An Employee's Guide to Achieving Financial Security in America - In several excruciatingly difficult steps

Gentle reader,

Here are some thoughts on making sure that you don't spend your life in a state of continual financial stress. There are a number of steps. I'm afraid the first step is a difficult one. The other steps are difficult also. Hi-ho, let's get started anyway.

The first step is for you to get a very high paying job. How do you do that? Well, it depends on the job but you should definitely spend some time researching jobs that pay well. For some you will need to invest years into college (medicine, law). For some you will need to be extremely smart (Wall Street quantitative analyst). For some you will need to be able to handle large quantities of boredom and stress (management, law). For others you will need the ability to successfully lie to other people (sales, law). OK, I gave lawyers a hard time there. If you have a family and you want a decent house to put them in, you should aim for $100k or above. There aren't many jobs that pay that much these days, you may have noticed. That's what makes this step so difficult. The problem with high-paying jobs is that, usually, the amount of stress you will have to deal with is directly proportional to your salary.

Why such an emphasis on a high-paying job? Well, let's be honest. Inflation has been creeping up (gas, energy, education, little things like that). In particular, housing has gone up by a ridiculous amount over the past 5 years. I find it very frustrating that if I was starting out today I would not be able to afford my own house. I know it's nice for some to have their property value appreciate but not to the point where young people cannot afford to buy a place of their own. So, if you want a decent house you will probably need to make a lot of money.

The second step is for you to live below your means. There are many places you can go to read suggestions (e.g. blogs and finance web sites). I think you should aim to have at least $500 of cash left over every month to save, after all other expenses, including maxing out your 401(k). Maxing out your 401(k) means that you will need to invest around $15k a year, which is over $1k a month. See how step 1 is important? It's difficult to do that on a very low salary, particularly if you have a family. Be wary of the lure of the new car. That will take several hundred dollars a month away for a few years, at least. If you own your own house, your mortgage will most probably be your biggest expense. Don't underestimate heating and cooling as well, depending on where you live. Energy costs are rising far quicker than inflation. Owning a house in general is a constant source of expenses.

The third step is for you to build up an emergency fund. You should aim for around 6 months of expenses, but more is better. Be aware of the fact that if you lose your job, you will probably have to COBRA (continue paying for, by yourself) your health care. That can be EXTREMELY EXPENSIVE for a family. We are talking $1000 a month or more. That cost should be included when you are figuring your monthly expenses. Keep your emergency fund in a high-interest account or treasury bonds, something that is VERY SAFE.

The fourth step is for you to be VERY CAREFUL about your career. You do NOT want to lose your job for an extended period. That is terrible, financially (as well as emotionally). Basic advice here is to avoid companies that are clearly in trouble (unfortunately, most companies will be in trouble at some time, because many businesses are cyclical). If the company you work for is not making a profit, it is cause to be worried and start looking elsewhere. To this point, you must MANAGE YOUR OWN CAREER. Update your skills constantly, make sure that you are competitive. Be aware of current salaries for your type of work. Are you highly paid? BEWARE. You are a target for losing your job unless you are obviously justifying your higher-than-average salary. By the way, it is a fact of life that NOBODY cares about your career as much as you do, so look out for yourself.

Since so few companies offer pensions any more, the fifth step is to invest steadily for your retirement and invest in the right things. Again, you can read books about this. A good one is "The four pillars of Investing" by William Bernstein. Avoid the following mistakes:
* Do not invest all your money in your company's stock! Remember what happened to Enron?
* Do not invest more than a few percent of your savings in any one particular stock. Consider low-cost index funds or ETFs (exchange-traded funds). Google for IYY (Dow Jones total market) or EFA (European large cap).

Also, do not overlook international funds. Many very intelligent investors are sounding warnings about the US economy. Are they right? Beats me. But it doesn't hurt to diversify into European stocks, and maybe consider China and India as well. Once you have picked what you want to invest in, STICK WITH IT. Don't be constantly changing your mind and chasing "hot" sectors. Every day the press focuses on what the stock market has done. Forget about it. You need to invest your money for the long term (20, 30 years). If you are investing steadily (e.g. every month) it is best for you that the stock market goes DOWN for a while anyway, especially when you are starting out. It's like prices being cheap at the supermarket.

Well, that's it, I have run out of advice for now so on to today's quote...

If you're old enough to start thinking about sex, you're old enough to start saving for retirement.
-Phil DeMuth


Until the next time, gentle reader, I remain as always,

your friend,

Buford Twain

Are you Middle Class or Working Class?

Gentle reader,

Do you consider yourself Working Class or Middle Class?

I am guessing that you answered what the vast majority of people in the US would answer: "Middle Class!".

But, what does that mean, and how do we define the "Middle" and "Working" classes"?

Let me suggest a very simple definition of Working Class, based on one simple test:

You belong to the working class if the majority of adults in your household *need* to work for a living in order to make ends meet.

I think this is a reasonable definition. Why? Because as soon as the percentage of working adults
in a household rises above 50% life becomes more about survival than "the pursuit of happiness". To use the vernacular: "It Mostly Sucks (TM)". Even if you enjoy what you do, your time is no longer your own. Well, aside from those 2 weeks of vacation (assuming that you even get that much).

In other words...

If you are a parent in a single-parent household and you need to work then using this definition
you belong to the Working Class, irrespective of the particular job that you have.

And, if you belong to a 2-parent household and both need to work to meet expenses then your
family is Working Class.

I don't know about you, but I find that it is becoming tougher to make ends meet than 10 years ago. House prices have increased, heating and gasoline are more expensive. Wages haven't really risen much, in real terms (adjusted for inflation). Many families are finding that they need both parents to be working. I think that in the future, a lot people who thought that they were middle class are going to find out that they are really Working Class.

And on to the quote for today:

If you give me six lines written by the most honest man, I will find something in them to hang him.
-Cardinal Richelieu

Until the next time, gentle reader, I remain,

Your friend,

Buford Twain

Don't be Number 1. Be Number 2.

Gentle reader,

Despite what they may say ("our employees are our greatest asset!"), companies don't have your best interests at heart. Trust me on that.

They are there to make money and that's about it.

Not-for-profit companies may be the exception (I have never worked full-time at one) but somehow, I doubt it.

Given that it's a dog-eat-dog world, what can you do to improve your chances at thriving and surviving as an employee commando in the corporate jungle?

Here's a tip that may seem counter-intuitive but bear with me, all shall be revealed...

Don't be Number 1 at work...(even though you definitely have what it takes)
Don't be number 3 at work...
Be Number 2 at work (no, not in the scatological sense).

If you are number 1, you might be paid more than the others but that comes with some serious drawbacks. You are too smart to fall into that trap. It means...

* You are the person they all turn to in a crisis. This means: LOTS OF PRESSURE
* You must be driven and competitive. In other words, STRESSED OUT
* You will be expected to lead the critical projects. Or, YOU WILL LIVE AT THE OFFICE

If you are number 3 (i.e. significantly below number 1) you will have the following fun little issues to deal with:

* You will be passed over for promotions and will therefore MAKE MUCH LESS MONEY
* You will be viewed as a bit of a LOSER and will therefore be the FIRST TO GET THE BOOT when the layoffs start.
* You will probably not enjoy your job and so you will be MISERABLE at work

However, if you are #2, or just ever-so-slightly behind number 1, you will enjoy the following benefits:

* You will get to work on some of the most INTERESTING PROJECTS.
* You will be PAID REASONABLY WELL (though, of course, not as well as #1)
* You will enjoy PRETTY GOOD JOB SECURITY
* You will enjoy a moderate amount of prestige
* You will not have a lot of pressure, since the #1 guy or gal will be taking most of it (haha!)

It's a bit like trailing directly behind Lance Armstrong in the Tour-de-France.

It's similar to following in the slipstream of an 18-wheeler.

Or driving right behind the speeding emergency vehicle when traffic is stuck.

It's almost (but not quite) immoral (you are purposefully holding back your best work)
It's a little bit risky (you might just get promoted to the #1 spot. Aaargh!) but...
It can be VERY ADVANTAGEOUS

Come on, you know it makes sense. You're a savvy slacker.

And on to the quote for the day...

"If fifty million people say a foolish thing, it is still a foolish thing."
-Anatole France

Until the next time, gentle reader, I remain as always,

Your friend,

Buford Twain

Essentials for the Working Stiff: The 401(K)

Gentle reader,

In case you haven't noticed, there are many companies that no longer offer a pension.

If you work for a company and they have never, not even once, mentioned that you are a part of their pension plan, then you probably work for one of those companies.

Of the few companies that remain that do offer pensions, some are going to go bankrupt. So they really don't offer a pension either.

If you are young and naive, you probably think you are going to live forever and you aren't too worried about your retirement.


However, I am here to tell you that you won't live forever and before you die there is a good chance that you will be too tired or sick to work.

In that case, you will need a supply of cold hard ca$h.

It is likely that the government will provide *something* to you in your old age (I am talking about what is currently known as social security).

However, the amount probably won't be enough to live on.

What is a financially well-informed person to do?

Well, the simple answer is: "Save Money".

The 401(k) plan (basically, a tax-deferred savings account) is probably the best way to do that, assuming you are eligible (i.e. your employer has such a plan).

There are a few reasons why it makes sense to put money into a 401(k) plan:

1) You are not immediately taxed on the money you invest in a 401(k) plan. In other words, you save the income tax for yourself instead of paying Uncle Sam.
2) The earnings (profits) you earn from investing that money is also not taxed until you start taking the money out.
3) Employers typically deduct money from your paycheck to go into your 401(k) plan on a regular basis. So, there is no additional "work" required on your part other than to keep your job. This makes it far more likely that you will accumulate a sizeable amount of money than if you had to actively mail a check each month. You are "paying yourself first".

The investments that are available in a 401(k) plan are typically mutual funds.

A mutual fund is a collection of many stocks all bundled together. When compared to investing in individual stocks, mutual funds are typically fairly "boring", because they move slowly as opposed to individual company stocks (think McDonald's, Disney, IBM, etc) that are more volatile. The "boring" factor is actually good thing: you are more likely to forget about them, and then wake up one day and realize that you are RICH!, or are well on the way.

I will take a closer look at how to pick from the different funds in your 401(k) plan in a later article.

The one thing to keep in mind is that, on average, stocks (and therefore mutual funds) increase in value over time, and over long periods of time (say, 30 or 40 years) often increase A LOT. I mean, a very lot.

The longer the time period, the more you are likely to gain. The bottom line:

*** IT IS VERY IMPORTANT TO INVEST WHEN YOU ARE YOUNG ***

How much should you invest in your 401(k) plan?

Before you even start to invest in it, think about the following because that will (or may) affect how much you can afford:

1) Do you own your own house? If not, would you like to own one? That is a reasonably good investment itself and it's worth putting your money there first if that is one of your personal goals/dreams.
2) Do you have an emergency fund that will allow you to live for 6 months if you were to lose your job today? If not, build up that fund and put it in something safe like an interest bearing savings account.

After thinking about 1) and 2), consider putting as much money into your 401(k) plan as possible, up to the maximum allowed yearly contribution (which is $15,500 for 2007).

The government is essentially offering you "free money" so take as much as you can get.

Note that I make this suggestion whether or not your company matches part of your 401(k) contribution or not.

If your company does contribute more free money, then you should definitely take advantage of that as well.

You (or your loved ones) will thank you later.


On to today's quote:

“He is richest whose pleasures cost the least.”
-Benjamin Franklin


Until the next time, gentle reader, I remain,

your friend,

Buford twain


[ Disclaimer: Not to be taken as financial advice. Think for YOURSELF at all times. ]