Role Model – Page 5

August 26, 2010

So not the right photo

If we told you someone was 29 and made $32,000 annually, and that he regularly went on exotic vacations (Italy, Alaska), was sophisticated enough to invest in gold exchange-traded funds and complicated Treasury instruments, and speculated about being a stay-at-home parent one day and retiring at 57, would you think he was:

a) bad at math;
b) dealing heroin;
c) Controlling His Cash?

His name is Brandon. We read his comment on Frugal Dad regarding the alleged expiration of the middle class (it’s comment #32) and were so impressed we asked him about his own financial details. The conclusion? He’s everything you need to be. If he can do it, you can. Brandon’s extraordinarily detailed, but that beats the hell out of the opposite. Again, it’s about buying assets, selling liabilities, and making conscious choices. Here’s some of his story:

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I’m single and childless. Four years ago my credit cards were maxed, I had a car loan, and was miserable in a low-paying job waiting tables. Rather than go the easy route with bankruptcy, I closed the cards, negotiated the interest rate and paid everything off with an emergency budget in under a year.

I took advantage of Indiana’s individual development account program, which also has federal funding. It gives you a large match in funding, financial literacy training, etc. for 4 years. You can double fund – my program took 2 years. You can spend the money on education, start a business with it, or buy a house. I turned $1600 into about $10k with this program. I also resumed my business degree, which I continue to work on very part-time. It’s not a priority since it serves no purpose to my job.

I started working in a higher-paying job, which pays $32k/year including overtime and holiday pay. Most importantly, I like it. I work with delinquent and abused kids.

I turned the overtime into savings, kept the emergency budget, and saved a few higher-than-usual tax returns. When I get my degree, it’ll be on my financial terms because I want it, not because I need it. Lack of a degree hasn’t held me back from any job I’ve ever wanted. I have lots of friends with $20k-100k in loan debt: I don’t know a college-educated friend or family member who doesn’t have significant debt. The only ones who earn a lot more than me are an engineer and a lawyer, and the lawyer’s expenses dwarf mine.

Last June I bought a condo for $103k, with all new appliances. I ended up with a homeowner’s warranty, $5k in the form of a down payment lien which is forgiven after 5 years. The house was immaculate, reasonably updated considering it’s 30 years old, and had a low monthly condo fee of $100. I have units on either side, so my electric and gas bills are tiny. I put exactly 20% down, avoided private mortgage insurance, and have a mortgage payment of about $480 (excluding low taxes and insurance). I also took advantage of a state program, and end up having a quarter of the mortgage interest I paid refunded to me each year.

Once I controlled my credit, my score shot up. When I got the loan it was 740-750, now it’s 770-790. That gets me a better rate on any future loan.

I realized I’d learned a lot by having an emergency budget, and it went from a necessity to something of a game. It became a challenge to trim costs. I learned how to do minor things on my car; how to change the oil, then the transmission fluid – not sure I’ll make it up to brake pads. I drive a paid-off ‘99 Prelude with 67,000 miles. I bought it in 2004 with a 5-year loan I paid off in 4. I’ll never take out an auto loan again, and will die without buying a new car – the math doesn’t work for me. I was without TV for about 5 years, but I had a $9 Netflix subscription, high-speed internet, and the library. My new roommate wanted TV, so I installed it, but he’s paying for it, and I might finally watch some football, but I can’t get into TV again even when I try. His TV install covered a $200 DSL upgrade fee that kept my bill the same but doubled my service speed.

I occasionally buy myself nice things – my big item this year is a Cutco forged knife set that I needed for a culinary program. Last year it was a treadmill to replace my 20-year old exercise bike, and before that it was a cheap HDTV to replace my 25-year old TV. I use what works until it’s impracticable to keep it, and when replacing it, make sure it’ll a) last and b) get used. I delay purchases of most things – I research it, look for pricing trends/deal cycles, and sometimes just let it hang as a bookmark or in my Amazon cart. If I still want something or feel I’ll use it when I remember to check it next, I’ll act.

I volunteered at a local community center regularly for a few years, the one that administered the IDA program. I knew most of the people working there, grew up with their kids. The center asked if I wanted to help with their foreclosure prevention program, so I did the training and became a counselor. I make a modest return off each client, help the center earn income, and get to help people – an ideal second job. That turned into an opportunity to help start a local teen court program at that center which I’m working on right now. It’ll be a $15k income bump if my budget gets funded.

I rented out my other bedroom. My roommate has raised my utility bill, but he pays my mortgage (or my Roth IRA, take your pick). The $8k homebuyer refund went back into my cash reserve, a portion of which went to replace the original HVAC system in my home. I ended up with $2k in rebates/refunds, even though my current system was still working. It bothered me to replace a working system, but I had incentive.

I don’t carry credit balances unless it’s silly not to, e.g. 0% financing, cash back programs.

My biggest weakness was restaurants, which also goes for most of my foreclosure clients. As a waiter I acquired a taste for good food, plus I was a 20-something man. My monthly grocery budget was $50, and my restaurant budget $500. Now it’s $150/$100 and I’m finding ways to cut it more while eating better food. The $100 is an entertainment expense: I wasn’t willing to give up some nicer meals or my favorite pub with friends. I almost never drink; it’s expensive and I don’t need it to enjoy a night out. The culinary classes will help, through better home cooking and potential future income if I wish.

I calculated the payback on the culinary degree based on my food costs. It’s rough, but I did it because I found the concept of payback on the $3k entertainment expense interesting.

I use prepaid cell phones – none of my friends notice, and I pay $15-20 a month. Nobody notices that my landline is Ooma and has already paid for itself. I keep it for local family, who like to talk. My gas and electric bills are so low that the delivery charges are more than the usage portion. I replaced some bulbs with CFLs, I avoid ghost power draws, and I keep a handle on the air/heat. I’m intrigued by some things like air-drying clothes and making my own detergent, but I haven’t jumped in – that’ll depend on cost and fun factor. Soon I’ll share my wireless with my neighbors, and that should offset my monthly condo fees by $15-20. Another benefit of the speed upgrade.

Last year I went to Washington, D.C. with my parents. I paid for all but a few meals and a Segway tour. I recommend train travel, by the way: it’s a vacation in and of itself. (Ed. Note: Hear, hear.) The year before I went to Glacier National Park with friends, also by train. In September I’m going to Italy, spending a few days with my parents in Venice before they go to Slovenia, while I head south over a week toward Naples. I’m not paying for the $1k plane ticket (thanks Mom), but I took $1k from the vacation fund and donated it to the community center. In a few weeks I’m hitting Vegas for the 7^th consecutive year (Ed. Note: have fun.) I timed the cheapest Southwest tickets, and have a great hotel price I’m sharing. I don’t gamble, (Ed. Note: ignore previous note) but I do like to eat well out there. Next spring or fall I’m going to take a train for a week through Alaska, which I’m already budgeting for in SmartyPig.

My co-workers all make more than I do, though none of them are more than lower-middle class. They usually have 2 incomes and have no idea how I do it without putting it on a card.

They’re rarely interested in hearing how, either. I’ve come to realize that either people can’t imagine living on my budget and not buying stuff all the time (not that they’ve tried it), or that they’ll only change after hitting bottom, and even then that’s iffy (see my foreclosure clients.)

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Impressed? You should be. More next week.

**This post was featured in Festival of Frugality #246**

Man of the Year

January 4, 2010

Bob enjoying his Man of the Year trophy (reenactment)

Lately, we’ve been guilty of accentuating the negative, poking fun at people who refuse to foster their money while not giving enough positive examples of what to do and who’s done it. This week, that changes. Sports Illustrated announces its Sportsman of the Year about a month in advance. Time names its Person of the Year around the same time, and as often as not awards it to multiple people, a symbolic person, or whomever happened to see the magazine on a newsstand.

At Control Your Cash, we actually wait until the earth completes its lap around the sun before handing out honors. And so, our inaugural Man of the Year: a person who exemplifies adopting the habits we’ve been trying to avail you of for the last few months. Anonymity precludes us giving our honoree’s full name, but here he is: Bob G., a 44-year old radio personality who lives in Las Vegas. For a decade, Bob worked for a particular station where he and a series of co-hosts did a morning show that was consistently both lucrative and popular. But because Bob works in the least rational industry in all of commerce, 2 years ago he was fired and replaced by a tardy borderline illiterate who commands half Bob’s salary. Even worse, Bob’s contract included a 6-month noncompete clause – the rationale presumably being that Bob is no longer talented enough to work for that employer, yet still so talented that he’d indirectly cost that employer money were he to work for a rival. You figure it out.

Even with a college degree (Wisconsin, communications, 1988), Bob was now rendered legally unemployable in his chosen field in the city he’d called home for most of his professional life. For most people placed in such a situation, the strategy would be simple:

Eat potato shavings while tallying the days until the noncompete expires;
Ask the wife to pull a double shift at the medical clinic;
Set fire to the credit rating;
Hop around the nation from medium-sized city to medium-sized city, a/k/a the transient career path of the doleful would-be radio star.

Instead, Bob descended to the figurative basement shelter and hooked up with a competing station shortly thereafter. Although he of course missed the $2,000 biweekly direct deposits, practically speaking, Bob and his household barely felt a breeze. Bob spent the previous decade contributing to his 401(k), automatically sending monthly payments without even thinking about it. He transferred it over to an IRA that’s now worth $165,000, and after getting fired set up a Roth IRA.* He also cut a regular monthly check to Vanguard, his mutual fund company. Today, that mutual fund is approaching $170,000. When the market dove, losing almost 40% of its value, Bob didn’t flinch. Instead, he took the drop in stocks as the buying opportunity it is, knowing they were bound to rebound. He started writing bigger checks, and watched his fund rise 30% over the year. And, while temporarily barred from earning income (yes, he signed a contract with draconian restrictions, but that’s another topic), Bob could at least reduce his expenses.

Except Bob barely had expenses to reduce. Credit card debt? Please. Bob carries a single MasterCard, using it for household expenses as a matter of course. He pays the balance in full every month, subscribing to the quaint notion that the price on the tag is what the buyer should pay. Bob would rather eat his groceries than spend years financing them.

Those household expenses aren’t particularly exorbitant, either. Dog food. Cable. An occasional night out with the fellas and a beer or two. A quarterly lovers’ junket to San Diego. Bob has yet to pay $300 for bottle service at a nightclub, and his next clothes-buying spree will be his first.

Bob, his gal pal “Susie” and their Rottweiler “Pinto” live in a house Bob bought new 7 years ago for $185,000. Even though Pinto’s had a health problem or two, his care runs about $800 a year, which is several times cheaper than a child would be. Bob caught the housing market before it exploded – which it did in Las Vegas in a more pronounced fashion than it did in most places. So was his home purchase a strategic decision, bought when it was bought because Bob predicted what market forces would soon do to the value of his property?

No, he bought because he needed a permanent place to live. He was tired of living in an apartment, wanted to build equity, and finally had a worthwhile partner to share his life (and expenses) with. Bob’s house shot up in value in the ensuing years, through no intrinsic reason. Buyers were just bidding prices up faster than builders could build, and Chez Bob went along for the ride. In theory, Bob’s functional house was worth $300,000 in early 2007. That fell as quickly as it rose. An identical house across the street sold 2 months ago for $172,000. Retroactively, it’d seem that early 2007 would have been the ideal time for Bob to have sold and enjoyed the $115,000 gain he’d spent 4 years building.

So did Bob cost himself $13,000 by buying when he did, instead of this past November? If he were a real estate investor with thousands of other options, maybe. But as a human who needs shelter, Bob made out just fine. Yes, his home depreciated. However:

He and his home still have plenty of years left. In Bob’s case, to live. In his house’s case, to regain value. There’s no such thing as a permanent price level of any kind.
What was he supposed to do instead, keep renting an apartment? He still had to have lived somewhere. Say he found one for $850/month. Instead of being down $13,000, he’d have been down $71,400.

Bob’s built equity in the house. He deducts the mortgage interest payments from his annual tax bill. Oh, and that mortgage? Its rate is fixed at 6¼%. Always has been. No nasty surprises that way: the nasty surprise of paying for his professional success by getting fired was plenty, thank you very much. If Bob were reckless, when the home reached its maximum value he’d have opened a home equity line of credit – also known as a second mortgage, it’s a loan from the mortgage company that’s tied to the new, enhanced value of the home. At the height of the market, some people did this, which is risky if you want to use the lent money to buy assets with. It’s ultrasonically risky if you want to buy jetskis and vacations with it, yet people did. And then cried about the heartless bastards at the mortgage companies when the bills came due. Not Bob. He just continued cutting the mortgage company checks without thinking about it.

He drives a 2000 Maxima with 120,000 miles on it. Bob signed a 5-year deal, always overpaid what was due and paid it off 2 years early. He gets the oil changed every 3000 miles and has yet to add aftermarket bumper canards or tinted windows. Every Thanksgiving and every summer, Bob and Susie visit his family in the upper Midwest. They buy the tickets months in advance, saving them a few dollars more for no incremental effort.

Bob’s not wealthy, not does he have any particular desire to be. However, he has a fanatical desire to avoid being poor. While putting that into practice, he’s managed to remain in the 90-somethingth percentile of net worth in this country despite getting fired. He didn’t, and doesn’t, even have to work more than 30 hours a week to get where he and Susie are today.

When informed of his honor, Bob celebrated the news by announcing that he was on his way to a movie. With Susie. And complimentary tickets. Controlling His Cash yet again.

*Real quick: whatever you contribute to a traditional IRA is deducted from your income for tax purposes, with the interest and appreciation taxed years later when you start collecting payments. With a Roth IRA, you pay taxes on the income when you earn it, but those payments, interest and appreciation in the future will be tax-free. You can only get a Roth if you make under $95,000. Bob’s salary of 0 thus qualified him.

**This post is featured at Funny about Money**

Meet your role model, Part I of II

Man of the Year

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