Friday, November 30, 2007

"Stop the Shopocalypse!"

It looks like Morgan Spurlock (of "Supersize Me" fame) has come out with a new movie titled What Would Jesus Buy? It sounds interesting, and I would love see it, but there are limited screenings at this time. Check out the trailer (QuickTime or QuickTime Alternative required). If you happen to catch it, please report back with a review. Here's a brief description from the web site:

What Would Jesus Buy? follows Reverend Billy and the Church of Stop Shopping Gospel Choir as they go on a cross-country mission to save Christmas from the Shopocalypse: the end of mankind from consumerism, over-consumption and the fires of eternal debt!

From producer Morgan Spurlock (SUPER SIZE ME) and director Rob VanAlkemade comes a serious docu-comedy about the commercialization of Christmas. Bill Talen (aka Reverend Billy) was a lost idealist who hitchhiked to New York City only to find that Times Square was becoming a mall. Spurred on by the loss of his neighborhood and inspired by the sidewalk preachers around him, Bill bought a collar to match his white caterer's jacket, bleached his hair and became the Reverend Billy of the Church of Stop Shopping. Since 1999, Reverend Billy has gone from being a lone preacher with a portable pulpit preaching on subways, to the leader of a congregation and a movement whose numbers are well into the thousands.

Through retail interventions, corporate exorcisms, and some good old-fashioned preaching, Reverend Billy reminds us that we have lost the true meaning of Christmas. What Would Jesus Buy? is a journey into the heart of America – from exorcising the demons at the Wal-Mart headquarters to taking over the center stage at the Mall of America and then ultimately heading to the Promised Land … Disneyland.

Will we be led like Sheeple to the Christmas slaughter, or will we find a new way to give a gift this Christmas? What Would Jesus Buy? may just be the divine intervention we’ve all been searching for.

The Shopocalypse is upon us … Who will be $aved?

Thursday, November 29, 2007

Work: It will literally kill you

I watched the Oprah show on the extreme weight losers yesterday, and it got me thinking about how this issue has gotten so out of control in our society.

I think work is a big factor in the obesity epidemic in America, and it really is killing us. How many people do you know fall into this trap? You are so tired from your workday that you don't have time to cook or exercise. Instead, you pick up food from a fast food restaurant, then head home and plop yourselves in front of the TV until you get sleepy from your meal or an energy low, at which point you either doze off on the couch or go to bed (often without brushing and flossing your teeth, leading to dental problems down the road). You wake up at the sound of your alarm feeling tired and unrested, but drag yourself out of bed and stop by Starbucks for a caffeine fix to get you going for the day. Then, on the weekends, you cram all your household chores and shopping, leaving little time to recoup and re-energize. You go to work on Monday feeling tired and depressed, wondering why the weekend went by so quickly.

Year after year, your pant size increases, you develop bags under your eyes, and you get winded from simple tasks such as going up the stairs. You become unhappy with yourself, so you buy things or turn comfort foods to (temporarily) make you feel better. You might try a diet or two here and there, or buy a gym membership as part of a new year resolution, but after a little while you quit the diet and the gym because other things take priority.

I see this happening all around me, and I think it's becoming more and more difficult to avoid the work trap and the kind of lifestyle that it creates, especially as it becomes embraced by society as the accepted norm.

I don't want to fall into this trap. I want to quit work as soon as possible because:

  • It makes us inactive. We sit in a car getting to and from work, and once we get to work, we sit in front of a desk staring at a computer screen for most of the day.
  • It adds to our stress levels. We have to deal with artificial stress inducers such as office politics, deadlines, and pointless meetings, that sap our strength and energy, leaving us cranky and miserable.
  • It prevents us from developing healthy habits. We go out for lunch, and eat portions that are too large for us. Or we get vending machine food because we can't make time for a healthy meal break. Or we give into temptations in the form of cookies, cakes, and doughnuts left over from office functions. Work robs us of the most productive time of our day, when we have the most energy to do things that are good for us like working out and cooking meals from scratch. It keeps us from getting restful and sufficient sleep because we're trying to cram other things into what's left of our busy days.
My primary motivation for wanting to quit the rat race is not so I can pursue other interests (although that is certainly a big reason), but so that I have the time to lead a healthy and active lifestyle. My health is the number one priority in my life, and I find it sad that Americans have put it on the bottom of their list.

A lot of people say that they don't want to quit work because it gives meaning to their lives, and cite references to people who die shortly after retirement because they have nothing to do. My question is, have you thought about what work is taking away from you?

Wednesday, November 28, 2007

3 steps to achieve financial success

I believe that most Americans can achieve financial success. I am living proof that it's possible. Granted, I have a well paying job, but I don't make an obscene income. Besides, I know plenty of people in my income range that have little to show for their years of working. And I think that even if my income was more modest, I would still be well on my way to financial independence; I just wouldn't have accumulated as much.

Here are the three steps that I feel are necessary to achieve financial success:

1. Live below your means. I realized that to make money, I needed capital, and to generate it I had two options: reduce my expenses or increase my income. I increased my income by gaining valuable work skills and hopping jobs, but that may not always be possible depending on the stage of your career. I also kept my overhead low, and that is something that everyone can do.

For one thing, I never tried to keep up with the Joneses. I knew from reading "The Millionaire Next Door" that self-made millionaires lead pretty modest lives, and people who flaunt extravagant lifestyles are financing those lifestyles at enormous opportunity cost. I kept my focus on becoming debt free and saving for early retirement.

I differentiated my needs from my wants, and carefully evaluated each expense that fell into the "wants" category. If it didn't match my priorities, then I opted to forgo it or found cheaper alternatives. That meant no luxuries like designer clothing, Starbucks, BMWs, concerts, etc., but I really didn't care about those things anyway. That doesn't mean I always deprived myself, I just made sure that any money spent on non-necessities was used to buy things that brought real, lasting happiness. I bargain shopped to find the best deals, and I made sure that I could pay off the credit card bills when they arrived. I also understood the eroding effect of taxes on my money: the combined impact of income tax and sales tax meant that only about half of every dollar I earned was available for me to use, so I spent them very sparingly.

2. Save. I knew my ability to work was finite, and I wanted to have the option of not having to work as soon as possible, so I treated my earnings like lottery winnings. I socked away the max into my 401(k) plan immediately upon starting my first job, and continued to do so as I changed jobs (and never cashed out). I figured I wouldn't miss 15% of my salary, and even if I did I could always scale it back. I survived just fine though, and because I kept my expenses low, I was able to save a significant portion of my take home pay and use it to pay off my first house early. I also started a ROTH IRA as soon as I was eligible, and maxed it out every year.

3. Invest.I learned about the amazing power of compounding, and the risk of inflation. Because I started early and had a long time horizon, I was able to invest aggressively. So far it has worked out pretty well for me.

There you have it, the three key steps to building wealth. These aren't new ideas, and it takes time and patience to see the results, but as someone who has done it I can confirm that they will work for you--unlike most get rich quick schemes. I think the most difficult part is the first step, where you have to make the paradigm shift from instant gratification to delayed gratification. Think of robbing your future self when you spend your money in the present, and perhaps that will help you resist the temptation to buy stuff you don't really need.

So if you want to do something to get started on the road to wealth, here is a simple action you can take now: log into your employer's 401(k) plan, and bump up your contribution amount. Remember, if you find that you can't live without the reduction in take home pay, you can always change it back, but I'm betting that you'll learn to live without it, and you'll be thanking yourself later.

Monday, November 26, 2007

Open enrollment reminder: sign up for disability insurance

Open enrollment is wrapping up at my workplace, and one thing that I find people often neglect to think about is disability insurance. Unless you work in a state that is covered by a mandatory disability insurance plan, I strongly urge you to consider signing up for Short Term Disability insurance--especially if you don't have a sufficient emergency fund established. Statistics show the odds of becoming disabled are higher than most people realize, and Social Security and Workers' Comp (which only covers on-the-job injuries) may not be adequate to replace all lost income, so I recommend opting for Long Term Disability insurance as well, if your employer offers it.

I found a more in-depth writeup about disability insurance here, and unfortunately I personally know of two coworkers who have had to leave their jobs due to serious off-the-job injuries. One of them was a promising young employee who suffered debilitating injuries as the result of a motorcycle accident, and to make matters worse, he hadn't bothered to enroll in LTD insurance coverage because he didn't think he needed it at his age. His parents ended up caring for him, but it was a significant burden that they had never planned for. Your ability to work is your biggest asset--especially when you're young, so protect it.

Click here for a CNN Money article with other open enrollment tips.

Saturday, November 24, 2007

Those Black Friday deals

Well, another Black Friday has come and gone. I'm sure there were some good deals for people who needed them, and were willing to fight the crowds. However, if you didn't need the items, then they probably weren't a good deal. For one thing, things like consumer electronics tend to get better and cheaper over time, so what seems like a good deal today probably won't seem that way a few months from now. Secondly, if you watched the Oprah show on hoarders, you know that keeping stuff has associated costs: making space for it, keeping track of it, and opportunity cost.

Although I enjoy a good deal as anyone else (and I do bargain shop when I need something), I value my time too much to spend it waiting in line battling the elements (it was interesting to drive around and see all the people who were willing to do that, however). Instead, I spent my Thanksgiving evening with family, followed up with an enjoyable experience at the movies.

Enjoy the rest of the holiday weekend, and as you browse through the ads, think about whether you own your stuff, or your stuff owns you.

Thursday, November 8, 2007

Making money in stocks: The only 6 things you need to know

I recently ran across an old issue of Family Money Magazine from 2000 that I saved. It featured an article (the title of this post) on investing in the stock market, and I think the advice is still pretty valid today.

Here are the six principles discussed in the article:

1. Systematic investing can improve your results dramatically. The author says that investing on a regular basis helps you to develop the discipline to stay in the market for the long term. She also mentions dollar cost averaging, which enables you to buy more shares when prices are low, and fewer shares when prices are high, but it's a strategy not without criticisms. I think simply getting started can often be the most challenging step, and systematic (or automatic) investing can lessen the pain because you are buying a little chunk of the market at a time, rather than taking a big bite at once. If you do decide to use the DCA approach and choose to invest in index funds, be aware of the impact that trading fees can have on your investments.

2. How you diversify is the most important determinant of your investment return. Yahoo! Finance featured an article before Halloween about personal finance horror stories, and one of the tales involved an investor who, over the course of four years, lost 98% of an $8 million portfolio that was invested in seven or eight stocks. Clearly diversification is important, and I would add that including international stocks in your investment portfolio is a good diversification strategy as well.

3. No money manager can beat the market over the long run. Neglecting the fact that even pros are unable to consistently predict how the market will move, the author points out that trading costs erode returns by about 0.81% a year, and management expenses further eats into returns. Large company funds have an average expense ratio of 1.23% a year, compared to 0.43% for the average index fund (according to Morningstar, 2000). If you think of money managers as middlemen who take their cut of the profit, and it's easy to understand why they have to outperform the market just to break even. I usually prefer ETFs or index funds to actively managed funds for this reason.

4. Over the years, growth stocks are your best bet. The author says you want to buy companies that are growing consistently and steadily, and that it's harder for investors to predict which value stocks (whose shares are cheap compared to the company's current earnings) are going to take off. I suppose from a risk perspective, it makes sense to buy companies that have proven track records than to gamble on newcomers, although I think owning value stocks can be part of a diversified portfolio.

5. A good stock is a bad investment if it's overpriced. Look at the P/E (price-to-earnings) ratio. If the stock is trading at a high P/E compared to historical values, you may want to wait, according to the author. I think there's more to determining the worth of a company or stock than simply looking at its P/E ratio, but it's certainly one factor to consider.

6. Trying to time the market is futile. Market timing is an investment strategy that never pays off in the long run, because the likelihood that you'll enter and exit at the right time is slim. It's better to buy and hold, which also prevents commissions and taxes from eroding your returns.

If you're a beginner investor, these six simple rules may help you to get started in the right direction.

Karen Cheney
Family Money Magazine
October 2000 issue

Wednesday, November 7, 2007

Renting vs. Buying: which is the better choice for you?

Mommy Millionaire Next Door has been shaking up the PF blog community with the unconventional wisdom that renting is better than buying a house, and revealed herself as someone who has managed to become a millionaire due (in part) to this fact. Given the current state of the post-bubble real estate market, this may seem like a no-brainer, but she runs the numbers to show that it could hold true at any time. You can read her well articulated posts on this topic here.

After reading the articles, the takeaway is that 1) renting is cheaper than buying when supply is greater demand, and 2) from an investment perspective, renting (and investing the difference) beats home ownership over the long haul. This shouldn't be mind blowing news, and prior to the recent housing boom people didn't view their homes as ATMs or stock-beating investment vehicles. People traditionally bought residences to live in, not to get rich with.

The idea of houses as get-rich-quick vehicles is a recent phenomenon. Real estate investors generated artificial demand driving up home prices, and ordinary people got caught up in the frenzy. However, as incomes failed to keep up with the rising home prices, the trend has come to a screeching halt and even started to reverse itself, leaving latecomers holding the bag. The problem has been compounded by buyers who stretched themselves or used creative financing to pay more than they could conventionally afford.

Except for the lucky few (myself included, see update below) who managed to cash out during the height of the housing rush, most people won't experience gains that approach anywhere near historical long term stock market returns. The primary purpose of housing is to provide shelter, not to make you rich. So if your top priority is maximizing return on investment, then renting and investing is probably your best bet. To help make this determination, you can run the Rent vs. Buy calculator as explained by Millionaire Mommy Next Door.

That said, there are valid reasons (financial and otherwise) that can make home ownership a rewarding experience once the housing market stabilizes. Here are some that I came up with:

  • Home as a forced savings vehicle. Let's face it, most Americans are terrible savers. They tend to spend every penny they make, and live paycheck to paycheck. Often times, a home is the only asset many people will ever have to show for all the years they spend working. For the financially savvy, renting can make sense if they have the discipline to invest the savings. For others, they will most likely spend the difference and wind up with nothing to show for it.
  • You're not at the whim of a landlord. Some people get really attached to their homes and the memories created there, and being forced to move can cause significant emotional tolls that outweigh the financial gains. Other people find that being able to customize and improve their living space provides a level of personal satisfaction that cannot be measured in dollars.
  • Homestead protection. All states afford some kind of homestead exemption to home owners, with Texas, Florida, Iowa, Kansas, and Oklahoma offering some of the broadest protection levels. Besides retirement plans, a person's house is the only asset that cannot be seized for the payment of court judgments (ever wonder why OJ Simpson lives in Florida?). With today's litigious society, this can be an important point to consider. While umbrella insurance can also provide cheap asset protection, it can be difficult to get a policy if you've had an accident, lawsuit, or other significant insurance claims in the past 5 years. Homestead protection is also a completely legal means of asset protection, as opposed to other questionable asset protection methods offered by some companies.
  • Pride of ownership. It's true, people tend to take better care of their own stuff than that of others. This is why many people won't buy used cars (I personally won't buy used rental cars), and some people dislike having renters as neighbors. You can usually distinguish the rental houses from the owner occupied homes in most neighborhoods, particularly those without HOAs. Of course some peoples are just slobs, but the likelihood is that people will take better care of their homes if they own them.
  • A house is a tangible asset. There is something rewarding about being able to physically see and touch an asset that you own. Perhaps I'm more of a visual person, but when my first house was paid off and I was buying stocks with my disposable income, it just didn't provide the same fuzzy feeling. When you own shares of a company, you cannot walk into the company headquarters and claim a piece as your own. While it may not seem like that big of a deal, my motivation to keep working and saving was reduced because I was physically disconnected from what I was working for.
  • A house is usually a safe investment. It might not beat stock market gains, but a house can be a smart purchase because it's likely to keep its value over time. You can't say that about most other consumer goods such as cars, boats, etc.
I think Mommy Millionaire Next Door has done a great service by dispelling the notion that home ownership is the path to wealth. Unfortunately, it's a lesson that has come too late for some. However, hopefully it will prevent others from making the same error.

Update: I calculated the rate of return on my first home using this CNN Money calculator. I purchased the house (and added some improvements) for $102.50 per sqft. in 1997, and sold it for $206 per sqft. in 2005. My result:

Return on investment:
Annualized return: 9.18%
Return for the entire period: 101.18%

Note: does not include Realtor fees (which I avoided by using FSBO), taxes, insurance(although the difference between homeowner and renter insurance is nominal in my case) and upkeep costs.

Wednesday, October 10, 2007

A different measure of success

I recently conducted a poll on, and asked people to calculate the percentage of adult earnings that their current net worth represents. Although I haven't received an overwhelming number of responses, I think it is a rather eye-opening exercise. If you're like me, it really makes you think about what you've done with all the money you've earned over the years, and what you have to show for it. By being consciously aware of these things, you may be able to alter your spending and savings habits to keep more of what you make.

So as you progress throughout your working career, keep track of your earnings. For example, I maintain a spreadsheet that lists, by year, my gross income, 401(k) contributions, and net take home pay. All of this information is readily available and/or easily calculated from your W-2 statement or year-end pay stub. This allows me to see, at a glance, my annual earnings, contributions to employer sponsored retirement plans, taxes withheld, and what I got to take home. I can then compare how well I've done at saving (and growing) what I've brought home over the years. It also makes it easy to find out how well my 401(k) plan is doing, since I know the cost basis, which can be helpful in determining whether I need to make any adjustments.

Look at your results regularly, and maybe it will help you stay focused on your savings goals. Good luck!

Financial aggregate sites

The Simple Dollar featured an article on financial aggregate sites yesterday, and the primary concern was regarding the issue of security. The way these sites work is that they require their users to share their login information to various financial institutions, which is then used to collect the users' financial data and present the information on one screen, with some useful analysis tools thrown in.

Now I have no problem banking online, and I feel pretty safe I as long as I exercise reasonable precautions (not saving/sharing passwords, running anti-spyware & anti-virus software, keeping my computer updated, and only using trusted/nonpublic computers). I'm pretty confident that my bank would give me my money back if a hacker steals my login data and empties my bank account.

The problem with third party aggregate sites is that I have to share my sensitive user IDs and passwords. I'm not so sure that banks would be willing to cover my losses if these sites were to become hacked, since I voluntarily gave them my login data. It's kind of like giving a friend or family member my credit card or ATM card; I am still liable for any charges and withdrawals that they incur. Also, many of these financial aggregate sites are backed only by venture capital, so I'm not super confident that they would be able to restore my losses in a timely manner--if at all. A commenter of the Simple Dollar article mentioned the lack of regulation, and we've all heard of nightmarish experiences that some users of PayPal (which is not regulated like a bank) have had to deal with, such as frozen funds, blocked accounts, etc.

If you insist on using these sites, you can minimize your risks by setting up alerts, and monitoring your accounts closely. Bank of America offers an optional feature called SafePass where sensitive transactions require a unique 6 digit code sent to your mobile phone; other financial institutions may have something similar.

To truly put my mind at ease, however, I suggest that financial aggregate sites work with financial institutions to come up with a more secure solution. For example, if I had a "view only" password from my bank that I could provide to the aggregate sites, it would make me feel much safer. To perform an actual transaction such as transferring funds or paying a bill, the aggregate site would redirect me to my financial institution's web site where I'd be required to enter my "full access" password in order to complete the transaction. This would limit the liability that the aggregate sites have to face, since they would only have the ability to look at my financial information, and not touch it. I am not sure how willing financial institutions would be to cooperate with financial aggregate sites on something like this, but I would think that they'd at least consider it in the interest of their customers, and from a loss prevention perspective.

Wednesday, October 3, 2007

On the subject of frugality

I've been thinking a lot about the topic of frugality lately, and just read a good writeup on it at The Simple Dollar (via Get Rich Slowly). I also like the Wikipedia entry for frugality, which is as follows:

"Frugality (also known as thrift or thriftiness), often confused with cheapness or miserliness, is a traditional value, life style, or belief system, in which individuals practice both restraint in the acquiring of and resourceful use of economic goods and services in order to achieve lasting and more fulfilling goals. In a money-based economy, frugality emphasizes economical use of money in meeting long term personal, familial, and communal desires.

Might also mean economical or avoiding waste."

To me, being frugal is about prioritizing my (limited) resources to focus on things that are most important to me, and bring me true happiness. It isn't about deprivation, neglecting wants, or being stingy for the sake of accumulating money above all else. It is about maximizing the returns on my hard earned money so that I get the most value (taking into consideration quality and price) in accordance with my priorities.

While I consider myself to be frugal, other people may not view me in the same light because their priorities are different than mine. For example, my house is much bigger than I need, and not representative of the typical Millionaire Next Door at all. "Your Money or Your Life" describes the concept of having "enough", and a smaller, more modest home would certainly meet my needs.

Am I being wasteful by having a larger residence than I need? Perhaps, since my utility bills are bigger than a smaller place would generate, and my land usage is more than I require. I struggle with this dilemma sometimes, but in the end I realize that life would be pretty dull if we only satisfied our needs. I truly enjoy my home, and the fact that it's an appreciating asset is icing on the cake. I could downsize and live completely debt free, but I've done that before and buying stocks just isn't as satisfying to me as building home equity.

On the other hand, I'm very economical in other areas. For example, I don't buy designer clothing as I don't care about brand names. I don't drive a luxury car, or carry a ton of gadgets. I recycle as much as I can to reduce my impact to the environment. I don't smoke or drink alcohol/soda/coffee, and while that's primarily health driven, I also consider them a waste of money because I derive no pleasure from those substances. I brown bag my lunch to work every day (I do spend quite a bit amount of money on organic foods, so while I may not be saving money in the short term, it is cheaper than eating out in the long run if you consider the health benefits).

So frugality is a matter of perspective, and I try not to judge others based on what they choose to spend their money on as long as they're getting true enjoyment out of it. However, if they fail to live below their means, then I would not consider them to be frugal. Achieving wealth requires that you spend less than you earn, and invest the excess. Being frugal can help you accomplish that by eliminating wasteful spending on stuff which doesn't bring you happiness, leaving you with more to invest.

To summarize, my acid test for frugality is:

1. Does it bring you true, long term happiness?
2. Does it prevent you from meeting your financial goals?

If you answer 1) yes and 2) no to those questions, then you've passed the frugality test.

Tuesday, October 2, 2007

My retirement plan investment strategy

I just read a recent interview with famed economist and lawyer Ben Stein. I've gained a lot of respect for him lately, especially after a piece he wrote for CNN Money about sticking with long term investment goals instead of following short term market trends. I am definitely all about investing for the long term, and it's reflected in my investment strategy.

Because I have a long-term horizon (I don't plan to touch my retirement funds for at least 30 years), I am almost completely invested in stock funds. My 401(k) plan offers the following stock fund choices (next to them are how my contributions are allocated):

The Aggressive Asset Allocation Portfolio fund is comprised of 20% bonds, 24% international equity, and the remainder is split between the S&P 500 index, large caps, and small cap funds. It is similar to a target retirement fund in that it invests according to my risk tolerance level, only it doesn't adjust the portfolio mix over time.

How did I arrive at this particular investment mix? My primary goal was to be invested in stock funds, however within that I wanted diversify amongst the various fund choices, so I decided to put an equal amount (25%) into each fund type: an index fund, an international fund, a managed portfolio fund, and US stocks. This allows me to see how the fund types perform over time compared to one other, and as you can tell from the chart below the international equity fund is kicking butt at the moment:

401(k) Investment Asset Allocation (as of 10/07) -

Ben Stein believes in foreign stocks, and so do I. 25% of my contributions are directly earmarked for the international equity fund, and another 24% within the Aggressive Asset Allocation Portfolio fund, making my total foreign investment a hefty 31% of my incoming contributions. Note that unlike a global fund, an international equity fund does not invest in US stocks. If I only had access to a global fund, I would raise my contribution allocation accordingly to increase my exposure to foreign stocks.

A lot of experts advocate regular rebalancing of retirement portfolios, usually on an annual basis, to bring investments back in line with the target asset allocation. However, like Ben Stein, I don't believe in rebalancing--at least not for myself at this time. Why would I want to sell off assets that are doing well to invest in underperforming (relatively speaking) funds? Not to mention the detrimental effect the sales fees will have on my portfolio. If I was nearing retirement, I could see an argument for using rebalancing as a tool to control my risk exposure, but until I start shifting a significant portion of my investments out of stocks it makes little sense.

I am fortunate that my current 401(k) plan offers funds with extremely low expense ratios. Most of them are at 0.50% or lower, except for the small cap fund, which is still at a reasonable 0.80%. Because of this, and the fact that I like the fund choices available to me, I was comfortable with rolling over my 401(k) accounts from previous employers. It makes managing my retirement funds easier, and reduces the amount of paperwork I have to file. I only wish I could use the same custodian for my ROTH IRA, which is invested elsewhere in a S&P 500 type index fund.

My advice for young adults

Young people have it tough these days. Escalating educational costs, schools and parents that fail to teach personal finance, and societal pressures to spend make it difficult to get ahead financially. Not to mention, companies are increasingly laying the burden of retirement savings and rising health care costs on workers, who in turn cannot rely on a broken social security system which is headed to the brink of collapse.

Fortunately, young people have a few factors in their favor. The most powerful element going for them is time, which, when combined with the power of compounding, can perform miracles. For most people, this is the simplest path to financial security.

To make the most of the power of compounding, max out your retirement contributions at the onset of your career and don't stop contributing. Those early dollars will generate the most growth later on (assuming you don't cash out or borrow against them), so the more you put in the better off you will be. Invest in aggressive mutual funds instead of more conservative bonds and money market accounts, since you have the time to ride out bumps in the stock market.

Another advantage young people have is flexibility. For example, if the cost of living is high in your area, consider relocating to an area where your salary will go further. CNN Money publishes an annual list of the best places to live, and offers a cost of living calculator so you can compare cities. The easiest time to move is when you're young and mobile, before settling down and starting a family. I chose Phoenix because the cost of living was reasonable compared to California (plus I don't mind the heat!), and I could afford to buy a house while young to start building equity right away. I would probably still be renting had I stayed in California.

If you're attached to your hometown, consider moving back home with your parents until you're in better financial shape. It's a surefire way to pay off debts quickly and start saving for retirement. Some people scoff at the idea of living at home, but if done for the right reasons (i.e., to get rid of debt or save for a house) there's nothing wrong with it.

Be smart about insurance. You won't need life insurance unless you have dependents, but be sure to purchase disability insurance to protect against the likelihood of being out of work due to injury or illness. I've known several coworkers who have had to utilize disability insurance, so it's not a rare occurrence.

These tips should give you a good start toward building a secure financial future. The key is to start early, and save as much as you can. Don't put off saving for any reason, even to pay off debt, because retirement plans limit how much you can put in and don't allow you to go back and make up for missed contributions.

Monday, September 24, 2007

What bad eating habits are we teaching our kids?

Parents may be making big blunders when they teach their kids to finish their food, and by placing restrictions on undesirable foods, according to a Scientific American Frontiers program titled "Fat and Happy?" The program asserts that children know instinctively when they become full, and teaching them to clean their plate causes them to ignore that instinct, leading to overeating. Also, placing restrictions on junk foods creates a "forbidden fruit" effect, which actually increases the children's desire for the restricted foods. Watch the following clip to see the children's reactions to different food control techniques, and the surprising results.

The next clip talks about the relationship between children's activity levels and their eating habits. It contains some good information as well.

You can view the rest of the video clips from the show on Scientific American Frontier's website. Some of it is pretty informative and eye opening. You may just end up changing your eating habits.

Sunday, September 23, 2007

My Story

I guess I had a humble but typical childhood. My parents were working class people, and didn't teach me much about money except to prioritize work before play. I was never allowed to watch TV until my homework assignments were done, for example, and was expected to receive A's in school. With both my parents busy working, I had to help with household chores, and there was no concept of an allowance. We had the basic necessities: a roof over our heads, and food on the table, but not much more. Still, I never felt deprived or resentful (ok, maybe I was a little bit jealous when my friends got money and toys for doing what I was expected to do), and in retrospect I am glad that I had to work for what I wanted because it taught me the value of money.

My first paid job was a newspaper route at the age of 10, followed by summer jobs throughout high school and college. I studied hard and did well academically, but that didn't leave much time for a social life. I graduated college with an engineering degree and about $10,000 in student loan debt, despite part-time jobs and scholarships. I didn't know much about saving and investing back then, but I knew that I didn't like the feeling of being in debt.

The job market for new college grads wasn't the greatest in the mid-90's, however I managed to find a position with a software consulting company making $31k a year. It wasn't much, but it allowed me to make my first major purchase (a car), and helped me with my finances in other intangible ways. The company offered a 401(k) plan, and made a huge effort to teach its employees about the benefits (tax-deferred growth, matching contributions, etc.), so once I saw the advantages of participating, I jumped on board immediately and socked away as much of my pay as the rules permitted.

That job entailed an extensive amount of traveling, which meant I didn't have to worry about getting my own place since my employer provided furnished accommodations at all the customer sites I visited. It saved me from many of the expenses and hassles that ordinary renters and homeowners have to deal with, and let me focus on my work, which frequently required a lot of hours to meet project deadlines. That left me with a significant amount of overtime pay and not much time to spend it, so I was able to save enough money to eliminate my student loans and car payment by the time I left the company two years later.

With some work experience and job skills on my resume, combined with a hot IT market, I was able to land another consulting job at double my salary. To me, $60k was unbelievable pay, and since I was skeptical about how long the boom could be sustained, I treated my income like lottery winnings instead of squandering it on temporary pleasures. I decided to use the money to buy my first home at age 25 because I was tired of sharing walls with other people, and I wanted a place of my own with a garage to park my car in.

The prospect of a 30 year mortgage was terrifying for me, however, and I couldn't see myself wanting to work for that long just to pay off the house. So I poured all my extra cash (after maxing out my 401k and ROTH IRA accounts) into the mortgage. Other people encouraged me to invest in companies, but I am glad I stuck to my guns.

After a year of working for the new company, I got tired of being on the road and getting paid a fraction of what I was earning for my employer, so I started looking elsewhere. I found a local company that needed someone with my skills, and signed a consulting contract with them that ended up lasting a couple of years. I charged them far less than what my former employer would have billed for my services, and in turn I received a huge bump in income. Thanks to my higher hourly rate, and the tremendous number of hours I sometimes put in to complete projects, I was able to pay off my house before my 28th birthday.

Being debt free was an amazing feeling, but I wasn't ready to quit working just yet, as I didn't feel that I had enough savings to retire on (I had a net worth of around half a million at the time). I still liked what I was doing, but I didn't want to go back to traveling, so after my contract ended I found full time employment at another local company. With no debt, I wasn't sure what to do with the surplus income that was flowing in, so I invested some of it in the stock market outside of my 401(k) and IRA plans, purchased some investment real estate, and upgraded to a bigger house several years ago. I think I first reached $1 million in (paper) assets in 2005, at the age of 33, but then the Phoenix real estate market tanked and I am in the process of rebuilding my net worth.

Some of the major influences that have helped shape my attitude toward saving include the "Affluenza" and "Escape from Affluenza" programs on PBS, and "Your Money or You Life" by Joe Dominguez and Vicki Robin. "Escape from Affluenza" was my first exposure to the benefits of simple living, and it had a significant impact on my way of thinking. I never liked being in debt and was never a wasteful person, but that show really resonated with me and helped me realize what is truly important to me, and enabled me to fine tune my spending habits to concentrate on those items. It also discussed "Your Money or Your Life" and its authors, Joe Dominguez and Vicki Robin. I borrowed the book from the library, read it from cover to cover, and started utilizing some of the ideas I learned. For example, I track every dollar I spend, and focus more on things that give me long term happiness, such as time with family and staying in good health.

I think that anyone can accomplish what I have achieved, given a proper attitude and the right approach; it just might take a little longer on a smaller income. I will get more into the specifics of budgeting, investment asset allocations, insurance strategies, and more in future posts.

Thursday, September 20, 2007

Welcome to my blog!

Looks like a lot of people are getting into this blog thing. Some of them have tidbits of wisdom to offer, and others have a lot of free time. I have a little bit of the former, and a bit more of the latter.

The purpose of this blog is to share my thoughts about different topics, including but not limited to: personal finance (saving and investing), practical tips/advice, interesting things I find on the web, and fun stuff. It's more of a hobby than a serious project, at least for now, so I don't know how regularly I will be updating this blog, but if I think of anything important to share I will try to post it here.

So sit back, kick off your shoes, and have a look around. My tips and journal entries on NetworthIQ are linked to the left. Below that are some interesting articles I've found on the web, which will be updated as I run across them. Also try the public chat room, or if you prefer, chat privately with me if I'm online.

Thanks for stopping by!