Chapter 1

“You mean to tell me you’ve been employed as a software engineer for five years and your net worth is $500?”

Those were the first words out of the mortgage loan officer’s mouth after he had finished reviewing my application. This is not what you want to hear from your banker when you’re looking to borrow a large sum of money. I was 26 years old. My buddy Frank and I were sitting with the loan officer in the bank’s conference room to review our joint application to buy a townhouse in the San Francisco Bay Area. (Real estate prices were so expensive in Silicon Valley that it was not uncommon for young engineers to pool their resources to buy their first property.) The banker’s reaction to my financial situation was a cold jolt of reality.

Bora Bora 1985. Tough duty, huh?

It was true. Despite my great salary, I was worth a mere $500. How was that possible? After four years of college with only $30 per month to spend, when I graduated I suddenly had more money than I’d ever seen in my life. After a few years of driving old beaters, I bought a brand new Toyota Celica GT with no money down and put the tax and registration expense on my credit card. No longer wallowing in student poverty, I learned to SCUBA dive, got my private pilot’s license and traveled the world. I visited Australia, New Zealand, several South Pacific islands, Mexico, Hong Kong, and a number of European countries. I put a lot of that fun on my credit card. I never missed a payment, but usually paid the minimum and went on having fun. I hardly noticed the several hundred dollars a year in credit card interest. Five years later, everything I earned had vanished.

The meeting with the mortgage banker was my epiphany. When Frank and I decided to buy the townhouse, Frank was the one who had the 20% down payment. I borrowed my 10% from him and he in turn charged me 10% interest on that cash. What I brought to the party was an income equivalent to Frank’s to make the mortgage payment manageable. Together we would qualify for the loan. However, I suddenly realized that if I ever lost my job I’d be broke in two weeks, especially if I was going to take on a responsibility like a mortgage.

It felt very uncomfortable to be in such a situation. I knew that Silicon Valley’s high-tech industry goes through frequent boom and bust cycles. What if I got laid off during an industry downturn? Then what? I had no spare stash of cash to rely on and was completely dependent on that twice-monthly paycheck. How could I have been so clueless about paying attention to my money? Frank had been working for about the same number of years, yet he was able to accumulate enough for a 20% down payment on a piece of property. Why hadn’t I done that?

I spent the next year or two paying off Frank and getting serious about managing my money. Over the following 25 years, I successfully learned to save and invest. Now in our early 50s, my wife and I are debt free, own a house free and clear, and have built a retirement portfolio that will comfortably sustain us in the coming years. And, we’ve had a lot of fun along the way.

Why I wrote this book

The financial life I led in my early 20s is a common story in our country. We didn’t discuss money much at home when I was growing up—that subject was considered a private matter.  None of my classes in high school or undergraduate courses in college explained how to manage my financial life. Many of my peers shared similar experiences.

Remember the old movies where the accountant was always some dorky wimp with a pocket protector? How often were those guys the heroes? Do you think John Wayne ever played an accountant? My assertion is that we need to elevate math geeks to the realm of greater coolness. You see, in the real world, personal finance skills can mean the difference between leading a comfortable, stress-free life, or spending years drowning in debt and never having enough money to feel satisfied and happy.

1931 Australian cricket match

Here’s the best analogy I can think of. A few years back, we were visiting friends in Melbourne, Australia. People there are as crazy about a game called cricket as Americans are about football and baseball. One of my Aussie friends took me to a cricket match so that I could get a proper education in the sport. My friend patiently explained the rules over the course of the afternoon. Sadly, I left as confused as I was at the beginning. (If you think baseball is a leisurely sport, you should try cricket. Cricket matches go on for several hours a day stretched out over multiple days.) Another Australian friend commented that she didn’t bother watching the sport because she thought it was “like watching paint dry.”

And so it is for many people with the game of personal finance. Watching one’s spending and planning for the future through investing is about as exciting for many people as it is for the uninitiated who attempt to understand cricket. The difference, however, is that you are playing the game whether you want to or not.

In every financial transaction, you are an unwitting participant in the personal money management game, be it a grocery store purchase, a night out on the town, paying the rent, or anything else. The game is going on around you all the time whether or not you want to play. It is truly the game that will have the greatest impact on your life. It’s to your benefit to learn the rules and get off the sidelines. Why not play to win?

I spent many years learning this stuff, often by trial and error. I’ve made mistakes in my financial life, some of them expensive. I consider those mistakes to be my personal finance class “tuition money.” I now have a seven-year-old son and have been thinking a lot about how I can help him avoid my early miscues as he gets older. Similarly, I have coached many friends over the years to share with them what I’ve learned. This book, for me, is a natural extension of that work. I’m aiming this at young adults because I’d like to help you get off to a good start in your financial life. In effect, I’d like to save you some tuition money in the arena of personal finance. As you’ll see later in the book, you and your peers have one enormous financial advantage over your parents and grandparents and that is: TIME.

Investing $4.25/day starting at age 20 can yield a balance of more than $1,000,000 by age 70.

The example above assumes an average 8% annual return in the stock market over the time period in question[1]. For reasons we’ll discover later, the amount required to achieve that same result ($1,000,000 at age 70) gets dramatically higher the longer you wait, as follows:

• $10/day at age 30 ($300/month)—still doable, but getting more challenging;

• $23/day at age 40 ($690/month)—you will probably need a second job;

• $57/day at age 50 ($1,710/month)—so much for the vacation house;

• $186/day at age 60 ($5,580/month)—at this point the lottery is looking better and better.

What this book will do (and not do) for you

Please understand that I am not a financial professional. Think of this book as one (somewhat older) consumer talking to another (somewhat younger) consumer.  Some of the ideas that I’ll share on spending, saving, and investing will resonate with you; some will not. That’s fine. Use the suggestions that make sense for you—discard the others or revisit them later.

I will introduce you to many of the key concepts that are essential to personal finance, but the list will not be exhaustive or complete. I think that would be overwhelming. Additionally, the nuts and bolts of some of these subjects have been well trodden by other authors. If you’d like to take a deeper dive into some of these topics, I’ve included several recommended books and periodicals on my website.

I intend to help you understand how the game is played and get you engaged in it. I further want to challenge you to think carefully about what you’re doing and whether the conventional wisdom is necessarily correct for your circumstances.

Geek heaven. My financial calculator.

For those who are math challenged, I’ll warn you that we’ll be doing some work with numbers in this book. Don’t worry—it won’t be anything particularly complicated. I’ll take care of running the numbers. Your job will be to stay with me to understand the how and why. I confess that in my first calculus class in high school, I tended to drift off to fantasies about my latest love interest rather than listening to my teacher drone on about differential equations. It wasn’t until a year later in college that I finally got it. Some of the math in this book may feel like that to you. If you notice yourself drifting off to fantasyland, hang in there.

For me, financial education is a life-long pursuit. Some of the things you’ll read here are enduring concepts that will serve you well for a long time. Others, like certain government tax incentives, may be obsolete by the time you read this. For this reason, I wrestled with whether to include specific numbers with things like IRA contribution limits, income tax rates, and so on. In some cases, I’ve referenced the figures applicable to 2010, the year this book was written. Be aware that many of these numbers change annually based on inflation rates or other formulas established by the government. Always do follow up research to see if the information still holds, if the numbers are still current, whether the government has changed the rules, or whether the eligibility limits for some particular program have changed.

I will not offer specific investment advice. However, I will attempt to explain the key things you’ll need to know to make your own decisions. I will mention products or companies with which I have experience and that I like. Some of the things that work for me may or may not be appropriate for your situation. You need to do more legwork to evaluate how to apply some of this to your life.

You, and no one else, need to take responsibility to put what you learn here into action. The last chapter will help with this. If you already have good savings and money management habits, you will have a great head start. If not, I’m sure you know that bad habits and inertia are difficult to overcome–it’s like quitting smoking.

Much about what you’ve learned about money, good or bad, you’ve likely picked up from your parents, friends, and the media. Please consider the following:

  • Was money tight or plentiful when you were growing up?
  • Could you have anything you wanted or did you need to save up for things?
  • Was there harmony or a lot of arguing at home around money?
  • Did (or do) your parents bail you out of money-related problems?
  • How has advertising swayed your financial decision-making?
  • What role have your friends played in your spending habits?
  • How do all these things affect your view of money and its role in your life?

These are not just idle questions. Your “financial philosophy” is key to how you manage many aspects of your life. We will explore this in Chapter 3.

I’ve informally coached many friends on how to better manage their personal finances. All have been grateful, but many have gone on doing what they’ve been doing and have continued to struggle with money. That’s one reason why I wanted to aim this book at younger people who are just beginning to be financially independent. Most young people in this country have a realistic potential to retire as millionaires, if only they get started early and develop good habits with their money. This book will show you how to get rich slowly, but surely, and have some fun with it along the way. Are you ready? Let’s get started.

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[1] This is the approximate pre-tax historical long-term average stock market return, though results vary widely from year to year. We’ll discuss this more in the investing section.

Chapter 1 of: From Ramen To Riches: Building Wealth in Your 20s. Copyright 2010 by James G. Wood. All rights reserved.

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