The Amateur Financier

If you followed along with our brainstorming session last week, you should have a more defined idea about what you would do if you could do anything with your life.  Our next step to see what we’re going to need, moneywise, in order make our dream into a reality.  (This shouldn’t be that much of a surprise; this is a personal finance blog, after all.)

Now, don’t panic, but we’re going to have make up a budget.  I’ll do my best to make this as painless as possible.  Besides, since we’re budgeting for your ideal future, I’m hoping that you can overcome any objections you might have to budgeting in general, and instead focus on the pleasant thoughts of that future.  You can, of course, apply similar techniques to budget for your current lifestyle, but I know it’s more fun to think about the future and how much better things will be then.

The First Result I Got For An Image Search Of 'Freedom'

Now, a few last comments before we get into the nitty gritty of our calculations.  First, as with any budget, it’s best to overestimate your costs and underestimate your income.  It’s hard to know with absolute certainty what your costs will be even a month or two in advance, let alone years or decades down the road, so it’s good to give yourself a healthy margin of safety, even at the cost of delaying the day when you can tell your boss where to stick it.  Second, try not to get too bogged down on exact figures; we’re not shooting for precise, down to the last penny figures; rather, we’re trying to get a general idea of what you need to save and earn.  Lastly, have some fun with it; you’re trying to create the budget for a perfect future, so there’s no reason you shouldn’t enjoy it.

Your Financial Freedom Budget

To help you come up with a simple budget, I whipped up a simple budget sheet you can edit with your own personal details.  Be sure to check it out; it’s a pretty simple spreadsheet, one that you could probably make yourself if you were so inclined.  If you’ve never created a budget before (at least, in spreadsheet form), this should give you an idea of what you need to include.  Or hey, try playing around with the provided sheet; that’s why I created it.

To help you fill it out with your ideal lifestyle, here’s a short guide to the information required.  The first box is where you fill in your living expenses.  Unlike most of the spreadsheet, you’re going to be filling in monthly (not annual) values; it’s probably easier for most people to determine how much their rent, utilities, food costs, etc., cost on a monthly basis than annually.  (I was going to use my actual expenses, but my current living situation as a starving grad student is far from where I would be ideally, so I made up some more appropriate values to serve as a template.)  One particular note: I included retirement saving in the monthly budget; even though your dream job is something you wish you could do forever, it’s good to keep up your retirement savings, just in case you find yourself unable (or unwilling) to keep working decades from now.

The spreadsheet automatically calculates the annual cost for you based on the total of your monthly expenses, as you can see at the bottom of the first box.  If you have quarterly or semi-annual expenses (insurance, for example) you can divide by an appropriate number, or…

Put your annual (and quarterly/semi-annual) expenses in the second box.  If you have magazine subscriptions you renew annually or yearly membership dues you need to pay, you put those expenses here and they’ll be incorporated into your budget.  (For something like insurance or other semi-annual/quarterly expenses, simply multiply by the number of times you bill the bill each year and use that value.)  Since this is a fantasy budget, I included spots for several yearly trips in the budget.  (I used Japan (one of the places my Sondra and I want to visit), California (Sondra’s native state, and a fun (albeit expensive) place), and the World Wonders (why not?); you could use whatever places you’d like to visit, or no place at all.)  Once again, there are a few extra lines if you have annual expenses I didn’t include (Or have more than three places you want to visit annually).

The third box allows you to try to plan for ‘once and done’ expenses, the sorts of things you don’t need every year, but still want to plan for.  If you want a new house, a fancy car, your own boat, here’s where you can incorporate the expense.  Since it’s unlikely that you’ll be able to spend tens, hundreds of thousand dollars on these expenses each year, I added a column so that you can determine how many years you wish to take to save up for these purchases.  Put in the cost of your dream items, the number of years you’re going to take to save up the money, and the spreadsheet will calculate your annual saving amount.  (Note: unless you intend to get a new car every three years (as my example spreadsheet shows) or, say, a new home every ten years, once you’ve saved up enough for the purchase, you won’t need this amount in your budget.  Still, it’s better to save too much.)

The fourth box adds up all your expenses, and gives you an overview of both the annual and monthly expenses.  The fifth box is where we look at the other side of the coin, your annual income.  You have the opportunity to include your ideal job’s income, any income you expect to earn from side work (maybe from making crafts or writing a blog), portfolio income (dividends from stocks, interest on bonds, etc.), and passive income (from rental income you own, for example).  One note on the values you should use: more than anywhere else, be conservative in your estimates here.  Yes, if your ideal job is an actor, it’s tempting to look at George Clooney’s income and use that for you income value; unfortunately, few actors ever reach that level, so you should probably use a much lower value to give you a margin of error.  (Of course, if your ideal job is not having to work at all, you can fill in a zero in this value to help determine how much passive/portfolio income you need to earn.)

The sixth (and final) box spells out the bottom line: how much money you’ll have extra or need to make up to fund your ideal lifestyle.  If the value is positive, congratulations!  As long as your estimates are on target, you should be able to live your ideal lifestyle, working your ideal job, without financial difficulty.  If you don’t have the skills to get your ideal job yet, that’s the only real obstacle standing in your way, so get out there and start building your skill set.

If the number is negative, though, there’s a bit of problem; you have a deficit you need to make up.  The numbers will indicate how much you need monthly, annually, and the lump sum you’ll need to cover the deficit with interest income.  How you go about closing that gap is up to you; next time, we’ll try to cover some possibilities in more detail.  Until then, keep planning your freedom!

Aw, book reviews; one of my favorite parts of being a personal finance blogger.  While I’m getting back into the swing of things (and trying to figure out how best to balance graduate studies, graduate work, and blogging), let’s have a mini-review of a mini-book to get things started.  The One up on Wall Street: Miniature Edition by Peter Lynch provides a short introduction to individual stock investing.  How well does it prepare you for the big plunge?

Three Sentence Summary: Before you get started investing, be sure you have the rest of your financial life in order.  There’s several types of stocks that can prove to be ‘ten-baggers’, each having different characteristics.  There are lots of possibilities in investing, and it’s important to take a long-term view while investing.

In-Depth Summary: Lynch starts by telling readers how to prepare for individual stock investing.  Quite a bit of the preparation is mental, having a plan for your investing and having the patience, humility, and detachment to succeed as an investor.  He also maintains that would-be investors should buy a house if they want before individual stock investing and that they shouldn’t invest any money that would cause any material harm if it were lost.

The second chapter covers the investment process itself.  Lynch suggests looking around you to find small but growing companies that could become ‘ten-baggers’ (stocks that grow ten-fold while you own them; it’s one of Lynch’s favorite expressions).  Lynch lists six types of stocks that can end up making you a lot of money: slow growers, large companies that show limited growth; fast growers, small, fast-growing companies; cyclicals, whose growth and profits tend to fluctuate in cycles; turnarounds, where companies on the brink come back from the edge; and asset plays, companies that profit primarily from the production of a single asset (like oil or gold).  The chapter ends with a list of hints on improving your stock picking techniques.

The book finishes with a few thoughts on taking a long term view and when to sell your stocks.  Lynch only recommends owning as many stocks as you have an edge and your research bears out the suitability of the stock.  Most of the chapter is devoted to what circumstances warrant the sale of each type of stock.  The book ends with twelve silly things that people say about stocks and stock investing, from being able to tell when a stock has hit bottom to waiting for a rebound to sell.

Pros: Well-written, interesting book on investing from one of the experts in the field.  Not a bad crash core in investing in individual stocks.  More than a little bit of Lynch’s humor present throughout.

Cons: Not that much help for individuals who don’t want to (or don’t have the time to) invest in individual stocks (other than one reference for such individuals to put their money into a mutual fund near the end of the book).  The miniature format means that there is limited information; even on the subject of individual stocks, there much more than can be covered in a 5 cm square book with only 95 pages.

Overall:One up on Wall Street: Miniature Edition provides a basic introduction to stock investing, although the short format means there’s a limit to how much information can be passed on.  You might want to get the full-version, as I’m planning, if you really want to get Lynch’s view on investing; the mini-book, while a good and interesting read, is far from all that you need.

If you’re reading this, there’s a fair to good chance that you’re already pretty well versed on the basics of personal finance.  You’re also probably physically attractive, highly intelligent, and very creative, to boot.  But enough about the many positive traits of my readers.  I bring this up because you’re probably smart enough to realize this already, but I’ll say it anyway: playing the lottery is a terrible method for becoming wealthy.

Again, you probably don’t need me to tell you all the reasons why putting down two dollars a day on a pair of daily tickets is a horrible ‘investment’, but if I didn’t, this would the shortest blog entry I’ve ever written.  So, let’s start with one of the biggest ones: the odds against you winning are absolutely insane.  MSN, while discussing and rebuking some other lottery myths, notes that the odds of winning the popular Mega Millions game (with a single ticket) are 1 in 135,145,920.  To help put this in perspective, the odds of being struck by lightening at some point in your lifetime are estimated by the National Weather Service as 1 in 6250; you are over twenty THOUSAND times more likely to be struck by lightening than to win the Mega Millions game.

Pictured: A more likely retirement plan than 'winning the lottery'

You’re probably already aware of these horrible odds; you might also have friends, neighbors, or relatives who, in spite of such odds, continue to buy lottery tickets.  One reason they’re likely to cite is that the profits from the lottery program go to support some worthwhile cause.  This is true enough, as far as it goes; rather than going to the local bookie or crime boss (or even worse, Donald Trump), proceeds from state lottery systems are often directed toward one or more worthy causes.  In my home state of Pennsylvania, for example, roughly half the money taken in by the state lottery system is put toward programs for the elderly.  It seems like a win-win; the elderly get more money and the people of Pennsylvania don’t have to foot the bill (unless they choose to buy a ticket).  What could go wrong?

Well, the elderly (or other programs supported by state lottery systems) could actually get less money.  A study of the proceeds of the multi-state Powerball game found that even in states where the money was supposed to go to a specific purpose, the state legislators directed other state funding away from the programs given lottery proceeds, leading to a net decrease in spending.  A few years after the lottery has been established, the program receiving money from the lottery is getting less money than if it was still being funded from the state’s general revenue.

That’s just the start of reasons to avoid the lottery; depending on your beliefs, there’s any number of other reasons.  Many religions consider gambling to be, at best, something their adherents should avoid, and at worst, a sin that nobody should engage in.  You might also find the fact that most lottery players tend to be undereducated, poor individuals as a reason to oppose the lottery system.  Also, the money that the states take in and put toward various programs (regardless of whether such contributions decrease the total amount those programs receive) comes out of the money returned to winners (aka, the people lottery players hope to become); you will have a higher percentage of the total money spent gambling returned to you if you go to a casino compared to buying a lottery ticket.  (Although, even there you shouldn’t expect to win; the only game you can  get a mathematical edge in, even in theory, is blackjack, and only then by counting cards.  Try that in the casino, though, and see how long it takes them to toss you out on the curb.)

Finally, there’s the economic argument against lottery tickets.  Let’s say you’re our two dollar a day lottery friend from before.  If you play five times a week, 50 weeks out of the year (maybe you take off for two weeks each year for the holidays), you’ll be spending five hundred dollars a year.  Keep it up for 40 years, and you’ll have put $20,000 into the state coffers.  Had you invested that money at a relatively modest 8% rate of return, you could have had an extra $130,000 in your pocket at the end of forty years, whereas you’d be lucky if you saw any return from the lottery.  (Even if you’re a more typical gambler, spending $150 each year, on average, putting that money into an investment earning 8% will leave you $38,000 richer in forty years; not as much fun as being able to say that you’re a lottery millionaire, perhaps, but also much more likely to leave you with something.)

Reasons To Play The Lottery

With all of this, you might think that I’m completely opposed to the lottery.  That’s not the case at all; if you do it right, playing the lottery can be fun, as with most other forms of gambling (there’s a reason games of chance, in spite of rarely enriching the players, continue to be popular, even to this day).

You just need to keep a few things in mind as you play.  First, play for fun; the chance you’re going to win is minuscule, at best (barring buying so many tickets that even if you win, you’re still going to be in debt), so if you can’t laugh when you lose, you should just stop playing.  Second, only play with money you can afford to lose; there’s an excellent chance you’ll never see this money again, so don’t spend food or medicine money on lottery tickets.  (I really wish I didn’t have to say this, but alas…)  Lastly, if you can, play with friends/coworkers.  Not only will you be able to buy more tickets without having to kick in more money yourself (improving your odds, however slightly), but it could also help your group to socialize more.  My mother has been playing the lottery with her coworkers since I was a junior high student, and they seem to enjoy it, in spite of the fact that the biggest wins they’ve ever had were for a few hundred dollars.  (For those of you who’ve never played the lottery, typically if you match some, but not all, of the drawn numbers, you’ll receive a smaller, usually pre-set monetary amount.  Call it a consolation prize.)

There you have it, why the lottery is not a good route to wealth, and some advice if you do play.  (For further tips, including suggestions on how to increase your odds of winning however slightly, consult the aforementioned MSN article’s second page.)

Do any of my readers play the lottery?  Any other problems I forgot to point out?  Lotteries seem to bring out the superstitious person in us all; what methods of increasing your lottery luck have you seen?

Happy Labor Day to all my fellow Americans!  Hopefully, you’re reading this as you prepare to go visit your extended family and indulge in a nice, end of the summer picnic.  It’s Labor Day, the perfect time to take a break from your labors.

Of course, not all of us currently have jobs we need a break from; given nearly ten percent unemployment, there’s a fairly large possibility that you’re currently in between jobs, yourself.  If you’re a fairly recent graduate, you’ve probably come out into the world and found few, if any, people willing to hire you right out of the gate, especially with older, more experienced workers willing to take your place for the same pay due to their own situations.  If you’re young and just getting out of college, the thought of moving back in with your parents has probably already crossed your mind a time or two.

Well, good news and bad news on that front.  The good news is that you’re not alone; a sizable portion of today’s twenty-somethings have ‘boomeranged‘, returning to live with their parents.  (Although, as that link indicates, it’s not as unprecedented or widespread an event as some media figures, including those who dubbed Generation Y as the ‘Boomerang Generation’, would have you believe.)  It’s not considered evidence that you are horribly socially defective anymore, at least by most of your fellow Gen Yers.  (Myself included, as I ‘boomeranged’ for over three years after I graduated from my undergraduate institution.)

An entire generation, defined by an Aboriginal weapon

Now the bad news: that still doesn’t make it an ideal living arrangement, particularly when it comes to dating.  However understanding both your significant other and your parents might be, living with Mom and/or Dad is bound to add a snag to your social life and ability to romance the boy or girl of your dreams.  Not to mention that fact that the stereotypes and mockery of those who are still living with their parent(s) continue to exist; check out the tongue-in-cheek dating guide from the Financial Samurai to see some of the images the phrase ‘I live with my parents’ can conjure up while you’re at the bar.

Making Yourself More Date-able

So, what’s the solution?  Give up, throw yourself into the ‘living with my parents’ stereotypes, and start sewing your costume for the next comic book convention?  Not necessarily; there are ways to make yourself a more attractive romantic partner, even when you’re rocking your Mom’s basement.  (Although, if you still want to go to a comic book convention, go right ahead; I’ve been to a few, and they’re a blast if you’re in a geeky mood.)  If you want to make yourself a more attractive potential date, and gain some financial independence and confidence in the process, you should:

-Get a Job: “But,” you argue, “I’ve been trying to get a job since I first graduated; what more can I do?”  A complete guide to job hunting is outside the scope of this article (check my previous thoughts on the issue), but here’s the take-away for today: take a crummy, part-time, ‘just to put money in my pocket’ job if that’s all you can get.  You can (and should) continue to search for something more permanent, hopefully where you can put your formal education to work (although, if you have a degree in something like ’18th century French Romanticists’, I’ll warn you now that your only real chance for a job in that field will be to continue your education and get a position as a professor), but you should be willing to take a crummy job just to have some money coming in.  Because you’re going to need money in order to…

-Pay Your Own Bills: Your parents are letting you live with them; don’t stretch their generosity even further by having them foot your bills.  Pay them yourself, and get a taste of what it’s like to truly be a responsible adult in the world.  Your student loans will be a big one (how big depends on how much you borrowed to pay for your classes and other, hopefully academic related, expenses), but don’t forget to chip in for things like your share of the phone bill and groceries.  If you still have a sizable amount of money left after all that (or perhaps even if you don’t), you should also…

-Pay Rent: Even if your parents (or grandparents, or other relatives) don’t expect you to pay rent while staying in your old bedroom, you’d be wise to do so, anyway.  Not only will paying rent to your parents help to cover all the expenses you aren’t chipping in for above, doing so helps you to get in the habit of setting aside a sizable portion of your income for housing expenses.  It’ll also help change you from ‘freeloading mooch’ to ‘hard-working, potential date material’ in the eyes of would-be romantic partners.  (At least, it worked that way for me with my fiancee.)

If your parents refuse to take any rent money, try to make this deal with them (consider making this deal anyway; it’s a pretty good one): suggest that your parents take the money and put it aside, in a special saving account for you.  When you leave their house, the money will be yours again to help pay the down payment on a new house, or to cover the first few payments on an apartment that’s not in their basement.  You’ll still develop discipline as you keep paying them (discipline that will come in handy with your eventual housing payments), plus you’ll have a nice chunk of change when you’re ready to move out on your own.  Speaking of which…

-Make a Plan to Move Out: Living with your parents has lost of some of the sting, at least if you’re a Gen Yer, but it’s still easy to overstay your welcome.  Make a plan to move out after a certain period of time or after you’ve achieved some basic financial goals (like ‘building up a three month emergency fund’ or ‘earning at least $500 a month’) that you’re working towards steadily.  Having such a plan will let your parents, your dates, and even yourself know that you’re serious about not staying in your parents’ house forever, and should motivate you to work even harder to make it a reality.

There; a simple plan to get you from Chateau de Mom to a place of your own, and make you look less like a loser and more like a dedicated, driven person while you get there.  With luck, all of that should be enough to convince your date(s) that you’re a keeper.  Again, it’s worked for me, why not for you?

What else for you recommend for someone who’s ‘boomeranged’, and wants to help establish their financial lives?  Does being employed and paying their own bills make a potential date more dateable in your eyes, even if they do still live with their parents?  Do you have something fun planned for Labor Day?  (I’ve got a six hour drive home, myself.)  Inquiring minds want to know!