11/17 Free Money Finance

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Free Money Finance - Grow your net worth.

Have You Ever Taken Risks to Try and Improve Your Career?
November 16, 2009 at 4:45 pm

If you've been a reader of Free Money Finance for more than 15 seconds you've heard me talk about the importance of managing your career. I've offered lots of thoughts on the subject of how you can build/grow/maximize your career, but I haven't dealt a lot with taking risks to boost your career (as highlighted in this piece from the Wall Street Journal.) I did mention taking risks a few times (mostly in passing) when I detailed all the jobs I've ever held, but I thought I'd add a few more comments/thoughts to the times mentioned in that series.

First of all, taking risks can definitely be a way to boost your career. Just like with investments, the higher the risk, higher the reward (usually.) So if you want to propel yourself and your career ahead by a leap or two, taking a big risk and being successful at it is certainly one way of doing so.

Of course, there's the downside to that option as well -- it's risky. And while you can try and select "risks" that you think you can control/deal with, events are often not controllable (especially when the situation is volatile.) In these cases, you can actually fail in your efforts and your career will take a hit (or two.) And thus the dilemma -- is it worth it or not to take risks to propel your career?

I've taken a few big risks (I think we all probably take minor risks here and there over time, but that's not the subject of this post -- I'm referring here to big risks that carry the chance for big success or crash-and-burn failure.) A few of the ones I've taken:

I moved to a new division that was in tough shape and the business I managed was in danger of going bye-bye. This was an instance where taking a risk paid off since I was able to turn the business around and was rewarded with more responsibility and managing a huge portion of our company's portfolio.
I changed industries and got a bit off the track that I had worked to develop the first several years of my career. I'm going to give this risk a semi-thumbs-up. The upside was that I enjoyed the company, the people, and the industry much more. It also set the path for my career that continued to lead to success. The downside is that I probably could have made more money staying where I was Oh, and that the job turned into a nightmare over time.
I joined a start-up during the dot com boom. I think we all know how that turned out. Luckily for me I landed on my feet, but this was certainly a risk that didn't turn out anywhere what I hoped for or expected. And to make matters worse, I invested in the company as well. Ugh.
I went to work for a very small, relatively obscure company. It's been a great place (good compensation too) to work for five years and I can actually see myself retiring from this place one day. On the downside, it's in an industry I'm not that familiar with and my old network has been lost as a result of the move. I'm not sure where my career would take me if I left this position. That's one reason I'm focused on building up my network.

How about you? Have you ever taken a risk to try and grow your career? What happened?

How to Become Wealthy
November 16, 2009 at 11:45 am

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on how to become wealthy:

If you want to become wealthy [the way other wealthy people have], live in a neighborhood where your household is among the top income generators. For example, what if your household's total realized income is in, say, the high five figures? Then live in a neighborhood where the median market value of a home is less than $300,000. Do so, and the chances are that among your neighbors, your household will likely be in the top 20 percent along the income continuum. Then live and consume as though your household's income was only 80 percent of what it actually generates. Save and invest the rest. Now you are on your way to becoming wealthy.

What is a good rule if you are determined to become wealthy? The market value of the home you purchase should be less than three times your household's total annual realized income.

If you're not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

A few thoughts from me:

1. I'm predicting that several people will hate this post. People don't like being told what sort of house to buy. ;-)

2. The author gives us the saving amount that seems to make most people wealthy (or so I assume from the info above): 20%. It looks like to me that if you can save 20% of your salary, you'll end up wealthy. There, now that is easy, isn't it? :-)

3. Do the two pieces of advice ("the market value of the home you purchase should be less than three times your household's total annual realized income" and "never purchase a home that requires a mortgage that is more than twice your household's annual realized income") imply that you should put up to 1/3 of a downpayment on any home you buy? If the home is worth three times your income and the mortgage can only be two times your income, that means you have to put at least 1/3 of the home's value as a downpayment, right?

4. I GUARANTEE that someone reading this (if not someone commenting) will say that the formula above will not work on the coasts and/or in higher-cost-of-living cities. My responses to that are:

I told you that living in more expensive cities is a drain on your net worth.

What about all those "great/high" incomes everyone is always talking about in big cities? As I've said, the higher salaries are more than eclipsed by higher living costs, and the inflated prices of homes is one of the biggest cost hits there are.

You can always rent.

If you don't want to become wealthy, there's no problem. Buy whatever house you want in whatever city you like.

Even if you buy a home outside these parameters, you still MIGHT be able to get rich if you are able to save the 20% of your income. I'm not sure, but it's at least an option to consider. (A way to do this would be to cut your spending in some other area where others spend more.)

5. I have to mention my formula for buying a house. Very similar to what they are saying above (though not as specific.)

6. The advice above is what we've used to buy our homes. Since we've been married, we've owned three houses. Here are the breakdowns on them:

House 1 -- Value was 1.4 times our household income, mortgage was 1.2 times our household income

House 2 -- Value was 1.4 times our household income, mortgage was 1.1 times our household income

House 3 -- Value was 1.2 times our household income, mortgage was 0 times our household income (we paid cash for this house)

My wife was working when we purchased our first two homes. By the time we got house #3 she was staying home full-time with the kids. These sorts of results are possible when do you what I've been preaching on this blog for years: manage your career to maximize your income, work to add additional income, and keep your spending under control. For the most part, this is also what the book advises, though they focus less on generating income and more on controlling spending.

Best of Money Carnival Now Available
November 16, 2009 at 10:53 am

Just a heads-up that the Best of Money Carnival is now up. Congrats to all participants and especially the winning post, Abysmal Survey Results: Americans Don't Understand Basic Financial Concepts.

BTW, I made the cut myself with my post titled How to Make Money as a Soccer Referee.

One final note: if you're a blogger and want a simple and easy way to drive traffic, contact me about hosting the Best of Money Carnival. I'm now taking hosts for the early part of 2010.

Steps To Grow Your Net Worth When You Don't Make A Six Figure Income
November 16, 2009 at 5:29 am

The following is a guest post from Danny Kofke, author of How to Survive (and Perhaps Thrive) on a Teacher's Salary.

It seems everywhere we look these days, we see something telling us how bad the economy is and how tough times are. I agree that for some this is true but, from personal experience, you can still live a wealthy life on a moderate income.

My name is Danny Kofke and I am a school teacher and author of the book ""How to Survive (and Perhaps Thrive) on a Teacher's Salary". My wife, Tracy, is a former teacher and now stay-at-home mother to our two young daughters. Despite earning a moderate income, we have no debt except our mortgage, have a 12-month emergency fund, invest so that we are on track to retire with a sizable nest egg, and live a financially secure life on a teacher's salary.

Here are some steps Tracy and I took that have enabled my family to thrive on a teacher's salary:

Build Up An Emergency Fund

This was the key step for us. I think this is important in case Murphy's Law comes knocking. You never know when/if the transmission in your car will go or the air conditioning unit for your house breaks in the middle of August. Tracy and I wanted at least $3,000 in this fund before moving on to the next step (we added more later on as we had less debt). We wanted a couple months of living expenses in this fund in case an emergency - when I say emergency I don't mean a 50 inch plasma television either - happened. This way we had the cash on hand and did not have to use credit cards to pay for an unplanned event.

Pay-Off Your Debt

After getting $3,000 in an emergency fund, Tracy and I started paying off the debt we had. We paid-off our credit cards and car - we just had one car at this time. I know some recommend paying off all your debt at this point but we kept Tracy's student loan and our mortgage because we wanted to move on to investing so we could use the magic of compound interest to our benefit.

We paid off our credit cards by taking the card with the smallest amount first and focused on getting rid of that. I know some recommend paying off the card with the highest interest rate first but we wanted to build traction and see some results fast. I think money problems are mostly emotional. Most people know it is not wise to use credit cards but still do it because what they buy with them makes them feel good. We knew if we saw immediate results in paying off our debt we would be much more likely to stick with it. I think this is similar to someone trying to lose weight. If you go on a diet and lose 3 pounds in week one and 2 pounds in week 2 you are more likely to stick to it. However, if you don't lose any weight after a couple of weeks, you are more likely to start eating unhealthy again. I feel that getting out of debt is somewhat like losing weight - once you get the ball rolling and see results you are motivated to continue getting rid of it.

Invest/Continue To Build Up Your Emergency Fund

At this point, Tracy and I started to invest in a Roth IRA. We just started with $100 a month and have increased this as my salary has gone up. $100 a month does not sound like much but, if a 25 year-old invested this amount every month for 40 years and earned a modest 7% a year, he/she would have over $262,000 at age 65! I don't think this is enough to retire on but it is better than nothing.

In addition, at this point, Tracy and I steadily built our emergency fund up to one year's worth of living expenses. This was before the recession so a lot of financial advisors were just suggesting 3-6 months of living expenses in this fund. We knew that Tracy would be staying home for as long as possible - it is 5 years and counting now - and we wanted to make sure we had enough money to cover our expenses in case something crazy happened. This fund has turned potential catastrophes ($700 car repairs, expensive doctor's visits) into inconveniences. This might be too large amount for you, but this is what helps Tracy and I sleep soundly at night.

When dealing with your finances, you have to remember that the person that cares the most about them is the one that looks back at you in the mirror each morning. It is not some advisor down the road or someone on TV. The steps Tracy and I have taken have given us a sense of financial peace and have enabled us to live a wealthy life on a teacher's salary.