Finding Balance In Your Finances

“The best and safest thing is to keep a balance in your life, acknowledge the great powers around us and in us. If you can do that, and live that way, you are really a wise man.” - Euripides (Greek playwright, c. 480-406 BC)

Balance is something that I struggle with daily. As a man of passion it is easy to get swept from one extreme to another, and finances are no exception. I came across a great post on Get Rich Slowly the other day that offers some great insight into the topic of balance in your personal finances called "Financial Balance Lets You Enjoy Today AND Tomorrow." Below are some of the main points of the post but do yourself a favor and read the entire post as I am sure you will find some of yourself within it.

Finding balance
In order to find balance, you’ve got to do some soul-searching. I think of it as a three-step process:

Find what makes you happy. Look inside yourself and ask, “What is it that brings meaning, pleasure, and joy to my life?” Be honest. How can you create a life that features more of the good stuff and less of the mundane?

Focus on your goals. Set personal goals based on the things that make you happy. If you like music, maybe one of your goals could be to learn to play the guitar. If you want to change careers, maybe one goal would be to go back to school. Make meaningful goals a priority, and let the other stuff be secondary.

Seek balance. Strive for moderation in all things. Pursue your goals, but don’t forget frugality. Be frugal, but don’t forget your goals. Work hard to build your financial fortress — but let yourself have a little fun, too.

The balanced money formula
One tool that I’ve embraced for the past year is the balanced money formula introduced by Elizabeth Warren and Amelia Tyagi in their excellent book, All Your Worth: The Ultimate Lifetime Money Plan.

Here’s what it looks like:

As you can see, when your financial life is in balance, you’re allocating enough for savings and needs, but you’re also setting some aside for the things you want. This idea is simple, but it was a revelation to me. No more spending too much on wants, but no more pinching pennies, either.

I really like this outlook. On the one hand the majority of people can relate to the struggle my fellow Oregonian went through with compulsive spending. But on the other hand I am sure many can also relate to becoming obsessive regarding saving and investing to the detriment of your daily happiness. I know that sometimes I go the opposite way and get stressed out if I am not saving enough or investing “enough.” Sometimes the percentages can be deceiving. “I am only saving 10%, I am not saving enough, I will never get to X,Y, or Z,” your brain might be saying. That is why I really enjoyed the visual representation of what it takes him to be balanced. It helps to focus and provide structure to your spending habits without becoming obsessed and disrupting that mental balance that is necessary for your happiness.

When I start to get stressed about how much I am saving and investing I think back to one of the main lessons from the ever-insightful classic The Richest Man In Babylon by George S Clason. The book states that saving a mere 10% over a lifetime is a surefire way to reach your financial goals. If you haven’t read that book, read it now. It’s about 100 pages set to a backdrop of what I would describe as Aladdin meets personal finance. Pretty interesting, very simple, and timeless.

If you are getting stressed that you are only saving X percent, keep in mind that you are probably doing better than most in the sense that you are actually keeping more than you spend. As I have stated before on BadskiBlog, if you are keeping more than you spend then it is only a matter of time until you reach your financial goals. If you don’t like how long that timeline is you can either spend less or make/keep more. It is an iterative process that is definitely more challenging mentally than tactically. Maybe I am a product of my generation and our culture in that patience is not one of my strongest virtues, however I have to remind myself that my wife and I are saving more than a quarter of our income and we are still living the life we want to live as far as experiences go. Which brings us to the most important lesson from the Get Rich Slowly post.

The quest to achieve financial balance is about more than money. It’s also about meaning. Money is important, yes, but it’s not the only thing. Money is a means, not an end.

Money is a means, not an end. I love that. Remember your goal is happiness and living the life you envision yourself wanting to live. That can start today….as in NOW. You can work on your personal finances by slowly course correcting over time, but you need to enjoy life now. That is why the concept of balance is so important and like most things it must be worked on over time.

The Story Of Mint - How Mint Went From Garage To $170 Million

Going from garage to being sold for $170 million dollars in only a few short years is in itself an amazing story. However this post isn't meant to dazzle you with tales of huge company buyouts. This post is about providing insight into the formation and progression of a start up. The video features Mint CEO Aaron Patzer who is a self proclaimed recovering nerd. The video is kind of geared towards a tech audience but there are many lessons that transcend the type of business you are creating that I am sure will be valuable to BadskiBlog readers. At first I really enjoyed the video because it had great insight into start up challenges and the different stages of the formation of a company. Patzer focuses on cash flow and funding which are the lifeblood of a business and he offers up lessons learned and real life Mint examples. The part that got me going about this presentation was the personal side of the entrepreneur. Patzer opens up and gives a glimpse into his own personal journey through Mint's creation.

"It has been something that has been transformative for me" - CEO Aaron Patzer

Patzer goes on to say that it (the creation of a company) does for you beyond money is very gratifying. Something that really resonated with me was when he said to create something from nothing is the essence of human progress. I think people like myself who are drawn intuitively to business and entrepreneurship are really drawn to create. If I was even remotely handy I could see myself never entering a classroom again and doing some form of construction and loving it. However, I think my own personal journey will have me create more with my mind than my hands. To me that is where the video was really valuable. It was just an awesome look into the journey of the person and the struggle through the self doubts etc.

I am a user of Mint and I recommend it to everyone when we get on the topic of personal finance. I highly recommend you use it as well. As far as free goes on the internet this site may be the best there is. I have been using it for a few years now and I have seen the features grow and expand and I think it is a must have in your internet favorites for anyone who is looking for transparency in where your money actually goes, how your investments are actually doing, and what your net worth actually is. Enjoy the video and start using the site.

Mint CEO Aaron Patzer on Startups from Techcrunch on Vimeo.

Personal MBA Update

Personal MBA Update: The Bogleheads Guide To Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf - I present you with yet another update along my Personal MBA journey. If you haven't read about the Personal MBA you can check it out here. I finished The Bogleheads Guide To Investing the other day and I must say it was pretty good. A lot of investing books are either get rich quick shock value investing scams or they are so boring and mind numbing that you fall asleep throughout the whole book without learning much of anything. This book provided a wealth of knowledge surrounding what I call "mindless investing" while still remaining viable from an entertainment standpoint. It is mindless in the sense in that they don't teach you be a day trader using intricate default credit option swaps or something. They preach low cost diversified mutual fund/bond fund investing based around a long term buy and hold strategy.

For those who don't know Mr. Bogle is the founder of Vanguard, the company that largely ushered in the new era of investor class through low cost passively managed index funds and online services. It's not often that investment books advise the majority of people to invest in index funds and total market index funds, especially when the company can profit from other investor behaviors like constant buying and selling and investing in actively managed funds with high expense ratios. It definitely says something about what Mr. Bogle and Vanguard stands for. The book preaches financial literacy and prudent do it yourself investing that is well advised for the majority of people out there.

I would definitely recommend the book to anyone who is interested in investing. I have read a lot of investing books and I still took away a lot from this book while touching up on the basics, and I think the novice investor would get a look at the broad topic that is investing as well. Here are the notes that I took while reading this book:

- Our financial markets are essentially closed systems in which an advantage garnered by a given investor comes at the disadvantage of other investors in the same market. As a group we investors are inevitably average, so beating the market is a zero sum game. After deducting investment costs its a losers game.
-Understanding that contrarian wisdom is the first step toward investment success
- "Choose a sound financial lifestyle. Start early and invest regularly. Know what you're buying. Preserve your buying power. Keep costs and taxes low. Diversify your portfolio."
- "In reality there is perhaps no one of our natural passions so hard to subdue as pride. Disguise it, struggle with it, beat it down, stifle it, mortify it as much as one pleases, it is still alive, and will every now and then peep out and show itself: you will see it perhaps often in my history; for even if I could conceive that I had completely overcome it; I should probably be proud of my humility." - John Bogle
- "Do not value money any more nor any less than its worth; it is a good servant but a bad master." Alexander Dumas
- "Drive in banks were established so most of the cars today could see their real owners." - E. Joseph Grossman
- Take 100 young Americans starting at age 25. By 65 one will be rich and four will be financially independent. The remaining 95 will reach the traditional retirement age unable to self sustain the lifestyle to which they have become accustomed.
- What is your financial lifestyle? The borrowers, the consumers, and the keepers
- 1. Graduate from the paycheck mentality to the net worth mentality 2. Pay off credit card and high interest debt 3. Establish an emergency fund
- Its not how much you make its how much you keep
- "Adding time to investing is like adding fertilizer to a garden: it makes everything grow." - Meg Green
- Late Actor George Raft explained how he blew about $10M this way: "Part of the money went to gambling, part for horses, and part for women. The rest I spent foolishly." All good wealth builders have one thing in common: they spend less than they earn.
- Nothing decreases your future net worth more than a new car every few years
- "When a man with experience meets a man with money, the man with the money gets the experience, and the man with experience gets the money"
- "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett
- Treasury issues are exempt from state and local taxes
1. Find a bond fund that matches your investment time horizon 2. Don't time interest rate hikes 3. Match your risk tolerance
- Bond vs Bond fund page 37
- "Ive found that when the markets going down and you buy funds wisely, at some point in the future you will be happy. You wont get there by reading, 'Now is the time to buy'." - Peter Lynch
- 10 advantages to investing in mutual funds: 1. Diversification 2. Professional Management 3. Low Minimums 4. No loads or commissions 5. Liquidity 6. Automatic reinvestment 7. Convenience 8. Customer service 9. Communications and record keeping 10. Variety
- ETFs basically mutual funds that trade like stocks on an exchange and are priced continuously throughout the day. Not good for buy and holders due to the brokerage costs
- "Control your destiny or someone else will." - Jack Welch
- Inflation stats on page 49 and table on page 51
- TIPS have real rate and rate adjusted for inflation 1.2+3=4.2 or 1.2+4=5.2% adjusted twice annually IRS taxes both rates
- Lower the tax bracket the higher the return - place in a tax deferred account
- I bonds are already tax deferred and TIPS aren't
- "You don't really need to begin saving for retirement before you reach 60. At that point simply save 250% of your income each year and you'll be able to retire comfortably at 70." - Jonathan Pond
- Factors for retirement:
1. The amount we save 2. Our current age 3. The age at which we plan to retire 4. How many years we will expect to live 5. Whether we plan to leave an estate 6. The expected rate of return 7. The rate of inflation 8. Whether we expect an inheritance 9. Other sources of income in retirement
- "There is a crucially important difference about playing the game of investing compared to virtually any other activity. Most of us have no chance of being as good as the average in any pursuit where others practice and hone their skills for many many hours. But we can be as good as the average investor in the stock market with no practice at all." - Jeremy Siegel Professor of Finance at U of Penn Wharton School
- Index funds beat 80% of all actively managed funds for one simple reason: rock bottom costs
- Page 81-86 quotes
- "The most fundamental decision of investing is the allocation of your assets: How much should you own in stocks? How much should you own in bonds? How much should you own in cash reserve?" - Jack Bogle
- Efficient market theory and modern portfolio theory
- Asset Allocation has greater impact on financial performance than anything Studies on page 92-93
- 1. What are your goals? 2. What is your time frame? 3. What is your risk tolerance? 4. What is your personal finance situation?
- "Never buy anything whose price you cant follow in the newspapers - and you shouldn't buy anything that is too complex to explain to the average 12 year old." - Jane Bryant Quinn
- "Bulls make money, bears make money, but hogs get slaughtered"
- Quotes on pages 105-107
- "The shortest route to top quartile performance is to be in the bottom quartile of expenses." - Jack Bogle
- 1926-2004 stocks returned 10.4% - 3.3% avg cost and its 7.1% nearly a third lost to expenses
- Page 117-118 quotes
- "The profound impact of taxes on fund returns is a subject too long ignored." - Jack Bogle
- Keep turnover low, use tax efficient funds in taxable accounts, avoid short term gains, buy shares after the distribution date, sell before the date, harvest losses
- "Of all the expenses investors pay taxes have the potential for taking the biggest bite out of total returns." - The Vanguard Group
- Invest in 401K to match amount, Roth to max, 401k to max, additional funds to tax efficient funds
- "Diversification is a protection against ignorance" - Warren Buffett
- Correlation for any two investments range from +1 to -1
- Over the past decade Morningstars five star equity funds have earned an average 5.7% against a 10.3$ return for the Wilshire 5000.
- Since the 1960's the average return of the top 20 mutual funds in each decade was less than the market index return in the next decade
- If you think timing the stock market is difficult timing the bond market is impossible. Of 14 bond timing systems tracked for the last five years only one beat a simple buy and hold strategy
- Wall st and financial media have a symbiotic relationship - The media wants readers viewers listeners and most of all Wall St's advertising dollars. Wall St also wants readers viewers listeners and most of all your dollars. Unfortunately these dollars come straight out of your investment returns.
- Pg 166-7 quotes
- "Economists report that a college education adds many thousands of dollars to a mans lifetime income -which he then spends sending his son to college." - Bill Vaughan
- Windfalls of money: Deposit the money in a safe account for at least 6 months, set a realistic estimate of what it can buy, make a wish list, get professional help
- "I helped put two children through Harvard-my brokers children." - Michael LeBoeuf
- "When someone buys or sells an investment the broker makes money and the brokerage house makes money, and two out of three ain't bad."
- Fee only advisers are the best they use a percentage of AUM assets under management
- "Foolproof systems don't take into account the ingenuity of fools." - Gene Brown
- Rebalancing is the act of bringing our portfolio back to our target asset allocation after market forces or life events have changed the percentage of our various asset classes
- use expansion bands to determine the need to rebalance +-5% example
- Rebalance in tax deferred accounts first because there is no tax consequence
- In 1980 only 6% owned mutual funds and today over half do. This increase has created an increase in the amount of noise out there
- There are only two ways to outperform the market: 1. Choosing superior investments 2. superior market timing
- Research shows the ability to do either consistently is so rare that it may as well be chalked up to chance
- Create simple diversified asset allocation plan, invest a part of each paycheck in no load index funds, rebalance when necessary and stay the course
- Investment pornography refers to excess advice and information but it is actually somewhat flattering. Real pornographers deliver what they promise!
- "I'd compare stock pickers to astrologers but I don't want to badmouth astrologers." - Eugene Fama
- There has never been a 15 year period when stocks lost money. That is all you need to know.
- 1. All forecasting is noise 2. Listen to the helpers ignore the hustlers 3. Be a skeptic and do your homework
- Investment experts fall in 3 categories:
1. Those who don't know what the market will do and know they don't know
2. Those who don't know what the market will do but they believe they do
3. Those who don't know what the market will do and get paid to pretend they know
- "Rich people plan for three generations. Poor people plan for Saturday night." - Gloria Steinem

Is Drinking An Investment?

Today a friend stopped by for a drink and to BS for a bit. After he left I got to thinking about two topics that rarely intersect; alcohol and personal finance. There are a million finance pundits and gurus out there who preach the uberfrugal approach to personal finance and want you to live on tuna and wonder bread. To these finance "experts," anything that does not directly improve your net worth is a financial sin and therefore must avoided at all costs. Something like buying a case of beer everything month is viewed as an unnecessary expense and nothing more. I am stepping on my virtual soapbox today not to advocate drinking, but to challenge that lifeless view on personal finance and propose a slightly refracted viewpoint on the subject.

I am not a scientist, but I imagine that the devastating effects of alcohol abuse can affect all human beings regardless of race, religion, gender, etc. It is the same non discriminating factor that makes alcohol so dangerous that also serves as the source of my argument that even drinking can be an investment. All kinds of people drink. Having a drink serves as common ground and a social expression across the globe.

Our lives revolve around social connections. We are social creatures that thrive on interaction with other human beings. Having a drink serves as a common action or reason to meet up. How many times have you said to even your best of friends, "we should get together to talk tonight." A little awkward especially for males. Getting together to have a drink is the lowest common denominator excuse for getting together for no reason other than to converse. Through communication we build relationships that not only open the doors for opportunities in the future, but make our lives enjoyable and worth living in the first place.

Is it that far of a stretch to say that having a beer is not only the farthest thing from a waste of money, but an investment into the quality of your life and the expansion of your social network? I can here the anti alcohol police coming at me from a mile away, but alcohol is not the point. The point is that the traditional approach to how you spend your hard earned dollar is typically a linear thought process that realistically just isn't that simple. You can substitute the alcohol with dinner, running, racquetball, or anything else that is an expense financially yet an investment socially. Being a guy that loves business and finance yet hates numbers and math I find that the status quo advice is often way too calculated. Let's blur the lines, lets get a little fuzzy, lets talk about the art instead of the science. If everything was linear or a calculation then it would just be "the way." The fact is as humans our lives are based on emotions, on our worldview, on biases, on the information at hand, on relationships. Invest in things that make you a better person to be around and things that facilitate your interaction with other people. Not only will it make your life more enjoyable, the intangible benefits are bountiful as well.

Investing: A Dialogue Amongst Friends

Below I have included a cleaned up email exchange between some friends and I. It all starts with an article that argues against the buy and hold strategy and continues on to touch on a variety of topics. Some of the advice is tailored more towards those in the Air Force because these friends happen to be in the Air Force, however there are some great points for everyone. I have separated each email with a line. Hope you enjoy.

http://finance.yahoo.com/special-edition/active-investor/buy_hold_rip;_ylt=A9G_b88TCfZJavgAihhsLKJ4
Bades, Reeser - I'd like to read your blogs concerning this article...don't let me down!
Franky
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I might have to tackle that one in the BadskiBlog. A few quick thoughts: The guy makes some good points. I have read other books that reference the study in which the 10 best and worst days are removed. The point is noted but I don't really think it enforces his point that buy and hold doesn't work. I think it contradicts it. As long as you were in the game over the life of the study those outliers would not extremely affect you and would only serve to give you an overall gain of 8% or whatever it was. I also think that articles like this one are meant to get readership and stand out in a fairly boring topic. At the root of all the investing madness there lies an asset that you purchase that someone else is willing to buy. The value which they place on that asset is what fluctuates. One can argue in this article that just because something has occurred in the past is no guarantee that it will continue to occur in the future. Great. Point taken. But I think it is even crazier to assume that things have changed so much that people are not willing to buy assets in pursuit of a better return than the "hide your money under the bed" strategy. Regardless of all of these arguments, what other option do you have? Do you pull out completely? Do you become a day trader? Do you resort to a life of crime? I still believe in the buy and hold strategy because psychologically it forces me to put away and save money. Even though I have a net loss over the last 3-4 years I am better off than I would be spending my money and clothes, cars, food, and beer and anyone who says differently is likely profiting from that advice or lying to himself/herself.
Badski
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Agreed. Buy and hold forever is still the way to go. If you are going to jump in and out of the market, do so with no more than 5% of your total portfolio.

Depending upon your tolerance for risk (mine is high), a good mix for young people like us with good jobs and a steady stream of income is 80% stocks, 10% bonds, 10% cash or cash equivalents. If you don't want to have $1M when you retire, go with 50% stocks, 30% bonds, 10% REITs, and 10% cash.

If you can, keep a good amount of cash in a savings account. You don't want to have to sell stocks or bonds to pay for something like a car repair, down payment, etc. Call the banks and negotiate your APY--you'd be surprised how easy it is. Shoot for 2-2.5%...rates are terrible right now.

How much cash should you keep? 10% of your overall combined gross income. My gross income is ~$47K X 2 for the wifey = $94K. I keep around $10K in a savings account. Don't keep a lot of cash in a checking account because you're probably getting about .20% interest.

If you haven't already set-up a Roth IRA with USAA call them today and begin the process--takes ~20 min. You can deposit up to $5,000.00 per year in your account. You will pay taxes up front, but it will grow tax free until you begin withdrawals at age 59.5.

In order of precedence:

1. Roth IRA
2. TSP (operates like a traditional IRA with higher limits)
3. Traditional IRA

Revisit this order if the military ever matches contributions in the TSP (it does for civilians)

What to buy in your Roth IRA:

1. USAA S&P 500 Index Fund, symbol: USSPX
2. USAA or Vanguard municipal or corporate bond funds

What not to buy:

1. Any mutual fund
2. Common stocks

Index funds have very low expense ratios. ~.15-.30%. Mutual funds run anywhere from 1.5-3.0%. Basically you are paying some jackass who knows no more than you do to lose your money.

Use the features at USAA and set-up a monthly deduction so you never even see the money. It will dollar cost average every month.

If you have a lot of cash and don't know what to do with it, try CDs (2.5-4.0% depending on the term) or municipal bonds (tax free both State and Federal).

Final thoughts (my opinion): The American dream is no longer about owning a home. Buy a home only if you've done (1) a ton of market research, (2) plan to live there a minimum of 5 years, 7-10 years is better, and (3) your credit score allows you to negotiate a great fixed rate mortgage--NEVER get an ARM. Don't look at renting as throwing your money away...it's simply a sunk cost of living the dream as an American warrior.

Feel free to contact me if you have questions about what you should be doing.

Love Always,

BK
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Greese,
Agree with everything you said with the exception of real estate but I think we both would agree that we are giving advice based on our own goals and dreams which may not be everyone else's. That is why I lean towards real estate and you don't, yet we agree on 99% of everything else. Good advice dude. Hope all is well boys.
Badski
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Hey boys, I haven't been in the last couple days, but have enjoyed reading the emails so far. Not gonna lie, still haven't gone through the resumes yet, but did read some of Greeser's and Ski's financial advice. I definitely think that even though everyone has different goals one thing should remain very clear...Only 2 out of every 100 or 2% of American's over the age of 65 are able to retire WITHOUT any assistance from Government or other support from children/families etc. The question is...What are you going to do about it? I'm not banking on the Government to help me out when the time comes. If you read the fine print in your Air Force "contract" nowhere does it say that even if you retire that they have to continue paying your "retirement benefits." Therefore, X amount of years from now, even that retirement salary you may suck up 20 years for can go away. Just food for thought when considering your future financial situation.

Devo
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Do either of you know much about Dave Ramsey? If so, what do you think? I bought his book and it's pretty good. He basically says to pay off all your debt right away and you'll have tons of money to invest after that. In theory, you can probably make more money without paying off your debt so quick, but in practice, it never really works that way... http://www.daveramsey.com/etc/cms/baby_steps_2867.htmlc?ictid=Useful_Tools
http://www.daveramsey.com/
Medy
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My parents follow Dave Ramsey's advice and listen to his show. I know a little about what he preaches and what he is all about. In my mind I think he targets people who are struggling a little bit more than you and I but he has some good advice. The one thing I really like about Dave Ramsey is his snowball debt approach. He believes that you should tackle your smallest debt...like a $400 loan on a TV for instance and pay that off first regardless of the interest rate. Once that is paid and you free up lets say $40 a month that was going towards your TV you pay that towards your next lowest debt which lets say is a student loan of $5000. Once you pay that you take the $40 a month from the TV and the $100 a month from the student loan and roll that over towards your credit card debt of $10000 dollars. Many gurus attack the fact that you aren't paying off your highest interest rate first and therefore it is costing you more to pay off your debt that way. But I like how he acknowledges the psychological side of saving and investing which is so often overlooked. These people need success not optimization. The freed up cash rolled into the next debt will be more powerful for them than optimizing paying the least amount in interest. I think the premise behind Dave Ramsey is undeniable. If you have no debt and save you will be well off. However for someone like myself who has developed good financial habits and is committed to investing and learning, avoiding all debt isn't really the best strategy for me in some areas, specifically real estate investing. I also think it is unreasonable for most people to make major life purchases like a car, house, etc without taking on some debt. Concentrating on paying off that debt and perhaps ignoring investing while you are younger is going to have you miss out on some critical wealth building years and the power of compounding interest. Like I said I think his premises are sound from the limited amount I know, especially for people who aren't as disciplined with their money, just don't forget that investing while you are young is extremely important as well.
Badski
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Agreed Badski. Some people need to tangible success in order to tackle their debt. However, from an investment perspective you should first pay off your debt with higher interest rates.
BK
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The more I learn about investing the more I learn to give the political answer of "it depends". Everything depends on who it is. There are some true time tested principles but if you cannot carry them out for whatever reason then whats the point. An example is that right now I have a huge surplus of cash in a money market fund. By all investment guidance and my age group I have way too much money in there. However, for my current situation and goals it is the right amount for me. I need some liquid cash for my next property, the market crash made me realize I did not have enough cash on hand for emergencies, and I to this date have never sold any of my investments. So I knew that I needed some more cash on hand for different life goals and preferences that others may not have. Little did I know that I have actually had a better return on that then my investments but that is besides the point. Now that I have built up that cash fund I am taking advantage of a market that as a whole is on sale! If you take responsibility for everything you do and keep investing and saving you are doing the right thing even if most people will tell you you can do better.
Badski

Personal MBA Update

I just finished reading "I Will Teach You To Be Rich" by Ramit Sethi this weekend and it was a pretty impressive book. Ramit Sethi maintains the blog iwillteachyoutoberich.com; one of the blogs that I enjoy and follow. The book is targeted towards 20 to 30 somethings early in their financial journey, however I would say that it is a solid read for anyone that doesn't know where to start on their financial journey.

For me this book didn't offer any mind blowing technical knowledge. Any college graduate majoring in business possesses the basic knowledge imparted by this book. But I think that is what Ramit intended! Personal finance isn't book smart hard, it is discipline and will power hard. Where Ramit's book sets itself apart is the well thought out general theorem and the overall practicality of the advice. Anyone who doesn't know anything about personal finance could pick up this book and, with some self discipline, be on their way to reaching their financial goals.

I must say that part of the reason I liked the book is that I agree with about 99% of what Ramit preaches. Ramit just does a hell of a lot better job at tying in all his beliefs and concepts into one book. The only area that I disagree with the book about is regarding real estate. And it is not so much disagreement, since the more I read his passage on real estate the more I think I know the message he is trying to portray. He is trying to say that your house is not an investment and buying a home may not be the best choice for everyone. I would say that your house is not an investment while you are living in it, however when you are buying it you should treat it as such. I am a big proponent of the value of real estate and am excited to get my next property, and I think that although the book's advice is solid and warranted it may scare off some younger people who should be looking to buy a home or purchase an investment property. The section is pretty short so maybe I am just overreacting.

The book does an awesome job of formulating a system that works, both numerically and more importantly psychologically. This is where young people will really relate. He is not saying to cut out all the fun in your life. He recommends a system to save a certain amount, and reaffirms that it is OK, nay almost encourages, you to blow the rest on things that you enjoy. Whether that is food, vacations, or shoes is irrelevant. I couldn't agree more and I currently practice a very similar system. You can read more on my mentality on my money tips post here.

Overall, the book kicks ass. The read is easy, there are some funny off color remarks, and the theory parallels my own which I think (although biased) is pretty solid. I will likely recommend it to my buddies and acquaintances that are looking for a place to start. It is also a great book to have on the shelf to make sure you are sticking with those good habits. Check the book out. Here are my notes from the book.

- Why money and food are similar: We don't track calorie intake. We don't track spending. Eat more than we know. Spend more than we realize-or admit. Debate minutiae about calories, diets, and workouts. Debate minutiae about interest rates and hot stocks. Value anecdotal advice over research. Listen to friends, our parents, and TV talking heads instead of reading a few good personal finance books.
- You don't have to be an expert to get rich. You do have to know how to cut through all the info and actually start.
- Info glut; too much info leads to decision paralysis
- ....As the number of mutual funds in a 401(k) plan offered to employees goes up, the likelihood that they will choose a fund-any fund-goes down. For every 10 funds added to the array of options, the rate of participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money market funds. I made a note that I do the same thing at NJ diners. There are 200 number choices and I can't even begin looking because I am too overwhelmed.
- The single most important thing a person can do to be rich is to start early. See Time Value of Money Chart on page 5
- "Why does just about everything written about personal finance make me want to paint myself with honey and jump into a nest of fire ants? Personal finance advice has been geared toward old white men and taught by old white men for far too long. I don't understand why newspaper columnists continue to write about tax-optimization strategies and spending less on lattes, hoping that young people will listen. We don't care about that. We care about knowing where our money's going and redirecting it to go where we want it to go. We want our money to grown automatically, in accounts that don't nickel and dime us with fees. An we don't want to have to become financial experts to become rich.
- A lot of financial problems are caused by one person - you!
- For all those that blame gov't, CEOs, evil banks, etc. have any of them ever read even 1 personal finance book?
- More important to start than to spend exhaustive amounts of time researching the best fund in the universe
- Instead of "how much money do I need to make?" say "what do I want to do w/my life and how can I use money to do it?"
- Why do you want to be rich? What does being rich mean to you?
- Our biggest purchases are made on credit. Good credit is the first step in building a good financial infrastructure.
- One key difference between rich people and everyone else is that rich people plan before they need to plan.
- Table on page 17 showing how credit affects what you pay.
- While other people spend many hours cutting coupons, growing food in their gardens to save on grocery bills, or being frugal with lattes, they're failing to see the bigger picture. It's fine to be frugal, but you should focus on spending time on the things that matter, the big wins.
- If you pay your entire bill on time, its actually a free short term loan (credit cards) easy to track spending free warranty extensions and rental car insurance
- Avoid card offers in the mail. www.optoutprescreen.com
- Avoid cash back offers because they don't pay, travel is better
- Friends brag about saving $10 on clothes while you silently save thousands by improving your credit score
- Pay on time, its the most important thing you can do. 35% of your score depends on it.
- Automate payments. You can get email and you can adjust the amount to pay in full.
- Eliminate fees - negotiate a lower APR - keep cards a long time and keep them active.
- Get more credit if you have no debt for a better credit utilization rate - 30% of score
- Use your rewards
- Avoid closing your accounts. You have less available credit and the same amount of debt.
- Pay down student loans www.dinkytown.net
- Consumerismcommentary.com
- Albert Einstein "Compounding is mankind's greatest invention because it allows for the reliable systematic accumulation of wealth."
- Ask your friends how much they have invested
- Millionaires invest 20% of household income each year. Wealth is measured by how much they have saved and invested over time.
- The Ladder of Personal Finance: 1. Contribute just enough to get 401(k) match. 2. Pay off cards and any other debt 3. Open Roth IRA and max it out 4. Go back to 401(k) and go above the match level up to the limit 5. Invest a non retirement account, pay extra on mortgage, invest in yourself
- Its not budgeting, its a conscious spending plan - Spend and invest enough and spend the rest guilt free
- Fixed costs 50%-60% Investments 10% Savings 5%-10% Guilt free spending 25%-30%
- websites on pg 109
- Lifehacker.com
- Americans love experts but being an expert is supposed to be all about results
- In 2001 Frederic Brochet ran a wine study. 57 experts evaluated on red and one white wine. After tasting the two they described red as intense, deep and spicy which are common to red wine. They described the white as lively fresh and floral which are also common. Not one expert picked up the fact that they were the same wine. The red was just some of the white wine with food coloring.
- You can beat the so called experts on your own but it takes guts because you have no one else to blame but yourself
- In an S&P study from 1983-2003 the market had an annualized return of 10.01%. During that period if you missed the best 20 days your return would be 5.03%. If you missed the best 40 days your returns would equal 1.6%. The only solution is to invest regularly putting as much as possible into low cost diversified funds.
- Yale's David Swenson said "Ive got 20 professionals here in New Haven devoting their careers to identifying high quality active management opportunities. An individual who devotes a couple of hours a week in the evening, at most, trying to compete with institutions that have armies of people out there? It just doesn't make sense."
- Survivorship bias does not include funds that fail. Only survivors.
- The perfect stock picking record. Email 10,000 people half about stock A and half stock B. If A goes up eliminate stock B group and email stock A group about C and D. Do the same again. And again. You now have 1250 people who see that you can pick two stock successfully. Each cycle is awed by the ability of the advisor. Don't trust the experts.
- Blogs on page 152
- Ask an actively managed fund or broker only one question, "What were your after tax after fee returns for the last 15 to 20 years?" They will not give you a straight answer because they will be admitting that they didn't beat the market.
- Warren Buffett "Be fearful when others are greedy, and greedy when others are fearful."
- 90% of your portfolios volatility is a result of asset allocation
- William Bernstein "Since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control."
- Your investment plan is more important than your actual investments
- "I believe that 98 or 99% - maybe more than 99% - of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs." Warren Buffett
- "When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long term index investor," Mark Hulbert
- "The media focuses on the temporarily winning active funds that score the more spectacular bulls eyes, not index funds that score every year and accumulate less flashy, but ultimately, winning scores." W. Scott Simon
- Links on page 197
- Ventureloop.com is craigslist for startups

How Much Do You Need To Retire?

In all the personal finance articles and books I read, the question "how much do you need to retire" always comes up. The answer is never simple and I tend to err on slightly outrageous overestimation side, but I came across an article the other day on MyMoneyBlog that has some very simple and good advice. I have been busy the last few days and haven't had a chance to run the numbers as accurately as I would like, but hopefully by immortalizing the concept within the vortex that is BadskiBlog I will be more apt to run the numbers correctly.

Here is the full post on a quick down and dirty plan to reach financial freedom. This plan is obviously overly simplified as it only contains two parts: accumulate 30 times annual expenses and pay off your mortgage. But the concepts are good and it's somewhere to start, especially for those with little financial knowledge.

I really like the numerical illustration of the damage done by lifestyle inflation. I think the psychology of investing and accumulating wealth is so often overlooked but it is some of the best advice a person can heed. No matter how much technical expertise you gain about investing and money, it is all for naught if you just increase you standard of living at a pace greater than or equal to your increased income? See my why athletes go broke post here if you don't believe me!

I would add to this article a few key tips that acknowledge the importance of psychology within investing. First and foremost keep more than you spend. Even it it's only 1%, just get started. Learn to live comfortably at that level and start ratcheting up your saving/investing percentage either through increased income or decreased spending/costs or some combination of both. I would also argue that you need to continue investing in your personal finance education. As your wealth increases your knowledge and ability to manage that wealth should be increasing as well. Maintain a lifelong commitment to learning.

All in all this is a great quick start article for those who feel lost about how much they need for retirement.

Article and Blog Addition

I have been giving a new blog a test drive and it has definitely passed my trial run. The blog I am referring to is entitled Get Rich Slowly. Not only is the author from the coolest state ever....Oregon, his posts are extremely well thought out and in line with my financial beliefs.

Check out this post for a sampling of the kind of insight this blog can provide. I know I keep referencing back to my definition of rich in the majority of my posts, but its like that old game slug bug where you punch your buddy in the arm every time you see a VW bug. Now that I have defined my definition I keep coming across pieces of work that reaffirm what I have come to believe. I might have to read the book he is referencing in this post as it probably has some great information to strengthen my beliefs towards wealth.

I like to make concepts into little memorable sayings, almost like a famous quote except I am far from famous. I guess it is my way of replicating that matter of fact truism effect that quotes have. My quote for the concept of living your life and enjoying not only the end state but the journey is, "always content; never satisfied." I try to tell myself to live that way. I try to always be happy but always want more for my life. Kind of new age-y as the Get Rich Slowly post would say but good words to live by. Enjoy the post and the new addition to the blogs that I follow.

Money (and Fitness) Tips - There's No Such Thing As A Free Lunch....So Bring Yours!

Ramit Sethi has an interesting post about how getting rich is not about trying harder. I tend to agree. Although it is difficult for me admit, since I attribute many things I have accomplished in my life to hard work, I think I have to agree that personal finance hasn't really been hard work for me. First off I enjoy learning about the topic so that helps. I think that getting my finances in order has had more to do with educating myself and developing good habits. We are creatures of habit and finance is no exception. If you develop good habits they become "the way it is" and less of a struggle to make to the right decision.

One habit that has worked well for me over the years is one that is multifaceted in its benefits. Bring your lunch to work! It sounds so simple that I shouldn't even be writing about it, however I can't tell you how many people I know or see that go out to eat every single day for lunch. 

Let's assume that you are 'frugal' in your lunch purchases and you spend a mere $5 per day on lunch. Most people would agree that going out to lunch and getting a meal for $5 is a pretty good deal. I would argue that it is a good deal, relative to the times you are actually going out to eat. However, when compared to bringing your own lunch $5 is pretty steep. Bringing your own lunch is a fraction of that cost per day. 

Let's run some numbers. Five days a week at $5 a pop comes out to $25 a week, or $100 per month. That's roughly $1,300 a year! If you invested that $1,300 at age 22 and earned a measly 6% return, you would have roughly $13,371.43 when you retired at age 62. And that is just one year of not going out to lunch every day. Imagine if you invested that much every year. Imagine if you got a larger return that 6%. Imagine if you were honest and admitted that you spend more than $5 per day on lunch!

The numbers don't lie and bringing a lunch is such an easy habit to form. That is why, as stupid as the recommendation sounds, I think it really is powerful to see the monetary benefits of simple daily habits. The same people who go out to eat everyday are the same people who haven't started investing yet because they have to do X excuse first. They are the same people who are missing out on a company matching 401K plan. They are the same people driving our nation's savings rate further and further into the negative. To be honest, they are probably the same people who are complaining that they can't lose weight.

Do you see a little bit of yourself in the description above? Good. You should. Going out to eat is enjoyable. I personally love to eat. And typically when I go out I eat and order twice the amount I would had I just brought my lunch. I am well aware of the social benefits of going out to eat lunch with co-workers and clients. The key is to make bringing your lunch the norm and going out to eat the exception. Is someone having a going away luncheon? Great go splurge on that day. Are you friends going out for their daily pizza and sandwich run? Not so great. Bring your lunch along, and recommend that you eat outside or back at the office.

I treat my work week as my monetary/dietary regimen so that I can treat my weekends like a vacation. This post is not about self denial, it's about setting yourself up for success while still enjoying your life. I hate the frugal approach to getting rich. I can't relate to the bloggers and columnists that say to cut up all your credit cards and live on sardines. What's the point of being wealthy if you cannot enjoy your life on the journey there? I go out to eat all the time on the weekends with friends. I probably eat and spend too much on the weekends. However I know myself well enough to know that I have formed good habits during the week. Know thyself, be realistic, set good habits, and enjoy your progress.

Don't beat yourself up for not working hard enough just form a simple habit and start building your wealth, who knows you might lose some extra weight in the process!

Another Blog Update

I have added Yielding Wealth to the blogs that I follow. I have a grace period where I typically follow blogs for a few weeks to see if I will actually continue to follow them. This one passed the test and I am adding it for your viewing pleasure as well. Enjoy.

Money Tips - Asset Allocation Continued

Last Money Tips post we spoke about Asset Allocation. It was more of a crash course on what asset allocation is, and it gave very general ideas on what to consider when creating your strategy. This post I am including my current asset allocation strategy for my Roth IRA, some other concepts to be aware of, and some examples of what I do to ensure that I am carrying out my strategy. Above you see a pie chart detailing my ideal asset allocation for my Roth IRA. I currently have all my investment holdings in funds from USAA and Vanguard. Both are renowned for their low expense ratios, customer service, and ease of use and I can attest that their reputations are well earned. As I touched on a bit in my other asset allocation post, I have a few different asset classes represented in my portfolio. I have mutual funds made up of stocks, bonds, real estate, and precious metals and minerals. Typically, these different asset classes are not heavily correlated, but in times like these it seems that way! Within those classes I have large, mid, and small cap holdings, foreign and domestic holdings, and every sector from financials to technology. What am I trying to illustrate here? Diversification and lack of correlation as to limit variation and lock in gains.

Here is my basic justification for what I am trying to do. I have 5% in my income fund which is a bond fund. I did this because bonds typically aren't correlated heavily with stocks and they are less volatile with regard to their returns. With lower risk comes lower returns and the bond fund is no exception, although many are predicting that the near future could be a great time for bonds. Since I am young and far away from cashing out my retirement fund I have a small percentage of bonds in my portfolio opting instead to take stocks that, although are more variable in their returns, provide a higher historical rate of return. 70% of my holdings are funds that are made up primarily of stocks. As we become more intertwined in the global marketplace I think more and more growth opportunities are going to be available overseas. For this reason, I probably have more of my portfolio than most people invested in foreign securities. I figure with a long term time horizon this is a safe play as well. I am also probably exposed more than most people to small caps and technology assets. This also goes back to time horizon and my ability to tolerate risk and accept short term losses. The largest fund in my portfolio is the S&P 500 fund. This fund is represented by the largest 500 publicly traded companies, and it serves as a very good indicator of how the economy as a whole is performing. If you think investing is too hard or you don't know where to begin, invest in an index fund like the S&P 500 or a total market index fund and you will likely be ahead of many people who try to outperform the market through buying and selling. I make this a large portion of my portfolio because it represents the market as a whole and traditionally it is a good diversified fund of large cap stocks. The rest of my portfolio is made up of a REIT fund and a valuable metals and minerals fund. I chose a REIT a while back because it is not normally heavily correlated with stocks (except in our current crisis when real estate caused the crisis), REITS are required by law to pay 90% of their income back to shareholders, and REITs are a low cost option to diversify into the world of real estate. REITs are also great to put into a Roth IRA (taxed on the way in, not on the way out) because the income returned and reinvested by the shareholders into the fund dodges what would be taxable income. The metals and minerals fund serves as a diversification fund that is not heavily correlated with my other holdings, and also serves as an inflationary hedge.

My portfolio is far from perfect and I would love to hear some comments on your recommendations. However it is a strategy that I created on my own that I follow and enjoy working with. And as I have said before, my returns are currently beating all the major indexes in the current economy so I am doing better than I would have by putting it all in the S&P and probably better than I would have turning my money over to an actively managed account with a broker. Some concerns that I have about my portfolio are that my funds have overlap. Some of my Emerging Markets holdings may be represented in my International fund or one of the other funds. I am sure the same holds true in most of my funds. This skews my actual percentages and naturally diminishes some of the diversification I am attempting to achieve. I also replicate some of my Roth funds in my non retirement holdings which alters my overall exposure to a certain asset class, segment, fund, or holding. I could probably track down funds with higher historical performance as well. However, all things considered with the time I put in I am fairly content with the strategy I have.
The chart above shows where my actual holdings are. They are off my ideal asset allocation based on a few factors. First reason is the gains and losses (mostly losses) over time. It also stems from adding new funds, and not investing up to the ideal amount based on IRA limits or lack of money. And finally it can become unbalanced due to a change in strategy. So what do we do about it? We can re-balance! Re-balancing is key to buying more when prices are low and less when prices are high alongside with another concept know as dollar cost averaging. Re-balancing is just what it sounds like. You are adjusting the amounts you have in each fund to return them to their ideal percentages. You can do this by shifting money from fund to fund, or by adding more to the lacking funds. Obviously you don't want to remove money from your retirement investments. As you can see, my REIT and Metals funds are the ones that are drastically lower than their ideal percentage. I like to look for the ones that are lower instead of ones that are over their ideal percentage because it forces me to add more money instead of just shifting money around. It makes the math a little more difficult but I just play with it in excel based on how much money I have to invest until I get close. Some people recommend re-balancing every quarter. I must admit that I typically do it around the end of the year or tax time as I am either putting last minute funds in to max out my contribution for the year, or I am putting money that I got back from my taxes into my next year's contribution (not a good habit as I should figure out my W-4 withholding and make that money work for me all year). The re-balancing shows you which funds have performed well since your last re-balance and which funds have not. When you buy more of the ones that have not to bring them to their ideal percentage you are buying when the fund is cheap. By buying less or none of the funds that are over their ideal percentage you are avoiding funds that are priced higher.

The other way to effectively buy low is through dollar cost averaging. Dollar cost averaging refers to investing the same amount each selected time period no matter how the market is performing. So if you invest $50 per month in each fund you will be buying fewer shares the higher priced they are and you will be buying more shares of the lesser priced funds. This is an excellent way to avoid timing the market while mindlessly, intelligently investing. I must say that I have not been dollar cost averaging as of late as I have been striving to reach another financial goal which requires more liquid assets. In this market I am actually making more on my money market anyway, but as a contrarian I want to take advantage of the sale the bear market has created. I have almost reached my cash equivalents goal and plan to start my dollar cost averaging habit again for my other investments.
The chart above shows what I described above. As you can see I added money to my REIT and Metals fund in order to get my percentages closer to the ideal state. I am expecting some money back from Uncle Sugar in taxes (again a bad habit I plan on breaking) and I will likely max out my Roth contribution for the year which is set at $5,000. I am sure if you Google asset allocation you can find a wealth of information out there, some good some bad and some that probably doesn't fully match all that I have told you. My advice as always is find what works for you. Is my method the most efficient and highest earning strategy in the world? Highly unlikely. But I am maxing out my Roth and learning a bit along the way and that is what truly matters. Like I said before please leave comments on my portfolio or request feedback on your own portfolio and start investing!