Friday, November 30, 2012

Financial Lessons from the School of Hard Knocks

What I was told: "Live cheap, accumulate wealth."

I did not take that saying from my father to heart. I did not make a plan to do so. What did that mean, accumulate wealth? What does it mean to live cheap?

Here are some of the plans that I plan to teach my children.

When you get a job, that is not the time to start living the high life. Take 10% of every check and put it into savings. 10% of 10 paychecks = 1 full paycheck. Having three months of savings is essential. Having six months is a luxury. That means it will take 2.5 years to accumulate 3 months of savings and 5 years to save up 6 months.

What can you do with savings?
Avoid financing purchases. When you put savings away, you accumulate interest that compounds. Compounding is when your interest makes interest. It is small at first, but that is how the wealthy stay wealthy. When you finance, let's say, a car, you are paying interest. Instead, keep driving your shitty car and sock away the $250-500+ per month that you would be paying for that car. In one year, you will have a lot more money to put down on that car. And you can wait for the car company to have a special interest rate, possibly 0%.

Live cheap.
I did not know how to work backwards through my fiances. I think I took home around $500 per week at one point in my career. So that's around $2100 per month. My living space should have been less than $550 per month, or 25%. I should have been saving $210 per month. That's 35%. Food, realistically, around $100 per week, or around 20%, so that's 55%. Then you have clothing, utilities, gas and car insurance.

I should not have been in the apartment where I was, as the 4th roommate in the smallest room, paying $650 per month. I ate lunch out regularly, though cheaply. And I went to bars. Now that gets expensive. And so on and so forth.

Instead, eat out rarely, if ever. I did manage to figure that out at some point. Cereal and milk, peanut butter and jelly, pasta, chicken, and veggies are all very reasonable to keep on hand. Find a cheap but good hole-in-the-wall restaurants for date nights (BYOB!) I have found that, while girls like to be wined-and-dined, they also like to go to a place that is unique. And if you're dating a girl that is interested in big money, move on. It'll be cheaper in the end. Conversely, if she's into you, she won't care that you don't have a lot of money but will respect that you are smart with your money. That makes an attractive long-term partner.

Accumulate wealth. This is what I really didn't understand. There is a difference between being rich and being wealthy. I mentioned before that the wealthy stay wealthy because of compounding interest. But you're not going to make a lot of money when money markets are yielding less than 1% as they are right now. Bonds and dividend stocks may yield 5-10%. Real estate! Buy a 3-flat and start collecting rent. If you buy smart, the rent covers the mortgage and insurance right away. Over time, rent goes up but the mortgage stays the same, which pays back your down payment. And real estate has, historically, risen steadily over time, the last ten years being an exception. So after ten years, you've got a piece of property that has, theoretically, increased in value and the rent being collected is probably 10% higher (or more) than when you started.

What am I doing now that practices what I preach? Wife has been maxing out her 401k contributions since she began working, so that helps. We purchased a house that was slightly above our budget but in a stable neighborhood. After five years, we are just starting to break even over our fiscal budget and our property only lost 10% of its value (much better than some people whose property lost 50% or more.) I shop for value, so not everything that we buy is inexpensive, but it is made to last. There are cheaper places than others for various foods, so I shop at several grocers. Both of our cars are paid off. Know what I did with the money saved from paying off our car? Put it against our mortgage. We shop for clothing during sale times at places like the Gap family of stores and have their Visa card so that we accumulate rewards dollars that we use during the next sale (you can count on minimum 25% off sales regularly and often as much as 40% off.) And don't neglect Salvation Army and other thrift stores! Bunny's favorite nightgown is a Cinderella dress that cost $1. Even on sale, most pajama sets cost $15 or more.

How I continue to be stupid: we eat out more than we should, or at least more expensively than we should. I should not play golf and hockey during the summer, but pick one.

What we did not expect: JD does speech and occupational therapy three times per week total. While our insurance is very good, it doesn't cover everything.

How I have improved over time: I created a budget on an Excel spreadsheet and it has evolved over time. I now have enough data over a few years to be able to forecast future spending.

How I plan to improve: I am going to create a new portion of my budget that reflects our wish list. Things like a new car for Wife, landscaping, a special vacation, and home improvements are some of the things that we can quantify and figure out what we can and cannot afford as well as prioritize.

The last word on savings: it allows you to live for today. Now that we've got some money in the bank, we can say, "Fuck it," once in a while. I am thinking about taking the family to a water park over New Year's. We should take that $1,000 and put it against our mortgage. But what if one of us dies in a car wreck? Or gets cancer? Having a few extra bucks will not make you happy, but is does create a certain level of freedom and confidence.

Thursday, November 29, 2012


Me: we're not taking the stroller.
Bunny: we're taking our feet?

Thursday, November 15, 2012

Good when...

I know I'm a good at-home Dad when the preschool Moms text me about what time they need to be somewhere.