a little too tied up in religiosity for my taste, but if you can ignore that (or latch onto it if that is your thing) he has very sound advice. Dave has a radio show (times vary by market) and you can also listen to it online.
- Michelle Singletary - Her advice is based on growing up with a common sense grandmother. She was poor, yet never had financial problems. Her bills were always paid and she always had food and shelter. Michelle has since become quite financially successful, all based on the advice of her grandmother. She writes a syndicated column and also has a TV show.
- Clark Howard - The ultimate cheapskate. Mostly he is a consumer advocate and a proponent of how to do things cheaply. He has a radio show, which can also be heard online.
DO IT YOURSELF
Okay, it isnt always cheaper, but it usually is. It doesn't matter if the project you are going to tackle is something you know how to do or not. You really CAN learn as you go. You will make mistakes. Sometimes costly ones. But you will learn. And the next project will be easier and will have less learning overhead. And most of all: I get more pleasure from looking at a project that I did myself that is merely 'adequate' than I would from looking at a project someone else did that was masterfully crafted.
TRACK YOUR PROGRESS
On this point, I have become obsessed. I have been obsessed for well over a year. We used to sit down and figure out our progress every couple of months. Ellie Mae would put a dot on a bit of graph paper and we would watch ourselves slowly eek up (usually) towards our FI goal. Then I thought: hey, we are using an open source program to handle our finances (GnuCash) -- I wonder if I could parse the file. I started parsing the gnucash file and spitting out "digested" data. From that, I started automatically generating graphs. And I mean all kinds of graphs: Asset v. Liability, Asset Types, predictive graphs, etc. Last I counted there were probably 50 or 60 different financial graphs. Now this obsessive-compulsive type of tracking is probably not necessary. But it was what really pulled me into the finances. It was no longer just something Ellie Mae handled well... it was something I was really a part of.