> Essays and Musings

> Overview

> This essay was written as a summary of basic finances.

> Topics covered include: budgeting, saving, insurance, and investing.

> You can view and download the original PDF version here.

> Part 1: The Basics

Anyone can learn to take care of their own money. People who try to manage your money for you are trying to earn a living — and are delighted to profit from your belief that finances are complicated and difficult. Never let anyone else control your money. Your money is your own responsibility.

> Here’s how:

1. Avoid debt. You can’t save money that isn’t yours.

2. Pay yourself first. Save first, then spend.

3. Live within your means. Spend less than you have.

4. Automate your savings. Have your monthly savings deducted automatically from your paycheck — it's painless and you're never tempted to skip it.

5. Save three ways. There are three types of saving:

(1) An IRA or 401(k) for the long term which allows you to grow rich slowly by taking advantage of compound interest (see page 11)

(2) An emergency fund for the mid term (about 6 months of take home pay, so if you're fired or get sick, you have the money to cover daily expenses until you can get back on your feet)

(3) A short term ‘pot hole’ fund of about $1000 for all the surprises that life throws at you (a flat tire, broken computer screen, lost phone, etc.). There will always be an unexpected emergency each month — once you acknowledge this as a fact of life, then it's no longer a scary surprise when you have to call the plumber, because you've already budgeted for it. You just refill the fund and you're ready for the next surprise.)

6. Always have health insurance. A medical emergency can bankrupt you.

7. Be slow and steady. You can start out with only saving a little each month — that's OK; what you want to do is establish saving as a habit: paying yourself first, automatically, and regularly. Do not make large financial changes based on ‘tips’ or ‘limited time opportunities’. Move slowly and steadily, not quickly and erratically.

8. Set up an IRA. Once you have an IRA (which you will never, ever, ever touch before retirement), you can relax about your future. You have over 40 years to use compound interest and the gradual expansion of the American economy to slowly grow your steady contributions into a nice chunk of change. You will have other assets by the time you retire (a house, personal savings, maybe even a pension or Social Security) but those will only be supplements, and not what you desperately need to avoid poverty. Even if the housing market crashes again or you lose your job early, you won't be destitute. Your IRA is your safety net.

> Part 2: Budgeting

> What is budgeting?

Budgeting means having a good relationship with money. It means being in control.  Budgeting isn’t about being penny pinching or miserly, it’s about being realistic. Budgeting frees you from anxiety, and gives you room to breath.

Budgeting is defined as: spending less than you bring in and planning for both the short and the long term.

> How do I budget?

Money is a very emotional topic for many people. They resent having to be realistic about money and honest with themselves about their financial limits. Fear and anger are paralyzing emotions that can make budgeting very difficult. Remember that you are in control and follow these steps:

Take your annual income (gross income), multiply it by 75% (because approx 25% goes to taxes). This is your take home pay (net income). Divide this by 12 (months). Take a hard look at that figure. This is what you have to live on. Here’s how you make it work:

1. Set Goals and keep it simple. Create categories, ranked by importance, and decide the amount you can spend in each. This is your budget. Stick to it. Be realistic about what you have and what you can afford.

           A. Rent/mortgage (Never pay more than 40% of your monthly residual income to rent. Review your rent every year to see if you can find a lower rate.)

           B. Savings (Pay yourself into the three funds: A Retirement fund, a 6 month emergency fund, and a ‘pot hole’ fund.)

           C. Utilities

           D. Health insurance

           E. Food

           F. Clothing

           G. Transportation

           H. Entertainment

           I. Additional categories (Set money aside for annual/intermittent bills such as property taxes, house/vehicle insurance, life insurance etc.)

2. Spend less then you have.

- Keep track of everything you spend and keep an eye on your balance.

3. Budget with your partner

- Open, honest, and respectful communication about money is critical.

- Make sure that you talk regularly about finances and your long term plans.

- Do they make a lot of impulse purchases? Are they too frugal to enjoy life?

4. Be kind to yourself.

- Learning to budget takes time and practice.

- You will make mistakes. Correct them and move on.

- Don’t give up. It’s worth it. The reward for budgeting is freedom from fear.

> Part 3: Investing

Note: Any money you need in the next five years should stay in your savings as cash. Investing for less than 5-10 years is speculation, not investment.

> How does investing work?

For any period over 5 years, the surest way to beat inflation* is to invest in a diversified portfolio of stocks and bonds.** Over the last century, the American economy has expanded at an enormous rate due to its relatively free markets.

While picking individual stocks is simply a gamble (almost no one can accurately pick which stocks will succeed) investing in an index fund (which tracks the growth of the entire economy as a whole by buying a little bit of all the major stocks) your portfolio rises as the entire stock market rises, decade over decade.

Below you will see charts showing the growth of US production over the past century. There are many dips, but the US economy always trends upwards.

You don’t need to pay anyone to manage your funds. Use a company like Vanguard, Charles Schwab, or Fidelity, which charge very minimal fees (less than 0.5%) and have a variety of different funds (mixes of stocks to bonds) to invest in.

Remember: Investing takes self discipline.

The economy goes up and down, sometimes very quickly. With a diversified portfolio in index funds (stocks and bonds), you set it and forget it. Ignore temporary ups and downs. You are investing for the long term.

[* What is inflation?

Inflation is the devaluation of a currency (such as the dollar) over time. Inflation causes prices to rise, which means that you can afford less with the same amount of money. The primary cause of inflation is the government, which has the power to add new currency into circulation, reducing the value of the existing supply. Today (2017), inflation is around 4% annually, meaning you effectively lose 4% of your money’s purchasing power each year if it stays as cash.]

[** What are stocks and bonds?

A stock is a small piece of a company. The value of a stock goes up and down according to the projected value of the company, i.e. how much money it might make (and be worth) in the future.

A bond is a small loan to a company or government. The company issuing the bond (i.e.asking for money) promises to repay the face value of the bond after a certain time period of time, plus interest. The longer you hold onto the bond, the more interest accumulates.

Stocks are riskier but can offer large return on investment over time. Bonds are safer but can only offer a small return on investment over time.]

> Why invest?

Over the past 150 years the US economy has been growing at a faster and faster rate. Every year the market goes up and down. Predicting year to year returns is impossible, but decade to decade, nothing grows as fast or as consistently as the US economy. Note that in 2017 we have far exceeded the 2009 levels shown and set a new stock market high.)


When seen on a large scale (from 1900 to 2017) the growth of our economy is astounding. Note that these charts are logarithmic charts, not linear charts, which means they contain far more growth than is immediately apparent. The Y axis is based on a percent increase rather than a simple numeric increase. We lost far more wealth in the 2007/2009 housing bubble (The Great Recession) than in the 1929/1932 stock market crash (The Great Depression), but as a percentage of our economy it was far less. Even with these ups and downs, when investing for more than a decade, the market always bounces back and goes on to break new records.

> What is Vanguard?

Vanguard is an investment company that provides a wide veriety of low cost mutual funds that are not actively managed by anyone. Instead, they track the major US stock indexes such as the S&P500, the Russell 2000, and others. The average fee of an actively managed account is 1.25%, which may not seem like much, but compounded over time can take tens or hundreds of thousands of dollars from your savings. Vanguard’s fees are 0.05% and lower. Furthermore, there is no evidence that managed funds perform better than index funds over the long term. In fact, there is considerable evidence that index funds outperform managed funds year over year. There is no reason to pay anyone to actively manage your money. Vanguard has 4.5 trillion dollars in assets as of September 2017.

Simply put, Vanguard is a long term savings vehicle. With Vanguard funds, your IRA and additional savings will make, on average, 8% return per year over your life time.

> Part 4: Planning ahead

OK, I’ve learned about finances, budgeting, and investing. What else should I know about?

The following pages contain 10 topics worth studying. Understanding these topics will help you avoid financial mistakes and ensure that you get the most out of life.

1. Insurance — What kinds are there and when you need them?

- Renter’s insurance:  Covers damage when you are renting an apartment.

- House insurance: This is added by default to your home’s mortgage.

- Auto/vehicle: For cars, boats, trucks, motorcycles, etc. There are three types of auto insurance. Most states require you to purchase them:

• Property: Covers damage and theft of your vehicle.

• Liability: Covers your legal responsibilities for bodily injury and property damage owed. Have at least 250k+. If you are the victim of someone without their own liability insurance, make sure that you have the medical insurance to cover your own catastrophic injuries.

• Medical: Covers the cost of treating injuries, rehabilitation, and sometimes lost wages and funeral expenses. If you already have a health insurance plan, some of this insurance can be redundant, and not worth paying for.

- Health insurance: Employers offer private health care plans. These should cover catastrophic injuries such as surgery, chronic illnesses, stroke/heart attack, rehabilitation costs, etc. Smaller hospital visits are often covered out of pocket. Employee insurance plans are usually more comprehensive than anything the government offers. If you are unemployed/self employed, there may be companies that offer free market options superior to government mandated health insurance. Whichever you choose, you must have some kind of health insurance.

- Long term health insurance: Start considering long term health insurance in your early 50’s. If you can self fund 20+ years of assisted living, you don’t need it. If you can’t, then long term health insurance protects you from bankrupting yourself if you need to go into a nursing home at some point in your old age. Shop carefully because the benefits vary widely. Some adjust for inflation, pay for companions, staying at home, etc. These benefits will affect the cost. Study different plans and go with a reputable company like Northwestern, John Hancock, and others.

- Umbrella insurance: As a property owner, this covers you against large lawsuits (it is usually very cheap, and well worth it).

- Life Insurance: This pays out a sum of money after a loved one dies*.

• If you are young and in a very serious relationship, have enough insurance to cover at least five years of living expenses (time for your loved one to recover from the shock and loss).

• If you married with children, have enough to take care of your spouse for the rest of their life, and put the kids through college.

- Disability insurance: (Usually very cheap; if it is offered through your employer, take it.)

- Specialty insurance: (For insuring an athlete's arm, a rare bug collection, priceless jewelry, a violinist’s hands, or anything else irreplaceable.)

- Key Man insurance: (If your death would cause a business to fail, they may take out insurance on you. It’s nothing to be afraid of.)

- Pet insurance: (If you are very attached to your animals)

[* - Buy term life insurance, not whole life insurance.

- If you have run your life properly, you will not need life insurance past 70.

- You do not need to take out life insurance on your kids. It is a waste of money.]

2. Credit cards — Simply put, be careful.

Pay your credit card bills every month like a religion. Pay all of the bills all of the time. Never pay the minimum. If you fall behind, you will end up in a swamp of debt that will destroy your credit rating, and quickly eat up all of your savings. If you do not pay your bills, they will charge you 15-30% interest. You will be in serious debt in a matter of months. These companies are happy to see you to mess up. They don’t make money off of people who pay on time. If you to pay the minimum, they get the maximum from you.


So why even consider getting a credit card? It can help you build a goodcredit score when you are young (although it can also destroy your life when you are young). A simple way to build a good credit rating is to put small monthly subscriptions (like Netflix, BackBlaze, Adobe CC, etc.) on your credit card and have the credit card bill automatically take from your checking account every month to pay for them. This creates a steady stream of reliable payments that is manageable and will slowly build a solid credit score.

3. Specialist (doctors) visits — You get what you pay for.

Although your health insurance may cover these visits, if you encounter a health problem that you feel requires a visit to a doctor (your child has a

strange rash, itchy eyes, joint pain, etc.) you may have to pay out of pocket. The best care is from private doctors, which can be expensive becuase they don’t always accept insurance. Save for these unexpected visits. In addition, make sure you maintain your health according to a schedule:

-Visit the dentist every 6 months

-Women should go to see an Ob/Gyn at least once a year

-Get a full checkup (physical) every few years

-Get occasional screenings as you get older.

-Women should get a mammogram every two years after 40.

-At 50 get a colonoscopy, and every 10 years thereafter.

4. Children  — They are expensive.

Start saving for your children the moment you think you will have them. If you do not have them, you have simply saved a nice nest egg.

• Start saving for their education as soon as you get pregnant.

• Never put the education fund in their name.*

5. Transferring wealth — Protect your money by planning ahead.

- Trusts: A revocable trust allows you to place all your worldy possessions in

a legal entity that, when you die, will automatically transfer to your

beneficiaries. This lets you skip probate.**

- Gifts: [Don’t do it.] You can give up to $14,000 to your children and

grandchildren tax free every year. This is not generally advisable. Beyond

helping a child with their IRA when they are young, this drains your personal

assets and doesn’t support the child’s financial independence in the long

run. You need the money more than they do. Expenses always go up, and

children always want more. Protect your resources until the day you die.

They can fight over your assets after you are gone. Do not lavish funds on

15-20 year olds, you are only hurting them.

6. Housing — Save, save, save!

- Apartments vs. houses: This is largely contextual, but if you are not planning to be somewhere for more than 5 years, it is usually not worth

buying a house. If you are, sit down and do the math to see if you can save some money.

- Saving for a down payment: Start young. Start really saving once you get engaged. It may take a few years. You can get a fixed rate or adjustable rate (ARM) mortgage depending on current interest rates. Shop around. Quotes vary widely.

- Income allocation: What percentage of your income should you allocate to housing? As little as possible. When you’re young it may be as high as 40%, but as you get older it should drift down to 25%.

- Big houses are money sinks. Unless you have a family with 20 kids, a large house is a waste of money. Spend modestly and live efficiently.

- Location, location, location. Buy the smallest house in the best neighborhood. Consider how much it will cost to get to work. Is it near public transportation? If not, how much will you have to spend on a car, maintenance, gas etc.? Do you really need two cars for two people?

- Remodeling: the danger zone. Remodeling can destroy marriages and wipe out savings. If a house is functional, don’t engage in major renovations unless you are wealthy. You will not make the money back when you resell the house. Period.

7. Transportation costs — Be strategic.

- When you are young you should live within walking distance of public transportation or commute by bike.

- Never buy a car *new* unless you can pay in cash, in full. Never lease a car.

- If you can’t afford new, buy a good quality car, used with low mileage.

- Maintain it properly and keep it as long as possible. It’s a complicated formula, but when the annual repair costs approach the cost of buying a replacement used vehicle, then consider getting rid of the old one.

[* *Often people will do this because the child’s tax rate is generally much lower than the parents and you can save a lot of money that way. The problem with doing this is that very often, as soon as the child turns 18 and realizes that his name is on the account, he spends the money on fast cars and pizza instead of his education. Retain complete control of your money at all times.]

[* **A legal process that occurs after your death. Basically, government taxes and fees for the privilege of dying.]

8. Wills, powers of attorneys, and health care proxies — Find people you trust.

- Wills: Yes, you need a will, and yes, you need it now. Even young people have assets. Protect them. Control where your money goes after you die.

- Powers of attorneys: This allows another person to control all of your affairs/assets while you are incapacitated. Choose this person wisely.

- Health care proxies: This names the person who will decide life altering medical decisions (whether to pull the plug if you are in a vegitative state, or opt for a risky surgery while you are unconscious.)

9. Managing your retirement — Prepare for the long term.

- Preparing for retirement: Will you be selling your house? Will you be retiring in place or traveling? How will you provide for your children? What new job, volunteer or payed, will you start? Begin thinking about the transition and the financial implications of your long term goals. Discuss these financial and tax implications with your lawyer and accountant.

- Beginning retirement: Congratulations! You’ve reached 65! Once you’ve retired, you can spend 3.5-4% of the balance of your IRA per year. This is subject to whether you need the money in any given year (because of other income sources), government rules (Minimum Required Distribution*), and market fluctuations.

- Health care: You will need to apply for Medicare** 3 months before you turn 65 or face penalties. You may also have regular health insurance from your previous employer, or you will go into the market and buy Medigap insurance (replacing your previous companies insurance with a new company) This Medigap insurance will cover the difference between the low Medicare payouts and the market prices.

- Health insurance: Keep up your long term health insurance payments.

- Review your will: Do this every five years and update it every 10 years.

- Find someone you can trust: You need someone, hopefully more than one, that you can trust to assist you in the near term as an executor and health care proxy so as to avoid elder abuse (children, family, neighbors that come in and start taking your assets). Identify trustworthy people, likely your children, to keep an eye on you while you decline so that you aren’t taken advantage of.

10. Learn, confirm, and share — Stay up to date and pass the knowledge on.

- Laws will change: Make sure you keep track of any new government regulations. They may affect your banking and investments.  

- Always read the entirety of any contract: Never sign something without reading all of the fine print, twice. Keep track of your institution’s competitors and occasionaly check that your savings strategy is still the best option.

- Empower others: As of today, 70% of college students are graduating with debt, almost half of the workforce is living paycheck to paycheck, and 62% of Americans have less than $1000 in savings. Most Americans are unprepared for basic financial emergencies, let alone retirement. It doesn’t have to be this way. Finances can be a tricky thing to talk about, even with the closest of friends, but if someone you know shows interest in the topic, offer to educate them. It may be difficult in the short term, but financial knowledge can quite literally save a person’s life. Financial independence and security is the greatest gift you can give another person.

[**The government requires that you take out a certain percent of your IRA each year after you turn 70 to ensure that you aren’t using it as a tax shelter.]

[* **Government funded health insurance for Americans over 65 and people with certain disabilities.]

> That’s it.

That’s all the information you need to live a financially independent life. But there is one more thing that might interest you...

> Part 5: Compound Interest

Compound interest is the secret to making money. Lots and lots of money.

Understanding the power of compound interest is the first step in financial planning. It allows us to understand why we should invest, and why we should do it now. Here are three examples of compound interest:

1. “Based on your current age and a 6% return rate — this is how much you need to be saving per month in order to reach $1 million by age 65.”


2. “Emily, represented by the blue line, starts saving the exact same amount as Dave (the red line), but begins 10 years earlier. Ultimately, she contributes around 33% more than Dave over the course of her career, but ends up with almost twice as much wealth as he does.”


3. Here we see the different effects of starting early and saving consistently. All three invest the same amount annually, but start and finish at different times.

Chris saves twice as much as Susan and Bill by starting early and continuing to invest for 40 years.

Susan, who only invests $50,000 in her 20’s, saves more than Bill who invests $150,000 but waits until his 30’s.


Now let’s see these principles it in practice.

In this example, you start with $1000 (your principal) at age 22 and save $250 a month at 7% compounded yearly for 43 years. (Starting at age 22, and retiring at 65). You save $761,000.


Now see what 8% (only a 1% difference) compounded yearly nets:


A 1% difference nets you an extra quarter of a million dollars by retirement. The little things matter!

In fact, that 1% difference is the equivalent of an extra five years of saving at 7%!


It is also important to realize that almost 90% of that 1 million dollars is from accumulated interest, and not the money you directly contribute.


Remember this: if you saved just $8 a day, the price of two cups of coffee, starting at 22 and ending at 65, you would have well over a million dollars in savings.

> Part 6: Building Wealth

Have you ever wondered how some families stay rich for generations? Time and principle. Let’s suppose your grandfather started a retirement account for you as soon as your parents got married. If $250 was invested monthly at 8% for 100 years (instead of just 43), you would end up with $111,722,557 dollars instead of $1,016,115. By investing for twice the time, you can save 100 times as much money.


But what if you don’t have extra time? Let’s say your parents were quite wealthy and put 1 million dollars in your savings at 22. If you start with this principle and save the same amount, $250 a month for 43 years at 8%, you would retire with almost $32 million dollars.


And what if your grandparents did that for you? If they left a million dollars in savings and the family added just $250 a month at 8% for 100 years, you would have 3 Billion dollars by the time you reached 65 (that’s a 300,000% increase in wealth 2.5 generations). This is how trust funds work, and why they can keep families rich for many generations when properly managed.


The lesson is: Time is money, but money can’t buy time. Start saving as soon as possible. Barring disaster, the money you save now will be spent during your retirement, so your grandchildren won’t be inheriting a billion dollars any time soon. But if you are able to put aside a little now, it can help them tremendously with their education.

> Part 7: What's next?

Believe it or not, you are ready.

Reading about personal finances can seem complicated and overwhelming at first. But in practice, it is a matter of a few simple habits carried out over a long period of time.

Your money is your own responsibly. Never let anyone else manage your finances or make long term decisions for you.

You are in control of your future. The decisions you make today determine what opportunities you, your spouse, your children, and your grandchildren will enjoy.

> If you learned from this essay, please pass it on to others.

Minimalism is more than an aesthetic.
It is a rational approach to creating objects from the ground up for efficient human consumption.

Minimalism is a philosophy for making life easier, and counter intuitively, it is the tool that allows designers to make life more complex. By reducing an idea to a few key concepts, we are able to think more widely and make broader connections.

Simplification and organization are the keys to seeing further and understanding more nuanced problems. In many cases, simplicity becomes a signifier of complexity - a phone is simply a piece of glass, a car is a chair on wheels, a room is four walls and a floor - but we recognize that what we see with our eyes does not constitute the totality. It masks the electronics, the engines, and the plumbing. We recognize this, and yet by the nature of their simplified visual form our mind is spared the burden of processing the sum of the parts.

This is the purpose of minimalism: not to reject complexity, but to assemble and refine it in such a way that we may produce yet more.

Design should do two things: save you time and make that time more enjoyable.

> No quick fixes.
Design should do two things: save you time, and make that time more enjoyable.
Real progress takes time. Temporary solutions are only interest payments on a problem. Good design is a systematic approach to problem solving that requires training and patience.

> Beauty is an emotional need.
Our ability to understand and interact with an object is determined by its form. Clarity is the goal. Efficiency is the result. An object that works is beautiful and vice versa. 

> Quality means reliability.
Building to the highest possible standards is a long term investment. A product is a promise and it must remain steadfast. There are no shortcuts to acheive quality.

> Build for the individual.
For design to have meaning it needs to be personal. Tailor a product to the individual whenever possible. When designing for groups, the best solutions are modular or customizable.

One cannot and need not be joyous all of the time. Joy is fleeting and is a reward for achievement. Achievement takes time; being the result of a conscious process. 

Pain is unnatural. It is the sign of a problem, a warning. It may be necessary, temporarily, to achieve some greater joy, or as a proper response to some significant loss, but as with joy, suffering should be temporary, and fleeting. Of perhaps more crucial significance than temporary joy or suffering is an understanding of a man's underlying emotional state, his default state. This state may vary from person to person, but consider: is it is on the whole either positive, confident, and calm, or is it negative, fearful, and stressed? This is the core of a person, their underlying sense of well-being.

The purpose of man's life is not to spend his years toiling away, decade after decade, in continual suffering, for the purpose of achieving a few days or weeks of euphoric happiness upon the completion of some momentous achievement that after death will be lauded for centuries. No, the purpose of man's life is to enjoy his entire life. Not the "short term", and not even the “long term” if that is to be defined as some long distant point always to be pushed back, but rather the “long term” as defined as the longest amount of time possible.

What this means in practice is not years of suffering now for a short payoff later, and certainly not short payoffs now for much suffering later (here we see that self sacrifice and hedonism are in fact two sides of the same coin), but rather it means setting oneself up in a position where one's mind can be continually pushed and stretched in an enjoyable manner, where day in and day out problems are solved and small rewards received. Where many small efforts, some difficult, some painful, but on the whole energizing and fun, add up to a great achievement that brings the reward* of a true and pure joy (without pain or fear or guilt), a joy that will still fade, but the memory of which will give fuel to motivate and inspire oneself and others, in the short and long term. 

* (and it should be mentioned: a reward that one is still capable of experiencing, as opposed to one received after years of sacrifice, which the recipient may be too mentally exhausted to enjoy.)

Life then is not about suffering through one's decades to get to the happiness at the end; rather, life is about achieving happiness, now and later, as much and as intensely as possible, or perhaps better stated: for as long as possible. To achieve this ideal state is, of course, much easier said than done. It takes many years to understand, to set up, and to master the mental process and career that will produce this kind of happiness, and still more years of constant effort to maintain and correct one’s mistakes, new and old. it must be understood that the aforementioned can only be achieved through reason, reason applied day after day, and without compromise. Rational thought is the key to achieving a meaningful and happy life because reason is the process by which an individual aligns his thoughts (spiritually) with his actions, and thereby connects with reality in an effective way. Reason is the foundation of finding and pursuing one’s purpose, or in Objectivist terms: to discover and fight for one’s own happiness.

More than self expression, art offers a unique way of learning and should be pursued as a complementary act to other forms of design.

To create we must first observe, judge, and react. In this way, creating art is a way for us to gain a deeper understanding of the world around us, and prepare us for the task of reshaping it.