Invest What I Save
Posted by creining | Filed under Financial Independence
In my last post, Save More I outlined how I save money. A professor of mine once said “poor people work for their money, rich people have their money work for them”. I liked that then and I like it now. I want to grow my portfolio so that it gets to a point where I can generate an income off of it. Traditionally, people would save money their whole life and then have this beautiful nest egg they draw down during their golden years. My goal is to grow my portfolio to an amount that I can generate an income from without impacting the principal. The only way I can do this is to invest in stocks. There is no way I can do this by saving my money in a savings account or “investing” in CDs.
I started investing in 2006. And what I’ve learned over the years is that I like to invest in consumer companies that offer something tangible and that I personally use. I really like Retail/Restaurant and Technology sectors. For instance, some of my holdings are Apple, Amazon, Chipotle, Coach, Google, Netflix, Priceline, Panera, Whole Foods and Starbucks. I like these companies because I use and am familiar with their products. I have an Apple laptop, I shop at Amazon, I eat at Chipotle, I use Google search products, I get hotel rooms from Priceline, I shop at Whole Foods, I drink Starbucks. This makes investing in these companies fun! I can walk into an Apple Store and say to myself, I own part of this company! One of Buffet’s quote is “invest in what you know” and that’s true for me.
I currently hold positions in 20 companies. That is the maximum I want to have as it takes time to follow that many companies. How much time? I would say I spend 2-4 hours a week following the companies I’m invested in, watching the market and deciding when, where, and how much money to invest. Investing to me is something I really enjoy doing so I make the time for it. Some people have told me that they don’t have the time to invest, or it’s too complicated. While I can buy the complicated argument, although it is simply something to be learned, I think it’s about priorities. I have made it one of my life priorities to be financially independent 10 years from now. In turn I spend the time it takes on investing to reach that goal. Some of these people will spend hours watching sports and reading the sports page. I am not much of a sports fan and the time I would spend watching sports I can spend on my stocks. I can make way more money with my stocks than watching sports, so that’s an easy decision for me.
Another Buffet quote is “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. I can say that is true for my holdings. The companies I invest in generally take care of themselves so I don’t have a lot of work to do. I only have to find points in time to invest more in them. This happens when the markets and people are most fearful. I think that when the markets can no longer grip you in fear is when you’ve truly become an investor. Fortunately, I have been through a recession now so I understand when and when not to be fearful. In 2008 my portfolio peaked on September 22 and it dropped to its lowest point on November 24, taking a haircut of 40% – ouch! This year, 2011, my portfolio hit an all time high on July 8 and it dropped to its lowest point on August 8 taking a haircut of 14%. Not bad; it seemed worse than that without doing the numbers. I was a bit more concerned with the recent drop because my portfolio is much higher compared to 2008 therefore the paper loss was much more this time. In fact the 14% paper loss I just experienced is far larger in dollars than the 40% paper loss I experienced in 2008. What am I doing? I am doing the same thing now I did during the downturn in 2008, invest a set amount of dollars every month. My horizon is 10 years out so I am not sweating the ups and downs in the market. I sweated it in 2008 a bit as it was my first recession experience – I started investing in 2006 – but I can see that my investments came out of 2008 super strong because I kept investing in great companies at great values and didn’t pull any money out of the market.
I’ve read a handful of books on investing. My favorite is One Up On Wall Street. This book is good for a new or seasoned investors. I’ve also read and recommend Common Stocks and Uncommon Profits, Your Money and Your Brain and Debunkery.
In Your Money and Your Brain the author suggests writing an Investment Policy. This is an excellent idea and is a way to take the emotion out of investing. Having emotions tied up in investments is a dangerous trait. I have written and use an Investment Policy, and I revise it as needed at the turn of the year every year. The other beneficial habit I have is keeping an investing journal. I have an entry for each stock in my portfolio that I use to jot down the date I purchased shares, how many shares I purchased and at what price, along with the P/E ratio and/or cash flow yield. I also note the reasons why I purchased more shares and how I felt about the company as an investment at that time. This has been really useful in order to look back over previous purchases of a particular stock and reflect on my decision to invest at that point and to notice and fix any investing mistakes I’ve made. I also use the journal to look at the multiples of past purchases to be able to set a target for additional positions at a better value points; meaning more attractive multiples. That is a principle of how I invest.
I may write another post on investing in the future; I have just scratched the surface of how I invest.
Save More
Posted by creining | Filed under Financial Independence
In my previous post I covered spending less. It follows that after you spend less you now have money saved. Personally I have always been a saver. I remember when I was 15 working in my first job as a dishwasher at an Italian restaurant and I would do calculations on how many hours I would have to work in order to buy things. I would ask myself if it was worth it to exchange 4 hours of steamy dishwasher labor for that Blind Melon CD at Kmart. Typically the answer was no, so my paychecks piled up in my savings account. My parents played a role as well as because they were penny pinchers. As far as I know they did it because they grew up with Depression-era parents. With that in mind I understand why they lived like that but I feel like they were not working towards any financial goal. I have a goal around why I am saving and that is to be financially independent. I look at it as a sacrifice now for a better tomorrow.
Someone looking at the way I save would probably wonder what the point is. I sometimes hear the “well you only live once” to justify spending fat wads of cash and making it rain. Well what I do know is that by spending more money I was never that much happier. The key I found is to think about the things you spend money on that do not make you happy and eliminate those. After that think about what things spending only a little bit of money makes you really happy and/or improves your quality of life immensely. This is a better payback. I found that I would eliminate spending money on certain things I thought I did not need but they adversely affected my quality of life so I added those things back in. For instance coffee. Yes, a lot of people stop drinking coffee and survive. However, I really enjoy the taste and ritual of drinking coffee in the mornings and since I brew it at home it costs me around $5.00 a week.
Granted going down this path can be a brain shift in realizing what out of life makes one happy and undoing the money factor inevitably tied into it. Over time I realized that buying stuff does not make me happy. Going out and blowing money on crap I don’t need will not make me happy. My things, the material possessions that I do currently own, do not make me happy. Walking a dog makes me happy, cooking a dinner with a special someone makes me happy, visiting with friends and family makes me happy, doing yoga makes me happy, reading a book (from the library of course!) in bed makes me happy, taking a bath makes me happy, having a full belly makes me happy, riding my bicycle around the lake makes me happy, strolling the farmer’s market makes me happy.
So how do I save money from a money flow perspective? Well I use the age old adage of “pay myself first”. This means before anyone else gets my money, I get my money. Automatically on the first of the month I have a set amount of money withdrawn from my checking account, where my paychecks end up, and deposited in my brokerage account. This money I use to invest in stocks on a regular basis. My money needs to work for me and that is why I invest it. My goal is to pay myself 50% of my after-401k and after-tax pay per year. I can say that I have been meeting this goal, less 23 dollars! I can’t say that it has been easy because it hasn’t but it has been fun! Meeting the goal and watching my wealth build is exciting to me. Also I have been transitioning over to this model from early 2010. This year I have made a lot of changes with my various personal finances in order to get them lined up how I wanted. Starting in early 2012 everything will be humming along with less time I will need to devote to my future financial independence.
Spend Less
Posted by creining | Filed under Financial Independence
In my previous post Becoming Financially Independent I covered my overall vision. Next I will cover spending less. For me spending less means being frugal or thrifty. I think that I live a fairly frugal life. It does not mean I wear potato sack outfits, eat cat food, and collect aluminum cans for extra cash. It means I make coffee at home rather than getting it from a coffee shop and buy summer polos when they go on clearance in the fall. I do spend money on things that I think help me live comfortably. However, that is a fine line and I know that everytime I spend money I am a bit further away from retiring.
When I think about what it means to be frugal it not only means making my dollars stretch but it also means living a low impact lifestyle. It means walking or riding my bicycle when possible (this means living in an urban area), not wasting food, eating healthy local and organic food (I am vegetarian), bringing my own mason jars and containers to the Coop to fill up on staples from the bulk aisle, washing my clothes in cold water and drying them on a rack (they last longer too), living in a sub 1000 square foot space, and drinking water from a reusable stainless steel bottle.
Frugal also means using the least amount of services. You know, the whole cable, internet, phone stuff that Charter sends me a piece of junk mail about weekly. I have been able to cut out paying for most services.
Television: I do not have any television service anymore after I ditched DirecTV for Plex. I do have Netflix which I pay $10 a month for which is well worth it! I both watch DVD’s I get through the mail and have an enormous streaming catalog available on my plasma.
Phone: I am thankful my employer pays for my mobile phone (seems to be the norm in I.T.) so I do not have that monthly recurring cost. I do not have a landline, does anyone without gray hair?
Internet: Internet service is included in my monthly condo fee so while I do pay for that it ends up being included in my housing cost bucket. I would not live without it though.
Gym: I do have a gym membership but I do not necessarily pay for this. My high deductible health plan from my employer includes a debit card that gets loaded with money every year to pay for health costs. I use this money to pay for my gym membership so it is not money that comes out of my pocket directly. Also, I get reimbursed $30 a month for going to the gym a certain number of times per month so that is essentially extra income.
Two other things that I pay for on a regular basis are my subscription to The New Yorker and haircuts. I really enjoy The New Yorker; I read it almost cover to cover every issue. I recently renewed it. While they charge $69.99 a year to subscribe on their website I called and asked them what the best deal they could give me and they offered 2 years for $59.99. Clocking in at 47 issues a year each magazine costs me $0.64! I can live with that. Haircuts. I like a great haircut. It is my one and only recurring splurge. I spend $45 on my haircut every 5 weeks. It hurts to write that!
When I do buy things I usually make sure I need it. I noticed an interesting consumer behavior within myself. Let us imagine there is something I think I need. I put it on my Amazon Wishlist as a way to keep track of “the things I need”. A couple months pass. I have not bought that thing yet. I realize I have lived without that thing for those two months and got by just fine. So I remove it from my Wishlist. This has happened quite a bit. I think by putting it on my Wishlist it satisfies some deeply hidden retail therapy I need.
For something I do actually need, for instance a new fleece to replace the old well worn one, I will research and pick out a high quality and well reviewed product. I will then go to Google Shopping and find the retailer with the lowest price on that item. I will then hit up a site like RetailMeNot to look for additional coupon codes I can use during checkout. I don’t think I ever pay retail anymore for anything besides groceries. Additionally, I subscribe in my RSS reader to Slickdeals which has, as the name implies, great deals on various items. Right now I do need a couple things and I am waiting for a deal to pop up on that site for those items – I need a backup drive for my MacBook and a new pair of Converse. I do not need those things right this minute so I am fine waiting for a deal. A side note on the Converse, I buy one new pair every year and it is my primary shoe. For travel, I use Priceline’s Name Your Own Price. You can game that system a little, check out Better Bidding. I can’t remember the last time I paid a rack rate for a hotel room I usually pay half of what someone coming in off the street would pay.
When making a purchase I also must get good quality for the price. I like to buy quality items, take care of those things really well so they last a long time, and then replace them when they are worn out. This applies to most everything I buy. For instance I bought these quality Turkish towels from Restoration Hardware 5 years ago. They look the same as the day I got them. I am sure they will last for many more years. The same with sheets. I have a pair of quality flannel sheets from Garnet Hill that I have had for years now and have lasted through tons of washings and still look great with no pilling.
Things that I do not use anymore I sell. I have a clothes rule that if one year goes by that I do not wear something I will get rid of it. I typically donate clothes but I will sell other things on Craigslist. If I can get $20 for something I will sell it, less than that and I do not think it is worth my time and I will donate it. My place is extremely uncluttered as anyone who has come over can attest to! I have one bookshelf full of books and about 10 DVDs. I sold long ago my CDs and recently sold the majority of my DVDs. I will never purchase those items again. I sold most all of my small kitchen appliances – my electric coffee maker, my deep fryer, two popcorn poppers (I use a large saucepan now). The other thing I have come to realize is that if I go and buy something today from a store, in a year I can sell that thing but nowhere near what I bought it for. So there is a cost to going to a store to buy something.
I try to do most things myself that I could pay someone else to do for two reasons. One, I like to figure things out and to feel a sense of accomplishment in performing a job I have never done before. Two, it saves me a lot of money! Recently I got a quote to replace some engineered wood flooring from a local store and it was $1,000. I had never replaced flooring before but with help from the internet and some Youtube videos I did a respectable job for less than $250. I had never changed the serpentine and A/C belt on my car before. I got instructions off the internet. I ordered the parts off the internet for $36 (less than the dealer wanted for the parts). I spent an hour of my time doing it and saved the $200 the local shop wanted. Is an hour of my time worth $164, yes!
Wrapping this up, these are some of the things I do in order to spend less, so I can save more, so I can invest those savings and become financially independent. I think we live in a society where we continually spend more time at the office along with more pay but what we trade in order to do that is needing to pay other people to do the things we once did ourselves. As I alluded to before, some people do not have the time to mow their lawn so they pay someone to do it. Or walk their dog so they pay someone to do that. Or to cook their meals so they eat out. When the nation industrialized, and we did that very very well, every worker did their 40 hours of the same task. I think that is when we lost the ability of doing these things ourselves. Before industrialization, people worked a little, played more, spent time with family, relaxed, hunted, gathered. It was simple. That is the time I am trying to get back to.
Becoming Financially Independent
Posted by creining | Filed under Financial Independence
It has been 10 years since I joined the workforce. As a bright eyed and bushy tailed college grad I signed up for a 40 hour a week job soon after graduation; my start date was June 11th, 2001. That puts me at 10 years, a whole decade, in the rat race. My thoughts around having a job, which to me means trading my time (and expertise) in exchange for money, started changing a few years ago. I realized a few things then, mainly that I didn’t want to work straight until I was in my 60′s only to realize that life had passed me by, along with all those years of good health. Then last year I stumbled upon and read a book entitled Your Money or Your Life. It was one of those books that really excited me and made me think that yes, the idea of leaving the workforce early is a reality. The book is written as 9 steps and demonstrates how people are making a dying rather than a living.
I did not do all the steps of YMOYL although I read the book and each step carefully. Three steps stood out for me. First, Step 2 makes the point that the monetary cost of working can add up when you think about commuting with a car (cost of the car itself, gas, maintenance, parking), eating out for lunch, snacks and sodas, the right clothes and shoes. And then you are paying for things you can no longer do because you spend all your time working. Things like childcare, house cleaning, car washes, food preparation and eating out, lawn services, house maintenance, dog walking. And because of all the stress of dealing with work and these other things you need to get away so you pay for a vacation to the Caribbean. You come back relaxed but soon enough you are stressed again and are paying for a psychiatrist. And you eat out quite a bit for dinner because you do not have time to cook let alone time for exercising so you have to pay for the latest diet fad and then a personal trainer. I can go on and on with this but you get the point!
Second, Step 5 in the book makes the case for keeping track of income and expenses and charting these. I had been using a spreadsheet to keep track of these things since 2006 so all I had to do was begin charting. This is a great visual tool! I chart my expense, my income, and the capital income I am projecting to make. I would love to share it someday but it is a bit personal for the internet. Another option not mentioned in the book is to use an online tool like Mint to accomplish this. I signed up for Mint about 6 months ago and have all my accounts hooked up to it but I found that I do not log into it. I love technology and Mint being right up there as a high tech financial tool I would have thought I would be a quick convert but for tracking these things I prefer a spreadsheet. For me, simple is better in this case.
And third, Step 6 delves into spending less meaning being frugal. I have been on both sides of the spending fence. I think I have always been frugal because my parents were cheapskates. For a bit of time I switched over to the other side where I was spending a lot of money needlessly, dipping my toe in the conspicuous consumption pool. I realized that it was not me. And you know what? Needless spending did not provide me with more happiness! I switched back to being frugal. The step is great, however I did not learn much from it because I had been practicing these things for years.
The whole book is a fascinating and inspiring read. With what I learned from the book in combination with my own pre-existing philosophy around finances I can say that I want to live a life where I spend less, save more, invest what I save.