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Money 101: Understanding this Phase

My understanding of Money 101 principles can be summarized in the following list:
1. Take control and responsibility of your finances.
2. Track your spending and create (and follow) a budget.
3. Quit spending more than you earn.
4. Pay down high interest debt (i.e. debt that is at a higher interest rate than what you might get if you invested your money).
5. Stop acquiring new consumer debt (debt for things that lose value).
6. Position yourself for Money 201 (improving credit score, saving seed money, etc.)
7. Begin making additional money, but without contributing much other than time (unless the return on investment will be greater than the debt you are paying off).

I currently am in this phase of my journey. I am a recent law school grad who just passed the bar, and I have taken a job with the county as a criminal prosecutor. I have significant debt, but I also have some time to devote to freelance projects to generate additional income to speed up my journey.

I am still licking my wounds from a failed business venture I began while finishing up my last year of law school. It's a long story, but in short, I learned that you should not personally guarantee a startup business. Needless to say, I found myself in a hole and I am slowly digging myself out using Money 101 principles. My credit is shot (for now) and I am just barely keeping over water. (I'm not looking for sympathy, I just want to share my experiences.) The point is, in order to reach my number, I am going to have to overcome some obstacles. I have no doubt that I will be able to surpass these obstacles, I just need to stick to my plan.

So, what am I missing in my understanding of Money 101? What suggestions are there for me and people in a similar situation?

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Replies to This Discussion

Permalink Reply by Adrian on December 10, 2008 at 9:37pm: Great question and I'd love to read some of the other members' answers! Budgeting was never a 'biggie' for me ... delaying gratification achieved a similar result - but, it may work better for you/others. Love point # 4 ... it's one of the big 'secrets' of personal finance ... PROVIDED that you do then invest the money if you're not using it to pay down debt :); ▶ Reply to This

Permalink Reply by Diane on December 11, 2008 at 7:45am: Mark, I think you summed up MM101 as I understand it, too.

I assume that you are working on a strictly cash-basis now. One of the real estate books Adrian recommended (or maybe both) talks about how to do deals when you don't have any cash, no job, no credit, etc.

That is where angels come in (assuming you can find some - but given the kinds of deals you should be looking for (and which the gurus say are definitely out there now, so not as much competition to buy as there is to look)), they will be given a better deal than the odds of a business starting out. For instance, if you're looking at an income-producing property (and it's the only kind you can, given your position), then you are doing the work to find it, but you share in the profit with the angels. Of course, if your angels are now shy (once bitten, twice shy), you may need to go for venture capitalists or partnering with someone else who doesn't have time to do legwork but wants something better for his money than the stock market's risk/return right now.

Have you noted the books Adrian mentions? Could be they come up in the video archives. Wouldn't it be great if he started a blogroll of recommended books? Wonder if he could do that for "don't touch these books" too?; ▶ Reply to This

Permalink Reply by KC on December 11, 2008 at 9:00am: Yes good ideas Diane. The only thing I would say is that I have heard of some entrepreneurs who went the "investing angels" route, and thought they had the angel on-side, and then later the angel just pulled out. So some entrepreneurs say please take great care who you decide to partner with, as the person with the money (that's the one with the wings!) is the one with the power.

And here in UK an ecologically-minded guy setup the Covent Garden Soup Company that only used fresh ingredients and could only be found in cartons in the chiller section of supermarkets, and it looked like it was going great. But his venture capital partners didn't like the way he was running the company, despite its evident success, and insisted he move aside and let their management team run the company.

So you are right in what you say, but its only fair to point out that although it was your idea, its the people with the money who have the power, so please prepare yourself for that potential eventuality.

Although obviously I accept that if your business can't see the light of day without outside investors, then you may have no choice but to accept whatever outcome they determine for you, in what you thought was your business.

I'm in a town which is part of "Silicon Fen" (a much wetter version of the US's Silicon Valley) where a "technology cluster" of businesses exists, and there are a few innovators here nursing grudges against venture capitalists who whipped the carpet out from under their feet.

So if you are obliged to go this route, remember who's ultimately in charge, and who can just walk away, and who can also take their money away, and who can force you to move aside.

This is not only true in the commercial sector. I have heard of a lady who setup a charity which provided residential schools for handicapped children, and it was set up with a governing board. Can you guess what happened? They voted her off the board! so she was out on her ear, and it was her project.

As with all things, look down the bright, sunny road ahead, but also take a look in the ditch at the side of the road to see what may have happened if things don't quite go as you optimistically imagine. Be hopeful - but also allow yourself to occasionally imagine the worst.; ▶ Reply to This

Permalink Reply by Jeff on December 11, 2008 at 5:49pm: Michael,

I think you've got it on MM101. It's basic personal finance blocking and tackling. I'd also ad that I believe it includes basic investments as well. Typical stuff like getting started with Roth IRAs etc, low cost mutual funds and building a basic understanding of equity related investments.

In MM201, you may need to break away from the the mutual funds to achieve higher returns, but I think that will be easier if you've built some stock market familiarity and understanding by participating in mutual fund investments. Adrian recommends a great book on value investing in this stage called "Rule #1" that is worth reading when you get to this point.

Good Luck
Jeff; ▶ Reply to This

Permalink Reply by Michael on December 11, 2008 at 6:43pm: @ Diane: I would be very interested in reading those books. One of my plans in late 101 and in 201 is to use Real estate as a way to generate more active income. I recently moved and I still own my old house. I am renting it out for a little over $100 more than the mortgage payment each month, but that isn't going to do it for me in the short run. I am very interested in finding those real estate deals that can be assigned to a third party investor, who is ready for the buy and hold phase. (For me, that will be a late 201, early 301strategy.)

At any rate, if you (or anyone) can remember the titles of those books, I'd appreciate the list. :)

@ KC: You make a good point, but I think that my initial plans for real estate will help me avoid that problem. In playing the game this way, I won't have anything to do with my partner/investor after I send him the deal. He will pay me a finder's fee (or assignment fee), and the deal will be his to do whatever he wants. My task will be to find a property that is sufficiently undervalued, allowing for me to make some money, while still passing a good deal to the investor. (example: I find a home valued at 100k, but can get it for 70k. The investor is interested in buying it for 75k. I sell him the deal for a fee of 5k.) I know this is simple on paper, but I think this market has these types of deals, especially if I am willing to look at foreclosures.

@ Jeff: Congratulations!!! I think you will make a great addition to the other 6 MITs.

Regarding investments in 101, I think I will focus on paying down my high debt (and minimal monetary investment in establishing additional sources of income). Once I get everything over 10% interest paid off, I will begin filling up my bucket of "seed money." When I get to that point, where I have sufficient capital to establish an additional stream of income, I think it will be in a business or in Real Estate. For some reason, I have always been attracted to those two, and not been much interested in the stock market.

My mountain is pretty steep. I have a negative starting point, what with student loans and all, and with 7 years to get to $7million, I need to be aggressive.

Thanks y'all for the comments and help.; ▶ Reply to This

Permalink Reply by KC on December 11, 2008 at 6:54pm: Dare I mention "Rich Dad" one more time?

I think this example of shrewdly buying under-rated properties is mentioned in one of his books.

He went to see a property in the country that seemed fantastic but just wasn't selling, so the sellor was growing impatient.

Kiyosaki asked the estate agent (realtor): "What's the problem?"

The realtor said: "You can't rely on the water supply in the summer".

So Kiyosaki went away and found a water expert. He looked at the rainfall figures and couldn't see any problem, so they went to look at the water tank.

"Oh that's the problem", the water expert said. "Just get another tank. There's enough rainfall, its just that he's not collecting enough to see him through the summer".

Kiyosaki went back to the seller and got it for a cut-down price, and then flipped it back onto the market, with another water tank installed.; ▶ Reply to This

Permalink Reply by KC on December 11, 2008 at 8:44pm: @Jeff - thanks for mentioning that book that was recommended by Adrian in MM201 called "Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week!" by Phil Town.

I've just been reading some of the customer reviews on Amazon

http://www.amazon.com/Rule-Strategy-Successful-Investing-Minutes/dp...

and it does sound an intriguing approach (especially after my comments about the overwhelming effect of being in a recession, on Lee's posting entitled "How do I invest with nothing?" :-)

It would be interesting to filter the numbers on US stocks in the way he recommends and see if there are any that conform to his criteria.

We'd then end up with a portfolio, a bit like the Motley Fool's "Million Dollar Portfolio" (which has now closed to new members), but whose principal details are still displayed at:

http://www.fool.com/shop/newsletters/36/6179aef7-7a4c-4cdc-9443-ef8...

Is this something you believe would be worth pursuing; or would we be throwing our money away if we bought stocks in a falling market, only to watch their value decline?

If it is ill-advised, perhaps it might still be worth getting Mr Town's stock screening ideas clear in our own minds, so we can run the stock screens when the market picks up.

Or we could put the candidate stocks into a Yahoo stock portfolio, and then that would automatically watch the progress or decline of all the stocks we'd entered, and would calculate the profit or loss every week for us, which we could post on here.

I wonder if he shows his portfolio of stocks somewhere else on the internet?

What do you folks out there think? Is this worth doing?; ▶ Reply to This

Permalink Reply by Diane on December 13, 2008 at 9:30am: I would never advise someone new to entrepreneurship (i.e., green) to go the VC route. In fact, most VCs would stay away from that as well. VCs are known for doing just what KC said - they buy into a company, basically and "Flip it" by cleaning house. Usually the management of the company is what is wrong. Most ideas-guys don't make good managers. Angels tend to be friends and family members who believe in the person's dream but also are willing to part with cash to help make it happen. They want to earn money as well, of course, but are less likely (unless you come from a monied family, in which case all bets may be off) to oust the family member. Depends on one's family I would say. As with any deal, put it in writing and include an exit clause, just as you would for a lease even, and consult an attorney (do not share one).

One of the books is Multi-Family Millions...and I'll get the name of the other for you later today or tomorrow.; ▶ Reply to This

Permalink Reply by Jeff on December 13, 2008 at 4:59pm: @KC,

The thing I like the best about Phil Town's book Rule #1 is that it takes a very Buffet strategy (value investing) and gives you some really good tools with which to implement the strategy. The only thing I differ from is the in and out buying that Phil talks about. I'm more of a buy and hold guy.

I'm in Garmin (it was a "value" when I bought at $45 :-) ) and will hold for the long run.

Jeff; ▶ Reply to This

Permalink Reply by KC on December 13, 2008 at 8:18pm: @Jeff - thanks for bringing Town's book to my attention - I have it on order, and I'm looking forward to learning the screening methods to find good candidates to invest in.

I had a look at Garmin on Yahoo finance, and at the Nasdaq, but you may want to ignore what I have to say, as I'm more of a trader, and I see you are in for the long run.

I hope I'm looking at the right Garmin - GRMN.

I'd just make two observations:

1) this is the first stock chart I've seen that seems to be forming a "saucer", moving horizontally like it might be preparing to move up. Although, (sorry to have to say this), it may be a pause before a further move down.

2) the Nasdaq index is showing a similar shape, so I'd set an alert to tell me when it had fallen to 1400, because if it gets there, then the break down, if it comes, will be if it goes below the recent low at 1316.

Similarly, if Garmin goes to 16, then a break lower will come when it passes through 15.22.

Its a pity you can't put some clever strategy together with options, so that any loss on the stock is offset by appreciation in the price of the put option.

Anyway, all this talk is just for traders - buy & hold folk need not concern themselves with it.

Incidentally, a "one touch" down bet (a bit like a put option) on the Nasdaq will give a 13% return if the Nasdaq drops 9% to 1405, so that seems profitable - if it does hit 1405, of course!

Good luck.; ▶ Reply to This

Permalink Reply by Jeff on December 13, 2008 at 8:27pm: KC,

It's obvious that you are a trader. :-) You appear to have a fair bit of knowledge about the technicals. I will confess to not being technically smart enough to be a day trader. Trend analysis, flying saucers, etc. is beyond me. Not that I don't think I could learn it, I just haven't taken the time to learn that level of detail.

You've got the right GRMN and I am in for the long haul. In fact if I didn't have to plan for buying a new home this winter, I'd be looking hard at sinking more money into GRMN, AAPL, and some others I've reviewed using Phil's tactics.

Thanks
Jeff; ▶ Reply to This

Permalink Reply by KC on December 15, 2008 at 2:55pm: @Jeff - Yes I can see you're in for the long haul. I just wonder if by using stop losses you can "stop losses". I've posted on the other forum, asking this very question, so you may like to review my comment below the first entry, to see if adapting Mr Town's approach in such a way may reduce the drawdown you suffer while you're waiting for the upturn.

Scroll down and see the second comment at:

http://www.shareyournumber.org/forum/topics/investing-101-for-numbe...

Alternatively, I fully accept that if you are relaxed with a "buy and forget" approach to long term investing, then none of these considerations will apply to you, and that's fine.

I just thought I'd mention this in case Nasdaq takes, say, a year or two to turn around, during which time your hard-earned cash in this market is going to diminish further.

But of course if that's your method, and the Motley Fool financial website advocates that approach too, then that's fine.

You might be interested in this free first chapter of Motley Fool's new book, on why "buy and hold" is the way to go.

http://www.fool.com/shop/newsletters/30/ecap.htm?CID=1612&sourc...

Cheers,
KC; ▶ Reply to This