Artwork Time!

Over the past three weeks I’ve been secretly working with an artist I discovered on reddit to commission a series of images to present to my future wife as a wedding gift.  They are done in the style of a cartoon we both enjoy, and depict us doing many of the activities that we enjoy together.  The process was smooth and simple: I described what I wanted, approved some concept sketches, evaluated previews of the final work, and paid for the high-res image files.  The entire time I was very excited to see the project to completion, and was not disappointed by my fiance’s reaction.

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Although I didn’t create the artwork myself, the images are very personal.  Art is a personal thing, and different pieces speak to different people.  It is the kind of thing that is hard to put a price on.  Perhaps this explains why some are willing to spend millions on a Picasso.  My position is that when you’ve cut out all of your frivolous expenditures it is very easy to justify spending hundreds of dollars on art, if it makes you happy and if you are not spending more than you are making.

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I talk about accumulating wealth; after all, that is the subject of this blog.  But wealth is more than money.  Money is merely a tool, a means to an end, an end which to me is ensured security and happiness.  It is important not to lose sight of that.  Maybe I could have had a higher savings rate this month (it will still be high), or retire a year or two earlier than I am planning (which is still early), but only at the cost of forfeiting experiences that I would not give up for the world.  You can recognize the rich man by the smile on his face.

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Then again, if I had any artistic ability of my own, that would be even better.  My fiance and I are of the same mind on these topics, although she is often better in the execution, having recently completed two oil canvases of her own (and the discounts she finds on her supplies amazes me).

PS.  The artist is Amy Liu.  If you like the pieces I commissioned then please check out her other work on her website or on her blog.  It was a pleasure working with her.

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Investment Strategy

When I began to save up significant monies (after paying off all my debt), I also began wanting to invest that money.  The advantage of investing is obvious; your money has the potential to make you even more money while you do nothing.  But as I made my initial discoveries on the topic I also learned about the disadvantages of not investing.  If you have a lot of money doing nothing but sitting in a savings account, then the interest you receive is negligible, and the value of that account will depreciate due to inflation.  In this situation, time works against you.  I was in that situation, and wanted my savings to work for me instead of idly depreciating.  Here are the steps that I took, and the steps that I recommend to others who are just beginning to accumulate the foundation of their retirement, in order to best take advantage of the time left between now and retirement.

Step 1:  RESEARCH

So keeping a lot of money in a savings account is bad.  What are our other options?  I would argue that the first thing a novice investor should do is research the different types of accounts you can open, how each is taxed, when (and how much) you can deposit or withdraw, and other advantages/disadvantages of each account type.  I understand that this sounds boring as hell, but YOU WILL NEED TO KNOW THESE THINGS EVENTUALLY and the sooner you sit your ass down and read about it, the more time you have ahead of you for your assets to grow.  I guarantee that no matter when you learn about these things, you will regret not having learned about them sooner, because taking advantage of this knowledge = free money.

You already know about checking accounts and savings accounts.  Your investment research homework assignment is to look up these other common account types:

  • Traditional 401(k)
  • Roth 401(k)
  • Traditional IRA
  • Roth IRA
  • Brokerage

And answer these questions for each account type as you do your research:

  • How would I open one?  Through an employer?  A bank?
  • How do I make deposits?  Are my contributions pre-tax or post-tax?  Is there an employer match?  Is there an annual limit on how much I can contribute?
  • How do I make withdrawals?  Are they taxed or penalized depending on timing?  Are there other fees?
  • How do I choose how the money in this account is invested?  What are my investment options?  (More on this below)

Part of the reason I’m encouraging you to do this research on your own is that I’m not an expert, just an enthusiast.  Your situation, your employer, and your goals may all be different than mine and by doing this research yourself you can put together a plan suited specifically for you.

Step 2:  INVEST

Open up one or more of the above account types and choose how the contents of that account are invested.  I especially recommend opening up a Roth IRA and contributing the max of $5k a year, then using that to buy VTSMX.  I like mutual funds managed by Vanguard because Vanguard is owned by the funds themselves (and consequently owned by each and every investor in these funds).  VTSMX is a stock market index fund which means that it is already diversified (so you’re not putting all of your eggs in one basket).  The stock market always goes up in the long term (look at any ten-year period, even those containing depressions/recessions, and you’ll find that this is true) so an index fund like this is a safe, solid way for your money to do better than it would in a savings account.

But hey, maybe you like a little more risk.  Do the research and have fun investing.  Have a long-term mentality and watch your assets grow.  Use the time you have; the more the better.  And don’t panic 🙂

EOM July 2013

My savings rate for July was 73%.

Instead of diving into different spending categories this month I just want to reflect for a moment on what it really means to save three quarters of your after-tax earnings.  I wish I could have done just a little better because a 75% savings rate is really wonderful when you think of it this way:

I saved enough money in this one month to sustain my current lifestyle for three additional months, with no need to change my spending habits or behavior.  If I were able to maintain this savings rate for an entire year, I could afford to “retire” for three years.

As it stands now, my YTD (year-to-date) savings rate for 2013 is more or less exactly where my 2012 savings rate ended up: 67%.  Still, two years of retirement for one year of work ain’t bad.

But because I continue to work and save, I don’t spend that money on retirement (yet).  I invest it.  Although it doesn’t enter into my savings rate calculations at all, I also keep track of how much I earn on my different investments.  If I take the value change of my investments over a time period, and divide by my total expenses for that same time period, I get the percentage of my spending that is covered by my passive income.

Last year (2012) that number was 7.4% for the whole year.

This year so far (2013 YTD) 41.5% of my spending is covered by the passive income that my investments generate.

Now, to be fair, not all of this money is at my fingertips.  Much of it is tied up in investment vehicles with penalties for early withdrawal.  But I don’t want to withdraw it just yet anyway.  This encouraging percentage is a reason for me to continue adding to my savings and my investments even as they grow themselves, under their own momentum, so to speak.  And when it gets to 100% it will be one indication that I am prepared to retire!

Another caveat is that this 41.5% is also very much a function of how well the market is doing.  If this number doesn’t average out to be 100% over my lifetime then whoops, time to get a job again.  Doing well one year doesn’t mean it won’t be halved the next.  But even if it does, it always comes back.  I’ll leave my investment strategy as a topic for another post, but I guarantee that you’ve heard it before, and that it is safe and boring.

Even when you take these caveats into consideration, these numbers are so encouraging.  They make me really glad that I’ve made a habit of taking 15 minutes a week to collect all of this data, and put time and thought into analyzing it and using it to inform my financial decisions.  And I don’t plan on stopping anytime soon, so stay tuned, and happy saving!