The Nonconformists’ Guide to Personal Finance
My short life as a daytrader
In my second year of college, I decided to take out $10,000 in student loans and become a daytrader. I could earn far more than the low 4% rate the loans came with, and I planned to finance my education with the winnings.
Sounds like a great idea, right?
There I was, hanging out in the school library, taking up two or three monitors with stock tickers running across the screen and Excel spreadsheets tracking my trades. A copy of Barron's would be spread out beside me, and the Wall Street Journal wasn't far away.
So how did it go? Well, there were a couple of problems.
- Real-time trading was hard to do in 1997. Back then, the internet was up and running well, and Datek Online had just launched, but real-time trading was still restricted to people with a lot faster connections than my school library had.
- Apparently, the school library was not designed for my exclusive use. For some reason, the library staff grew weary of my hanging out in the library all day, taking up three computers. I tried to play it cool when they asked me about it — “Oh, is there a problem?”— but in the end I was put on library restriction: I could use only one computer at a time, and if others were waiting to do academic work, the stock trading would have to stop. Not wanting to pay for a better computer and connection at home, I finally gave it up.
Fast-forward ten years, and I haven't done any stock trading since then, but I've managed to choose unusual paths most of that time:
- I lived in West Africa for four years, working as a volunteer for a charity without taking any salary.
- I've worked as an entrepreneur for most of my adult life — ten years and counting without the dreaded “real job”.
- After spending so much time overseas, I've found that I really enjoy traveling to places most North Americans never go to, so I recently set a goal of traveling to every country in the world before my 35th birthday in 2013
Each of these experiences has taught me a lot about personal finance, and in a few important ways, my belief in unconventional living has carried over to how I handle money. I've made a lot of mistakes along the way, but I've also done a few things right.
With that in mind, I've written a two-part summary to explain more about how I handle my finances. While I don't expect that anyone will adopt my own system in full, I do hope that this summary may help others who see the world similar to the way that I do. My thanks to J.D. for providing a forum for this summary here at Get Rich Slowly.
Back to basics
First of all, I'd like to think that most of what the GRS site advocates — and what GRS readers consistently practice — represents a great start to a nonconformist approach to personal finance. Sadly, the majority of North Americans are woefully under-informed about financial matters and do not set savings goals.
Simply by planning and taking deliberate action with your finances, you are already in a league of your own.
Further, as different as I may be, I am an advocate of most of the basic financial advice presented here on GRS and in other like-minded publications. Some financial advice is fairly generic, but there really are some good principles that are true for everyone.
For example, I believe in:
- emergency savings funds
- paying off credit card balances every month
- being aware of all your expenses
- using a cash method for discretionary spending
- long-term index fund investing
I think of these things as The Basics. Simply following The Basics will put most of us far above the curve.
Also, I am generally skeptical about retirement as it's commonly defined (more on that later), but I am even more skeptical about Social Security. If you're under 50 years old, I don't recommend you count on Social Security for anything. Consider those payments you make each month as a parent or grandparent tax.
Where I diverge from the conventional wisdom is over the issues of debt, focused spending, home ownership, traditional employment, retirement, and charitable giving.
Here are a few of my principles — and please, feel free to take them or leave them for yourself as you see fit. I don't make judgments about the choices of others; I only think it's reasonable that each of us should carefully consider our own motivations and priorities. As J.D. says, “Do what works for you.”
#1 — There is no such thing as “good debt.”
Finance books and magazines often talk about “good debt,” in the sense that a long-term mortgage is considered a good thing to have. Depending on your perspective, a car loan or education loans may also be “good.”
Well, this is probably the only thing in the world I am conservative and old-fashioned about, but I happen to believe that all debt is something to worry about. While watching many friends accumulate huge levels of debt buying cars and houses, I have lived my entire adult life debt-free.
This has occasionally meant going without something or not buying an expensive car (I don't own any car at all now), but the real secret is that choosing to live debt-free is no sacrifice at all. Even though I work as an entrepreneur and have never had a stable income, I also don't have to worry about falling behind on mortgage payments or watching credit card finance charges rise every month.
#2 — Student loans? No thanks!
Aside from the short experience of daytrading with my undergraduate loan money (I actually came out a little ahead, but I wouldn't recommend trying that), I've financed the rest of my education without debt as well.
Two years ago I came to Seattle and began an expensive graduate program, and since that time I have met a lot of students who have gone into debt to finance their undergraduate and graduate education. It's fair to say that some of them are happy with this choice, and there are certain professions (such as medicine) where it is very difficult to get an education without taking on serious debt.
However, it is also fair to say that I know a lot of people who have truly regretted taking on so much debt to go to school, especially if they enrolled in a program that does not lead to a high-paying job after graduation.
I'm simply not comfortable borrowing large sums of money. I was able to pay for my University of Washington Master's Degree on my own. But now that I'm writing during the day instead of building businesses, I really can't afford to continue paying for my education. Earlier this year I was accepted to a competitive Ph.D. program on the east coast, but the offer didn't come with financial support, so I had to make a tough decision.
I could have started the program by taking loans or using long-term savings, hoping that more financial support would come along later. To be honest, I briefly considered taking the loans. But in the end I made the right choice, at least for me: I'm not going. I don't value it that much.
#3 — A house is a liability, not an asset
I am currently living in one of the most expensive housing markets in North America (Seattle, Washington), and I have no interest in buying a home here. I am quite happy that my landlords are responsible for maintenance, and that I pay no homeowners' dues or property taxes. (Yes, I realize that some of those costs are factored in the price of rent, but I think we still come out ahead.)
In the long-term, you do have to live somewhere, and if you're staying put for the next 30 years and want a home of your own, ownership can make sense. But for many of the rest of us, renting is becoming less of a stigma now that people have begun to realize that taking out huge mortgages isn't usually a good idea.
Invest in yourself
My wife Jolie and I made a decision several years ago that guides most of our spending choices. We try not to spend money on “stuff” — physical items that all of us end up accumulating over time — and instead focus our spending on life experiences that we value.
Jolie is an artist, so we invest a lot in her art education and supplies. For me, world travel is my highest personal expense category. On a train ride from Hungary to the Czech Republic a few years back, I worked out the cost of visiting 100 countries. I had already been to a lot of countries, and I figured that to get to the remaining 60 or so and stay for a few days in each would cost roughly $30,000, or the cost of a large SUV.
I prefer to use public transport and don't own a car in Seattle, so I thought, wow, that's cheap. I could have a large vehicle and complain to everyone about the cost of fuel, or I could have the world. For me, it was an easy choice.
Some people would say that world travel is a frivolous luxury, and not something that should be such a prominent item in a graduate student's budget. I'll try to consider that point the next time I'm flying off to Hong Kong or Johannesburg.
Because travel is so important to me, my working budget includes funds for at least one Round-the-World trip each year. I realize that I don't need this trip in the same way that I need to buy groceries, but I do need it in the sense that it is one of my highest priorities, and I would rather eliminate other expenses before cutting into it.
A lot of GRS readers may not be as interested in travel as I am, but that's OK — it's more important to find your own “life experience” priorities. What do you get excited about? What are you truly passionate about? I believe these items should be your spending priorities, right after groceries, savings, and investing in others — the next area in this short guide to unconventional personal finance.
Invest in others
For many affluent people, charitable giving is an afterthought. It's something we do once in a while to feel better, or at the end of the year for a tax write-off.
I have a problem with that mindset. Done well, charitable giving is essentially an investment in those less fortunate than us. I don't view investing in others as a luxury or an afterthought; I consider it as essential as taking care of our own savings.
Money doesn't solve all the problems of the world, and it's important to give to the right causes. For example, because far more people give to short-term relief than to long-term development, the money spent on disaster relief is often highly inefficient and poorly used.
But when you create a strategy for your investment in others, you can have a positive impact on far more people, and the quality of that impact will be greatly optimized.
If you're not sure where to start and are looking for good causes to increase your own giving, consider the following organizations. I personally know the people who run each of these groups and give them my highest recommendations:
- Kiva.org — This great organization has the objective of democratizing microlending by matching small donors (like you and me) with promising entrepreneurs in the developing world who need small loans to improve their businesses.
- CharityIs — My friend Scott Harrison started this project to bypass government foreign aid (most of which does not go to the poorest people in poor countries) and directly provide access to clean water and sanitation throughout Africa and Asia.
- Care — One of the larger, more traditional charities, Care has managed to keep administrative expenses down even as they have expanded to projects in 71 countries
What I'm Doing
Right now I'm beginning a writing career while my wife works as an artist, so we have definitely had to cut back on both giving and savings, but I still try to pay attention to the overall percentages. I also believe that if you don't “miss” the money you give — if there is no real sense of sacrifice — you're not really being challenged by the giving.
Therefore, I have a stated goal of investing at least 15% of our income every year in charitable giving. I feel a little strange about writing that here for 50,000 people to read, because this is something that is very personal, and I have previously shared the number with only a few people.
To those who say that it's hard to give to others when you don't have much money yourself, part of me wants to sympathize, but another part remembers that we chose to adopt this principle when we were living on about $12,000 a year. In the end, all I can say is that every year we have given more money away, and we have rarely lacked for anything.
To be continued…
By getting the basics under control, rejecting conventional beliefs about debt, choosing to spend freely on life experiences instead of “stuff,” and creating a giving plan to invest in others, I've built a personal finance system that is aligned with my values.
There are just a few important parts left, including where the income comes from. I'll discuss that in the next update, which will be published at Get Rich Slowly next week. In that article, I'll discuss alternative forms of work, the financial independence goal, and a few mistakes I've made on my nonconformist finance journey.
Thanks for reading this far! I welcome feedback, questions, or disagreements in the comments below.