I have recently been fascinated with financial data. There’s nothing in particular that’s caught my fancy, but all of it. Things that used to bore the ever-loving shit out of me are now like the tastiest brain-candy ever made to me. I can’t get enough. I am about two-thirds of the way through The Truth About Money, and will start another Ric Edelman book, The New Rules of Money, immediately after I finish The Truth About Money. I am enthralled. So much so, that if I sent you a link to this blog directly, you will most likely be getting copies of both of these books from me at some point.
Maybe patience is finally settling into my character. Or maybe the missing stuff from growing up in a hand-to-mouth household has finally stopped being so important to me. Or maybe the fact that my plan to retire by 40 is quickly slipping away has become too clear to deny any longer; there don’t seem to be enough tomorrows to put off changing my ways. Whatever it is, I think I finally get the financial puzzle that has escaped me for too long.
The old “pay yourself first” saying, I couldn’t figure out what the hell that meant for the longest time. I knew what it meant, but it seemed thoroughly infeasible to me. Pay myself??? Are you crazy? Let me tell you all of the reasons I can’t!
- I have to eat (out every meal…and tip according to how buxom the waitress is)
- I have to pay my credit card (that I use for buying CDs and such that are all necessities)
- I have to pay my car payment (for the car that I don’t really need)
- I have to pay rent (on the apartment that is over-priced)
- I have to smoke (this does hold some validity because I was a real cocksucker for a while after I quit; some might say that quitting didn’t adjust my demeanor at all, but I’ll leave that to the comments)
- I have to drink no less than 10 Starbucks drinks a day
- I have to have a bar tab no less than $200 every Friday and Saturday night
The list could go on, but it boils down to this: I don’t do that crap anymore and I’m still alive. Imagine that.
I don’t mean to sound like I have it all figured out, because I don’t. Far from it. I have, however, figured out a little bit, and I’m going to share that with the world…or at least the minimal readership that this site has. With that said, here’s the first of my financial installments.
Paying Yourself First
This sounds far more difficult than it is. That is to say, that it sounds impossible, but it’s not at all. Every savings plan I would con myself into was foiled by my need for some big ticket item (and I use that term loosely because some of those items wouldn’t make me think twice about laying down the money now, but at the time they were major purchases). I would get going on a savings plan and, four months in, I would see something that I absolutely couldn’t live without. Getting the funds from my savings account to my checking account was a non-issue, so I’d have the current most coveted item in all the land. What a fucking dimwit! (For the record, not everything I did that with was just the bauble of the moment. I’m typing this on one such purchase.) And I say that despite the fact that it’s not ancient history. As few as four months ago, I was behaving like this.
My first step to becoming financially competent was to stop sabotaging myself by draining my savings every time I wanted some shiny thing. I have all the willpower in the world when it comes to a number of things, but not when it comes to resisting the urge to buy things. (The psychology behind this impulsiveness is the topic of another post.) That being the case, I kind of had to trick myself. My friend AJ told me about her ING Direct account, saying that it was pretty cool because she’d set it up to automatically transfer funds out of her checking account into her savings account on the days she got paid. I thought that was pretty cool stuff because I’m about the most forgetful person on the face of the planet, so I looked into it. About the same time, I was reading The Richest Man In Babylon and was seriously pondering the whole “ten percent of your pay should be yours before you pay anybody else” philosophy. This was perfect to do that. I wouldn’t even really see the money in my account before ING Direct pulled it out of there for my benefit. Even more compelling for me was the fact that it takes three business days to transfer funds out of the ING Direct account into my checking account. PERFECT! No more impulse buying for me! (Or so I thought. I have found ways of doing it, but it’s all been games I played with myself. No more.)
So I set up my ING Direct account and hit a wall while signing up. How much could I afford to siphon off every paycheck? According to The Richest Man In Babylon, I was supposed to pay ten percent to myself before I paid anybody else. That rule applied to taxes, too. So I got out my pencil, paper, brain, and a recent pay stub, and started working the figures. Without going into much detail, I figured out that it was absolutely possible to survive without ten percent of my gross income in my account every paycheck. It wasn’t comfortable by and stretch of the imagination, but it wasn’t unbearable. And it was all for the greater good, right?
Now I had an automatic savings account. I was off to the races. Yeah, not really. I had another hurdle to get over: fake money.
Fake Money
Fake money is the term I use to talk about all types of borrowed funds except mortgages. There are far too many benefits to having a mortgage to consider it “fake money,” so don’t go on a tirade about how mortgages are awesome debt because I’m not talking about them in this section.
Fake money comes in all different forms, but the worst of the bunch, and the most common, is credit cards. I loathe those little plastic devils. Something that it’s taken me a long time to learn is to not buy something unless I have the funds for it on hand. Using a credit card to facilitate the transaction isn’t the end of the world. Not sending a payment for the amount of the transaction is puckering up and blowing the horn of Armageddon. Why in the hell would anybody do this? I know the answer to this from experience: instant gratification.
I had heard all of the arguments against this kind of behavior and nodded at its wisdom as it was issued forth from whatever source. And then I would promptly go charge something without having the liquid funds to cover the purchase. What a fucking moron!
Don’t beat yourself up too much about doing this. I beat myself up, but I don’t condone that mentality (I’m a moron, remember). Fake money is fake money because it’s like spending Monopoly money. You don’t give it a second thought. It’s all a game, so what’s the harm? That’s why it’s evil. It’s so tempting to charge it and let it ride until you have sufficient funds to cover it. It’s getting to have that something you put on lay-away without having to wait until you’ve paid for it. It caters to the part of most Americans that needs instant gratification (I need to get started on that post because this seems to be a recurring theme), which is a weakness we don’t really even see, much less admit to.
So we’ve figured out that its natural for Americans to have impulse control issues, and that problem is preyed upon by credit card companies. Vicious, i’n’t it? Once you know this, you’re ready to make a break from the behavior. It’s not that easy (there’s no automatic transfer type of deal to fix this problem), but it’s possible. The bad news is that breaking the habit of spending fake money is only the first step in getting out of it. The next step is paying off all of your prior mistakes.
The wisest plan I’ve ever heard is what my mom called the “snowball scheme” of paying off debt. The scheme basically is that you pay the minimum on all of your cards while sending a little extra to one of them. Once that first one is paid off, you take everything you were sending to it (i.e., the minimum and the extra), and start sending it to the next one in line. This is a brilliantly easy scheme. But it’s missing a crucial piece: what order should you be paying off your cards? My thought on the matter, for years, was that you pay of the lowest balance so you can get that snowball rolling as quickly as possible. That’s a fine approach if the balance on that lowest card is no greater than a minimum payment plus whatever extra you can muster. If it’s more than that, as it likely is, Ric Edelman has the greatest answer: the priority of paying off your cards should be in descending order from the highest interest rate to the lowest.
I have to admit that both of these pearls of wisdom seem quite obvious, and I can’t say that I didn’t utter (even if under my breath) a “no duh” upon hearing/reading them. That being said, it’s taken me fourteen years to actually implement them successfully. Either I’m just a total idiot (which is a topic indirectly covered by all of my posts), or it’s not as obvious as it sounds. I’m leaning toward me not being that bright, but the answer to every riddle seems obvious once you hear it.
I’ve implemented the Snowball Scheme to pay off my credit cards, and I’m running like hell toward being debt free for the first time since I was seventeen. I’m set. Retiring at 40 looks plausible now…except for that little problem of an income without a job. Wait, what?
Income Without A Job
Pipe dream. Those are the words that come to mind when most folks hear that. Either those words or the simple one that fits in so many contexts: “bullshit.” I, however, believe it’s absolutely viable.
Notice that the section is not entitled Income Without Work, it’s Income Without A Job. There’s a distinct difference. We are trained from a very early age to believe that working is how to create wealth. It’s a reasonable conclusion, and the argument is quite well backed. I don’t like that, though. The fact of the matter is that nobody who is truly wealthy worked a nine-to-five to get there. They might have started off that way, but they didn’t break out until they left the rat race. So, it seems logical to me that outside the rat race is where I’ll find the key to generating a ridiculous amount of wealth…or at least enough to live on while I’m sitting on my ass.
As easy as all of that sounds, it’s not. I haven’t done it (yet), so who am I to jump on a pulpit and start thumping a book about it? I’m nobody of consequence. Neither was anybody who did anything extraordinary before they performed their extraordinary feat. Albert Einstein couldn’t make it through algebra class. I’m not saying that I’m anywhere near the intelligence of Al, but his feat was performed with his brain, I don’t have such grandiose aspirations.
Since I haven’t achieved “independent wealth” (which is a misnomer, but since I don’t have a better universally accepted term, I’m going to use it), I can only outline for you what I plan to do and/or what I’m doing. (I guess I’ll make subsequent posts to keep everybody up to date on the success or failure of my attempts, as well as any tuning I do on the plan.)
The first thing I’m working on is eliminating debt. That one is straightforward enough, I think; I’m using the “snowball technique” I was told about so many years ago. I am building my safety fund (i.e., six months worth of bill payments in cash that I will not touch).
I am also investing in income generating no load mutual funds. The technique I’ve chosen for this is rather brainless, using a subscription NoLoad FundX (I’m not endorsing that service at this time, but simply letting you know what I’m doing). This generates some cashflow without taking too much of my time (a few hours every month is what I expect to spend managing my portfolio when it has enough assets to generate an income large enough to replace my current paycheck). Oddly, this investment strategy is much like the debt payment “snowball technique” in that I don’t need the income generated by the investments right now, so they are invested right back into themselves, compounding to generate even more wealth. It’s a rather exciting kind of monetary perpetual motion.
Once I have enough income being generated by the mutual funds in which I’m investing, I’m free. I won’t stop there, but at that point, my time becomes mine which allows me to venture in new directions. More importantly, it allows me to pursue those ventures from the comfort of a hammock on a remote beach in the Carribbean. Or maybe I’ll go to college. Who knows? I don’t. It’ll be fun finding out, though.
Living The Dream
I have a plan (that happens to evolve daily), and I’m acting on it. I haven’t time-lined it, so I don’t know how long it’s going to take me to reach independence, but it will happen eventually. For now, I’m living the dream.
I guess the worst case scenario is that, at 65 when I’m ready to retire the “right way,” I’ll have a helluva portfolio to allow me to live pretty well. If I’m not able to hammock work until 65, oh well. I’ve had fun getting to a point where I truly don’t have to worry about the next generation keeping me afloat financially (since social security won’t be there for me). It seems like a healthy recreational activity to me, healthier than most other recreational activities I’ve taken up over the years, anyway.
