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 🙂

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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!

Riding the Technology Curve

The future is here, it’s just not evenly distributed yet.” – William Gibson

Many people are excited by gadgets, myself included.  Whether it’s Apple’s iPod or Google Glass, these futuristic tech toys are fun and exciting.  When a new model comes out, people queue up, sometimes for days, in front of the store to be one of the first to own it.  The early adopters pay the most for it.  After some time, there is usually a price drop, then another, until eventually sometimes people simply discard the item in favor of the cutting-edge replacement.

Obviously gadget collecting is an expensive hobby, and the farther you lag behind the technology curve, the cheaper everything is.  As exciting as these things are, I try to practice restraint and avoid being an early adopter of anything.  As cool as they are, I’ve actually never owned an Apple product.  I’m not sharing this with you to make a statement about this one particular company; their products are incredible, like something out of an old science fiction magazine.  Rather, I want to point out that over my lifetime I’ve spent a total of $0 on Apple products.  I’ve never really felt that I NEEDED any of them.

Earlier this month, I discovered Project64.  This program emulates the Nintendo-64 video game console, and is available for FREE!  Pretty much any N64 game has a “ROM” available on the internet somewhere.  This means that anybody with a laptop can play and appreciate the entire library of N64 games today for free.  I never had an N64 as a kid, and I’m glad I never bought one for the original retail price of over $150, or any of the games for $50 or more.  Because now, I can enjoy them all for free!

Project64 isn’t even that new, it’s just that I only just discovered it.  There are plenty of other emulation programs for other systems out there too.  By just waiting a couple of years, you can eliminate nearly 100% of your video gaming costs!  And this same concept applies equally to other non-necessities like carrying your music around with you as well.  It’s totally cool, but do you really want it right now, at that price?  Try waiting, and saving that money instead.

We live in an age where the rapid advancement of technology makes these waits trifling.  Don’t want to pay hundreds of dollars for a flat-screen TV?  I bet somebody, somewhere is trying to give away a perfectly good tube TV.  Let the early adopters have their fun, and let their business ensure that companies like Apple will continue to create and innovate, with the pleasant knowledge that you will have access to all of the same things without needing to pay for the privilege.

EOM June 2013

My savings rate for June = 61%.

I spent $0 on gaming this month!

I spent exactly my regular monthly average of $70 on alcohol this month.  Same for my monthly $10 cell phone bill, $35 heat/electric bill, and rent.  No surprises there.

I spent more than usual on gasoline and on groceries (about double) due to a wonderful visit from my parents.  I wanted to keep them well fed and also show them around.  Although this lowered my savings rate a bit this month, it was well worth it!  These are the kinds of things it is important to spend on.  And I can easily afford it because of how good I am at saving up!

In the same vein, I shelled out $100 to rent my apartment complex’s guest apartment for the night that my childhood friends rolled through with their band, Swear & Shake.  They regularly tour the eastern half of the United States and this was their first show in Madison, WI!  So naturally I wanted to see them, make them comfortable, and show them a good time.  Again, well worth it.

Some other reasons my savings rate was lower than usual this month:

  • I made my semiannual auto insurance payment for $400.  I’ve been meaning to shop around for cheaper insurance.  Upcoming post maybe?
  • I spent about $100 on new summer clothes.  Since I’ve been keeping track, I’ve been spending about $165 on new clothes annually.  You can tell I’m not much of a shopper, although I do take advantage of the low prices at Kohls (I shop there almost exclusively).
  • I also made a cash withdrawal of $175 to refill my wallet.  They only take cash at the local farmer’s market I go to, and I also wanted cash on hand for my recent business trip.

It was a fun month, including a visit from my parents, from old friends, and a camping trip.  Even with all of this going on, I still managed to save 61% of my after-tax earnings!  I am still confident that by the end of this year, my overall savings rate for 2013 will be greater than my overall savings rate for 2012 (67%).  Onward and upward!

And remember, the best things in life are free… like this view!

IMG_20130627_120855

Rules and Risks

There is an old board game called LIFE where players move along a track from start (getting a job) to finish (retirement), and are subjected to random events along the way.  Win $5,000 in a karaoke contest!  Pay $100,000 for plastic surgery!  You also have the option to purchase auto insurance and home insurance to mitigate risk later on.  Flood!  Fire!  Good thing you picked those certificates up, right?  Of course, in real life not every event can be insured against.  And there will never be any shortage of life events, random or not.  Every action has its risks, and (real) life has its rules.  Break them at your peril.

life-car-pegs

One of life’s little rules are speed limits.  Breaking them is a common risk that many people take.  The benefit of speeding is reaching your destination sooner.  The risk is of getting caught, being issued a citation, and needing to pay hundreds of dollars to the state.  I was speeding recently, and a police officer was waiting for me on the other side of a hill.  He issued me a ticket for about $300.  On top of that, I was driving a car that belonged to my passenger, and her registration was not up-to-date, so she got a citation too.  That was a risk that she took to save the $75 registration fee.  I think in both cases the risks did not outweigh the benefits.

This and other recent events have definitely influenced me towards being much more risk-adverse.  Stop speeding; slow down.  Think critically about risks and potential gains.  Always ensure you are insured.  Be prepared for the worst case scenario.  This attitude will save you money (and peace of mind) in the long run.

Here is a list of actionable items that may help you practice this attitude:

  1. Do not speed.  Speeding tickets are expensive, and you may not be shaving off as much time from your trip as you think.
  2. Keep licenses, registrations, and insurance policies up to date.  You will avoid fines by renewing the former and mitigate risk by owning the latter.
  3. Keep an emergency fund.  You will have more options for when you encounter negative life events.
  4. Follow the rules, and pay attention to authority.  Be reasonable, but keep your head down.

Most of this is common sense, but it never hurts to refine ideas by giving voice to them.  You may only be between jobs for a month without health insurance, but if you couldn’t pay a hospital fee in case of an accident (worst case scenario) you should get an individual insurance plan, even if it is just for one month.  When all is said and done, avoiding the risk will almost always be the smarter choice.

In the case of my speeding ticket, the only thing I did right was number 3 on my list: having an emergency fund to cover it.  Here is to getting the rest right also, and not letting little speed-bumps (so to speak) prevent me from reaching financial independence by 35!  Because life, unlike LIFE, does not end when you retire.

The Invitation Situation

The average wedding in the US costs around $25k, according to online sources.  Well it’s no wonder why, if you break this total down into it’s component costs.  These sources show that foolish people regularly spend $800 on invitation-category expenses alone!  This includes engagement announcements, save-the-date cards, invitations, reply cards, postage, and a guest book.  Now that the Green Pilgrim has covered all of these bases in preparation for his own wedding celebration he feels the urge to share what he has learned so that you are not taken advantage of by an often exploitative industry.

My future wife and I are very close to our friends and family, and we know all 100+ of our anticipated guests quite well.  So we just told them we were engaged, and which day we were planning the wedding for.  Total cost: $0.  (The average for engagement announcements and save-the-date cards combined is about $200)

We also wanted to make it easy for our guests to RSVP, so we decided to create a wedding website.  TheKnot offers a free wedding website builder that we found agreeable (there were plenty of other free options for the website, but we liked the ease of their template approach).  The website has a built-in guest book page on which we have already collected a few well wishes.  We have all the other things you might expect like directions, accommodation information, the proposal story, etc…  Lastly, there is a password protected RSVP page (the password is on our invitations – no reply card necessary).  Total cost: $0.  (Average cost of reply cards and guest book: ~$150)

Finally we have the invitations themselves.  We found a deal online from PartyPOP that offered to print and send free wedding invitations.  After vetting this seemingly too-good-to-be-true deal we realized that what they get in return is exposure.  The envelopes have their company name on them and they encourage you and others to go through them for other wedding-related expenses.  By default they have the address of their personalized wedding website for you on the invitation, but we covered this up on each of the 75 free invitations with free correction fluid from my office supply closet at work, and wrote in the website we preferred.  We did something similar with free folder labels over the PartyPOP logo/website on the envelopes too.  All told, the invitations look quite nice.  We spent a Sunday afternoon addressing the invitations and envelopes ourselves.  Total cost: $0.  (Average cost for invitations: ~$200 and up)

One remaining cost is postage.  I will save a little on this by using my free inter-office mail to send invitations to coworker friends we are inviting, but we will probably come in just under the average of $75 for this (I will be paying for postage and sending them off later today).  I have no qualms supporting the USPS (they do good work!), and this is our ONLY invitation expense.

Looking over the above makes me feel really good about myself and my quest for early financial independence.  For less than a day’s work we saved $550 that can be better spent on our future together (or our honeymoon).  And anybody can take advantage of the same deals (or better ones) for the time cost of a little research.  If you think that $25k is too much for a wedding then you’re not only 100% correct but you’re already on your way to becoming a green pilgrim yourself!  My aim is to make the path easier for you; together we are stronger.  I am pleased to have a partner in life who also abhors waste, strives for efficiency, and values happiness and health above all.  As you can see, our attitude is already paying dividends.

EOM May 2013

Hello Pilgrims!

Another month gone, another month closer to retirement.  My savings rate for May was a modest 64%.  So far in 2014 my overall savings rate has hovered just around what it was last year (67%).  Putting aside 2/3 of what you earn might sound psychologically difficult at first, but “flexing your frugality muscle” gets easier with practice, and I could not be more happy with the way things are going.  The only thing I’ve needed to cut back on are frivolous expenses like frequent trips to fancy restaurants and bar drinks marked up 300% because somebody hands it to you from behind a counter.  These things alone allow me to indulge in luxuries like travel and live entertainment without compromising my plan to retire by 35.

My major expense this month (besides rent) was a plane ticket to my bachelor party in August.  Nothing crazy folks, just a lake-house weekend in the Catskills.  A few weeks after that I’ll be going to Jamaica for a week with my future wife; that trip is already paid for.  I suppose I could give up these things and retire by 32 instead, but that just doesn’t seem worth it.

So what can I do better?  I bought a lottery ticket this month.  The Powerball craze got to me.  $3 down the drain.  Although we did hit one of the numbers.

I also bought a computer game for $15.  I had torrented it for free, but enjoyed it so much I bought a legitimate copy in order to receive the developer’s frequent updates.  Now the novelty has worn off, and I am not sure the benefit of owning a legitimate copy was really worth it.

On our recent camping trip I got lost on my way to the campsite and had to buy an overpriced map from a gas station for $8.  I really should have bought a more reasonably priced map (or written better directions) when I gave up the data plan for my cell phone, but I’m saving so much money from that switch that I can’t really be upset.

Great stories, eh?  Everything above is small potatoes, but adds up over time in a positive way just as surely as a cigarette smoking habit adds up in a negative way.  By living below my means I was able to pay off the debts my younger, foolish self incurred and build up significant savings that will multiply themselves over time.  Now I don’t need to worry about federal student loan interest rates doubling on July 1st, or making payments on a car.  The benefits of extreme saving will only increase over time, and things are looking pretty good already.