What are your financial flashpoints?

OK, I was all set to tell JD Roth (at Get Rich Slowly) that wealth comes from your actions, not from some ‘magical millionaire mind-set’ when I clicked PLAY on this video by the author of a book that JD was reviewing on his site

… the video actually hit home!

I remember some distinct financial flashpoints that helped to set me on my financial path … for better or worse:

1. My dad waking me up in the middle of the night to go and watch our shop burning down

2. My dad telling me our (bad) financial situation

… not one event, but a series with the common theme: we were living beyond our means.

This hit home, and I resolved never to be a financial burden on anybody …. never to hold my hand out … and, so on. From a young age, I held down after school jobs, bought my own clothes, saved up for my own cars, paid for my own trips, and so on.

This is not unusual; many – most – of you probably had to do the same. And, we were not totally ‘poor’ … my dad could eventually solve most of his financial problems by going to other, wealthier relatives for hand-outs.

But, what made it a little different for me was that my dad hid all of this from my mother and my sisters … THEY believed that we lived a ‘normal’ upper-middle-class lifestyle. I actually lived in a different ‘financial house’ to the one in which they lived, even though we shared the same 4 walls!

No doubt, these experiences go a long way to explain why I am independently / self-made wealthy today, and to this day, the females in my family still live off hand-outs.

Yes, there are financial flashpoints that help to explain my ‘wealth motivation’, maybe you would like to share yours?

How to change your life …

I don’t like calling this a motivational blog; that’s not my intention at all. Above all, I want this to be a practical blog: rules and techniques that you can employ straight away.

Sometimes, though, I come across something of a motivational nature that I think I must share … in this case, twice!

I’ve shown this video before … in the context of “if he can do it, so can anyone”.

But, this time, I want you to take a really close look at it from another angle …

I want you to see the actual moment, caught on camera, of a man changing his own life!

I also want you to catch the look on the judges faces – the subtle change in demeanor – that shows that they, too, realize that they are witnessing an amazing metamorphosis.

And, I think this is the way it really happens: I think that there are moments when you step out and your life changes …

I remember a couple of such ‘moments’ in my own life:

The first was when I stepped into my father’s business and, soon after, he went on vacation. The only other employee was jealous of the nepotism thing (i.e. me joining) and promptly decided to fake a back injury and step out for a couple of weeks, himself.

That left me to do the work of three people, which I managed to fit in … between the hours of 8am and 3am. Two weeks of 20 hour days, and the business didn’t skip a beat …

The second, was when my father became terminally ill and the bank suddenly pulled our funding: no funding, no business since we were a finance company.

Somehow, during the next two weeks I managed to: restart the business with No Money Down; find a new equity partner (who actually PAID me some goodwill to buy in while providing $600k starting capital); and, a bank to put up a couple of million, totally unsecured … and, our customers were none the wiser.

There were others, but these two were the defining moments in my business life: if I could survive these – and, I did – I realized that nothing could break me.

You will have these moments in your business and/or financial life – the larger the goal, the larger the challenges that you will face … I guarantee it!

Curling up in a fetal position and sucking your thumb is NOT an option 🙂

Now, this is a clever post …

Maybe it’s only because I recently compared personal finance to Vegemite, but I like this guy: he has the gumption [AJC: don’t think this is the right word; any ideas?] to compare soccer to personal finance, then actually make it make sense!

Not to mention, it’s just plain good advice:

Spain is Soccer World Cup 2010 Champion. Analysts say that is because of their mental strength, their wily forwards, a strong defence and the hardworking midfield.

Apart from the mental strength, which is invisible, what’s visible on the field are three important components.
1. Forwards, to score the goals.
2. Midfielders, to control the game.
3. Defenders, to save, not leak goals.

I know you have this idea that I would be comparing soccer with Personal Finance. Here it is.

Personal Finance has three important components too.
1. Investing, to get more bang on your money.
2. Maximizing your income, to control the game of money.
3. Frugality, to save and not leak money.

And yes, you also need to have that mental strength not to be dragged down by “fear and greed”. And keep coming back even after failure.

Now, I haven’t given the whole game away [pun intended!], because Ranjan goes on to talk about the three types of investors … but, you’ll have to read his post to find out 🙂

Financial advice for an 18 year old …

My blogging friend JD Roth (at Get Rich Slowly) offers some advice to an 18 y.o. who asks:

Are there any other resources you would recommend to a financially clueless 18 year-old?

JD gives some of his usual good advice:

Maybe it’s because of my own experience racking up debt during college, but I think it’s important for young adults to learn the fundamental law of personal finance: To build wealth, you must spend less than you earn. There’s more to it than that, of course. The less you spend, the more flexibility you have.

… but, I really want to be able to tell this kid:

After teaching ‘kids’ to save some / spend some (to understand that there needs to be a balance), and all those other wonderful things that JD suggests in his post, I would strongly advise any young reader to get some ‘business experience’ on the side.

Fortunately, with the internet, that is SO easy these days:

1. Start a ‘for money’ blog. Stuck for a topic?

Try this: write a blog aimed at other high school / college kids chronicling your attempts to improve your own financial situation … worst case, it could read as comedy.

2. Sell stuff on eBay; even better, find stuff in China and then sell it on eBay.

Try not to get ripped off AND make a profit. Write about it on your blog … it will DEFINITELY be funny!

3. Start a web-site selling anything; OK it may not make money (or, it COULD become the next Facebook), but you will learn heaps.

Better yet; try all three!

What financial advice would YOU like to give this 18 year old?

View your 401k as insurance!

I agree with Financial Samurai’s basic sentiment, which is to effectively ‘write off’ your 401k and Social Security:

Every month I contribute $1,375 to my 401K so that by the end of the year, the 401K is maxed out at $16,500.  Unfortunately, $16,500 a year is a ridiculously low amount of money to save for retirement if you really do the math.  After 10 years, you might have $200,000, and after 30 years you might have $600,000 to $1 million depending on the markets and your employer’s match.  Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay tax upon distribution.

CNN Money and other advisers showcased super savers who to my surprise include 401K and IRA contributions as part of their percentage savings calculations.  In other words, if you make $100,000 a year, save $4,000 a year in cash, and contribute $16,000 in your 401K, you are considered by financial advisers as saving 20% of your gross income.  Your $20,000 in “savings” is woefully light because in reality, you are only saving $4,000 a year. With the stock market implosion of 2008,  your 401K has proven itself to be totally unreliable.  Like Social Security, contribute to it like any good citizen should, but in no way depend on Social Security or your 401K to retire a comfortable life.  I

Depending on Social Security is depending on the government doing the right thing.  There’s no way that’s going to happen.  Depending on your 401K is depending on people choosing the right stocks consistently over the long run, which isn’t going to happen either.

Because Social Security is a burden on governments and society, it’s always at risk of being watered down or eliminated … this is less of a risk the older your are (hence closer to receiving the payments).

But, not so your 401k: while governments can (and, probably will) water down – instead of increase – the contributions and benefits of your retirement program, the money that you contribute (and, your employer match) is still yours!

I don’t think you’ll ever lose what you contribute + whatever gains the flawed investment choices available may bring.

I look at my retirement plan (which I haven’t contributed to in years!) as insurance: if all else fails, when I reach whatever age the government of the time lets me access MY money, I’ll have something to keep me one step away from homeless … just.

So, I agree with Financial Samurai’s closing advice:

The only person you can depend on is yourself.  This is why you must save that minimum 20% of your gross income every year on top of contributing to your 401K and IRA if you can.

You’ve heard of Paying Yourself Once? Well, I think you need to Pay Yourself Twice™ … once inside your 401k (there’s your ‘insurance policy premium’), and once outside of your 401k.

It’s the money that you can put aside OUTSIDE of your 401k that will drive your wealth, because you can put it to MUCH BETTER USE (e.g. investing in business, real-estate, value stocks, etc.) than that money locked away inside your 401k and in the hands of grossly under-performing, fee-driven mutual fund managers 🙂

Managing your life through the rear-view mirror …

Not many people are rich, so following COMMON financial wisdom can’t be all that it’s cracked up to be, can it?

Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.

I see it very simply:

If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?

How ‘risky’ is that risk? And, what do you stand to lose?

Some people, like Executioner, look at the 100% risk/loss scenario:

Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.

Sure, it’s not outside the realms of possibility, but has it EVER happened?

What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?

I’m betting that it’s not zero … not, by a long-shot!

But, maybe the rules have suddenly changed?

Neil thinks so, at least when it comes to house values:

House appreciation used to be a sure bet, but it isn’t any more.

But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.

And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.

And, it did. Big time!

Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]”.

So, I can’t help wondering:

If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …

… or, are we just guilty of doing more ‘rear mirror’ personal financial management?

I can’t give you the answer … only 30 years of ‘future history’ can do that!

But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?

Or, is that just the way that Warren Buffett thinks?

And, I know one which side of this coin I’ll be betting on 😉