The Amateur Financier

Recently, Frank Curmudgeon of Bad Money Advice posted (or rather, reposted) an article in which he discussed hyperopia, or excessive far-sightedness.  The basics of this condition involve regretting excessive caution taken in the present to avoid a hypothetical negative outcome at some point in the future.  The study he cited included, as an illustrative example, students who increasingly regretted the decision to study rather than party during their college years.  Over time, more and more students came to regret having too much self-control, versus not enough.  (I feel their pain; I wish I had done a bit more socializing and a bit less studying during my college days.)

When it comes to your finances, hyperopia can hurt you, just as can myopia (excessive short-sightedness).  You might find, years or decades down the road, that you feel you’ve gone through life without having any fun, instead saving and scrimping during your best years.  At best, this point of view can taint the otherwise grand event of saving enough to retire, or even retire early.  At worst, in an attempt to make up for lost time in the wild and crazy department, you might end up spending a great deal of money when you’re older (and have less time to make it back) than you would have during your younger days.  (Think of the guys who go through a mid-life crisis and buy a car with a six-figure price tag.)

How Do I Avoid Financial Hyperopia?

There’s no certain way to avoid being too farsighted and frugal with your money.  Each person is different, and what I might consider an excessive amount of saving, you may feel is just right.  If you do too much spending in an attempt to capture all the joys that life has to offer (and to live with no regrets), you will likely end up with not enough in savings when it comes time to retire, and end up with a heap of regrets anyway.

If there’s no way for me to tell you how much to save and how much to spend to make you happy, what advice CAN I provide?  In a nutshell, know yourself, and adjust your spending to meet your own needs and desires, now and in the future.  For a bit more advice on avoiding hyperopia, consider the following tips:

1) Splurge on Events, Not Things – Probably my strongest belief related to financial hyperopia: events are more memorable than physical objects, and you shouldn’t skimp on them if you hope to live a life relatively regret free.  Just about all the really good memories I have are from things I did, usually with friends or family, rather than things I bought.  If you want to avoid feeling like you missed out when you retire, be sure to do plenty of new and interesting things with your loved ones throughout your life.

2) Don’t Make Spending a Routine – No matter how interesting and memorable something is the first time you experience it, if you do it repeatedly, it’ll become boring and routine.  Even the most exciting and interesting vacations will become boring and start to blend together in your mind if you take the same ones every single year.  Make sure to vary your spending, in order to capture different experiences throughout your life and avoid feeling like you’ve seen it all.

3) Don’t Try to Make Big Changes All At Once – If you feel like your frugality has caused you to miss out on some great experiences in life, you might be tempted to make up for lost time by becoming very loose with your money.  In a word, don’t; going on a spending spree is unlikely to make you feel more satisfied with your spending decisions in life, and is likely to leave you significantly poorer in a short period of time.  Instead, plan out some events (or things, if you prefer) that you feel will make your saver’s regret decrease, and slowly start to integrate them into your spending plans.

4) Try to Start Young When Saving – You might wonder why a tip saying to save is included in a list of solutions to excessive saving.  The answer is simple: thanks to the power of compound interest, each dollar you save and invest while you are young has time to grow into much, much more money in several decades time.  As a result, saving a little bit (more) while you are young will enable you to spend more as you get older, without having to worry that you won’t have enough money to retire.

That’s all I have on financial hyperopia and how to avoid it.  As money problems go, it’s hard to think of a better one to have; still, if you are preventing yourself from having interesting and memorable experiences in order to save more money, you may feel as if your life has passed you by when you finally get to enjoy your spoils, and that’s something we want to avoid.  Make sure you accrue good memories as well as money during your life, and you should end up fine.

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“R-E-S-P-E-C-T
Find out what it means to me
R-E-S-P-E-C-T
Take Care, TCB”

-Respect, by Aretha Franklin

As you might guess from today’s opening lyrics, today we’re going to talk about, well, respect.  That is, holding the people and things around you in esteem, treating them as if they have intrinsic value, and showing courtesy and good behaviour to the people around you.

What does this have to do with personal finance, you ask?  Well, on the surface, perhaps not much; but respect really underlies every aspect of the monetary system.  If you don’t respect the companies that issue stock, why should they expect to get any of your money?  If your investment advisors don’t respect you, what’s to stop them from taking your money and running (a la Bernie Madoff)?  And of course, if other countries stop respecting America and trusting in our ability to pay our bills, just think of what will happen to our currency and standing in the world.  In short, respect is an important part of lives, and there are many people and things of which we should be respectful.

Whom Should I Show Respect?

Your Family – Treating the members of your immediate and extended family as valuable, important people is an excellent place to start.  If you genuinely respect your relatives, regardless of their choices in life, you help to form stronger, more durable connections to them and have them much more willing to help you in future, should the need arise.  (Not that such an ‘emergency plan’ should be your primary motivation for respecting them, of course; it’s just a nice bonus.)

Your Coworkers – If you want a work environment where your stapler doesn’t suddenly disappear on you or your lunch gets eaten right out of the company fridge, it all comes down to respect.  Do your best to treat those around you respectfully, and hopefully, your sentiments will easily be returned.  While strict enforcement of company policies can help to decrease the problems of a workplace with disrespectful people, there’s no substitute for having coworkers that return your courtesy towards them.

Your Company – By the same token, you should treat your company and the area you work with respect.  Don’t make a mess, behave inappropriately, or treat your boss shoddily.  You’re just going to make things less pleasant for your coworkers, and possibly bring your boss’s wrath down upon yourself.

Your Significant Other – I wish I didn’t have to say this, but here goes: if you don’t respect your partner, things will not go well in your relationship.  If you are just using your significant other to meet your own needs, whether physically, emotionally, or financially, the best case is that they will quickly tire of you and move on.  The worst case ends with a huge court proceeding that drags on foever, and makes you seem like a massive jerk.  Just avoid either one by showing respect to your romantic counterparts.

Yourself – Lastly, but perhaps most important, respect yourself.  If you don’t respect yourself, nobody else is going to, either.  Then, since you aren’t getting respect, you’re not going to give it to anyone else either.  Break this circle, find out what about you is good and deserving of respect, and treat others with the respect you now feel.  (But don’t go too far in the other direction; there’s a surprisingly thin line between healthy respect for yourself and egotism.)

That’s all I have to say on the concept of respect.  Remember, respect yourself, respect others, and respect will come back to you.  Now, be safe and respectful to each other, all of you out in reader land!

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Yesterday, I had a horrible, horrible drive home from work.  Two of my wheels went flat, and it took the bulk of the day to get them fixed.  Luckily, since I’m working the night shift now, I had the time to get towed (to two different repair shops), have the wheels replaced, and have the hub of one wheel fixed (at a third shop I only reached thanks to my emergency spare).  Unluckily, because I had to run around repeatedly in order to accomplish all of this, I only got about three hours of sleep before I needed to go into the work that night.

Still, even though I had little sleep (and even less time to catch up on my blog writing and reading), it did inspire some thoughts for me.  The biggest one is to be prepared for trouble whenever you go out driving.  Although I was on the road for less than an hour, going a route I practically know by heart,  I still ended up having to stop.  If you aren’t prepared for such an eventuality, it could end up costing you in terms of time, money, and even safety.  With that in mind, here are some points of advice for anyone who drives regularly, as well as my grade in each of them.

Car Maintenance Tips

1) Keep your car in good shape: The more preventative maintenance you do, the less likely you will find yourself standing by the side of the road, calling desperately for help, trying to find someone who can give you a ride.  If you make sure you have fresh oil, plenty of fluid in your radiator, good tires with a nice tread, and no problems with the frame, you’re going to have much less trouble with your car during your drives.
My Grade: B – I do try to keep my car in good working order, but sometimes I let things get a little backed up and my tires get a bit bald or my fluid levels get too low.  After this event, though, I’m going to make much more effort to be up on these preventative maintenance tasks in the future.

2) Know thy car and how to repair it: Let’s face it, no matter how well we try to care for our ride and how much we try to keep it working, accidents happen.  A tire blows, the engine overheats, the radiator blows; when we drive, any number of things can occur that can stop us in our tracks.  Being able to determine the cause of your problems, and fix the most common minor ones, is a valuable skill for anyone who spends time behind the wheel.
My Grade: C – I can change my tires, check my fluids, and keep my car moving in most circumstances, but if anything happens to the engine or to the exhibition catacomb, it is way beyond my ken.  Luckily, that’s fairly rare.

3) Have the Appropriate Materials Needed: When you have car trouble, it’s likely due to problems with your tires or the engine.  Now carrying a complete engine and four spare tires is not the sort of thing most of us can (or will) do.  But if you make an effort to have some repair and replacement materials on hand, you’ll be that much closer to being able to fix your car problems yourself.  Being sure to have everything you could need (especially if you are going to be far from stores or other resources) is vital for the prepared traveler.
My Grade: D – I’ll be the first to admit, I don’t usually have enough car repair items in stock.  I have an emergency spare tire, a jack, and a wrench, but that’s it; no extra oil, no spark plugs, no jumper cables, no equipment of any kind to help if something other than a tire gives way on me.  For that matter, I only have the one emergency (non-full-sized) spare, so if two or more of my tires go, that’s all she wrote.

4) Stay Calm: If you do find yourself in a situation where your car is no longer functioning and you can’t repair it, don’t panic.  Stay calm, focus on contacting someone who can help (either a family member or, more likely, the nearest repair person), let your boss or whoever you were driving towards know the situation, and wait until the calvary shows up.  Yes, having your car break down is a pain, but if you keep focused, you can easily get through it without a problem.
My Grade: B – I’m pretty good at not panicking under pressure, and it has helped whenever I’ve had car trouble.  I could be better (less cursing my luck when these things happen, for example), but I’m not too bad.

5) Have a Cell Phone Handy: In these days, when everyone and their kids have their own phones, finding a working public phone is all but impossible.  If you are out driving, be sure that you or one of your passengers is carrying a charged cell phone, so you have some way to contact help should you need it.
My Grade: F – I carry a cell phone everywhere I go.  Unfortunately, it’s getting kind of old, and it no longer holds much of a charge.  In the case of this incident, I ended up having to go inside the nearest gas station and use their phone (the pay phone out front was out of order).  Being able to get help on your own is vital to your safety, so be sure to be more prepared than me.

6) Join AAA – The American Automobile Assocation provides any number of services to its members, offering towing to stranded vehicles and sending repairmen who can perform simple maintenance on your vehicle.  Plus, you can frequently get discounts at various retailers by presenting your card, potentially enabling it to pay for itself.
My Grade: A – I am a proud, card-carrying (literally) member of AAA, and have been since I first started to drive.  They’ve helped me out a pinch many times (more than I would care to admit, honestly), and are more than worth the cost.  If you are a US citizen who drives a car and aren’t a member, I strongly, strongly recommend you change that fact immediately.

There you have it, six pieces of advice from me to you that should make your driving life a lot smoother.  Farewell, and happy travels!

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I’ve been thinking lately about cashing out lately.  For those of you who’ve never heard the term, the concept is basically to build up your money so that you are able to effectively retire early, usually in your forties to fifties, and do whatever you want with your new found free time.  Depending on your personality, that might be taking on new hobbies, expanding the time you devote to your existing hobbies, simply spend more time with your family, or even start working a job you really enjoy, regardless of the pay rate.

So far, cashing out sounds pretty good; what could be better than calling it quits on your job a decade or two ahead of schedule and being able to live every day like it was a vacation?  Well, unfortunately, there are some downsides: because you’re trying to retire so early, you’re pretty much going to be on your own as far as saving for retirement.  Retiring before the age of 62 means you aren’t entitled to even partial Social Security benefits, and pensions (for those lucky few who still work at companies that have them) are likely going to unavailable to someone who’s only been on the job for fifteen or twenty years.

“No problem,” you say, “I’ll just depend on my own retirement savings to carry me through.” Well, that’s fine, except early retirement means you’re not giving your best friend as an investor, compound interest, much time to work. This means, if you want to get to the amount of money you need in a much shorter time frame, you need to add much more money to your investments.  How much more?  Well, let’s say that you crunch some numbers and decide that taking out $40,000 of your money each year will allow you to enjoy your early retirement.  If we assume this amount will represent no more than 4% of your total portfolio, that means you need one million dollars in your account on the day you retire in order to make your whole plan work.  If you’re saving for 40 years, no problem; according to my ‘back of the napkin’ calculations, an annual contribution of $2100 more than gets you to your goal.  (We’re setting aside inflation at the moment, to make the calculations a bit easier; don’t worry, we’ll cover how inflation affects the amount you need to invest soon.)

The problem starts if you try to cut down that amount of time until retirement.  If you want to retire in 30 years, expect to contribute $5600 a year to reach one million; more than twice as much, but still a workable amount for someone who requires about $40,000 a year to meet their needs.  To retire in twenty years, you’re looking at a contribution of about $16,000 a year, nearly tripling your savings requirement.  Finally, to reach a one million dollar nest egg in ten years, you will need to contribute $58,000 a year, nearly fifty percent more than you intend to spend each year in retirement.  If you are not making a six figure salary, you’re going to be hard pressed to come up with nearly sixty grand year; and if you are making that much, are you really going to be satisfied only spending forty thousand dollars each year after you retire?

If that hasn’t shattered your dream about retiring to a tropical paradise in just a few more years, let’s note that this is an oversimplification.  For one thing, we haven’t talked about inflation at all.  This is one area where the early retirees have a bit of an edge; less time until retirement means less time for inflation to eat away at the real value of your money.  Unfortunately, it also means you’re have to increase the figures we just gave for the yearly contributions; even ten years from now, a million dollars just won’t be worth as much.  To get an inflation-adjusted million after forty years (with a 3.5% assumed rate of inflation), you’ll have to increase your yearly contribution four-fold, to $8400 dollars; in order to retire in ten years with an adjusted million, you’ll need to put in $82,000, a nearly ten-fold increase in your contribution amount from a forty year horizon.

After hearing all this, are you sad, depressed, and ready to just give up on your dreams of early retirement?  No?  Good; if you realize the enormity of the task ahead of you and still are determined to retire early, you might just have the resolve and determination in order to make your dream come true.  To help you out, let’s end this column on a higher note and go over a few steps for anyone who shares my dream of leaving the rat race and retiring early:

1) Plan carefully, and conservatively - Your first step should be to sit down, crunch some numbers, and see (a) where you currently are, financially, (b) where you hope to be when you retire, and (c) what path you need to travel to get from (a) to (b).  Decide just how much you will need when you retire (adjusted for inflation), the amount to invest each year, and whether it will be possible for you to pull that much from your budget to add to your future plans.  If it’s simply not mathematically possible to retire at the time you want (without working two more jobs or simply never eating), try to shift your desired retirement date a bit; aiming to retire in twenty years rather than ten cuts the (inflation-adjusted) amount you need to save down more than fifty percent (to $32,000, if you are curious), and going from a twenty to thirty year time frame  (which could still lead to retirement before the AARP decides to add you to their ranks) cuts the needed amount in half again (to $16,000).  Of course, all these figures assume you’re shooting for an inflation adjusted one million dollars at retirement; you’ll have to adjust them to meet you own particular situation.

2) Cut down on your spending – There are two advantages to this course of action.  First, if you’re spending less each month, you have more money to put towards your early retirement, making it easier for you to meet your investment goal.  Second, if you find you’re able to live a good, full life spending only thirty thousand a year rather than forty thousand, you can probably adjust your final goal downward, requiring less in contributions (or netting a quicker time to reach the needed amount with the same contributions).

3) Invest More – If you’re trying to retire years, if not decades, ahead of the rest of your office mates, you can’t invest the same amount that they do.  Putting 10% of your paycheck into a 401(k) every year might (and I stress, MIGHT) provide you with enough of a return in order to retire at 65, but it won’t be enough to give you a ‘Get of Work…Forever’ card by the time you turn 50, to say nothing of when you’re even younger.  Shoot for 20-30% of your gross income, and try to ramp it up a bit more, if possible.

You should also look carefully at the rules governing retirement plans, to determine if, should you invest in a 401(k), IRA, or Roth, whether you will be able to get the money out when you need it and how much it will cost you in penalties and other fees when you do.  If they look like they will benefit you, feel free to take advantage of their tax advantaged nature for a portion of your retirement savings; if not, simply use taxable accounts.  (A complete guide to all the subtleties of retirement accounts as they pertain to early retirees is bit more than we’re going for right now; just be aware that usually, taxable accounts will be better when you’re trying to retire early, but not always.)

And most importantly…

4) Make sure to have fun along the way – It might be tempting to take every spare cent you have and put it into your retirement savings (and you might argue that I just told you to do as much in my last point), but if you do so at the cost of your current enjoyment, you’re going to spend some of the best years of your life doing an impression of Scrooge while your friends, coworkers and classmates are having the times of their lives.  Furthermore, if you spend the first twenty years of your adult life depriving yourself, you’re going to be that much more likely to live it up when you do retire, and possibly blow through all the money you worked to accumulate.  Neither of these events is something I want to happen to you.

A much better strategy is to be conscious of your financial goals and how much you are trying to save, but not to let it stop you from having a life.  Go on, attend parties, go on dates, spoil your significant other every now and then, and perhaps even spoil yourself occasionally.  Just try not to go over the top when you do so; be frugal in your day to day life as well as your celebrations, and you can have your fun AND save your desired amount for an early retirement.

Here’s looking at good luck to you in your attempt to retire early; I hope I’ll have the chance to join you!

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