MattHutter.com

A couple years ago I opined my views on saving and investing on a well-known website. It was picked as the post of the day to my utter amazement. Read on for the complete post.

After reading the Millionaire Next Door three times (I currently own five copies and give them as gifts to friends and family when they graduate from high school/college) it had a profound impact on my life. I think following the seven principles of millionaires covered in that book can drastically increase your odds of becoming FIRE [Financially Independent Retired Early.] They are:

1. They live well below their means.
2. They allocate their time, energy, and money efficiently in ways conducive to building wealth.
3. They believe that financial independence (the FI in FIRE) is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.

The book explains in full detail each of these principles and how they achieved their net worth. And by the way, Fools, the back of the book lists the professions of those interviewed for the book. Among some of the surprising careers on the long list:

Accountant, ambulance service, auctioneer, citrus fruit farmer, geologist, horse breeder, janitorial services contractor, lecturer, meat processor, oversize vehicle escort service, trader, timber farmer.

Also shocking–> the impression I got from the book is that doctors and lawyers statistically have the odds stacked against them of achieving great wealth. This is due to their expected high lifestyle and status artifacts they are expected to own. The more I think about this, my son’s pediatrician is probably only in her 30s and she drives a Lexus. Good luck, becoming a FIRE.

Anyway, the whole reason for this post is that I wanted to share with my fellow Fools a simple formula I’ve developed to evaluate how “on track” you are to becoming FIRE. Here it is…

At what age in life did you (and your spouse) achieve a net worth equal to that of your household income?

For example, if your household income is $60,000 per year how old were you when you had that much built up in your 401k, IRA, stocks, home equity, etc?

For some of us, it happens in our 20s, others in our 30s and so on. For some of us, it happens in our 50s/60s and some of us never build up a net worth equal to our household income.

For me and my spouse, we hit it at age 27.

Now, what’s amazing about this formula is that it has ABSOLUTELY NOTHING to do with your income, career or starting net worth. If you make $200,000 per year imagine how long it will take you to build up a net worth equal to that amount. Obviously LBYM and maximizing your investing will drastically speed up hitting that goal.

Here’s an even neater concept I love sharing with co-ops/interns/recent grads in our office:

If you stick 15% of your salary per year under the mattress you will have saved up an ENTIRE YEAR’S salary in 6 years, 8 months. Plus, you will be accustomed to living off 85% of your income (from saving 15% per year). So, in theory, you could quit your job for a year at age 29 (assuming graduating at age 22) and have a BETTER lifestyle than to which you are accustomed (you’ll have saved up 100% of your income, but you’re used to living off 85%, remember?). Pick any age for yourself and this still works.

Now, here’s where it gets really fun:

-invest it in stocks with a 9% annual return
-get a raise at any point during those 6 years, 8 months
-have a company that matches your contribution in any way

…and you can very easily reduce that build-up-a-year-of-income goal to a mere 4 or 5 years. Of course, in a retirement account you can’t touch it until until 59 ½ or thereabouts, but you get my point.

Remember……..two quotes by which I live my life:

“It has nothing to do with how much you make, it’s how much you save.”

“Invest until it hurts.”

And talk to my wife….she claims we’ve burn hurting for quite a while now!

Just my .02

Matt

Note: the original post on that well-known website can be found here.

Apparently I have been eating too much free food and somehow I’ve picked up 20 pounds too much for my size. In my opinion, Weight Watchers is by far the best lifestyle change (note I didn’t say “diet”) you can make to combat weight issues. I only have superficial knowledge of other weight loss plans out there, but here is Weight Watchers in a nutshell:

1. Eat anything you want. Yes, you can have cheeseburgers for breakfast and donuts for lunch and dinner but it’s not recommended. Weight Watchers is based on the points system and those burgers and donuts will burn through your daily point total allowance in about three minutes. For a man my size (5″10′, 35 years old) I have a daily points allowance of 24 points. You can use these points any way you want. Once you hit 24 points during that day, you stop eating. If that’s too challenging for you, rest easy they thought of that. You also get 35 weekly points to use on any days that you go over your daily point total. Family barbeque where you struggle to discipline your eating? Not a problem. Have a couple beers (lite beers are only two points) or some chips and take those from your weekly reserve.
2. Attend the weekly meetings. This is where you either a) strut your stuff in front of the crowd and get applause or cheers or b) put your tail between your legs and recognize that other normal people like you are having success with this thing – it can’t be that difficult. During my last meeting I announced that I had crossed the ten-pound-loss threshold and the crowd applaused for me. Granted I feel like Brad Pitt compared to some of these poor souls, but it still boosts your ego to get that applause. The major points of the 30-minute meeting are announcing new promotions to keep you motivated, hearing stories or anecdotes from the instructor, hearing other members announce their success, hearing other members mention tips and ideas and seeing other folks like you wanting to better their lives.
3. Find some zero point foods and eat them. For me, this has been pretty easy. Nearly all vegetables are zero points and most fruits are one or two points. I make it a habit to have the recommended four to five servings of fruits and vegetables. Plus, there is something psychological about the brain thinking it is eating when in reality the body is consuming zero-point foods that have no affect on weight. The brain is trained to see food, activate the salivary glands, move the arms and hands to bring the food to the mouth, chew the food and digest it. This psychological motion is identical whether consuming a slice of chocolate cake or a bowl of grape tomatoes and carrots. My success has been in “tricking” my mind into thinking it is still getting that chocolate cake when in reality it is getting plenty of healthy veggies.
4. Exercise. Being an avid jogger, I used to be of this mindset. “Hey I just ran four miles, I can have two bowls of ice cream and a Snickers bar.” Um – WRONG! For a person of my size, running four miles is the equivalent of five points. That Snickers alone is six points! The ice cream is probably another ten points. You can see why it’s just easier to eat less than pig out after exercising. Exercise does a couple things for your body, none of which including letting you pig out. First, it slowly changes your metabolism over time. Eventually you could eat a Snickers and it would have no effect on your weight. Ever. That may take months or years of intense physical activity. Second, it gives you leeway on your daily point totals. Days that I allowed myself a little snack after dinner were also days that I jogged in the morning. Before bedtime I realized I still had four points left for day and realized that it was from the early-morning jogging.
5. Learn the hunger scale. A large part of my problem was binging when I was starved. Weight Watchers has a hunger scale similar to this:
   1. Totally full
   2. Ate a little too much
   3. Pleasantly satisfied
   4. Will be hungry soon
   5. Completely famished

   The idea was to always keep yourself around three or four. For me, that meant eating every two to three hours. Yes, it meant snacking at my desk throughout the day, but it prevents those level-five famished fire alarms for me where I could eat a row of Oreos (and have before).

6. Stay away from red-light foods. A red-light food is one that you know you won’t stop when you eat just one. For me this includes pizza, cookies, cereal, some bread products and chocolate. Eventually I will have the discipline to eat these types of foods, but for now I am staying away from them like an alcoholic stays away from bars.
7. Develop a plan for red-light situations. Red-light situations are the same concept as above, but limited to places instead of foods. For me, red-light situations include family picnics and barbeques, employer-purchased meals (“Hey, work is paying for it. I can eat as much as I want!”), and anywhere where I had a couple drinks and thus lowered my judgment and critical thinking. I make a mental plan before leaving the house. I fill up on water, zero-point foods and a game plan for how to stay away from the pizza table or the beer cooler.

The list above is just one man’s observations on how to have success with Weight Watchers. Your success will vary, but hopefully it will be as plentiful as my success has been.

Finally, here are some quotes I heard at one of our meetings that stood out:

• Nothing will ever taste as good thin feels.
• All that matters are the first couple bites. Beyond that it all tastes the same.
• If I am going to eat it, make sure it is worth it. Crappy chocolate is not worth it.

Good luck in your healthy living endeavors.

What if I gave you a bowl of skittles and told you that you could eat as many as you wanted? Then right before you finished the skittles I mentioned you are going to need to save 20 green ones or else. Would you be frustrated that I waited until the bowl was nearly cleaned out before you found out you will need those green ones? That is exactly how many of us run our checking accounts. Plunk down your paycheck in the account (skittles in the bowl) and then keep spending and spending and spending until the account is nearly empty and then-OOPS!-the car needs a $400 repair and we only have $58 in the account (you didn’t save enough green skittles). Or put another way…..plan for your spending!

The envelope budget system works like this: take about five or six envelopes and label them for your discretionary spending accounts. This would include groceries, eating out, vacations, entertainment, household items and gift spending. I would not recommend setting up envelopes for your utilities or house payment since you do not have much control in affecting those monthly amounts. Plus, it is not realistic or convenient to pay your electric bill in cash. Next, go through these discretionary categories and break down how much you need to put into each envelope per month (or per paycheck).

Sample paycheck of $2000 take-home pay per month:

• Approximately $1200 per month of the paycheck goes to the mortgage, utilities and loans. This leaves $800 for the envelopes
• $400 per month for groceries
• $50 per month for gifts (weddings, birthdays, etc.)
• $75 per month for eating out (this could be merged with the groceries account if you wish)
• $75 per month for vacation
• $100 per month for household items (home improvement items, landscaping, home repairs, etc.)
• $100 per month for clothing

Here’s how it works. Every paycheck you go to the ATM and withdraw $400 in cash (and drive home very carefully!) and do that twice per month to get the $800 in the above example. Once you get home you deposit half of the amounts above (example above was monthly amounts) into each of the envelopes. Then as you spend money during the week you take it from each envelope. Each one acts as sort of its own bank account. I’d recommend recording the amount you removed from the envelope on the envelope itself. Two things will begin to happen to you over time:

1. You will control your money. Not the other way around. Who wants your money (how much or little you have) to control you? Not me.
2. Instead of having too much month left at the end of your paycheck, you will have plenty of your paycheck left over at the end of each month.

A perfect example of the envelope budget system in action occurred to me this weekend while replacing our broken mailbox post near the street. The “household items” envelope at the time had about $60 in it. I took that cash and headed to the hardware store. As luck would have it, the mailbox I found and liked cost $52. That left me with $8 to put back in the “household items” envelope. The way most people do it would be to buy any mailbox regardless of what’s in their bank account or even worse put it on a credit card. My envelope system sent me home with leftover cash in my pocket and control of my finances (only having $60 for this category forced me to keep in within the limit).

My wife and I did the envelope system right after we were married in 1995 and now I’m pleased that we’re back on the system. Another benefit of the envelope system is that you pay cash for things. Paying cash for big ticket items has a bit of a sting to it. Imagine buying a new $900 refrigerator and shelling out nine Benjamins one by one by one to the Best Buy salesman. Believe me…it’s painful watching that cash go out of our wallet.

Another benefit of the envelope budget system is that you enjoy the items for which you’ve saved your money. Most consumers charge their Disney trip and then spend months, interest and frustration paying it off later. With this system you are depositing $100 per month into an envelope saving for that vacation. Imagine how much more fun Mickey Mouse or Space Mountain become when you know the trip was paid for before you ever entered the park or hopped on that airplane.

One final benefit of the envelope system is that it forces you to have a front-row view of where your spending is going. Watching one envelope continue to get cleaned out or seeing another build up over time reminds you of your spending habits. For us personally, the grocery envelope gets tattered and worn in about two months of use, but the “Christmas” envelope is still fresh and crisp like the bills in it.

Bottom line: the envelope budget system makes your money work for you, not the reverse.

Do you think watching television influences your spending? In this article I will convince you that the more you watch TV, the more likely you are to be a poor manager of your money.

The Lifestyle Of Actors And Actresses

People in Hollywood live a lifestyle beyond most of our wildest dreams. They are well-tanned and well-groomed. Most of the biggest name celebrities have figures and physiques of athletes or models. They drive expensive cars and live in expensive homes. Jennifer Aniston singlehandedly created an entire cottage industry for hairdressers wanting to give their customers her exact hair style and look. Mark Wahlberg in the early 1990s (back then he was called Marky Mark) singlehandedly became the most successful Calvin Klein jeans model in the history of the company. He sold more jeans by posing shirtless on billboards and magazines than any other marketing campaign could ever hope to achieve. Bottom line: the more you become ensconced with the lifestyles of the rich and famous, the more likely you are to spend your money on their income. That’s a bad thing.

The Barrage Of Commercials

In the 1960s a typical one-hour show had nine minutes of commercials. Today it is twice that at 18 minutes per hour of programming. A thirty-minute show today now has eight minutes of commercials. Put another way, when you watch ten hours of television you are watching nearly three hours of commercials. If scientists put you in a room and made you watch products pitched to you for 180 minutes it would be very likely that you would want to buy those products either immediately (think pizza when you’re starving) or the next time you are in the store (basically anything by household consumer giant Procter and Gamble). Over time, the mass marketing of these products begins to sink into your subconscious mind. In my opinion, the brands with the least risk of consumers buying generic competitors are Coca-Cola, Kleenex, Jif peanut butter and Wonder bread to name a few. The decades of brand recognition and advertisements dumped into our minds makes the decision to purchase that product a no-brainer. Bottom line: the commercials do affect your spending habits over time although you probably don’t feel it during each commercial.

Recently I heard a caller on the Dave Ramsey radio show comment on her employment with Sears. She claimed her hours had been reduced by the company because she had not sold enough Sears credit cards or the MPAs (Master Protection Agreements) to customers. Now, I’ve posted about this topic before here and here but this caller officially spilled the beans. It’s pretty obvious that commissions and profits are tied to both the company and the employee for selling these MPAs which are commonly called extended warranties. The reason I believe that Sears is not looking out for you is because by the time you get to checkout to pay your bill, they stick you with more useless financial junk to buy.

In another Sears incident, one blogger details her story at length about how she had extreme difficulty getting her money back from a Master Protection Agreement that failed to provide coverage for her digital camera. The long and the short of it is that she paid for part of the MPA with a gift card and part of it in cash. When she went to get it refunded (due to Sears not even servicing digital cameras after all!) the store manager required her refund be given in the form of a store credit.

A former Sears appliance salesman basically created a Master Agreement Manifesto detailing the dubious nature of these offerings. Among the highlights I found unbelievable:

• the company holds weekly meetings to discuss MA quotas and techniques to sell them
• the salesmen are told to not give up selling the MAs until the customer says “no” at least three times
• a mathematical diagram called the bathtub curve which display high failure rates for products either in the first days of use or many years later thus making a curve the shape of a bathtub. Sears uses this curve to maximize profits on the MA by making the warranty end right when failures become more likely (in many products after three years)
• for many people the MA ends up being a waste of money because they lose it or forget to use it

As many of my posts stress, remember the following tips when buying from a major retailer. First, using their in-store credit card significantly increases the chances of you getting taken to the cleaners on interest charge if you miss a payment. Second, the extended warranties are a rip-off that transport cash from your wallet to the retailer’s pocket and end up providing you little and the merchant a lot. Third, loss leaders will often get you into the store for a free or cheap deal, but often you are enticed to buy more once in the store. Remember these tips for maximum savings for you.