Double Journey

I get paid twice a month, on the 15th and on the last day of the month.  That would make today payday.  As I was sitting at my computer today, I said out loud, “Oh, today is payday.  I almost forgot”.

My coworker looked at me and said, “There is clearly a man that doesn’t live paycheck to paycheck.”  Of course, he is right.

I certainly understand this is a luxury that many might not have.  It’s hard enough in this day and age to save any money let alone enough where you can almost completely forget that it is payday.  However, I tend to think most people have a lot more fat in their budget than they realize.  So I tend to think that if more people tried, they could eventually not end up living paycheck to paycheck.  The key is to break it up.

To not live paycheck to paycheck, you probably have to have six months of living expenses.  This is the standard amount that almost any financial advisor would give you to say that you are financially sound.  It is a hard goal to manage, but it is very doable.  The key part of that is not the money you save, but it is the money you spend.

Six months of living expenses is much easier to manage if you cut down your living expenses.  If you can cut your living expenses from say $1500 a month to $1000 a month, that equates to $3000 less you have to save every month.  Now that’s a big difference.  I have helped others do this by simply making them list out what they spend in a month, and then asking them a simple question, “Would you rather continue to struggle and worry about your finances day in and day out and have that latte, or would you rather sleep better at night?” (both from being financially secure and having less caffeine)  The answer should be obvious.

For me, saving six months of living expenses has never been hard, and it isn’t because I made a lot of money or lived in a cheap area.  It’s becasue I controlled my cost.  At no time in my life have I spent more than 70% of my paycheck on my living expenses.  This means I’m saving 30% at a minimum.  Now that number runs closer to 50% as I make more money, and I keep my standard of living relatively flat.  Think its impossible?  It isn’t.  When I first graduated college, I made less than $50,000 a year.  While that may seem like a lot to some people, try living on that in New York City.  Now try saving money.  Not so easy.  My paycheck came out to roughly $1600.  I got this twice a month.  Keep in mind this is a NET number after taxes as well as whatever I put away in my 401K (which should never be considered as part of your pay. You should just do it and forget it.  Learn to budget without this money) My goal was then, and is now, to only have to spend one of these paychecks on my living expenses.

Out of college, I shared a two bedroom apartment with two other people.  Our apartment was $3400 a month.  My share of it came out to a little more than $1100.   So how the heck do you live on $500 a month in NYC?  Well to be fair, I did cheat a little.   I was a consultant so I travelled a lot which means I also got a small living stipend for each day I was gone.  This would more than cover any meal I had (I ate cheap) as well as any incidentals.  In fact, I got to save most of the money.  But even without this, I could have made it.  I had no car so no insurace or gas cost.  I limited my going out and my cab rides.  I didn’t go to a lot of shows or movies or buy things I didn’t need.

Before I left NYC, I had a nice little cushion.  More than enough to cover my move back to L.A, which I had to pay for myself, as well as all the other setup cost I had to incur like security deposits, setup fees, etc.  Not once did I have to go into debt despite the sudden large expenditures I had to make.  Why, because I told myself I would never have to be one of those people staring at the calendar wondering when the next Paycheck was going to come.

In this case ignorance really is bliss.

I went to the dentist today.  Unlike some people, not a huge fan of the dentist.  Today was a prime example of why I am not.  I’ve had a number of cavities in my life and it appears that its time to redo some of those fillings, so I’m going back next week to go take care of it.

Here is the thing though.  I am just doing whatever it is they tell me I need to do.  It’s not cheap.  It will cost me out of pocket about $350.  Lucky for my, this is coming out of money I still have in my HSA from Microsoft, so in reality, I’m not really paying for it, but that isn’t the point.  I could imagine for a lot of people, spending $350 when nothing is obviously wrong would be a very difficult thing to do.

So what do most people do in this situation?  Would they just spend the money and get everything fixed or would they ask a lot more questions and only do the things they absolutely had to do?  It’s easy for someone like me to just do whatever is advised, but I really wonder what people do when they have to make choices about their health.

I was reading an article in a Money magazine and someone asked a question of when they should tell their significant other that they are wealthy.  The questioner was divorced and had a relationship after her marriage where her new boyfriend “used her” for her money and “made her” buy him expensive things.  The writer wanted to know if she should hide her wealth from someone she was getting serious with.

Now, full disclosure time, I was pretty up front with my girlfriend about my finances.  It couldn’t have been more than a few weeks before I told her what I made.  I’m not sure I told her how much I have in total for a while, but I certainly didn’t hide the fact that I had a lot of money, and I make a good amount.

But that’s not the point of this post.  I actually don’t really care how or if people tell their significant others about their finances.  I tend to think it is a good idea to because finances are so important (the #1 reason get divorced is because of a financial problem or differences)

What bothered me more than anything was the victim mentality.  How do you “let” someone use all your money?  Nobody can make you spend money on them.  They can’t reach into your pocket and force you to buy them nice things.  They may trick you into thinking they like you for some other reason than your money, but only you can actually let them spend your money.  If you think it’s going to be an issue, draw boundaries.  I only buy things for my girlfriend that I’m totally willing to give.  I wouldn’t be angry after the fact no matter what happens, because I choose to give what I want in that moment.

What do you think?  Would you feel bad if you spent lots of money on someone and then found out they were only with you for your money?

It’s been a little bit over three months since I moved back to California. Was it worth it? Well there are a couple of things to consider. Let’s talk about the negatives first.

1. In a little bit under 3 months, I’ve already paid $2000 in state income tax. My equivilent in Washington would be $0.
2. Traffic is bad enough that I’ve started taking the train every once in a while.

And that’s about it. On a personal note, my girlfriend is still in Seattle, so California has been a little bit of a drag without her. But she is moving down soon so that will soon rectify itself. Now let’s talk about the good things

1. Housing wasn’t as bad as I thought. I’m paying $1700 for my two bedroom. For this area, it’s a pretty good deal. Still slightly more than I would spend in Redmond, but not by much.
2. If you like looking at girls in short skirts, there are definitely more of them around. Not only are they better looking but they obviously have the opportunity to wear short skirts because …
3. The weather is SOOO Much better.

Let’s look at that last one shall we. The weather forecast for tomorrow in Redmond is

It’s going to be fairly cold and pretty rainy. Typical March weather. The forecast for Pasadena tomorrow.

Not quite the same thing. It is actually pretty damn hot down here lately. If you go outside and stand in the sun for a while you will actually start to sweat.

So on the one hand you have pretty girls and nice weather on one side and traffic and a few thousand dollars on the other. So is it worth it? Yes! There are some things money can’t buy, and most of the good things you can find right here in California

Don’t try to keep up with the Jonses. After seeing a post on MoneyNing about working on Chirstmas, it got me to thinking about how people always try to compare themselves to other people. While MoneyNing’s post was about working on Christmas Eve, I think the advice is true in ALL aspects of life.

I used to really care what other people thought. Thank god I got over that before I actually started earning my own living. Ever since I was on my own, I cared much more that I was doing well and not so much that people thought I was doing well. Don’t get me wrong. Sometimes I look around at my peers and want the things that they have. Would I like the nice car or the newest gadget? Of course. But I would also like to stop working at a young age, and I won’t be able to do that if I accumulate stuff rather than wealth.

It’s just a cycle you can’t win. So stop trying to buy whatever it is that you think you have to buy just to look like you can. Believe me, the Jones’ probably can’t afford it either, and you are trying to win a fool’s race.  All that will happen is that you will push yourself into debt.  And you won’t even accomplish what you want, because the Jonses really don’t care what you have, they have their own problems.

Be rich, don’t look rich.

I love eating sushi. I didn’t always. I didn’t take my first bite of sushi until I was 24. But somewhere along the way I grew to love it. The problem with Sushi is that it is very expensive. Almost anywhere you go, sushi is going to run you about $5-$8 for two sushi pieces. This makes it prohibitive to eat very much of it very often.

I went to eat sushi for lunch today. I spent $23 for three orders of sushi (Tuna, Yellowtail, and Salmon) and a roll. This is probably pretty standard. However there is a place in Seattle called Sushi Land. I miss it. I traditionally go to the one in Redmond, and it is great. The service isn’t always the best, and they tend to be pretty inefficient when it comes to cleaning tables and seating people, but you can’t beat the overall experience.

For the exact same meal I just got at this other restaurant, I would have spent $6.50. That’s about 70% cheaper! Each of the sushi pieces would have cost me $1.50. The roll would have also cost me $1.50 (I would have had to get two roll orders at Sushi Land to equal the one I got at today’s restaurant). And here is the kicker. The sushi at Sushi Land would have actually been better. It isn’t the best sushi I have ever had, but it is definitely better than average. And for the price you can’t beat it. I can get a meal there cheaper than I can at most fast food restaurants.

Add the fact that because it is a conveyor belt system, and you can just pick your sushi off the belt without having to ask for it, and you have a great situation. You can come in and eat in a matter of about 5 minutes or less. So it’s better, cheaper, and faster than you can get at almost any other dining experience. I’ve introduced a few of my friends to this place and before I left, we use to go all the time. Rick is one of those individuals. If you really want to pay him back for developing Paint.NET, just buy him a couple of plates of the spicy tuna roll. Then again, he probably would be happier if you just donated the money.

If I could use the money for this experiment to buy a franchise, and I was at all interested in running a restaurant, I would. Then again, I might eat away all my profits

Here is a trick to prevent yourself from buying something you don't really need. Whenever I really want something, I always think about just how much money it is actually going to cost me down the line. The alternative to buying something is to not buy something and save the money. You then put the money to work for you and suddenly that small purchase really starts to make a difference.

Take lattes for example. Say you buy a latte at $5 a pop everyday you go to work. Figure that there are about 230 work days in the year and you see that lattes will cost you about $1150 a year. Now say instead of buying those lattes, you save the money and at the end of the year put the money in an index fund. After 30 years, assuming a 10% rate of return, that money turns into $20,000.

This is even more true for big ticket items or things that are reoccurring. That $3000 LCD flat panel? That cost you $52,000. Want to buy a new car instead of just keeping your current one? That could cost you almost $500,000. This is not to say that you should live like a miser and not buy anything. You should of course enjoy your life; you just need to be aware how current consumption will affect your future net worth. The latte example only considers one year. Imagine if you don't do it over 30 years. The numbers get staggering.

Want to try it out yourself? Just enter the cost of some item above, and it will calculate what the real cost of that item is 30 years down the road. If you want to adjust the numbers from the default, you can do that too.

Every once in a while, I’ll talk about something I learned along the way that has helped me build a pretty sizable nest egg at a relatively young age. So to start things off, I will give you my best tip. The secret to building wealth is to start building wealth.

I know what you are saying. What? Well the secret to building wealth is recursive. For all you non computer geeks, this basically means that the definition of something is contained within its own definition. As soon as your head stops spinning let me explain through my own personal story.

I wasn’t always on the path I am today. I started out of college with a good job that paid well. However, living in New York City, I had a lot of expenses. The two bedroom apartment I was renting was $3400 a month. My share of it was basically eating up half my paycheck. Somehow though, I managed to save some money and even put a little away in my 401K, almost $5000. After a year, I left my job and had to pay for my own move back to California, and that ate a big chunk of my savings. However, I still managed to keep enough for an emergency fund.

Over the course of the next few years, I was careful with my money, always remembering that sometimes, unexpected things like leaving your job and moving across the country can pop up and you need to be prepared. I still managed to max out my 401K every year and slowly but surely it was growing to quite a bit of money. As I became more successful in my career, I continued to see promotions and pay raises, but each time I kept my lifestyle pretty much the same. In fact, I began living more frugally. I’ll explain why.

The effect of getting more income and spending less money was VERY POSITIVE on my bank account. The higher I saw it go up, the more I wanted to see it go higher. The more money I got, the more interest I could earn from my savings account. As I started investing my money, I realized that the more money I had, the faster the whole pile would grow. This became almost addictive. I would find ways to save more and more money so I could funnel it toward these accounts. The power of compound interest is really displayed when you have a big bank account, and it just starts to snowball on itself. It almost becomes a game as you try to find more ways to save money or earn income to see the wealth grow.

So this is the best tip I can give. Just start trying to build wealth by any means you can. As you do it, you will find you really like it, and you will find other ways to increase your wealth. You will start getting into a feedback loop and you will soon realize that building wealth just becomes a habit. I now earn well over 2.5 times what I used to when I lived in NYC but I probably spend less money. All because I have become addicted to building wealth.

So Ningpo makes a good point, I never really discuss what I think “good” is vs. “great” So what is my definition of “good”?

First off, when doing this comparison, I’m going to talk strictly from a financial sense. There is not good or great without great friends, family, and if you are lucky enough, someone to share your life with. So that being said, this is what I consider to be a “good” life. A good life is a life where you are very comfortable, have all the things you need, and with a little bit of work, will continue this way indefinitely. This implies

• Having no debt outside of your primary residence (bonus if you have none of this).
• Having a job you like.
• Having a job or income source that allows you to live an upper-middle class life and afford a few luxuries.
• Having enough savings such that you could choose not to work for one or more years and still be OK.
• Having a savings plan that,if continued, will allow you to comfortably retire at your current consumption level by the age of 60.

So what makes something great?  Having all the above, but not having to work at it anymore but taken to a whole new level.  You can quit your 9-5 job, and just enjoy doing whatever it is that you want to do, even if that is to work.  You can afford pretty much whatever reasonable luxury that you want i.e. you could afford the BMW but maybe not the Ferrari.  You are probably “good” if you are in the top 15% of the population in terms of income and wealth, you are probably great if you fall into the top 1%.

So what is your definition, from a financial perspective, of good vs great?

A quick financial lesson. While this post may not seem relevant to me telling my back story, almost everything I talk about will be based on this concept, so pay attention. If you want to be rich, one of the most important things you will ever learn is the power of compound interest. This concept is best learned through example.

Let’s say you decide to invest in a Roth IRA, my favorite investment vehicle. You decide to start one today and invest the maximum $4,000 every year. You invest it wisely in an index fund that follows the total stock market which has historically returned 10% a year. In 40 years, your $4,000 a year, ($160,000 in principal payments) turns into $1,947,407.24, All of it tax free.

Now imagine if you were a good little saver and have saved the last 4 years. With a modest gain over the last few years you have $17,000 in your account. With the same investment strategy above you now have at the end of 40 years 2,716,814.59, All of it tax free. That is almost $800,000 difference for saving a little bit earlier. That $17,000 turned into $800,000!

Still not convinced? How about this? You do the above strategy from the ages of 25-35 and then stop. So for 10 years you invest $4,000 and then nothing after that. By the age of 65 you will have an account worth $1,223,633,58. Your $40K turned into $1.2 Million.

Or instead, you do nothing from the age of 25-35 and instead save from the age of 35-65 with the same strategy. Your final balance will be $723,773,70. Your $120K turned into $720K. Not bad until you consider that that’s a half-million dollar difference from the previous example of $1.2 Million! And you put in 1/3 the amount in principal and saved 3x as long!

The lesson? Save early, save often. I can’t stress this enough to my young friends. I know it is hard to save money now, but in the long run, it makes a BIG difference. This concept applies outside of finance as well. Doing the right things today, can pay big rewards tomorrow. You should always have an eye on the future and understand that small differences today, can have big repercussions in the future. This applies to you choosing what school to go to, what job to take, whether or not you should buy that new TV, pretty much everything you can think of. The younger you are, the more important this concept is. Understanding this at a very young age, helped me to get where I am today as I will explain shortly.