Sustainability is the new buzz word in environmental circles. It means to live in such a way to continue indefinitely without serious damage to the environment. I normally find that a lot of the ideas put forth by the Green movement are shortsighted. I remember seeing the gas station on University Avenue in Berkeley putting out a sign that the “new, clean gas is here” when MTBE was being added, only to then hear the reports of MTBE polluting ground water in leaking gas tanks and that most of the wells in the Lake Tahoe area were undrinkable. I also remember seeing the “campus conductor” — an electric powered bus that circled the Berkeley campus — declaring “zero emissions.” Never mind that there was coal being burned somewhere to make the electricity used to charge the bus’ batteries, and that they were getting about 10% of the energy out of the coal, versus getting about 20% if they had just burned diesel. Apparently many of the buses in the fleet actually were diesels because the electric ones were expenses and had limited range between charges.
They may be onto something with this sustainability idea, however. I’ve actually found that I dislike things that are not sustainable. I hate big kitchen appliances that are only used once in a while and need to be stored away. I also hate it when the kids get some big toy when there is no place left for it in their rooms. I like there to be a place for things – not to have things that are constantly in the way and need to be moved around from place to place. For me, nothing is worse than big home repairs or other events where everything gets moved out-of-place. Neurotic, I know.
I also find that with economics it bugs me when an economic bubble is underway because it is not sustainable. The thing about these bubbles is that they can seem to go on forever. You know that the party must end at some time, but that does not mean it will end today.
During the .net bubble at the end of the 1990’s I could not wait for the bubble to burst. It wasn’t just that I wanted to invest but knew the prices were way too high, even though they were. It genuinely bothered me that there were huge valuations for stocks that were totally unrealistic. For example, Priceline, which sold left-over seats on airlines, had a higher valuation that the top three airlines combined at one point. It also wasn’t like anyone didn’t notice this. I remember reading this fact about Priceline in the Wall Street Journal.
The amazing thing was when AOL was bought by Time Warner. They had somehow found a way to get people to pay real money for this thing that was valued in fake money. I mean, there were only maybe 10% of the shares trading with the remaining 90% locked up by insiders. People were falling all over themselves to pay for those available shares, not thinking about the fact that the insider’s shares would be unlocked in a few months and when they flooded the market the price would fall through the floor. They were too busy thinking they were making money.
Likewise, the housing bubble, where people were paying insane prices for houses by taking out loans where they paid only the interest or even less than the interest each month, also bothered me. Obviously at some point people were going to need to start paying off the loans with money they didn’t have. In that case many people never paid for the loans they took out, instead choosing to simply walk away, leaving the banks, the taxpayers, and their neighbors (who saw their home prices evaporate as the entire neighborhood went into foreclosure)to pay the bills.
In personal finance, the goal really isn’t to be a miser who turns two-ply toilet paper into single ply and cuts open toothpaste tubes to get every ounce. The goal is to live in a financially sustainable way where the amount spent is covered by the amount earned so that the lifestyle can be continued without growing debt. To have enough savings to cover the unexpected events that always come up. To not live on the bleeding edge of your earnings but instead to have enough margin to be able to weather a job loss without losing the house. Ultimately sustainability means being able to live a lifestyle without needing to work at all.
A sustainable lifestyle is not necessarily a spartan lifestyle. In fact, sustainability grows more comfortable with time, and those later in life who have lived a fiscally sustainable life will be far more comfortable than those who have not. Here’s what fiscal sustainability looks like at each point in life:
College: OK, living sustainably in college on a student income means sacrifice. A sustainable lifestyle in college isn’t having a lush apartment with a gym and eating out every night. College is where the most sacrifices must be made to live sustainably, but then again, you’ll be spending all of your time studying at the library anyway, so how many comforts do you really need at home? A fiscally sustainable life might be sharing an apartment with a roommate or two, or perhaps renting a room from a nice family and helping out with yard work in exchange for meals. It is studying a lot, maybe working a little, and eating as cheaply as possible by hitting happy hour buffets, cooking ramen noodles and beans and rice, and never turning down free food.
Probably the most important consideration for living sustainably in college is which college you choose, Living fiscally sustainable means choosing a college with tuition and room and board that are within your budget. As many graduates who are now looking for a job to start paying down their $80,000 in student loans are finding out, a high-priced school is usually not worth the cost. It also means getting out as fast as possible since college means earning little, if any income and a lot of expenses and fees. So, think about getting preliminaries out at a community college while commuting from home before even setting foot on campus, taking summer courses, and carrying as full a load as possible.
Starting Career: When you start your career, to live sustainably you need to avoid taking on debt and reducing any debts you have to zero as quickly as possible. If you choose to put away a portion of your salary for investments at this point it will be far easier than cutting back later. Continue this your whole career, putting a portion of each raise away, and you’ll have far more money to spend throughout your life than those around you because you’ll be earning interest instead of paying it.
This is not the time to buy a home or a new car. Start by building up an emergency fund of $6,000-$10,000 as fast as possible. Keep this money in a bank CD with maybe $2000 in a savings account to cover unexpected expenses. If you ever need to spend any of this money for an emergency (not a vacation), replenish it as fast as possible.
After you get your emergency fund saved, buy a reliable used car for maybe $3000, and pay off your debts start putting a few hundred bucks a month away for a down-payment on a home and for the next car. After you have raised a few thousand dollars, stick it in a mutual fund and then start contributing directly to the fund. As this fund builds your life will become even more sustainable — since you’ll have the money in the fund to tap should you lose your job and go through your emergency fund. You can also always stop contributing to the fund to rebuild your emergency fund as needed, but make sure that you are always saving and investing. Make it part of your routine.
Make sure you also start contributing to your 401k or an individual IRA or Roth IRA if there is no company match. Start right off the bat contributing 15% if you can, 10% if you can’t. Make sure to at least contribute enough to get the full company match if there is one – it’s free money! Then fund your IRA. Retirement may seem years away, but if you start early you’ll be far wealthier.
Early Career: At some point that investment account will grow, both from your contributions and from capital gains, to the point that you can afford at least a 20% down-payment on a home and still maintain the minimum required balance in the fund. If you live in an expensive area this may be a starter home and you may trade up in a few years. Once you have the down-payment saved up, lock in your balance by selling (don’t forget you’ll pay about 15% taxes on the gain, so save a little extra) and start looking for a home. Note that the market will go up and down, but it will grow overall. Be patient and wait for the market to lift your savings to where you need them to be.
You should continue to invest a few hundred dollars a month regularly and replenish your investment account after you buy the home. Bring your lunch to work most days and only eat out maybe once per week to save money. These little sacrifices can make a huge difference over time. Hopefully your earnings will continue to grow as well. Increase your retirement savings up to the 15% point, then start investing more to build your investment account. You can start buying other funds and/or adding some individual stocks to your portfolio as your balances grow.
Mid-Early Career: At this point you may have young kids at home, a good amount of equity built up in your house, retirement account balances starting to look respectable, and a fairly healthy taxable portfolio. You’ll also be about 10 years from paying off your house since you will have taken out a 15 years fixed loan and not taken out a HELOC or used home equity to pay for vacations and home improvements like your coworkers. Hopefully as your income has grown you’ve increased your lifestyle somewhat, perhaps starting to take more extensive vacations and buying some nicer furniture, but you’ve also been increasing your investments. Perhaps with each raise you decided to spend half and invest half. You should start a college account as each child is born so that college costs will be a little more manageable 18 years down the road.
You will have upgraded your car a bit, driving a $10,000 car you bought for cash. Your investment accounts are starting to generate maybe $10,000-$20,000 per year, but you continue to reinvest it all since you are doing fine with your salary right now. You enjoy knowing, however, that you have something to fall back on should you need it because of a layoff.
Mid-Career: At this point you have paid off your home. You realize that the $30,000 or so you have in each of your college accounts really won’t make much difference since you have around $500,000 in investments, $300,000 in retirement accounts, no home payment, and a good income so you could really float any college your kids choose. You are really starting to see your net worth grow rapidly with investment income reaching $100,000 in some years, rivaling your salary.
You start to take a small income from your investments, maybe $10,000 per year, and do home upgrades and take vacations for cash with the proceeds from investments. You allow most of the money from your investments to be reinvested to let them grow and because you really have everything you need. You start to buy $15,000 and $20,000 used cars for cash every four or five years. You could buy a new car, but you can get a much nicer used car for the same money and you lose a lot less in resale.
Mid-Late Career: This is when your income really starts to soar. You have several million dollars in the bank and are making a million dollars or more from investments maybe every two or three years. You have decided to buy a couple of vacation homes in areas you love and rent them out as investments when you are not there. You have paid cash for your kids college, which barely made a dent on your investment accounts. In fact, it seemed like they repaired themselves as you wrote the checks.
Your children are young adults who you’ve taught to live financially sustainable as well. You’ve decided to help them along so you’ve started giving them each $26,000 per year (the gift tax limit) for the last several years, so they each have investment accounts of about $100,000-$200,000. They are using this money to start savings accounts for their own children, invest for their retirement, and to help take care of irregular expenses. They’ve learned to keep building the accounts with time and use the income rather than spend the principal, so their financial futures are set as well.
Income from your job really doesn’t matter anymore. At this point you have become entirely self-sufficient and financially free. You have the freedom to change careers, if you wish. Maybe you start your own business, or open a bed and breakfast or a restaurant. Maybe you buy and operate an inn in New Hampshire or on the California coast (if you can tolerate the taxes).
Late Career: You wealth has grown despite the expensive vacations you’ve taken and the vast amounts you’ve given away to individuals and organizations. You now perhaps have $10-$20M in investments, scattered through stocks, real estate, and the odd start-up company. You are able to make huge differences in other people’s lives. Yo are able to do things like put several families up in motels for a week after a tornado, build schools in Africa, and provide hundreds of books for school libraries.
Anyone out there living a financially sustainable life? Anyone who thinks it’s better to spend your money and live “for the now?”
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.