Personal Finance

Joshua Dorkin over at BiggerPockets.com was kind enough to interview me for his Meet the Investor series. Just wanted to say thanks and I hope the BiggerPockets.com audience enjoys!

I haven't posted as much as I'd like about real estate, but I thought I'd link to a few of my favorite posts about personal finance, investing, and real estate. I'll be adding a lot more of these types of posts in the near future, so check back soon or subscribe to my RSS feed. Thanks!

Can Money Buy Happiness?

My realization on real estate

My thoughts on financial bondage

8 free things to get (and keep) your finances in order

Emergency fund vs. debt paydown

My long-term financial plan

These are some things to do that won't cost you anything (or hardly anything) other than time, but will help keep your finances organized and under control. It's a good idea to do these things at least on an annual basis. They may not directly improve your finances immediately, but if you stick with them over the long-term, you'll see a dramatic change in your financial situation.

Create a written financial plan
If you don't have written financial goals, drop everything and get it done. If you've never done it, it might be difficult to get into the groove, but it will be well worth the effort. Almost nothing will improve your financial well-being more than having a written financial plan for your future.

Assuming you already have a written financial plan, it's a good idea to review it on at least an annual basis, and probably more often. I try to have a formal review of my goals about once per quarter, but I'm constantly looking at my plan in the interim, even as often as weekly. For your formal review, check to see if your assumptions and future plans are still the same, and adjust your goals and milestones as needed.

Setup a written budget
The number one rule of building wealth over the long-term is living below your means. Even if you make $500k / year, if you spend $501k / year, you're going backwards. It's very difficult to live below your means without a budget. You can budget on a piece of notebook paper, in Excel, Quicken, Money, or Mvelopes. I very highly recommend Mvelopes, and you can read my post on it here. It's not perfect, but it's the closest thing to perfect for this that I've discovered. Your mileage may vary.

Interesting article about the subject of wealth in the Bible. The author discusses how some commands and admonitions regarding wealth in Scripture no longer strictly apply under our modern economic and monetary systems, though the underlying principles still apply. Written by a professor from my wife's alma matter.

Views of Wealth in the Bible and the Ancient World

Rich Dad, Poor Dad by Robert T. Kiyosaki

When I was about 19, this book changed my entire outlook on money and finances. Looking back, and reading through the book now, I see a lot that I disagree with, but it sparked my thinking about how to manage money, and what financial freedom truly means. Not a practical book, but definitely a good start if you have no "financial motivation."
The Millionaire Next Door by Thomas J. Stanley

This book, which I read recently, is the result of years of research of America's millionaires: how they live, what they wear, what cars they drive, how they made their money, etc. It was definitely inspiring to me, and also got me thinking about the impact of wealth on future generations, both good and bad.

Cashflow Quadrant by Robert T. Kiyosaki

This book builds on Rich Dad, Poor Dad and goes into detail about how to build multiple streams of income and gradually reduce your reliance on earned income. It contains overviews of the impact on personal finances and income of things like real estate investment, entrepreneurship, and investing in businesses.
The Richest Man in Babylon by George S. Clason

This is a deceptively simple book that contains a series of financial parables that teach the importance of always saving, the power of compound interest, investment, insurance, and other time-tested financial truths. Easy read and a good reminder of some very basic lessons. Again, good to read if you find yourself lacking that "financial motivation."

Everyone always says that money can't buy happiness. I've always liked to say that money can't buy happiness, but it can buy relief from certain types of misery. Perhaps an example will be helpful.

Every time I fly commercially, about the time I'm shuffling through security with my shoes in one hand and my recently-torn-apart bag in my other, I think about the indescribable joy that private air travel would be. My feeling escalates as I'm herded onto a plane that is probably older than I am, and sit down between two enormous women who both have toddlers that are vying for the title of the World's Most Annoying Child. By the time the beverage cart creaks by at the express speed of .00756 mph and the Flight Attendant informs me that the last of the orange juice was just given to the grubby little urchin screaming his head off next to me, I'm ready to kidnap the little bugger and sell him on the black market to finance the purchase of my jet.

Relax, I'm not in the business of peddling children. Yet.

Anyway, the point is that flying commercially is miserable. Absolutely terrible. Could money buy relief from that? Certainly.

However, even I'm willing to admit that this is a rather unproductive example. Most people will never set foot on a private jet, so it's not really a viable alternative to commercial travel.

A more representative type of misery that most people go through is financial slavery. In fact, to say that most people go through this is misleading, because the majority of us will spend most of our lives mired in financial slavery, "working jobs we hate so we can buy shit we don't need." (Fight Club)

Let me give you a few examples of more common types of misery that characterize financial slavery:

• Not being able to spend time with your family because you have to work two jobs
• Not being able to provide adequate food, shelter, clothing, medical care, etc for your family

So lately, I've been listening to a lot of personal finance podcasts. Many of these podcasts revolve around people digging themselves out of the debt-hole they've sunk into.

Side not: It's amazing to me how ill-prepared most people are to deal with money, and how cavalier our society is towards excessive spending and debt. But that's another story for another day.

Anyway, one of the people I've been listening to is Dave Ramsey, and while I don't always agree with his advice from a purely financial standpoint, I do think that it often makes sense from a behavioral standpoint. For example, his method of paying down debts, called the Debt-Snowball method, has people arrange their debts from lowest to highest balance and pay them off that way. Mathematically, this is not optimal, and you end up ahead if you arrange them from highest interest rate to lowest interest rate. Over the long term, you'll pay your debts off faster and pay less in interest than you will using the debt snowball method. However, Dave recognizes this and advocates his method instead because of the psychological effect of paying off a larger number of small debts and maintaining a feeling of progress. This is just one example of how he tends to take behavioral issues into effect as well.

One of the things that has always annoyed me with most financial advisers is that they all tend to make statements like "First, you'll need to make sure you have 3 to 6 months worth of savings as an emergency fund. Next, you'll arrange your debts from highest to lowest interest rates and pay them off in that order." Bam! Apparently, these people do not live in the real world and think that sound financial advice means telling people who are barely scraping by as it is to somehow save 6 months worth of expenses before they begin attacking their debts. Let's take a look at how this strategy plays out in the real world.

I've been reading "The Richest Man in Babylon", a series of financial parables set in the Babylonian era. They've been around since the mid-1920's and convey (very simply) some basic principles of finances and money management. They're the kind of things we all know, but few of us seem to do. The highlights are the following:

1. A portion of all you earn is yours to keep. Save at least 10% of everything you make, no matter what
2. Do the above by controlling your expenses carefully with the use of a budget
3. Put those savings to work for you by investing
4. Don't be risky in your investments
5. Buy a house
6. Plan for retirement and future generations
7. Increase your earning potential

Again, very basic stuff, but apparently the majority of people just don't get it. For example, the average savings rate in America is now NEGATIVE. People who make $50k per year spend just over $50k per year and people who make $100k per year spend just over $100k per year. Average household debt goes up every year and the average American only has something like 15k set aside for retirement.

From an article in Men's Health on things you should do but probably haven't:

"Be debt-free. Compounding interest is like a sorority girl on Ecstasy. She'll go both ways, but you get a hell of a lot more out of it when she's going your way."

Early last month, I started using a service called mvelopes.com. This is a personal finance and budgeting program that you would use instead of MS Money or Quicken. I had tried both Money and Quicken with very mixed results. I found them to be bloated, buggy, and trying to do too much and failing to do it well. So I decided to take the plunge and give mvelopes a try.

Mvelopes is basically an online representation of the envelope budgeting method, where you put cash into envelopes for groceries, spending, medical, gas, etc and then take the cash out when you need to spend it. When it's gone, it's gone. This can be a very effective method of budgeting, but it's 2006, and I don't want thousands of dollars in cash sitting in my house, not to mention the fact that I only use cash for a tiny percentage of my monthly transaction volume.

Enter Mvelopes.

Basically, Mvelopes works using the exact same concept as cash in envelopes, but online. So you setup a budget and then when your paycheck comes, you divvy it up into the envelopes, which represent budget categories. Mvelopes doesn't move any money, it just keeps track of how the money in your checking account is allocated. Then, as your transactions come in (automatically downloaded from the 12000 financial institutions they have relationships with), you assign them to the envelopes that they correspond to and they reduce the envelope by that amount.

Perhaps an example will help. Let's say you get paid $100 and you put that cash in the "Clothing" envelope. The balance of the envelope (assuming it was $0 before) is now $100. You buy a sweater for $25. When that transaction is downloaded from your bank, you just drag it into the clothing envelope and it reduces your balance by $25, to $75.

The service has a ton of other benefits and it takes a little bit to get the hang of everything, but it's awesome. I highly recommend it.

http://www.mvelopes.com

Great blog post on 9 steps to effective long-term financial management:

http://www.wesabe.com/blog/index.php/2006/10/17/what-hold-you-back/

Of those, my wife and I have accomplished three. We're hard at work on the rest. I would actually add a few more to the list for us, since we're relatively aggressive about pursuing long-term wealth:

10. Start a business
11. Buy and hold income real estate and other cash-producing assets
12. Give back to churches, charities, and communities with your money and your time. Don't wait on this one until you accomplish 1-11. Start today.

10 and 11 may not be for you; they're not for everyone. I would recommend 12 to everyone, though. Don't give people less fortunate an excuse to hate you because of what you've been blessed with. Share the wealth.