Lottery tickets graph

As a child, I was fascinated with lottery odds. I recall that the odds of winning the Florida lottery jackpot at that time were about 1 in 14 million, and that scratch-off tickets displayed the odds of winning a prize on the back, which was usually around 1 in 4.

The above graph (drawn by me) is actually far too optimistic. The odds of overall gains are lower than 1 in 4 because a typical scratch-off or instant-win ticket counts a prize of the same amount as the purchase price as “winning,” even though this is actually breaking even. Of course, buying a $2 ticket and “winning” $2 is the second commonest outcome, behind the most common outcome of losing $2. Further, the overall odds of making money decline precipitously as additional tickets are purchased. Although the “1 in X” odds of winning X fantastic prize increase with the purchase of additional tickets, the value of the improved odds is always far below the ticket price.

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Piggy Bank image

An emergency fund is basically a reserve of money you set aside in case of an emergency such as being unexpectedly fired from your job or your car’s transmission failing. Many people recommend analyzing your monthly income or cost of living and then aiming to have three, six, or even eight months of funds on hand. However, when you are starting out building the fund, you should first aim for one month of funds, then two, and so on. For example, if your cost of living is $3,000 per month, you would want $18,000 in your emergency fund to cover six months of expenses. Then, you would not be scrambling to pay bills or find another job. This flexibility allows you to reduce stress and make better long-term decisions about your next employer.

Why have an emergency fund? The emergency fund is the first step toward financial independence. Credit card issuers like to tout credit cards as an “emergency” lifeline, but this only encourages you to end up not being able to pay the balance back and being subjected to extraordinary interest rates that are often as high as 28% per year (annual percentage yield).

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We always hear about the importance of starting early to save for retirement. This yields several questions:

  1. Why start early? Why can’t you just focus on your bills now and “catch up” later when you are earning more money?
  2. What does “save” mean? Does this mean putting money in a savings account?
  3. What is “retirement”? Is retirement something you do at Age 65? If I love working, does that mean I don’t need to save?

The truth is that both “saving” and “retirement” are misnomers. The key is to invest for financial independence. This means having enough assets to cover your living expenses without having to work again. This might include having enough money to support your significant other and family, too. Whether you “retire” in the traditional sense or not is your choice.

Why start early? There are two big reasons:

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Chico with lots of dog food

Here we see my father’s chihuahua, Chico, on top of 200 pounds of dog food I bought on clearance for $70 at Walmart. Presented with this, people will look at you funny and ask the same repetitive questions like “why are you buying so much?” In this case, Walmart was clearing out this dog food even though it still has over a year left on expiration. The price was 50–60% off the normal price so that an 18 lb. bag of Purina was $6.25 and a 20 lb. bag of Ol’Roy was $5.50.

Stocking up when items are on sale is a great strategy when a few criteria are met:

1. The price should be a “good” deal. This varies by person. Stocking up on Louis Vuitton handbags because they are at the lowest price ever might be a great deal for someone who has a bonafide purpose for them (e.g., projecting an image or enjoying a high-quality product) and is financially equipped. Otherwise, not so much.

2. You would use the item anyway. If this is something you would be using anyway but would be likely to buy at a higher price in the future, then buying it on sale or clearance might be a good decision. There is, of course, a certain amount of uncertainty here. For instance, a child could have a growth spurt and grow out of the clothes you bought for him or her.

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I am not one who can lecture you on the perils of credit cards from personal experience. I don’t have a redemption arc where I was once buried in credit card and student loan debt, but had an awakening and went on to dig myself out through sheer tenacity. I have 13 credit cards; buy everything using credit cards; got my first credit card at Age 19 (seven years ago); have received tens of thousands of dollars in credit card signing bonuses, cashback, and rewards such as Chase Ultimate Reward points, American Express Membership Reward points, Southwest Airlines Rapid Reward points, and Starwood Hotels Preferred Guest points; have never paid a cent in interest; and pay in full (PIF) every month by the due date (except during the occasional 0.00% APR introductory period).

I have not studied business or finance formally—I went to college for a Bachelor’s in psychology and a Master’s in applied learning and instruction. However, I have been interested in personal finance since I was a teenager in high school and read extensively via Internet searches before receiving my first credit card (a Discover More card, now called Discover It). I heard and internalized the horror stories about penalty interest rates, drowning in debt, bankruptcy, collections, et cetera. I avoided and continue to avoid consumer debt traps, aided by never moving out of my parents’ house, living in Florida where in-state tuition is cheap, having low-income parents which enabled me to receive the maximum Pell grant during my undergraduate studies, and probably a genetic or acquired lack of susceptibility to the lure of over-spending with credit cards.

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Today, February 5, 2018 we saw a large decline of the Dow Jones Industrial Average and other stock market indices.

DJIA drop on 2/05/2018

Although the stock market has had phenomenal gains since 2009, and especially in the past year, we are seeing a temporary decline that, in the past week, has erased the past two months of market gains.

Having a bias toward action is helpful in many areas of life, but investing is one area where inaction wins. In fact, investors who have died or simply have forgotten about their investments have results superior to the typical investor. The typical investor buys high, sells low, and then has fear of missing out (FOMO) and buys back in when the market is high again. The present “crash” spurs typical investors to sell, supposedly to prevent further losses. The typical investor’s behavior looks something like this:

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Financial independence (FI) means having enough financial assets that you could live the rest of your life without working. Bloggers frequently use the FIRE acronym which stands for [become] financially independent and retire early. Such a life might be pictured as living off capital gains from one’s investments without reducing the principle, much like how a university or non-profit foundation lives off its endowment in perpetuity (albeit, often subsidized with tuition, sales, donations, etc.).

If FI means not touching the principle, this means you could live to 100 and your original investment would still be there (even when adjusting for inflation). This requires a combination of frugal living and large amounts of accumulated assets. You might be able to achieve FI with just a quarter million in assets if they live in a low-cost-of-living area, behave frugally, and invest in the stock market at-large (e.g., an S&P 500 index fund). Although there is luck involved (e.g., what the market does), one can certainly influence their income, investing, and spending. (On the other hand, if one chooses to avoid stocks entirely, it would be difficult or impossible to achieve FI with bonds or Treasury bills, due to their low propensity for growth.)

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