Tuesday, May 6, 2008

Personal Fiance 101 - How to Save and Invest


I'm Tiffany Baugh's husband, Brian. I'm an engineer at Boeing, but I am a wannabe financial planner. As I was finishing my senior year of school, I became completely disinterested in engineering, so I turned my attention to investing. We had a chunk of change that was rotting away in a checking account, so I decided to learn how to make the most use of it. Along the way, I think I have learned a thing or two about money. This post is meant to serve as a practical guide to getting richer through living below your means and investing wisely. I hope it helps.

In order to get richer, you have to spend less than you make. This is called saving. It is usually thought of as making more than you spend, but I challenge you to consider it the other way. In the first part of my post, I’ve tried to illustrate some practical ways to spend less than you make. I’ve tried to arrange my thoughts in order of importance.

Once you have savings, you should learn where to put your money. I’ve tried to address that in the second half of my post.

  • Live under your means. If you want to increase your savings significantly, you will have to learn to live well under your means. The following principles have helped me considerably in my life:
    • Understand needs vs wants
      • Whenever I make a purchase, I ask myself if it is a need or a want. If it’s a need, I buy it without remourse. If it’s a want, then I have to do some more thinking. If you want to increase your net worth, this is the single most important principal that I could impart to you. There have been countless times that I have wanted to buy a new toy, but I’ve refrained because I didn’t need the thing. I use this skill daily.
      • A budget can help you distribute your spending to satisfy your needs and wants. I’ve heard that they are very useful for a lot of people, but I don’t use them.
    • Spend less than you make
      • When you get a raise/bonus/tax rebate, pretend like you didn’t. You’ll magically increase your savings. Tiffany and I pretend like we are college students even though we’re making a hundred times what we were in school. It pains me when I hear of people blowing off their tax rebates on plasma TV’s which they really can’t afford. I am not going to alter my spending habits at all when my $1200 gift from the IRS arrives. It will go straight to savings.
      • Watch out for recurring fees. They’ll kill you because you don’t even thin when you pay them. I’m talking about cell phones, tv, internet, car insurance, etc.
        • Tiff and I pay $13/month for Comcast local TV. It was tough saying goodbye to ESPN (more so for Tiff than for me), but we hardly miss it at all.
        • Tiff and I pay $100/year for BOTH of our cellphones. We have T-mobile prepaid phones which we use sparingly. We use less than 1000 minutes a year total. Tiff and I are able to get a hold of each other 99% of the time when we’re apart through normal phones at home/work. I don’t miss having my normal 1000 minute/month plan one bit.
        • Tiff and I pay $13/month for voice over IP (VOIP) phone service, with unlimited long distance. Since we can’t live without broadband, I figured that we ought to get the most use out of it. VOIP quality is fine. It’s better than cell phones but worse than land lines. We use viatalk (viatalk.com) and like them fine. I believe they have a promotion right now for 2 years of service for $200. That’s better than the promotion that I locked in to.
        • We take advantage of internet promotions, which give away internet for free for the first 6 months. Once the rates go up, you can switch services to qualify for the new internet promo. We switch between Comcast cable internet and Earthlink broadband every 6 months or so. The great thing about this strategy is that Earthlink uses Comcast cable, so you don’t need some installation guy coming to your house every time you want to switch. It’s as easy as a phone call. We save TONS of money each year by doing this. If you are too lazy to do what I just mentioned, simply call up your current provider and ask them to match a competitor’s promotion. 99% of the time they will give you a cheaper rate so that they don’t lose your business. Info here: http://www.mymoneyblog.com/archives/2005/08/how_to_save_138.html.
        • Car insurance. Tiffany and I have gotten some pretty sweet discounts at Geico by following the counsel provided here: http://www.mymoneyblog.com/archives/2006/12/pentagon-federal-offering-3-year-cds-at-625-apy.html. We save about 15% a year on car insurance by simply by opening up a checking account at PENFED.
      • Develop cheap hobbies. Some of our favorite cheap hobbies are playing board games, hiking, biking, going on walks, and reading.
        • I could go on forever about board games. I’m not talking monopoly or sorry. I’m talking about german strategy boardgames like Settlers of Catan, Alhambra, Ticket to Ride, etc.
      • Eat out less frequently. It pains me to the core every time I go out because I realize how much cheaper I could eat at home. It’s so bad that when it’s my birthday, I request to eat at home instead of going out. If you do go out to eat, don’t order drinks, sides, or deserets.
    • Never, ever, ever pay bad interest. I would categorize education loans and mortgages as good interest. Anything else would fall under the bad interest category, including cars.

At this point in the post, you’re probably asking yourself if I could be any more stingy. Let me try to explain why in the heck I care about minimizing expenses. I like to save money because I understand the significance of saving a dollar. In order to spend a dollar, I have to make over a dollar because of taxes and tithing. If I assume a 25% tax rate, I would have to make $1.33 to spend a dollar ($1/0.75). If I pay tithing, I would have to make $1.54 to spend a dollar ($1/0.65). When you save $1, it’s the equivalent to earning $1.54. This is an incredibally empowering topic which a lot of people don’t understand. For us members of the church, I believe it to be especially important, since we pay tithing and usually live off of one income.

One of my coworkers is a single guy with a lot less financial obligations than me. He doesn’t pay tithing or support a family. He shares rent costs with a roommate. I would think that our salaries are almost identical, but he cannot manage to stay out of credit card debt. We, on the other hand, manage to save about 30% of our income. It just goes to show you that it’s not how much you make; it’s how much you spend.

Now that we’ve learned how to maximize savings, we should have some extra change laying around. In this next section I’ll try to explain what to do with it.

Invest your money wisely

    • Own a home if you can. Unfortunately, after being out of school for 1.5 years and living in an overheated Seattle real estate market, we have been unable to cough up the 20% required for a house. Fortunately, through living the principals mentioned in the first section, we’re getting close. There are countless benefits to owning a home. I’m looking forward to building equity in a house, never having shared walls again, and having a juicy tax write-off some day.
    • If your employer matches any retirement contributions, you must take advantage of that. When you fail to take advantage of your employer’s matching, you are literally throwing money away. This is a tough principal for a lot of us young folks to grasp. When I was an intern at my company, I didn’t take advantage of the company matching because I was a dumb kid. I didn’t understand what a 401(k) was or why I should take advantage of employer matching. I’ve wised up over the past several years, and I’m kicking myself for my wasted opportunity.
      • Invest in low-cost mutual funds. Just like the principles described in the first section, cutting costs is one of the best ways of guaranteeing superior performance on stocks. I invest exclusively in index funds, which are like mutual funds in that they hold a variety of stocks, but they are passively managed. What this means is that a person isn’t actively trying to guess what the best stocks are going to be. Rather, the index simply tries to follow a pre-determined mix of companies. The S&P 500 and DOW are the most common US indices out there. There are countless PhDs out there who swear by passive investing. I’m not as smart as them, but I’m smart enough to read their books and believe them.
    • If you have money left over, put it in a Roth IRA. Each year, you are allowed to put $5000 per person in this tax-sheltered account. The Roth differs from the traditional IRA or 401(k) in that you pay the taxes now, but you never pay taxes again. That means that when I withdraw from my Roth IRA in 40 years, I won’t pay a penny of taxes to the government. One of the greatest advantages of the Roth IRA is that you can touch the principal (money that you have contributed) without penalty at any time. When you do this, you don’t have to pay taxes, since the money has already been taxed. Traditional IRAs or 401(k)s impose a 10% penalty upon withdrawal of funds in the event that you withdraw before retirement.
      • Open up a Roth IRA at Vanguard. It is hands down the best brokerage out there. Vanguard has the lowest fees out there, and they have a wide variety of index funds to chose from.
    • Invest in yourself. The leaders of the church have told us on many occasions to “get all of the education that you can.” It’s a powerful statement that has inspired me to go back to school for a graduate degree. Investing in your education is simply the best investment that you can make. As the world becomes flatter and flatter, it is getting more and more competitive. Having an education will be paramount in remaining marketable through these times. Thirty years ago, all it took was a high school diploma to be marketable.
    • Open up a money market savings account. These vary from traditional savings accounts in that their interest rates don't suck. Current money market rates are around 3%, though they were as high as 5.5% before the federal reserve started slashing interest rates over the past 6 months. WAMU has one of the best rates in the country right now, at 3.25%. Sign up here: http://wamufreechecking.com/FreeChecking/index.html?appType=FC&AffiliateID=cj&CreativeID=whoohoo
      • At any point in time, Tiffany and I only have $50 which is rotting away in a checking account. Everything else is invested or making interest.
      • Since money market accounts have a limit of 6 withdrawals a month, we simply buy everything ever on a rewards credit card and pay it off in full every month. This way, we have far less than the 6 transactions a month. If we owe a friend $5 bucks or something, it comes from our checking account.

Sorry about the length of this post. This is a subject that I’m incredibly passionate about. I hope that it has done somebody some good. I’d better get to bed before I get myself into more trouble with the wife.

Recommended Reading:

The Richest Man in Babylon. This is the best book which I’ve ever seen on the topic of personal finance.

A Random Walk down Wall Street. This is hands down the best book which I’ve read on investing. It’s pretty technical, so you may want to read my next recommendation.

The Little Book of Common Sense Investing. This book is a quick read and gives a convincing argument for index funds.

- Brian

12 comments:

Claire said...

Holy crap! You are one of my new favourite people! I loved everything you had to say. We live without a lot of the "fancy things" like cell phones, cable tv, and until two weeks ago we only had one car. The only reason we bought a second car is because a wonderful opportunity presented itself and we were able to pay cash. Sometimes it feels like we are the only people living this way... at least that we know!!

I love the idea of putting all your money in a money market account and using a credit card... I never would've thought of that. I like it a lot!! And thanks for the info on investing. I've always been scared to invest because I know so little about it. I will definitely be doing some research and putting some of our money towards investing very soon. Thanks again for all your fantastic information!

Liz said...

This was an amazing post. Thank you for taking the time to write it. I am going to forward it on to my husband to read. We have been working hard on a lot of these things, and there are some new ways that you mentioned that we can try to save money.

Tiffany said...

I'm Brian's wife and I'd like to send a shout out to him for taking the time to write this post... thanks sweetheart. :) I have to add my comments for all of you. Brian really is as stingy as he seems which was REALLY hard for me when we first got married (and still is sometimes when I REALLY want to go out to eat and my "inner voice" (aka husband) reminds me how much cheaper it would be to eat at home. But (with the exception of eating out that I still miss often...its a weakness) everything else that we have cut back on has seemed like it would be SO hard (switching to pre-paid cell phones, cutting back on cable, etc.) but it has been so much easier than I thought it would be! And I'm SO glad that we did it! TV especially...because A: it gives us more time to spend together and B: most TV shows on cable (and local channels for that matter) aren't worth watching anymore. We still get locals which includes PBS for some sweet Sesame Street action and Discovery channel..and NBC for The Office and Fox for American Idol. ;)

Also, about investing...I'm TERRIFIED of the stock market and it was VERY hard for me to say good-bye to money to put into our roth IRA, but (as long as I don't check the stock market everyday and realize that its in it for the long run) it really has been a GREAT decision and we've done very well for ourselves having started that.

Abby said...

wow! Thanks for this post! I too am going to forward this to my husband.. he has really been wanting to so some stuff like this, but he's not as educated in the area as you, and hasn't quite known where to start. Thank YOU!

Bethany said...

This was a comforting post. I'm not alone in having a crazy money-saving husband! Tiffany, I'm sure we could exchange some good stories. My husband probably isn't quite as extreme (we did our part for the economy and bought a dining room table with our IRS refund), but he seriously could have written this. It drove me crazy at first, but now I love it. Very good post!

Linz said...

I echo the same sentiments...thank you sooooooooooo much.

Tiffany said...

This is Brian again. I just checked out the formatting in internet explorer, and my post looks like crap. It looks a lot better in Firefox. Sorry about the weird formatting stuff...I'm new to blogger.

highdeekay said...

Okay, devil's advocate here...
What is the use of saving all that money if you aren't enjoying the fruits of your labors?

I get living within your means. I get saving for the future. I don't get being miserly just to watch your net worth increase. If you can't give your wife the night off from cooking (and support your local economy at the same time) once in a while could it be that you are taking this principle a bit too far?

I appreciate the information and the work put into this post. I am COMPLETELY committed to living within our means and staying out of debt and preparing for the future. I just have never really understood the point of getting/being rich. I guess that is why I married a university professor... :)

Liz said...

amen bamamoma!!! I totally agree with you! I appreciated this post but half of me was inspired and half felt guilty! My husband and my favorite date is a good dinner out and probably always will be. We live within our means but we also make part of our budget for fun things. There are totally things I can take away from this but I also believe in moderation and that you have to build things into your budget that are fun and rewarding for you-even if they're wants and not needs sometimes! :)

The Stump Clan said...

I agree with both ends of the spectrum. Saving for the future is important and something I need to work on, but I don't want to live so frugally that I can't ever indulge. I really like this quote that I actually read from a comment on the money blog that Brian posted- "A lot of people who get caught up in all this money stashing forget one important thing. Saving to live is only important if you’re actually going to live."

Tiffany said...

This is Tiffany again...I have to say in response to the comments that we do go out sometimes (mostly on anniversaries and birthdays (Red Robin totally gives you a free meal on your birthday! Sign up today!:)) and sometimes when I'm just done in the kitchen (although usually on those nights Brian makes dinner for us which is a bonus!). Also twice a month we're allowed to go to Chipotle or Papa Murphy's (I love those places..and you don't have to pay a tip! Whoo hoo!) And we're not crazy about being rich...we're not too crazy about money really (I guess that's why its easy for us to live so much within our means ;) ), we just really want to be able to buy a house someday (hence the savings) and also retire someday (hence the investments). We still have plenty of fun living life (with our inexpensive hobbies) and like Brian said...as long as you know how to live within your means, it makes it easier when you make the wants vs. needs choices. We still make big purchases (Brian just bought a new camera and road bike last year) we just don't spend lots of the things that we don't need and don't want as much so that we have the savings needed for the things that we really DO want. That's the reasoning behind our savings. Does that make sense? Because I TOTALLY agree that there's no point in saving just to have a stash of money that you're never going to use.

And the thing about using the tax money to buy stuff...Brian didn't mean don't use it to buy stuff...he just means that if you're in debt...use it to get out of debt, as opposed to getting further into debt (which is what a lot of people do with their bonus money). And don't use it to buy things that you really don't need/isn't a thought-about want, just because its a free gift. We totally have plans of using our savings to go on fun vacations (once we can afford them..and get enough vacation time from work!) and treat ourselves to fun nights out...we just really want those things, so we don't spend our money on things that we don't want as much...like going out to eat often and cable TV. Some people REALLY want those things...so as long as its what they budget for...then that's great! They just have to give up some other wants to keep those ones. Anyway, I'll finish this post. I hope it made sense. Because I do agree that you shouldn't deny yourself everything just to have money "in the future"...you just need to plan out what you want, and then live within your means. :)

highdeekay said...

Tiffany (and Brian), I totally appreciate the work put into this post and admire your commitment to living the way the prophets have advised. Please don't think I was being critical of you. I just honestly have never understood the draw of being rich.

Having said that, I think you guys embody the most important aspect of this whole discussion (or one of them). You have worked on a plan TOGETHER and you are both committed to it. You have found some balance and compromise but this isn't one spouse imposing HIS/HER plan on the other. Kudos!

And thanks again!