Tuesday, December 14, 2010

Investment Lesson #1 - Before you invest you should save.

There's lots of ways to invest and it can be a very complicated subject or it can be very simple. I have dabbled in stocks, bonds, real estate so I'll tell you about my experience in these areas. Let's start with the first lesson and how I learned it.

Lesson #1 - Before you invest you should save.

When I was about 10 years old my mom took me to the local savings and loan and opened a passbook savings account for me and my sister. After depositing a few dollars that I earned mowing lawns I received a little booklet that listed my account balance. Once a month I would go deposit a few more dollars and get my passbook updated with the amount of interest I earned. It may seem a little outdated these days but savings accounts are still around. Of course my motivation for saving back then was to buy something that I wanted. What was interesting was that once I saved enough money to buy that something, I didn't really want it as badly any more. I also found out that if I took money out of my account, the interest that I would earn would go down. I can still remember the interest rate that I got on my first savings account, 5.5%. I also remember that when I would walk into the savings and loan they would have advertisements for their other services. I learned that once I had enough in my savings account I could earn a higher interest rate in a different type of account called a certificate of deposit (CD). There was a catch though, I couldn't withdraw my money for a period of time called a maturity date. The longer the maturity date, the more interest they would pay me. I bought a 6-month CD and earned a whopping 7%. It seemed like a very long time back then, but every month I'd go to get the interest stamped into my booklet and watched it grow. Of course I didn't save all of my money, I also bought stuff--paint for my bicycle, a tennis racket, model rockets, you know--stuff. The stuff that I bought became more and more expensive as I earned more money, cameras, stereos, even cars, but I kept my savings account, though at times the balance went down to just a few dollars.

Of course I eventually opened up a checking account and once I was in college I got my very first credit card--an American Express Card. It may seem like an unlikely card to start with, but they were running a promotion for college students that can prove they had a guaranteed job upon graduation. I had an uncle who ran a TV repair shop in Mar Vista and he helped me with the job guarantee, though I never went to work for him. Once I got that card, other credit cards were easy. In a few months I had at least two Visa and two Mastercards, a Shell gas card, a JC Penny's card a Sears card and probably a few more I forgot about.

Now I want to make sure you understand the time line here. This was after I was in the Navy (1975-77) and before I started Art Center College(1981). You see, I didn't have enough money saved up to go to Art Center (the college of my choice) so I went to Cal State Long Beach for a couple of years and got a degree in journalism. As a Vietnam era veteran I was paid to go to college. It didn't matter which college or how much the tuition, I got paid the same. So instead of getting a job I went to an inexpensive, state funded college. It was with my government subsidy income that I was able to qualify for all this credit. I was also able to save up enough money to go to Art Center for one semester. With my good grades and credit rating I qualified for student loans.

I did graduate, a BFA in photography, with distinction no less, but only because I was awarded a scholarship and got a couple of those student loans. For the first time in my life--I went into debt. It wasn't terrible, I had several months after graduation before I had to start paying back the loans, the interest rate was a very low 3% and they gave me a 10 year payment plan so the monthly payments were doable. So--I went off to New York City to apprentice with some of the best photographers in the world. I made very little money and paid a lot in rent. I had to watch every penny. I mean that quite literally, I got some accounting ledgers and kept track of all my income and expenses, including a few coins I found on the street. It was very tough in the city and I was barely scraping by but I was determined not to give up. I started getting my first "real" photography assignments in New York about 6 months after I arrived. I had several magazine assignments, including my first cover. My assistant days were over sooner than I could imagine. However, magazine publishers and advertising agencies tend to be a bit slow in paying. They expect you to cover the expenses of the assignment until their client pays them or when the accounting department decides to pay your invoice, 30 to 90 days later--or more. Those credit cards sure came in handy and I went further into debt. My plans were to learn from the best in New York then return to Southern California where the weather was much more to my liking so I started looking for assignments out West. I got offers to shoot corporate annual reports--good money, good work, so I packed up and bought a ticket home, paying with my credit card. I kept busy and in a few months I rented a studio space and bought a brand new mini van, financed of course and I even had a line of credit at the bank and open accounts at the local pro photography stores. I was still in my 20's with my career well on the way--but why did I feel poor? Debt.

There's an old mining song where the chorus line goes like this:

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

The way mines used to operate was that the workers were allowed to bring their families to live in the shacks near the mining site and instead of being paid with money they were paid with credit vouchers which could redeem at the company store. Everything they needed, well at least their basic survival necessities, were available at the company store. If they needed more than they had earned vouchers, the owners would give them credit which they could pay off by working. Eventually, the miners got so far into debt that they couldn't leave to work somewhere else. This was known as "Debt Bondage" and it was essentially a form of slavery. The practice continued until the United Mine Workers and other unions put an end to it.

Think about it, the practice of Debt Bondage is illegal yet people continue to get themselves into debt all the time. They are working to pay interest to the bank, credit union, mortgage company, loan shark, etc. There are basically two ways out of debt, bankruptcy or death. Okay, there is another option, pay off the debt--that's what I decided to do.

I moved back home with my parents. It wasn't too bad, I basically just slept there. I was also getting along much better with my parents in my 30's than I was when I was in my early 20's. I did the math and found out that if I got out of my studio and only took the location jobs I would take in less money but would cut my overhead costs dramatically so when my lease was up, I moved out of the studio. First of all I paid off my high interest debt, the credit cards. From then on, I always paid off their balances in full. I also paid off the loan on my van, early. I even paid off my student loan way ahead of the 10 year payment plan. I was going to buy a house and almost closed a deal on one but it fell through at the last minute--so, I continued living at home instead of renting an apartment.

Things were going okay for me. Though I wasn't rich yet, my savings were growing. I had just enough work to keep me busy enough. On the weekends I would go sailing. And my relationships with girls were starting to get more serious. Then I got the worst news ever--my father had cancer and only a few months left to live.

I tried taking him to different doctors, maybe there was something someone could do, but there was nothing. The only thing I could do was to spend as much time with him as possible--and get to know him better. Some of our conversations were barely coherent. He told me to eat lots of meat because cattle were big, powerful animals. Mind you the doctor advised my father to cut back on red meat when he had a heart attack 20 years earlier--he really missed his steaks. My dad wasn't religious but he did get interested in eastern philosophy in his later years. Zen and Buddhists believe in reincarnation so I was surprised when he told me to, "find what you really want to do with your life and do it--you only live once." I hadn't worked or earned any money in months but because I had no debt and enough savings I was able to spend that precious time with my dad. I was right next to him when he died.

I made a few decisions at this point. I always wanted to work in the motion picture industry but was talked out of it so I settled on my second choice, photography. Though I liked photography, I didn't like running the business. I decided to find a good paying position making movies. I also decided that I didn't want to work until mandatory retirement age, do a couple of trips and drop dead--like my father. I was going to get healthy and leave the rat race early. In order to do this I had to start getting serious about saving as much money as possible. I wasn't too concerned about finding the right person, getting married or having kids. My friends who got married early and had kids were either miserable, divorced or both--and they were all in debt.

I'll spare you the story of how I got into the movie industry but it was during that first year working in film that I got really serious about building up my savings and to start investing. I did have an Individual Retirement Account that I started when I had the studio and was starting to take care of some of my mom's money--I always seemed to do better managing her money than my own, probably because I didn't take as much risk with her investments. I was also getting a fairly substantial salary and had almost no expenses. I was still living at home with my mom on the weekends and staying with my brother during the week. He didn't have much room so I slept in a sleeping bag in his living room for an entire year. When I finally got an apartment my requirements were to be in a nice neighborhood, I choose Beverly Hills, and the rent had to be so low that I could pay for it even if I was on unemployment, I found a place in Beverly Hills for $500 per month, my unemployment benefits were about $1,000 per month back then. However, I never went on unemployment while I had that place.

You might have heard of "rules" like save 10% of your income. I'd say that would be good but it isn't really a rule, just a suggestion. What really helps is to have a reason to save and to set a realistic goal. My reason to save was to have the freedom to go where I pleased, when I want, having the option of taking a job or not working, in other words--to be financially independent. I wanted to reach that point as soon as possible, certainly no latter than 55 years old so I could have several years of leisurely living. I also had a dollar amount in mind, $500,000. I figured with that I could live a nice quiet, simple yet secure life as a bachelor. You could call it early retirement. I'd rather call it an alternate lifestyle because for me retirement brings up images of old people sitting in rocking chairs waiting for the Grim Reaper to arrive.

I didn't remain a bachelor, I got married. Matrimony, well that's a whole different lesson. Let's just say that I was very fortunate to meet someone who shares my dreams.

So to wrap up this first lesson:

1. Live below your means - Spend less than you earn, the difference between your income and expenses is called savings.
2. Stay out of debt - Debt is Slavery!
3. Make attainable goals - It is much easier to save if you have a plan. Make sure your goals are reachable, don't set them too high but definitely don't make them too easy!
4. Avoid compulsive buying - Stop and think before purchasing anything. Is that item really necessary? Is it really going to make you happier? Are you willing to push back your financial goals to make that purchase?
5. Don't spend windfalls, save it - A windfall is when you come upon money that you weren't really planning to get. I could be an inheritance, winning a law suit selling some property or taking the prize in the lottery. There are plenty of stories of lottery winners going bankrupt.

I got rid of lots of books when we downsized to fit in the back house, but there were a couple of books that I saved. I read them a few times and passed them on to one of my nephews.

Your Money Or Your Life - by Joe Dominguez and Vicki Robin

Debt is Slavery: and 9 Other Things I Wish My Dad Had Taught Me About Money - by Michael Mihalik

So start saving. In the next lesson we'll get started on investing.