Category Archives: Investing

A Picture Is Worth A Million Dollars

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I thought it would be fun to create a flowchart based on the stuff I put in The Hero with a Million Dollars. They say a picture is worth a thousand words, I think my picture is worth maybe 2-300 words. More importantly for me though, It has been worth many thousands of dollars.

Before we look at the chart, there are a few questions that come up right away when you look at this process:

Q. If I give 10% to charity, pay 10% to debt elimination and fund my 6-month contingency fund with 10% that leaves only 70% to live on.

A. Was that a question?

Q. How can I be expected to live on 70% of my meager salary?

A. It ain’t easy but it can be fun if you look at it the right way. Living frugally and trading down to wealth help us create rituals that serve us. The rewards are delayed somewhat but once the habit is set we swiftly forget about the downside.

Q. No. You don’t get it. I have a mortgage, car payment, student loans, credit card payments…did I mention my mortgage?

A. I get it. I’ve been there. Trading down to wealth takes some time but you can start where you are. You can start to look for a reliable, pre-owned car that makes sense for you. You can start to look at a living arrangement that encourages frugality. This could be buying a smaller house in a nice neighborhood. It could be renting a less costly room or apartment. How many new things do you own that could have been purchased pre-owned for a fraction of the cost?

It is the habit that counts most. You must develop positive money habits. The percentages can be adjusted at first while you are starting out. Try 5% – 5% – 5% [Charity- Debt Elimination - Contingency ]

Q. Can I just skip the charity stuff? I need charity more than I need to give charity.

A. Nope. Lots of reasons but I like this one best: Helping others is a fundamental human need. You send yourself a powerful message when you contribute to the health, happiness, growth or well-being of another. Most of us will work harder, longer and strive to be more effective when we know that others will benefit from our toil. Trust me on this one. It is vital. Also, helping others is being a good human. You want to be a good human, right?

If you can’t feed a hundred people, then feed just one.

-Mother Teresa

Q. What is Asset Allocation? What do I invest in?

A. Asset Allocation in this example is simply the percentage of stock index funds vs. bond index funds. When you are young – (20s & 30s) 70-100% of your investments should be stock-based. As you age, bond funds should start to garner a heftier slice of the pie.

As for what to invest in, I encourage you to read The Elements of Investing by Burton G. Malkiel and Charles D. Ellis. I wrote a short review awhile ago.

I have invested with T. Rowe Price for a long time and while some of their expense ratios are a bit higher than Vanguard and Fidelity, I especially like their Automatic Asset Builder program that allows you to start building a world-class investment portfolio for as little as $50.00 per month. Set it and forget it! Whichever investment house you choose, you can’t go wrong.

Q. I have a secure job, do I need a contingency fund?

A. Yes. See my article Contingency Theories for more info on this important but sometimes overlooked  topic.

This hypothetical Q&A could have happened but did not. I made it up. If you have real Questions, let me know.

Some of you have commented that this site has been quiet for a little while. While I have been working on several projects and closing a few deals, I am eager to provide more regular updates. There are also 2 things I want to mention:

Trent Hamm’s book “The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams” is a good read, especially if you are young and struggling with your finances. His blog, The Simple Dollar, is a favorite of mine.

My friend (If he will let me call him that) J. Money over at Budgets are Sexy has one of the most open and refreshing sites on personal finance I have seen. There are so many “Do what I say not what I do” blogs out there it is nice to find one that is at once authentic and interesting. I find myself rooting for him and hoping his investments go well. Worth a look!


Here’s the flowchart. Tell me what you think…

How to become wealthy

How to become wealthy

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How to Follow Your Bliss

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It is no secret that I am a fan of the late Joseph Campbell. My book adheres closely to his concept of a monomyth. I do not pretend to be an expert on the subject matter that so fascinates me. I consider myself a student and will always be one. Comparative mythology studies the myths that people live by. It is as much concerned with paleolithic cave drawings as it is with modern middle eastern strife. The breadth is staggering. With our big brains and our assorted accoutrements of modern life it is easy to forget how closely linked we are to our rich mythological past.  While there is an anthropological slant to many of the approaches I have studied, Joseph Campbell brings passion and more than a little dramatic flair to his chosen life-work.  We all live by a myth, this is our personal story, our personal narrative. Sometimes this is a part of a larger worldview as in the case of membership in one of the great world religions. Sometimes we try to find our way by other means.

Joseph Campbell used to like to say “mythology is referred to as other peoples religion“ and that “religion is simply misunderstood or misinterpreted mythology“. He felt that the emphasis on the historicity of religious texts often got in the way of the spiritual message. While many people get caught up on both sides of the fence trying to either prove or disprove a finite act of religion, trying to tie a religious event to a real historic place, date or person, I believe that it is the abiding, guiding message that matters most in our lives. For example, flood myths preceded the Bible by many centuries. Deucalion of Greek myth was the son of Prometheus and Pronoia. Pelasgians were the neolithic culture that preceded the greeks and the story goes that Zeus let loose a heavy rain, the rivers swelled and the seas rose. Deucalion and his dad Prometheus built an ark and was saved from the deluge. Noah and the Sumerian Xisuthros are both heroes of the same myth, the same story. There are strikingly similar stories in the Koran, in China,  in Aboriginal Australia and even with the North American Indian tribe the Menominee. These stories hint at both a universal threat of flood on the ancient world stage and the need for humans to mythologize about it. Our shared stories and ritual bring order out of chaos and help us relate to each other in meaningful ways. We destroy these relationships when we throw out the story and the ritual and instead cling simply to the historical vessel that carried them.

Any of Joseph Campbell’s densely academic books require dedication and commitment to thoroughly absorb. Among his pantheon of wisdom regarding comparative mythology he states that one needs to follow their bliss in order to live a fulfilling life. It is the history of the world as seen through the eyes of the great story tellers that bind us all together and in that vein Campbell drew heavily on the Hindu Upanishads to form his belief on this subject. Earlier, both  Ralph Waldo Emerson and Henry David Thoreau espoused transcendentalism as a kind of personal mythology.

I try to view Campbell’s admonition within the scope of his greater body of work. He seemed to firmly believe that we are all intrinsically connected. We all share a common background that reaches back far beyond recorded history might suggest. The roots of the human condition dig deeper than many of feel comfortable admitting. Despite our apparent differences we all share a closely held need to help others. Our bliss is a reflection of that.

Another way of saying follow your bliss could be to follow that which holds you in rapture, that which arrests your soul. It is imperative for us to define our purpose in life and get to the business of following our bliss. Your bliss takes you by the hand and pulls you where you’ve always wanted to go but were afraid to tread there yourself.

What is my bliss?


What draws you forth?

What would you gladly do for free if your bills were paid and you had no obligations?

Imagine that after you die, there is a giant brass plaque erected in your honor…What would you like it to say?

In the ceremony, the great mayor of the city gives a speech in your honor…What does he say about your life, your contribution?

What does your family say?

To follow your bliss is to do what you are.

To follow your bliss is to help others with the gifts you were given, the skills you acquired and all the strength you can summon.

Write a one-page plan on how to follow your own bliss.

please comment

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Should I Stay Or Should I Go?

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If I go there will be trouble
An’ if I stay it will be double

-The Clash

A short while ago, John Courson told the Wall Street Journal that underwater homeowners “should not walk away from lawful debts”. He went on to ask “What about the message they will send to their family and their kids and their friends?”

Five Years ago I would have heartily agreed. Fulfilling obligations, I believe, is a mark of one’s character. While I still firmly believe that every person should strive to fulfill their obligations, my definition of what constitutes individual responsibility has changed in the realm of home ownership. The unrelenting greed of mortgage lenders and the abject failure of our government to regulate them has severely harmed the average U.S. homeowner. It is true that a subset of homeowners could have been more aptly described as ‘speculators’ during the run-up to the crash but I still am convinced that the vast majority just wanted a nice place to live and raise their families. These ‘innocents’ were directly harmed by the collateral damage from a war that they did not sign up for.

So who’s John Courson? He is president and C.E.O. of the Mortgage Bankers Association. A group with an enormous vested interest in folks paying their home loans, no matter how big and unwieldy they happen to be. You see, Courson represents the very people who created the meltdown and even profited from the cleanup. The MBA members demolished the value of your home but refuse to reduce your principal balance. He does not want you to default, this would send the property back to bank ownership and they would be forced to sell it for what it is actually worth. Courson also pointed out on a separate occasion that “defaults hurt neighborhoods by lowering property values“. This was before, of course, before the Mortgage Bankers Association stiffed their lender in Washington D.C. to the tune of 25 million. Read the -Wall Street Journal Article

Here is the bottom line: corporations aren’t immoral, people are. The Banks and the MBA were  just doing the job of any corporation, to make as much money as they possibly could. Their perceived responsibility to shareholders was to get as many heartbeats into the funnel as quickly as possible so they could slice the ensuing mortgage up into Mortgage Backed Securities. After all of the qualified home buyers had homes, banks went after people who weren’t qualified to buy. Since these loans were sold almost immediately, the original lenders did not assume the risk of a loan default. That’s how an unemployed person could buy a 4 bedroom, 3 bath house with cash out at settlement. The bank simply did not care if they defaulted. The loan would go into the slicer with thousands of others and be a part of the CDO pool.

The question comes up then. Should the individuals who were not ‘qualified’ have bought these homes in the first place? Probably not. Individuals should know their financial situation but when Real Estate Agents, Appraisers, Lawyers and Banks are all using their professional influence to convince people that buying a home is the best course of action, it would take the strongest of the best of us to resist that kind of pressure.

The crash affected everyone, qualified or not. I would imagine that the first wave of foreclosures happened to those with the least ability to pay their mortgage. Then, as the recession continued, some people lost their jobs and then their homes. Now, those  qualified individuals who still have a job find themselves punished for their responsibility. They kept their jobs, their loan costs more and now their job is less secure. What’s more, the value of their home has dropped so much that they are severely underwater on their mortgage.

No good deed will go unpunished.

So what are the options for these folks? What about “Making Homes Affordable”?

The HAMP program is completely inadequate for a number of reasons. First, It does nothing to address the extreme loss of value homes have suffered because of the banks unrelenting greed. It simply tries to get people to take on a new loan for a house they still cannot afford. The principle is not touched. Secondly, It is aimed at people with financial hardship. How evil can banks get? They want to preserve their earnings by roping in the least capable of protecting themselves. The folks who are still financially solvent pay an egregious penalty. Their good judgement and strong financial discipline are the very values that they are being punished for exhibiting.

Why am I punished for being responsible?

If you bought a house with a reasonable loan, good credit and find yourself 30, 40 even 50% underwater you have every right to be angry. With such a big meltdown and so many bad actors within the circle of responsibility it’s hard to assign blame. Even worse, the President of the United States is out there urging homeowners to take the moral high ground and continue paying their mortgages. Now, even your sense of civic duty comes into question. I understand the dilemma from a macroeconomic perspective. Are home values too high? In a word, yes! The only reason home values shot up so far and so fast was because the law of supply and demand was so hideously tampered with by these influential financiers.

Strategic Foreclosure

Some homeowners are making the decision to walk away from their loans. Good people. Hard working, morally upright people. How could they do this? It’s simple really. They found themselves $100,000 underwater on their home with no help from the Feds and no help from the banks, they made the decision to walk away from their mortgage. They know their credit score will be devastated but are not overly concerned. They can stock up on things they would ordinarily use credit to purchase (For instance, They could get an auto loan before default at a low interest rate and have a reliable car for the next 7-10 years). They know that even when the economy fully recovers, home prices will not reach the astronomical levels we saw from those artificially inflated prices.

Should I cool it or should I blow?

Brent T. White, a University of Arizona law school professor wrote a 55 page academic article called “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis”. He said that a shame and social control agenda that extends all the way to the White House has been underway to keep people paying the mortgage on their underwater properties.

Laws differ from state to state on what you are responsible for after a default. Check your situation. If you remove the social manipulation coming from Wall Street and the White House and make the decision to strategically default a rational one, short term pain may result in a much more sustainable situation for you and your family.
Donald Bisenius, a Freddie Mac VP said on May 3rd “Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy. That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.”

Allowing Wall Street to profit by manipulating home prices, converting mortgages into worthless strips of paper and even betting on the failure of this entire system is perhaps the worst social policy of all.

This indecision’s bugging me
If you don’t want me, set me free

Are you underwater on your mortgage?

What are the moral or ethical issues that would prevent you from strategically defaulting?

Should people who can pay their underwater mortgage be obligated to?

Please post your comments.

EDIT: I noticed that The Simple Dollar just posted an article which has developed into an excellent discussion on the same topic

-WR

( lyrics are from the song“Should I stay or should I go” copyright 1991 The Clash)

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Sometimes You Need Money to Save Money

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The rich get richer, and the poor get poorer. Is this true? Well yeah, sometimes. You don’t necessarily need to be rich to take advantage of smart savings, though. You do have to organize your financial life in such a way that you have a bit more cash on hand than the average Joe Taxpayer.  Once you have funded your contingency fund , are on the road out of debt and have set your wealth plan to “semi-auto”, it’s time to look at how you can accelerate your savings without changing your lifestyle one iota.

In my quest for financial simplification, I have hit more than a few minor speed-bumps. The long version goes like this: I canceled a few of my checking accounts. They had ACH debits attached to them for various things. One of them was for my voip phone service and after a full month the account was past due. Short version: Vonage called and they want their money!

I explained my situation and since I was an early adopter of their service (2002), they gave me a pass on the late charge. I checked their website to enter my new payment method and found that they offered a big discount if i paid for the full year upfront. So I thinks to myself “What a great topic for discussion on me blog”. It did not take long to find a few more excellent examples of this.

Here are a few that I can point to recently in my life:

1. Vonage: They offer a 20% discount if I pay the year up front.

I have used this service for 8 years now. It’s good and has already saved me a ton (vs. a landline). Bonus: I bring the adapter with me on long vacations sometimes and have my home phone with me. Also brought my phone number along when we moved. It is not a perfect service, it piggybacks your Cable or DSL internet connection and will fail if the power goes down or your internet drops. We both have mobile phones so 100% uptime on the house phone is not critical. I’ve been very happy with it overall. It’s a solid service at a great price that just happens to now be 20% cheaper.

2. Car Insurance: If you pay the annual policy premium in full you can save a bundle.

Insurers tack on administrative fees and interest charges for premiums that are considered “fractional”. These can be monthly, bi-monthly or bi-annual. See what the penalty is for you if you are on a fractional plan.

3. Investments. Vanguard offers some of the industries lowest expenses for their mutual funds in exchange for a sometimes higher minimum investment.

I am a big fan of Index Funds. Why? Read my review of The Elements of Investing. If you share my enthusiasm for the slow road to wealth, let’s take a look at how fees affect our returns.

First, for even the most basic of index funds there is a $3,000 minimum investment. Most have have very low expense ratios and fees.

Second, if you have $100,000 to invest, the savings are even greater. In some cases the expense ratio is 50% lower than their standard offering. These hidden savings really add up (as do the hidden costs on the flip-side).

Lets take a look at Vanguards Extended Equity Market Index Fund, This is a rather aggressive index fund that tracks the Standard & Poor’s Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies.

The Investor Shares are called Vanguard Extended Market Index Fund Investor Shares (VEXMX) . These have a $3,000 minimum investment and a .30 expense ratio.

The Admiral shares are called Vanguard Extended Market Index Fund Admiral Shares (VEXAX) . These have a $100,000 minimum investment and a .15 expense ratio.

With a 100,000 investment, held over 20 years, assuming the exact same investment and returns, you will have about $20,000 more in your Admiral fund. Expenses add up and should always be considered when choosing an investment. (to be fair, Fidelity has very low ratios, some as low as 10 percent. I personally don’t like the 90 day redemption fee that many of them also carry. If you are going to hold for a long time, take a look at Fidelity.)

There are lots of other examples out there, Moolanomy has a great article on how to save money on your mortgage.

What are some of the things you already pay for that could save you money if you prepay or buy in large quantities?

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Book Review: The Elements of Investing by Burton Malkiel and Charles D. Ellis

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I have to say right off the bat that I am a big fan of Burton Malkiel’s A Random Walk Guide to Investing. I have applied his recommended strategy very successfully in my own portfolio. It was not always that way for me though. When I was forming my investment philosophy I naturally gravitated to the top selling books. I figured the best sellers list was where all the good knowledge was. If I just read the top 3 or 4, I would have everything I needed.

Timing, Value, Hyperactive Vs. Passive, Day Trading Vs. Let it Ride, Secret Formula after Secret Formula. There was no shortage of answers. The only problem was that none of the strategies espoused in these wonderfully marketed books actually worked in a predictable way. I tried a few stock-picking strategies with the little money I had to invest and lost most of it. It turned out that the timing was right for  A Random Walk Down Wall Street to be my eye-opener. Keep in mind that this excellent book was originally written in 1973 and is more of an academic treatise on market efficiency than a what to do with your money guide. At 400 pages it is a daunting read but worth it if you need convincing that trying to beat the street is probably not  for you. A Random Walk Guide to Investing is the cookbook version that has a more pragmatic slant but could still be considered a bit wordy for a nuts and bolts investment guide. That is where The Elements of Investing comes in. The Hardcover is only 176 pages, the dimensions of a trade paperback and typeset with a large, easy to read font. It distills the intelligence of A Random Walk Down Wall Street and A Random Walk Guide to Investing with a few additional years of wisdom and validation.

Malkiel is a proponent of the Efficient-Market Hypothesis. The idea is that markets have in them all the information they need to perform efficiently and an individual investor will not be able to outperform them consistently. This flies in the face of the CNBC money gurus who seem to make their money by helping you lose yours:

“If I had only followed CNBCs advice I’d have a million dollars today…provided I started with 100 million dollars”

-Jon Stewart  – The Daily Show

I read The Elements of Investing in PDF format for this review. It was a few days later at the bookstore that I really had a chance to appreciate one of its greatest assets. Elements is a small, light, easy to read book that is packed with everything you need to make excellent investment decisions. There is little theory, no filler and no unnecessary self-gratifying gibberish that defaces many otherwise good finance books. It’s as if the authors are saying, “it’s the information, stupid” instead of preaching from a high pulpit. These authors indeed do not waste our time with self promotion for they seem to be genuinely interested in providing us sound financial advice.

The book is divided into 5 simple concepts that form the basis of an excellent investment strategy:

1. Save regularly and start early.

2. Take advantage of tax efficient retirement investment vehicles.

3. Diversify broadly: Own the whole market.

4. Rebalance annually to stay within your target asset allocation.

5. Stay the course, ignore market ups and downs. Focus on the long term.

These ideas and strategies are not new. They are the proven strategies we have been told about for years, scattered among the rocks and hidden in plain sight. It is the laser-like focus that this tiny book provides that makes it so valuable. It needs to be on our shelf in a glass case with a little hammer adorned with the words “in case of severe market correction; break glass”. It is in these gut wrenching moments when we need this sort of wisdom.

There are a few minor changes from previous works here as well. There is more of an emphasis on global investments and the author’s share with us some stock-picking stories perhaps to remind us that they too, are human and get caught up in market timing from time to time.

Having Malkiel on your bookshelf and in your portfolio could be the smartest financial move you ever make. It certainly was mine.

The Elements of Investing by Burton Malkiel and Charles D. Ellis is available on Amazon.com

Have you read this book? What did you think?

-WR

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Cult of frugality

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Frugality is a fad.

Fads of yesterday

Fads come and go

My father just happened to be in fashion every 15 years or so because the style he clung to would re-emerge like a comet that had been circling distant planets. He simply never changed his style of dress and ‘fashion’ caught back up with him. He did not keep up with current norms. He didn’t know the Joneses and if he did he would abhor the thought of ‘keeping up’ with them.

I remember vividly my teacher talking about recycling and the wonder of solar power back in my elementary school in 1979. One of my science projects was devoted to this theme (Give a hoot, don’t pollute?). Gas prices were through the roof, there was rationing and a mild state of panic in the air. Alternative energy was going to be our ticket out of this mess.

Flash forward 31 years. (doodle-a-loop…doodle-a-loop…)

What happened?

Once the pressure was lifted, the temporary solution went away. It all makes sense, we see it happen all the time. The fix was no longer necessary. In the case of energy, fuel became cheap and abundant which removed any need for alternative energy. Through it all, my father dressed the same and just happened to be out of sync with the world at the most embarrassing times for my sister and I. Being frugal can be a fad or a ritual. Frugality, in large part has been forced upon unwilling consumers like water rationing in a lifeboat. Once ashore, the deprived get to work making up for lost time. Once the veil of anxiety is lifted, we will see a consumer revival like no other. we must strive to make our frugality a permanent part of our life, not a temporary fix to a inconvenient problem.

It might not feel like it but we are exiting the great recession. Our family, friends and neighbors are going to go back to their pre-crisis levels of consumption very soon (if they haven’t already). We have all experienced ‘recession fatigue’ from time to time. The urge to splurge bubbles up more violently when we have gone without for extended periods. These are the welts we have on our waist from the tightened belt. It is the pang we feel when we see the 2010 Lexus beside us, all shiny and confident while we lumber along in our 93′ Oldsmobuick. It is I want breaking through our tired defenses.

The catch to all this is that frugality is the answer to our problem. When times are at their toughest, frugality keeps us from going under. When times are good, frugality pays! As our economy recovers and our earnings increase, diverting more of our income into our investments (rather than our lifestyle) will be the best decision we ever make.

There will always be a new Apple i-something begging for our money and time, it is when we devote both to our financial independence that we become truly wealthy.

Do you think the current emphasis on frugality will last?
What are your thoughts?
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Contingency Theories

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Do you have a well funded Contingency Fund? A Rainy Day fund? I would love to hear your thoughts on this subject.

Simply put, your contingency fund is money you have stashed away to protect you and your family from unforeseen circumstances (we all have these). This is usually the loss of a job but it could be a medical issue, legal issue or any other nasty thing that comes up from behind and bites you on your assets.

Having a contingency fund is the first step to building wealth. One of the major benefits I have noticed in my personal experience is that having a financial buffer actually helps me make better financial decisions. It’s as if just knowing there is a safety net helps me choose opportunities with clarity, take calculated risks and enjoy the process a bit more.

Now, you should not freak out and try to account for every awful possibility that could befall you but conversely you need to adequately prep yourself for life’s unexpected gifts.

Shouldn’t I pay off my credit cards or other consumer debt first?

No. (I am certain to get some hate-mail for this) Your contingency fund should be funded at the same time that your consumer debt is eliminated. You absolutely need to eliminate debt. That is a key component of any wealth plan. What is even more important is developing your Wealth Rituals. These are just habits that, over time, become part of the fabric of your life. Your financial success depends on the care and feeding of these habits. You should not have gotten into consumer debt in the first place but it will only be your rituals that get you out. Your ultimate goal is to form the rituals or habits that serve you and to eliminate those that don’t. If you have moderate debt (10% or less of your gross income) strive to go 70-10-10-10. That is, Give 10% to charity, pay down your debt with 10%, fill your contingency fund with 10% and live on the remaining 70%. Here is what I mean:

Adjust the percentages based on your situation. Maybe 97-1-1-1 is the best you can do at this point. Just make sure you do it. Lean heavily on getting your contingency fund up to your goal amount, though. maybe 70-20-5-5, with 20% Contingency.

Some questions that have come up in recent discussions are:

How much is enough?

This is obviously the crucial number. You want to have enough saved to pay your bills, fund your job search and possibly finance a bit of education if that makes sense.

The huge question here is for how long?  6 months?  12 months?  2 years? There is no single right answer to this. What is important to note is that you are not trying to replace your income. You are trying to stay afloat until you can regain full employment. Some things you spent money on while on the job are no longer necessary (Tolls, Parking, Gas, Lunches out) while some things might go up (beer, resume printing, beer). Up until recently, 6 months was proffered as a sufficient time-frame. I believe 6 months is still great for most people. Some executive level folks may need to have more of a buffer since the air is a bit thinner up there and it could take longer to land a comparable job. At whatever level we are, we need the assets in place to be able to bounce back from misfortune.

Here is the magic formula: My Monthly Expenses X 6 = My Contingency Fund

How much is too much?

After the bubble burst, for those who have been steadily employed and have drastically reduced their expenditures (mostly out of fear that they could be next in the unemployment line) They are finding themselves with huge bank account balances (an enviable position for many). Now that the recovery appears to be imminent, they want to make sure they are not missing key opportunities. Now is the time to max out your 401(k) and begin to fund a Roth IRA. I Recommend a mix of Extended Equity Index funds (Both domestic and international) and Bond funds in your 401(k). If you have some dough left to invest after the $16,500 maximum contribution, Call T Rowe Price or Vanguard and open a Roth IRA.

Some Q&A might be appropriate:

Q. What is my risk tolerance?

A. Personally, I think this should be based on dependents. The more humans(or animals) you have depending on you for survival, the lower your risk exposure should be. period. Going solo? No Worries! Have 3 kids, 2 cats and a spouse? Not so much. Make sure you can support you and all those who depend on you for a full year.

Q. Where should I put the money?

A. This is cash or cash equivalent. Ideally you should put this money into a FDIC insured account. What we have found is that many jobs are tied to the overall economy. When the stock market drops, companies tend to lighten their load (i.e lay people off). that is also when more financial institutions close up shop. If your contingency fund is in the stock market, you can lose your job and your money.

How do I do this, Where do I find the money?

There are essentially two ways to deal with this problem:

  1. Increase your income.
  2. Lower your expenses by trading down to wealth.

Increase your income

  1. Sell your stuff. Especially the stuff you have stored in a rented facility.
  2. Start a business based on your passion.. Follow your bliss! Your own home-based business can be a great source of income as well as a huge tax benefit.

Lower your expenses

By lowering your monthly expenses you drastically lower your risk exposure. This is an often overlooked benefit of a frugal lifestyle. How can I do this?

Trade down to wealth

  1. Buy used and invest the difference. Go to yard sales and estate sales  in your area. Check out Freecycle and Craigslist. Above all remember that “New” is the most expensive adjective in the dictionary. What are you getting extra when you pay retail? A box? A tag? Not much!
  2. Eliminate debt. Consumer Debt is self-imposed slavery. Serfdom. No matter who you are it is stressful and painful. Get out of debt!
  3. Consolidate your fun. Stretch your entertainment dollar by looking at ‘experiences’ rather than ‘events’. A family trip to an historical park near you, for instance, is less expensive and MUCH more memorable than another trip to the multiplex. A little planning goes a long way.
  4. Be Healthy. Sounds silly, right? Walk, bike or jog every day or so and your outlook brightens while your medical bills go down. It’s a fact!
  5. Save on everything. The blogosphere is full of amazing resources to help you get the best deal on just about everything. Are you a mom? Check out Deal Seeking Mom. My favorite personal finance and frugal living blog has to be Wise Bread. Drive around your town on Saturday morning and take advantage of the yard sales & Estate sales going on. I have a very wealthy friend who loves doing this. Kind of like therapy.

Be joyfully frugal

Frugal living is not about sacrifice or pain, it is about wealth. You must free up your cash seeds to grow into cash oaks. Too many people eat the seeds! A reminder of what it is all about is probably in order:

Wealth is made up of the things that make life worthwhile

Only you know what these things are. These are the laughter of your kids, the smile of your spouse, the Saturday mornings with your family. These are the joy of a job well done or the feeling you get when you ‘nailed it’. Wealth is a personal, visceral, emotional experience that is unique to everyone. You must figure out your personal definition. Being disciplined with our money offers us these experiences. Frugality is money discipline and is the key to financial independence. Once we understand this and begin to see our seeds sprout into mighty trees, we can feel a sense of joy.

Frugality rule #1 : Spend money on things that go up in value. Be an investor, not a consumer.

Frugality rule #2 : The Joneses don’t give a rat’s nevermind what you drive or what you wear. Many are too self absorbed to notice. Buy, wear and do what is right for your family!

Having a 6 month fund based on conservative expenditures should be enough for most of us. If you are at the top of your earning pyramid, you should go for 9-12 months.

Building a 6 month contingency fund is the first phase of becoming financially independent.

-WR

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Welcome to WorthWild.net

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Glad you stopped by.

Within the walls of this blog we will be taking a sometimes unorthodox approach to financial independence. We’ll look at wealth not as an end-goal but as a truly sustainable lifestyle.

First a definition:

Financial Independence: Living on the income generated by the semi-automatic streams you have established.

Q. What are ‘semi-automatic streams’ ?

A. Besides a good name for a rock band (this marks my first homage to Dave Barry), semi-automatic streams of income include dividends from your investments, profit from your business or royalty payments from a creative work. All of these require substantial initial effort but usually minimal ongoing attention.

WorthWild’s tagline is “Financial Independence on your terms” and I hope I can live up to this lofty Ideal. Achieving Financial Independence is hard. Anything worthwhile usually is. It takes dedication, sacrifice and humility but I think you’ll agree it is well worth it.

One important thing to note is that everyone has a different dollar amount that represents their threshold for financial independence. The more frugal you are, the faster you’ll get there. Period. This is why frugality constitutes a significant focus of this blog.

In the posts that follow we’ll revisit this definition and refine it for our purposes…

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