Taking risks like an Actuary

Yesterday I wrote a ridiculously abstract post about taking risks.  In it, I provided no numbers, no facts to back up my belief that taking risks can be worthwhile, particularly on things you truly desire.  Today, I’d like to try to bring it back to basics and talk numbers with you, especially with respect to Financial Independence.  So, let’s look at this whole risk process more like an actuary.  Don’t know what an actuary is?  Well, have you ever seen the movie Along Came Polly?  Basically, Ben Stiller’s character is an actuary.

Heavyweights remains my favorite Stiller film.  Dodgeball and Zoolander after that.  I think he only has two looks.

Heavyweights remains my favorite Stiller film. Dodgeball and Zoolander after that. I think he only has two looks.

In real life, an actuary tends to be someone who measures risk.  They have dive into massive amounts of data to figure out when people will die, how much money insurance companies need to have on hand in case of massive natural disasters, and will even determine what sort of asset allocation insurance companies should have in their portfolios.  Really, they are very, very, smart people (David Merkel at the Aleph Blog is one of my favorite guys in this arena.  While he isn’t an actuary, he’s worked with them all his life and understands the field).  And they are extremely good at figuring out if risks are worth it by utilizing math and logic.

So let’s take Financial Independence and think about that. That’s one of my constant themes around here and is something I’d like to achieve in the next ten years.  I’m obviously a ways away but still, I think about it.  But rather than look at the risks normally associated with quitting your job in order to live a stress-reduced life, let’s look at how our everyday choices can affect our goals.

I have a car payment that is $471 a month and I detest.  It takes away from my investments and I seriously want it to just go away.  In addition to this, I spend about $200 a month going out to eat, getting drinks with friends, etc.  This is hugely reduced from what it used to be (greater than $600 a month) but it still kills me to see it.  Beyond this, about $100 slips out of my hands every month somehow.  My guess is that the gnomes take it but more likely, it’s little things that just add up.  So, in total, I personally have wasted spending of $771 a month.  If I continue to waste this each month for ten years (not entirely realistic, since the car loan is paid off in another four or so but bear with me) I will have missed out on a full $142K in principal and investment gains.  That right there could mean the difference between retiring in ten years and retiring in fifteen.  That’s not an insignificant number!!

But that’s just me.  Let’s look at someone else.  Let’s take a coffee habit into account here.  Let’s say that Sally gets a coffee every workday, Starbucks, and it costs her $5 total.  Sally works 50 weeks out of the year so she’ll average just about $105 a month.  Sally isn’t interested in Financial Independence so she works for 40 years and retires.  How much money did Sally end up losing?

$369K.  She lost $369K dollars in 40 years.  And truth be told, it will actually be more.  Forty years ago, a cup of coffee cost a fraction of what it costs today.  In forty years, assuming constant inflation of 3%, it will cost $16!!  So really, Sally will lose WAY more than $369K in real dollars.  But in 2013 dollars, it’s close.

The point is that in the long run, every decision we make, whether small or large, has a consequence.  Every dollar could and should be invested and put to work for you, earning you more money while you are off doing something else, getting you closer to your goals.  Every $100 we spend is worth $220 in ten years.  That adds up each and every month.  We need to scrutinize every dollar we spend and ask ourselves “does this help me?”  If the answer is “no” or “I don’t know” then put the card or the cash away.  If you’re going to take risks, take cheap ones!  Like cliff diving

Yup, it's actualy me!  And yes, Cliff Diving is awesome and everyone should try it.  Just, you know, don't get hurt.  That's when it starts costing you money.

Yup, it’s actualy me! And yes, Cliff Diving is awesome and everyone should try it. Just, you know, don’t get hurt. That’s when it starts costing you money.

Taking risks like a champ

Most people don’t like to take risks.  They prefer safe.  Safe investments, safe neighborhoods, safe countries. Safe safe safe.  But at some point in our lives we all need to take risks.  It’s bound to happen.  And the thing is, a certain amount of risk can be a good thing.  It allows us to break free from our constraints and hopefully grow towards our goals.

The reason I’m getting into this is because most of the people I know are stuck in a rut.  We’re all in our mid to late twenties, still in the early stages of careers, and we don’t know what we really want from our lives.  You’ve probably read somewhere that this is the point in our lives where we’re supposed to take risks because we have enough time to make our comeback from any failure.  But that’s not the goal here.  I’m talking about calculated risk, good risk, risk that moves things two steps forward.

The first step is just making yourself open to change.  I’ll give you an example.  I graduated college in 2009 and was searching for a job.  Knowing that the Texas economy was still growing while the rest of the country was in shambles, I moved to Dallas from Boston.  From there, I got a job in Los Angeles and have been here ever since.  The only reason I was able to make either of those moves is because I put myself out there and was open to new places and new things.  If you’re not willing to accept the risks inherent in life changes then nothing can change.

The next key to taking risk is that you have to want it.  Most people don’t get that when it comes down to it.  You need to want something so badly that you’ll actually go for it.  Want to move to New York City?  Contact that recruiter!  Want to be a lawyer?  Set up shop and start practicing.  Want Financial Independence?  Go read Mr. Money Mustache and make it happen.  If you want it bad enough, you’ll take a look at the risks and figure out ways to make it work.  Maybe you’ve got to get a second job in order to pay off your student loans early enough to truly retire.  Maybe you need to just get out of the city you’re in and go to Fiji or New Zealand because that’s what you want.  If you want it badly enough, you’ll look at the risks and laugh in their faces.  You’ll make it work.

Next?  Keep trying.  We encounter risk every day of our lives in little, tiny doses.  We also see it all the time in big, potentially crushing doses.  The point is, you have to keep after it.  This goes right with the prior step of wanting something so bad that you’ll do anything for it.  If you keep taking risks and they’re good, calculated risks, you’re going to succeed.  There is a reason that some people are serial entrepreneurs.  Sure, they may just be wired differently than everyone else but there is something encouraging about people who just keep taking shots.  Wayne Gretzky famously said “You miss 100% of the shots you don’t take.”  Well, it’s true.  Plenty of people sit back and watch as friends, family and those around them succeed in love and in life.  They complain that it should be happening to them, that they could do it too.  Well my friends, they’re not taking their shot.  And if you don’t take yours, things will rapidly slip out of grasp.

I'd really like to know why the person is the Great One's "special friend"

I’d really like to know why the person is the Great One’s “special friend.” I’m going to mullet over…

Most of the risks we see in life are made up of our own fears that we’ll be inadequate or incapable of success.  The more you try and put yourself out there, the more you’ll learn about yourself and see that it is simply not true.  But without trying, without wanting it, you’ll always let the risks overwhelm you.  So get up and start a company or talk to that pretty girl or cute guy.  Take a chance and don’t let the potential risks get in the way.

 

Image courtesy of Wayne Gretzky’s “Special Friend,” Jeffrey Simpson.

Big Life Changes

So, life is changing pretty quickly out here in LA.  The girlfriend, a licensed attorney in the state of California, has officially resigned from her current job in order to actually pursue her legal career.  You see, her current job has her doing virtually no legal work.  It’s the job she took while she was studying for the bar so she could make ends meet.  It ended up turning into a full time position after everything was said and done.  While they want to hire her on as a junior counsel, they don’t have the budget for it and just can’t keep her.

So she’s going out and hanging a shingle (yeah, I didn’t get it at first either.  Crazy lawyers).  She’ll freelance for a bit, doing whatever legal work or overflow work she can find from her network and get some more experience.  The hope is that by getting the exposure to more legal work and having some attorneys see the quality of her work, she will be able to get a job offer as an associate somewhere.

I'd put this sign outside the apartment but I'm afraid of the riff raff it may attract

I’d put this sign outside the apartment but I’m afraid of the riff raff it may attract

What does that mean for me and Jackson?  Well, for Jackson it means that he’ll get a lot more belly rubs and won’t be so lonely while she’s at home.  For me, it means buckling down even further.  Since we won’t know where her next paycheck is coming from, we’re going to focus the first portions of her freelance earnings directly into her student loans.  She went to law school and they’re a pretty decent size, so this makes the most sense.  As she makes more money, incrementally, we’ll be able to increase how much she pays towards rent and other expenses.

I’m going to have to cut back a huge amount as well.  I was already cutting down on going out to eat or get beers.  Now that has to drop to zero.  Additionally, I’m going to finally get a Costco membership and start saving some money over there.  Hopefully I can at least share a friend’s card for a bit before putting the money down for it.  I’ll also keep looking into options on selling my car and eliminating that payment.  I’ve been toying with the idea of become a one car household and purchasing a bicycle but we’ll see.  I’m still underwater on the car loan unfortunately, which makes any decision there a difficult one.

This is going to put a dent in my savings I think.  I’m still going to put away the same amount as now, I just won’t be able to save any extra on top of that.  That means that Financial Independence will get pushed back a few years.  While I’m not happy about this, it’s a step in the right direction for her.

So if anyone has any legal work that needs to be done, send me an email.  I know a young and enthusiastic attorney that would love to help!

 

Image courtesy of loop_oh

Stop Wasting Time

We all know that each of us has only a limited amount of time in each day, week, year, or lifetime.  We’ve talked before about attaining a work-life balance but now I’m thinking most of us (including me) waste too much time.  I miss deadlines for this site sometimes.  I’m not proud of it but it happens.  Sometimes it’s because I didn’t plan ahead and ran out of time and sometimes it’s because I just couldn’t think of anything.  Both come down to my own preparation and my severe procrastination.

Yikes, big ass clock

Yikes, big ass clock

Fortunately, in the office, I don’t act this way.  I get things done when I’m there because I’m able to focus and build a game plan for each day.  But we all waste time in some ways.  Let’s go over a few of the problems:

1.  Constantly checking and responding to emails:  Sure, you want to be prompt but you can’t constantly be answering emails or you’ll never get anything done.  If you continuously stop and restart your mental process on the project you’re doing just to answer an email, you’re wasting your time!  You can still be prompt without answering emails immediately.  Block out certain time where you’ll answer emails and questions.  I like to do first thing in the morning, after lunch, and right before I leave work.  This way I tend to take care of everything during the day and night.

2.  Putting out every small fire that comes your way: no one likes fire drills at work.  They take you away from whatever it was you were working on and screw with your process and your day.  Now, I’m not saying that you don’t jump up and fix the big problems.  What I am saying is don’t get dragged down by the little problems.  More often than not, they’re being blown out of proportion by someone and will put themselves out.  If you’re the boss, you can’t bother with these things.  If it’s your personal life, don’t let it bring you down!  Just keep moving and focusing on the goals you’ve set.  Everything else is going to align up over time.  It’s all a process!

3.  Cracked.com: Normally I wouldn’t include something as simple as a single website but let’s face it, Cracked is a gateway website.  You start off reading about badasses surviving in the wilderness, click a wikipedia link and come out of an internet binge four hours later on the wikipedia page for ceramics tiles made for Justinian I.  If you’re at work, block Cracked.  If you’re home, just try not to get sucked in.  Maybe reserve it for the weekends.  Just don’t let it take you.

4.  No goals, strategy, or focus:  Make a damn list!  You can’t live every day by the seat of your pants.  If you don’t have goals or a routine, you’re letting what happens in your life drive for you.  You need to take back control and focus.  Creating a list, however mundane it may seem, will help.  Crossing things off your list as you go is immensely satisfying and you’ll find you get much more work done when you plan ahead.  Professionally, it’ll look good to the bosses.  In your personal life, well, you’ll never be without toilet paper again.  Wouldn’t want this to happen to you…

If you can enact some simple changes in your life, you can save yourself so much time.  It’ll make your more efficient at your job and it’ll make your personal significantly easier.  The more time you waste, the further away you get from Financial Independence.  If you’re here, chances are that’s a goal you want to attain.  So stop wasting your time, start planning ahead and saving some time for yourself.  You’ll thank yourself for it.

 

Image courtesy of ToniVC

Boston Marathon

By now everyone has heard about the bombings in my hometown, the armed robbery and shooting which followed at MIT and the unprecedented manhunt for the remaining suspect. Everyone back home, stay safe. Stay indoors and keep your eyes open. This has been a tough week for all of you. I love you all and just want you all to stay safe.

20130419-074626.jpg

Fighting back against Student Loans

By this point, you probably realize that I hate debt.  And while student loans helped me fund my education, which got my job, they’re still debt.  But here’s the thing about them: you might not know where they are.  When I graduated college, I was lucky.  My loans were only in three places and my mother is an amazing records keeper.  I was able to quickly find them and start paying them down when I got my first post-college job.  But a lot of people aren’t that lucky.  Some have loans in four or five places, plus private loans.

The good news is, there are ways to figure this out.  The government set up the National Student Loan Data System just for this purpose.  They knew exactly how difficult it was to deal with them so they tried to make it a bit easier.  You log into this site and are able to find all your loans, who is servicing them, and how to reach them.  You’ll need a PIN (found here, it’s not hard to get one and you might already have one) so it could be a little easier but hey, at least they put all the loans in one place.

The great thing about this is that you can find ALL your federal loans.  If you’re on a PLUS loan, you can find the information.  The downside here is that there is no information about private loans.  Obviously, the government doesn’t have anything to do with those.  Which means if you have them, you’re probably not too happy with the interest rate.

Don’t worry, you can find those too.  It’ll require another step though.  You see, once a year you’re entitled to your credit report, courtesy of TransUnion, Experian or Equifax.  The government made it law that they have to give it to you, free of charge, once every 365 days.  If you have private loans, they’ll be on your credit with all the information you need to find your servicer and argue with them for a few hours about how criminal their interest rates are.

Between these two sites, you should be able to get a good count of your loans, payment dates and payment amounts.  Tracking these loans and making your payments on time will be key to getting rid of them before you turn 40.  So take a look and figure out how much you own!  It’s going to be a big deal.

Additionally, if you’re still a student, you should take a look at this.  Student Loan interest rates are set to double in the next year on all new debt issued.  Write your congressmen, your senators, your representatives, whomever you think can help.  Going from 3.40% to 6.80% is going to cost you and the rest of the students thousands of dollars each.  The purpose of federal student loans isn’t to make money for the government but to make education more affordable to every citizen.  So if you can, write and make sure that they know to do their job.

 

Please note, no links in this post are affiliate links.  Also, only click on adsense if you are actually interested in the product!

Image courtesy of Occupy* Posters

My Car was Impounded

The past week has not been my best week.  I was in Chicago for a few days on business and wasn’t able to get away to visit any of my friends or family that live there.  All in all, I only got about six or seven hours of sleep while I was in Chicago.  Needless to say, when I got back I was brutally exhausted.  At some point, during all my traveling, I lost my lucky coin (yes, I’ve got a lucky coin.  It’s a 1924 Silver Dollar).  I try to not be a superstitious person but old habits die hard.

Saturday night, my friend was having a going away party and the girlfriend and I went.  It was at a really great little Mexican bar/restaurant in Hollywood, a place I’ve legitimately been to maybe twice since I moved to LA.  It’s also a place where every parking lot costs $10 or so.  Now, I’m not cheap but to me, the metered parking on the street was a better option.  Plus, it was after 8!  That meant it was free!  So, we drove around for ten minutes or so until we found some street parking close to the bar.  We double checked to make sure it wasn’t a red zone and went on in for a night of fun.

When we left to the bar a few hours later, we noticed that there weren’t too many cars parked in the street anymore.  Odd, but it was after midnight.  We both assumed people had just been leaving.  Then we got to the spot where my car was supposed to be.  It was gone.  So was every other car that had been parked on the street (at least 10 or 15 cars).  After talking to some of the valets that were in the area, we learned that about five minutes after we parked, the parking enforcement guys came, ticketed and towed everyone.  After 8PM, rather than becoming a free parking area the street became a no parking area.  Not quite what I’m used to but ok, I didn’t do a good job reading the signs.

Well, at least it wasn't stolen...

Well, at least it wasn’t stolen…

At this point, I’m having a bit of a freak out.  No one is picking up with the city to tell me where my car is.  Worse, I can’t even remember my plate number.  I give up and we take a cab back to our apartment ($60 cab ride, yuck) and I call it a night.  At 1:30 in the morning, there is only so much one can do.

The next day, I found out where my car was and what the approximate cost was (well, my friend did all the legwork).  If you’ve never had your car towed, let me tell you, there are a LOT of fees.  They charge you for the tow, a mileage charge, a storage fee, an insurance fee, etc etc.  All these fees don’t even include the fine that I have to pay the city.  The girlfriend drove me over, I checked my car out (no damage luckily) and got it home as soon as I could.

All in all, the fees for the car added up to $272.  The fine for the city was $73 and the cab ride was $60.  $405 in total, all because I refused to pay $10 to park in a parking lot.  This was definitely a time when my frugal and cheap side got the better of me and ultimately cost me money.  I feel like this sort of thing will be rare in the long run but damn, this was just the worst!  I’ll always double check the parking signage going forward a bit closer.  No way I’m ever letting this happen.  Now I just hope this $405 hit doesn’t kill my budget this month.  The last thing I need is another month of my cash dropping!!

 

Image courtesy of: Travis S.

Don’t let your job kill you

Chances are, if you’re reading this and live in the United States, you’re working too much.  Even more so, you probably aren’t happy with your job.  Yet, you still work long hours.  You might even call yourself a workaholic.

Stop.

We all know that in order to get ahead in life, you need to work hard.  The problem is that we work TOO hard.  As a society, the United States works more hours per year than any other country on the planet.  And we’re number four in GDP per hour.  But when you break it down to a per capita per hour basis, we just don’t get that much out of each person per hour.  The reason we’re so high on the charts for productivity relates directly to how many hours we work.

Now, working hard isn’t the worst thing in the world.  We love the athlete that works hard and eventually becomes a starter, an all star, all pro simply through hard work.  It’s a huge part of the American dream.  But, alas, we’re not athletes.  Many of us are office workers who sit for eight to ten hours out of the day.  Worse, we’re stressed.  We have deadlines to meet, sales to close and customers to appease.  All that stress, all that sitting around, that’s what’s killing us.

You see, it’s not really the work itself that does us in.  It’s how we manage it and make it work for us.  It’s pretty well known that stress can influence the onset of coronary heart disease.  It’s also well known that sitting around all day makes you fat.  But stress and burnout as a cause of disease and sickness is even worse than you think.  A study in Psychosomatic Medicine showed that burnout and stress increased the likelihood of getting coronary heart disease by more than 40%.  Even worse, if you were in the top 20%, aka the person that just can’t get out of bed in the morning to get to work, struggles throughout the day and needs a break after being there for only 20 minutes, well, you have a 79% increase in the likelihood of coronary heart disease.

Yikes.  A 79% increase is no joke.  It’s horrible.  This is literally something that could kill you.  So how do we deal with this?  What sort of preventative measures can be taken?

First off, stop letting people get to you.  Yes it’s your job and you might not yet have eff you money but still, don’t let it get to you.  When you leave the office, leave work there!  Don’t bring it home if it’s bumming you out.  I know that’s tough for a lot of people but it’s the truth.  You absolutely need to do it.

Secondly, you need to work out and eat better.  Let’s face it, just trying to roll with the punches and not let things get to you can only get so far.  You need to actually take care of your body if you want to enjoy your early retirement some day.  Just going on walks every day can help.  Eating more fruits and vegetables and less processed cheese could also help.  I know it’s delicious but it’s just not worth it.

If you’re so stressed that you read this post and the article above and just nodded the entire time, well, you need a vacation and a serious life change.  I know that normally this sit is about personal finance but this is an important topic to me as well.  Making and keeping money is only worth it if you’re healthy enough to enjoy it.  If you’re burned out by your job, maybe you need a new job or a new industry to work in.  Maybe you just need more rest.  Ultimately, you need to do what’s right for you and take better care of yourself.  So relax, don’t let the little things get to you, and go for a run!  Your brain  could use it.

 

Image courtesy of windsordi

Net Worth Update – April 2013

April Fools Prank

Today is one of my favorite holidays: April Fool’s Day. I love this day. In the past, I have gone as far as completely wrapping a coworkers desk, filling a cubicle to the top with ballons, replacing every single pen in the office with crayons, and numerous others. But these days, the pranks are not to be for me. I’m a boss now and have to do something called “setting an example.” We’ll see how this goes in the long run but I think that it’s just a bunch of rubbish!

April Fools Prank

Ah, the wrapped up desk. Surprisingly took a long time. I’m terrible at wrapping

As is custom on the first of every month, it’s time to review my finances and see how I’m doing. Since we’re also through a quarter of the year, I’ll also look back at some of the goals for the year and see how we are progressing there. Anyway, to the chart! Template courtesy of J Money at Budgets Are Sexy.

Net Worth Update - April 2013

Net Worth Update – April 2013

This was a pretty decent month for me. Overall, I’d say that a $1,400 to $1,500 gain in Net Worth is what I truly expect each month. February was brutal in the spending category and I’m glad to be out of that hellish place. With March on a good track, I’m hoping to make April and May strong enough to get me within $1,000 of a positive Net Worth. Let’s take a look at each category:

Checking Account: This was the one major blemish in all of my accounts. This account dropped nearly $500 this month, which really does not work for me at all. My budget is extremely strict and while I stuck to it well, this still happened. There is at least one good thing to take out of this though: Every month I’m putting $400 combined into my savings and Vanguard, so I didn’t REALLY spend $483 too much. This just means I’m going to have to be more conscious of my spending and will probably have to shift some money around at some point in the future. Hopefully though, I can get this into a positive gain each month.

Savings Accounts: Solid growth from my contribution, not the interest. I’m sure this will grow throughout the year as I search for better ways to use my capital.

401k: I know it’s Tax deferred and I can’t touch it for another few decades but this account makes me happy. Each month, it goes up between $600 and $1,000. This really is the biggest difference between nearly having a positive Net Worth and being stuck with something in the negative teens. I’m pretty happy with how my company contributes to this and the service we use is extremely easy. For the record, I’m balanced in this with 30% in bonds and 70% in the S&P 500 Indexed Mutual Fund.

Vanguard: March was a busy month in the market. We hit new highs right at the end of the month in the S&P 500, so I’m not complaining. I’ve mentioned before that a pullback in the market will happen eventually but hey, I’m not worried. I don’t need this money now and won’t need it for many years from now. I’ll just keep contributing, no matter what!

The Acura: More and more reasons to not drive: the value of the car really holds up! If the current rate of depreciate holds and I continue making the slightly extra payments, I should no longer be underwater on the car in February of 2014. Hopefully, with some extra payments here and there plus maybe a bonus or two, I can have that take care of by the end of the year.

Liabilities: Another drop with no increase in Credit Card debt. It’s important to me to keep this up. I’m hopeful that I might have some free cash soon to throw at this. If I do, I think things will really start looking up here.

Just another few months like March and I’ll be in positive territory. That was goal number one at the beginning of the year and I’m nearly there. In fact, let’s take a look at how far along I’ve come since January of 2012, when I really started tracking my numbers.

Finance Chart

A chart of my financial history since January 2012

Just a little over a year ago, my net worth was almost at negative $22K. I’ve come a long way since then, paying off my debts, my credit cards, and growing my investment accounts like crazy. I’ve also got significantly more cash in reserves, making me feel a lot more secure in life.

If things can keep going in the right trends (that is, up), then this chart will start to look very good very soon. Hopefully I can pay off a huge portion of my car loan by year end, if not all of it. Once I do that, many things will change.

Happy April Fool’s Day everyone! Watch out for any pranks or tricks. Especially if you’re in my office!