Reducing Expenses Archives

Saving as a Question of Liquidity: How to Save Your Money

I tend to agree with the notion you should save around 50% of your income. I’m not entirely convinced on what percentage of that we should be saving pre-tax and how much we should be saving post-tax.

It largely depends on your age and future plans. I’ve been thinking about some guidelines to determine what percentage of your 50% savings rate you should allocate pre-tax versus post-tax.

Goals Determine How You Save

Think about your goals in the next 10 years, if you decide to either buy a house or go to graduate school I urge you to reconsider your pre-tax savings rate.

Let me give you an example. Until recently I was saving 30% of my gross income and putting it towards my 401(k). This reduces the amount of taxes I paid in total, but considerably reduced my take-home pay. The only downside to investing in a 401(k) is you cannot withdraw from it without penalty until you’re 59 1/2.

Save for Graduate School

If you’re attending non-sponsored graduate school within the next 5-7 years I would keep your pre-tax savings to under 20%. I personally think any chance to reduce debt is worth it. I already know the argument is that you can earn high returns investing that money and just take on relatively “cheap” debt to maximize your potential wealth.

I value the freedom that comes with living with no debt more than I do excess returns. It is such a relief working every day and saving for retirement knowing that you are not a slave to debt. Sure you have to work to provide for yourself and your family if you have one, but that is entirely under your control.

If you attend graduate school full time you have to consider living expenses while not earning an income. Saving 50% per year should equate to a year’s worth of living expenses. Of course, that 50% savings will not be liquid if any portion of it is saved in a 401(k) or Roth IRA.

Let’s say you save 25% of your income in a 401(k) and Roth IRA. That leaves you with 25% to save that is liquid. This is the amount that you can plan on using when you attend graduate school. The savings rate is every year you save 25% you save 6 months of expenses.

For simplicity’s sake let’s say the location of your graduate school has a comparable cost of living to where you currently live. For a full-time 2-year MBA program you should save enough for living expenses in 4 years.

For a full-time 3-year law program you should have enough living expenses saved after 6 years.

If you can swing a sponsored full-time or part-time program you’ll be even better off!

Save for a House

A common goal for many is to own a home around the time they’re 30. If you’re saving towards this goal you want to make sure the savings you have are liquid and easily accessible. We can do the same exercise as above, except using time as a measurement of living expenses isn’t really relevant.

You want to save up a large enough down payment, typically 30% of the purchase price.

Determine what your goals are before maxing out your 401(k), it might not be the best move for you.

Downside To Saving Cash

One of the main drawbacks to keeping a lot of cash is inflationary pressure. In our current environment (around 9.1% inflation), if you’re not growing your cash it’s lost 9% of its value in the last 12 months.

So the cost of liquidity is essentially the rate of inflation plus the performance of whatever you would have invested that money in, let’s say the S&P 500 index to keep it simple.

So we’re looking at inflation of 9% for the past 12 months and the market is down around 8%. So we would have been better off not investing in the past 12 months but remember that no one can predict the market.

The market has averaged a positive 10% return since 1957, this just happens to be a down year.

Make sure you understand the opportunity cost of holding savings in cash reserves. Sometimes it’s worth it to bet on yourself by investing in education. Sometimes you need liquidity to invest in another asset class.

Don’t underestimate increasing your earning potential. Aggressively saving is not enough.

Cash is King?

I think we tend to underestimate the power of liquidity. Having cash ready to deploy in assets that have been dragged down by the market is a powerful force. So is the ability to invest in yourself to improve earning potential and career prospects.

Think twice before you have all of your cash tied up in ill-liquid holdings.

What level of liquidity are you comfortable with? Let me know what you think.

Why Renting Today Is A Nightmare & How To Survive

Renting today is a mess, and there are a couple reasons why.

The costs of renting were going up before inflation, now things are getting even scarier. I live in the midwest, where costs of living are significantly lower than in other areas of the United States. Even in my area, rent prices have increased 8% over the past two years.

Housing is a pretty popular topic at work. Lately, some of those conversations have helped me think about things to keep in mind if you’re in the market for a new lease.

New Construction Is Stalled & Expensive

There is a debate on if there is a housing shortage currently, with many agreeing that we are about 1.5 million homes short to meet demand. In any case, a lot of people want to increase the housing supply but the supply chain for construction companies is snarled, leaving it very expensive to complete new projects.

My theory is because commodity prices are up across the board, real estate developers and construction workers will prioritize the most profitable building projects which typically go to people building luxury apartments as investments or mega-mansions who would never struggle in this market anyway. This prioritization doesn’t help people like myself who want to save costs, new construction is going to cost more, but it costs even MORE if all of the construction consists of luxury apartments.

Many developers have a backlog of projects right now so I wouldn’t expect any capacity that’s added to the rental market to be budget-friendly any time soon. If developers are a national force I would expect them to focus on the HCOL areas such as major coastal cities or hot cities like Nashville or Austin. The midwest is unfortunately towards the bottom of the priority ladder.

The low availability of single-family homes drives a lot of would-be home buyers into the rental market, further taking away available apartments from habitual renters. These would-be buyers typically have higher incomes and are willing to pay more for rent, so their influx into the rental market drives rental prices higher.

There Is Available Housing – Just Not Where We Want To Live

People congregate in areas with lots of jobs, good school zones, and vibrant communities. Everyone wants to live in a place like that! That’s part of the problem, there’s usually not a lot of space to add new developments in these areas. Housing outside of highly desirable places to live is cheaper, but because no one wants to live there.

I experienced this growing up in what most would consider rural Tennessee. I thought housing at college was expensive, then I moved to the Detroit metro area and got sticker shock here. Coming from an LCOL area makes it difficult to fork over the amount of cash it takes to live in popular areas for young professionals here; so I don’t.

I chose to live about 15 minutes north of where a lot of people choose to live because the over cost is lower and I get more for my money. Currently, I’m paying around $1.71 per square foot. According to rentcafe.com, the average rent per square foot in my city is $1.43. Really I’d say my apartment is pretty below average quality-wise so I should probably look to move when my lease is up!

Are You Overpaying For Rent?

Rent prices are all relative to your location. I can’t compare the price of a one-bedroom apartment in San Francisco to a one-bedroom apartment in Louisville, Kentucky. It’s just not a fair comparison as you’re probably not about to choose between living in these two cities.

Find the average price per square foot in your city, and shoot to pay around 20% less than that. Looking at my current situation that means I should really be paying closer to $1.14 per square foot if I want to stay in my town. If I want to move around it could be a different story. You have to decide on the location that works for you.

I want to keep my housing costs to a maximum of 15% of my gross income to allow me to really save a significant portion of my salary. I encourage you all to do the same to be one step closer to securing that F-You money!

The Argument for Buying Quality Furniture

Lately, I’ve been in the process of buying furniture for my new apartment.

When I was deciding on what to purchase, I ran into a multitude of options. I could buy second-hand furniture or new furniture.

Even with the new furniture, I could choose to buy from a place like Ikea or buy more expensive furniture.

Here’s the main reason why I decided to buy a mix of used and new quality furniture.

Longevity

If I spend a little more on quality furniture now, I can use it for longer than I would use less well-made furniture.

One big-ticket item is my couch. I spent $1,000 on my couch because I want it to be comfortable and I know the couch is well made.

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I think I’ll use this couch for at least 5 years. Let’s do the math to see how much this couch will cost me on a regular basis.

A purchase price of $1,000 spread over 5 years of use turns out to cost $200 per year.

Going even further, a cost of $200 per month spread over 12 months is $17 per month.

I’d gladly pay $17 per month for this nice couch I bought.

I think 5 years of use is conservative, so the cost per month of that piece of furniture goes down the longer I use it.

In this case, I wanted to get a new couch and I admit that I paid a little more for the style of it.

I intend to get my money’s worth out of it through many years of use.

Used vs New Quality Furniture

I bought a new couch, but what about my other pieces?

I don’t feel like it’s worth it to get new furniture for everything because there is such a markup on furniture prices.

There can be as much as a 200-400% markup on retail furniture prices!

That makes buying used furniture an easy decision, especially if you’re not sure how long you’ll keep a piece of furniture.

I bought a set of Martinsville of America coffee tables and end tables for $120 at an estate sale a couple of weeks ago.

Buying used quality pieces can help keep you within your budget for furnishing your apartment.

Author Bio

Drake is a freelance writer who’s interested in history, economics, art, & beer. Drake graduated with a degree in Supply Chain Management and began working at General Motors. He writes about popular personal finance topics and shares his journey. Make sure to check back for more posts on Abnormal Money.

Investment Advice From A Venture Capitalist

Recently I watched a David Rubenstein interview with the successful venture capital founder & investor Marc Andreessen. I watched the later half which mainly focused on Andreessen’s investment advice.

I’ve enjoyed Rubenstein’s interviews but this one stood out to me immediately. I caught it again a couple of days later on TV and I realized what made the interview stick out in my mind.

Rubenstein has a very serious personality interspersed with bits of dry humor. Andreessen on the other hand is extremely lively and chuckles at his own jokes. The two could not be more different in their personalities but they are both incredibly successful businessmen.

Andreessen had some interesting investing advice he revealed in this interview. Before I get into the advice itself I want to add a little background to who Rubenstein & Andreessen are, and what they’re known for.

David Rubenstein

David Rubenstein is a former practicing lawyer who held positions in the Carter administration before co-founding the private equity firm The Carlyle Group in 1987.

The Carlyle Group has since grown to manage $260 billion and has 29 offices around the world.

He is a published author and currently hosts The David Rubenstein Show: Peer-to-Peer Conversations on Bloomberg & PBS.

He is an avid historian and owns rare copies of some famous legal and historical documents such as the Magna Carta, the Declaration of Independence, and the U.S. Constitution.

Rubenstein typically interviews influential business leaders on his show that are well known or attempting to do extraordinary things. His show gives us an insight into the lives and thoughts of these people.

What makes his interviews so interesting is that he is more of a peer than just a professional journalist. This adds another layer to the interview that usually isn’t present when most professional journalists obtain interviews.

Marc Andreessen

Andreessen is an influential billionaire venture capitalist investor. He got his start in tech by co-founding Netscape along with other important early internet companies before they became acquired by larger companies.

In 2009 Andreessen co-founded the venture-capital firm Andreessen Horowitz (a16z) with $300 million in capital which has now grown to $18.8 billion invested in multiple funds.

a16z has funded companies such as Twitter, Facebook, GitHub, Airbnb, and many more.

Part of the reason that Andreessen has been so successful is that he has experience founding companies and the founders he invests in respect that.

He also mentioned multiple times in the interview with Rubenstein that he is in the relationship business, and you can tell he is extremely personable.

Private Equity & Venture Capital

These two businessmen are both active in the world of finance, albeit in slightly different ways. Venture capital and private equity are very similar but have important distinctions.

Private Equity

Private equity is when investors purchase equity in a company privately, in other words not through the stock market.

Think of it as a direct transaction with the company you are purchasing equity from. Private equity is interested in beating the market and generating sizable returns.

They are usually interested in more stable companies that may have a reason for wanting to remain private, including not having to answer to public shareholders. Another reason firms invest may be that they see a way to grow the business’s revenues and make their equity share more valuable.

Furthermore, these companies are no longer considered start-up companies. These are more mature and stable companies, I like to think of the distinction as fewer engineers leading and more MBAs.

Venture Capital

Venture Capital investors have the same idea as private equity investors but they target different companies. VCs target startup companies, from early stage to late stage companies.

Startups need VC money to grow their company and build their products because their business is not generating significant cash flow yet. You’ll see that technology is one of the most popular industries to invest in at the VC level because of its scalability and user stickiness.

Investment Advice From Marc Andreessen

At one point in the interview, Rubenstein starts asking questions about investing and getting Andreessen to give his take on investing decisions. Andreessen had some interesting answers to the following questions.

I think this is great investing advice for someone who wants to invest but maybe doesn’t have the confidence to pick and choose specific ETFs or stocks.

How Do I Invest With A Good Venture Capital Firm?

Surely a great VC like Andreessen would have some tips and tricks for investing with top VC firms, right? Think again.

MA: “The venture capital firms that are open for outside money are generally the ones you don’t want to invest in”.

The top-tier VC firms that make 20%-40% returns on their money are not open to the general public. They are open to very wealthy individuals with connections to the industry who have a lot of capital to put forward into a VC fund.

What’s The Best Investment Advice You’ve Ever Received?

MA: “It’s probably from Warren Buffett. Put all your eggs in one basket and watch that basket. Really know what you’re doing. Really deeply understand the nature of what you’re investing in”.

Warren Buffett is famous for being one of the most successful investors of all time. He understands his company’s business model, its industry, and its customers as well as the CEO running the business.

Invest your money into companies that you know inside and out, speculative investing is a sure way for you to lose money in the long run.

What’s The Most Common Investment Mistake You Observe?

MA: “I think it’s the opposite of [putting all your eggs in one basket and watch that basket]. I think it’s when people read something in the paper or see it on TV and they take a flyer on it without really understanding it”.

This correlates with speculative investing. Investing in a business because it’s hot right now without understanding the business and its goals and its customers will surely lose you money in the long term.

It’s important to do your due diligence before investing. We want to grow our wealth not gamble with it!

If I gave you $100,000 tomorrow what would you do with it?

MA: “I’d put it in an S&P 500 index fund. Don’t get fancy”.

This mirrors Jim Cramer’s advice of putting the first $10,000 of your portfolio into a low-cost index fund.

If you are investing in the public markets it is very difficult to outperform the S&P 500 in the long run. Those 500 companies are some of the best companies in the world and with an index fund, you have an equity stake in them.

Even many professional investors agree that with smaller amounts of capital it’s generally a solid idea to track the public markets instead of actively trying to beat them.

Time will tell if Kathy Woods’ ARK funds will end up proving that popular investing philosophy wrong.

Keep Things Simple

What does all of this mean for us? It pays to keep investments simple.

Have fun with your portfolio, really research the individual companies you choose to invest in, and follow their quarterly earnings and shareholder letters. Andreessen’s investment advice is to become an active equity investor.

At the same time, it’s probably a good idea to keep the majority of your money in an S&P index fund for long-term growth.

VC and PE investors have access to amounts of capital we don’t and therefore they have the ability to purchase meaningful equity in private markets and they have the ability to realize much greater gains than in the public market.

Until we reach that level of wealth. Keep things simple and invest abnormally.

Do you agree with my conclusions? What do you make of Andresseen’s advice? Any thought on private equity or venture capital? Let me know in the comments!

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Ways to Lower Your Rent & Why It Matters

Right now, home prices and rent are as high as they’ve ever been.

For those of us looking to move to a new neighborhood or even a new city that is bad news.

We want to live in a nice place, but so does everyone else!

Look at this data from the Case-Schiller Index:

Just a bit of information on this index, it measures house prices related to the real price of homes in 1890 when the index was at 100.

This shows that the only time home prices have been as high as they are now just before the Great Recession.

I believe that the same trend can largely be seen with rents in most cities.

The version of the Case-Schiller index that is maintained by Standard & Poor showed that home prices increased 14.6% in April 2021.

I’m moving to a new city to start my job and I would love to keep my total rent costs (rent, utilities, parking, etc.) under 30% of my gross monthly salary.

I’m starting to see that it will be difficult to live in an area I want with a good commute.

Here’s a couple ways I’m trying to offset the higher prices of rents in the area where I’m moving

Buying used furniture

Facebook marketplace has been a great way to find good value used furniture for my new apartment.

I recently picked up a desk that is bigger than my current one plus a chair and a lamp for about $150!

I think the chair alone is worth that much. Try to look for deals on marketplace and be patient.

My advice is to look for someone selling who is buying more expensive furniture and just wants to get rid of what they currently have.

The person I bought mine from was turning his former office into a nursey for the baby he and his wife were expecting.

Look for people who are more concerned with getting rid of their pieces than trying to get the highest price.

Look for roommates

If you can manage living with roommates, then this is a great choice for lowering your rent.

I found a couple of people looking to rent out a room in their house or current apartment for about $800/room.

Be sure to take utilities, parking, and snow removal into account if applicable.

Another added benefit is most times the apartment or house you’re moving into is already furnished by the person who is already in the unit.

Not having to furnish your entire place could easily save you a couple grand.

Depending on how much you value having full control over your kitchen and other common spaces you might opt to spend a couple hundred more for your own place, but make sure to keep housing expenses under 30%.

Look for rent discounts

Some apartments offer discounts for employees of large employers like big corporations or hospitals.

Some of the more common ones I’ve found include waiving application fees and deposits!

A few have offered a small rent discount per month, around 5%.

It’s worth asking leasing agents if they offer any employer discounts, sometimes these are referred to as preferred employer lists.

Resist the urge for lifestyle creep

This is my first salaried job out of college, and it would be so nice to have something nice to reward myself for getting through college, wouldn’t it?

I could get a really nice genuine leather couch, or a nicer apartment in a more popular neighborhood, buy a new bike for cycling, etc.

Having a couple nice things is fine required that you plan for them, but once you stop living like a college student it will be difficult for you to go back to that cheaper lifestyle.

I want to make sure I save up a nice chunk of change for my savings and I’m still able to contribute to my 401k & Roth IRA.

I’d rather hit my contribution targets in those accounts than having a really fancy couch or going out to eat 4-5 times a week.

Final Words

Finding housing can be stressful and expensive, so make sure you stay on budget and still have money to save and invest after paying for your expenses.

The only feeling worse than being broke after paying your rent is knowing that you’re not saving for early retirement.

What other tips do you have for lowering your housing expenses?

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