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

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. ]

Buford Twain's Portfolio Possibility: Berkshire Hathaway

Gentle reader,

Warren Buffet and his Berkshire Hathaway company are truly diamonds in the rough.

Mr. Buffet is a man who is simultaneously smart, honest, funny and charitable.

As if that weren't enough, he consistently makes boatloads of money for his shareholders.

Warren Buffett started out in the textile business. When that didn't work so well, he moved on to re-insurance and "regular" insurance. For example, GEICO is a very MINOR part of Berkshire's portfolio of wholly owned companies. So is fast food (DQ anyone?), jewelry, private jets (NetJets is one of their latest acquisitions) and many other somwehat boring yet highly profitable businesses such as electronics components distribution (TTI).

Berkshire Hathaway's biggest "problem" is that they simply have SO MUCH MONEY floating around ("float" literally, from their insurance businesses) that they have a hard time finding quality things to invest in. Much of the money is invested in the stock market. Berkshire Hathaway owns around 8% of Coca-Cola and has a large stake in around 15 other large US-based companies including the Washington Post, Wells Fargo and Home Depot.

When Mr. Buffet sees a company that he thinks is priced attractively, poised to grow, and is run by good managers, well -- he buys it. Traditionally, these companies have been US-based. Increasingly, Warren is reaching further afield (e.g. ISCAR is an Israeli company that makes cutting tools).

Personally, I believe that Warren Buffet has shown that it is possible to make money AND not be morally bankrupt. Therefore, even those who lean toward socially responsible investmenting should take a look at Berkshire. Those of you who care solely about monetary matters (shame on you!) will also be intersted. In his annual review, almost the first thing Mr Buffet does is chart the performance of Berkshire Hathaway against the S&P 500. What other corporation does that? And isn't ashamed of the results??

Although A-shares of Berkshire Hathaway are currently running over $100,000 a piece, you can pick up a B share for about 1/30th of that, or around $3600. The only disadvantage of owning B shares is that they do not entitle you to vote as a shareholder. But you CAN attend the annual shareholders meeting in Omaha (May 5th this year)!

My only concern is Mr. Buffet's age (76). But, he is actively working on picking a successor
(or successors, since it will likely take 2 or more people to do what he was doing on his own).
Whether that person or persons will be able to carry on as effectively remains to be seen...
The question to ask about Berkshire is the same question Warren Buffet asks about the companies he is interested in acquiring, or investing in. That question is: "Is the company priced attractively and how quickly can it be expected to grow its profits?"

I leave you to do your own research on Berkshire and the "Oracle of Omaha".

But for now here are a few words of wisdom, taken from the Berkshire Hathaway 2006 Annual Report:

When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.
-Warren Buffet

If you want to get a reputation as a good businessman,
be sure to get into a good business.
-friend of Warren Buffet to WB

Be fearful when others are greedy,
and be greedy when others are fearful.
-Warren Buffet

ISCAR makes money because it enables its customers to make MORE money.
There is no better recipe for continued success.
-Warren Buffet


And until the next time, gentle reader, I remain,

Your friend,

Buford Twain

PS - This post was included in the Carnival of Personal Finance #91

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

Don't forget the possibility that you may die BEFORE you retire

Gentle reader,

You know how those well-meaning people are always telling you to save as much as you can for retirement (including at times, myself!).

Well, there is one thing that they almost always fail to mention.

The fact is that a good number of people won't make it, or will die shortly after they retire.

How many? What are your odds? Good questions. I can tell you this. I am 41 years old and already I have lost one close friend who died in his mid 30's.

Over 40,000 Americans are going to die this year from car accidents.

Money and success only go so far, and not very far at all when you are in a pine box six feet underground. Or cremated, or whatever.

When you reach 40, your odds of dying each year are somewhere around 1 in 200, I believe.
So between the ages of 40 and 60, assuming that the odds don't go up, you have a 1 in 10 chance of dying. Those odds don't sound too great, do they? Even if you make it, there is also a reasonable chance that you will have some terrible disease, or be crippled and unable to really enjoy the remainder of your life.

"Buford, you depressing old fool, what is your point?" you are probably asking by now, and I apologize for being long-winded.

My friends, my point is this: You had damn well make the most of your life and enjoy it while you have it. Or, as I am told the Bulgarians say, "You better wear your new clothes".

Sure, put some money away for retirement. More importantly, perhaps, make sure you have 6 months or more of expenses put away in case you lose your job.

However, I advise against putting EVERYTHING away for retirement. The sad fact is, many of us just won't make it that far. Which brings us to today's quote:

"Life moves pretty fast. If you don't stop and look around once in awhile, you could miss it."
-Ferris Bueller

On that note, I will end this entry, but rest assured that I remain,

Your friend,

Buford Twain