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Archive for May, 2011

Auto Rich … Net Worth Poor!

 :: Posted by ifm89408 on 05-09-2011

AAAT’S What I’m Talking about!!

If there is one single lesson I can teach a 20 something person it is this one.  Driving the latest, coolest, fastest, most desirable car is the surest way to never acquire growth.  There I said it, and I just burst your bubble <sorry>.

I am going to add that this is advice I did not really get from Harold.  Sure, when he was younger he bought used cars and kept them for a long time but once he was about 50 years old he started buying a new car every year.  Then again, by age 50 he had done the “heavy lifting” of creating wealth and could afford a luxury like that.  I’ll make you a deal – you save and build a solid net worth then you too can trade for a new car every year.

Almost 30 years ago I got my first computer and of course spreadsheets were the first thing a good engineer would learn about.  One of the things I created was a spreadsheet showing the long term wealth impact of owning new and fashionable cars.  At the time I was conflicted; I was a supposedly successful engineer and lived in Southern California – a society where a person was absolutely defined by what they drove, but I had opted for the most mundane ride you might have ever seen – yes I was driving a 1978 ElCamino (I bought it from Harold, who replaced it with a new Buick)!  Even though it seemed intuitive that driving a boring used car like that would save money, I needed to prove to myself why I had made such a sacrifice.  Solving this gave me something to learn on my new computer, while it also would help ease my bruised id.

I dug out this now almost 30 year old spreadsheet the other night and updated some of the basic criteria and refined some of the formulas etc.  Here is what I did and the results.

Two different people  – Mr. Cool “Chick Magnet”, and Mr. Net Worth “Chick Repellant”

Mr. Cool:

  • Buys his first new car for $45,000 (OK – he did not get the Audi but got a 3 Series BMW)
  • Borrows all his money to afford his cool car – but only pays 6% interest for new car rate (5 year Loan).
  • Pays  an additional $1,000/year for insurance and registration (hey, that  “GR8TANTRA” Custom plate is expensive).
  • He gets another new car every three years.  Sells the old one for 60% of what he paid for it.


Mr. Net Worth:

  • Buys his first 3 year old, low mileage, used car for $15,000 (60% of the $25,000 new price 3 years ago for that Honda Accord)
  • Borrows all his money – pays 7% since used car rates are normally more than new car rates (3 year loan).
  • He pays an additional $75/month in maintenance costs, because his car is aging.
  • Keeps his car for 5 years (paying it off in 3 years and having no car payment for years 4 and 5)
  • Sells his car for 15% of what he paid for it 5 years ago.

Some common criteria:

  • Inflation of 3% (increasing the price of cars each year)
  • Return on extra cash invested by Mr. Net Worth is 8% (he is a smart Geek!)


So what are the Results already (scheez – do we have to sit through all your pontificating?  Get to the punch line!)

After  5 Years

  • Mr Cool:      Owes $26,500 on his 2nd car
  • Mr. Net Worth:      Just got second car, owes $15,140, has $47,500 in the bank.

After 10 Years

  • Mr. Cool:     Owes $36,960 on his 4th car (and the new baby does not fit in the sports car).
  • Mr. Net Worth:  Owes $17,550 on his 3rd car, has $108,200 in the bank for Juniors College Fund.

After 15 years

  • Mr. Cool:      Just bought his 6th car for $70,000 (those Mercedes SUV’s are spendy), owes $52,700 on it.
  • Mr. Net Worth:  Just  bought 4th car for $23,400.  He owes $20,400 and has $197,500 in investments.

After 20 years (hey, these guys are only 40 years old)

  • Mr. Cool:     His 7th car cost $72,000 two years ago (Remember that 3% annual increase has a much larger impact on high end cars than it does on lower priced average cars).  He currently owes  $36,400.
  • Mr. Net Worth:      Owes $23,586 on his 5th car.  Has $328,577 in investment account.







But HERE is what I ended up with!


My analysis and spreadsheet put numbers and scope to what I intuitively knew.  I just had no idea the vast scope of the impact (as much as $500,000 in 25 years).  When I first did this some 30 years ago the impact was about ½ of what I presented here, but the cost of cars was less than ½ of today.  As with any long term financial estimation it is just an estimation, nothing is exact and conditions will never be just as predicted.  Still, there is such a large difference between the two cases that I am convinced that “Fast Cars” are simply the quickest way to drain a person’s potential net worth no matter how the chips actually fall over the years.

I have just skewered one of the most sacred cows of the young adult just starting out on a successful career path, so I expect resistance (I KNOW you think I am full of “it” right now).  Believe me I have heard all the excuses and rationalizations:

  • I will just do it once in my life.
  • I owe it to myself
  • I deserve it (after getting that big bonus check)
  • I’m getting a great deal on this car.
  • I need to look successful for my job (great for Real Estate).

Let me clue you in <Y-A-W-N>.  Anyone with a lick of life experience can see through your façade of “success” and knows you are actually in hock up to your ears and just a few missed paychecks away from having that car reposed.  If there is anything you owe to yourself it is the savings brought on by owning a more practical ride and a big investment account.  Take the conservative route until you have established your net worth and you will be able to easily afford those nice cars later, just like Harold did.

After I did this analysis I decided to keep that old ElCamino until it just had no more giddyap (12 years I drove that car).  I have never owned a new car and am only on my second car since I sold that ElCamino 19 years ago.  Since then it has been Honda Accords.  Reliable, nondescript, economical and I normally get almost 150 – 200K out of one.  I guess I could probably follow Harold now and start rotating cars every year but I go back to my spreadsheet and know I am satisfied with the simplicity of my old cars and my extra change.

I Cannot Save a Cent

 :: Posted by ifm89408 on 05-07-2011

OK, we have gone over the fact that I believe anyone who starts at a young age can pretty easily become a millionaire.  I showed you how to do it with a simple saving plan of $4,000/year.


Don’t think I have not heard this before.  For many $4,000 a year may seem like a lot of money, especially when you are working at a minimum wage job.

What I am about to tell you is the first difficult thing you will have to do and it is up to you whether it is worth it or not.  I’m not kidding you, when you are saving only $4,000/year it will seem like the you will NEVER get there (so why try?).  Here is what you are up against:

After 5 hard years of saving (with 6% return) you will only have:  $22,548

After 10 years:  $52,723

After 20 years:  $147,142

Of course in each 10 year period you are only putting away $40,000 of your money, and hopefully you see in the first 10 years you make about $12,723 in return, but in the second 10 years you make $54,419 (and it keeps getting much better – that is another lesson).

The problem is it will seem like NOTHING at first – like it is just pure gut savings, and in fact IT IS!

So how do you accomplish these feats of savings?   It is a three step process:

1.        Break down the task at hand to something simpler.  $4,000/year is $333.33/month, $76.92/week,  $10.95/day.

2.       Find something that you can give up:

a.       Daily Starbucks – $5.00.

b.      Cigarettes – $6.00/pack.

c.       Go out Friday OR Saturday night, not both.

d.      Drive a used car.

e.      Take a lunch to work.

f.        Get a roommate.

3.       Put that money into an investment account – FIRST, before anything else.


What I am saying is to make lifestyle changes.  What I like to think of as “Living a level below what I think I can afford”.  It is a FACT that people will live up to the absolute level of their income.  If you make $700/week and take home $560 I can guarantee you will spend every penny of it if you allow yourself to do so.  Now I come along and tell you to save $76.92 of that $560.  What you have to do is look at a person who you think only has $480/week to spend and live like they do.  There is your $80 in weekly savings.  Giving up some of the suggestions above, or finding things of your own that are not NECESSITIES to give up allows you to make those savings.

Here is exactly what I did as a yute….

I graduated college and received one of the top paying jobs in my class (it was pure luck, believe me on that).  When I got to my new life (I moved 2,500 miles for that job) I did the following:

1.        Bought a used car that was not very cool (but cheap to own and reliable).

2.       Got a roommate (in fact two roommates).

3.       Would only go out once a weekend.

4.       Rode a bicycle, played softball, played pick-up basketball and used a cheap gym membership for my primary entertainment (all costing next to nothing)

5.       Quit smoking

6.       Eventually the three of us moved out of our posh “bachelor pad” and into a much cheaper house we rented.

7.       When I bought my first house I bought it as a partnership with one of my roommates.

8.       Had money deposited directly into my company 401(k) and into an IRA I established.  This is the “Pay Yourself First” technique that I think is so important.  Once the money is in those deferred accounts it is like it is gone (at least that is how you should think of it).

While my starting salary at the time was only $400/week I managed to save $2,000 every year for my own IRA and an additional $2,100 into my company 401(k).  Sure it was a different time and living expenses were less but that was still over 20% of my total pay, or more than 27% of my take home pay (so you should be able to do the same percentage).  Sure, I had friends driving Corvettes, going out several times a week and generally living a much more exciting life than I was, but I was determined to “Live a level below what I knew I could afford.”  I had watched my father (and mother) for years running a strict budget, buying day old bread, raising our own cattle and chickens, canning all our vegetables from our garden, living with a single car for a family of 8.  I knew we could have had more but I had learned why we did that and securing a future was more important to me than my current gratification.

So don’t tell me you cannot do it unless you want me to come over there and go through three months of your checkbook and credit card charges and tell you EXACTLY where I would get those savings.  You have to internalize your savings.

Anyone Can Do It!

 :: Posted by ifm89408 on 05-07-2011

This is the first subject post of this blog and for good reason as it really forms the basis of what I will be talking about from here on out.  I have never seen a definition of “Rich” (or for that matter “middle class” – ask your politician to define it next time they want to help the middle class) so I am going to give you one right here.

Rich is having all the necessities required to live a fruitful life.  You can define what that is for you.  Believe me, I am sure the requirements to meet that definition are very different for Mother Teresa than they are for Donald Trump.  My point is it’s a personal decision how you define “rich” and one persons wealth may be inconsequential to another.  It is important to understand that dollars are only a financial measure of wealth and while I will address some other aspects of wealth in my posts,  dollars are what I will be concentrating on.

All that said, what I am going to be looking at is making “Millionaires”.  It is still something few people ever reach even though it may not have the pizazz it had when I was a young man.  While I am writing this there are about 10 Million people worldwide who have achieved this level of net worth, about 1 in 700.  In the USA it is about 3 million or roughly 1 in 110 people.  So my feeling is if you can get to that level then you are at least on the correct path.

Required reading for anyone who desires to know exactly how to become a Millionaire is the book “The Millionaire Next Door”.  I am going to give you the “Cliff Notes” here:

1.  Stay Married.

2.  Start a Business.

3.  Be Thrifty (maintain a budget).

4.  Be Practical (no status items like big houses or cars).

5.  Take maximum advantage of investing opportunities such as tax deferred accounts.

6.  Income and wealth are very different things, a high income person often has a low net worth in relation to their income.

7.  While generally conservative, Millionaires invest and take risks they understand.

8.  Most take many years to accumulate wealth.

Of course NONE of these are absolutes, but the authors did extensive research and I can tell you from my experience that in general these are correct.  Now I am going to give you three descriptions of Millionaires that I have know over the years:

1.  Worked as a laborer for 35 years.  Maximized the company 401(k), lived modestly and saved the difference, choosing to buy stock with what was left over.  This person did all of the 8 except working for someone else.  That is OK, that gave solid opportunities to build deferred savings, earn a company retirement to augment those savings, while living thrifty allowed this person to make additional savings.  All of these savings were invested for returns in excess of bank returns (taking risk).  This person learned the stock market, did their own investing and understood those risks.

2.  Small business owner, married with several children (put all through college).  Wealth was split between tax deferred and taxable accounts and several houses that were paid for and rented.  Again, this individual took advantage of the opportunities to save tax deferred, lived a modest lifestyle, budgeted to allow for additional savings, and did their own investing (including the rental houses) learning on their own what they could about the stock markets.

3.   Family farmer, ran an additional business and sold the farm at the peak of the market to lock in generations of wealth.  This is out of the ordinary but this person continues to run a small business, lives modestly, remains married and does all the other things to maintain the level of wealth that was locked in from the sale of the family farm.

My point is that all of these three accomplished their level of wealth slowly over time and while they may not have complied with all of the predominant traits each did really fit many of the criteria.  I have seen enough of this in my lifetime to believe that anyone can get there given enough time.  That last qualifier is VERY important – TIME – is the key.  Notice all of my examples earned wealth over a long period of time and that is what the authors of “Millionaire” found in general.  This is why I am really aiming this blog to younger adults, this is the time in life to learn information like this so it’s application can have it’s largest impact.

All of this actually jelled with me when I was about 20 and looking at these new investment accounts called IRA’s.  It was real simple since there are no tax impacts until you take the money out.  I could just calculate how much an annual deposit of $2,000 would become (that was all that was allowed back then).  When I saw the numbers I was memorized, because this just seemed too easy.  So lets take a look at this so you can see the impact of time for yourself.  We are going to use a person who deposits $4,000/year ($333/month) which is currently a standard IRA deposit.  Those deposits will receive a very reasonable 6% annual return.  We will do this, planning on taking the money at age 70 (when you must start taking IRA distributions).  I am going to do this for a person who is 20, 30, 40, and 50 years old.  I will list how much was invested over the years and what it should be worth with the 6% return at age 70.  Hopefully you will see how urgent it is to start early and just how easy it will be:

Age                      Total Deposits                            Account Value at Age 70

20                         $200,000                                       $1,161,343

30                         $160,000                                         $619,047

40                         $120,000                                         $316,232

50                           $80,000                                         $147,142


I hope you see what turned me on as a young 20 year old.  The difference between starting right away and waiting for 10 years to start saving is essentially DOUBLE.   Yes, you only put away $40,000 of your dollars the first 10 years but it is the 50 years those dollars get to grow that makes the difference.

Putting it this way hopefully you can see why I believe anyone can get there.  You can give all kinds of excuses like:  “$1 Million 50 years from now will be nothing” – they said that over 30 years ago when I started and it is still significant (the only people that say that are too afraid to try or have given up).   Or “I cannot save that much” – I doubt that, it is just not important enough to you to put away $4,000/year.  If you are making $40,000 a year you should be able to save 10% if it is important to you.  Instead of using all your income to live, simply knock your standard of living down a notch and make the savings.  You can continue to make the excuses, and I can continue to tell you how to overcome each excuse.  The bottom line is that no matter what you say, all I hear is that it (becoming a millionaire) is just not as important to you as is the current consumption of your income.  Once you internalize the goal of becoming a Millionaire, or even take the additional step of calculating what “Rich” is to you, it is really only a matter of time, persistence, a bit of deferred gratification, and some hard work.