What true wealth means

True wealth isn't about having a lot of stuff. It's about having few wants. Ask anyone how much money they need to be truly happy, and they'll all tell you the same thing: a little more.

But it's always going to be a little more if you don't know what it means to be truly wealthy and if you're never happy with what you already have.

Let's say you get a brand new car, like a fancy one. A luxury sedan, I think the car ads call them. It's amazing, It's fast, it's sexy, it's shiny.

Everybody either wants to be you or be with you, and people would give an arm and a leg to just sit in the passenger seat...

...except they don't.

When was the last time you stared enviously at a mid level BMW? One just like (gestures expansively) aaaaalll the others on the road, 60% of which were likely purchased in a fit of middle age crisis?

Anyway, the thrill of new shiny fades, the car loses value, and you crave the next shiny high. You get envious of your neighbor who just got an even luxurier sedan.

When most people buy fancy things, they're just trying to look wealthy. True wealth doesn't involve having expensive things but having few wants. It means being free from envy about other people's stuff. It means being free from debt and not stressing over missing a payment on something. It means not being a slave to a bank or a boss, and being able to spend time how you see fit.

If you're always chasing that next high, no amount of money will ever be enough. There's always something bigger and better. But if you are happy with a modest life, true wealth is attainable. Plus, you can calculate how much money you need to be able to live off passive income forever (It's 25-30 times your annual expenses, by the way).

Having time to do things we enjoy and having experiences are more valuable than stuff, and the benefits last longer.

Having time to do the things in life you enjoy tends to be more valuable than living in a big house or driving a fancy car while you're drowning in debt.

Just to be clear, I don't begrudge people buying good quality things, or even fancy or expensive things if they like them and can afford them. This post isn't directed at them.

Financial Independence through deferred gratification

I went to the USS Midway museum with my wife yesterday.  It’s a giant Navy battleship docked in San Diego that you can walk through and it’s pretty cool, even if you’re not really into WW2 history. On one of the decks, there was an interactive flight simulator, the kind you can control and make the plane spin and do loops.

While we were in line, she wondered out loud how much one of those 4,000 lb machines would cost.  I told her I wasn't sure, but that I could probably afford to buy it, though I didn't think I should (because that money would be better spent making me more money).

Do you understand the kind of freedom that comes from knowing you can blow $30k (I'm guessing) on a video game machine if you felt like it, and it wouldn't affect your bank account?  That freedom is called financial independence. And the best way to gain that independence is to start saving as early as possible.

Often when I talk to people about early retirement through a high savings rate, they tell me they don’t want to live a miserable frugal life, only to die the day before retirement or to wait to enjoy the money til they’re 70 and too old to enjoy life, or the Camaro they can finally afford.

But that’s the wrong way to think about it.  It’s not all or nothing.  You can save as much as you want. Granted, the lower your savings rate, the longer it’ll take you to hit retirement, but you don’t have to go all out like those people that use a cup of water a day to clean themselves to save money.

Do you know the kind of freedom that comes from having a financial cushion, even if it’s only $2,000? You have wiggle room.  An emergency won’t devastate you.  What about having enough money saved at 33 that even if you never saved another dime and let your investments ride without withdrawing them early, that by 60 you were assured of a VERY comfortable retirement?

That’s me, by the way. I saved up all that money over the past 7 years.  And I never felt like I was depriving myself.  I could still live my life, but I did it sparingly.  I weighed the satisfaction and value I’d get from the thing, meal, or trip I wanted to buy against the future utility of those funds. So basically, do I want to buy a Dodge Charger now (as opposed to a cheaper, smaller car), or a Ferrari later?

I can now say yes to many more things in life because I have money saved.  Parasailing this weekend?  Sure, why not?  Emergency trip to another country?  Chump change. Eat at a fancy restaurant the day before I get paid?  Why ask? Sure.  But… would that money be better put to work making me more money?

And because I saved and cut back when I was younger, when everyone else is still living paycheck to paycheck and the only way they're going on vacation this year is if Mr Mastercard foots the bill for a while, I'm riding high on increasingly larger passive income streams and don't have to think twice about spending money on something I find important.

When everyone else is still struggling with crippling mortgage debt because they took on more house than they could afford and/or drive a similarly financed expensive vehicle because they need to give themselves a certain amount of luxury, I'll be living a simple but satisfying life, comfortable in the knowledge that I could purchase their house and car (in cash, several times over) if I wanted to.

That is freedom, folks. And you can achieve it if you prioritize it.

Interest: the rowboat analogy

Let's imagine you're in a rowboat on a lake.  Your rowing speed is about 5 mph, and that's exactly how fast the boat is going.  The faster you row, the faster you go

Now imagine you're on a river whose current is about 2 mph.  If you're rowing upstream, your overall speed will be 3 mph.  

Yes, I know that's not a rowboat; bite me

You're still rowing at about 5 mph, but the stream is eating away at your speed.  If you were to row downstream, you'd be going at 7 mph.

What's my point with all this rowboat stuff and the bad drawings?  It's a good analogy for interest.

If you've ever bought a car, had a savings account, or owned a credit card, you probably know what interest is.  It's the extra money you have to pay back on top of the money you spent/borrowed.  Interest can suck when it's working against you (when you're in debt), but it's pretty awesome when it's working for you.

When you're on the lake, you move as fast as you row.  That would be like a bank account.  Your money grows as fast as you add to it.  When you're rowing upstream, that's like being in debt.  You can throw $500 at your debt, but if your interest this month is $200, you really only chipped away at $300 of the loan.  Interest works against you in this case.

Rowing downstream is like having investments.  You add $500, and the interest that your money earned makes it grow.  So not only did your money grow by the $500 you added, but by an extra $200 that your portfolio earned for you.

This is why it's so important to get and stay out of debt.  Debt is a killer of financial independence and having a comfortable retirement.  Get out of debt ASAP, and save as much as you can.  Your future self will thank you for it.

Keys to success

This semester I've been taking a speech class, and all of my speeches have revolved around personal finance.  The kids in my class are all between 17 and 21, so I figured I'd try to reach as many of them as possible.  It's been pretty successful, and at least a dozen of them have told me that I encouraged them to start saving and investing.  Last week I had my final persuasive speech, and handed out a list of handy tips I call "Keys to Success," and here they are:

Spending

·         Don’t use credit cards for useless purchases. 

·         Avoid debt. 

·         Always pay off your credit card balance in full every month.

·         Spend less than you earn. 

·         Make sure you can afford it before you buy it. 

·         Spend money on the things you enjoy, and cut costs on the things you don’t. 

·         When your income goes up by a certain amount, don’t let your spending increase by the same amount. 

·         If you are unable to save anything, at least make sure you aren’t going into debt. 

·         If your basic expenses are more than you bring in, find a way to either spend less or to make more. 

Life

·         Have goals.  Write them down.  Everything you do should be with those goals in mind. 

·         Never stop learning.  Educate yourself, and strive for constant improvement. 

·         Exercise. 

·         Be disciplined. 

·         Network like crazy. 

·         If you provide a product or service that people want, or can solve a problem, you will become rich. 

·         No one owes you anything.  The world doesn’t care what you want.  Go out there and get it.  Be lucky you live in a country where you are able to move up, and the government can’t just take away your property. 

·         There is no job that you are too good for.  You may have to start small, but keep your mind on your goals.

Pay yourself first

Make sure you put money away right when you get your paycheck, similar to how you treat your bills or your rent.  Automate your savings and your bills (take money out before you even see it).

If you don’t find a way to make money while you sleep, you will work until you die – Warren Buffett

  

Financial Independence

·         The stock market returns about 5% in real returns (adjusted for inflation) in an average year.  Therefore, you can safely withdraw 4% of your net worth every year and the money will last forever

·         Save 25 times what you expect to spend in a year.  If you have a million saved, you can safely withdraw 40,000 a year (4%) and it will never run out.  That money will adjust for inflation.

Saving

The best time to plant a tree was 20 years ago.  The second best time is now – Chinese proverb

·         Start saving as soon as possible. 

·         Pay off all your high interest debt before you start saving. 

·         Interest can work for you or against you, so avoid debt and save as much as possible, as early as possible. 

·         If you start saving $100 a month when you are 18 and do that for only 10 years, then stop saving entirely, letting the cash grow until you are 65, you will have $345,000.  However, if you wait until you are 28 to start saving, you will have to save $100 a month for 41 years to reach the same amount. 

·         Save at least three months of living expenses in a savings account.  This will be your emergency fund.  Once you reach this goal, continue to save and funnel your money into your investment accounts. 

·         Don’t worry if you can’t save anything right now.  Just work towards it.

Investing

·         Make your money work for you instead of the other way around. 

·         Invest your money and let compounding interest do the heavy lifting for you. 

·         Plant your money tree now and enjoy the fruits when you’re older. 

·         Max out your tax-advantaged retirement accounts (401k, IRA) before you invest in anything else.  Generally Roth is better for both, if you qualify.  If you’ve maxed those out, use any extra money to purchase investments through a commission-free brokerage platform like Robinhood. 

·         Choose low-cost passive index funds.  Vanguard has some of the cheapest in the industry.  Avoid actively managed mutual funds, since they usually underperform the market over a long period of time due to their commissions and fees. 

·         When choosing a financial advisor, make sure they are a fiduciary, and they are fee-only.  This will make sure they’re looking out for your money, not theirs. 

·         Don’t put all your eggs in one basket – diversify.

Entrepreneurship

I know a few people who share my zeal for money. Some, however, don't have the patience to play the long game. They know they're destined for wealth and think of themselves as entrepreneurs (or may have started on the path), but may not have concrete ideas on what to do exactly. So they hatch up quick business ideas without really thinking them through.

For me, starting a business is not the way to go. I don't have the risk tolerance or patience to get it off the ground and make it succeed. I'd much rather just move money around: making investments in stocks, start ups, or personal loans. I don't even want to do rental real estate because it means I'd have to be hands on; looking at the properties, screening tenants, repairing the houses, etc. That's just not for me. I'm ok with taking the slow route. Working in whatever, saving as much as I can, and investing it, mostly in stocks.

A good friend of mine, who's getting a Master's degree in Entrepreneurship, came up with an idea for a business. He'd open up a window tinting business for homes, offices, and cars, and was reasonably certain it would succeed, since his uncle had one. He wanted to go to the bank for a $50k loan to get it started, and asked me if I could loan him a few thousand to pay off his credit cards to make him a more attractive borrower. He, like me, is very motivated towards wealth, and he doesn't really care how he makes it.

A few things that I came up with in that conversation, which I hope he would take to heart, were:

1) When starting a business, you almost always want to start small. See if you can actually do it, and if there's a demand. In his case, he was willing to borrow $50k to open up a shop without actually having tinted anything before. My advice was that he should start very small. Buy the bare minimum amount of materials and offer to tint the cars of friends for cheaper than established businesses would.

2) Never, ever, overextend yourself. This also ties into starting small. Businesses, especially ones that you don't have any experience in, can easily fail. In his case, if he had borrowed the money, he'd be out 50k. This applies to all kinds of stuff. Don't take loans on if you don't have a reasonable amount of certainty that it will help you make more money. This goes for opening a business as well as investing (with leverage), or taking out student loans.

3) Don't view credit card debt as any different from a car loan. Debt is debt, and while the interest on credit cards tends to be a lot higher, it's not impossible to escape from. All you need is a plan. Most people tend to fall into the trap of despair, and think they'll never get out of credit card debt. However, those same people don't worry about their mortgage or car loan, even though the loan might be a lot more than they owe on their cards. Why is that? It's because you know exactly when you'll be done paying off you car or house. There's a fixed payment every month, and people rarely stress out of it. Credit cards never end because they allow you to pay a very tiny minimum payment, ensuring you'll be on the hook for years or decades to come. The moral of the story is: treat your credit card debt as you would your car loan. Figure out when you want it to end, pay a fixed amount every month, and don't worry about it.

4) Making money for the sake of itself isn't a worthy goal. The most successful entrepreneurs got to where they are by solving a problem, some even solving a problem people didn't know was a problem. I read an article today where Mark Zuckerberg talks about entrepreneurs, and this part jumped out at me: "If you want to build something great, you should focus on what the change is that you want to make in the world," Zuckerberg said. "I see too many entrepreneurs who decide that they want to start a company before they actually know what it is that they want to build. To me, that seems backwards."

Anecdotes about my mother

I don't know if this will be a regular thing, but every now and again a funny (less in the funny sense, more in the interesting) memory of my mother comes up, more so now as she nears the end of her life.

A couple of weeks ago I was in Germany visiting her, and one of the many things we talked about is the US presidential election.  She's always been a staunch conservative; self-reliance and all that.  Though we were pretty poor growing up (we lived in a 2 bedroom apartment with 4 kids), my parents refused to go on welfare, seeing it as a cheat to the system.  Anyway, another thing I distinctly remember growing up was her distaste for Donald Trump.  For roughly the same reasons as mine today: he's sleazy, he made his money by cheating investors, not paying his debts (strict conservative no-no), etc.

Let's be honest.  Donald Trump is hardly a Republican, but many of my conservative friends who previously disliked him now support him merely because of his current role.  I was curious to see if she would too.

When I asked her, she said she hoped Trump would win.  I was surprised, until she went on to say that America needed a wake up call, and Trump would be the one to crash the country fast enough so people would wake up.  If Hillary is elected, we'd continue on our gradual slide, but that would take too long.

Yup, I guess.

Germany trip

I just got back from a week-long trip to Germany with my girlfriend to see my mother, who is in the late stages of cancer (renal, I think, though she has massive tumors all over her body, which are pushing on her organs and making it hard to breathe sometimes).  Still, she's survived longer than anyone expected (3.5 years and running, on a timeline of 6 months), and she's in high spirits, though she's weak.  She attributes her continued life to foregoing all forms of conventional treatment, reasoning that chemo and radiation therapy would do more harm than good, and even if it did give her an extra year versus six months, that year would be a sucky one.  Quality of life, you see.

Though she has been taking echinacea extract, which she swears by.  My mother has very strong ideas about a lot of things, and health is one of them.  She's German, and a strong (read: stubborn) lady.  I remember about a year ago, when she told us that "Ach, I'm so lazy, I can barely clean the windows anymore" when referring to the increased tiredness the cancer was giving her.

This is the view from my mother's hospital room.  She is really enjoying the stay, and compares it to a hotel

Anyway, it was a really good trip.  We flew in to Munich, and took the train to a small town (24k people, 4,000 within the city wall itself) in Bavaria called Nordlingen (there's an umlaut over the o, but I can't figure out how to type it).  Nordlingen is a town built on the site of an old meteor crater, and it's round as a result.  It also has the distinction of being one of only 3 towns in Germany that have intact city walls around the whole town.

It was also the inspiration for the anime show "Attack on Titan," though the shape was about the only similarity.

Germany is pretty cool.  Bavaria has a lot of countryside, many small towns interspersed with fields.  It's so green.  Here's an example of most of what I saw on train rides

The food is really good, and so cheap, compared to the US.  I know part of it has to do with the exchange rate (it's about $1.10 per Euro at the moment), but even at its height, the food was relatively cheap.  One thing Germany does real well is baked goods.  Best croissants I've ever tasted.  You could get them for 29 cents at the supermarket (50 cents to 1 euro at a bakery).  We took this picture at breakfast one morning.  Not the greatest, but there you have it.  Those striped ones were actually pretzel croissants.  The doughnuts actually tasted like American bread rolls, which are slightly sweet.



Every day, we'd walk to the hospital about 3/4 mile from the city and visit my mother for a few hours, and sometimes we'd just walk around the city.  On one early morning walk, before the jet lag had subsided, we spotted a familiar figure in a window.

Adolph Kitler

Or Katzler for my Germans.

The best parts of the town were the cathedral and the wall.  We went for a walk on top of the wall, which was covered for the most part.

This is what most of the wall looked like

There was a bar on/in the wall

Parts of the wall were repaired and made into an uncovered bride type thing

It's pretty crazy to see buildings with dates from the 13th century.  Then you get the weird juxtaposition of traditional architecture and modern technology, because, y'know, people live here.

The cathedral was a 90 meter tall (300 ft) church in the center of the town

Getting to the top was a lot easier than the last time I was there 3 years ago, and the view is killer.

Us at the top

I'm always reminded of the scene in the movie In Bruges where Colin Farrell's character tells the fat American tourists they'd be better off not climbing the tower, and they get pissed and do it anyway, and get a heart attack.  Pretty sure fat American tourists are the reason they had to reinforce the walkway around the top of the tower

Though it's so narrow I don't know if fat Americans could fit.

Towards the end of the trip we went to Schoss Neuschwanstein (which I pronounced Noishwangshwang up until pretty much the last day), which happens to be the inspiration for the Disney castle.

This is a picture from the internet:

And here's a picture of us with the castle in the background:

We did go all the way up, but holy schitt there were a ton of tourists from all around the world.  Though I can't really complain, since... so were we.  Here are some more pics of the castle:

On our last day there, we visited Munich, which, while being a large city, feels fairly spaced out.  It's very pretty, very old, and has a distinctly European vibe to it.  We went to a palace with these huge gardens out front similar to Versailles, and walked around downtown with all its restaurants and museums, walking through what I think was called the British Garden.  It was similar to Central Park, and there was a large river that ran through it.  Due to heavy rains, the water level was higher than it usually is, and when it flowed under the bridges, it would come out faster on the other side, which some people were using to surf. 

In summary, Germany was beautiful, and I had a great time.