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A Few Favorite Personal Finance Books

Rich Dad, Poor Dad by Robert T. Kiyosaki

When I was about 19, this book changed my entire outlook on money and finances. Looking back, and reading through the book now, I see a lot that I disagree with, but it sparked my thinking about how to manage money, and what financial freedom truly means. Not a practical book, but definitely a good start if you have no “financial motivation.”
The Millionaire Next Door by Thomas J. Stanley

This book, which I read recently, is the result of years of research of America’s millionaires: how they live, what they wear, what cars they drive, how they made their money, etc. It was definitely inspiring to me, and also got me thinking about the impact of wealth on future generations, both good and bad.

Cashflow Quadrant by Robert T. Kiyosaki

This book builds on Rich Dad, Poor Dad and goes into detail about how to build multiple streams of income and gradually reduce your reliance on earned income. It contains overviews of the impact on personal finances and income of things like real estate investment, entrepreneurship, and investing in businesses.
The Richest Man in Babylon by George S. Clason

This is a deceptively simple book that contains a series of financial parables that teach the importance of always saving, the power of compound interest, investment, insurance, and other time-tested financial truths. Easy read and a good reminder of some very basic lessons. Again, good to read if you find yourself lacking that “financial motivation.”

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Can money buy happiness?

Everyone always says that money can’t buy happiness. I’ve always liked to say that money can’t buy happiness, but it can buy relief from certain types of misery. Perhaps an example will be helpful.

Every time I fly commercially, about the time I’m shuffling through security with my shoes in one hand and my recently-torn-apart bag in my other, I think about the indescribable joy that private air travel would be. My feeling escalates as I’m herded onto a plane that is probably older than I am, and sit down between two enormous women who both have toddlers that are vying for the title of the World’s Most Annoying Child. By the time the beverage cart creaks by at the express speed of .00756 mph and the Flight Attendant informs me that the last of the orange juice was just given to the grubby little urchin screaming his head off next to me, I’m ready to kidnap the little bugger and sell him on the black market to finance the purchase of my jet.

Relax, I’m not in the business of peddling children. Yet.

Anyway, the point is that flying commercially is miserable. Absolutely terrible. Could money buy relief from that? Certainly.

However, even I’m willing to admit that this is a rather unproductive example. Most people will never set foot on a private jet, so it’s not really a viable alternative to commercial travel.

A more representative type of misery that most people go through is financial slavery. In fact, to say that most people go through this is misleading, because the majority of us will spend most of our lives mired in financial slavery, “working jobs we hate so we can buy shit we don’t need.” (Fight Club)

Let me give you a few examples of more common types of misery that characterize financial slavery:

  • Not being able to spend time with your family because you have to work two jobs
  • Not being able to provide adequate food, shelter, clothing, medical care, etc for your family
  • Constantly being stressed about how you’ll pay the bills this month
  • Getting stuck in a job or city you hate because you can’t afford the risk of trying something new
  • Being a burden on someone else for financial care
  • Seeing your marriage torn apart by the stress and anxiety that money problems cause

The number one cause of divorce in America is money problems. Is divorce miserable? You betcha. It’s a special type of misery that almost always gets passed on to your kids and, if you’re lucky, your grandkids. If the number one cause of one of the most destructive forces in our society is money problems, how can people say that money can’t buy happiness?

I was pondering this today as I walked to work (yep, I walk to work. City living rocks.). In terms of deciding whether money itself buys relief from certain types of misery, the relevant question becomes this: For most of the people experiencing the types of financial misery that I described above, would more money really solve the problem? I think that in most cases the answer is no. Let me explain.

It’s always helped me to think about money not simply as as solution to problems, but as a multiplier of both problems and solutions. If you’re responsible and able effect positive changes with a little money, you’ll likely be responsible and able to effect even greater positive changes with more money. Conversely, if you’re unable to manage small amounts of money without getting in over your head, and you’re constantly thinking that if you just had more money, your problems would be solved, then the reality probably is that more money would only exacerbate your financial problems in the long term. We need only look at Lotto winners, a high percentage of which are bankrupt within a decade of their winnings. Here’s a great article from MSN Money about the subject.

The point is, if you’re not responsible with a little money, you aren’t going to suddenly become responsible with a lot. I think I’m going to have to revise my saying to be the following:

“Money can’t buy happiness, but it can buy temporary relief from certain types of financial misery. However, unless the root cause of that financial misery is dealt with properly, the end result of injecting money into the situation is often worse than the problem was to begin with. Ultimately, the only long-lasting paths to relief for financial misery are death, an infinite supply of cash, or learning proper financial stewardship. Your call.”

Hmmm…definitely not as catchy.

Posted by Della William on

My realization on real estate

I’m a huge proponent of real estate investment. I’ve come to realize that it’s not the panacea and get-rich-quick strategy that infomercial gurus would have you believe, and it’s definitely not easy money, but real estate investment can be a very lucrative long-term investment that can significantly enhance your wealth.

My latest realization is that around 45% of the gross rents of a residential property go to cover operating expenses, such as utilities, management, maintenance, taxes, insurance, uncollected rents, and legal and administrative fees. This leaves just 55% of the gross rents to cover mortgage payments. The most significant mistake that most new investors make is underestimating these expenses. Many investors simply compare the rents collected (or that they think they’ll collect) with the PITI (principal, interest, taxes, and insurance) and consider the rest profit. This is naive. I did this when I bought my first property, a 4plex, and I can tell you that it has been much more expensive than that.

I can also tell you that, in most areas, it is almost impossible to find a property for nothing down that will truly provide a net cashflow in the first year. However, that doesn’t make a nothing-down investment a bad one. On the contrary, buying an investment property without putting any cash down can be a great long-term investment, provided that you do it for the right reasons.

Other than buying for less than the fair market value (always a good idea), there are four ways to make (or lose) money through real estate investment:

1. Cashflow

This is what’s left after you pay for the operating expenses and the mortgage. It probably won’t be much at first, and you’ll probably actually experience a loss for the first few years. However, if you buy smart and manage smarter, you can convert this into a positive number by raising the rents over the years, while your mortgage payments will stay the same, provided you have a fixed-rate mortgage. After 30 years, or however long it takes you to pay off the mortgage, this number can be many thousands of dollars per month per property.

2. Appreciation

Real estate generally goes up in value over time. Over the very long term, it’s usually not quite as dramatic as what we’ve seen over the last few years, but your properties can easily double or triple in value over the course of 30 years. The important thing to remember here is that you don’t need to time the market if you hold long-term, generally 7-10 years or more. There’s an old saying in real estate that the best time to buy is 20 years ago. The second best time is now.

3. Loan amortization

Every month, a portion of your mortgage payment goes to reduce the outstanding balance on the loan. Initially, it’s a very small portion, but over time, that amount will grow larger and your liability against the property will drop rapidly, until you own the property free and clear. The best part of this is that your tenants will end up paying for almost all of this over the course of the mortgage term.

4. Tax incentives

Though not as lucrative as they once were, real estate still represents a great way to decrease your tax liability. There are many issues in this category, so I won’t go into them. Consult a reputable accountant, which you should be doing anyway if you’re going to invest in real estate.

The bottom line of real estate is this: real estate offers an opportunity to buy an cash-producing asset with someone else’s money and have that money paid back by someone else, and in the end, you own the property. After the first few years of feeding the alligator, your property should turn around and begin feeding you, and it will continue to do so forever, with the amount it feeds you only increasing each year.

Here’s my advice on getting started investing in real estate: get started. Don’t wait. Do your homework, seek wise counsel, and just do it.

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Emergency Fund vs. Debt Paydown

So lately, I’ve been listening to a lot of personal finance podcasts. Many of these podcasts revolve around people digging themselves out of the debt-hole they’ve sunk into.

Side not: It’s amazing to me how ill-prepared most people are to deal with money, and how cavalier our society is towards excessive spending and debt. But that’s another story for another day.

Anyway, one of the people I’ve been listening to is Dave Ramsey, and while I don’t always agree with his advice from a purely financial standpoint, I do think that it often makes sense from a behavioral standpoint. For example, his method of paying down debts, called the Debt-Snowball method, has people arrange their debts from lowest to highest balance and pay them off that way. Mathematically, this is not optimal, and you end up ahead if you arrange them from highest interest rate to lowest interest rate. Over the long term, you’ll pay your debts off faster and pay less in interest than you will using the debt snowball method. However, Dave recognizes this and advocates his method instead because of the psychological effect of paying off a larger number of small debts and maintaining a feeling of progress. This is just one example of how he tends to take behavioral issues into effect as well.

One of the things that has always annoyed me with most financial advisers is that they all tend to make statements like “First, you’ll need to make sure you have 3 to 6 months worth of savings as an emergency fund. Next, you’ll arrange your debts from highest to lowest interest rates and pay them off in that order.” Bam! Apparently, these people do not live in the real world and think that sound financial advice means telling people who are barely scraping by as it is to somehow save 6 months worth of expenses before they begin attacking their debts. Let’s take a look at how this strategy plays out in the real world.

If you make $30k per year, 6 months of expenses is $15,000. If you can afford to somehow set aside 20% of your after-tax income towards that emergency fund, and you never touch it (because you definitely won’t have any emergencies), it’ll take you nearly 4 years of saving up, assuming that your after-tax income is $2000 / month. 4 years. THEN you get to start paying down your debts. Are these people crazy? It’s doubtful that most of the people who are deeply in debt could put 5% aside for 4 years, let alone 20%. If you put 5% aside long enough to build up 6 months of reserves, it’ll take you almost 18 years! (not counting any interest earned on that money)

Here’s a better idea. Get $1000 together, and then start attacking your debts. If you have a true emergency, you have $1000, plus you always have the credit that you just paid off. I know that sounds crazy, but if you’re really serious about this, you’ll do almost anything to avoid going into more debt, while spending a few dollars of that $18,000 might look pretty tempting when your car breaks down or you get a speeding ticket. You have to cultivate the attitude that debt (except for mortgages, perhaps) is a cancer and almost anything (within your ethical and moral boundaries, of course) is better than incurring debt. If you do that, you can usually find some other way to deal with emergencies than spending on credit. However, if you have $18,000 sitting in your emergency fund, it’ll be pretty tempting to use a little of that to pay this and a little to pay that, and you don’t have that same drive to be creative.

Posted by Della William on

My thoughts on financial bondage

I’ve been reading “The Richest Man in Babylon”, a series of financial parables set in the Babylonian era. They’ve been around since the mid-1920’s and convey (very simply) some basic principles of finances and money management. They’re the kind of things we all know, but few of us seem to do. The highlights are the following:

1. A portion of all you earn is yours to keep. Save at least 10% of everything you make, no matter what
2. Do the above by controlling your expenses carefully with the use of a budget
3. Put those savings to work for you by investing
4. Don’t be risky in your investments
5. Buy a house
6. Plan for retirement and future generations
7. Increase your earning potential

Again, very basic stuff, but apparently the majority of people just don’t get it. For example, the average savings rate in America is now NEGATIVE. People who make $50k per year spend just over $50k per year and people who make $100k per year spend just over $100k per year. Average household debt goes up every year and the average American only has something like 15k set aside for retirement.

My company (CNET Networks) had a guy come in today from the Social Security Administration and speak to us about how Social Security works. Nothing really new. I was hoping he’d talk about some of the plans to fix SS, but he merely said that it will be bankrupt by 2040 unless we change something. Fantastic. The thing that struck me was, 1) how little money you get, even if you paid a fortune into Social Security, and 2) how jacked up it is to face a retirement of 20+ years knowing that there’s no way you can even come close to living on what you have. What person, at 66, wants to realize that they have to work until they die? How sad. The saddest part was that they actually increase your benefit if you work past 66, because they’re trying to keep people working as long as possible. Isn’t that great? We live in a country where senior citizens are encouraged by their government to work as long as possible, even well into their 70s, or until they die, whichever comes first.

It all kind of clicked for me this evening. I was reading the book again and this part jumped out. The speaker is a slave who fled his city because of debt and fell into the wrong circumstances, eventually ending up as a slave to a very wealthy lady.

“So I was turned over to Sira and that day I led her camel upon a long journey to her sick mother. I took the occasion to thank her for her intercession and also to tell her that I was not a slave by birth, but the son of a free man, an honorable saddle-maker of Babylon. I also told her much of my story. Her comments to me were disconcerting and I pondered much afterword on what she said.

‘How can you call yourself a free man when your weakness has brought you to this? If a man has in himself the soul of a slave, will he not become one no matter what his birth, even as water seeks its level? If a man has within him the soul of a free man, will he not become respected and honored in his own city in spite of his misfortune?'”

Think about it.

Posted by Della William on

My money quote of the week

From an article in Men’s Health on things you should do but probably haven’t:

“Be debt-free. Compounding interest is like a sorority girl on Ecstasy. She’ll go both ways, but you get a hell of a lot more out of it when she’s going your way.”

Posted by Sorrells Garden on

My multitasking addiction

I’ve noticed that I’m addicted to multitasking. I have a very hard time sitting down and watching something without doing anything else. I can’t have just one window open or one tab open in firefox. I feel this compulsive need to carry on 18 things at once, even though it stresses me out sometimes and I probably do each thing less well than I would if I just focused on one thing.

Why is this?

Maybe it’s because of the incredible rate that information is flooding our world. There are billions of blogs to read, videos to watch, discussions to join, friends to talk to, etc, etc. When I’m not doing those things, I feel like I’m missing out. I was missing out before the Internet, but it was such a pain to NOT miss out. Now, it’s only a click away, and if I’m signed on to AIM, these things often come to me!

I need to work harder to be more focused and more respectful of my own need for mental peace and occasional unproductivity.

Posted by Sorrells Garden on

My mvelopes experience

Early last month, I started using a service called This is a personal finance and budgeting program that you would use instead of MS Money or Quicken. I had tried both Money and Quicken with very mixed results. I found them to be bloated, buggy, and trying to do too much and failing to do it well. So I decided to take the plunge and give mvelopes a try.

Mvelopes is basically an online representation of the envelope budgeting method, where you put cash into envelopes for groceries, spending, medical, gas, etc and then take the cash out when you need to spend it. When it’s gone, it’s gone. This can be a very effective method of budgeting, but it’s 2006, and I don’t want thousands of dollars in cash sitting in my house, not to mention the fact that I only use cash for a tiny percentage of my monthly transaction volume.

Enter Mvelopes.

Basically, Mvelopes works using the exact same concept as cash in envelopes, but online. So you setup a budget and then when your paycheck comes, you divvy it up into the envelopes, which represent budget categories. Mvelopes doesn’t move any money, it just keeps track of how the money in your checking account is allocated. Then, as your transactions come in (automatically downloaded from the 12000 financial institutions they have relationships with), you assign them to the envelopes that they correspond to and they reduce the envelope by that amount.

Perhaps an example will help. Let’s say you get paid $100 and you put that cash in the “Clothing” envelope. The balance of the envelope (assuming it was $0 before) is now $100. You buy a sweater for $25. When that transaction is downloaded from your bank, you just drag it into the clothing envelope and it reduces your balance by $25, to $75.

The service has a ton of other benefits and it takes a little bit to get the hang of everything, but it’s awesome. I highly recommend it.

Posted by Sorrells Garden on

My long term financial plan

Great blog post on 9 steps to effective long-term financial management:

Of those, my wife and I have accomplished three. We’re hard at work on the rest. I would actually add a few more to the list for us, since we’re relatively aggressive about pursuing long-term wealth:

10. Start a business
11. Buy and hold income real estate and other cash-producing assets
12. Give back to churches, charities, and communities with your money and your time. Don’t wait on this one until you accomplish 1-11. Start today.

10 and 11 may not be for you; they’re not for everyone. I would recommend 12 to everyone, though. Don’t give people less fortunate an excuse to hate you because of what you’ve been blessed with. Share the wealth.