Double Journey

Yesterday we had a very nice, albeit typical, California day. It was in the mid to high 70’s for most of the day and even got to the point I turned on the AC just to cool the apartment down a bit. There was one person who was even more happy than me to be back in California. That would be my cat pictured above. One of the big drawbacks in living in a place like Seattle was that we just did not get much sun. To make matters worse, my apartment in Seattle did not really get any direct sunlight.

When you have a kitty that loves to sun bathe, that can be a problem. Now that we are back in Southern California and I have a southern facing apartment, kitty just loves to spend his day sprawled out and laying in the sun. Lucky for him he doesn’t realize how much more expensive it is to live here. Despite a higher salary than what I was earning in Washington, I’m really not saving more money. In fact, I’m probably saving less. We will see how it all equalizes as soon as my move in cost are gone and my girlfriend eventually makes it down, but for now, definitely not saving as much money as I was before.

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.

So right now, the big question mark in my life is where am I going to live. I’ve spent most of my free time the last few weeks looking at apartment listings or going to go see places. One of the things I’m struggling with is figuring out exactly what I want. For me, I have a few requirements for the place I want to live and it is making it hard for me to find a place. These are

1. They must take cats - I’ve joked with friends that I would give my cat up to find a place, but in reality there is no way I would do this. This eliminates a lot of places that just won’t take pets.
2. Must have a dishwasher - I don’t do dishes. My girlfriend doesn’t either.
3. Must have a washer/dryer IN UNIT - I won’t rent a place that I have to share a laundry facility. I’m lazy with my laundry, and don’t want to be checking on it all the time
4. I have to be able to get two parking spots - and I would rather they both be included in the price of the apartment.
5. Roomy - Got to have enough room for the TV I’m going to buy.
6. Clean and relatively new- I’m probably past the point where I can really compromise on this. When I walk into a place, I want to feel like it is bright and clean and that the appliances are in good condition.
7. Budget - This is the most flexible component for me but perhaps the hardest for me to adjust. I’m just not use to spending money on rent. I keep debating like MoneyNing did not too long ago, how much should I improve my standard of living?
8. In Pasadena - This is the closest place to my new job where I’m willing to live. I’ve lived there before

The first four are not negotiable. The fifth one is somewhat subjective as is the sixth one. My budget is pretty flexible. Before moving down, I thought I would be right in the $1800 mark but having looked at quite a few places, I think the number is closer to $2000. A question for me is if I want to go up to $2300. If I go up that high, I can probably easily get what I want. I can afford it, it is just a matter of if I want to. The last one I may adjust. I greatly prefer to live in Pasadena, but right now I’m not finding what I want in the area I want.

So what do you think I should do? Do you think I should just spend the extra money and get exactly what I want, or should I scale back my expectations a little bit and compromise somewhere else?

I’m actually not one for New Year’s resolution. I’m much more the type to just start something whenever the mood hits me rather than wait for a specific point in the year to take on a new challenge. However, since I have this blog up, I’ve decided that it would be good to lay out some financial resolutions for myself and see how it stacks up at the end of the year. So my financial goals for 2008:

1. Double my $20,000 - Obvious but worth mentioning.
2. Develop another source of Income - Right now I have two. I have my job and I have my investments. I really would like to have at least three if not four. It would be great if I could get this blog to make money. But if not that, I really want to at least come up with an idea on how to get my income to go up. I could probably save myself to being rich, but it will be a much easier journey to get there with another income.
3. Watch my basket more carefully - Warren Buffet advises that you put your eggs in one basket and then watch the basket very carefully. That is something I got away from in my investments this year with all the other things going on in my life. I need to be more choosy in picking stocks for my long-term portfolio, and watching that basket like crazy. I made a big mistake with ETrade, and should have gotten out much earlier. I paid the price for it.
4. Spend more money - OK. I know, this is usually the exact opposite of what most people try to do. Problem is, I’m not most people. I suffer from the exact opposite problem that most people do. I save way too much. I probably save about 60% of my net take home pay in one form or another.

That’s it for now. They are actually pretty big goals. #4 may seem easy to some, but it has proven very difficult for me in the past. I even started a “spending” plan about two years ago, and it didn’t work. I couldn’t make it stick. Odd huh?

What are you New years resolutions?

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.

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.

One of the things I thought I would touch on before I actually start my mad dash for the double would be to continue on the topic of how I was able to get into the position I am in now. I started this conversation in an earlier post, but when I thought about it, realized there was much more to it than just save, save, save. Over the next several days, I will dive a little bit into my personal life and let you all in on how I’ve been able to get where I am today, creating a site where I just might blow $20,000.

I didn’t do all of this by accident. If there is one thing my life has been, it’s been deliberate. I’ve been relatively successful in my life, and I think it’s very important that you understand just who you are getting in the car with before we all take this journey. More importantly, I think I can share some advice and insight on the one thing I have been really good at doing thus far, managing my career and saving for retirement.

My ability to start this little project of mine is a direct result of my ability to manage my career and finances. These are two things I think are vitally important to people of all ages but especially so to people like me who are in the earlier parts of their career. I might go off in some strange directions that don’t make sense at first, but believe me, it will all come together in the end.

Admittedly, I have a distinct advantage over most people when it comes to this particular challenge. Most people, probably don’t have $20,000 just sitting around waiting to be doubled. So how did I come up with this money?

I did it the old-fashion way. Actually, inheriting the money is the old-fashion way. I did it the second-to-oldest-fashion way. I saved. I saved every cent I could and didn’t buy things that I didn’t need. My obsession with saving almost borders on the ridiculous. There were times I literally had to develop a SPENDING PLAN, so that I would loosen up the purse strings and actually spend some of my money. I earn a very good living, and I live very modestly. This has allowed me to save a tremendous amount of money over the past few years. Enough so that I could probably take five years off of work, and still be in OK shape. I wouldn’t do that, because I actually like working, but it is feasible.

As Rick points out in his post about this site, I love to talk about money. I especially like to help my friends realize how important it is to save money, and not get into a cycle of constantly buying what you want whenever you want it. Through hard work and discipline you can get to a point where you can either quit your job or start a crazy idea like trying to double your money. If you are lucky, you can do both I have gotten to the point where I have zero debt of any sort. I don’t have any credit card debt, student loans, or car payments. Since I don’t own a home, I don’t have a mortgage. It is times like this, when I don’t have any income, that it really pays off.

I can’t talk about saving money without posting my all-time favorite SNL skit on the subject, Don’t Buy Stuff You Can Not Afford. I laugh every time I see it. The sad thing is, there are lots of people just like this couple.

Steve Martin says it best when he ask, “I think I got it. I buy something I want, and then hope I can pay for it, right?” You would be surprised how many times I have had a conversation with someone just like this.