In early October, 2007, I announced that I had retired in my forties. So I now join my wife, who had stopped working earlier to be at home with our child. As promised, I am writing a Friday series on "How We Did It," of which this is segment #4. ( #1 is about our childhood , #2 is about education, and #3 is about working.) Our story is a boring one because we did it by working for established companies, spending less than we earn, and prudently investing our savings. There were no business start ups, lottery winnings, or inheritances involved. However, it worked for us. Read on if you still want to find out how.
In my first job, many of college graduate new hires, did social activities together. It was clear to me that I had chose a different lifestyle than many of them. My apartment was 1/3 to 1/2 less expensive than their apartments. I drove a 13 year old family car, while many of them purchased new cars. I rarely used my credit card in contrast to some friends that charged their limit and paid the minimum. Looking back, I wasn't perfect, but I did manage to do some things right.
Here's What I Did Well
Acted below my wage. In the early years, I usually had money left over each month, which I put into a savings account. I only recall one month when I spent my entire paycheck before the end of the month, my first month of working. I managed to spend all my money three days before my next paycheck. However, I was able to make it until the next pay day. I never did that again. Here are some of the elements that contributed to living below my means:
- Rented and furnished a basic apartment close to work. To me, an apartment was only a place to sleep and I didn't want to spend much time commuting. My first apartment was a mile from work and its only amenity was a pool. No clubhouse, sauna or exercise facility. It was about 2/3 to 1/2 the cost of luxury apartments in the area. I furnished it some college items and hand-me-down furniture from my family and lived there a couple years before moving to a rented house with a friend.
- Bought only what I needed. My only major household purchases were a microwave and a personal computer, both of which were relatively new in the 1980s. Even back then, I didn't have cable TV, gym memberships, or buy other things that I wouldn't use.
- Didn't buy the next car for two years. While it wasn't pretty, the 13 year old family car was reliable and got me where I needed to be. Not having a car payment was extremely helpful for managing my early finances.
- Inexpensive entertainment. Local recreational leagues were my main form of entertainment. I found them to be good exercise, great socializing and, of course, fun. The major expense was the weekly social event after the game, at a local bar.
- Avoided debt for everyday expenses. Initially, I operated on a cash basis to manage my finances, which prevented me from over spending. The only debt I had was my student loan. Initially, I didn't have a credit card. When I started using a credit card, the bill was paid off immediately.
Here Are Things I would Do Differently Today
During my first three years of working, I didn't have the savings to pay cash for a car or put down a 20% down payment for the house I wanted. So in both these areas, I probably took on a little too much debt, and monthly payments to acquire them. While my choices were stretching, I was able to survive since I was frugal in other areas of my life.
- Bought a new car after two years. I admit it. I had the new car itch. I bought my first car with a 4-year loan. Fortunately, I didn't buy a BMW, which I had been considering. Although I could easily afford the payment, it did significant reduce my savings and made it difficult to qualify for a home loan in the future.
Today, I would buy a more basic new car than I bought. Alternatively, I would buy loaded used car. I have purchased cars both ways and have been very satisfied.
- Stretched to buy a house. In the eighties, people were still benefiting from increasing value of homes. I bought the most I could afford, even though the bank thought I couldn't qualify. I ended up partnering with my parents, at 50% ownership to buy the house. I covered 100% of the mortgage, although 1/2 was considered "rent" payments to my parents.
Fortunately, this stretch worked to my advantage. I had bought a house in a desirable and highly appreciating neighborhood. It ended up almost tripling in value when we sold it 16 years later, for a annualized 6.2% after tax return. In addition, interest rates were dropping during the eighties, enabling me to refinance from a 30-year to 15-year mortgage for the same monthly payment. Finally, after 16 years, my monthly mortgage cost was exactly the same, while my salary had almost tripled.
If I did this over again, I would purchase a two family house, or duplex, and rent out the other part to a good friend. Doing so would have covered a major part of the mortgage and expenses. Also, the house would have been a real estate investment, with the income, tax and capital gains benefits associated with it.
Next segment: Setting Goals and Tracking Progress
Here's the series:
- Our Childhood Preparation
- The Value Of Higher Education
- Making The Most Of My Job
- Lifestyle and Spending Choices
- Setting Goals, Developing Plans and Tracking Process
- Staying The Course
- How Luck Played A Role
- My Personal Finance Mind Tricks
- The Professionals We Used
- When Preparation Met Opportunity
For more on Reaping the Rewards , check back every Friday for a new segment.
Photo Credit: morgueFile.com, Kenn Kiser
This is not financial advice. Please consult a professional advisor.
Copyright © 2007 Achievement Catalyst, LLC