Defining Your Goals

 This is more or less a dream I had about teaching a youth class about money. Using a blackboard, I had me on one side and a cloud on the other "hopes and dreams." 

The class is about Defining our Goals

Drew an oval in the middle, this is a face. Added eyes, nose, mouth. We're defining the face a bit. Hair, shadows, neck etc--an artist knows that adding details provides DEFINITION.

"Car hits tree"--as journalism student I learned this is an event, but to make it a story you gotta add Who What When Where and Why. This is DEFINITION.

So we have a cloud that is an undefined hope and dream. In high school I maybe didn't know what I wanted to do like some kids did already, but I had some NEGATIVE definites! 1. I did NOT want to spend the rest of my life waking up to an alarm clock and grinding away at the same job. 2. I did NOT want to marry a sugar daddy so as to be supported all my life--that would be tantamount to slavery. 3. I did not ever again want to dissect a frog, so a career in biology was out.

This feeling, negative though it was, defined the WHY--my motivation--for aiming for my hopes and dreams. But now, we can't hope and dream that we DON'T do something, how can I define the hope and dream positively? Alex came along and he nailed it--he called it financial independence. Because, you see, here are some definitions of the WHAT which is the cloud:

I want to do whatever I want whenever I want. (The flip side of NOT living by the alarm clock). Meld that together with the reality check that everything in this mortal life needs MONEY, and you see that "financial independence" equates to "doing what I want" independence.

More to follow, I gotta eat breakfast...

OK, now it's almost bedtime--the day flies. So, defining the what is better if it is a positive, not a negative. I've got "doing what I want." Now for the HOW steps in between the WHY and the WHAT on the board.

It's a series of engineering "How" questions!

Alex started: HOW we get to do what we want is tempered by having money, so now we further define Doing what we Want into Being Financially Independent. Because you can't just do whatever you want unless you have the money to do it with.

Next: HOW can we be financially independent? What is that, more specifically? We discussed it and decided that if we had a regular stream of income falling from the sky, as it were, without having to directly work for it, that would be financial independence. We decided that we didn't need to be rich or wealthy, but having our monthly budget taken care of would do it.

We looked at what we were spending and (at the time) thought $500 a month would do it. If we could generate $500 a month we'd be financially independent! I had thought that if I were an author, I could get royalties and that would be it. Further examination revealed that I'd have to be one heckuva great writer with one book, or a hack writer with 50 books a year to get that kind of money. Other people think that if they buy old houses, fix them up and rent them out, that rents would be their income-without-having-to-do-anything. Again, not really true. Alex pointed out that interest in the bank, or dividends from owning stocks, wouldn't involve much "tending" compared to writing or being landlords. So, HOW to get $500 a month got further defined as being $500 a month in interest. That's $6000 a year. Now the next step:

HOW much money's gotta be in the bank to get $6000 a year interest on it? Well, it depends on interest rates! At the time, if we could get Certificates of Deposit at 6% interest, that meant we could invest $100,000 and it would yield $6000.00 a year.

OK! Big gulp!!! HOW are we going to save that, and HOW long will it take? Based on Alex's income at the time, if we lived on $500 a month we could also save about $500 a month (that was FIFTY PERCENT savings rate!) and reach our $100,000 goal in six years. We did it in eight, by the way.

NOW WE HAD A PLAN. Putting this all on the board, I get to re-emphasize to the class that the HOW steps, iteratively attacking the problem and defining it into smaller and smaller pieces, is how we got from our motivated WHY WOULD WE DO THIS to WHAT IS IT WE WANT TO DO.

So, isn't this what personal trainers do in the gym? You want, what, giant biceps? Don't just dream, boy, make a plan! Here's what it's going to take, step by step.

So, the dream isn't about something new, but it did give me an idea that I'd like to present to kids who may not know what the process is of turning dreams into reality.

And that's all I've got to say about that.

Ten Principles--an Overview

Hi, these ten principles came to mind as we were driving from Florida to our new digs in Washington State. Two are familiar from our first try, but the rest are pretty important too.

1. Budget Personal Allowances so that you don't have to accpunt for the to anyone. You can be frivolous and burn the money if you want! This is good for the marriage and also for the Economic Unit you are together.

2. Use the Two-Bucket System. I will be explaining this concept in a blog post to follow.

3. Don't hold stock in the same company you work for. Remember that old cartoon of a guy sawing off a tree limb while sitting on the limb? I think Bugs bunny and Elmer Fudd were in that. If management wants to pay you in stock options, decline and take the cash instead. What happens if your wonderful company belly flops or goes bankrupt? You lose your job, and--oh wait--you can't use your stock as a backup of funds, cuz now its value has plummeted. You're SOL, friend.

4. IRAs turn perfectly good qualified, tax advantaged dividends and long-term gains into higher-taxed regular income. Boo! I will dedicate a forthcoming post to this little-realized truth. The corollary: 

5.Roth IRAs are a great way to protect already-taxed income savings from future tax on any dividends or capital gains you may have for the rest of your life. Yay! Point here is that only ROTHS will not eat away through taxation your attempt to get rich.

6. Live within your means. This means save aside money no matter what you make. Adjust your wants downward. Do without stuff. I am not kidding! So many times I've witnessed people getting welfare (even within the LDS church system) whilst they have pets, or a smoking or drinking habit, or a smartphone, and of course--cable television. These, my dear kiddos, are NOT necessities. You wanna get out of being in crappy jobs all your life? Say goodbye to the pet, the gadgets, the TV, and even the better neighborhood or the fancier car.

6a--a corollary--don't spend your capital. Leave it untouched and only spend the dividends, interest, and any gifts or bonuses you get. 

7. Invest in educating yourself and your children but don't go into debt for it. If what you love to do doesn't pay well (as being a potter didn't for me), you can become a tradesperson, work part time for good pay and benefits (even unionized), and be an artist or musician on the side (I periodically had "real jobs"--researcher in a prison, ad manager for a newspaper, freelance writer. I tried to join Navy reserves but they didn't take me.) If you have children, it would be good to get them adequate schooling, but you don't have to move to the richest place in town to make that happen.

8. Avoid debt. Especially, don't leverage yourself! Leverage is a two-edged sword, you can cut yourself badly. Rent until you can pay for a home with cash, if you really think you need to own a home. I think I'll post about our many adventures in home ownership and how we are now happy renters, later.

9. There is a free lunch, but you must still work. A tree produces fruit on its own, that's your free lunch. But, you still have to care for the tree. A cow produces milk, that's free lunch, but you've got to care for the cow and milk her. Farming analogies are great!

10. Don't get into a situation where you are forced to sell your stock. Period! Keep a cash reserve of three to six month's salary.

Random other concepts here to end with: The golden goose story is a great example of how to manage money wisely (the farmer and his wife did NOT manage wisely). Do you like sales at the store? Buy stocks the same way, when they are low-priced.

STOCK represents companies. The Stock MARKET represents an auction at best, a casino at worst. A livestock auction (note the word stock in there) is you buy and sell your livestock. Prices go up and down. It's not the same as your live stock itself. If you own live stock directly, the value is in the meat or milk they represent (and maybe a little in the manure they produce). The meat or milk doesn't go up or down like the market. More on these things later.

First Things First: Basic Principles

All financial success stories should come with a caveat: at the time written, the author enjoyed success--but afterwards, what happened? Was he or she still successful, or did a fatal flaw later emerge in the success plan? Did the author celebrate too soon? Did the author of "How I Made Millions" have to write a sequel, "How I Frittered It All Away?"

So before you jump in, reader, do your homework! At the time you discover this blog, you should find out if Alex and Barbara Szabo are still enjoying their financially independent retirement, or are they in the poorhouse now because their plan was inherently unsound?

April 2013: we assayed to blog at this time, but never posted it. What follows is the text of what was written then, posted now in January 2016.

Here we are, at a milestone time in our lives, and milestone times are always good times to summarize the past and lay out plans for the future. After 2 1/2 years on the market during the recession, our New Mexico home just sold (freeing up a good chunk of cash), and after 8 1/2 years working for MIT Lincoln Labs Alex just retired, ending a great flow of income. We have now got an investment portfolio worth one million dollars, and look forward to a regular “allowance” of spending money for the rest of our lives, without materially touching the principal. Nice milestone!

So. How did we get here? What did we do to turn from poor students into retired millionaires? How can we assume with confidence that our pot of money will remain intact, and generate enough for us to live nicely on for, say, thirty more years, without any further earned income, without its getting eaten up by taxes, and while still tithing ten percent to our church? Will you see yourself fitting into the patterns we have lived, or will you find that our method is not for you after all?

I hope to explain what we did and why, clearly enough for you to make your own informed decisions.

These two basic principles of family financial life underpin all the saving, budgeting, and resource deployment suggestions in the rest of this blog:

1.We are a single economic unit.
2. We don’t have to justify to each other what we do with our personal allowance.

Alex and I had acquired differing financial habits growing up as children in our different families. I was a lot lazier about keeping track of money, and didn’t understand budgeting and planning as well as Alex did. I didn’t find the idea of counting money very creative or interesting, at the beginning. But I learned from him, and over the years I have taught him some things, as well. For instance, once I learned to enjoy seeing money pile up, I was much more loath to risk it than he was!

Getting married entailed adopting wholeheartedly one supreme financial principle and that was this:

We are a single economic unit.

There was to be no “his” and “hers” accounts, no dividing of wealth, no hoarding of hidden secret funds from each other. My father had hidden money from my mother, and then he left her. Not good! Although my parents (meaning, my mother and her second husband) didn’t save up cash in the bank as much as they leveraged it in real estate, risky tuna-fishing schemes, stocks, and some bonds, whatever income they each earned went into one pot, and whatever financial decisions they made, they made them together.

Alex’s parents both fully embraced this single-economic-unit principle and they were doing well when I met them, just as Alex’s dad retired. They were from Europe, went through World War II, and believed in paying cash for everything, and had saved up a huge wad of it and kept it entirely in money market CDs. Alex learned that if he wanted a new telescope, he had to save for it and THEN he could buy it, out of his savings. He worked through school. He had several thousand dollars in a savings account when we married.

It is not easy to adopt this financial assumption if you are selfish, as I was. What if one person works harder or earns more money for his labor than the other? What if one person doesn’t work at all? The “single economic unit” idea sounds a lot like communism. Actually, it also sounds like the Mormon law of consecration. What astounded me is that when we married, Alex was willing to give up “his” hard-earned savings account to pay off a mortgage that I had obtained on a house I “owned.” But he saw, rightly, that he merely transferred his savings from a liquid form into a real estate form, into something that we could both live in and enjoy. And without paying one single cent of interest to a bank for the privilege! As I say, I was more selfish in this regard (thus my astonishment at his generosity) but quickly learned about the benefits of pooling our assets for the common good.

Here is an example that makes this vital principle easier to comprehend: first, if you as parents have a burly teenage boy and a smaller five-year-old girl you already know that the one eats at least twice as much food as the other (or maybe, without children yet, you find that the husband eats twice as much as the wife). Do you begrudge the hungry one that extra quart of milk and all the leftovers? Do you make him pay extra for it? Probably not! You already understand that it is perfectly reasonable to let the burly hungry one eat more from the stew pot than the rest of your family. Where there is love, there is understanding and allowance. So it must be financially in your family. Everyone’s earnings go into the one pot--no matter how much or how little--and everyone’s expenses come out of the one pot--no matter how much or how little. Money is just like food, or shelter, or clothing--your family shares it.

Another vital financial principle right up there next to the first one will help you swallow the “all for one and one for all” financial philosophy. It is something I learned from my mother, and insisted that Alex and I adopt in our family budget: each of us must have a “personal allowance”--even as adults--that is sacrosanct; and it is imperative to agree that

We don’t have to justify to each other what we do with our personal allowance.

If we want to throw ours away on something the other feels to be useless, so be it, and NO NAGGING! The size of our personal allowance, and whether it includes or excludes, say, clothing, is something you discuss in your family and come to an agreement on beforehand. This allowance may go up or down over the years, but the main idea is that this is an escape valve in what might otherwise seem to be a rigid financial pressure cooker. I can tell you that it really helps!

An example: when we go on vacations together, this vacation money comes out of our common pot. But there was a time Alex had to go to Massachusetts for a week of work, and I thought it would be nice to go treat myself to a spa for a few days. I used “my” money to go do that, and enjoyed it without any guilt that I was spending “our” money frivolously on myself while my husband was slaving away trying to build our money up. We don’t have problems of guilt or resentment, but I understand that many couples might; and this concept will be invaluable to you if you have ever felt guilt as the spender or resentment as the earner.

Another example: Alex likes to buy the latest and best computer equipment. This has cost him thousands of dollars over time. No problem! I like to buy new clothes and pass along my older clothes a couple of times a year. Alex likes to keep his for twenty years, it seems, but--No Problem!