Finance – Chapter 3, Odds and Ends

  1. Good health is an asset. Good health is the most important financial asset you can possess. If there is a simple guide for good health, it must be Exercise and Moderation. You need to exercise and you need to be moderate in your behavior. However if you would like to live a hundred years, like I plan to, then you need to spend additional time learning in more detail what to do, and also additional time in doing what you learn.
  2. A good relationship is an asset. A good, stable, mature relationship with those whom you have a financial partnership (like your spouse and children) is the next most important financial asset you can possess. If you are having “family fights,” financial matters usually suffer and sometimes suffer greatly. Lawyers, court fees, separate accommodations and transportation all take their toll, both emotionally and financially. When my folks were young, there was a saying that “two can live as cheaply as one.” Implicit in the statement is that the two are living together. The statement was probably used to justify many marriages. If the two are breaking leases, getting separate accommodations and furnishings, driving separate vehicles and in general trying to “live well” (as in “living well is the best revenge”) the aggregate finances will really suffer.
  3. Keep learning for success. With the exception of jobs that cannot be moved, such as many service jobs (frying hamburgers, etc.) and construction; low skill jobs are going to keep moving out of the United States to countries with lower pay scales. If you saw the 1960’s movie The Graduate, you may remember the man counseling the new graduate with a single word, “plastic.” He was trying to tell the graduate that the future lay in plastics. I think now the word would be “electronics” or “communications.” According to Jay, electronics will soon become the largest “industry” in the world, displacing food production. And electronics has only been around for a hundred years or so. There are no signs of the industry maturing. There are now one billion telephones in the world, but wherever you look you can see system expansion. Do whatever you want to do, but be good at it. Do not learn the “tricks of the trade,” learn the trade.
  4. Keep track of the Cost Basis of your investments. Although it means the same thing, the Cost Basis is described a little differently for an investment like a house than it is for a security. For your house, the Cost Basis is the original purchase price, plus the cost of all of the subsequent improvements, but not maintenance costs. Examples; if you replace the garage door due to damage, it is maintenance. If you add a garage door opener, the opener is an improvement and adds to the Cost Basis.
    For a security, the Cost Basis is the sum of all of your purchases plus the “income” you have declared on your income tax statements, minus any (partial) sales you have made.The reason it is important to keep track of the Cost Basis of your investments and your house, is because it is how you figure your profit or capital gain, when you sell. It is an easy concept to understand, but difficult to figure unless you keep good records over a period of years, including your income tax papers. If you do not keep good records, you may pay excess taxes because you do not know any better or because the IRS caught up with you.
  5. Diversify your savings. Do not keep all of your eggs (savings) in one basket. Spread your savings around, a little. It is nice to work for a company which matches your saving in their stock or gives you a good deal in their Employee Stock Ownership Program (ESOP). Take the good deal, but remember when the company gets in trouble, your job may be in jeopardy at the same time as your savings are also.
  6. Check your Social Security Account. The Social Security Fund is probably not going to go bust, although it is presently being looted to help pay for the federal deficit. However, you may not be listed, or you may not be getting credit for your contributions. You need to check every two years to make sure that your contributions are being posted to your name and number. There are places you can get a mail-in form, but you probably can also call and request the information. (800-777-1213).
  7. Save Something. The median US family income in 1989 was $34,213. How are you doing? From a financial point of view, how well you are doing does not relate to how much you make, but how much you save.
  8. The federal budget will not be balanced. The Balanced Budget and Emergency Deficit Control Act of 1985, more commonly known as the Gramm-Rudman-Hollings Act, or simply the Gramm-Rudman Act imposed automatic spending cuts to end the deficit in 6 years (by 1991). In 1987, a revised act set the “balance year” as 1993. In 1990 the target “balance year” was moved to 1995. What do you think will happen to the “balance year” now? Hence my earlier suggestion that inflation and deficits would continue. The Social Security Cost Of Living Adjustments (COLAs) for the last 8 years were: ’84, 3.5%; ’85, 3.1%; ’86, 1.3%; ’87, 4.2%; ’88, 4.0%; ’89, 4.7%; ’90, 5.4%; and ’91, 3.7%. These numbers probably track inflation pretty well. It is encouraging to see both President Bush and Governor Clinton getting more serious about explaining their financial plans for the nation. However the federal budget will not be balanced for many years. (Neither of their plans are very comprehensive, but I tend to favor Bush’s as the lesser of evils.)
  9. Dollar Cost Averaging is a silly little procedure where if you buy the same dollar amount of an item as the price varies, then your “average” cost is lower than the “average” price. That is nice, but not as good as when the sell price is higher than all of the purchase prices.
  10. The world is getting better. With a few notable exceptions (like AIDS), there is a lot of evidence that the world is getting to be a better place. And AIDS is easy to avoid, just do not be promiscuous. About 100 years after Louis Pasteur discovered germs cause many diseases, Small Pox has been completely eliminated from the earth. My mother used to worry greatly about her 5 children getting polio, as polio crippled some children every summer. Now instead of worry, inoculations are available. Fifty years ago infections used to kill many injured people, now with penicillin, very few die from infections.
  11. Live below your means. There is no reason, other than lack of discipline, for you to spend everything you make.
  12. Give a little back to Society. Give a little money, time, your special talent, or even blood at the Red Cross.
  13. Get a will. I would not go out and contract a high priced lawyer to write a will, unless you have a special situation, but you do need a simple will to avoid problems for those you leave behind when you die, and we are all going to die. There is no other way to get out of this place. So get a will. If you do not, the state and lawyers may get most of what you leave behind.
  14. If you get money back from Income Taxes, lower your withholding. You may think it is a big thrill to get money back when you file your taxes, but get serious, what it means is that the government has been holding your money for you, without paying interest to you. Do some simple calculations and lower your withholding. Or send me a check for that amount every month, and every April I will send you last year’s money back.
  15. In finances, doing right is not difficult, knowing what is right is what is difficult. And I really cannot make it much easier. When watching the Stock Market, watch the percentages, not the numbers. Pick stocks (mutual funds) with a significant history (I use 10 years), you may miss a rocket, but also maybe a bomb.
  16. For some people religion is more important than money, and that is OK. That is a choice everyone must make for themselves. Uncle David had a bumper sticker which said, “If you love Jesus, tithe, any fool can honk.” Your religion can be an expensive budget item. It is up to you. I definitely will not tell you what to do in this area. I am not very religious, at least not in a “organized religion” way. Because of the following:
  • My great grandfather Gottfried Huebner left Germany due to religious troubles between the Catholic and Protestant (called Reform in Europe) groups.
  • My grandfather David V. Huebner left the Baptist Church of Lorraine, Kansas over an argument and subsequent fight about some girl’s honor.
  • My Graber grandmother’s family never spoke to grandmother again (in her life) after she and grandfather were married by his friend, whom her family felt was not the appropriate person, nor qualified, to marry them.
  • The good Protestant people of Bushton, Kansas would not let the Catholics build a church in the town.
  • The Catholics of Wilson, Kansas, after gaining control of the school board, fired my dad from his job as superintendent of the Wilson school system and hired a Catholic replacement (and the next year Glen, Jay and Ray helped our “new town” beat Wilson in high school football)
  • I have not seen any church go beyond its own ethnic origins.
  • The Catholic/Reform (30 years’) War cost Germany 10 million dead, of a total population of 14 million in the 18th century or
  • Here in the Middle East, we hear about and are exposed to the impacts of the Islamic holy wars and the Christian crusades of 1000 years ago. (Look at Yugoslavia.)

Finance – Chapter 2, Investing

When our parents were killed in a traffic accident in 1956, Jay and I were 16. The other vehicle was clearly at fault and had a significant insurance policy. The result was that although our parents were not very well off financially, there was enough money for “us kids” to go to college. Uncle Gene was appointed our guardian. Then a year of college cost maybe $2000 if you lived well, as I did. After I graduated from college I had about $2000 left. Uncle Gene seemed to be pretty well off, and made his living from investments in the oil business, etc., so I asked how I should invest. He would not give me advice. I took his reluctance to advise me to mean that providing someone investment advice was heavy business. Maybe that is why I have answered Jay’s simple suggestion to provide some advice to his kids, with a long answer. Anyway, what follows is my advice concerning investments.

  1. Basics first. If you haven’t accomplished the basics from the last chapter, that is put aside enough money to have what you consider enough financial flexibility to handle life’s normal crises, then you are not ready for investing. Do not forget this, no matter how tempting the investment opportunity! You can start planning, however, so read on. I also suggest some homework, starting now. I cannot make you a wise investor, you must do it.
    It seems to me as the two most common motivations for selling someone something are; (1) get their ego involved, i. e. the Marlboro Man, and (2) convince them it is a good investment, i. e. you cannot afford to miss this opportunity! If something is such a good investment, why is the salesman selling it? Be cautious of “investment counselors” selling things, but if you have the time, listen to their advice, for the information and ideas. Only you can make the decision of what is a good investment for you, and it is not an easy decision. Mostly what stands in your way is not stupidity but ignorance. And there is a difference between the two; one is correctable with effort, the other is not.
  2. Risk versus Profit. Someone once told me that “in Engineering the rules are very complicated but applying them is simple, and in Law the rules are simple but applying them is very complicated.” In financial matters there almost seem to be no laws. As close as you get to a law is; the higher the risk the more the profit and loss potential. With this in mind, most personal finance primers draw an “investment pyramid” and tell you to start at the bottom with low risk investments and after you have a substantial base, you can move up toward higher risks (and profits). That idea is good, but it is not very specific. However some of the first things you need to do are in the low risk category; save some money for a rainy day, start buying a house, have the insurance you need, and those kinds of things. How wide you make the base of the pyramid, and even what you consider risks are open to interpretation. There are recent books you can read about “what to do during the coming depression,” and “how to make millions in the coming boom.” Boom or bust? If you think the future for America (and the world) is not very bright, your investment strategy should be different than if you think the good times are just around the corner. You must live with your judgments. Some people buy gold because it will always be good. It does not earn interest, however. I have friends who purchased gold at $600 and $800 an ounce, and have held it for 10 years, so far. It now sells for less than $400. I’ll continue this later, but for now remember profit and risk seem to go together.
  3. Taxes assist some Investments. In physics there is a law that says (roughly) that one cannot measure something without changing it. Something similar is true in US tax laws. Every time the US Government makes an addendum to the tax laws (usually well intentioned, to help some segment of the economy) all kinds of things change. I knew a man who bought a medium sized sailboat, leased it to a “rental company” who made it available for people to rent. The man’s deprecation tax deductions were larger than the payments, so every year he made money and in five years he owned a five-year old boat and had money in his pocket. (He did take some risks, but basically he ripped off the rest of us.) The Tax Reform Act of 1986 closed most of the worst tax loop holes, and left basically two tax schemes available for most people. (Glee and I have a couple more working, but that is another story.) The two schemes are home mortgages and retirement accounts. These will not make you rich, but they will give you a 28% advantage over other investments, if you earn income. Of course you still must consider the risks associated with the investments of your choice.
    The reason a house is a good investment is that the interest you pay on the mortgage is deductible from your income taxes. That means it actually costs you 28% less than what you pay out in interest on a monthly basis, if you have income and itemize your deductions on your income tax return. That does not mean paying interest is better than earning it, just less painful if it’s for a house. People who think that paying more interest is better because they can deduct more, are 72% wrong.There are two kinds of retirement accounts which are “tax advantaged,” Individual Retirement Accounts and 401(k) plans. An IRA is a good deal because, under certain conditions (which you can learn about by reading the Federal Income Tax package) you can deduct from your gross income, up to $2000 that you invest in an IRA (so investing $2000 saves you $560 in taxes, if you are in the 28% bracket) and you do not have to pay taxes on the investment’s earnings each year. You do not pay until you withdraw the money. So called 401(k) accounts are investment accounts which are usually arranged through your employer. A 401(k) puts some of your pay into a tax protected investment before you actually receive it and you do not have to report it as income on your Income Tax Return. 401(k) accounts also earn interest that you do not have to report, or pay taxes on, until you withdraw the money.

    If you do withdraw money from either type of retirement account, except for certain circumstances, you will pay a penalty, however. So read the rules. These are great long term investment vehicles, because the gains are not taxed until long after they have compounded. All investments for these types of accounts are not the same, you can have a fixed dollar, interest earning account all the way (in risk) to a leveraged, aggressive growth mutual fund account. The levels of risk are obviously different. You need to know quite a bit about investments to make good long term decisions concerning which types are for you. Read on.

  4. Informed Judgment. Above I brought up the idea that you need to have an opinion about where our nation is going to have an informed judgment on how to invest. Let me give you a start with a 25 cent history of American economics.
    Until this century the US government left the “market place” alone. When the economic engine had almost gone out during the late 1920’s, President Roosevelt (and Congress) started spending money the government did not have to give people jobs. The economic advisors of the time suggested that a depression was as natural a state of economic affairs as a boom, and to change the conditions, a stimulus had to come from somewhere. Roosevelt took the challenge. To a large degree it worked, and the depression began to lift. World War II also helped get people back to work. The government then borrowed more money to fight the war. After the war balanced budgets returned. In the 1960’s President Johnson did not want to stop President Kennedy’s social programs or raise taxes to pay for the Viet Nam war, so he (and Congress) kept raising the national debt and borrowing to pay for the bombs, bullets and social programs. Substantial inflation occurred during this period as a result. (The house we owned in Virginia sold new for $36,000 in 1972. We purchased it for $63,000 in 1975, and sold it for $110,000 in 1982. Lots of the increase was inflation.) The national debt really got out of hand when some economists convinced Presidential Candidate Reagan that economic activity could be moved to a “sustained, higher level” by more government spending with no more taxes. Many businesses caught the fever and spent money they did not have. (Believe me when I say there seem to be no rules in economics!) To some extent these “supply side” economists were correct, but inflation also stayed with us. The Federal Reserve Board, which is independent from the President and Congress, finally stepped in and raised interest levels to cool inflation, which unfortunately also slowed down economic activity. So now we are left with a mountain of debt, lots of empty office buildings and insolvent S&L’s (because about all they own is empty office buildings). (The USA has enough available office capacity for the rest of the decade.) So, what do we do now? And further, how do we invest now? Well, what do you think is going to happen now? (Incidentally during this period all of the news was not bad, we did cause the “evil empire” to collapse. Recently I read that the “cold war” cost US taxpayers $5 trillion.)Lets look at some numbers. The US economy is about $6 trillion per year (Gross National Product – you need to learn what that means, if you do not know). The Federal budget is a little over $1 trillion per year, 30 to 40% of which is borrowed and adds to the national debt. The Defense Department gets about 30%, which is no longer as big a slice as the interest on the national debt. The national debt now stands at about four years total Federal Governmental expenditures, or $4 trillion. Time for hand-wringing? Yes, or at least considerable concern. Some people think that Ross Perot pulled out of the Presidential race after learning that there is no easy way out of the mess that we are in. You cannot have an informed opinion unless you understand all of these numbers, including how many zeros there are in a trillion, what our debt is in relationship to our GNP, and items like that. Compare it to your own budget situation; if you did not know what your income, debt and expenses were, how could you make informed budget decisions? So learn! (I also urge you to vote, someone said that “Every nation has the government it deserves.”)

    My opinion is that regardless of who wins in November, we are going to have elected a rather fiscally conservative President. Both Bush and Clinton have gotten the word that the American people are mad and want sound fiscal policy, not more smoke and mirrors. Who ever wins will slowly begin to bring the annual deficit down and that will be something of a drag on the economy. They will not balance the budget for a number of years. To balance the budget now, every individual US taxpayer would have to increase their tax payment by $3364. To do that would cause a depression. And the only reason that the increasing interest payments on the national debt will not strangle the US economy is because creeping inflation (3 to 6% a year) will lower the real value of the debt. (That is, in my considered opinion, we are and will continue paying our debt off by making our money worth less.) If 3 to 6% inflation continues, fixed dollar savings, like credit unions, CD’s and S&L’s are not where you want your long term savings, money that is above the pyramid’s base. What is? I recommend mutual funds. Read on.

  5. Mutual Funds. Saying “mutual funds” is like saying “vehicles.” They come in all sizes, shapes and perform all types of functions. I’ll give you a little information and some references, then you are on your own. The dominant type of mutual funds is stock funds, which take your money and invest it in a group of (common) stocks to attempt to achieve their (your) investment objectives. Most mutual funds charge a commission to join, up to 8%. These are called “load funds.” You truly pay a “load” to get in. A number do not charge a load, and they are called “no-load funds.” There is no significant difference in performance between the two, I repeat, there is no significant difference in performance between the two; it is sort of like comparing IQ’s of white and black people, for both groups they vary all over the lot. So judge each on its own merits, both people and mutual funds. The first mutual fund I purchased was from a salesman (the salesman gets the “load” in a load fund), when you are young and insecure, a salesman with confidence that you are doing the right thing can be very convincing. The fund did not perform very well and I have since sold it. All other mutual funds that I have purchased have been “no-load,” some great performers and some not so good. When I was a kid, I remember other kids saying, “If you are so smart, how come you aren’t rich?” I now know the answer is not lack of intelligence, but lack of information. You can hire managers to seek the information (full time) and to rapidly act on it in your behalf, that is why I recommend mutual funds. If they do not perform, you sell the fund (fire them) and buy (hire) another. This is capitalism at its best, working for you. An often made mistake is not selling a loser. You are not married to it, sell it.
    Why not invest in stocks directly? Unless you can spend full time you will not be expert, and if you are not expert you will not do very well. Further with a small amount of money, you will not get an expert stock broker to advise you. Mutual fund managers are expert, determine your objectives and hire an appropriate expert.
  6. Sources of Information. If you are interested in investing in mutual funds, you should look for the Forbes (magazine) Annual Mutual Fund Survey. Usually it is the first issue in September. For it’s cost, $4, it is a very good buy for anyone interested in mutual funds. Sometimes you can find that issue in the local library, but often it has been stolen. Other sources, which are available in most public libraries are:
    Wiesenberger’s. This is an annual publication that gives lots of general information about funds, the type of information newcomers need, then gives performance ratings for up through the year before its publication. A few brief remarks from the 1990 edition: There is now $1 trillion invested in mutual funds; the three steps to investing are (1) determine your goals, (2) determine funds objectives that match your goals, and (3) select a specific fund; the S&P 500 (a stock index) gained 76% 1980-90, and 143% 1970-80. The book costs $49.United Mutual Fund Selector. This twice monthly newsletter provides “news” and data, and a “recommended” list of funds for most objectives. It costs $125 per year.

    Growth Fund Guide. This monthly newsletter provides information about growth mutual funds, a popular type, and has a recommended list. It costs $89 per year.

    There are also other sources, such as Morningstar ($395 per year), the financial pages of your newspaper and lots of articles in “finance” magazines, but there is also lots of useless data in with the information. Keep in mind that learning about mutual funds is easier than keeping up with stocks.

  7. Keep up with what is going on in the world. Is this a good time to get into the market? I do not know, it is a strange point, probably not a real good time to get in, certainly not in a big way. (Glee and I are pretty much “in the market,” because interest rates are quite low and I’m pretty confident about the USA. Plus we are also pretty high on the pyramid) The Price to Earnings ratio (what a stock costs over what it pays in dividends) is at a very high point (35), which means that the market could fall 20-30% very easily. On the other hand, it was at this level before the Feds lowered the discount (interest) rate the last few times. Those lowerings of the discount rate should have stimulated the market somewhat, but didn’t, all they did was to keep it up. So what will happen? I’m not sure. My wild guess is that it will muddle along through this year (it almost never falls in a presidential election year), it may fall some and then slowly rise as economic activity picks up into the fall. Overall the 1990’s will be good for market investments. (The average market gain per decade is 78% so far this century. That is better than most other investment choices.) Other items which will influence the market are wars, oil price changes, government spending changes, the jobless rate and things like that. Uncertainty and bad news nearly always lower the market. Good news only allows it to slowly rise.

Finance – Chapter 1, Introduction

Jay Huebner will have to take some of the blame for these papers, he suggested that I provide his children some written guidance on “how to invest money.” After thinking about it for a while, I have decided that I would provide some written guidance, but the audience I aim for and the subject would be a little broader. The audience a little broader because it is easy to do with our computer and perhaps there are more that are interested. The subject a little broader because I believe in so doing, it would be more useful and there would be less chance that it would be misleading.

This first chapter is devoted to basic guidance. Chapter 2 provides the real investment advice, and 3 pursues additional details.

What this is not. This is not all of the information you will ever need on personal finance. There are lots of good books on the subject, try the local library or book store. Most community colleges, etc. have reasonable courses on the subject. If you think education is expensive, try ignorance. To effectively manage your personal finances and invest wisely, you must devote a continuing effort, forever.

Get some financial flexibility. Your hot water heater could explode, your car could be wreaked or stolen, you could get sick or be laid off or need an operation. If you are stretched to the limit financially, any of these could make the disaster worse. Have some cash in your checking account, some standby credit from your credit union or whatever. How much? You think about what could happen to you and what the effects would be and decide. Glee and I, being in Saudi Arabia, keep two checking accounts (different institutions) each with a month’s pay and have several lines of credit (that do not cost unless we use them) in standby. To prove the point, in July 1992, the AC in our Dallas house died, the renter screamed that it was hot and we used most of a month’s pay to fix the problem.

Budget and review your financial situation. One of the witty sayings in a financial computer program I have says “Rich people plan two generations ahead, poor people plan for the weekend.” You need a plan, even if it is only for the month. Preferably it will be for a year, better yet for a few years. If you have kids, or will have them and want them to succeed, you need to start planning for their college. Ross Perot said “Texas has enough hands (field hands), what it needs is more heads (educated people).” The same with the rest of America. Costs for four years at a state university are about the same as a house; community colleges are less, and private colleges more. Do not be frightened, just start planning. To some extent you plan when you check the balance before writing a check, and when you get your monthly statement and balance the checkbook, but that is not enough. Where should the money go? I say you should save something every month, even a little, because then it becomes a habit – a self imposed requirement. Many people say “take the savings out first,” in effect pay yourself first. Do what ever works for you. If you do not have a written budget, you probably do not have a budget. Every six months, or year you need to review how you have done and what changes should be made. This includes evaluating how well your investments have done. Every time I get a pay raise, I review our budget and financial planning and decide how to “spend” the new income. I have been doing this for 30 years. I also do an annual review of our financial planning in conjunction with doing our income taxes, which I start right after the first of the year. I will discuss investments and taxes more later. The point is you are responsible for your financial future, take charge of it.

Do your own calculations. Not that you will very often find banks, S&Ls or salesmen making mistakes or lying to you, but you need to calculate the costs to you. For example when buying a car “on time,” look at various lengths of payments and various sources of finances. Figure the total cost to you, including insurance, setup charges, fees and etc. Employee owned credit unions usually are less costly than commercial sources for borrowing money to finance a purchase. When you find a good credit union, maintain your membership. They may not, however, be the best place to keep a large amount of savings. Often doing the calculations are difficult because you do not have sufficient information. That is your problem. Get the information. Believe me, it matters. On the other hand, I once had an office mate who said that he spent 4 hours finding a 3 cent error in his checkbook. The payoff was not worth his effort. There is an old saying about being penny wise and pound (Sterling) foolish. Judgment is required.

Insurance is to spread the risks. After you have thought about #1 (above) for awhile, you will probably come to the conclusion that there is a limit to the extent of disasters that you can be financially prepared to accommodate. How right you are, and most of the rest you have to handle with insurance, which is an outgrowth of people getting together to share specific risks. Of course most of these institutions have evolved to where it is no longer obvious that that was their purpose and intent, but that is what it was and is. So what you should insure are those things of financial value that you cannot afford to lose, and those risks that you cannot afford to take. If you buy a house or car “on time,” the “holder of the note” will insist on insurance, to protect their financial interest. Not yours, theirs. Notice that you pay for their protection. I was the primary breadwinner in our family for many years, so I had lots of insurance on my life. I wanted our kids to be able to afford college, even if I died. Now that our kids are out of college and our investments, etc. are sufficient for Glee to live a fairly comfortable life, I have eliminated most of my life insurance. Life insurance is not a good financial investment, do not use it as such. Term insurance is much cheaper than other alternatives. Invest the difference. Think carefully about what you insure. For example, if you have a pleasure boat, maybe you only want liability insurance.

Health is better than wealth. What is a rule like this doing in a personal finance paper? Well, number one, I am writing it, I feel strongly about it and I wanted to include it. Number two, your state of health, your expected future state of health and your life expectancy have a significant impact on finances, so they should have an impact on your planning. Also your life style choices related to health have an effect on the cost of a number of items, such as life and health insurance. So exercise, all things in moderation, and do not smoke.

Consider Discretionary Money. Beyond adequate food, minimal shelter and clothing, and transportation; all of your spending could be considered discretionary. If you get right down to it, you do not have to have vacations, many new clothes, stereo, TV, labor saving appliances, Christmas presents and etc. I am not suggesting you give any of these things up, but I am suggesting that you consider all of them as discretionary items. Items that, for the purpose of budgeting, you could live without. Do not be “trapped” by things, just because you are used to living with them. You are trading hours of your life for things, choose carefully.

Basics first. It is a pleasant reverie to think that as soon as you start making money, you can start investing in a hot growth stock and retire before you are 30 years old, maybe even before you pay off your new house or before it is time to trade in your leased car. To barrow money for investment purposes is called leveraging. Unless you really know what you are doing, leveraging is about as smart of a scheme as buying lottery tickets, and your odds for a substantial success are about as good. Lottery tickets are called Idiot Taxes by Jay’s kids. Stick to the basics, which I define as:

  1. Pay off (or do not get into) credit card debt;
  2. Arrange your life style so that all future vehicles, vacations, and other discretionary items are financed out of your savings (earn interest, do not pay it);
  3. As soon as your life style and employment are stable enough, purchase a house. (a house will get more attention later);
  4. Establish a nest egg for that rainy day (that earns interest, or at least gets you free checking) and start saving;
  5. Get the basic insurance that you need; health, life, etc.; and
  6. Start an IRA (more on IRA’s in Chapter 2).