As a millennial, the pressure to feel like I should own a home grows with every passing year.  It’s one of those ways we can really feel like we’ve made it.  It’s how your peers know you are an adult.  But is owning a home really a good idea?  When does it make sense?  Probably much later than we would expect.

As someone hell bent on being financially secure and becoming independently wealthy, the only things I think are more important than investing as much as I can, as soon as I can are:

  1. My relationships with other people, and
  2. My health.

It shouldn’t cost much money to build relationships – As The Beatles so famously said, “Money can’t buy me love.”   As for my health, again, good relationships with good doctors (or good people in general) are worth more than all the money in the world, but hopefully healthy habits, health insurance, and my HSA will cover the financial burdens of sickness or injury.

That frees up every remaining dollar to max out my 401K, IRA, and HSA contributions every year – and further challenge myself to invest as much as possible outside of that.  That I should max out every available tax-advantaged account (whether Roth or Traditional) before doing anything else is a foregone conclusion in my mind.  My lifestyle is built around behaving as if the money that goes in to those accounts is not, and was never, available to me for any other purpose.

That sounds really intense!  What does this have to do with buying a house?

Opportunity cost.

In order to save 20% for a down payment on a home I would have to stop investing the maximum in my 401K and IRA and I am absolutely unwilling to do that, even for a year.  And you should be too in my opinion.  By forgoing investment in those accounts for even one year we would be missing out on literally tens of thousands, if not hundreds of thousands (depending on age) of dollars in retirement.  And for what?  The privilege and prestige of being saddled with hundreds of thousands of dollars worth of debt for decades? Not to mention taxes, insurance, and maintenance.

But… You many say – You are buying a house! That means you get to keep it! All the money you waste on rent is just flushed down the toilet.

This argument is not without some merit, but I believe it is quite overblown because it is much less certain that the value of a house will .  I will in all likelihood, eventually buy a house.  It will be a small house that costs much less than I will be told I can “afford”.  And this purchase will be well after my age and salary have advanced to a point where the opportunity cost (future value) of the down payment, interest charges, taxes, insurance etc are more bearable and do not impinge on my ability to save and/or invest 30-40% of my income.




The $100 Salad

I had certainly been made aware before of how the costs of daily habits can add up to huge dollars, in the form of opportunity costs for my future investments but that point was driven home more poignantly than ever recently when a co-worker explained to me why he is so diligent in bringing lunch from home rather than purchasing it from a fast food vendor near the office.

What he showed me was a Future Value Calculator.  The future value of money is the amount that a given sum will grow in to at a given compounding interest rate and time horizon.  The higher the interest rate, more opportunities to compound, and longer the time horizon, the higher the future value will be for any amount invested.

I was eating a salad that day that set me back $8.66 – this was a bit high for a typical lunch, but not outrageous given some of the alternatives, however certainly much more expensive than cooking groceries.  After we talked I was interested in how much I could have had in retirement if I had invested that $8.66 instead of eating it.  I assumed a historically reasonable growth rate of 8% compounded once per year for 32 years which is about the amount of time left before I reach a typical retirement age.  Drop those numbers into my spiffy new future value calculator, and my salad actually cost $101.64 in retirement savings.

What does this mean for our budgets?

This means that the sooner (and more) we start investing, the better off we will be later in life.  Because the money we spend or invest when we are young has a much bigger impact on our retirement wealth than money we spend even 10 years later.  For the sake of simpler comparisons, let’s assume we start work at 22 and retire at 62.

Consider that the future value of $1 invested for 40 years at 8% is $21.72, but the future value of that same dollar invested for 30 years is $10.06 – less than half.  This means that in terms of opportunity costs, my $8 salad is twice as expensive for me at age 22, as it is at 32.

In fact the impact of compound interest is so dramatic, that at 8% growth, investing $10,000 per year for 40 years would give us $2,797,810 in retirement.  That is about one and a half million dollars more than what we would have if we waited until 32 to start investing $10,000 per year.

But! You may say – I don’t have $10,000 per year to invest, and I certainly didn’t when I was straight out of college!  And what if I’m already 32? Or even older?  That’s ok, this is just an illustration, you are not competing with me or anyone else.  You are only competing with yourself from yesterday.  Surely you can save more money than that guy!  The bottom line is, start now, and start with something.  Start with as much as you can as soon as you can.  We’ll look at what to invest in next time.

Your Economic Future Belongs in Your Hands

A few weeks ago I read a story in the Washington Post about the aftermath of the closing of a McDonnell Douglas plant in Tulsa in the early ’90s; specifically how difficult it was for those who lost their pensions to put their financial lives back together after getting laid off.  Certainly my heart goes out to them for banking on promises that were later broken.

While there is probably plenty of blame to go around, and maybe nothing that could have prevented this hardship befalling them, the topic for today is not who is at fault for the predicament that the former employees find themselves in.  Rather I want to discuss what can be done at an individual level to help mitigate personal economic disasters like this one.

Have a Robust Skill Set

Many entrepreneurs strike out on their own at least in part because they believe that working for others is more risky than working for themselves.  As Thomas Stanley wrote in The Millionaire Next Door – “Risk is working for a ruthless employer.  Employees are at risk, they have a single source of income.”  He later notes that this does not at all mean that you have to become an entrepreneur to be successful.  I am also not saying that this is the only way to go, but the important lesson to be learned is that it is far better to put your trust in yourself, than to rely on some organization’s pension or even the government’s social security program to protect your economic future.

The alternative for those of us who don’t want to try and start our own business is to have a robust skill set that is broadly applicable and can stand the test of time.  I was lucky to have friends and mentors who guided me toward public accounting, and while it is not a perfect job, it pays well and allows me to build skills that I value having, and that I know will serve me in the future.  It is also an incredibly robust and in-demand industry where I believe I will always be able to find work.

What I do not want for you, is to go in to (or stay in) a field that is so specialized that you can only be employed by a few people, or to take on massive student debt to study something so obscure that your job prospects (or earning potential) are minimal.  Be future oriented and think about the needs of others, if you can meet those needs you can profit, whether as an employee or an entrepreneur.

Save Money!

Regardless of what kind of job you have: Save money.  I’ll say it again.  SAVE MONEY.  That means don’t spend it.  But I have to have ______!!!  Dignity in old age?  Peace of mind when you’re sick or get laid off?  Unless you filled in the blank with food, shelter, or energy, there is probably an alternative.

As the article points out, few companies still offer generous pensions, and few individuals are saving a significant amount for retirement.  They cite a Federal Reserve survey from 2016 that found almost half (about 45%) of U.S. families have nothing saved for retirement, and “The median account, among workers at the median income level, is about $25,000.”  The old belief that saving 10% of your income is going give you a good retirement is flat out wrong.  Try 20 or even 30%.

Often times we struggle to get to 20% but it is so important to try.  Try even just a few dollars a week.  Try $50 or $100 a month.  Whatever you can.  You don’t have to live a Spartan existence, but you have to save something.

Why is this SO important?!?!

Because it puts the power in your hands, it keeps the ball in your court, it is an aspect of life that you have control over.  Kevin O’Leary of Shark Tank is fond of saying that money is freedom.  That sentiment is a huge part of why I pursue wealth, and why I think financial independence is so important.  Saving your money, spending frugally, and investing carefully help to put us in a situation where we are not dependent on someone or something else for our daily needs.

I recall a story from a young landlord I met once who told me how his old boss would pick on him mercilessly for driving an old used car.  When it finally broke down and he bought a new used car, his boss noticed immediately, came and put his arm around him and said “Congrats on your new car, I like my employees straddled with debt.”  He told me that after those words he knew beyond doubt that his boss was not on his side and quit just a few days later.  He would not have had the power to leave that awful situation without savings to support him.  Without brushing off that man’s cruel criticism of his frugality and continuing to save, he would not have had the financial confidence to stand up to him.


Building Systems for 2018

One of my favorite Youtube videos from 2017 came from Big Think — It is by Adam Alter on the topic of setting systems instead of goals.  He makes the argument that it is better to practice moving toward what we want than to focus on a goal.  It sounded to me like habit building.  Alter uses the example of an author whose goal is to write a book.  Instead of getting up every morning to ‘write a book’, they could create a system for sitting at their desk and writing for one hour a day.  Without the pressure of how much to write, and without any other tangible thing that has to happen, the author can succeed just by sitting down and writing something.

Overcoming the desire for instant gratification can be tough.  It is much easier to watch Netflix or football or play video games all weekend than to be true to our long term goals.  We all have it hard wired to some extent.  Alter says that pursuing the systems we set provides the positive feedback we need to keep going.  So instead of existing in a failure state until we have achieved our goal, we succeed every time we follow through on our system.

While this idea may not seem like anything earth shattering, building systems shifts our focus from not having what we want, to taking action toward getting it.  This mindset helps us to hone in on which daily habits are going to get us to the goal we have set for ourselves and then build them in to our routine.

So how do we make our habits stick?  How can we make sure that we act on the systems we want to build?  Well, as a good friend pointed out to me, everyone has at least some habits, because a habit is just something we do everyday.  For example, getting out of bed in the morning is probably something we all do.  So we can work toward incorporating our new habits in to our lives by anchoring them to our current habits.  To build on the example of an author, they might start their one hour of writing first thing in the morning after waking up.  In this way, they can build a new habit, using the strength of a current one, even if the current habit is something as simple as getting out of bed.

This process of system building can help in many different areas of life: ever feel so rushed that you don’t eat? Or end up buying coffee or lunch, or dinner while you’re out because you don’t feel like you have the time or energy to handle cooking yourself?  I’m guilty of buying lunch at work sometimes 3 times a week or more, and this really hobbles my ability to save money.  Because saving and investing are big goals of mine, I want  to cook more so I can pack more lunches, and consequently buy fewer lunches while at work.  I already have the tupperware, but I grocery shop on an as-needed basis, rather than at the same time each week.  My new system is to anchor the grocery shopping trips to my commute home on Thursdays.  I do this because commuting back and forth to work is something I do every day and I know from experience that I’m less likely to go back out after I get home.  I also need to cook and pack meals which I can anchor to the end of dinner.  I have managed to go a whole week without buying lunch at work but my next goal is to pack a lunch every day for a month.

I would love to hear about some of your goals or New Year’s resolutions.  Do you have systems in place that helps you save money by avoiding those little daily expenses?

Little Things Matter

Surely you’ve heard the tired old attack against your daily Starbucks coffee, and the now infamous attack on avocado toast.  You may think, do those things really matter?  Doesn’t Warren Buffett eat a McDonald’s breakfast every day?  Yes he does, but he is also already a billionaire (He has also lived in the same house for his entire life).

Many articles have been written about how skipping your daily Starbucks is not going to make you rich, but there was one in particular that came out this year which really struck a nerve with me.  The author is a hugely successful salesman and self made millionaire.  Why wouldn’t I trust his advice?

The answer is that I don’t think like he does, and reading an article he wrote will not transform me over night and bring me the success that he enjoys.  It is the same reason I didn’t drop out of college to start my own computer company.  As a close friend of mine put it: “I just don’t bet those odds.”

While his advice is generally good, I think it is a bit out of touch.  I’m not sure that very many people have the ability to increase their incomes significantly without great effort or a serious commitment to a new career path.  This means that for the vast majority of America, the answer to financial independence lies in being frugal, and investing wisely.

He says things like, don’t invest until you have saved 100K, because you need to prove to yourself that you can do it.  Listen, I save more than a third of what I make, I’ve been maxing out an IRA since I started working, I have no student debt, and I’ve just recently gotten to where I’ll be able to max out my 401K contributions next year.  I have a Master’s degree and a good paying job and not even a goldfish to take care of and my net-worth is not 100K.  Furthermore, if I had just saved cash before even starting to invest, I wouldn’t have learned any of the things I now know about investing.

While according to recent surveys we are generally getting better at saving, just a year and a half ago things were looking bleak.  The bottom line is that it won’t matter how much we earn if we don’t have the strength of habit to keep it.

Daily personal habits have a huge impact on our financial health, just as they do on our physical health.  Surely we wouldn’t think it reasonable for a person who has abused their health with years of bad habits to go to a doctor and expect to be made healthy again overnight.  Skipping your daily latte is not going make you Warren Buffett rich, but it could help you feel less stressed about money.

Lastly, it is easy to say that skipping a $3 coffee will only save you $1,000 a year, and that’s assuming you buy it every day.  But the money that is spent is just the tip of the iceberg, if we ignore the advice of waiting until you have $100,000 to invest we find that the forgone growth of the money spent on coffee adds up to something serious.

It is easy for people who are already successful to overlook what it was that got them to where they are.  I believe people are generally bad at understanding the tremendous impact of marginal action.  Success boils down to daily habits, as the old saying goes, small holes can sink a big ship.

A Personal Experience

Today I want to tell you a story about a personal experience I had a few months ago.  I hope that it illustrates a mindset that I believe is essential to becoming financially independent.

I was out at a shopping center, a place that featured several major department stores within walking distance.  I was looking to add to my wardrobe before starting a new job.  As I browsed the aisles of one store, checking prices on slacks and collared shirts, I wondered if they had a certain cologne I had heard a lot of good things about.  Since this was a fairly nice store they had a cologne counter.  I chatted with the sales associate about different colognes but they didn’t have what I was looking for (turns out my idea of “classic” is everyone else’s idea of “out of style”).  However I did find one that I really liked.  It was $80 for a 4 oz bottle.

Recognizing my own ignorance of the cologne market I thought I might challenge myself to find it for less.  I didn’t like the prices of the clothes I found there and despite the salesperson’s attempt to convince me otherwise, I knew that particular week was not the last time they would ever have a sale.  I walked out without buying anything and went on to the next store.

The next place I checked was one of those so-called “Off price” department stores.  Whether or not they had the cologne was a toss up but they sold other stuff too and I was headed there for shirts and slacks anyway.  Sure enough!  There it was…  The same cologne, this time it was locked in an anti-theft plastic box instead of behind a fancy glass display, but I felt safe taking my chances on it smelling the same.  At $35 for the same 4 oz bottle my 10 minute walk out of one store and in to another could save me 56%. The $45 discount that I found in that 10 minute walk was the equivalent of making $270 after-tax dollars per hour.

Again, instead of buying it, I challenged myself to find it cheaper.  When I finished at the mall that day I went home and found my cologne online.  $25 for an even bigger bottle!  I was getting good at this.  Then something happened.

As I sat thinking about whether saving another $10 was worth waiting a few weeks for shipping… Oh yeah I forgot to factor in shipping costs.  But wait! The website says if I spend $50, the shipping is free.  Do I really need $50 worth of cologne?  Heck I rarely wear what I already have.  By the way how much do I have already?  Plenty is the answer.  Looks like that new cologne will have to wait.

In the timeless words of Ben Franklin, “A penny saved is a penny earned”

Or in my case $25.

The Time Value of Smart Shopping

When I describe to others how I shop, often waiting weeks to find the right price on any particular item, they are often surprised and say something like “I think shopping is a waste of time.” Or “I just don’t have the time to do all that.”

The way I see it, unless you are a high caliber professional who’s actual take-home (after tax; in your pocket) bill rate is somewhere north of $200 per hour, you don’t have time not to.

First, let’s put money and time into perspective:

Remember that when we work, we are spending hours of our lives that we will never get back.  In a very real way, we are spending those hours to buy money.  That money represents our time – the time we spent to earn it.  In this light, potentially wasting money by not shopping around is wasting time.

There is certainly a balance to it, we may not want to spend hours saving a few dollars, that would be penny wise and pound foolish.  But whether or not something is “worth the time” depends on what our time is worth.  It depends on what else we could be doing with our time – this is called our opportunity cost.

I think of it this way: If you make $10 per hour, you can ‘spend’ up to an hour trying to save $10 before reaching your break-even point.  But this is assuming you could have been working instead of shopping around.  If you couldn’t have been earning $10 in that hour that you spent shopping, then your actual opportunity cost is much lower.

Generally speaking the less we make, the more careful we have to be about where our money goes, but even if you have a six figure income, you can be left wondering where it went at the end of the month if you aren’t a mindful shopper.

What does “shopping” mean?

Let’s start with clearing up some expensive beliefs about what it means to shop.  Shopping is not going to a place that sells stuff and buying as much as you can carry home.  Shopping is not strolling through every aisle of the grocery store and picking out whatever fits your fancy.  And we haven’t necessarily ‘shopped around’ just because we took a long time to buy something.

Shopping is a mindful and deliberate comparison of the prices of similar goods from different places.  This is distinct from purchasing.  This process should also involve a genuine examination of whether or not we need to add more things to our lives.

Truly getting a good deal, and maximizing the value of our spending dollars requires knowledge of the alternatives.  It requires a certain market knowledge that can only be gained from the leg work of comparing prices.

It doesn’t take as long as you think:

Ever feel like something or someone you are waiting on is taking OH MY GOSH FOREVER!!!???

Psychologists define a person’s ability to be patient with life’s natural progression using the term “frustration tolerance”.  This is that feeling of calm and patience that goes straight out the window when I get hungry.  The higher frustration tolerance we develop, the less likely we are to feel like things are taking too long to accomplish.

But irrespective of our feelings about it, shopping often takes much less time than we might expect (and we’ll continue getting faster with practice). For example, when I go grocery shopping for the week I spend about 30-45 minutes between 1. taking stock of what I need, 2. comparing prices in the weekly grocery sales, and 3. putting a few lists together.  Then I drive to whichever store has the most things on sale first, and I buy only those things.  If I go early in the morning, or late on a week night I can get in and out in 30 minutes or less.  I almost never feel like I need to visit more than 2 stores in any given week to get good deals on what I eat, and the total time invested usually amounts to less than 3 hours including commuting.

All this is well and good Steve, but at the end of the day, I would rather have leisure time than spend it running around checking prices or haggling for discounts.  My time is so much more valuable than the discounts I get by shopping.

The amount of time and effort we devote to shopping is a personal choice; but I believe it is more a choice of when to spend our time, than how to spend our time.  Taking the time to shop indicates an important future-oriented mindset, because every dollar we save today is one we won’t have to work to earn in the future.

A Different Mindset

Greetings readers!

Go easy on me, this is my first ever blog post.

I’m glad to see that there is such a wealth of information available about personal finance on the web in the form of various blogs and other articles.  This allows us to see many different perspectives with relative ease and then discern what is tried and true.  When I read blogs like this one I look for common themes; what ideas, what advice is mentioned over and over again?  That is the advice that I consider most strongly in my daily decisions.

I wanted to start off by discussing a few fundamental mindset shifts that helped me to see money differently.  There are countless articles and books that discuss the idea that the rich and the poor think differently, and while some of those writings are better than others, I don’t want to go in to too much detail on that topic yet.  However there are some fundamental ways of thinking that I feel are important to outline.

Investing in Yourself

First, investing in yourself means investing in your future.  Each time we procrastinate and each time we take on debt, we are borrowing from our future selves and making things that much harder down the road.  For most young people, myself included, life will not get easier as we age.  I mean that we will continue to have more and bigger responsibilities as life goes on.  The silver lining is that our ability to handle life’s challenges and responsibilities also increases as we grow.  Unfortunately this growth in our ability to handle life is not automatic, it is precipitated by diligent work.

Investing in yourself then is not necessarily spending $50 on a massage because you are stressed, it is spending the time to educate yourself about the responsibilities you will face in life.  Taking just 30 minutes each day to seek knowledge on a particular topic, in our case money, adds up to an incredible wealth of confidence and knowledge as time goes on.  As Aristotle wrote: excellence is not an act, but a habit.  Money is something that impacts almost every other aspect of our lives.  Instead of burdening our future selves by worrying about it later, let’s prepare for whatever is ahead by taking time each day to build our financial knowledge.

Understanding Where Your Money Goes

Second, budgeting and understanding where your money is going is critically important to achieving financial independence.  It is easy to think that if you don’t have money, you can’t budget, but being strapped for cash means it is even more important to know where your money is going.

I dragged my feet for months after I got my first full time job before starting a budget but if I had done it right away I would be better off for having invested more at an earlier age.  The easiest way to get started is to consolidate the sources of the information that you’ll need.  If you spend cash, always ask for a receipt.  If you have multiple credit cards, only use one for at least a month.  If you do not have a bank account, get one, and if/when you do, download the transaction history for the last month.  Once you have your credit card and bank transactions for the month, and your box of receipts handy you are ready to begin.  It could take about an hour or two to categorize that info in a notebook or on a spreadsheet that lays out where your money went.

Wait, TWO HOURS? Are you kidding me?  Can’t I use an app to do that?

No I am not, and yes you can, but most computer programs are just glossed up spreadsheets anyway and I think there is a lot of value in doing it yourself.  It is also important to remember that the time it takes you to complete this task each month will go down as you reduce the number of credit cards you use and decrease your spending, which are good goals to have anyway.  Remember investing in yourself?  Two hours out of the whole month is not much time.

Many of those who are financially stable diligently track their income and expenses on a monthly basis.  This is similar to what Dave Ramsey calls “Give Every Dollar a Name”.  Not only do they know where their money goes each month, but they feel responsible for making sure that their money is put to productive uses.

Future Benefits

Lastly, it is important to think about spending money in terms of the benefit your purchases are going to provide you with in the future.  This means thinking about Return on Investment as it relates to consumption spending just we would as it relates to investing.  Spending $10 on a book that teaches you something and inspires you to confident action is probably more productive than $10 spent at a restaurant.  Can you spend the same $10 in both places?  No, every dollar you ever own in your life can only be spent once.  Our responsibility is to ensure that enough of the money we have the privilege of owning is spent to benefit our future selves.

By focusing on learning, understanding where your money goes, and keeping future benefits in mind, we can begin to change our relationship with money, ultimately shifting money management from a topic that is unfamiliar and intimidating, to one that is a natural and seamless part of our daily habits.