Thursday, July 4, 2013
The Incredible Joy of Financial Independence
About a year ago -- around Independence Day 2012 -- my wife and I reached an important financial milestone, our own Financial Independence Day. We were in our mid-30s, with four kids and only one working-for-pay adult amid one of the worst job markets in generations, but we were free. Not rich, mind you, but free nonetheless.
When we ran the numbers, we discovered that with reasonable returns on our investments, we could stay in our house, cover COBRA/HIPAA health insurance premiums, and feed our family home-cooked meals. The kids would be on their own for college, our entertainment budget would consist of walks to the park for picnics, and we'd have to downsize our transportation to just the (paid-off) minivan. But still, we had a reasonable chance of making bare-minimum ends meet without working.
Peace throughout turbulent times
The transformation in our lives was astounding and almost instantaneous. I still work, as we want better than subsistence living and to help our kids start their lives without excessive debt, but I was able to land two jobs that were about as close to ideal fits for me as exist in the job market. That only happened because we had the freedom to ask for what we wanted at a time when many others were simply happy to have any job.
The transformation in our lives was astounding and almost instantaneous. I still work, as we want better than subsistence living and to help our kids start their lives without excessive debt, but I was able to land two jobs that were about as close to ideal fits for me as exist in the job market. That only happened because we had the freedom to ask for what we wanted at a time when many others were simply happy to have any job.
In addition to the awesome jobs, I also regained the ability to attend most of my kids' sporting events, spend most weekends and some evenings with them, and tackle some of the overdue "honey-do" list. For the first time in years, our work and life were in some semblance of balance, thanks almost entirely to reaching that state of financial independence.
We got there, so can you
We followed an incredibly simple strategy to reach that point of financial independence:
We followed an incredibly simple strategy to reach that point of financial independence:
- Spend less than we earn.
- Invest the rest, in tax-advantaged accounts when possible.
- Reinvest dividends in something, though not necessarily the dividend payer.
- Repeat.
The strategy was simple, but it certainly wasn't easy or quick. Kids got sick. Cars broke down. The air conditioner, water heater, furnace, and other appliances needed to be replaced. Vacations were reduced to driving trips to visit out-of-town family. Entertainment came largely from the public library and neighborhood sports. And notice that I mentioned working two jobs...
I followed that four-step strategy before my wife and I were married, and once she realized that it was her best shot of being able to stay home with the kids, she quickly converted. Yes, it took years of sacrifice and being extremely choosy in our spending. Still, having emerged intact on the side of financial independence, we can attest that the benefits, from peace of mind to improved work-life balance and family time, are certainly worth it.
How we invest
The centerpiece of our plan was consistent investing in a strategy that has its roots in Benjamin Graham's timeless classic, The Intelligent Investor. The keys to that strategy are:
The centerpiece of our plan was consistent investing in a strategy that has its roots in Benjamin Graham's timeless classic, The Intelligent Investor. The keys to that strategy are:
- Dividends: We look for companies that pay dividends, have a history of raising their dividends, and look capable of continuing to raise their dividends over time.
- Valuation: We look for companies that trade at what look like reasonable-to-cheap prices based on some fundamental measure of their worth. Since the financial crisis took out some of our weaker holdings, we began including balance sheet strength in that valuation consideration.
- Diversification: We follow Graham's advice to look for companies that meet our other investing criteria and that operate in different industries. This absolutely saved us during the financial crisis, as many financial institutions looked good in the rearview mirror at the same time they were busy melting down. We lost more than I would have liked due to our holdings of financial companies, but far less than we would have were it not for Graham's diversification principles.
As we worked through that strategy, we had some good years and some bad years, and we didn't consistently beat the market. But we were able to keep on plugging away, because we understood the strategy and believed from Graham's experience and his followers' that it would work for us over time. And with every paycheck with money automatically sent to the 401(k), every IRA contribution, every reinvested dividend payment, and the occasional after-tax investment, we kept at it.
Why almost anyone can succeedPerhaps the most important lesson we learned along the way is that you don't need to trounce the market to wind up comfortable. Indeed, the act of investing is in many ways more important than the returns you get from investing. You just need a reasonable strategy that you can consistently follow and the persistence, perseverance, and time to see it through.
The strategy that got us to our Financial Independence Day may or may not work for you. But in honor of our nation's Independence Day this Fourth of July, I encourage you to take the time to consider what your path to your Financial Independence Day might look like. Because the sooner you start, the better your chances are of reaching that goal, and the longer you'll be able to enjoy the fruits of your effort and sacrifice.
Sunday, May 5, 2013
Warren Buffett offers advice on investing and life
Hours of questions at Berkshire Hathaway meeting yield advice from billionaire Warren Buffett
By | Associated Press – 1 hour 21 minutes agoRELATED CONTENT
- Berkshire Hathaway Chairman and CEO Warren Buffett, right, and Microsoft founder and Berkshire director Bill Gates play bridge outside of the Borsheims jewelry store, a Berkshire Hathaway subsidiary, in Omaha, Neb., Sunday, May 5, 2013. The Berkshire Hathaway shareholders meeting was being held this weekend in Omaha. (AP Photo/Nati Harnik)
OMAHA, Neb. (AP) -- Billionaire Warren Buffett dispensed plenty of advice on investing and life during this weekend's Berkshire Hathaway shareholders meeting.
The wisdom Buffett and his investing partner Charlie Munger offer is part of what attracts more than 30,000 to the meetings each year.
Here's a sample of their insights:
INVESTING SUCCESS:
Buffett and Munger told shareholders that successful investors must learn all they can about the businesses they are buying and stick to industries they know, but the right temperament is also important.
"You just have to avoid getting excited when other people are excited," Buffett said.
Admittedly, it's hard to continue to make rational decisions about investments when the stock market is soaring, but it has proven profitable for Berkshire Hathaway.
"We've always tried to stay sane when other people like to go crazy," Munger said. "That's a competitive advantage."
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DISADVANTAGES OF SIZE:
Berkshire Hathaway's size and its $49 billion cash pile allow Buffett to do bigger deals than ever, like the recent deal to buy half of the H.J. Heinz Co. in a $23.3 billion transaction.
Buffett reminded shareholders that size does have its disadvantages. He said it will continue to get harder to meet or exceed Berkshire's past returns.
But Munger said he's confident the conglomerate will still perform well over the long term.
"Of course our annual gains will slow down a bit, but it will still be very pleasant," Munger said.
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PASSION:
Buffett said he's just as passionate about investing and running Berkshire Hathaway as he was when he was younger.
"You have to love something to do well at it," he said after a questioner suggested he'd lost some intensity at age 82.
Buffett said hunting for acquisitions and thinking about Berkshire is what he enjoys.
"There's nothing more fun for me than finding something new to add to Berkshire," he said.
___
FED FORTUNES
The Federal Reserve's aggressive bond-buying program has helped stimulate the economy, but Buffett said it may be hard for the Fed to safely unload its $3.4 trillion investment portfolio.
"It's a lot easier to buy things than it is to sell them," Buffett said.
The Fed has been buying $85 billion a month in Treasurys and mortgage bonds to try to keep long-term borrowing rates down and get the economy moving.
Buffett said it's hard to predict what will happen when the Fed starts unloading bonds, but it's likely to be "very inflationary."
"We really are in uncharted territory," Buffett said.
___
BERKSHIRE HATHAWAY'S FUTURE:
Buffett said he doesn't expect his successor to make any significant changes to Berkshire Hathaway after the 82-year-old investor is gone.
Buffett faced several questions related to the future of the Berkshire conglomerate he built.
Berkshire's next CEO may make some changes in how many of the more than 80 subsidiaries report to him directly, but he expects the company will remain extremely decentralized.
And Buffett said he doubts it would make sense to split Berkshire into several different pieces.
"Breaking it up into several companies, as far as I'm concerned, would produce a poorer result," Buffett said.
And even though Berkshire's next CEO won't have the Oracle of Omaha's reputation and connections, the company will still have a huge pile of cash to invest.
"In times of distress, few people have capital and even fewer are willing to commit," Buffett said.
As usual, Munger cut straight to the heart of the issue.
"I want to say to the many Mungers in the audience, don't be so stupid to sell these shares," he said.
"That goes for the Buffett family too," Buffett said.
Wednesday, March 27, 2013
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