A young, successful reader turns her financial life around and is now building her investment portfolio.
Hi Joshua,
First off, I thoroughly enjoy reading your blog — I’m sure you hear this statement quite a bit. I stumbled upon your writing originally from About.com probably around a month or so ago. I have been silently reading every post I can find since. I’m not one to normally email an author for multiple reasons but in this case, I was hesitant to message you because I’m sure you get inundated with messages from your one million and growing visitors.
Anyway, I truly find you to be an inspiration and, in some ways, you remind me of myself. My friends and family laugh at me when it comes to finances because I make enough to live comfortably (probably not what you would consider comfortable) but I do support myself and have fully since I was 17.
3 years ago I didn’t even have $300 (2009) in my bank account. I had made very, very poor decisions financially and landed myself in debt as so many young (and old) American’s do these days. Truth be told, it wasn’t as much debt as others probably find themselves in but it was debt and for someone so young, I grappled with how to pull myself out of it. I work in the IT field so I began selling my services, thus creating a brand of myself essentially, under the guise of a company who was willing to pay me in a performance based salary. (The more money I made for them, the more money I made for myself.)
In April 2010, for a myriad of reasons, I found myself needing to take out a loan from one of my close friends for $12,000 in order to pay off the remainder of my car at the time. I insisted on paying the loan off, with 10% interest, within one year. I also had about $8k worth of credit card debt. My personal goal to myself was that I would enter 2011 without any debt to my name and I would then work to rebuild my credit. In November of 2010, with a final check of $4000 for my $12,000 car loan, I was officially out of debt. That’s a total of $20,000 worth of debt paid off in one year. I wasn’t able to save much that year at all but I went into the follow year without any financial obligations preventing me from saving.
I promise I am trying to make a long story short here, so I went into 2011 and I had to buy a new car after a car accident which resulted in the loss of my newly fully owned previous car. I finally had savings to make a down payment high enough to get a fairly reasonable interest rate and make sure I was ahead enough for the amount due vs. amount owed on my new car.
Next, from 2011 to today in 2012 I have managed to save $41k to my name. Not including the asset value of my car, I have about $11k in assets / investments (though I just started and am slowly learning the ropes) and am hoping to gear up my future to be the opposite of the environment I was raised in. (My father passed away several years ago and barely got by on Social Security and my Mother doesn’t know how to save if you told her how.)
Today, I own my own small business and have another job full time. I force myself to live on a teacher’s salary as well and my favorite saying is, “That’s a tax deduction!”
I work very hard but am now able to work from home and leverage my time and finances in ways that I hope will pay off in the future. Some of my recent investment decisions have been made off the advice and guidance you offer in your posts. For that, I owe you a huge thank you.
I will wrap this up, but if there is any chance you have any time in your hectic schedule to offer any financial advice to a young 24 year old, it would be very, very appreciated. If not, I completely understand and again, I thank you for your time and your writing.
Your fan,
Jessica
Congratulations on the $41,000 you’ve saved, including the $11,000 of which is in your investment portfolio. Never forget that the largest oak tree in the forest started from a single acorn and money is no different.
Personally, I give “advice” because I don’t think you should ever do something because someone else mentioned it. Instead, I will share a few things that I would tell someone in my own family if they were in your position; things that you should consider and think about to decide if they work in your situation based on personal factors. Take them for what you will. If they help you reach your life goals faster or more efficiently, I’m happy to have helped. Only you can decide which ones, if any, are appropriate for your situation and personal circumstances.
A lot of the big lessons were covered in a response I wrote to a young college student several years ago. For you, who are a bit older and should already know those lessons, I would add a few things focused specifically on finance.
1. Never Go Into Credit Card Debt
I don’t care if you have to go hungry a few nights out of the week, credit card debt is poison. You cannot get ahead paying interest rates that are several times higher than the rate of inflation. It is compounding, working in reverse. Rather than making you richer, it is quicksand that pulls you down into financial oblivion. The very first month you cannot pay your balance in full, you have a credit card debt problem.
2. Measure Your Success By the Amount of Net Cash That Flows Into Your Accounts Each Month
[mainbodyad]I prefer to use what I call the British method of measuring your wealth. What matter is the net surplus cash, after taxes, adjusted for risk and effort, that is sitting in the bank every month after you’ve paid all of your bills. That surplus cash is what allows you to buy more cash generators, give to charity, upgrade your lifestyle, or put money into saving reserves. I don’t care if you make $100,000 per month, if you spend $99,000 of it, you are living dangerously. Make sure that every year, your monthly surplus cash generation is rising at a rate much higher than inflation. You need to grow the pie in a way that doesn’t risk wipeout or sacrificing the things that matter to you, such as family.
3. You Can Arrange Your Money Around Your Life or Your Life Around Your Money
That basic adage of the private banking industry is true. You have to know what you are willing to sacrifice, and what you aren’t. If you really like a certain town better, but the tax rates are higher, you might be willing to live with that. Make informed decisions based on what gives you the most utility in your life. I’ve said it before but it is worth repeating: Your goal is not to end up with the highest net worth possible. Your goal is to build the highest net worth you can, consistent with the life you want to live. There is no “right” answer – it’s different for everyone.
4. Be Honest With Yourself, and Explicit In Your Goals
Too many people get away with having vague, non-defined objectives. How do you know if you are failing or succeeding? That’s not an intelligent way to go about it. Identify, very specifically, how much cash it would take for you live the way you desire on a monthly basis. If you need, say, $15,000 per month, then you know what you have to do. You can measure your progress to that finish line. You can pull your financial records to see “I’m only making $4,300 per month in surplus cash but last year, it was $2,100 per month so I’m going in the right direction”, and be happy about the fact that you are making real progress! Don’t be ambiguous.
5. Remember that Saving and Getting Richer Isn’t the End Goal For Its Own Sake … Money Is Your Employee
Your capital reserves – that is, your savings – represent an asset that has a job to do. It should be treated very much like an employee. If you eventually built savings of $1,000,000 and had no debt, I would not be satisfied if that money wasn’t generating at least $80,000 per year in look-through earnings, of which $30,000 to $40,000 was paid out as cash. If we were talking about real estate assets, I would expect to see even higher returns. Every dollar you save has the ability to go out, like a little soldier, and capture another 4¢ to 12¢ for you in most asset classes, at current interest and inflation rates. You do not exist to serve or save money; money exists to serve you and produce more money.
Repeat it to yourself as many times as it takes to inscribe it onto your metaphorical heart: Your job, your paycheck, your investment portfolio, and your career exist as tools to give you the life that makes you want to jump out of bed in the morning. Arrange your life in a way that they are serving you. Too many people lose sight and reverse the equation. You have to use the primary mission of your life as the measuring stick against which all things are compared. Money is only one variable, albeit a vital one, in the equation.
6. Keep Your Finances To Yourself
No one should know your assets, liabilities, net worth, cash flow, or income. It can create too many uncomfortable situations. Let your life speak for itself. Heaven knows if I weren’t writing online, I would never mention finance publicly to anyone except close friends and family. People would probably wonder what I did all day. That’s the way I would want it. It sounds unfair – and it is – but if someone knows you have $41,000 sitting in the bank you aren’t doing anything with at the present time, they can convince themselves that you should loan some to them. People will more often approach you for startup investments. Charities and churches will solicit you, sometimes subtly. Just avoid it. Don’t let anyone know you’re doing well. Go stealth.
7. Always Account for the Value of Your Time
If you launch a business and, after five years, you and your spouse are putting in 80 hours a week, making $100,000, that is not exactly a success. To earn that $100,000, you are selling 8,320 of hours of your life every year (yes, you are selling it to yourself, or rather your business, but you are still selling it in exchange for cash). That means your sales per unit, in this case per hour, is $12.02 before taxes. Unless you love your work akin to finding a religious calling, which I think is ideal but by no means a requirement, I don’t think this is a good way to go through your prime years.
You cannot just look at absolute profits or profit margins. An honest accounting of returns must include the time given up in exchange for that cash.
8. Monitor Your Credit Score
I am not a fan of the entire credit score model in the United States because I think it is setup in a way that is almost a form of extortion (e.g., universal default laws). That said, while this is the game, it pays to play it. I have a service through one of my financial institutions that monitors my credit constantly. The moment any change is made in my credit file, I am immediately sent an email, a text message notification, and a warning message when I next login. Every month, a copy of my credit file is pulled and I can review the data to verify everything. When and if you ever need to access the debt markets, such as taking out a mortgage to purchase a real estate investment, a sterling credit rating can save you tens of thousands of dollars a year in interest expense, which, when compounded, can result in millions of dollars in future wealth if those savings are invested. The small things matter.
9. Set Minimum Liquidity Reserve Levels
There is an accounting truism I want you to consider: People don’t get wiped out because they are losing money. They ultimately get wiped out because they don’t have the liquidity on hand to cover a bill that has come due. Cash is king, as the saying goes. It may be trite, but it is right. You need to look at your household expense levels and establish minimum liquidity levels below which you will not fall. That way, if you lose your job, if your home is wiped out in a natural disaster, or if something unfortunate befalls you, you won’t have to be thinking about money at a time when your attention should be elsewhere and it is necessary to run deficits, draining past accumulation.
[mainbodyad]The specifics for your situation should be spelled out in your investment policy manual.
Whenever you are required to dip into those liquidity reserves, alarm bells should be ringing. Make changes immediately so that you don’t reach the bottom of the reserves before adjusting your life. If it means canceling tennis lessons, do it. If it means moving to a smaller home, do it. If it means selling a car, do it. The biggest mistake people make is waiting too long to make radical adjustments to their expense base or, in many cases, declare bankruptcy. They end up harming themselves much more than they would have if they’d recognized reality much sooner.
10. Plant As Many Seeds As You Can Now for Harvest Later
Early in life, you are likely to find yourself short on financial capital but long on time capital. A single $100 bill invested at 26 and parked for 50 years will grow into $11,739 at average rates of return. Put off planting that seed just 10 years, and the future value drops to $4,526. Put it off twenty years and it drops to $1,745.
You want to stuff your portfolio full of assets that will provide the kinds of returns our case studies of Hershey, General Mills, Coca-Cola, Nestle, Clorox, Colgate-Palmolive, and Procter & Gamble did. What will those assets be in the next 40 to 50+ years? Who knows, but history has shown the key is stability of earnings and high returns on non-leveraged capital. It only takes a few exceptional long-time winners to make a career, and a fortune, so plant seeds intelligently, taking the long view. Building wealth isn’t hard, with the exceptions of catastrophic health conditions. Believe that you are worth it, and secure your own future. No one else is going to do it for you.
