Worthwild Financial Snapshot: Cinco de Mayo Edition

Happy Cinco de Mayo!

First, Let me dazzle you with my Margarita Recipe:

2 Ounces of  freshly Squeezed lime juice (Pulpy is good)
1 oz triple sec
2 oz tequila ( Get a bottle of Dos Gusanos, or Two Worm Tequila and share with a friend)

Ice, Kosher salt and a few wide rimmed glasses.

Ok, Now that’s better. Let’s do a Worthwild Roundup. Here are a few stories and articles I found worthwild this week:

1. SCORE blog: Successful Entrepreneurs Share Stories.

My favorite line: Self-employed individuals have a certain entrepreneurial spirit that’s hard to describe. But, you can see it in his or her facial expressions and hear it in their voices. Once you catch the bug, it is hard to think of anything other than launching your business. How true

2. Budgets Are Sexy: Help a Reader- pay off student loans or start saving

My Advice?: Get moving on building an (at least) 6 month contingency fund. This is not a matter of current need, local situation or any other fleeting reason. It is a matter of philosophy. Building and maintaining a contingency fund forces you to make tough value choices and build enormously powerful lifelong habits. You’ll realize that having this critical safety net allows you to make better choices about almost everything else in your financial life. Try to refinance your student loans to lower rates + longer term. One thing different about student loan debt than most other forms is that *hopefully* your earning power will climb over time.

3. Consumerist: I am so glad to see an American company be so profitable, Wait! What? http://con.st/10018507

4. Deal Seeking Mom: Lots of coupons going on!

5. Get Rich Slowly: Pack Smart To Save Money

Great article. My personal tips are to pack sandwiches, water and a bag of veggies for long road trips and picnic instead of restaurant. You get on the road quicker and can spend the time walking and stretching your legs (instead of sitting in a booth at a Shoneys). You save a ton of cash, too!


I posited my opinion on who should get the Bin Laden bounty


Let me know what you think.

The Wisdom of Warren Buffet

Warren Buffet is amazing. He is one part folksy, one part frugal and all parts genius. Anyone interested in achieving financial independence would benefit from his sage advice. Anyone interested in investing their lot successfully would benefit from reading a book he considers to be the best treatise on investing ever written The Intelligent Investor

Anyone who would like an annual insight into his methods, successes and failures would do very well by reading his annual letter to the stockholders of his company, Berkshire Hathaway.

I never, ever read stuff like this. Annual report to shareholders? ugh. Like reading the instruction manual for a microwave. (Why do they even have these. Should say, “If you do not know how to use a microwave, please return it to the store or ask someone to help you”.)

This one is different. Buffet’s annual letter to shareholder’s is the investment world’s Steve Jobs Keynote. Instead of dropping the cloth from this years i-Thingy, It is a look into the thoughts and philosophy of the worlds greatest investor. It is an anomaly. A shareholder letter should not be easy to read and funny. These literary vessels are supposed to obfuscate performance and hide the CEO’s mistakes, right? Instead, Buffet’s letter is clever, open and even whimsical. Full of interesting ideas and quotes with impact.

In his discussion of  Clayton Homes, Builder of manufactured homes (Trailers), Buffet discusses the plight of the American homes industry. In just a few paragraphs he sums up the conundrum. While Fannie, Freddie and the morally bankrupt mortgage industry were populating their stick-built homes with warm bodies (only to dice up the loans and resell them as commodities) , Clayton was in the unenviable position of selling and mortgaging small affordable dwellings without the help of the big government backed organizations. Why bother helping a working class family into a starter home they could readily afford when we could lure them into a McMansion and profit twice! First when the loan is sold and again when the home is eventually seized. The collusion and corruption we saw in the entire real estate sector (including the U.S. government involvement) is legendary. We will be reading about this era as a warning for a long time to come.

Buffet offers an unorthodox and outstanding solution:

“Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

Well said. My wife and I started off in a starter home, not a manufactured one but a structure 75 years old and small enough to be called a shed if looked at with squinted eyes. This was during the boom times and every lender I spoke to ridiculed me for not leveraging more. We bought that home (still own it as a rental) for a little over what I earned in 1 year. I used an online calculator that told me a conservative choice would be in the 400-420k range. I knew that was crazy. We found a home for 100k, drove used cars and worked hard to make it just right and never looked back. I am not suggesting that I made no mistakes (ask me about my WorldCom investments) but I do assert that your big choices need to be made using your own wisdom, intuition and clarity. A Bank and a Real Estate Agent will not have your best interest in mind when telling you what you can afford.

He is just as wise in summing up the subsequent credit crunch:

“Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.”

We should all have cash in our portfolio. This is not just a contingency fund that waits for us to make mistakes, it also awaits our moment to seize a unique opportunity. To Zig when everyone else is screaming “ZAG!”.

“By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well.”

In short, Buffet runs his enterprise just as one should run his or her home and life. Keep an eye on value, be frugal, be optimistic in spite of the naysayers around you.

Here is the link to the letter: http://www.berkshirehathaway.com/letters/2010ltr.pdf

Let me know what you think.


The Cult of frugality: Part II

Frugality is no longer a fad. (That ship has sailed)

Fads of yesterday

Fads come and go

The most recent wave of the fad of frugality is on it’s way out. This fad comes upon us when jobs are scarce and people are scared. Now that things are looking a bit rosier I urge you not to let it go. Donate your Crocs, Uggs and lowrider jeans but hang on to your frugality.
The Dow Jones Industrial Average  is hovering above 12,000. Consumer spending is up. Credit card interest rates are up as well according to this CNN Money article. It seems that the credit card reforms left out the most obvious culprit in the ‘debt is the slavery of the free‘ equation: Interest Rates.
One of my favorite radio programs is APM Marketplace. Kai Ryssdal, besides having a pretty cool name, puts on an amazingly informative and entertaining half hour money talk. Today the Marketplace team reported that credit card use has risen while savings rates have dropped. Hmmm. I remember wondering last march how many people would retain their frugal mindset. What do these numbers seem to tell us? It is too early to tell but I think most of us have or will soon revert to previous habits of spending. If your pre-meltdown habits were frugal, great. If you, like millions of others, got caught up in the spend-for-all then you should probably hide your plastic right about now. Couple the past few years of recession fatigue with good news of the economy and an early spring and you could be in for some difficult consumer temptations.

Spring is near!

Now, it is true that we need consumers (you and me) to go out and spend. Buying stuff is the engine of capitalism. Just make sure that you are building your contingency fund and investing in your long term wealth first. There is no benefit to our society when unhinged spending leads to a personal financial disaster. One of my all time favorite quotes is from public speaker and author Jim Rohn:
“I will take care of me for you, if you will take care of you for me. ”
- Jim Rohn
It is important to understand that while it may seem like there is a direct cause-and-effect relationship between one and the other, The Stock Market is not The Economy. Experts use the economic indicators and stock indices to predict the future but are often wrong in their prognostication. The only relatively sure path to financial independence is to practice the fundamentals:
1. Give your money or  time to a worthy cause (here’s a good one: Lovedrop)
2. Be frugal
3. Build a contingency fund
4. Park your money in well-balanced investment vehicles
5. Strive to find your bliss and follow it

If you will do these things for me, I will do the same for you.


btw- I have a ton of Silly Bands, real cheap, if anyone is interested…

What’s your ‘Minutes Per Dollar’ rate?


How can we ensure that we are making the best decisions with our money? What does a product or service really cost us as individuals. We naturally assign the value of something based on how many dollars it costs for us to purchase it. The truth is that the real value or our real cost changes over time.

Money is loosely coupled to value. In this sense it is an arbiter of value. You need to translate this ubiquitous, generally acceptable measure of value into a specific, locally interesting one. Minutes per dollar is one way to do this. There are others but I think you’ll have fun with this one.

MPD - Minutes Per Dollar

Understanding this concept could be the key to getting a grip on your spending. We mentally assign cost and value to any purchase we make. Sometimes it is conscious, other times not so much. If the price is high, we sometimes conjure up our mental judo master to ‘talk ourselves into it’. We use quantifier words to soften the impact and we use universal arguments akin to these:

You only live once.

You can’t spend it in the grave.

What good is it if you’re too old and gray to enjoy it?

We also use cost definitions. These are more specific to the purchase at hand. What are the cost definitions many of use to assign value to a particular purchase? I have a few:

It’s just $20.00 a month

It’s just $350.00 a year.

It’s only $500.00

First off, the word just in this context is a very dangerous modifier. Saying just or only are persuasive words that tend to limit the impact of a potentially bad decision.  Let’s take a look at the $500.00 item from above. How much is it really?

Let’s see. $500.00 + 6% sales tax = $530.00 actual cost.

but wait, there’s more…

How much do you have to earn to be able to spend $530.00?

Let’s say you earn $67,480 per year. This is $35.00 per hour (based on a full year with 20 days of leave approx. 1,928 hours)

If you make $35.00 per hour that would be 15 hours, right? not quite.

What is your after tax earning rate? take a look at your paycheck and follow along

A typical single filer pays about $14,000 in taxes (Federal, State, Social Security and Medicare). This means you take home closer to $53,480. Your Net hourly wage then is $27.00.

* Obviously some states have higher or lower tax rates and some taxpayers can claim certain deductions which will lower this figure. For the sake of this discussion, lets keep it simple.
but wait, there’s more…

What does it cost you to work where you work? do you commute? pay a toll? pay for parking? Childcare? Get your clothes dry-cleaned? Eat lunch at a restaurant? (where you would not otherwise).

What do these costs translate into?

If you have a 25 mile one way commute to work and you work 261 days a year that (at 35 cents a mile) this comes to about $4500 per year in commuter cost. We’ll ignore the lunch, tolls, parking, childcare and dry-cleaning for this example but be sure to calculate these things in when you try to arrive at your “minutes per dollar” rate. Lets subtract that from our modified wage:

( 53480 – 4500 ) / 1928 = $25.40

What does this mean for your purchase? You don’t work 15 hours for that $500.00 item but closer to 21 hours.

Are you willing to work 21 hours for this ? That’s two and a half work days not counting the cost of your commute.

That is 2.36 minutes to earn a dollar (60 minutes / 25.40)

2.36 is our minutes per dollar multiplier in this example. (This is 2:21. Just multiply 0.36 * 60 to get the seconds component) How can this help us make good decisions? Understanding our real cost, that is the number of hours we need to actually work in order to buy a particular item will ultimately help us assign the proper amount of pain & effort to a purchase. Advertisers make it their job to assign pleasure and joy to making a purchase (or pain to not making one). Have you seen the SNL Broadview commercials?

Lets look at a couple of real world examples:

IPAD: A 16GB Ipad from the Apple store is $729.00.

729 * 2.36 = 1720.44 minutes.  1720.44/60 comes to 28.67 hours worked for this item (not including apps).

Dinner out: Dinner out vs. backyard BBQ: 75.00 (Dinner w/ tip) – 15.00 (Burger & Buns) comes to a delta of $60.00

( 60 * 2.36 ) / 60 = 2.35 hours worked to make up the difference between a BBQ and a dinner out. Might be worth it on occasion.

In general, It Costs $500.00 vs. It Costs me 18 hours of work may produce different answers to the common question:

Is it worth it?

Could this be helpful in making purchasing decisions? Is this just plain tedious and dumb? Please comment either way.


Contingency Theories

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.