A Roadmap to Building Wealth in 2020, Part 1
A Roadmap to Building Wealth in 2020, Part 1
Starting young is easily the best way to get ahead.
In the modern world of investing, there are more options than ever before. You can invest in stocks, bonds, real estate, mutual funds, ETFs, cryptocurrency, luxury shoes, or Lottery Tickets (this is a joke).
Which ones are safe?
Which ones are risky?
Which offers the greatest return on investment?
How do you know which one is good for you?
In the Pomegranate Seed’s, Roadmap to Building Wealth in 2020, you’ll find answers to these questions and much more. This guide is not a roadmap to get rich quickly or to learn how to become a professional trader.
Instead, you’ll be learning…
Part 1: How to become ready to invest.
Part 2: The Basics: What are stocks, bonds, ETF’s? What is compound interest? What are stock options? How do I open an investment account?
Part 3: How to value invest in all these different options while developing shaping and adjusting a long term plan.
Part 4: How to measure and take risks with your money.
Part 5: How to choose asset classes, to create an allocation mix that makes sense for you.
Part 6: Portfolio Construction, Calculators, and Simulation
If you've never invested before, that's OK. No matter what, as long as you are in your 20’s and 30’s time is on your side. The Roadmap to Building Wealth in 2020’s mission is to deliver practical ideas using investment education and personal finance strategies to help you make the most of your financial future.
Part 1: ARE YOU READY TO BECOME AN INVESTOR?
So who is an investor? Can anyone be one?
The truth is, we are all investors. When we hear the word investor we immediately think of Wall Street, nice cars, lots of cash. Sure, thats just one type of investor, but so is the owner of your favorite Armenian bakery. An investor is a family saving for their kid’s college, or a college student surviving on the dollar menu. We are all investors because we manage and spend money in hopes of receiving something in return.
An Investment is a commitment of money or other resource in which you think you will reap future benefits.Perhaps you invest better oil in your car? What’s the benefit?You invest more time in your studies? What’s the benefit?What kind of investments are out there?
Can I afford to invest?
You have to start somewhere. At the early stages of the investing process, an important question needs to answered. Can I afford to invest?
The money you use for investing can come from anywhere- a savings account, birthday money, or even a poker win. If you have money put aside, you’re ahead of the game. The more you start with, the better your earning potentials.
Rule: NEVER BORROW MONEY TO INVEST
A simple way to understand if you can afford to invest is to see what you have left after paying all your bills. If it’s around $100, perfect, start saving the money in a “money market mutual fund”. Think of the money market mutual fund as a holding tank for your money while you decide what to do with, it’s always a plus when you earn money by doing nothing.
Rule: Pay off as much debt as possible before investing. Debt is a drag on your ability to save.
You should aim to save $1000 before you make a move. If it is possible, always save more. If it is easy to save $100 the first month, “get greedy” and try to save $200 the next month.
If you don’t have extra money at the end of the month, there is no point in trying to invest yet.
STEPS TO GROW YOUR NEST EGG.
Every successful investor needs a source of income for their investment plan. Your nest egg (or your savings), is the lifeblood of your financial future.
In order to have a successful base of capital to invest, we have to take a hard look at what we make (income) and what we spend on (expenses).
It’s mentally and emotionally draining to account for what you need in order to achieve what you want. We all hate looking at our depleting bank accounts, but if done honestly, is the most important step in conquering your financial future.
Give your finances a “colonoscopy”.
Optimize your nest egg by being brutally honest. Make two lists and be as specific as possible.
List 1: Sources of Income
List 2: Expenses.
I've included a useable template with categories for you to easily start accounting.
You’ll be surprised at how much you spend and where you spend it. The purpose of the financial “colonoscopy” is to help you find expenses that can be cut, or saving that can be increased to create a budget for investments.
Do we really need that subscription, or go on that holiday, or eat at this restaurant?
Rule: Use as many sources of data as possible to do your financial conolonscopy. Included credit card statmenets, loan statements, digital recipets, or online Personal Finance Tools like Truebill.
Savings and investments are included as expenses in order to judge how much your money is already committed to this portion of your finances. If you’re employed, double-check how much you are contributing to your 401(k) or an IRA.
You don’t have to torture yourself, but cutting out expenses every other month will work for you.
THE HOLY ANALYSIS
Once you’ve made your list, its time to analyze the strength and weaknesses.
Are you putting your money in the best possible places, and if you are, what’s the best use for it?
Keep what makes sense and immediately dump what doesn’t work.
Ask yourself tough questions.
Is spending higher because it’s a want or a need?
Do you really need the extra expense?
Are you spending excessively or carelessly in certain areas?
What could you do to reduce the expense?
For example: If you’re spending a lot of money on Postmates, but you’re not receiving your food, that’s a sign that your Postmates money might be better spent on paying off some debt, buying your own ingredients for food, or saving for retirement. You can still order from Postmates, but one or two times less a month is huge.
For example: If you’re spending loads of money on books, check your library first. You don’t need to pay $65 for the hardcover of a Donald Trump biography, it’s probably in your local library already.
You should walk away from the exercise with some specific action steps to address categories that are too high or out of line.
For example, “I will reduce entertainment expenses by $200 next month because I will only go out to eat one time per week instead of three”.
Your goal at this point is to build a budget by reducing spending using action steps we’ll go over below.
Origami Budgeting
Budgeting is just like origami. Careful planning, execution, organization are needed to get a blank piece of paper to come to life. Budgeting is the same way, without careful planning, execution, and organization, your financial future will never come to life.
There is no right way to budget, however, there is one constant in budgeting: To trim expenses as much as possible in order to leave money for saving, investing, and other financial objectives.
Budgeting 101
A good budget starts with knowing how much money you have each month. Since we laid out all of our expenses and income, we have a really good understanding of where our money is going and how we can redirect savings for better use.
I've included a useable template that allows us to start budgeting.
You may have discovered that your finances are being crippled by small expenses, such as groceries, coffee, alcohol, cigarettes, and going out with friends. Absolutely nothing wrong with living a little, but these things add up make the pain of big expenses much worse.
A $3 daily latte is on average $21 per week, $84 per month, and $1008 per year.
You get the picture. The “small” things can add up in a hurry and by finding things you can do without or that you can replace with cheaper alternatives, you can make a big difference in your spending.
Once you know where you are spending your money, you can start dividing them into sections. Look at big expenses first, then look at medium expenses, and then the smaller ones.
Big expenses are above $300/month and small expenses are below $50/month. The small expenses will be your largest section. Once you divide the sections, sum the expenses to understand how to attack them. Some expenses will be difficult to reduce or replace for example the big expenses like credit cards, mortgages, and car payments. That doesn’t mean you shouldn’t explore lowering your bigger expenses.
For example: If you have a $2000 credit balance at 13% interest per year which you’re only making minimum payments too, could turn into a $3,500 balance in 5 years. Consider targeting credit card debt as your first success in order to free up money. If you pay off the balance of $2000 today, you’ll be freeing up $3,500 to invest.
For smaller expenses like grocery shopping, take $50 cash so you don’t overspend and use your credit card. A good tip to save money on small expenses is to pay cash and never spend more than what you have in your pocket. If dining out is standing out as a big expense, cut the 3 nights of dinner our to one.
Budget - Actual = Success
The next step is to compare how much money you will budget to spend after your targeted cuts. Whatever is left is your free cash- what you will put in your money market mutual fund in order to build your investing capital find. Track the difference between what you budgeted vs how much you actually spent every month to illustrate how successful you are in achieving your goals. Get greedy when you can and save more every chance you get.
If you miss your targets in some areas or overspend in others, don’t be discouraged. This just means that you have to reexamine what you’re doing and make more adjustments. While adjusting your objectives and saving targets, spend some time looking for leaks- impulse buys. Be prepared to fight the urges by limiting the cash in your wallet, having a grocery list, and not falling prey to the “buy 1, get 50% of the 2nd” advertisements.
Try to make the budget as simple as possible, if you have family, make it a team effort. Reward your self for hitting a milestone, there is always a good feeling when you’ve made progress towards unlocking your financial future.
If you’ve made good decisions based on your financial “colonoscopy”, your analysis of the data, and have begun budgeting artfully, you should start seeing your debt shrink and notice your savings growing. Even if its $50 dollars more in your account every month, its a hell of a start. As you pay off more things like credit cards, you can control your expenses and adjust your objectives, your free cash flow should start to grow.
Now that you have $1000 saved, you’re ready to start learning The Basics.
Subscribe to the Pomegranate Seed to receive Part 2 of the Roadmap to Building Wealth in 2020. We’ll be covering The Basics: What are stocks, bonds, ETF’s?
Armand has worked as an investment analyst and technology project manager for the last 5 years. Prior to Grüv & Illuria Security , Armand spent 2 years with NASA Jet Propulsion Laboratory, where he was responsible for budgeting, marketing, and overseeing business deliverables for NASA’s “Juno” spacecraft. Fun fact: Juno now orbits Jupiter. Most recently, Armand spent his time working as a Derivatives Analyst at the TCW Group - an asset management firm with over $200 Billion under management. He was in charge of trading documentation, onboarding assets in excess of $1B via Future and OTC Clearing, and servicing over 200 clients while negotiating over 50 successful trading documents with broker-dealers.
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