Friday, February 29, 2008

Secrets of My Modest Success

As I start this blog, I am 27 and have a net worth of about $25,000. It's not a huge nest egg. I know of several people around my age who have net worths of several hundred thousand, or even a million. My little chunk of money isn't even enough for a down payment on a condo on my city. However, it is a good emergency fund and it's not bad for someone who just recently started making over $35,000 a year.

If you're just starting out, my modest savings might seem more achievable and less intimidating than the huge net worths of others. The steps I've taken to get here are also perhaps more accessible to the average person. Much of what I've done was luck, or dumb luck, and can't be replicated, but if you're not as far along the savings path as I am, I hope that explaining my history will help you come up with some ideas that will work for you.

1. I was brought up frugal. I was born in a town of 80 people. My parents had a garden where they grew vegetables and fruit. All our food was made from scratch. My father made four loaves of bread every week--two white and two cinnamon. He didn't have a bread maker. My brother and I were two of the few children in town, so we got lots of gifts from the crafty women in our church. When I was born, I received 27 baby blankets. I also remember handmade clothes, handmade quilts, and a homemade Cabbage Patch doll. My parents also used cloth diapers, and I suspect our "baby food" was just mashed up adult food.

Later, we moved to a bigger town. We bought some, though not all, of our clothes from thrift stores. I got hand-me-downs of the latest eighties styles from a slightly older neighbor. I remember looking at unit pricing while grocery shopping with my mom--I could pick out any juice as long as it was 100% juice and less than 3 cents an ounce. My brother and I got the things we wanted at Christmas and our birthdays, but other than that we paid for things like toys, craft supplies, and gifts out of our allowance. Starting at 12, I also got a clothing allowance, and tracked my clothes spending in a little notebook, which I assume was my parents' idea.

When we traveled, we camped. We even camped outside London. On vacations, instead of fast food, we ate MREs (a type of military rations). My father got ridiculously excited whenever there was an advance in MRE technology. He even brought MREs to some Norwegian relatives we visited (I don't think they appreciated it).

I always knew we weren't poor, and I never felt poor. When I thought about my parents' frugality, I thought of it as them being "strict" rather than poor or cheap. They spent their money in areas that were important to them--I may not have had as many Barbies as my friends, but we bought our first computer in 1982 and by the time I was fourteen I'd been to about a dozen countries. (We lived in Europe for part of that time, but my friends in Europe didn't travel nearly as much as we did.)

2. I made my credit card mistakes early. One summer in college, I racked up a balance of about $500 on a credit card. Later that year, I went on a vacation and added another $500 to it. I paid it off as I could, about $100 every month. Then one month I didn't get paid for my student work job and so had no money. No money at all--during that same month I needed $5 to replace my student ID and had to borrow it from an acquaintance. So I didn't pay my credit card bill that month. I just thought I would have to pay a fee or something (hey, I was young), but instead they canceled my card. It was a couple of years before I got another card, which luckily left me without a credit card during the financially dangerous post-college years.

3. I set financial goals. Since the age of 18, I've almost always been saving for something, usually either a big trip or an upcoming move. Most of these goals had timelines: for instance, one February I set a goal of having $2000 and being able to move out of my parents' house by August. I think having a deadline is important. The deadline can always be changed later on, but it gives you something concrete to work towards. "I want to save $5000 this year" is a lot easier to achieve than "I want to save $5000."The second statement could mean you want to die with $5000 in the bank.

I also think it's important to build up your savings skills by starting with small, tangible goals. If you're getting out of debt, I'd recommend starting with trying to clear the smallest amount of debt, so that you have an accomplishment to build on. If you don't have debt but also don't have any money, I think starting with a goal like "I want to buy a plane ticket to California," or "I want to buy a new bed," is probably better than starting than with something abstract like building up an emergency fund. The emergency fund is important, but I think you're more likely to succeed at building an emergency fund if you have the experience of successfully saving for something you want.

4. I invest.
Starting when I graduated from college, whenever I had an amount of money I knew I wouldn't need for a few weeks or months, I put it somewhere where it could earn interest. Since I was saving for short-term goals, I put it in very safe places. I have an interest-bearing savings account. I have a money market fund. At one point I was buying a lot of 90-day CDs. None of this made me tons of money in interest, but it got me into the mindset of expecting my money to make money and got me familiar and comfortable with financial products other than a regular checking account.

5. I saved too much. The start of my current nest egg came from saving for a series of moves I made in my early twenties. I saved for moves to London, Austin, Chicago, and New York. For each move, I had increasingly ambitious savings goals. Each time, I didn't have to use as much of my savings as I thought. I got lucky in finding jobs--I've never been out of work for more than a month. After the move to New York, I moved back to Chicago and still had $4000 of my New York fund.

Last year, I built that $4000 to $10,000 so I could qualify for the good high-yield savings account offered by my bank. I'm convinced that the only reason I was able to save that $6,000 was because I had a goal in mind. After I got the $10,000, my savings stagnated. I only started saving again after I set a monthly goal for my retirement savings. It's possible that once I've saved all this money, I still won't be able to retire at 35, or my goals will have changed and I'll have something entirely different in mind. For now, the important thing is that I'm working towards achieving something that I really want.

The best advice I can give to someone who's starting from scratch is this: No matter what else you do with your money, always have a goal in mind. The more defined this goal is, and the more regularly you review this goal and what you're doing to achieve it, the more likely you will be to get there.


Jacob said...

I know the problem of slacking on savings when a goal is reached. That was certainly a problem for me after reaching FI. Then I figured that with my new job, I should just buy a new this or a new that. So I started slacking. Eventually I picked up steam again and set a goal of 30% above bare bones FI.

Scarlett said...


Just curious, how close are you to that goal now?

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