Categories
Debt Investing

When Compound Interest Empties Your Wallet

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

– Albert Einstein

Compound interest is a financial concept I really, really wish was emphasized more in the United States’ education system.  Of the many subjects taught in school, all of them with some value and most of them with a good deal of value, personal finance would benefit all students (and probably most teachers).  A good friend and mentor summarized our shared view regarding the lack of personal finance curricula in formal education: “Why do we spend 12 years in first through twelfth grades, then four more years in undergraduate education, and sometimes several more in additional schooling learning to be better workers only to graduate and have no idea how to manage the money we make?”

The first time I recall a teacher in a formal school setting emphasizing the power of compound interest was in graduate school in an MBA finance class where the teacher, thankfully, spent his first class providing students two hours of personal finance education.  While I was well aware of the power of compound interest by the time I entered the MBA program and had also spent many years investing by then, I was also aware that many people see personal finance as overly complex, so I was glad the rest of the class was getting this lesson.

Compound Interest Giveth

As I wrote previously in Part 4 of the Personal Finance Foundation series, compound interest is a powerful tool for growing wealth over time. Investing money at a given interest rate over a given amount of time can produce huge growth.  Increase either the interest rate or the amount of time the money is invested, or, better yet, increase both, and you’ll see enormous transformations.

Example 1: Roth IRA, $6,000 contributions, 30 years, 6% interest

The 2020 IRA contribution limits allow you to contribute $6,000 annually.  If you were to contribute $6,000 annually for 30 years and receive a return of 6% annually, in 30 years you would have $508,810.06.  Note that of this amount, $186,000 are contributions you made and the remaining $322,810.06 is interest earned.  I want to emphasize that the $322,810.06 is money your money earned for you, and is not money you traded time, energy, sweat, or tears for.

Example 2:  Roth IRA, $6,000 contributions, 30 years, 8% interest

Holding all things equal (maintaining the $6,000 annual contribution for 30 years) and raising the rate of return to 8% would result in you having $740,075.21 at the end of 30 years.  This is $231,265.15 more than the amount you would have in the previous example.  The power of even a slightly larger interest rate invested over time is clear in this example, as just a 2% increase in the rate of return results in a huge difference.

If you use recognize that the maximum allowed contribution to IRAs has increased over time, it stands to reason that in the future you could increase the $6,000 contribution you’re making, resulting in larger returns over time.  Further, the 6% and 8% interest rates I used are below the average rate of return for the S&P 500 stock index for the past 30 years.  With dividends reinvested, the 30 year annualized return for the S&P 500 is 9.4% as of May 10, 2020.  I purposely chose the more conservative 6% and 8% rates of return because I prefer to estimate my returns conservatively.  In other words, I’d rather play it safe in estimating how much money I may have in the future rather than relying on too high a rate or return and then finding myself without enough cash in the future.

While compound interest can grow your net worth immensely over decades, it can also be an immense drain on your financial health.  Here’s how.

Compound Interest Taketh Away

A prominent financial voice and personality has often spoken of the ease of finding investments that reliability generate 12% interest.  While I find his claim questionable, there is a financial liability that can drain you of money at a much faster rate than 12%, guaranteed:  Credit cards.

I use multiple credit cards that give rewards for spending and they have a range of interest rates from 9.9% on the low end to 17.99% on the high end.  The card charging 9.9% was issued by a credit union and the 17.99% interest rate belongs to a Chase cash back credit card.  While we as savers and investors seek saving and investment vehicles that produce the largest interest rates, it’s also important to consider what we do when we carry credit card balances:  We choose to pay credit card companies interest rates that are much higher than we can (most likely) find on our own in investment vehicles. I’m going to walk through a couple of examples to demonstrate the amount of money you hemorrhage by carrying balances on credit cards from month to month.

Example 1:  A credit card with a 9.9% interest rate, a $10,000 balance, and an $84 minimum payment

If you have a credit card with a 9.9% interest rate, a $10,000 balance, and pay an $84 minimum payment until you pay off the credit card, you’ll get the following results:

Expected payoff time:  490 months (about 41 years)

Interest paid:  $31,154

Insane!  $31,154 of interest.  You can see how people trying to get out of the credit card debt hole by making minimum payments, or close to minimum payments, often feel like they’re on a hamster wheel, barely able to make progress.  Also, look at all that interest paid to the credit card companies that, alternatively, could have stayed in your pocket had you either paid off your balances immediately or had you paid them off much sooner.

Example 2:  A credit card with a 17.99% interest rate and a $10,000 balance

If you have a credit card with a 17.99% interest rate, a $10,000 balance, and pay a $150 minimum payment until you pay off the credit card, you’ll get the following results:

Expected payoff time:  504 months (42 years)

Interest paid:  $65,558

Again, if you only pay the minimum payment on a credit card, you’re going to spend a very long time paying off the balance.  Granted, the examples above use a static minimum payment while you pay off the balance rather than adjusting the minimum payment based on a percentage of the balance, but the takeaways are the same:  You need to pay more than the minimum payment on credit card debt, otherwise the interest you’ll pay will be outrageous.  In this second example, consider that the $65,558 in interest is cash credit card companies are earning in their “investment” with a rate of return of 17.99%, all at your expense.

Getting Out of Credit Card Debt

Call your credit card company, explain your situation, and ask if you can have a lower interest rate.  Especially during the pandemic, credit card companies are more likely to be empathetic, as they’d rather have customers providing them cash flow rather than customers unable to pay.  Even if the credit card companies aren’t able to lower your rate, you’ll only have expended a short amount of time to call them, so make the call.

Identify spending that isn’t needed.  If you’re not doing so already, track your spending with a budget or cash flow plan.  I have a cash flow plan template you can download here in Microsoft Excel format.

There are plenty of other tools you can use for budgeting or cash flow planning, but your end goal should be to identify spending that isn’t needed.

Stop using credit cards and start paying the balances down.  There are two popular strategies for paying down credit cards:  Paying off cards with the smallest balances first in order to generate quick wins and to generate the associated emotional rewards (this is often referred to as “The Debt Snowball”), or paying off credit cards with the highest interest rates first (this technique is often referred to as “The Debt Avalanche”).  Mathematically, the second plan of attack is best, but humans aren’t purely mathematical creatures, especially when it comes to personal finance.  Both strategies have their merits.

Takeaways

  • Pay off credit card balances every month.  This prevents interest from accruing at enormous interest rates.
  • If you’re working on paying off credit cards, strongly consider paying off credit cards with the highest interest rates first.
  • Interest you’re paying toward credit cards is lining the pockets of credit card companies.  Consider how you can pay yourself instead, namely through saving and investing, and grow your net worth.
  • Once you’re done paying down credit card debt, build a habit of saving cash for large purchases so that you don’t jump on the hamster wheel again.
  • Even better:  Once you build up cash savings for large purchases, consider how you can start using excess cash for investments so that you can reap the benefits of compound interest.
References

I used a calculator from Credit Karma’s web site to calculate payoff times.  This web site also provided the great visuals.

Categories
Saving Spending Uncategorized

Money Lessons from the Pandemic

The COVID-19 pandemic has been a sobering experience, to say the least:  Lockdowns, supply shortages, skyrocketing unemployment, a stock market plummet, and, worst of all, over 58,000 deaths in the U.S. caused by a virus that is not fully understood.  I’ve been fortunate to remain employed and maintain the same income, but if the lockdown continues for an extended period of time, my employment becomes more and more uncertain.  The increased risk of losing my job has motivated me to examine my life to see what I can do to lessen the impact of unemployment and to take preventative action to ensure I can cover my essential expenses for as long as possible in case I’m laid off.

Lesson:  Use Anxiety, Fear, and Stress to Reduce Expenses

Hopefully you share my experience of not having your income impacted by the pandemic.  If you’re like me, though, anxiety and concern about “what if” have entered your mind after seeing 20% of the U.S. file for unemployment:  What if I lose my income or my income is impacted?  Let the “what if” motivate you to examine your expenses to see what you can cut out.  I’ve been focusing on reducing my expenses to the bare minimum so that I can pay for essential expenses (home, food, and transportation) for a longer period of time should I lose my job.

Eating out has long been one of my largest monthly expenses, with me sometimes eating out multiple times daily, so the pandemic and associated restaurant closures have presented a great opportunity to buy groceries and prepare meals at home.  In the past, I’d accomplish my goal of eating out less for three or four days in a row, at most, but then would slide back into old habits.  During the pandemic lockdown, I’ve loved seeing the savings of eating at home and prepping multiple meals when cooking, since I can quickly run to my fridge for food when I’m hungry and want to eat quickly.

Subscriptions and memberships to various services have also been on my chopping block.  Subscriptions are sneaky because they’re often not large expenses and aren’t attention grabbing, so often we pay them blindly every month.  In this pandemic, I evaluated many of these subscriptions that I “just pay” monthly to see if I really valued them:  Amazon Prime, credit card annual fees, Netflix, a Wall Street journal subscription, and more.  I cancelled some of these that I don’t really, really value, including unused gym memberships (I had four at one point which, yes, is ridiculous) that have been reduced to two memberships, both of which I use on a frequent basis.  In part two of the Personal Finance Foundation series (you can check it out here:  https://wp.me/p2zuKS-eo), I described how expense cutting can help you build net worth.  Reducing expenses during the pandemic has left me with more cash to save and invest, both of which build net worth, and both of which are very fulfilling to do.

Lesson:  An Emergency Fund Fosters Peace of Mind

Emergency funds are a basic component of a financial plan and for good reason.  An emergency fund serves as a buffer when you have an interruption in income or when you have unexpected expenses.    In times like these, if you lose your job but have an emergency fund, that emergency fund can tide you over.  Specifically, you can determine how long your emergency fund will tide you over by taking your monthly expenses and dividing it by the size of your emergency fund.

For example, if your expenses total $2,500 monthly and your emergency fund is $7,500, you could afford to live solely off your emergency fund for three months.  Of course, if you pick up a side hustle after you’ve been unemployed and generate some income, or if you crunch down on expenses, you’ll make your emergency fund last that much longer.

If you’re fortunate and haven’t lost your primary source of income, though, the emergency fund provides you peace of mind.  When it’s not needed, the emergency fund is a soft landing for you on a rainy day that reassures you in trying times.

Lesson:  Generosity is a Calling that Lifts Our Spirits

“Then the king will say to those on his right, ‘Come, you who are blessed by my Father. Inherit the kingdom prepared for you from the foundation of the world.  For I was hungry and you gave me food, I was thirsty and you gave me drink, a stranger and you welcomed me, naked and you clothed me, ill and you cared for me, in prison and you visited me.”

Matthew 25:34-36

A good friend and coworker of mine teaches his children that it’s advantageous to be good stewards of financial resources so that they can bless others when others are in times of need.  He emphasized to his children, “how would you feel if your brother or sister needed money but you were broke due to having mismanaged your money?”

I’ve found a degree of joy and peace during the pandemic by giving financial help to friends who lost their employment and by giving to Catholic Charities, who does a wonderful job of allocating cash donations to folks who are struggling.  Catholic Charities recently informed me of a case where a struggling mother contacted them informing them she’s unable to pay her electric bill due to losing employment.  Catholic Charities not only paid her current month’s electric bill but went above and beyond to pay all her current month’s utility bills.

If you have the ability to help others financially, I highly recommend doing so, especially if you’ve struggled spiritually, emotionally, or mentally during the pandemic.  The act of giving helps others and it also lifts you spiritually, emotionally, and mentally.  I’m a huge believer in the concept of building myself into the person I admire so that I can give him away, and I’m proud I’ve built a solid financial foundation so that I have the ability to help others in times of critical need.  If you’re not in a place to help others currently, remember the feeling of not being able to help and use it as motivation to strengthen your financial situation so that you’ll be better prepared to help in the future.

Categories
Investing Retirement

Personal Finance Foundation – Part 4 – Invest, Invest, Invest

Having examined how you can grow net worth by reducing spending and growing income, we now come to the most powerful tool for growing net worth: Investing. Reducing spending produces quick wins in growing net worth, but there’s only so much cost cutting you can do until you are living on a bare bones budget. Increasing earned income is a great way to increase your net worth that, theoretically, has no ceiling, but we all know that raises don’t come easily. Also, even if you do get that raise, you’re still trading time for money.

What if there was a path for you to augment employment income by having your assets work for you and earn money for you?

The Miracle of Compounding Interest

I started investing when I got my first full-time job out of college. I put 5% of my salary into a 401(k) and, following my older brother’s advice, I maxed out a Roth IRA. For better or for worse, I socked money away in both accounts and didn’t spend much time looking at them except to rebalance occasionally. I say this was “for better” because shortly after I started working full time, the subprime mortgage crisis contributed to the stock market crashing and, as a result, my 401(k) and IRA accounts lost almost half their value. Had I been more attentive to my retirement accounts, I would have seen them hemorrhaging value which likely would have caused me grief. While I’m very committed to leaving my retirement accounts alone until retirement, I’d rather not test my resolve.

You may be thinking, “you’re not much of a personal finance person if you only put 5% of your salary into your 401(k).” If I remember correctly, I received a 3% match on this contribution but, you’re right that 5% is less than I’d recommend anyone invest. Over time I gradually increased my contributions so that now I contribute over 20% of my gross income to my 401(k) and also max out IRA contributions. Now I have well over a decade’s worth of compounding interest rewarding me for my efforts.

What is compounding interest? A plain English example: You start off with $1,000 and earn 10% interest annually. The first year you earn $100 in interest, which leaves you with $1,100 total. The second year you earn $110 (10% of $1,100) in interest, which leaves you with a total of $1,210. Keep repeating this math (or, even better, use this great compounding interest calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm) and you’ll have $1,610.51 at the end of five years.

The beauty of this $610.51 growth (the difference between the red line and the blue line in the picture above) is that you didn’t trade time for money to gain the $610.51. Instead, your money sitting in an investment account worked for you to earn more on your behalf. Extend your timeline to 15 years and your initial $1,000 turns into $4,177.25. Mind you this growth is happening without you adding a penny extra. Change the initial $1,000 to $5,000 with the same 15 year timeline and 10% interest rate? You wind up with $20,886.24.

If you use your imagination a bit, you’ll see how you can leverage compounding interest in a very powerful way. It’s not very likely that you’d make contributions to your retirement accounts only in your first year of employment but never again, right? If you make the first year contribution of $5,000 then add $5,000 every year for 15 years at a 10% interest rate, at the end of 15 years you end with $179,748.65. Not bad, huh? Key takeaway: $29,748.65 in growth that occurred (your $150,000 of deposits subtracted from the $179,748.65) didn’t require your time, sweat, energy, or tears. Instead, your money worked for you.

One of the most powerful variables in growing wealth via compounding interest is time. If you extend the previous example from 15 years to 30 years, you witness astounding growth.

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” – Albert Einstein

The Basics: How to Invest in the Stock Market

You may be thinking, “OK, great buddy. I want some of this stock market action and having my money work for me. Where do I start?” A common place to start, and where I started, is in an employer-provided 401(k) retirement plan. Think of the 401(k) retirement plan as a wrapper for investments, and stocks as an investment you can put inside this wrapper.

A significant benefit of the 401(k) retirement plan is the tax advantages that come along with it. When you invest in the 401(k), your annual taxable gross income is reduced by the amount you invest, and the invested money is not taxed until you withdraw it. If your employer, for example, uses Fidelity to manage their 401(k) plan, you would create an account on Fidelity’s web site or use the account created for you by your employer. Once you log into the account, you’ll be able to select from likely a variety of investment choices.

One very common selection to make in 401(k) plans is a target date retirement mutual fund, which automatically adjusts the mutual funds holdings (think stocks, bonds, and cash) as you approach your targeted retirement date. In general, it’s a good idea to move gradually from riskier investments (think stocks) to less risky investments (think bonds and cash) as you approach retirement.

The volatility of stocks could cause the loss of a significant amount of your nest egg as you enter retirement, so it’s best to have some protection against this volatility. A great example: Retirement portfolios immediately after the sub prime mortgage crisis lost almost 50% of their value. It took roughly three years (until 2012) for the stock market to recover the lost value. How would you feel if you planned on retiring in a given year and then observed almost half your nest egg evaporate?

I’ve just described investing in the stock (often referred to as the equities) market, but there are many, many other types of investments. An alternative investing technique I’ll discuss next is real estate, specifically rental property, investing.

A Second Investment Vehicle: Real Estate

A brutal reality I observed during the subprime mortgage crisis were retirees needing income from their 401(k) accounts while seeing almost 50% of their balances evaporate. Hindsight tells us that the stock market recovered these losses within a few years, and then entered a very long bull market, but I could empathize with the fear and anxiety experienced by retirees who depended on their 401(k) to navigate retirement.

About the same time, I learned of a concept I found fascinating: The multi-legged retirement stool. In short, what if your retirement income didn’t solely depend on a 401(k), with its commensurate stock market volatility, but was also funded by another source of income? A three-legged stool has stability not by relying on one or two legs but on three legs. Similarly, your retirement income could have more stability if it didn’t only rely on income from the equities market.

While I love the simplicity of investing in index funds within a 401(k) and and a Roth IRA, I also love the dependable income stream produced by rental residential properties. People will always need a place to live, so there will always be a demand for residential real estate. Though we’re certainly witnessing significant disruptions of rental income streams during the COVID-19 pandemic, I sleep better at night knowing I have three disparate sources of potential income: Employment, retirement accounts, and rental property.

My long-term plan for bear markets (significant stock market downturns) is to rely more on rental property income to fund my lifestyle while simultaneously leaving my 401(k) and IRA accounts untouched so as to not make paper losses real losses. In other words, while the stock market may be down and your retirement account balances may be down, these losses aren’t realized until you withdraw money from retirement accounts, thereby selling shares at lower prices when it would be better to sell at higher prices.

In the worst case scenario of both the stock market being significantly down and your renters not paying their rent, a scenario that is highly unlikely but that is occurring with some landlords in the country as renters lose employment during the pandemic, take advantage of your emergency savings to tide you over until either the stock market or rental income stabilize.

Categories
Cybersecurity

Cyber Securing Your Finances in Five Steps

If you’ve been paying attention to the news the past year or two, you’ve no doubt read headlines about organizations having their computer networks infected, encrypted, and held hostage by hackers seeking a ransom.  Ransoms have reportedly ranged from thousands of dollars to millions of dollars, sums hackers know to seek from organizations that have large quantities of money available (or available via cyber insurance policies).  Consider, too, that many ransomware infections go unreported, as the organizations hit by ransomware never make the news due to preferring to keep things quiet, pay the ransom, and go about their business without alarming customers and shareholders.

Ransomware infections, though, aren’t isolated to businesses.  A ransomware infection on your personal computer could result in huge damage to your finances:

  1. Stolen passwords to banking and financial web sites
  2. Stolen documents containing sensitive data (i.e., tax forms, investment statements, bank statements, etc.)
  3. Encrypted financial documents:  In layman’s terms, this means that you won’t be able to access these documents if you don’t have a backup (that doesn’t get encrypted, too!) until you pay a ransom and *hopefully* have the hackers honor the ransom and decrypt your data
  4. Potentially having to pay hundreds or thousands of dollars to a criminal in hopes they’ll help you decrypt your computer.

How can you protect yourself?

Here’s what you can do to minimize the likelihood of a ransomware infection, minimize the risk you face if you are infected, and minimize your downtime if your computer is infected.

1. Practice good email hygiene

How often: Daily

  • Do not click on links in emails

Rather than clicking on links in email, type the address you want to visit instead. Links in emails can mislead you by saying one thing and leading you to a different web page. This different web page can do any number of malicious things, like impersonating a legitimate page (for example, impersonating your bank’s login page) or installing malware on your computer or phone.

  • Don’t open attachments in emails you aren’t expecting.

Hackers often attach malicious files to their emails, so being extra cautious and taking time to consider whether you should open that attachment is very important. Opening a malicious attachment could execute malware that encrypts your files, rendering your data inaccessible until you pay a ransom in exchange for, hopefully, the hackers decrypting your data.

In case you make the mistake of opening the wrong attachment and infecting your computer…

2. Back up your data

How often: Monthly

Many businesses that have been infected with ransomware have been saved by having data backups.  By having data backups available, businesses have been able to delete ransomware from their networks and simply restore data, which removes the need to pay hackers for their decrypting “services.”

Having backups of your important spreadsheets, documents, and other important files will provide you with an insurance policy, too.  Important:  After you take a backup, keep it separate from your computer.  Unplugging the USB drive where you keep backups will prevent that USB drive from becoming infected when your computer is infected.  Of course, if your computer is infected, do not plug in your USB hard drive to the infected computer prior to your computer being wiped clean.  Similarly, if you use an cloud-hosted backup service, don’t connect to it to restore your data until your computer is clean or you may inadvertently infect and encrypt your cloud-hosted backups.

3. Don’t Reuse Passwords

How often: Whenever you set a new password.

As a cybersecurity professional, I routinely see hackers take advantage of “password dumps,” huge lists of compromised user names and passwords. You’ve likely received numerous emails from given web sites and cloud-hosted services indicating your password was stolen in a data breach, and these data breaches typically result in a password dump being sold or posted on the internet. Once hackers get a hold of these password dumps, hackers test these user names and passwords on other web sites, knowing that most of us have a bad habit of reusing passwords.

  • Recommendation: Use a password manager to generate unique passwords.

Password managers can securely store your passwords and also generate random, complex passwords for you. The upside is that when a web site is compromised, the password you use with that web site isn’t used on other web sites. The danger of reusing your banking or investing passwords in other locations is significant, and it’s very risky. There is technology, though, that acts as insurance against hacked passwords…

4. Use Multi-Factor Authentication (MFA)

How often: Set up MFA once, then use MFA when you log in.

Multi-factor authentication (MFA) is technology that requires you to verify your identify not only with a password, but also with either something you have (i.e., your smart phone) or something biometric (i.e., your fingerprint). The advantage of MFA is that a hacker can’t log in with only a stolen password.

  • Recommendation: Enable MFA for all banking and investing web sites.

By enabling MFA on banking and investing web sites, you add one more layer of security to your assets at these companies and you make it more challenging for hackers to access your money. If by any chance you have reused a password on your banking web site that is used elsewhere, and if this password has been stolen in a data breach elsewhere, MFA will prevent a hacker from logging into your bank using this stolen password. Of course, as I already mentioned, please don’t reuse passwords.

5. Update, update, update

How often: Monthly

Updates released by software providers, phone manufacturers, and other device manufacturers often address security vulnerabilities, and it’s these security vulnerabilities that hackers seek to take advantage of. Hackers depend on businesses and individuals to be lazy in updating their computers, devices, and software in order to take advantage of them. One way hackers take advantage of vulnerable software is by emailing you with a link to a web site that will infect your computer. Another way hackers will take advantage is by emailing you an attachment that, when opened, depends on insecure software to install something malicious.

  • Recommendation: Install updates frequently

Keeping your devices and software updated provides an additional layer of security, so I highly recommend you update frequently. This is challenging due to how frequently updates are released (typically monthly and sometimes more frequently), but it’s a core aspect of security I practice as a cybersecurity professional. When you install updates, keep in mind the many places where updates should be installed: Your computer’s operating system, software on your computer, internet browsers, smart phones, tablets, and internet connected devices.


By following these five steps, you’ll increase the security around your finances and will make yourself a much tougher target.  If you have any questions about these steps or want clarification, comment below or email me via my email address listed on the Contact page.

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Uncategorized

Personal Finance Foundation – Part 3 – Grow Income

This is the third part of my Personal Finance Foundation series that serves as a starting place for those who are looking for an organized way to approach their finances.  It’s easy to find personal finance articles, but it’s much more difficult to find an organized approach to personal finance.  To read Parts 1 and 2 of the series, go here:

Personal Finance Foundation – Part 1 – A Starting Place (Calculating Net Worth)

Personal Finance Foundation – Part 2 – Easy Money: Spend Less


When it comes to moving the needle in your financial life and growing net worth, increasing income is one of the three primary steps you can take (with the other two being reducing expenses and investing).  You can make an immediate impact by cost cutting, but there’s a limit to how much you can cut spending.  On the other hand, although increasing income takes more effort, there’s no upper limit to how much you can earn.

Grow Your Career

One obvious way for you to grow income is to grow your paycheck at your current job or in your current career.  There are many ways to do this, with a few highlighted below.

Be Kind

You likely don’t expect “kindness” to be part of the advice you read on a personal finance blog.  That being said, with the hiring decisions I make, my number one criteria is bringing somebody on board who is kind, gets along well with people (even during disagreements, gasp), and reflects my organization’s culture (including and especially qualities of kindness and servitude).  No supervisor wants to be a babysitter, and no coworker wants to be around a bad coworker who exhibits any number of negative qualities:  Negative self talk, blaming, shaming, energy sucking, passing the buck, etc.

On the other hand, we all like people who are kind to us and generous with their time and effort.  Who doesn’t like that coworker who will take time out of their day to facilitate a project you’re working on?  Also, guess who management will promote when a position opens?  It certainly will not be someone who’s difficult to get along with, no matter how smart.

Work More Than Expected

I’ve observed colleagues whine and whine about not being paid enough, all the while showing up late and leaving early on a regular basis.  One thing’s for certain:  This doesn’t look good to managers.

Putting in more effort than is required is a simple way to build credibility while building your reputation.  Stack the cards in your favor by demonstrating to coworkers that you go above and beyond.  You’ll build a reputation for being a hard worker and your boss will notice, giving you an additional piece of justification for a pay raise when you next ask for one.

Learn Continually

Learning continually about your business vertical and your job responsibilities allows you to grow closer to being a subject matter expert.  Expertise in a given field can be parlayed into being a “go to” person, and this usually entails commensurate financial compensation.   For example, there are certain niches of engineering-related knowledge I pride myself in knowing well and I’ve become a go to person in my organization for this knowledge.  This means more recognition as a subject matter expert and an additional feather in your hat when asking for a pay raise.

Change Directions

You may determine that increasing your income in your current line of work isn’t feasible.  Whether it be that you hate your current job, have a limited income ceiling, dislike your boss and/or coworkers, a change of direction may be in order.  There are several ways to increase your income while choosing a different line of work.

Get an MBA

A Master of Business Administration (MBA) degree is a common way for professionals to change careers.  I’ve had MBA classmates change directions from technical roles to managerial roles.  I’ve also seen  other classmates completely change verticals, from software engineering to finance, and greatly increase their income.  I completed an MBA well into my professional career and found that it generated many opportunities, especially related to leadership, as I moved from a role with a technical focus to a leadership role.  An MBA is a great way to learn about the many aspects of leading and managing an organization and, as a result, organizations looking to fill leadership roles often filter resumes and LinkedIn profiles based on this credential.  Hint:  Look for an employer who pays for graduate education and leverage this benefit to further your career.

Learn a Trade or Become an Apprentice

There are many, many ways to earn a good living while not wearing a white collar.  A Google search for plumber and certified welder salaries indicates $50,000 annually is feasible, with much more compensation available for folks willing to specialize further.  Of course, as with any skill, it takes time, training, and patience to become proficient.  An apprenticeship under a well-experienced tradesperson could be your ticket to accelerating growth in expertise, career change, and income increase.

Develop a Side Hustle

You may be thinking, “thanks, buddy, but an MBA and trade school aren’t free.”  While I’m a big, big fan of having someone else pay for either, (whether it be through an employer, a government program, the GI bill, or another avenue), you can immediately boost your income  by picking up a side hustle or part-time job while you pursue education.  There are any number of side hustles you can pursue that you can jump into immediately:

  • Drive for a ride sharing company (i.e., Uber, Lyft, Sidecar, etc.)
  • Walk dogs through Rover or a similar app
  • Post your gig skills on Fiverr.  Many of the skills posted on Fiverr can be used from the comfort of your home.
Categories
Spending

Personal Finance Foundation – Part 2 – Easy Money: Spend Less

This is the second part of my Personal Finance Foundation series that serves as a starting place for those who are looking for an organized way to approach their finances.  It’s easy to find personal finance articles, but it’s much more difficult to find an organized approach to personal finance.  To read Part 1 of the series, go here:

Personal Finance Foundation – Part 1 – A Starting Place (Calculating Net Worth)


Spend Less

To grow your net worth (assets – liabilities), you can do any of the following:  Earn more, spend less, or grow your money through saving or investing.  When you start taking control of your finances, finding places in your life to spend less gets you immediate wins.  For example, it’s much easier to find cheaper car insurance than it is for you to get a new job or promotion that will give you a pay raise.  A few clicks will let you choose a higher auto insurance deductible and lower premiums, while a promotion requires you to demonstrate additional value to an employer over the course of several months or years.

Focus on the big expenses when cutting spending, since this will provide you with the most significant savings.  Sure, you can pack a lunch a day or two more per week, but doing this won’t move the needle as much as focusing on big wins that will net you hundreds or thousands of dollars.  Transportation and housing are typically the largest expenses for most people, so I recommend starting your cost cutting here.

Transportation Costs

If you’re in massive debt but drive a $40,000 truck, sell the truck, buy something less than $10,000 (you can get a very reliable vehicle at this price), pocket the difference and free yourself of the monthly payment if you’re financing.  As you hopefully know, a new vehicle’s value declines precipitously the moment you drive off the car lot, and continues declining significantly the next couple of years.

What if you took the money you saved driving a modest vehicle and applied it to a credit card balance, which likely has an interest rate well over 10%?  Or, what if you took the money you saved driving a modest vehicle and invested it in Vanguard’s Total Stock Market Index Fund, which has returned 7% since it’s inception?  By the Rule of 72, a rough measure of how long it takes money to double at a given interest rate, your money would double in about 10 years (72/7 = ~10).

Another example:  If you’re currently driving a vehicle with bad gas mileage and are also driving long distances on a regular basis, you would save significantly on gas costs by instead replacing your gas guzzler with a gas efficient car.  Many cars now average 30 or more miles per gallon, so you could potentially cut your gas costs in half by switching to a more gas efficient vehicle.  At a cost of $2.75 per gallon and at a 15 gallon savings, you save $41.25 on fill ups when comparing a 30 mpg vehicle to a 15 mpg vehicle.  At two fill ups per month, this saves you $990 annually.

Housing Costs

Your largest cost cutting wins will likely come from cutting housing costs.  For example, if you’re renting a $1,400 per month apartment but are drowning in debt, you can likely find a less expensive but livable apartment, condo, or rental home that would save you hundreds per month.

Another method for reducing housing expenses is house hacking.  This is done by getting a roommate or multiple roommates to pay you rent and split expenses, allowing you to take their rent payments and apply them toward the mortgage.  If two roommates pay you $500 each (I know, that’s cheap rent today), you’ll have an extra $1,000 every month and $12,000 annually to apply to your mortgage.  House hack for a few years and you’ll greatly accelerate paying off your mortgage and avoid paying tons of interest to the bank, especially for 30 year mortgages.


When it comes to cutting costs, though, there’s a limit to how much you can cut.  Sure, you could spend your free time cutting coupons, and this is fruitful to a degree, but you could also spend your free time engaged in activities that could move the needle much more drastically.  I’ll address these activities in my next post.

Stay tuned for part 3 of my Personal Finance Foundation series!

Categories
Debt Investing Saving

Personal Finance Foundation – Part 1 – A Starting Place (Calculating Net Worth)

So you’re on the journey to get your financial house in order.  You first need to know where you’re starting.  You do this by measuring your net worth.  Net worth is calculated by adding up your assets and then subtracting your liabilities.  A very, very simple example: You have a savings account balance of $10,000 and have a credit card balance of $2,000.  Your net worth would be $8,000 ($10,000 in assets minus $2,000 in liabilities).  It’s certainly possible to have a negative net worth (think of the recent college graduate with student loan debt but no assets to their name), too.

As you can see, one way to increase your net worth is to increase the value of your assets.  Another way to increase your net worth is to decrease the value of your liabilities.  Often, though, and especially in the world of personal finance loud mouths, an extreme emphasis is placed on either increasing assets or decreasing liabilities, as if both can’t be accomplished simultaneously.  Both can be accomplished together and you’ll find positive movement in your net worth by focusing on both initially in your journey to a healthier financial state.

Here is a screen clip of an Excel spreadsheet I use to track my net worth:

Net Worth Spreadsheet
Net Worth Spreadsheet

You can download the spreadsheet here.  As you enter assets and liabilities, the spreadsheet automatically adds up both categories and automatically updates the resulting net worth value.  I update my spreadsheet monthly in order to keep tabs on my financial health and, more importantly, to see if something is out of whack and needs to be addressed.  Frequently updating your net worth will provide you with encouragement when you’re taking the right steps and seeing net worth grow, but it will also alert you if you’re slipping into bad habits.  It’s better to catch a bad habit a month or two in rather than realizing years later that the bad habit has caused you major financial damage.

Here are some challenges I’ve encountered while tracking net worth:

Challenge 1:  Accurately valuing certain assets and liabilities.  The value of a given asset or liability may not be black and white.  For example, when including a home’s value in net worth calculations, you should use the going market price for your home and avoid using values that may inaccurately inflate or undershoot the actual value.  This means that your home’s taxable appraised value may or may not be near the home’s market price (i.e., what you’d get if you sold the home).

Challenge 2:  If you have an asset that you’re financing, like a home or a car, make sure to include both the asset and the accompanying loan on your net worth statement.  Again, make sure you’re valuing the asset accurately (hint:  Kelley Blue Book is a great way to value cars).

Challenge 3:  Even though you’re enthusiastic about a collection you have (American Girl dolls, stamps, coins, etc.), they may not be nearly as liquid (i.e., easy to sell) as you think, and they may not be worth nearly as much as you envision.  I don’t include collectibles or jewelry in my net worth statement because I don’t see them as liquid assets.  This is an arguable point, though.  If you choose to include collectibles or hard-to-value items on your net worth statement, try to be accurate with their valuation.

Challenge 4:  You’ll encounter ups and downs in your net worth if a sizeable portion of your asses are in volatile categories, like stocks.  You’ll notice the ups and downs even more if you track your net worth monthly.  This is OK, as stocks (I’m thinking index funds when I say “stocks”) appreciate over long (10+ years) periods of time.  Just make sure that if you’re net worth is declining in value that you’re not contributing to this with reckless spending, overloading credit cards, or buying that Corvette you probably can’t afford right now.

Now that you know your net worth, you have a baseline from which to measure progress or regression.  If your net worth increases, this shows financial progress.  If your net worth decreases, this shows regression, and you should be especially aware of what’s causing the decline.  Your goal should be to increase your net worth over time.

Personal Finance Foundation – Part 2 – Easy Money:  Spend Less

Categories
Investing Retirement Saving

What Can You Learn from the Subprime Mortgage Crisis?

It’s hard to believe time has passed so quickly.  Ten years ago the subprime mortgage crisis led the U.S. economy into a severe recession and carnage ensued.   Many people lost their homes along with huge portions of their retirement savings.  Credit markets froze and taxpayer money was used to purchase toxic assets from the very banks that facilitated the crisis.

A decade removed from the great recession, what takeaways can help you succeed financially and prepare you for the next economic downturn or recession?

  • Only you have your best financial interests in mind.  Banks were more than willing to lend money to under-qualified borrowers, and this resulted in skyrocketing foreclosures when interest rates increased on adjustable rate mortgages (ARMs).  Some argue that banks were negligent in persuading under-qualified buyers into taking on supersized mortgages.  This certainly could be the case, but it hammers home an important lesson:  Understand your financial choices and don’t rely solely on someone else’s opinion to guide you, especially if they are in a position to make money off of you.  Educate yourself before you pay someone for their financial guidance, as this will better allow you to see if your adviser is pursuing your best interests or his.
  • Diversify your investments.  Plenty of folks who planned to retire in 2008-2010 had to delay retirement due to seeing their 401(k) plans shrink drastically as the equity markets plunged.  This meant several more years of work for this group.  What if, though, this group had rental property as an additional source of income for their retirements?  The recession economy saw an increase in renters, resulting in increased income for rental property investors.  These rental property investors could choose to withdraw a smaller amount from their 401(k) plans while relying more on the increased cash flow from rental property investments.  While I’m not advocating only for rental property investments as a source of retirement income (it certainly is a great option), I am advocating for a multiple-legged stool for your retirement portfolio that does not leave you in an anxious place should an investment class take a plunge.
  • Invest more than you need.  I’ve never heard anyone complain that they invested too much.  In the case of workers who had to postpone retirement due to the Great Recession, many of them could have continued with their retirement plans had their nest eggs been larger.  While this may go into the “thanks for the insight, buddy” category, your savings and investment rate is a better determinant for your success than rate of return:  http://www.thesimpledollar.com/five-most-important-factors-for-investment-success/
  • Follow your plan, not your emotions.  The S&P 500 lost about 57% of its value from October 9, 2007 to March 9, 2009, the day the index bottomed out during the Great Recession.  Thankfully, I didn’t check my retirement account balances much during this time, mainly because I had barely entered the workforce after graduating from college.  My plan, though, was to continue working for at least three, if not four, decades more until I retired, and equities with all of their volatility were the foundation for growing a large enough nest egg.  The S&P 500 took four years to reach its value on October 9, 2007 and has grown much more in the current bull market.  Investors who made an emotional decision to sell during the recession likely missed much of the growth during the subsequent recovery and likely missed the opportunity to purchase shares of the S&P 500 while they were on sale.  Recessions and downturns in the economy can be very anxiety inducing if you don’t remember that these are terrific opportunities to buy shares on the cheap and that the market provides substantial returns in the long run.  The past 30 years saw the S&P 500 return 11.66% (10.19% geometric return) with dividends reinvested.
The S&P 500 has returned 11.66% (arithmetic) and 10.19% (geometric) the past 30 years.  Courtesy of http://www.moneychimp.com/features/market_cagr.htm

For a terrific read about the subprime mortgage crisis and its causes, read The Big Short by Michael Lewis.  The book will hammer home my first point regarding educating yourself on financial decisions, especially major ones like taking out a mortgage.  While I think the majority of people in finance are well-intentioned, great people, The Big Short shows that there are individuals who will seek to take advantage of you (as there are in any industry).  While the financial industry may or may not be in a better position to avoid a similar crisis, you can certainly prepare yourself to not only avoid making bad decisions during a recession, but to take advantage of the opportunities presented by an economic downturn.

Categories
Bible Dave Ramsey Debt

Lending Money – Advice from Scripture and the Catechism

At Mass on last Sunday, February 19th, the following passage from the Gospel of Matthew caught my ear:

Give to the one who asks of you,
and do not turn your back on one who wants to borrow.

This passage stood out to me because at first glance it stands in contradiction to another passage, Proverbs 22:7, I’m relatively familiar with due to Dave Ramsey quoting this passage:

The rich rule over the poor,
and the borrower is the slave of the lender.

I’ve adopted Dave Ramsey’s advice regarding lending money to others:  Mainly, I prefer to give, rather than lend, money to family, relatives, or friends who are in need, as I don’t want to create an obligation for them and have them indebted to me.  Note that I have to see a strong need present in order to consider giving money to friends, family, or relatives.  Dave often sites the “Thanksgiving dinner situation” where one relative owes money to another, resulting in increased tension between the two due to debt.  I want to avoid this situation in relationships with people I care about.  Proverbs 22:7 certainly supports this philosophy.

Given that Matthew 5:42, though, exhorts us not to turn our backs on the one who wants to borrow from us, how does this not create a contradiction, and where does this leave us when someone wants to borrow from you?  When I need clarification on scripture, I go to the Catechism of the Catholic Church, and it provides some clarity in this case.

VI. LOVE FOR THE POOR

2443 God blesses those who come to the aid of the poor and rebukes those who turn away from them: “Give to him who begs from you, do not refuse him who would borrow from you”; “you received without pay, give without pay.” It is by what they have done for the poor that Jesus Christ will recognize his chosen ones. When “the poor have the good news preached to them,” it is the sign of Christ’s presence.

We are called to help the poor and give and lend to them.  The Catechism also calls us to be prudent in giving and lending:

1806 Prudence is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it; “the prudent man looks where he is going.”  “Keep sane and sober for your prayers.”  Prudence is “right reason in action,” writes St. Thomas Aquinas, following Aristotle.  It is not to be confused with timidity or fear, nor with duplicity or dissimulation. It is called auriga virtutum (the charioteer of the virtues); it guides the other virtues by setting rule and measure. It is prudence that immediately guides the judgment of conscience. The prudent man determines and directs his conduct in accordance with this judgment. With the help of this virtue we apply moral principles to particular cases without error and overcome doubts about the good to achieve and the evil to avoid.

San Damiano Cross

In my multiple years of serving dinner at a local homeless shelter, l learned that the Dallas/Fort Worth homeless population struggles mightily with mental illness and associated alcohol and drug addictions.  Although these homeless certainly are poor, prudence has us put “right reason in action” and consider that our giving and lending could potentially enable their addictions.  As a result when interacting with the homeless, I prefer to give them food or supplies, or offer to take them to buy a meal.  Further, I give monthly to Catholic Charities, who has expertise in providing services to the homeless while not enabling bad behaviors.

Matters are more complicated, though, when considering lending to family and friends.  As I mentioned before, I have to see a significant need (major health issues, hunger, etc.) as well as effort to improve financial habits that may have placed them in their precarious situation.  A friend recently asked to borrow money from me in order to take a vacation, saying “I would have my money back in five days, so what’s the difference?”  I didn’t lend them money, and certainly didn’t give them money, as I reasoned she should be a good enough steward of her money so that she isn’t living paycheck to paycheck.  More to the point, a vacation isn’t a need.

As in many cases where scripture is difficult to interpret, seeking the guidance of the Church will provide clarity.  The virtue of prudence provides further clarity in this case, as well.

Categories
Debt Investing

Is College Worth It?

The cost of a college education and the associated debt that often accompany a college degree were both hot topics during the recent presidential election cycle.  The price of college tuition has soared and greatly outpaced both incomes and inflation.  One fringe presidential candidate even campaigned on promises of “free” college education for all (rant:  We’ll be taxed all the more to pay for this “free” college).

There is a camp that believes all people should go to college no matter the circumstance.  This view, though, doesn’t address the financial implications of attending college and also discounts various nuances, including whether a person would like to pursue a trade or career that does not require a college education. Additionally, some individuals may not succeed in a traditional classroom or school environment. They may benefit much more from an apprenticeship or hands-on training environment where substantial education costs are not incurred.

Tradesman can expect to make respectable salaries, too. Salary.com indicates a plumber earns, on average, in the range of $36,568 to $51,610 annually as of January 30, 2017. Welders make on average $32,409 to $42,798 as of January 30, 2017 according to salary.com. US median household income is $55,775 as of 2015 according to census.gov, the United States Census Bureau, so these salaries are certainly competitive when considering they are earned by individuals (as opposed to households).

I have an undergraduate degree in a STEM major and a Masters in Business Administration with an emphasis in finance and real estate.  My undergraduate college was a liberal arts college and, while as a student I questioned the value of all those “useless” electives, I now value all the writing practice, communications skills, and soft skills I gained.  My MBA was 85% paid for by my employer and provided me with a ton of business, finance, and investing knowledge that I am leveraging to continue investing in equities, start real estate investing, and potentially start a business with a colleague.  Was an MBA needed to continue investing in index funds, start investing in real estate, and open a business?  Certainly not.  Having the MBA 85% paid for, though, by my employer made this a great opportunity and helps me understand most aspects of running a business, and this knowledge was conveyed to me by terrific professors and the learning was facilitated by classmates who had expertise in many fields, including investment banking, real estate, energy, supply chain management, and management.

So, is college worth it?  It depends on many factors.

If you’re going to college, here’s how you can increase your return on investment:

  • Advanced Placement Exams.  Take advanced placement (AP) courses while in high school. You can then sit for AP exams in various subjects.  Depending on how well you score you will earn a corresponding amount of college credit.  Each hour of credit you earn will save you hundreds of thousands of dollars.
  • CLEP Exams.  College Level Advanced Placement (CLEP) exams function similarly to AP exams and allow you to earn college credit.  As with AP exams, CLEP exams can save you hundreds or thousands of dollars in tuition.
  • Get Community College Credit.  Community colleges have tuition that is much cheaper than 4 year universities.  If you’re already attending a 4 year institution, look into their transfer credit policy and see which hours (especially basic credits) can be taken at the local community college and transferred.
  • Finish College.  According to a recent LinkedIn article, graduates with a bachelor’s degree earn over $1 million more in their lifetimes relative to those who only hold high school diplomas.  If you start college but don’t finish, and if you also incur student debt, you’re putting yourself in a hole that will be difficult to escape.
  • Choose Your Major Carefully.  Certain majors are more in demand by employers and certain majors typically result in higher starting pay.  It’s one thing to finish school with $200,000 in debt but a $100,000 starting salary as an analyst at an investment bank.  It’s a completely different ball game finishing school with $200,000 in debt but starting your career making $30,000 as a social worker.  Notice that I’m *not* saying don’t become a social worker (or any other major, for that matter).  Before you choose a given major, know reasonable starting salaries and how long it would take to pay off debt if you choose to carry debt. Educating yourself on your degree’s financial ROI will help you save yourself from the potential surprise and grief of monster debt when you graduate.
  • Have Your Employer Pay For It.  Many employers will subsidize part of your college education, especially if it relates directly to your job, while other employers, especially universities, will pay for your entire education.
  • Choose a College with Successful Career Placement.  I credit esimoney.com for this great, and often overlooked, idea.  A college education is a step toward employment, so visit the career services offices at your prospective school and ask the placement rate for students in general and, more importantly, for students in your major.

There’s no easy answer regarding whether college is worth it for a given individual.  If you’re considering a trade as a profession, college may not be the route you choose.  If you decide to attend a college or university, there are many factors to consider that can help you increase your return on investment.