I read a lot of personal finance blogs, and always smile when I read other's debt-repayment success stories. Paying off debt is such a rewarding thing to do! In addition to providing a sense of accomplishment, it also has an amazing power to instill good habits and have a slingshot effect on your savings. Here's how having a large amount of debt impacted my own situation.
Out of college, I had over $150k in student loans. I had gone to an expensive private university on a scholarship, and my parents had agreed to help with the rest of the cost. The first year went great - but engineering was hard! I also realized I loved a lot of other things in school, and took my eye off the GPA ball. Long story short, I lost my scholarship in my junior year. Coincidentally, my parents experienced some changes in their lives, and could no longer help with the costs. I had two options: take out student loans, or transfer to a less expensive school. I opted for the loans, not realizing how much money was truly at stake.
Fast forward to graduation, and I had about 15 different loans. Some were big - for tuition - but some were small. I only then realized how expensive on-campus housing was, or how much those summer classes cost. I was heartbroken when I realized the payments would be about $1,800/month after the initial grace period. I was humbled.
The first year of adulthood was wild. I was literally broke and slept on couches for a few months, then borrowed money from my grandmother to pay for the security deposit and first month's rent of an inexpensive apartment with my best friend - who also borrowed money from his parents. Once we were settled in, we moved into a room together and rented out the second bedroom for a year. I also got a sales job and excelled. Without that job, I don't know how I would have made it.
I was able to pay off about $30k of my highest-interest loans in a few years. I set up my retirement accounts and learned about compound interest - which led me to believe it would be better to invest as much as I could, rather than pay off some of my lower-interest debt. So that's what I did.
I began making minimum payments on the low-interest debt around 2009, when I also went to graduate school. I took out another $50k in ~3% loans to cover 2 years of business school, reasoning that what I had at the time (about $50k) would be better off left to grow in the market. Glad I did, because that turned out to be the 2009 low point, and the market went up for more than a decade after that.
So come 2011, I had about $120k in undergrad loans and $50k in business school loans. I paid off about $30k. I also had almost $100k in my investment and retirement accounts, which were growing. At this point I was investing about the same amounts as I paid toward debt. Combined, over half my income.
Part 2 coming soon.
It wasn’t until recently that I was living off of my salary. But about a year ago, I began to shift my focus to building up my side hustle. Now I live entirely off of the side hustle income, channeling all of my passive investment earnings and wages from my full time job back into my portfolio. This has fueled growth dramatically and has given me a sense of true independence.
In addition to the side hustle, I've built a portfolio that churns out enough income to cover my expenses. Having three income streams each large enough to cover all of my expenses gives me a sense of security and confidence. Building the passive income took about 15 years, and the side hustle income took about 5.
Just goes to show you that planning ahead and building these things takes time but make a big impact.
What a whirlwind of a year! In March, I watched as my portfolio dropped by almost 30%, wiping out years of savings in a matter of days. I thought to myself, "If only I had sold everything in February, I'd be golden."
Less than 6 months later, everything had bounced back. I thought to myself "If only I had borrowed more money and invested it in March, I'd be golden."
This summer, I watched many electric vehicle startups explode by 300-400%. I thought "if only I'd bought all those back in May, I'd be golden." Then I watched TSLA rocket to $500 (post-split), and thought to myself "If only I had bought more Tesla."
A friend of mine just before September's "Tech Wreck" had sold some stocks to buy a house, and I thought to myself "if only I'd sold all my stocks..."
You get the idea.
The truth is, I'm terrible at timing the market. The market is unpredictable by nature. If anyone tells you they can predict the market, they're simply proving they don't know what they're talking about. Choose an appropriate asset allocation. Stick to it. And don't beat yourself up if you "miss" all those opportunities to time the market.
The most successful investors have probably "missed" them, too.
When I was a kid, one of my goals was to be a businessman and enjoy abundant wealth. I grew up middle class; my parents both had good, stable jobs - my dad was in a union and my mom was a nurse - and we had pretty nice things. New cars, summer camp, piano lessons, a pool table in the basement. But my parents still stressed about money. There never seemed to be enough.
A seven figure portfolio was supposed to eliminate all that stress. For years, my stress was caused by concerns that I wouldn't earn enough money, or save enough, or invest enough. But even now, I still feel stressed.
Warren Buffett says there are 2 rules to achieving wealth: 1) never lose money and 2) never forget rule number 1.
When you're starting out, you tend to focus on making and saving and investing money.
But once you have money, you focus on how not to lose it.
Money-related stress may be inevitable after all.
Well, it's official. I'm no blogger. :) But I AM all about financial independence, and thought I'd share an update.
A few things people might find interesting about me are that I live in NYC, have an 800 square foot apartment, eat out at restaurants often, travel internationally several times a year, wear nice clothes, and keep my car in an attached garage near the elevator in my air-conditioned building.
And I usually spend less than $40k a year. How? My girlfriend shares the rent, I travel using points or stay with friends, and I drive a fuel-efficient Prius.
I started my financial journey when I was 24, when my net worth was -$125k due to my student loans and credit card debt. I learned to be frugal because I had to be.
I worked my tail off in sales for a few years, starting with a salary of $35k, eventually earning six figures a couple years later, and, by the time I left for business school at 27, my net worth had grown to about $0. I was proud. I was awarded a fellowship to a two-year MBA program, which ultimately cost less than $50k (including tuition, room and board, travel, and books), a fraction of the cost of most other top 20 programs. I qualified for 3% federal student loans, so I left my money in the market and let it grow. When I re-entered the workforce at 29, I pursued consulting, where I knew I would travel often, save money, meet a lot of people, and expand my knowledge. As my career has grown, so has my income - to the tune of about 12% a year.
Early in 2017 I reached the crossover point, where I could finance my current lifestyle exclusively with passive income, saving 100% of my take home salary. I choose to keep working, though - there are so many things to learn, places to go, and people to meet. Opportunity is out there, and I won't find it sitting on my couch.
Because I've been less stressed than I used to be, I helped start a business with my partner, which is thriving! In a few years I may transition there full time, or explore something else. While I may have 'retired' from mandatory work, I've found optional work to be rewarding enough to keep doing.
A lot of my friends have approached me lately about investing - I guess word got out that I'm obsessed with personal finance. They want to know what to buy, which firm to use, what accounts to open. You get the idea. You might be wondering the same things.
Before I get tactical with them, though, I always point out that this is a MAJOR ACCOMPLISHMENT! Deciding to invest extra money means two things: first, it means they have extra money, derived from spending less than they earn. And second, it means they're thinking about the long term. These are the building blocks of wealth; people who think this way tend to become wealthy. So props for having some extra cash.
So now they're smiling, they're feeling good. They want to jump right into which broker they should use or which stocks they should buy. <smh> At this point, I have to stop the whole conversation again, and ask two simple questions:
1) Are you sure you should invest?
2) What are you investing for?
The answers to these two questions will have a much, much bigger impact on their investing success than any brokerage choice or stock tips I could share (which I actually can't, because someone starting out should never buy individual stocks). Anyway, let's dig into those two questions:
1) Are you sure you should invest? This one's huge. So you've saved up ten grand and are ready to put it to work. But are you sure you should invest it? I mean, have you already reviewed your Personal Balance Sheet? If you've paid off your credit cards, stashed away some cash for an emergency, and don't anticipate any big expenses for a few years, ok - maybe you should invest.
2) What are you investing for? Investing for retirement, a child's college tuition, or a down payment on a house each has a different time horizon. The last thing you want to do is pull money out of an investment account a year into a big market downturn. Once you know your time horizon, you can figure out which accounts to use, how much to allocate toward stocks or bonds, and even which broker to choose. Seems like a simple question, but it'll get you thinking.
So imagine we're friends. You might be a little peeved I didn't recommend buying AMZN, but you'll be glad I asked these questions. Take a day or two to think them over - review your Personal Balance Sheet and write down your long term goals. Then let's talk shop about when, how, and where to put that extra money.
Millennials want Financial Independence, not Retirement!
I get all worked up every time I read another one of the same articles on retirement. Save 1x your income by 30, 5x by 50, 12x by 67, yadda yadda ya. I really hate the way the industry thinks. As if anyone in his or her twenties is going to stay with the same career - let alone the same job - earning the same income consistently for 30 or 40 years seems silly, doesn't it?
We're Millennials! We don't play by those rules. So what does that mean when it comes to our retirements? Should we bother saving anything if we're going to start the next Facebook? What if we're going to go back to school in 5 years and land a six figure job?
If you're anything like me, you've probably tried one career and are on your second or third by now. Whether you went to business school and started fresh like I did or switched gears after 5-10 years in banking, consulting, or big law, one thing is for certain: you are unique. So why do so many financial advisors recommend saving a percentage of your income every year, or working a certain number of years?
Instead, I recommend taking a holistic view of your expected earnings over your lifetime. Do you plan to work in Corporate America for a decade and then take the next decade off to raise kids? Better save as much as possible while you can. Maybe you're going into business for yourself and can forecast income growth of 10% per year for the next 20 years - so it'll be more important to start small but ramp up savings consistently.
Consider, too, your lifetime expenses. Do you plan to have kids? Do you want to go back to school? Start a business in your 50's? Retire early?
Once you've considered the big picture, you'll have a much better idea of what you need to do today.
You’d be surprised how many smart people don’t have a financial plan. Don’t be one of them!
The more you earn, the easier it is to save. Unless, of course, you spend it all. The key is to create a place for your money before you earn it, before you even think about ways to spend it.
Envision you earned $1M this week. Now that’d be nice, right? Really think about it. Your company goes public and everyone gets a huge bonus, you win 5 numbers in the Powerball, you discover that old stamp collection your great uncle left you is worth a fortune. It doesn’t matter where it comes from – the point is, you now have $1M. What would you do with it?
If you’re thinking about which loans you’d pay off tomorrow, what car or clothes you’d buy, or how much you’d give your parents for their dream vacation, keep thinking. We want to figure out where you’d keep the cash if you had to keep it.
Think of things like 401(k)s, IRAs, Roth IRAs, taxable investment accounts, high yield savings accounts, checking accounts. See where we’re going with this?
Now divvy up that $1M – you might want $150k in the 401(k), $550k in the IRA, $200k in the taxable account, $90k in savings and $10k in checking, for example. (It’s hypothetical, so let’s not get hung up on contribution limits.) Visualize those accounts.
Imagine checking them every month, watching them compound and grow. Imagine sleeping well every night knowing you have enough cash on hand to last several years. Imagine feeling proud of yourself for having the discipline to earn and preserve that kind of wealth.
Ok, back to reality. You’re probably at least a few years from that kind of cash. But keep the end goal in mind, because it’s only a matter of time before you get there. That visual is a rough cut of your financial goals. You know which accounts to open, which ones to fund. $400k in an investment account won’t happen overnight, but every bonus, commission, or raise could help get you there. Once the account is open and growing, you’ll feel compelled to add to it over the years.
Of course, the $1M target is arbitrary – you could start with an even more ambitious goal – maybe $5M – or something more reasonable, like $100k. The point is, visualizing that stretch goal will help things along.
When you have a place to put future earnings, you’ll want to put them there.
Investors have more options than ever these days. Thousands of stocks, mutual funds and ETFs are available in hundreds of assets classes – some are specific (small cap domestic energy sector stocks, or large cap technology growth stocks) while some are broad (all US stocks or all global bonds).
While choosing the right asset mix is most important, choosing the right assets is a close second. Many mutual funds charge high fees – some charge sales fees as high as 5% – and they all charge an ongoing “management fee” of up to 2% each year. Most people consider funds with fees of over 1% to be expensive.
Now you might think 1% or 2% doesn’t seem like a lot of money. If you were buying a cup of coffee and were charged a 2% convenience fee, you might not care. But when it comes to investments, even a 1% fee can take a big cut of your return.
Stocks have returned about 10% annually over the last 80 years. After inflation, the real return has been about 7%.
Now consider paying 1% in fund fees on your investments earning 7%. That’s over 14% of your expected return each year (1/7 ~ 14%)! 1% doesn’t seem like a lot, but a 14% fee seems crazy. And that’s for a 1% fund in one year. A fund with a 5% sales fee could eat almost your entire return that year. And don’t even get me started about the impact of compounding that return.
Always remember to watch those fees!
You may have come across the term “asset allocation” as you read about investing. It’s one of the most important concepts to understand, and isn’t as complicated as it sounds.
Even though almost anything we own is an asset (furniture, cars, education, art), the assets we’re addressing here are stocks, bonds, and cash.
Each asset type carries a certain amount of risk and reward (called return). Cash is the lowest risk – a $100 bill won’t turn into $50 if you put it in your sock drawer for a month. But it’s also the lowest return – that $100 bill won’t magically turn into $200, either. Stocks are the other end of the spectrum: high risk, high return.
If you’re not thinking “how can I get the highest return while taking the lowest risk?” you may be asleep at your desk. Pay attention! The goal is to maximize return while minimizing risk. Since there are virtually unlimited combinations of assets in a portfolio, you can choose the risk/return scenario that you feel most comfortable with.
Generally, the younger you are, the more stocks you should own. In fact, there’s a simple formula for calculating the percentage of stocks to own: 130 (or 120) minus your age. For most millennials saving for retirement, stocks are the way to go, with perhaps a minor allocation to bonds and cash.
Until next time,