My first job offer out of college was in the Bay Area. With $28,000 in student loan debt I relocated to Sunnyvale California for a sales job. At 22 years old I had money for the first time, shared a place with a roommate and had a paid for company vehicle. Life was great, I ate out and traveled to anywhere I wanted to go. I had worked hard so I deserved it. When you grow up with no money and now that I had some, I needed to treat myself well. I managed my money well where I had no credit card debt, only student loans. Since my company didn’t provide a company match in my 401K I didn’t feel the need to contribute. I had 40+ years to contribute, I was a badass so I knew I was going to make a lot more money.
First Year Negative Net Worth -$28,000
My company vehicle was a mini van as I posted here. At 23 years old I “needed” a better vehicle especially if I wanted to date well in the Bay Area. The $32,000 vehicle had a manageable payment with gas and insurance of around $650 a month. I could afford it because my rent was low, with bonuses I was making over $50,000+ a year. I budgeted well, I was proud that I didn’t have any debt except student loans and my car loan. Everybody in the Bay Area had car and student loans.
Second Year Negative Net Worth (with student loan payments) -$58,000
Turning 25 was a milestone. I could rent a car without penalty, and I contributed 5% to my 401K for the first time. 5% was the recommended allocation, with my expenses I couldn’t afford anymore. I didn’t buy expensive “useless” stereo systems or junk like my friends that had credit card debt. The problem was that I had no tax write offs, taxes was my biggest expense. I had some money saved up so I bought my first home in Hawaii for the tax write offs and to build equity.
Third Year Negative Net Worth( with rental down payment) -$44,000
After five years I thought I was doing well. I had a real estate rental, a nice car and my 401K balance was growing with the market. Despite all that I still had a negative net worth, I was ghetto rich. Ghetto rich is where it looks like you have money and own a lot of things, but in reality you don’t own shit. My Negative Net Worth meant I was borrowing money to buy depreciating assets, as opposed to leveraging money to buy appreciating assets.
Fifth Year Negative Net Worth -$24,000
It took me another two years to realize that spending all that I made and making minimum investments to my 401K meant that I was destined to work for another 35 years. When interest rates dropped I refinanced my rental and took cash out to pay off the remaining $12,000 of my student loans. To get my net worth positive I needed to:
Get tired of debt and focus on building wealth.
I prioritized my retirement contributions up to the maximum allowed by my company. To pay for it I cut down on a lot of wasteful spending, I didn’t eat out as much and didn’t need to go to Vegas twice a year. All leftover funds was sent to pay off the remaining car and student loans.
Tune out the noise and always keep investing.
Regardless of what was happening in the world I invested every paycheck. When picking individual stocks (which I don’t recommend) I bought great companies and held it for years even when I lost more than half my money. My biggest pet peeve is when people talk about how it was obvious that 2009 was a great year for investing. Losing 60 percent of your portfolio when you only have $40,000 and saving $15,000 a year is easy to recover. It is much more difficult when you lose more than six figures on your investments, at one time I had lost nearly three years of salary on investments. By not panic selling and staying invested I was able to magnify my returns due to buying in a down market.
Understanding there is money to be made in any market.
I know naysayers will point out that I used my rental’s equity to pay off my student loans. When I bought my first property prices seemed high at that time. Despite the increase in equity due to a drop in interest rates my payments are lower than when I first purchased. If you value real estate correctly (basing it on rents and the neighborhood) it doesn’t matter what home prices do. Real estate is my favorite investment class and I believe you should ride the housing boom.
Having a diverse portfolio and having the courage to buy when the market drops hundreds of points in a week. Prioritizing your investments above all other expenses. The market is at an all time high, what if in 5 years the Dow is at 25,000 and everything looks cheap today?
Do you budget for investments? Do you have a positive net worth? If not what are you doing to achieve it?