Student Loans

One of the things I have not had to be saddled with in my young adult life is student loan repayments for my wife or me. We both went to state schools, not the fancy private schools that really don’t typically provide much better (statistically) of an education anyway. My wife’s parents paid her tuition all 4 years, and her housing the first 2 years. She got a job to pay her housing otherwise.

I’ve had a lust for learning for as long as I can remember. I taught myself geometry at home while I was learning algebra at school so that I could compete better on the math team in middle school. I began taking accelerated classes in 3^rd grade, went to the “gifted” middle school program, was one of 30 kids in my county of 3000 freshmen to be accepted into the math and science program in high school, and went on to get a full academic scholarship to college. It covered tuition, housing, food, books, and a small stipend. I also applied for a couple small ad hoc scholarships that gave me some extra spending money those 4 years.

Side note – I finished 16^th in my class and opted to go to a state school with financial aid rather than a private or more prestigious school that I would have to pay for. My parents said 2 things early on: If you get a scholarship to college they’d buy me a car (hey, cheaper for them) and if I didn’t get a scholarship, I’d be going to the local state school. Massive student loans and private/out of state tuition weren’t an option. I am so indebted to my parents for many of the hard lines they drew, knowing what was best for their children despite us not being able to see it at the time.

Anyway, each step of my academic career prepared me for the next. I worked hard in elementary school to test into the middle school program. I really developed my passion for math in middle school and used it to get into the high school program. My success and test scores in high school propelled me to a college scholarship. My work ethic in college, despite the many factors that some adolescents fall victim to, had me graduate with honors and find an engineering job with the federal government – in the midst of the recession when the vast majority of all my graduating classmates couldn’t find work.

I was lucky to be born with a propensity to learn quickly and retain information that allowed me to succeed in school. However, I did not squander that gift and worked hard to use it efficiently and make smart decisions with my future in mind.

My parents instilled values in me that complemented my internal motivation to succeed. They created expectations that told me that anything less than success wouldn’t be tolerated. They even “dangled the carrot” of the new car that really catalyzed my drive (pun intended) to get that scholarship. These actions, both direct and indirect, in our household throughout childhood built the foundation for a solid academic career that got my finances and my net worth started in the positive direction once I became an adult.

Personal Finances

One of my earlier posts  focused on the ways my parents set my values for frugality, strategic decision making and spending, and saving. When I got money as a kid, I first saved it, then chose to carefully spend it when something was worth buying. When I got money from grandma for birthdays and Christmas, I put that money away for a rainy day rather than going and spending it all the next day. My wife and I still operate that way. Rather than looking at this “extra income” as a source of money to go buy something we don’t need, we simply add that money to our regular financial accounts to fund our next goal or debt payoff.

My parents led by example. When we traveled, we stayed at lower cost hotel chains, or with family and friends. We drove all of our vacations because flying was expensive. We brought our food and ate meals outside of restaurants where possible. Our day to day didn’t involve many restaurants. Feeding a family of 5 adds up quickly when you eat out. We didn’t have video games, a big screen TV, or the highest cable package, as socializing and playing outside is far more important to adolescent development than sitting behind a screen like many kids of the current generation.

As soon as I was old enough to understand, my dad began teaching me about investing. While in high school he helped me buy my first mutual fund (one that I still have, but I’m trying to find the right time to sell now that I realize the horror of high expense ratio funds!). When I went to college, I learned that he had been investing on behalf of my siblings and me for many years, and then gave us the money he’d invested as a gift to get us started in the real world.

Everything I saw, and continue to see, my parents do with any relation to finances or income and expenses is deliberate, and with the future in mind. This has translated to my own daily thinking. It became a habit, became natural. Since these thoughts and weighing of fiscal pros and cons have been part of me for as long as I can remember, it’s easy for me to analyze options on the fly and choose the best decision for my family in the moment. I don’t even have to try.

The one place that I would say I have deviated from my parents is my willingness to turn off the conservative thought process and attack my financial future with more risk and aggressiveness. However, growing up in a household of conservative money management gives me the past experience to draw from that keeps me grounded as I leverage more debt and make choices to expand my net worth as quickly as possible.

Stay tuned for more on the net worth conversation…

Compound Interest is the 8th wonder of the world

-Einstein

When I was a kid, I would walk into the bank to deposit something like $50 of soda selling money, and I would be so excited to see how my money had grown since the last time I had an account update.

There was no online banking. I had a bank-provided ledger book that the teller updated in ink pen for me every time I deposited money in my savings account. I wasn’t entirely sure how it worked in those early adolescent years, I just knew my money was supposed to grow by giving it to the bank.

I learned the details of the time value of money and compounding interest in middle school.

FV = PV x (1 + r)ⁿ where:

FV: Future Value

PV: Present Value

r: rate of return

n: number of periods

This is simply telling you what your money today will be worth in the future given the set of assumptions shown. For example, if I hadn’t saved a dollar since I started tracking my net worth in December 2010 and just wanted to know what that $30,000 is worth now (let’s say December 2018 for simplicity) at varying market conditions (let’s assume the market has averaged 8% gains in that time) then I would have:

FV = 30,000 x (1 + 0.08)⁸ = 55,528

A simple rule is that it takes about 10 years for your principal to double at 7% interest.

As many financial advisors will tell you, the power of compounding interest starts slow, but increases at exceedingly rapid levels the longer you extend the math.

After 20 years that $30,000 should be worth $139,828

After 30 years: $301,879

After 40 years: $651,735

Not bad that $30,000 of adolescent savings would be worth over $600,000 when I’m 63 years old.

Parents, teach your kids to save. Save early, save often. Many articles start hypothetical scenarios for saving for retirement at age 20. Why can’t you start at age 10 and add another decade of compounded interest to the math for retirement years?

The learning will compound as you teach your teenager positive financial habits, saving, frugality, and the power of math for watching your money grow.

Now lets say that I contribute $100 per month, or $1200 per year, to my retirement fund, starting back at the end of 2010.

The formula for that is:

FV = A [(〖(1 + r)〗^n -1)/r ] where A is the annual contribution.

FV = 1,200 [(〖(1 + 0.08)〗^8 -1)/0.08 ]= $12,763

If I had started doing that in December of 2010, I could add that money to the new worth of my original savings of $55k, totaling approximately $68,000.

Again, the value is from the many years of allowing this savings to compound.

After 20 years of $1,200 annual contributions I would have saved $54,914

After 30 years: $135,939

After 40 years: $310,867

If you add that money to the future value of my original savings, I’ve got just shy of a million dollars of net worth. We can all find $100 a month in our budget to put toward retirement, can’t we?

Further, if you can avoid/minimize lifestyle inflation as you get older and your earnings increase, you can save more than $100 a month in your 30s, 40s, and 50s to grow these example dollar amounts much larger.

How do you avoid lifestyle inflation?

• Every time you get a raise – be it cost of living for inflation or merit based – you should set aside some (or all!) of that extra money in your paycheck to pay yourself first in your retirement savings.

Mrs. OneDollarAllowance here – This is how I handled my early retirement savings. I thought the concept of putting money towards something so far away, while I was barely getting by with living expenses in college, was ridiculous. My parents said, “at least put in what gets matched.” So I did. Six months into my part-time job, I graduated college and was hired full time, with about a $10,000 raise. With all of that extra money and no extra expenses, I should have maxed out my retirement, but I was a dumb kid. I increased my retirement savings, but didn’t max it. It wasn’t until I met Mr. OneDollarAllowance that I was pushed to contribute to all retirement accounts fully.

• Don’t rush to go buy the next big gas guzzling SUV. Drive your cars longer and buy vehicles that are more fuel efficient and reliable at higher mileage levels.
• Don’t go buy that big dream house in your 20s. You don’t need to keep up with the Joneses. Remember that people don’t post the negative side of their lives on social media. If you compare your life and your belongings to the people you see online, you’ll do yourself and your finances a disservice.
• Curb your craft beer and your fancy restaurant tastes. These are good to treat yourself to every now and then to maintain your sanity, but eating out is the biggest thing I see my generation spend their money on, watching their paychecks disappear every two weeks.

There are countless examples of ways you can flex your frugality muscles, but I’ll leave those for a future post.

Let’s go back to the numbers for increasing retirement savings and see what happens. We’re going to save $100 a month for the first decade, $200 a month for the second decade, $300, then $400 for the last decade.

	Principal	End 10 yrs	End 20 yrs	End 30 yrs	End 40 yrs
Starting $	$    30,000	$        64,767	$      139,828	$      301,879	$      651,735
First Decade	$    12,000	$        17,384	$        37,530	$        81,024	$      174,923
Second Decade	$    24,000	$                 –	$        34,768	$        75,061	$      162,048
Third Decade	$    36,000	$                 –	$                –	$        52,152	$      112,591
Fourth Decade	$    48,000	$                 –	$                 –	$                 –	$        69,536
Total	$  150,000	$        82,151	$      212,126	$      510,116	$   1,170,834

There are several takeaways from this chart.

• It’s surprisingly simple to amass wealth purely from discipline and deliberate, consistent saving.
• In 40 years, your money multiplies quickly compared to the principal you invested.
• The amount of time you invest is far more important than the amount of money you invest. Note that the money that had 40 years to grow nearly had triple the effect of the last decade, which was 4 times as much money, but only had 10 years to grow.
• The starting principal made up 20% of total money invested, but its value after 40 years is 55% of the total.

In summary, it’s never too late to start saving, and the worst thing you can do is continue putting it off until tomorrow. The earlier you put money away and let it grow, the more it is worth when it’s time to tap into those funds.

I remember having about $450 to my name at about age 10. That money is worth approximately $2,200 now, and should be worth about $22,000 when I’m in my 60s. Not bad for selling sodas out of a wagon for a couple summers and then just not spending that money.

From an early age, I appreciated money and wanted my own. My parents weren’t the type to hand us money if we wanted to go see a movie or wander the mall with friends. I understood that if I wanted something, I’d have to buy it with my own money. I also understood quickly that my $1 weekly allowance, divvied up, wasn’t going to grow as quick as I wanted to do or buy things.

My dad worked for a large company in IT, and my mom worked as a teacher. Dad worked your typical business hours, sometimes putting in extra time because of his work ethic, showing you did whatever it took to get the job done. It’s those little things, leading by example, that you don’t realize you’re learning/teaching until long after the fact.

Mom was home for us after school, as she worked the same hours, and this allowed us to build a tight family unit because mom was there to support us in our our extracurriculars both in and outside of school.

It was mom being home in the summer that catapulted me into entrepreneurship.

I grew up in a developing neighborhood, and we saw an opportunity to capitalize on it. My brother and I rolled our radio flyer up and down the street to the many houses being built around us, stocked with a cooler full of sodas. Fifty cents for a cold mountain dew was a nice refreshing treat to the construction workers battling through the summer heat.

It was a rude awakening when mom took some of our earnings to buy more soda, so not all of that 50 cents was profit! Boooo. Lesson 1.

I later graduated to mowing lawns, pushing the mower all over the neighborhood, hitting up the 6-8 houses I was tasked with taking care of each summer for $15-$20 each. Most of this money got saved, as 15 year olds don’t have a lot of expenses. I didn’t have video games growing up, technology hadn’t advanced very far with other toys that interested me, and I spent time playing sports into the wee hours of the night or seeing movies at the dollar theater with neighbor friends.

My family did not go see new releases.

Once I was old enough, I started working at a local country club. It turned out to be the perfect job for a high school and college student. I liked playing golf, I got to be outside, and I got to watch the lives of these affluent members (and befriend some) and create a vision I wanted to reach for later in my life. Oh, and I got to play free golf for 5 years. I worked between 50 and 60 hour weeks all summer, and worked as much during the school year as my parents would let me.

I loved being at work; I loved the people; and I loved the paycheck (overtime pay kicked in after 40 hours). I made so much money I didn’t know what to do with it. I wasn’t a big spender, and I loved watching my savings account grow. Who knows what my life had in store, and I wanted to have something saved up in case I needed it.

Mental Toughness

This is when I needed to be mentally strong. People didn’t like how I spent (well, didn’t spend) my money. People didn’t like what I assigned value to and what I deemed wasn’t worth it.

I was called cheap or something similar, on the regular.

My parents set the stage by giving us a comfortable, but not extravagant lifestyle. Down the road, I’m not sure how the mental strength sustained, and it certainly wasn’t easy nor did I maintain my cool at all times, but I never wavered on my principles when faced with adversity.

In college, I drank beers before leaving the house, so as to not spend $6 on a ‘craft’ beer at the bar. I didn’t go out to eat for every meal. Now that I had to start paying for golf, I played during twilight or weekdays. (who wants to play a 6 hour round on a Saturday morning anyway?)

There were a number of things I did to take the path less traveled, but ill get to those in a later post.

My philosophy didn’t change once I graduated college, and the ridicule hasn’t really lessened. I’m lucky enough to have a wife that’s been on board. Sure, we’ll splurge and go out to eat once in a while, but she’s not out shopping regularly, getting her hair done every 6-8 weeks, or getting her nails done every two weeks. She also values her money. We value the time we spend together traveling, or simply staying home and playing board games with friends, rather than going downtown every weekend for dinner and drinks.

Why is it other people’s business how I prioritize my dollar? While this has become a theme for the last decade and a half of me being a W2 employee, I just keep telling myself that my family’s well-being is worth the ridicule. I’ll have the last laugh when I retire in my 30s and the others have to work into their 60s.

My favorite quote since getting into the financial independence movement:

“Do what others won’t so you can live like others can’t.”