working man

in my previous post i mentioned that i am a hard worker and i make a decent wage. i suppose that's always been true, depending on the characterization of "decent". i've certainly always tried to live below my means, and save as much as i could, which sometimes has made the lower salary that i drew when i started out in IT about 15 years ago seem like more than what i bring in these days. i'm not intending the following to be a "how-to", nor do i mean for it to come across either boastful or deprecating, it just was the way that my career (and some connected parts of my life) turned out, and what is leading me on my journey to early retirement.

i started out my career in 1997, after graduating from the university of houston, working for a large defense contractor in the aerospace industry in clear lake, texas. i was pretty frugal while working there, and lived like a poor college student. in fact, i didn't have a tv or much furniture, probably for the first year there. one summer, i actually split rent with a roommate, on an apartment that we were renting for less than $350 a month. back then, with my low cost of living, i was actually able to save enough my first year to buy a new car (it was a 1997 saturn sc2, with a no-hassle sticker price of somewhere around $15,000, if i recall correctly), pretty much all in cash. i decided to finance about 1/2 the purchase to establish some credit. while i managed to save a decent amount while working there, i didn't have any concept of investment. i just socked my money away in a checking, money market, or savings account. i worked there for about 2 1/2 years, and while there, i met my then-girlfriend (now-wife), which resulted in my spending pretty much all the money i had stashed away. so, i started over with a negative net worth and a bank balance of $0.

after working there, i decided to make a move to be closer to my girlfriend, who was going to school at the university of texas in austin, texas. i found a job with a startup credit card processing company, which came with a decent raise (and some soon to be worthless stock options). i enjoyed working at this early stage company, as it gave me quite a different perspective having come from a huge, well established company. my cost of living jumped up a bit while working here, as my brother was attending the university of texas as well, so we lived together, and i picked up the rent and utilities to help out. i was able to increase my savings while working here, and started putting $1,000 a month aside to invest in stocks while starting the savings machine back up. i actually worked here for only about 6 months before a friend of mine came calling with a bigger, better opportunity.

i moved to a dallas, texas suburb in late 1999 to pursue my next opportunity, which, after having been exposed to startup life, was just too great for me to pass up. a friend of mine came calling with a job opportunity with a brand new company that had a very amorphous idea. i ended up taking the job, as employee #4, and its pay increase which included an annual bonus, and a healthy number of stock options (again, soon-to-be-worthless). the first few months of this job was a lot of brainstorming, a lot of prototyping, a lot of core library development, and what evolved was a video streaming company, along the lines of what youtube.com does today, just way too early -- at a time when broadband penetration was a fraction of what it is now. i felt sure that i would be the next dot com millionaire, which turned out not to be the case when the company folded in 2001. during my time with this company, i continued to sock away $1,000 a month into the stock market and save pretty aggressively, mostly in an s&p 500 index fund, and was fortunate enough to get out of those holdings prior to the market crash to fund the purchase of my first house.

so, in april of 2001, after my girlfriend (who moved to dallas after graduation) and i took out a mortgage and depleted much of our investment and savings, both of our companies folded up shop. now, those were some financially exciting times. i don't recall exactly how close we were to $0 in our bank account, but we were pretty darn close, though we were able to land on our feet pretty quickly . i ended up finding employment with a dallas based low fare airline, for pretty much the same salary as i was making before, and my wife found a job with a startup company where she was underpaid, but got a lot of responsibility. we were able to resume investing $1,000 per month above our normal savings at this point.

in august of that year, my girlfriend and i got married, and i decided to take another job at about the same wage, as going from startup to a big huge company was too much a shock to my system. i ended up going to a small consulting company, and to be honest, i didn't expect to be there long, i figured it would be a way for me to get out from where i was at and find something else. of course, the economy was terrible at the time and ended up at that firm for about a year and a half before jumping to my next opportunity.

in my next job, i worked as a software contractor for a company that developed software to manage thin clients, and my annualized salary was probably a bit higher than what i had been making previously. at the same time, my wife made a job change that was a good amount more than she had been making. at this point, we decided to refinance our mortgage to a fifteen year. at the same time, we had the opportunity to purchase a rental property in the west campus area of the university of texas. i didn't really have a firm grasp on the numbers when we took the plunge, but we went ahead and put 10% down on a 15 year note. we wouldn't flow cash on this, but the way i looked at it, we would have someone else pretty much paying on our note, and we would be out of pocket a hundred or two hundred a month for that privilege.

though this was at another fairly early stage company, it was without the responsibility that i had enjoyed at my other startup stints. i still enjoyed the work, it was fairly autonomous and i got some decent exposure to different technologies, and i think i made an impression on people that saw my work, but i decided to make a move about a year into that job, after seeing an org chart that did not have my name on it.

in my next stint, i took a slight pay cut to work for a fairly early stage company in the prepaid credit and prepaid long distance space. i enjoyed my work there, but it wouldn't be long lived as i would have thought, as they were an acquisition target. in fact, just before the acquisition closed, the entire development team (about 10 developers) was laid off. that was roughly a year into my tenure there.

after that, i joined a large firm that developed software for securities trading, and it too was too much culture shock. i was able to bear it only about a month or so before i returned to contracting.

i contracted for about six months for one firm before the company that acquired the prepaid card company that i worked for came calling for consulting help. i took that on and charged them quite a bit. at that point, we were able to increase our monthly investment allowance to $2,500 and also build up a proper emergency fund (outside our normal savings and checking accounts), which consisted of 12 $2,500 one year cd's, each maturing in successive months. that firm ended up offering me full-time work, but i elected to go elsewhere when a former colleague looked me up and asked me to come aboard and join his company as employee #3.

that company turned out to be short-lived (about one year) as well, as our one main customer was slow paying and ended up in a heated battle with our ceo over some fine print, and i returned to consulting for a few different firms. while out on the road consulting, another former colleague contacted me about joining an energy company that we was co-founder and cio of, as a software architect. i jumped at the chance, even though it salary was comparable to what i could command as a software contractor.

i am pleased to say, that after 4 years, i am still at that company, now heading up the enterprise architecture group. about a year after joining that firm, my wife and i moved to a new house. we had built up a decent amount of equity in our first place, since we were on a 15 year note, and we took that and some savings (this time we did not touch our investments), and put 20% down on our new house.

recently, my wife has gone part time with her firm, coincident with the birth of our second child. we continue to save aggressively, invest that same $2,500 a month, and have added a monthly contribution of $250 each toward our children's college savings through a 529 plan. we also continue to save $500 a month in a savings account, though i have rolled out of most of our cd's, since the rates are abysmally low. when she went part time, she lost the opportunity to participate in her company's 401k plan, stock purchase plan, and benefits. we have moved the family over to my company's benefits, but it's considerably more expensive than what her larger firm was able to foot.

this same year, we converted our rental property from a 2 bedroom to a 3 bedroom so that we could command a higher rent, and expect it to break even on cash flow, or come out ahead a bit. in a few more (make that 7 or so) years, it will be paid off, and i expect the cash flow to be enough probably to allow us to make a small adjustment to our careers (allow my wife to cut back her hours, etc.). in addition, i found two rental properties that i purchased with a friend, which should flow a few hundred dollars cash per month, and the goal is to add one or two properties a year.

that pretty much sums up my entire working life, and what is the foundation for my journey to retiring my my 40s.

reboot

i've been purposely anonymous (not just by name, but also in not divulging my age, profession, income, etc.) in my writing on this blog from the beginning because i felt that would allow a broader audience to read my posts.

an interesting thing happened the other day that made me rethink this approach, and made me think that i should narrow my focus and write with a very specific and personal audience in mind. you see, i was having lunch with a co-worker and the topic of goals, retirement, and the like came up. now, here's a guy i respect very much, who is about the same age as i am, about the same income level, and for all practical considerations, we could be practically twins on paper.

when the talk moved to retirement, i shared with him that my goal is to retire or semi-retire by the time i am 45 years old. i am currently 36. he was a bit shocked, and floated a big question my way: "what's your secret?"

i was perfectly honest with him. i don't have any secrets. for the most part, i am a pretty normal guy. i have not had any big windfalls occur in my life. i have not made a ton of money in stocks or real estate. i did not come into any family money by birth or inheritance. i am not an entrepreneur. i do not own my own company. i am a hard worker and make a decent wage.

there might be some small things that may separate me from my co-worker. i have never carried any credit card debt. i did not take out any student loans. the only debt that i have ever carried is mortgage and car loans. i have been an aggressive saver most of my working life.

i am married and my wife and i were dual income / no kids for about 7 years. my wife is now part time and we have 2 kids -- a one year old and a three year old. we live in the suburbs some 20 miles north of dallas, texas, in what is for most respects our "dream house".

i used to think that i'd need 2 million dollars to retire, but these days i feel like retirement or semi-retirement can be accomplished with far less. i could be dead wrong. but, this is what i am going to write about.

attentive spending

i came across an article by one of my favorite personal finance writers, scott burns, today entitled the power of attentive spending. he gives some examples in that article on what a typical family can do to save $500 a month.

this comes out to $6,000 a year of after tax "earnings". to put it in perspective, he notes:

Suppose, for instance, you have the good fortune to live in a no-income tax state and want to get all your return from a portfolio of common stocks. At a 15 percent tax rate on dividends, you’d have to collect gross dividends of $7,059 to net $6,000 a year. With the S&P 500 index yielding 2.29 percent, you’d need to have $308,246 in your portfolio.

that's a lot of money.

while i'm not sure that i can find $500 a month to trim out, i would say that finding any reasonable sum would certainly be worthwhile in light of that comparison.

the moral of the story: a penny saved is more than a penny earned (after tax implications).

529 plans

well, it's time for me to open and start contributing to a 529 plan for the new addition to my family. after some deliberating, i've decided to go the savings route rather than the pre-paid. the 529 college savings plan allows after-tax contributions into a savings vehicle that grows tax free when used for college. this is good stuff for something that i am going to have to pay for anyway.

there are also pre-paid tuition plans covered under the 529 tax code, but i feel that they are more rigid and limit your choices down the road.

in researching this, i found a great comparison tool that helped me out to arrive at the utah 529 plan (you don't have to live in the state to sign up, in most cases) -- it's got a low expense ratio index fund that i'm going to go with.

bonus time

i was surprised to find out a few weeks ago that my company decided to pay out bonuses this year. it wasn't a huge windfall, but amounted to about an extra month's worth of take home pay. so, what did i do with that money? absolutely nothing. it just went into the bank and has been sitting there. that's where it'll probably stay. in the past, when i have been fortunate enough to receive a bonus, i was pretty diligent about putting some of it away into a separate account.

times have changed for me, however. my saving is so automatic these days, i know that each month i'm socking away a good percentage of my pay into investments, savings, and more discretionary accounts. it's a great way to live.

dinner conversation

we had dinner with some friends last night and one of them made a comment: "you know i think you guys are probably like us. we don't have a whole lot in savings, we have some in retirement, and got some credit card debt . . . ". i don't recall where the conversation went from there, but i thought it was a pretty accurate picture of the average american.

well, i didn't correct him and tell him that we have a fully funded emergency fund, save and/or invest a good chunk of our take home, and carry no debt except our mortgage. i really don't know how i was instilled with this sense of right and wrong when it comes to my finances -- i suppose it must have been my upbringing, but it really is alarming how the everyman must live.

the way people spend, i have no idea how we, as americans, can afford to retire. are we banking on social security? are we going to work forever? win the lottery?

savings vs eliminating debt

a friend of mine jokingly said to me the other day that he wished he had some high interest credit card debt because that would be an easy way to 'make' 10-20% on his money with no risk. it's funny, but if you get down to brass tacks, it's entirely true. a lot of people ask should i be saving money or paying down debt? well, to me it comes down to the rates on each -- if you can make more in interest in your investments / savings (factoring in your risk) than the interest demands on your debt, you should save, otherwise you should pay down your debt.

the interest you avoid paying by paying down your debt is identical to money that you actually sock away in your savings account.

how to save money

i tried searching for some interesting ways to save money this morning. it turned up the usual suspects: quit smoking, pack your lunch, make your coffee at home, drive less, and blah, blah, blah. most of these don't apply to me, and i get tired of reading how to save 10s of thousands of dollars a year with methods that simply won't work for me.

i've found that the key to saving money is stashing it away before you get a chance to spend it. whether that's increasing your 401k contributions, set up a second direct deposit from your paycheck, or whatever other automated method you have before you to divert the money before it gets into your hands.

brown bagging lunch

i eat 5-6 small meals a day. if i ate all of those meals out, it might get very expensive, so i spend about an hour or two on sundays preparing one or two big dishes that i can dole out and bring for lunch for the entire week. this saves me time and energy in the morning and i can get enough variety during the week by adding in a sandwich here or a protein drink or bar there. a lot of finance pages that i read tell you to keep a journal of things that you spend money on, and by making coffee at home (for instance) you can miraculously save tens of thousands of dollars (i exaggerate). i am not going to start telling you that a save a ton of money with my cooking extravaganza -- actually, eating healthy can oftentimes be on par with spending on a quick bite out for lunch. what it does do for me, though, is give me something that i can pretty comfortably ball park, budget-wise. i know that i'll every week, i'll spend about the same amount on food and it's a number that i can live with. of course, i eat out sometimes for lunch -- you have to for sanity, for business, for fun -- but i know that for the most part that's going to be every now and again and i can live with that.

pre-bringing home your check saving

saving is a hard mindset to get into. it's even more difficult when every day, week, month, or whenever you get paid, you bring home your paycheck (or it's deposited in the bank for you). the easiest way to save, i think is to set things up automatically so that you don't feel like you've lost any income. there may be an adjustment period, but once you get used to your new paycheck it's very easy to save.

for instance, my wife and i each have 10% of our pre-tax earnings invested in our respective companies 401k plans. additionally, my wife has 15% of her (post-tax) earnings invested in her employee stock purchase plan. that right there has us saving an automatic 35% (not excatly because of taxes and matching contributions). additionally, we have various splits that put money into our primary checking, savings, and spending accounts.

at the end of the day, the deposits into our checking account don't look quite as full, but the balances in our 401ks, stock plans, and other accounts are looking healthy, and we hardly notice the ding to our disposable income.

how to save money

i read all the time about how to save money -- just skip your morning coffee, brown bag your lunch, quit smoking -- but, to me this advice is good for a week, maybe two, and then you fall back into your old habits. it's a lot like new year's resolutions or dieting or other things that are bright and shiny when they are new, but get old fast.

the only real way to save money is to make it a priority in life. ha! that's definitely one of those things that is easier said than done. look, i bring my lunch to work, i drive a used car, i eat out only once a week, but it took a long time for me to realize and prioritize these things in my life. what it really took was for me to understand that the pleasure or convenience of these things was not really worth the money because the cheaper alternatives were not sacrifices: my lunches are just as good as the food i could get around my office, my car is nice, but not too nice, and my one meal out is usually a great one.

there's more to saving than just saying it, of course. i have several accounts where money is taken out of my check automatically. i also use electronic transfers to move money out of my primary checking account. it makes it easier to avoid spending if the money is already spoken for, but i do leave a good amount in my primary checking account, but i don't consider all of this money spending money. it's just way too hard for me to budget exactly what i am going to spend from month to month. that means some of my savings spills over into my spending accounts. how do i resist the temptation to go and spend all of it? honestly, i just do. there's no magic to it, unfortunately, but at some level learning how to do that is probably a good exercise. again, it's like dieting. back when i had a weight problem, i tried a lot of things -- low carb diets, counting calories, packaged meals -- but what eventually happened on all of them is that i would start craving something and crack and never get back on track. what worked for me was finally learning about nutrition and exercise and applying those concepts to my life. instead of depriving myself, i would allow myself a taste of this or that. i think the same concepts can be applied to your financial life.

if you feel like you're depriving yourself, it's never going to work, so relax a bit and learn about financial matters. don't corner yourself into the low-carb equivalent of a financial diet. learn how to spend and save your money and you'll be better off for it.

emergency fund

ask any number of people about an emergency fund and you are likely to get just as many responses. some say that you need 3-6 months of living expenses in your emergency fund, others say a year of take home pay, and others will tell you something entirely different. don't even ask about where you should keep your money, because you'll get an equally confusing array of suggestions.

here's my take on the whole thing. an emergency fund is a fund that you need in the event that you lose your job. period. end of story. it's not something that you would tap into if you incur a sudden unexpected expense. it is used only in the event that you lose your job and you need to pay your bills. that's it. people will tell you that it's okay to use for this or that or the other. a popular one is medical emergencies. sorry, bub, that's what insurance is for.

now, on to the specifics of your fund. your fund should be based on your total monthly household pay (you need to consider your spouse's earnings) and you should fund it so that in the event that you lose your job you have the equivalent amount of money available to you as you would while you were working. so, you would need to have however many months stashed away as you think it would require to find a new job. in some cases that may be 1-2 months. in others, it may be a full year. a rule of thumb is that for every 10k you make, it will take a month to find a job. so, if you make 40k, you should budget for 4 months to find a job, and, as such, 4 months in your emergency fund.

where should you keep this fund? personally, i keep it in a series of staggered CDs that mature every month. that way, it is almost exactly like getting paid -- the money is available to me at a specific time each month, and if i have a job, i just let it roll over. for example, let's say i make $60,000 a year ($5,000 per month). i need an emergency fund to cover 6 months of pay, or $30,000. i divide that 30,000 into 12 CDs, each maturing at the beginning of every month. in this case, i would have 12 $2,500 CDs. now, if i lose my job, i'll be able to tap into my emergency fund at the beginning of the next month . . . but wait! i don't have my full pay available to me! that doesn't bother me, but if it looks problematic to you, you may want to put your money into a more liquid account. to me, the $2,500 is fine because it's an after tax versus a pre-tax (gross) figure, and i won't be overly concerned with contributing to a 401k or putting money away into savings while i am unemployed. i'll probably want to cut back on some expenses, too. so, to me, the $2,500 is roughly equivalent to my $5,000 monthly gross pay.

the cost of higher education

every so often, i'll wake up in a cold sweat and bother my wife with the trouble of the escalating costs of college. i'll ask her: 'what if our kids want to go to harvard?' or 'how will we ever afford to send our kids to school?'.

when i went to college -- a state school -- it was really cheap. i remember it being less than $1,000 a semester. i had a scholarship that paid up to $1,000 a semester and i always got a little spending money back after registering for classes. but even state schools are expensive today . . . my school would likely cost me 2-3 times that much today. when you add in room and board, things can get pretty expensive pretty fast. now, i had a job throughout college and managed to get out of school with no debt. i'm not sure that i could do it today with the numbers i hear being thrown around about cost of school.

well, fortunately for me, i have time on my side. no kids yet . . . so, even if somehow a newborn were dropped on my doorstep today, i'd have about 23 years to stash some cash away (that's 18 years up to the 1st year of college and 5 years after that). and to me, that's the only way to do it. if it cost $25,000 a year, that's $125,000 per child for a college experience. sounds like a lot, huh? well, that's only somewhere around $5,000 per year every year if you start saving the day your child is born through his last year of college. that's if it's just sitting there without any interest. if you can make 5% on that annually, it turns out that you can just stash away $3,000 a year, which seems pretty doable -- that's just 250 bucks a month. of course, if you can jump it up to the 10% historical return on the stock market, you could put away half of that annually -- a very reasonable $1,500.

now, i've exagerated the numbers a little bit, but i'd rather wrong on the high side in this case. i mean, if it turns out that my kid can finance some schooling with a scholarship or if it doesn't quite cost as much as i'm expecting, hey, that's a nice little fund to start off with coming out of school.

a new car!

i've purchased 3 cars in my life -- all new -- and i'll never buy a new car again. my first car, i bought after about a year at my first job. the car that i had been driving wasn't in great shape -- it had some body damage, the a/c didn't work, it burned all sorts of fluids -- but it drove pretty well. i just 'needed' a new car.

well, i bought one. it was pretty reasonably priced and i put quite a bit down. i financed it over 3 years at 5% and the payments were somewhere around 200-300 a month. i drove that car for 3 years and got into another new one. this time, i had some better reasons, my family needed a car and i could afford to help out.

well, i found another new car to buy. i put nothing down on that, financed it over 4 years at 7% and the payments were around 750 a month. i liked the car, but i didn't like it 750 a month worth. i had serious buyers remorse, but i kept plugging along and am still driving that car today, 8 years later. i love that car now. the best thing about it is there's no payment.

my next new car was an suv that i bought 2 years ago. similar situation -- my family (or actually my wife's family in this case) was in need of a car. so, we bought a new one and gave them her old car. this time, we put quite a bit down and are currently financing it over 4 years at around 4%. payments are around 300 a month.

the next time i have to buy a car it is going to be used. i used to think that there was no way to buy a reasonable used car -- there'd always be mechanical problems, you can't trust a guy selling a used car (why would he be selling it?), etc. but, i've come around -- that 750 a month payment taught me a lesson. 750 bucks a month can be much better spent (or saved) other ways.

i came across a posting by dave ramsey about how to get into a car you want. it basically starts with you buying a beater for cash and putting the money that you would be spending on a new car into savings. a year later, you can trade the car you bought and add the savings for a better beater. rinse and repeat.

save, save, save

last year, i lost somewhere on the order of 50 pounds, but before that, i had yo-yoed, like many people do -- gaining 5 pounds here, losing 10, gaining another 15. i had tried a lot of fad diets with some success, but it wasn't until i dedicated myself and really learned about fitness and nutrition was i able to lose the weight and keep it off.

now, what does this have to do with personal finance? at first glance, absolutely nothing, but i think a lot of people fall into the same weight loss traps with their savings. i mean, it's easy to stash some cash away one day but find it gone the next, get a raise or bonus and find your spending magically drift to that level, or diligently contribute to your savings but break into it because you 'need' that next great thing. we've all been there -- nutritionally and financially.

i read somewhere recently that the us savings rate for this past year was something like -1%. that means that as a people, we were spending more than what we made last year. now, i know that this doesn't take into account other measures of worth like unrealized gains in equities or real estate, etc., but, it seems like a pretty alarming statistic to me. at this rate, we'll be broke in a few years!

personally, i am an aggressive saver -- it has saved me from myself those times that i have been an aggressive spender. i've heard all sorts of numbers, rules of thumb, etc. on how much we should save, but i've never paid much attention to those -- they just seem way too low. i put away 10% of my after tax pay directly into a separate account, but beyond that, i contribute 5% to my 401k plan, put another 35-40% into equities or other savings vehicles and live off the remaining 50%, which largely falls into my mortgage, bills, and other spending. these percentages have stayed pretty much static throughout my professional life. it's rather unfortunate, but what that means is that i am spending way more today than i was when i was bringing home 20k a year. i think that makes me pretty typical, too, though.

i guess the point to my whole rant is this . . . einstein is credited with saying that compound interest 'is the greatest mathematical discovery of all time'. i don't have a lot of knowledge in the stock market or real estate or other investment vehicles (these are all part of my portfolio, but we'll get to that in a future ramble), so one way that i can make sure that i can participate in this great discovery is to save. whether that be a money market account, savings account, cd's, or what-have-you, i save a bit every month.

whether you put away 5, 10, 20, or more percent of your take home every check, it's all getting you the game of the great discovery of compound interest. it may not seem like that much now, but after it doubles in a few years, and doubles again a few years after that. it's just like dieting -- one or two pounds this week or next doesn't seem like much, but after 25 weeks, you've lost 25-50 pounds!