Slicing Through Money's Mysteries
Here’s an insightful post from Allan from The Philippines. He shares with us his story about growing up poor and working his way up. Hope you enjoy his 5 money habits he learned that will never make you rich.
They say we are creatures of habit. This is especially true when it comes to money. When the going gets tough, it is easier to resort to what’s comfortable. When that happens, your own money habits take over. The only question is – will your money habits get you through and make you rich?
Saving money is about principle sometimes. Let me explain.
For the past two years I’ve taken the bus to work after driving for 7 years prior. The company re moved our free parking benefits and I wasn’t about to pay $350/month to park in a garage just 5 miles away.
I have a love hate relationship with the bus. When it’s raining, and I have to stand outside shivering, I hate it. When the bus skips my stop every so often, I hate it. When the bus driver slams on the brakes a couple feet away from the stop light and we all go flying, I hate it. When the bus is packed like sardines, but there are some very attractive riders I need to squeeze next to, well, I guess it’s OK.
My VIP Pass aka monthly bus pass costs $60, while taking a cab to and from work costs $30. Hence, the cost breakdown is simply $60 for a bus, $350 for parking, and $600 for a cab every month. Out of principle, I wasn’t going to spend 5-10X more on transportation if I could just ride the bus.
Your Money Ratios is a book by Charles Farrell. Your Money Ratios can help you get a better handle on your finances.
Publisher: The Penguin Group. Hard cover. 257-pages. Price: $26.
Author: Charles Farrell, JD., LL.M., investment adviser with Northstar Investment Advisors, in Denver. He writes the “Retirement Roadmap” column for CBS Moneywatch.
Review: “Your Money Ratios” sings to me! For someone who loves using ratios such as the 1/10th rule for car buying, and 30/30/3 rule for home buying, I absolutely adore this book. Charles’ writing style is very balanced and easy to understand. When it comes to math, many people, including myself fall asleep. But, if you can just do simple division and multiplcation, this book will keep you on the right path towards financial security.
Charles’ “Unifying Theory of Personal Finance” is his core philosophy that all decisions you make should help move you from being a laborer to being a capitalist. In other words, make money work for you, and not the other way around. It’s important that with every single monetary decision you make, you ask yourself will this help you become a capitalist or not.
Let’s go through Your Money Ratios with the key money ratios from the book.
The first ratio Charles introduces is the Capital to Income Ratio (CIR). Capital is defined as the savings in your 401K, IRA, annuities, CDs, cash value of your life insurance, savings, equity in commercial and rental real estate, and the fair market value of any business interests.
Capital does not include the equity in your primary residence because it does not generate income. The real return of your home is the rent-free use of the property once you pay off your mortgage.
The underlying goal is for everyone to have a CIR of 12 by age 65 i.e. $1.2 million in capital if you average $100,000. With a CIR of 12, one should be able to retire financially secure while living off 80% of your pre-retirement income due to the returns from capital and social security. While working we probably live on about 60% of your actual income due to expenses such as one’s mortgage, which will no longer be there when we retire.
Your finances hit a tipping point when your Capital to Income Ratio hits 2. At a CIR of 2 your earnings from you capital will generally add more to your wealth than the amount you save each year. Over a 40yr savings cycle, you contribute 30% 70% are from earnings.
See: Ranking The Best Passive Income Streams
To get to a Capital Income Ratio of 12, Charles highlights on two savings rates: Save 12% of your annual income ever year from ages 25-40, and save 15% every year after wards. The math works, and obviously the math works even better if you can save more of your annual income.
To clarify, the Charles’ 12% and 15% savings ratios include your 401K contribution.. Charles believes that your 401K is key to financial independence due to employer matches and tax free contributions.
I challenge readers to max out their 401K and save an additional 12-15% of their gross income. Mentally write off your 401K amount, and pray it’s there at age 59.5. My strong belief is that your net worth is an illusion, except for the cash and most liquid of assets.
Also see: How Much Savings You Should Have Accumulated By Age
One needs to differentiate between income-producing debt and income-reducing debt When you take on debt, you need to leave enough for you to meet the savings ratio
Owning a home and paying of your debt increases your retirement income and helps move you from laborer to capitalist. “Deemed Income” is the investment income you get to keep in retirement because you don’t have to use that income to pay a mortgage or rent.
Education debt, is good debt, but aim to keep it to 75% or less of your average 10 year gross income. Financially, it is better for your kids to take on the debt than you provided they stick to the Education Debt Ratios.
Charles, like others believes there is an education bubble. Tuition costs are ridiculous and will eventually fall because income growth doesn’t support the cost. Charles advises not saving for your kids education before you save for your own! If you don’t save enough for yourself, your kids inherit your financial burden and have to take care of you. Your financial independence is a great gift to your kids.
It’s all about playing offense (stocks) and defense (bonds) to come out ahead. Charles recommends a permanent 50%/50% allocation your entire working life. I find this too conservative. I like following your age as a percentage to allocate to bonds i.e. if you’re 35, somewhere around 35% of your investments are in fixed income securities.
Charles is super risk adverse because he wants to avoid big losses. As an investment adviser, and given his age, I have a feeling he has seen tons of carnage over these past two investment cycles. A 50% portfolio decline requires a 100% increase to get back to even. A 80% portfolio decline requires a 400% increase!
Charles fears Congress will go overboard in fixing SS, and create one large wealth-transfer. Despite the “fix”, SS will survive. Lower paid workers get much more out of the system than higher paid-workers, based on their actual contributions.
It’s important for everyone to understand the basics of SS, to not change the program from a long term retirement program into a welfare program.
Your FICA tax is 7.65% from you, 7.65% from employer of which 12.4% goes to SS, and 2.9% goes to Medicare. You need to work for at least 10 years for a covered employer before you can receive benefits. Cap is on $142,800 of the income you pay in 2021, thank goodness for many.
SS adjusts for inflation is great. And if you’re married, your spouse has the right to benefits equal to the higher of his or her OWN benefit, or one half of yours. Not bad!
By the way, if you were born after 1960, the full-retirement date to receive social security benefits is 67! You can decide to take reduced benefits starting at age 62.
“Your Money Ratios” has the potential to be one of 2010’s best sellers in the personal finance space. I love everything about the book, from the tone of the author, to his simple instructions, to the way the book is packaged.
There’s no doubt in my mind that if you follow Charles’ instructions, whether you are 25 or 45, you will be able to reach financial independence by 65. Go to your local bookstore or Amazon and check it out!
Go to www.yourmoneyratios.com, type in the code 778811 to check out your ratios and see where you stand!
Manage Your Money In One Place. Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital to help monitor illegal use of your credit cards and other accounts with their tracking software. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
Are credit cards weapons of mass financial destruction? The answer depends on if your name is Saddam Hussein. Although proponents would say no proof was ever found!
You hear so many stories of consumers up to their eyeballs in credit card debt, and I’m just wondering WHY? Credit card debt is the most expensive debt out there, second only to usurious rates of loan sharks.
Perhaps the reason why is because credit cards are ubiquitous. According to the US Census Bureau, there were 173 million credit cardholders in the US in 2006, using 1.5 billion credit cards?
That’s right, the ratio is almost 10 credit cards to every one user, with transaction volumes of over $2 trillion a year! No wonder the US consumer gets in trouble, and why credit cards are such big business!
My view on credit cards is quite simple: Use credit cards only to your advantage, and never let them take advantage of you! Whenever you see your credit card misbehaving, you should think to yourself “Bad boy! Bad, BAD!” I think my wife tells me this sometimes, but I try and tune it out.
Joel is hosting a $500 American Express giveaway, and gosh darnit, I’m entering to give myself a chance to win. In “You’re Rejected! How I Use Rejection To Motivate Me Every Single Day,” we discuss how success is a numbers game.
The more you put yourself out there, the higher the chance you have to succeed. Here’s my attempt to win and use the proceeds to buy toys and clothing for underprivileged children this winter in San Francisco. The program is called “Toys 4 Tots.”
Here are the best rewards credit cards today.
Too bad I have to pay the bill every month, and then get reimbursed, thereby creating unnecessary delays, negative working capital, and occasional late fees. There was a time when having an AMEX Corporate Card was very cool (your early 20’s), but it soon gets old. At least their service is solid.
The second card is my personal Citibank Home Rebate card which gives me a 1% rebate on all purchases to pay off the principal of my primary residence. I’ve had the card for six years, and the card has paid off more than $1,700 worth of principal already.
What’s more interesting to note is that based off a 5-6% mortgage interest rate, the real savings is thousands and thousands more because of interest saved over time.
Of course, nothing is perfect. I woke up one day to find my 6.99% Citibank Home Rebate Credit Card rate jump to 14.99% duringthe height of the recession last year.
Funny, because the 10-yr yield was still in the low 3%-range, and the Fed Funds rate was below 1%. This pissed me off, and I immediately called them to lower the rate. Again, don’t let credit card companies and banks take advantage of you.
If someone were to kidnap my pet rabbit and force me to sign-up for another credit card to save his life, I would have to pick the Visa Black Card.
The selection of credit cards Joel provides is impressive, but only the Visa Black Card is well, black. In addition, the description says “Membership limited to only 1% of US residents!” Don’t you want to feel special if you pack a new financial weapon of mass……… joy?
A credit card is a wonderful financial tool if used properly. I put everything on my personal credit card because 1) It helps record all my transactions which are divided into different categories I can review every month, 2) The 1% home rebate saves me money, but is not the primary reason for use, 3) I don’t like carrying over $100 in cash, and 4) A credit card provides consumer protection against fraud and defects.
But I must ask again, why on earth would you EVER not pay off your bill in full every month? Not doing so is akin to pulling the grenade pin and not letting go! Did you know that if you paid off $999 of your $1,000 balance, most credit cards will charge you interest on the full $1,000 balance? Credit Card companies are marketing geniuses. Make sure you’re Albert Einstein.
The credit card companies already make a small commission off the vendor every time you use the card, don’t let them charge you interest as well!
Credit cards are not weapons of mass financial distraction if used properly. Instead, they are a necessary part of day-to-day transactions, and there seems to be no turning back.
1) Spatula when there’s a hole in the wall to fill with caulk.
2) Ninja star when I’m in a dark alley and someone is coming after me.
3) Babe magnets at a bar when I tell the bartender to “leave it open.”
4) Lock pick when I leave my keys in the house.
5) Tooth pick after a good ‘ol San Francisco crab feast.
Check out the Chase Sapphire Preferred® Card and others. I use my Chase credit card for all my business and travel spending to get points for more free travel, insurance in case my bags are lost or my flight is stuck, and more insurance for defective products I buy and want to return.
Everybody should have a credit card for the free 30 day credit. Just make sure to pay off your credit card every month in full! Check out some of the benefits:
Related: The Best Rewards Credit Cards
Manage Your Finances In One Place. One of the best way to become financially independent is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money.
Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
Finally, they recently launched their amazing Retirement Planning Calculator that pulls in your real data and runs a Monte Carlo simulation to give you deep insights into your financial future. Personal Capital is free, and less than one minute to sign up.
Ever since I started using the tools in 2012, I’ve been able to maximize my own net worth and see it grow tremendously.
Is your retirement on track? Check with PC’s Retirement Planner
Updated for 2021 and beyond. Now is more important than ever to track your net worth because the easy money has already been made. Refinance your mortgage, increase your savings, and watch your money like a hawk!
What is this blasphemy you say? One of our main tenets is to observe what people DO with their money, and not what they preach. The public clearly loves Bank of America and Wall Street again because how else would Bank of America be able to raise $19 billion from us, to pay us back?
In an “Open Letter To Vikram Pandit, CEO of Citigroup” we urged Vik to sell the 34% government stake back to the very public that bailed Citigroup out before year-end. Why? So Citigroup can pay their employees big bonuses in 2009 by saying they are no longer under the government’s stewardship. Sure, paying back $45 billion in TARP sounds like a lot, but Bank of America just did it!
In fact, joining Bank of America are Bank of NY Mellon Group, Goldman Sachs, JP Morgan, Morgan Stanley, and State Street who’ve all been able to pay back their TARP loans and pay their people handsomely this year. This begs the question, what’s wrong with Citigroup, one of my main “go broke banks” used to optimize my finances.
SORRY, I DONNO
I’m pleased to bring you a guest post by faithful reader and commenter, Larry Ludwig (bio below). He writes a thought provoking piece about challenging the norm of becoming debt free. You’ll be smarter after reading this, guaranteed! Enjoy, and as always, feel free to debate away! Rgds, Financial Samurai
You’ve heard the financial gurus like Dave Ramsey perform pasectomies on his show and Suze Orman with her numerous “I have 50k in debt” guests. The gurus all say, debt is bad, credit is evil, and being debt free is nirvana, yada yada yada. While I do think as a whole Americans have too much consumer debt, the goal of being completely debt free is actually a terrible idea. Let me be specific: buying things that depreciate with debt is bad, that big screen TV, new clothing or car. Most of the financial gurus do not make this distinction and make all debt to be “evil”.
I believe Rich Dad/Poor Dad Robert Kiyosaki has said it best, “There is good and bad debt and being debt free is more risky than having good debt.”. Now before you go off on my recommendation of Robert and his questionable background, I believe his statement is sound and correct.
The primary reasons are:
• Opportunity Cost
• Asset Allocation
• Inflation
• Tax Deductions
• Arbitrage
• Leverage
