Personal Finances: Part One by @terra_naut

Here we are again, with a new and improved financial crisis meeting us all. Everyone’s nervous, but not everyone is unprepared. The more prepared you are, the better you’ll weather-the-storm like this one (or the next, and it will come). Here’s the good news, it doesn’t take much to get prepared, I mean it’s not easy, you’ll have to put in the work. But I guarantee you that if you follow the simple time proven advice that I am going to share, you’ll sleep better, live more free, retire more comfortable, maybe even retire early if that’s of interest.

While building my last business, in March 2008 I got down to $32 in the bank, credit cards maxed out, no savings, and just received a call from my landlord (he sold the condo) and we had 10 days to move. I had a seven month pregnant wife, no health insurance, a three year old daughter and no income. Unemployment being rampant in South Florida I couldn’t find a job stocking shelves at a grocery store. I completely ran out of money. Some of you may find yourself in a similar situation, or god forbid even worse. I want to take a moment to say, it sucks, but you’ll find a way through this. Just keep moving. Don’t do something stupid like hurt yourself or someone else. This too shall pass.

I’ve crawled through broken glass, and learned a lot of these lessons the hard way. I’ve made decisions which prolonged happiness, inflicted unnecessary pain and stress, as well as watched different great opportunities pass me by because I didn’t have the money to take advantage of them.

Twelve years later, I am proud to say that I am a decamillionaire, debt free, charitable and living my best life. I did happen to sell a business for a lot of money, but I also followed and still follow the same principles I am going to share with you. Those principles not only made me wealthy, but will insure that I stay that way.
Don’t worry, I am not going to sell you an online course, or a book. I just want others to discover the peace of mind of financial independence.

Let’s get started. Uncle Sam is mailing most of you checks, my question is… Do you have a plan for that money? Don’t squander this opportunity.

Where to start if you have no savings at all:

Build a small emergency fund. If you have consumer debt like credit cards, personal loans, etc… start with something simple like $1,000 in an emergency fund. Though a thousand dollars isn’t a lot of money, it’s enough cash to pay for something unexpected, like an auto repair, an appliance, a trip to the dentist. Think of those unexpected expenses that jump out of nowhere that you end up having to put on a credit card. Let’s build a small emergency fund to deal with those, and let’s pay off our cards.

With each adult being mailed $1,200, your first check could check this box. Some of you already spent yours, or aren’t getting one. Regardless find a way to put together a $1,000. I know there’s some readers who feel like a grand isn’t going to do anything for them at this time. You may be right, but that doesn’t mean you still shouldn’t start on the path to financial independence.

Once you establish your emergency fund:

Let’s organize your consumer debt, credit cards, personal loans, cars, student loans… etc. Dave Ramsey suggests organizing them from lowest balance to the highest. Some others say organize them from highest interest rate downwards. Either way let’s make a list, organize them one way or another. This is usually a moment of truth for a lot of people. Looking at credit card balances where they have no idea where the money went, frittered away on God knows what. For some people every time money’s handed off to them it’s like they fumble. Madison Ave advertising executives know how to part you from your hard earned bucks. You need a plan for where that money is to go.

Once those debts are organized you need to free up cash flow to create a debt snowball. That’s where you make a concentrated effort to pay off your debts.

A few things you can do to raise some extra money:

Cancel subscriptions
Ask for more hours at work* (If you’re still employed)
Get a side-hustle
Sell things that have value that you don’t use or can live without.
If you can trade your lease in early, or sell your car to get out of a big payment do it. Replace your expensive ride with something cheap and reliable.

There’s a bunch of great online calculators to help you develop a payoff plan and you can play around with the numbers to see how soon you’ll be free. I wouldn’t consolidate the debt by creating a new form of debt. I think it’s important to suffer a bit here. Put some structure in your life, build some self-discipline. Trust the process. This is going to be the hardest part, but most rewarding. Once you get consumer debt out of your life, you can fast track to success.

You eventually want 3 months of expenses if you have a stable job, or 6 months if you’re an independent contractor, after you pay off your consumer debt.

The next major step is to start investing. If you’ve had credit card debt, you should have some understanding of the power of compound interest. It’s time to harness that power for your benefit. If you want a good explanation of the power of compound interest, watch this video.

Investing seems much more daunting than it really has to be. I recommend keeping it simple. If you make under 125K adjusted income, open a Roth IRA. If you have a 401K at work, and they match anything then max it out at least to the match. Take a good hard look at the fees and products that you may have selected. It’s unfortunate but 401K’s are often riddled with terrible investment choices and outrageous fees. This is an area where you need to start educating yourself, fees.

There’s only a few things you can control when it comes to investing, you should focus on those. These are the fees you choose to pay, diversification or lack there of, and the amount you contribute.

Fees, the silent killer over time. Nothing will erode your long term money making compounding machine like fees. Think 1.5, 2, 3 % isn’t much? Think again. Fees are one of the three things you can control and you need to look very closely and educate yourself on the fees you’re paying. Over a lifetime these can erode as much as 70% of your gains compounded. Just a few percent a year. Fees impact on returns over time… watch this.

Diversification: It’s really hard knowing which company is going to be successful in the long run. Yesterday’s juggernauts are today’s bankruptcies. There was a time when GM, Kodak, GE, XEROX, dominated business. Today all of those companies are a shell of what they once were. And companies like Apple, which were once almost out of business, dominate for now. Only 20% of professional investors beat the index after fees and expenses. The index is a collection of stocks. One of the indexes I like is the S&P 500. The S&P 500 is the top 500 US companies by market share. So in one ETF I get some Apple, Google, Amazon, Berkshire Hathaway (I.e. Warren Buffett), Walmart etc…. You get the point, why not just buy the best America has to offer and grow with them. 40% of their revenues come from outside of the US so you’re globally diversified to a decent extent with this one low cost ETF. Warren Buffett made a bet saying Hedgefunds would underperform the S&P 500 index over a 10 year period. Guess what who was right? A simple S&P 500 index beat the worlds most highly compensated investors, by a mile, and so can you. Also, when Warren dies, his wife’s estate is to be invested guess where? Vanguard S&P 500 index fund. The Vanguard ETF for the S&P 500 is VOO. It costs a whopping .03%! That’s it! A fraction of 1%. Want even more diversification, try VTI that’s every publicly traded company in America for also .03%. This means you get the keep the vast majority of your upside, why should you give an advisor 33% of your winnings, you put up all the money and take all the risk. Point is picking winners is really difficult over the long run, so you’re much better buying the market in a low cost index fund like VOO or VTI. I personally buy these index funds on the Fidelity platform. It’s completely free to buy and sell.

The last thing you can control to a certain extent is how much you contribute. Be sure to do whatever it takes to max out a Roth IRA at least. $500 a month for 40 years at 8% would yield you over 1.6 Million dollars. Wait ten more years and the power of compounding will give you 3.5 Mil. Many of you could find a $500 extra a month.

Please take time to learn more about how fees impact your investments, diversification, and start building that emergency fund. Below are a few resources I suggest if you want to develop your knowledge base around personal finance and investing.

I hope to share another article soon about spending and financial independence.

I’d say good luck, but luck has nothing to do with it. Just do it. Your future self will thank you.

Books:

Bogleheads Guide to a Three Fund Portfolio. Simple investment strategy that anyone can do by themselves.

Tony Robbins Unshakable. This book is actually a great read if you’re staying up worrying about your current investments.

A Simple Path to Wealth.  It’s is a wonderful book. It’s one of the great primers to personal finance IMHO.

Blogs:

bogleheads.org

Investing

About

Other free resources that I recommend.

Here’s a great wiki on that will walk you through the basics of investing.

How to raise your child’s financial IQ is a great primer for even adults who lack the 101’s of investing and spending. Another great resource:

In his book, I will teach you to be Rich, Ramit Sethi talk a lot about automating your investments. Watch this google talk where Ramit gives 80% of his content for free.

Be sure to play around with a compound interest investment calculator! You’ll be inspired trust me.

Part Two coming soon…on spending.

@terra_naut is a long time RCS reader and friend.  He has impeccable style, and really knows what he’s talking about.  He moonlights on @terrable.advice where he talks about all things financial.  It’s great stuff; we are lucky to have him as a contributor.

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9 Comments

  1. RBC
    04/20/2020 / 12:23 PM

    Love this post. For me, the biggest challenge is a mental one. Like most people, I enjoy nice things and am fortunate to have a lot of them as I do have a fairly decent job. How can I mentally shift from wanting nice things (usually used as rewards to myself, ie closing a big deal, milestones, etc) and put that money in the markets instead?

    • @terra_naut
      04/20/2020 / 12:49 PM

      Hey RBC! Great question that I hope to address in the follow on article. I myself have wrestled with that very same question for years. I look forward to sharing what conclusions I came too and perhaps you can gleam from them.

  2. Wheels
    04/20/2020 / 3:01 PM

    Great post! I don’t think people can read these posts enough. My issue is I have no idea how to make my money work for me. I just keep adding and adding to savings where it does nothing.

    • @terra_naut
      04/20/2020 / 3:44 PM

      Wheels – congratulations for even having savings, that means you already probably have an emergency fund, and probably don’t have too much consumer debt. You’re right though that it doesn’t perform much. I can recommend a few things for you. 1. Look online for an FDIC insured high yield savings account. American Express has one I use, so does ALLY. Put your emergency fund there so you at least get 1.5% interest vs zero at a local bank. 2. Second, you need to find growth beyond inflation, inflation is that cancer that erodes the value of your hard earned money over time. Remember when you were a kid what a buck bought you? A heck of a lot more than it buys today, that’s inflation for ya. You need to start putting a portion of that savings in the market or real estate, somewhere where it can grow 8% or more a year on average over the long run. If not, you’ll find that your savings doesn’t amount to a whole lot of buying power when you’re in retirement.

  3. 04/21/2020 / 2:17 AM

    Awesome post! I was wondering if you have an opinion on Acorns. Seems to be an awesome app for me personally as I’m not the kinda person to manually save so I have a recurring payment every week on my acorns account and the rounds up feature as well as the diversified portfolio that the money contributes to. Seems solid? Should I drop it for other options like Fidelity?

    • @terra_naut
      04/21/2020 / 10:07 AM

      Hi Michael – Acorns is a cool tool to scoop up additional savings, I’m a fan. I personally wouldn’t use them beyond an automated savings tool. If you want a robocalls-advisor, I think Wealthfront or Betterment are better choices. Personally I would just open a Fidelity account and buy VTI or VOO and keep buying and forget about it for 30-40 years.

      • @terra_naut
        04/21/2020 / 11:29 AM

        robo-advisor* not robocalls! 😉 Autocorrect for the fail!

      • Charlene Jones
        04/21/2020 / 8:56 PM

        Thank you for the insight.
        I recently medical retired from the military ( huge loss of income) . Went back to school full-time (interior design) and now drowning in bills. Getting ready to graduate and starting a business. Do I pay bills, invest in the business (just bought a much needed pc for work at home). Please provide insight and thank you.

        • @terra_naut
          04/21/2020 / 9:26 PM

          Charlene,

          Firstly, thank you for your service. I am sorry to hear about your medical discharge, I hope you’re recovering.

          In regards to your bills, I don’t know your particular situation, so I can’t provide too much insight into specifics. There’s a fine line between drawing in bills and using third party companies to negotiate your debt. If you see a way to get out from under it within five years, (use the debt payoff calculator in the story above) to determine if there’s a viable way out within 60 months. Credit scores are used more and more from insurance pricing to obvious pricing of financial products. If you blow up your credit score, you may have difficulty even renting an apartment. There’s a credit card counseling service called Christian Credit Counselors I believe who help you negotiate a payment plan with your creditors. On the other hand, a lot of banks and companies have all sorts of CV19 payment deferrals etc. So once again, organize your debt, see if you have a path out of it within 5 years. Look at Dave Ramsey, I will Teach you to be Rich, and spend time educating yourself how you can negotiate your bills and payments while trying to retain your credit score.

          In regards to starting a business, that would depend on your ability to network and market yourself to get work, if not, look to work at a local regional firm and establish yourself under someone else’s brand.

          Hang in there!

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