Young and Frugal

I took an investments class the during the Fall semester of my Senior year in college, and when I say “took” I mean that I dutifully attended every class, sat in the front row, and tried with all my heart to understand what the hell he was talking about.  It wasn’t that I didn’t understand the material, I just didn’t understand how our professor could brush over things so fast.  Most of the rest of the students never attended because the professor was one of the few that “recycled” his tests every year and didn’t change anything except for the numbers (ie: you did not need to attend class, you just needed to know someone who took him last semester).  

Dr. Chucky (as he preferred to be called) is one of the most peculiar people I have ever met.  And this is what you need to know about him… He probably smoked 2 packs a day, he sweated like a pig, and he spoke 6 languages.  He was a professor because it allowed him to play with his portfolio all day and use his summers to travel.  He is an incredibly smart person, but the type of smart person who didn’t relate very well to less smart people.  He has been on over 10 game shows and won a great deal of money from them.

I have previously written about things that should be mandatory for every college senior to learn (My Mandatory Class Proposal) and this series is about what Dr. Chucky rushed through on the last day of class when he handed out a sheet with many jumbled and incomplete sentences.  The thoughts were broken into 5 different categories.  We then talked about a 6th.  I will try and decode his thoughts in this series. 

Purchases:

1.  ”1 hour search/study for each $1000 purchase”       

 What I believe he is saying here is don’t sweat the small stuff.  I write a great deal about frugality, and how I’m a bargain hunter, but usually what happens to me is that I over-research items and I don’t value my time enough.  If you spend 8 hours trying to figure out how to save 10% on a $1000 purchase is it really worth the time?   On the other hand, if you spend 20 hours researching a car and how to buy one it is probably a better use of time.  Or if you are looking to buy a house, spend as much time as you can, I don’t know if it’s possible to over-research a $200+ thousand purchase.

2.  “Think of all purchases in annual terms”       

 We live in a society that looks at things as “how much per month” without looking at the entire picture.  Sometimes it’s easier to finance things (not recommended) but we need to look at a bigger picture than just monthly, so look at how much you’ll be paying every year.  That should open your eyes, especially if you start to think about how much of that is interest and how much is principal.  Then look at how much you’ll be paying over the life of the loan…is it worth it?

 3. “Autos: go to fleet manager or internet managers”       

 Car salesmen are the pawns of the dealerships, the more they get you to pay, the more money they get.  Fleet/Internet Managers run the show.  They don’t get paid based on how much you pay, they get paid based on inventory turnover.  They don’t like to deal with haggling, they just want to get you in a car and out the door.  Mary and I did this when we bought our Volvo, it was a great experience, we got it for a great price, and we didn’t even need to haggle.  The internet manager agreed on our price, though the sales manager was royally pissed off (we heard him yelling at the internet manager).

 4. “Insurance, higher deductibles will lower premium rates“       

This pretty much speaks for itself.  Some people may say “but then I have to pay more if something happens,” true, but if you took the difference between the more expensive monthly payment, and the less expensive monthly payment you could be adding that difference to your emergency fund and earning interest on it in the meantime.  Pretty soon you’ll have saved enough to pay a higher deductible if something were to happen, and the rest is just more money saved.

 5. “Live below your means, save on : yard, car wash, cable TV, tipping”       

In other words, live below your means and don’t mindlessly spend.  There are plenty of luxuries that most people consider staples, Cable TV being at the forefront.  If you look for places to make cuts, you will find them.  You can wash your own car, you can take care of your own yard, and you don’t have to be known as a “big tipper.”

 6. “House purchase: Multiple Listing Service add-ons”      

  While I normally probably wouldn’t be able to decode this, I did jot down what he was talking about.  Multiple Listing Service (MLS) is the service that real estate agents use to search for houses.  What he meant by add-ons is to go to your real estate agents office early in the morning and map out which of the houses added to the list that morning you will go look at.  He was a big advocate of buy the cheapest/worst house on the best block, and he recommended that this was the only way to get it before someone trying to turn a profit by flipping it would.  Mary and I discovered that this really is the best way to do it.  When we were looking at houses we went by one that we really liked, on the day it was listed.  It was listed for what our agent believed was below market value, and the next day a contract was in on it for full asking price.  Two months later, it had been flipped and was back on the market for $100k more.

7.  “$1,000/month rent, buys a ~ $360,000 home after tax @ 5%”      

 This is one that I really can’t fully decode.  I believe he is essentially saying don’t throw away money on rent when you could be buying a house, but his math seems to be off.  By my math $1000/month buys a $225,000 house at 5% interest, if you put 20% down.  If you paid $1500 a month on mortgage you could do a $360,000 home after 20% down.  As someone in the process of buying/building a house, I’m still torn on the whole rent vs. buy thing.  There are tons of pros and cons to each, but I’m happy with our decision.  

As you can see, in Dr. Chucky’s list of incomplete sentences and thoughts on personal finances there is some great wealth of advice just waiting to be decoded and understood.  Stay tuned for more!

Mathematically being young and frugal makes a great deal of sense; save as much as you can now, and let the compounding interest build up over the course of your life. 

In theory if I were to invest $50,000 in a decent mutual fund at the age of 23, assuming it earns at least 10% a year (slightly less than the historical average of the stock market), I would have $2,262,962.00 by the time I’m 65.  That sounds great, and the numbers don’t lie, however it’s not that easy.

Achieving this goal, while feasible, means that we need to continue living the way we are now (very frugally) and save for over two more years before we would be back in good financial shape to buy a house.  We could do it, but it wouldn’t be fun, and we are already committed to the house.  

The fact of the matter is that being young and frugal comes with many opportunity costs; the biggest being a social life.  Personally, it’s in my nature to not be able to rationalize going out to bars and paying big bucks for a drink I can make at home for a fraction of the price.  Plus I’m not a big fan of loud crowded spaces.  I do however love hanging out with friends and meeting new people…who doesn’t?

In college I hated going out to bars, I would much rather have hung out with a few of my roommates or thrown a party at our house than go out.  As a bonus we would host the parties, charge a cover to get in, drink for free all night, and have money left over to pocket or pay the resulting tickets.  It was a pretty good setup :)…until we lost about 80% of our deposit when we moved out.  

I know there are always alternatives to going out to bars, but for the most part, when you are hanging out with friends, meeting new people, or even networking you will most likely be doing so while spending money.  Whether it be at a bar, a movie, the golf course, or over dinner, you’ll be spending money.  It’s called social spending, and it’s a fact of being social.

To be honest, this aspect of being young and frugal is less than fun.  It especially sucks in the office because everyone I work with goes out for lunch at least 3 times a week.  The frugal train of thought on this is to take your lunch to work and it will save you a ton of money, so this is what I do, and it does save a great deal of money.  On the flip side, I’m certain that I am missing out on a great deal of good networking (and the male bonding) that comes with going out to eat with the guys.  Also, I’m wondering if my being social with my bosses at lunch could have an effect on an increase in my salary, thus offsetting going out to lunch.

Mary and I have kept room in our food budget for us to each go out to lunch with our co-workers once a week.  At the time we set the budget it was a reasonable expectation, and while it is a reasonable expectation, it’s getting to the point where I feel bad telling them I won’t be going to lunch today.  I love that I am always invited, but I know that there becomes a point where you are turned down so much that you don’t ask anymore. I’m hoping that I am not approaching this point.

Outside of work it’s hard for us to make new friends right now because of our extreme frugality and location (both will hopefully only be around for the 2-3 more months).  We live 45 minutes away from work, and we are more than 45 minutes away from “uptown” where any sort of nightlife in Dallas occurs.  On top of that all of our childhood friends from the area no longer live here!

So with all this, is it possible to live frugal and still have a vibrant social life?  I’m sure it probably is, but for Mary and I, and our extreme situation, it seems that we have struck out.  Our saving for our house and preparing to be house poor is strike one, our current location is strike two, and being married seems to be strike three because all of our peers are still single. 

I am more than open to suggestions on how get our social lives back on track while still living frugally, so if you have any please post them in the comments section. I’d love to hear what you have to say!

I’ve always been a jack-of-all-trades, never afraid trying to do something on my own, and always watching and learning how to do things.  I can’t help it, was raised this way. 

From a young age I pushed a toy lawn mower behind my dad as he mowed the lawn, in elementary school I spent afternoons with my grandfather who taught me about woodworking and tools as we built (yet never finished) a rocking chair, in junior high I hung out with carpenters and contractors everyday after school as they remodeled both my grandparents and my parents houses.  I was an early adopter of HGTV, yet This Old House remains my favorite home improvement show.  In high school I, like most teens, was infatuated with cars, and as a result I can, and have done just about everything on a car, short of body work.  Through all of this, I learned and did even more as I became an Eagle Scout.  I watched, I learned, I did.

I loved these aspects of my childhood, and these aspects built a foundation for me to know how to do an extreme variety of things, and as much as I love (and Mary loves) this about me, it’s a curse.

I constantly have internal struggles as three aspects of my life make it nearly impossible for me to make a decision on any variety of things.  These three things that alone are great, seem to deeply conflict each other.

1. I’m a DIY type of guy, born and raised, for the sake of being constructive, and seeing a finished product that I created, saving money is just a bonus.
2. I’m Frugal.
3. I’m a perfectionist.

As the saying goes, “jack of all trades, master of none.”  I’m a perfectionist that can’t do any of the things I love to do perfectly, yet I hate the concept of paying someone when I can do it myself, but since I know how things should be done (even though I can’t do them perfectly) I monitor to make sure things are being done right.  As Fat Bastard in would say “It’s a vicious cycle.”

This internal struggle is one of the major reasons that Mary and I decided to build a new house instead of buying an older home and having projects.  We’d rather move into a house already done the way we want it than have to live with imperfect DIY project after project.

JD at Get Rich Slowly, posted an interview with Tim Ferriss, author of The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich.  I have not read the book, but in the interview the concept of a “low information diet” is brought up.  Tim explains that the people who excel with this type of lifestyle don’t overload on information.  Instead they outsource what they can, and don’t feel the need to stay caught up.  Tim calls them “selectively ignorant,” not really knowing more than they need to.  In other words, they are the opposite of me.

I am going to try being selectively ignorant because in many aspects of my life I feel that because I know how something is done, I should do it myself.  As a result I have a handful of half finished projects, and quite a few that would look much better if I would have paid someone else to do it.

What it comes down to is focusing on the things that you truly thrive in.  If you can focus on these things, and outsource/outchore the rest to others, in theory you’ll be doing quite well in your career and in your life.  This concept is one that was first brought to my attention in the book Strengthsfinder 2.0, which has the reader take a personality test and then tells you the 5 things that you thrive in, and what type of people to surround yourself with in order to be most successful.  It is a great test/book and I highly recommend it, as it was the first publication that I read which focused on strengths and not weaknesses.

I have to begin accepting that just because I can do something myself, it doesn’t mean I should. I am excited that I won’t have any large or highly visible projects once we move, and I’m looking forward to being able to focus more on what I’m good at (like looking towards the future, advising, and teamwork), and getting better at a select few things I truly enjoy but am not great at (like writing). 

I am 100% addicted to Digg, and because of my addiction I was able to read a great blog entitled 12 Things I Learned By 42 That I Wish I Knew At 22 on a great website called The Wisdom Journal. In this blog, Ron, the sites founder, creates a great checkpoint and learning opportunity for millennials.  I decided that since I am 22, it would be a great opportunity for me to measure myself up against some great advice (and hopefully you will do the same).  Ron’s points will be bold and italicized, with my comments after.  

1. Stay in school.  Don’t quit.  I’ve successfully made it through College, and yet now that I’m out, I feel like I’ve given up something big, I miss it, and will probably end up going back for an MBA.  (Seriously, stay in school as long as you can, the real world isn’t nearly as much fun.)     

2. Money doesn’t spoil, it keeps.  Start investing early.  That is the one thing that I was pretty good about when I was younger.  My grandmother gave my brothers and I very generous checks when I was in 6th grade.  My oldest brother paid off debt, my middle brother bought a motorcycle, I invested.  While Ron recommends mutual funds (as would I now), I played the stock market at a young age.  I watched my money triple in value in the dot com boom, then I watched it fall because I left it in too long.  I was even by the time I got to college and fell in love…with my first Mac and iPod (in 2003).  So I invested in AAPL, and what a wild ride it was.  By the time I graduated, I had sold half of it to pay for my wife’s engagement ring, and this fall I sold the rest to get us completely out of debt and help us buy our car.  Since the money is no longer in the market, I’ll say I’m about even on this one, even though I’m not largely invested (we have some money in a different stock) Mary and I don’t have any debt.  However, it is still early, so we will be maxing out our 401k’s and Roth IRA’s within the next year. 

3. Don’t buy the first house you look at.  Buy the cheapest house in the nicest neighborhood.  Check…except that we are building the cheapest house in the nicest neighborhood; well not the cheapest, we are doing some upgrades we believe we will get our money out of at sale.  We are building the cheapest plan available in the neighborhood though (with a different elevation, because the cheapest elevation was really ugly). 

4. Establish a habit of living within a budget. We are working on that one.  Overall we’re pretty good about sticking to our budget and we are pretty frugal (see My Frugal Best Practice).  Our current major expense that puts us over budget is Gas, but that will go way down when we move into the new house, closer to work and to the city. 

5. Learn how to negotiate a better deal on everything.  I love negotiating, and while Secrets of a Bargain Hunter post didn’t necessarily go into negotiating, I always ask for a discount, and negotiated a great deal on our Volvo. 

6. Keep your medical insurance in force at all times.  I have to say that my wife and I are guilty of not doing this one.  There was a 2 month period between when we got married and my wife got her job (she got one before I did) that we were not covered by medical insurance.  Never again will I let this happen, I was nervous even doing the things that usually relax me.  When Mary and I would run, workout, or I would go wakeboarding, I was constantly worried about getting hurt.  I will definitely be following this advice. 

7. It’s quality of time at work, [and] quantity of time at home that matters. … The lesson learned: family will be there after the job is long gone.  Value and treasure them.  I currently have the advantage of carpooling with my wife to and from work, and since we don’t have any kids, we are lucky to be able to spend a great deal of time together.  We may have already been dating for 5 years, but we are still learning about each other in our first 6 months of marriage.  We also both want to have our own ventures so that we can delegate how much time we spend together and with our kids (those will come 5 years down the line). 

8. Don’t listen to those who think there is a shortcut to wealth.  Check.  I love history, and according to Benjamin Franklin,  the way to wealth is Industry and Frugality. 

8a. Stay far, far away from multi level marketing “business.”  Check.  I’ve had to knock some sense into some of my friends on that one. 

9. Make sure your spouses values line up with your own.  I guess time can really be the only determiner of this, but so far we are doing well.  We have open discussions about everything, especially money.  However, I see us (as a generation) moving away from marriage to an extent.  Many of us (my wife and myself excluded) have been the product of divorced households, and I know a number of people who don’t plan on marrying because they haven’t seen good relationships firsthand. 

10. Learn how to network.  I’m trying.  I definitely understand the merits, and I am very blessed to have a father-in-law who is phenomenal at networking.  I have been able to observe him and pick up tricks so far.  I’m definitely a work in progress. 

11. Never accept a job just because the pay is higher.  I’m proud to say that I actually turned down a job for more pay than I’m making now because I couldn’t see myself being happy there.  On the flip side, I think that might be because I was still living in my idealist college world.  Now that I’m out, I would consider it more closely. 

12. Trust, but verify.  I have definitely learned this in my 22 years, and I think most millennials have because of the internet.  I have always been told not to trust everything you read on the internet, and it has naturally carried over into my daily life.  Snopes is my best friend. 

Overall, I’d say I’m in decent shape, but I know there is nothing that can replace experience, so with that, thank you Ron for some great advice, hopefully we can all learn from this! 

For as long as I can remember I’ve been young, I wish I could say I’ve been frugal, but that would be starting out this blog with a bold-faced lie.  I’m a product of middle class America and was raised to work hard for what I want, and that is what I’ve always done.  I’ve also always had the grace of my parents to help me out…until June 29, 2007. 

On that fateful day I got married to Mary, my high school sweetheart, just 2 months after graduating college.  Don’t get me wrong my parents love my wife and are thrilled that I got married, but in their minds that was the day I was officially off the family payroll.

I don’t mean to bore you with personal posts unrelated to personal finance but I feel at this juncture it is important to understand the point of view that many of my posts will be coming from, and while I am, in fact, young, married, and frugal (sometimes), it doesn’t have quite the ring to it that “Young and Frugal” has. 

Mary and I, like most millennials, are the youngest children of baby boomers, and as a result of that, we have lived a privileged lifestyle, even more privileged than our siblings, because our parents were already making good money while we were growing up.  We as a generation don’t know much about what it means to struggle and save, and this is also where our financial faults come from.

To elaborate, in May Mary and I will be fully in over our heads, for better or for worse.  You see we are building our first house, and will be spending too much money (upper $200s…in the Dallas area), to get a house that is too big (2500 sq/ft), and way too nice.  In fact it leaves us with an unbalanced budget by about $300 a month, ironically the cost of our car payment for the new car we needed wanted.  Maybe “Young and Stupid” would have been a better name for this blog?

I’d like to think we’ve done a great deal right with our finances because we have no other debt than our car payment, and we got a great deal on the car (future post).  But because of our inability to wait we will struggle.  We are going back to how we were raised: we have both agreed to work hard for it and make extra money.  We’ve thrown around various ideas of what we will do to make extra money, and while we haven’t decided on any yet, I will definitely keep you updated (hopefully 3 times a week).  And in some aspects it’s a very good thing for us because it will make us apply our degrees, as both of us have degrees in finance (ironic, I know) and entrepreneurship.

As a side note, I want the blog and you to be a way for me to maintain accountability for these things.  Who knows, maybe I’ll even get Mary to make a few posts down the road!

-Daniel