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