An Open Letter to Bernie Sanders Supporters

IMG_1836This is an open letter to those who are flocking to Bernie Sanders events and are proudly calling themselves Socialists.  You may be enjoying the excitement and talking about “feeling the Bern,” but do you really know what is at the root of Socialism, Democratic or not?

While Bernie Sanders may say in speeches that he will be making things fair by taxing rich corporations and stock speculators, the root of Socialism is armed robbery.  It is employing others to take things from people to give to you; taking things that you did not earn by putting the ones who did earn them under the threat of imprisonment.  And if you don’t believe it involves guns, just try to not pay your taxes and see whether the people who show up to arrest you are wearing guns.  And while you may believe from Sander’s speeches and the rants from your Socialist professors, who hide away in the ivory tower because they have no capability to do anything truly useful for society, that you would just be taking money back from evil people who came by their wealth dishonestly and by oppressing “the workers,” let me introduce myself as one of the people you would be stealing from to get your free healthcare, free college, and other free money.

Let me first say that I am certainly nothing close to a billionaire and that I have made less than six figures for most of my career, but I would be one of the ones paying for your “free college,” your “free healthcare,” your “free housing,” and your “free food.”  You see, if you took all of the wealth made by all of the billionaires combined in the US, it wouldn’t come anywhere close to covering even just “free tuition.”   This means that it will be middle class people paying for most of this free stuff Sanders is offering.

Despite not making hundreds of thousands of dollars per year, I’ve been able to put myself in a much better financial position than most of my peers with a paid-for house, no debt, college savings accounts for our children, and enough savings and investments to greatly ease worries about losing a job.  Like virtually all people in my situation, I didn’t do it by taking from anyone or cheating anyone.  Anyone with whom I traded my services or goods has felt that they got at least in value what they gave me in return.  This is true of people who become wealthy because those who cheat others seldom stay in business or remain as employees for long.

The reason that I have been able to amass more wealth than my peers is because I made choices starting from high school to put me into the position that I am in today.  I came from a middle class family that saved up money for my college education because they felt it was important.  I worked hard in high school, completing all assignments and studying before every test, to graduate in the top 5% in my class, which qualified me for a scholarship to attend a state university. While I could have taken out loans and attended a private college like the University of Southern California, I chose to attend the University of Arizona because I could go on a full merit scholarship.

While at the University of Arizona, I worked extremely hard on my classes, studying and doing homework during any opportunity between classes and doing five hours of homework or more on a typical night, taking maybe one day off per weekend except during  finals.  I attended office hours regularly, read what I needed to read, got all of my homework problems right, and made sure all projects were my absolute best work.  I took between 19 and 21 credit hours per semester (including orchestra and jazz combos) to graduate as fast as I could (I graduated in four years, but could have graduated in 3 1/2 if the classes I needed were available).  This combined with my scholarships and living a very modest lifestyle allowed me to leave without undergraduate school without debt.

Because I worked so hard as an undergraduate, graduating Summa Cum Laude with an aerospace engineering degree, I was accepted into every grad school to which I applied, including Stanford and MIT.  Because U.C. Berkeley offered a full scholarship, which Stanford and MIT weren’t going to (or at least were slow to indicate what they would do), I chose Berkeley over the more expensive private schools.  I chose to live within my means rather than buy what I could not afford and then complain about how high my student loan balances were.  By taking a research assistantship, living modestly, graduating quickly and taking odd jobs here and there I was able to graduate without going through the rest of the money my parents had saved for school and without taking on any debts.  I didn’t have a lavish apartment.  I didn’t go on any expensive trips.  After graduating, it took 9 months to get a full-time job so I did part time and consulting jobs in the interim.

When I started a regular job I started at a salary somewhat above what people with BS degrees would have gotten.  This is not because I was privileged or because I cheated someone, but because I worked hard to get through grad school and graduate with a Ph.D.  I spent a lot of hours in the lab, working on my research and dissertation, studying for really difficult written and oral exams covering everything I had learned during the previous seven years, and writing and editing my dissertation.  Along the way I learned skills such as organization, research, writing, money management, and how to read complex journal articles, all of which made me more valuable.

Once I started work I continued to work hard but not just for the sake of working hard.  I worked to learn skills that were useful.  I tried to figure out what most needed to be done and to do it. I thought about the goals of my organization and how I could help it get there.  I didn’t wait to be told what to do, but instead thought carefully about how I could contribute and improve things.  I was reliable – coming in to work extra when it was needed without being asked, making sure I was ready for meetings and events and making sure my company was seen in the best possible light.  Because of this, I continued to gain salary and increase my income from work..

While having a good salary, after ten or fifteen years of working my way up helped, a lot of my wealth generation was due to the choices I made and the willingness to sacrifice and wait for things.  When I did get a regular job, I did make the stupid mistake of buying a new car and putting it on a 6.5 year payment plan, but I swore that would be my last new car, paid it off in 4.5 years, and am still driving it today 18 years later.  For our other car we bought a used Camry for $3,000, then five years later bought another newer model for $8,000.   We may sell this one next year since we’ve had it for about seven years and pay $14,000 cash for another Camry or an Avalon.  I saved thousands of dollars per year on depreciation by buying used cars for which I could pay cash and driving them for several years.  This has allowed me to trade up in cars with cash and to save and invest for retirement.

For the first several years in the new job and after getting married, our only vacations were  a weekend away or two and a road trip to visit in-laws.  We didn’t go to any all-inclusive resorts in the Caribbean because we could not afford it.  We didn’t buy a time share.  We didn’t go to the beach for spring break.  Instead we saved and invested the money, knowing that we cold go later when we could pay cash for it instead of putting the trip on a credit card.

We also bought a modest house where we could afford the payments since they were less than 25% of our take-home pay.  We put it on a fifteen year loan and paid it off in twelve years, allowing us to save hundreds of thousands of dollars in interest.  If we buy another home we’ll pay cash using some of the money we’ve invested to upgrade.  When we want to make a home improvement, we save up and pay cash.  We save and invest for car repairs, home repairs, vacations, and home improvements.

And by investing, I am not taking advantage of anyone.  On the contrary, I’m providing money for people to start businesses and create jobs for other people. More importantly, I’m providing funding for people to create businesses that do things for other people, like feed hungry people through restaurant chains, make cellphones so that people can communicate, and create computer chips that allow people to use the internet.  I invested in Cypress Semiconductor that made the chips that made USB technology possible so that you can connect your iPod to your laptop.  (You’re welcome).  I invested in Home Depot that provided the building materials for thousands of homes.  (You’re welcome, again.)

None of the companies into which I invested have made people feel like they have been cheated.  In fact, people eagerly go to these businesses because they feel they are getting something of value that makes their lives better.  In exchange for funding these businesses I have received a small percentage of the profits (about a 2% return on my investments on average).  Other money I have made from these investments is because the businesses have grown to provide services to more people.  It is because I have been willing to risk my money that these businesses have been able to grow and provide more services for more people.  You see, you make money in a free enterprise society by helping people.  The more people you help, the more money you make.

So I have cheated no one.  I have stolen from no one.  I have made money by providing goods and services to people that they were delighted to receive and were eager to provide me goods and services in the form of money in return.  I worked my way up to earn more by being reliable and thinking of what I could do to provide what was needed to others.  I saved and went without many of the luxuries others around me were enjoying so that I would have money to invest.  My investments have allowed others to create and grow businesses to create goods and services that have delighted others.  I have fed the hungry.  I have clothed the  naked.  I have provided access to the vastness of the internet through chips and computer hardware that was created due to my investments.  Today I’ve amassed enough wealth to be financially independent, although I continue to work as hard as ever.  I don’t sit upon my wealth like Scrooge McDuck, but instead continue to invest and allow other businesses to grow and provide more services to more people.

And my having wealth does not prevent you from having just as much wealth or even more.  Bill Gate’s and Warren Buffet’s wealth has no effect on my ability to be wealthy.   What I have, I have created through my work and my sacrifice.  You could do the same and multiply the amount of wealth in existence.  You don’t need to knock down a home to build another.  Two people can have homes if they each put for the effort to build it.  Likewise, you could create just as much wealth by doing what I did – doing things for other people that they wanted and were willing to pay you to do, living below your means so that you could build up savings, and then investing that savings, providing even more things to even more people in doing so.

So if you think you deserve some of my wealth, don’t be a coward and hide behind Bernie Sanders.  Tell me why you think you deserve my wealth and I do not.  Tell me why you think it is right to steal what I have.  What have you done?  Who have you helped?  What have you provided to others?

You may think that Socialism will make your life better, but I can tell you that it won’t.  The only way those who work hard and those that do not can be equal is if they both have nothing.  Socialism destroys wealth, it doesn’t balance it.

Agree?  Disagree?  Please leave a comment.

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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.

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Follow on Twitter to get news about new articles. @SmallIvy_SI

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.

How to Manage Your Cash Flow in Your Twenties

(This is the third post in a series on cash flow.  The first post in the series is located here.)

Cash Flow Diagram for Couple in their Twenties

Cash Flow Diagram for Couple in their Twenties

In the last post we looked at the cash flow of the typical middle class family, which is a cash flow that will put them into debt despite having a good income.  Today let’s look at what the cash flow diagram of a couple in their twenties should be if they want to become financially independent.  This is the best time to get your cash flow right so that you’ll never go into debt in the first place.

Let’s assume our couple has no kids yet and have a couple of student loans.  While getting the student loans was probably not a great idea, sometimes it is a necessary evil.  If they make just a few other good choices, they can still turn their finances around and be debt free quickly.

The diagram above shows the cash flow for our twenty-something couple.  (Click on the diagram for a better view if needed).  Note the following:

Box A, Income:  Our couple has two jobs, with a $20,000 and a $40,000 income.  One person seems to have gotten something from his/her college degree, where the other just took what he/she could find.  This happens fairly often, but even taking a job that may not pay so great can help you financially when combined with another income that can carry most of the load, plus it is better to be working and getting experience since that is how you get a better job later.  If you look at the total expenses at the bottom, you’ll see that the couple spends $40,600 per year, so most of the second person’s salary can be used to retire debt, save up for bigger expenses like a home, and invest.

Box B, Cash-On-Hand:  Our couple used their initial salaries to build up an emergency fund of $9,000.  That should be enough to cover things that come up like medical co-pays and car repairs.  This money keeps them from putting these expenses on a credit card and starting into the debt cycle.  It is also money that will be there if one of the two lose their job and it takes a few months to find another one.  They keep most of the money in savings that earns more interest.

Box C, Obligated Expenses:  Our couple has chosen to rent an apartment for $600 per month.  They are saving up for a down payment on a house, so they are taking an apartment that is safe and clean, but without all kinds of extras.  They will have plenty of time in their lives to have luxuries – right now they just need somewhere to live.  Note that they have also chosen to live somewhere that makes sense for their salaries.  Beyond rent, their only obligated expenses are some taxes on their cars and their student loans.  Note that there are no car payments since they used some of their initial paychecks to buy a couple of used cars for $3,000 each.  They have about 1/3 of their income obligated before the month starts.

Box D, Necessary Expenses:  In this box we have the things that they need to buy but that they have some flexibility in the amount paid.  Here they are working to keep expenses down.  They eat in most meals with perhaps $50 per month for a couple of modest meals out.  They spend a couple of hundred dollars in clothing, just replacing what needs to be replaced.  They are young, so they only have $1000 per year in medical expenses for normal care and the occasional flu.  Their necessary expenses are about 1/6 of their take-home pay.

Box E, Optional Expenses (Luxuries):  Here are the luxuries that they choose to enjoy.  Note that they keep these small relative to their income – around 10%.  This leaves money for investing and saving.  They chose an inexpensive hobby – backpacking.  Other choices would be running, camping, card games, biking, shore fishing, reading, disk golf, and gardening.  Things like golfing can come later when they have higher incomes and more money in investments.

Otherwise they have a small amount of spending cash each month to spend however they choose, some money for movies and going to hear live music at coffee shops.  They also have a little money for special occasions like birthdays and festivals.  They take a modest vacation each year, costing $2,000, maybe to visit parents.  Because they are keeping their luxuries low for now, they have money to invest to generate an income for luxuries later.

Box F: Required Investments:  The don’t have any children yet, so they don’t have any college expenses to save for, but they will want to retire some day.  They put away 15% of their income into retirement accounts, with 8% going into 401k’s to get the company match, then the rest going into individual IRAs where they have more investment choices.  By investing early for retirement, they’ll have no problem reaching their goals and having plenty of money to live on in retirement.

Box G: Saving and Investing:  After paying for everything else, they still have $10,400 left over.  Note that despite only having a $60,000 income, they are able to free up over $10,000 per year by 1) buying used cars so they have no car payments, 2) limiting things like meals out and expensive entertainment, and 3) taking modest vacations until their income increases.  They put $5,000 away each year for a home, allowing them to put down a down payment of about $30,000 in six years, or 20% for a $150,000 home.  They might decide to put this money on the student loans instead, then use the money they free up from the loans to build up a down payment more quickly.  They also put away $1500 per year into a car fund so that they’ll have the money to buy new used cars in four or five years.

That leaves $3,900 to put into investments each year.  This is the money that will allow them to become financially independent in their mid-forties.  It also gives them more security since they have resources to tap into beyond their emergency funds if needed.  Over time, these investments will add to their yearly income, increasing their cash flow.  After just five years, they might be able to generate a yearly income of around $2,000 from investments.

Looking at the upper right, we see that they have $17,400 in free cash flow. which includes their luxuries and their savings/investments.  This is cash that would be available to cover things that come up if needed since they have flexibility.  Because they have limited obligations, they have a great deal of control over their income.  Compare this with most people who have everything obligated before the month even starts.   Note that if they wanted they could choose to cut way back on luxuries and savings for a year or so and knock about $15,000 off of their student loans, maybe paying one off.  This would free up more cash flow that they could then direct towards saving up for a home or investing more.  Just killing off the smaller one would add $5,000 to their free cash flow.

Your investing questions are wanted. Please send or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

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.



How to Buy Your First Stock with $2,000


Investing in stocks really isn’t as difficult as some people think.  The first way everyone should be investing is through a 401k plan at work and then a private IRA at home.  Most of that money should be invested in inexpensive index mutual funds and ETFs.  Once you have your retirement covered, however, perhaps you wish to invest in individual stocks and try to pick some great companies that will outperform the markets over the next couple of decades..  Today I’ll go into how to buy individual stocks.

I chose $2000 since that is about the minimum amount you can invest and get a decent ratio of the commission you pay to the value of the shares.  You should be paying commissions of 5% or less, and paying less than 1% is even better.  You might pay 10% or more if you buy only a few shares.  In general you want to buy stocks in 100 share increments.  With $2000, you therefore can choose stocks with prices up to about $19, leaving a little room for the commission.  You also generally want to avoid stocks selling for less than $10, since they tend to be more risky, although during big declines in the stock market such as the current slump you may find even great companies who have seen their share prices beaten down below the $10 mark.  For example, right now I own shares of two retailers, The Container Store and Pier One Imports, that are selling in the $5 range because they have been beaten down during the current bear market.  Both have also made missteps and seen a decline in their performance as well, however, so they do carry some risk since they may not find a way to turn things around.

If you are going to invest regularly you should setup a brokerage account.  When I started investing all trading was done by phone with a broker.  I had an account with Merrill Lynch, mainly because my father had an account with them (and because I was only 12 years-old, and didn’t really have a choice).  Merrill Lynch is what is known as a full service broker, which is kind of like a full service gas station:  You get a lot of bells and whistles and pay extra for them.

One of the biggest bells is a broker that you can talk to who can advise you on the best ways to make a trade, give you some stock picks, and do things like analyze your portfolio each year for issues.  Today I really don’t need much advice, but I am still with Merrill Lynch out of inertia, sentimentality, for some of the other services they provide, and because I like to phone in orders and have a relationship with another person.  Most brokers I’ve dealt with I’ve had as a broker for ten years or more.  In addition, because I invest for the long-term and trade infrequently, the difference in commissions I pay versus a cheaper online version doesn’t really matter.

In the late 1980’s, discount brokers emerged.  These brokers charged a lot less (50% less or more) than full service brokers because you didn’t get any frills or any advice.  You simply called in an gave them your order and they did what you asked.  You may or may not talk to the same person each time you called, so you probably wouldn’t build up a relationship with a broker.  The creation of the  internet and the ability to enter orders yourself has cut costs even more, making it possible to enter trades very cheaply, but again with even less personal interaction and advice.  There are numerous online brokerages, the most famous of which is probably E-Trade.

With any broker, setting up an account is just a matter of calling or going online, giving some information, and sending in a check or doing a bank transfer to fund the account.  Once you have an account there will normally be an account fee each year (I think Merrill Lynch charges $125 per year) to pay for the accounting they do.  Most of the money they make is from commissions, which is a charge for making trades for you, interest charged when accounts go into margin (borrow money to buy stocks), or the normal bank process of lending out money you have in your account to others.

Normally when you have a brokerage account, the broker will keep the certificates for the shares you buy and put them in what is known as the street name.  This means that to the company the shares will appear to be owned by your broker, but you will have a listing of what you own in your account.  When the company sends information to the broker, such as yearly reports, the broker will forward the information to you.

If you want, you can request that certificates be issued to you.  This may come with a small charge, plus it will then require you to protect the certificate since someone could theoretically steal it and then sell your shares and collect the money.  If you choose to hold certificates, it is therefore a good idea to get a safe deposit box and keep your certificates there for safe keeping – both to guard against theft and fire.    If you ever want to sell your shares, you would need to send the certificate back to the broker.  Most people keep shares in the street name to avoid this inconvenience, but it might make some sense to keep certificates yourself if you were worried that the brokerage firm might dissolve and lose the record of your shares or something, but this is very unlikely.

If you just want to buy one stock and then hold onto it, you may be able to contact a broker and arrange to make the trade and then get the certificate sent to you.  This will allow you to avoid paying the account maintenance fee each year.  You may get charged a little more for commissions this way than they would with a standard account, but it can be done.  Again, if you’re going to hold a stock for a long time, the difference in commissions won’t matter much.  For building wealth, however, it is a good idea to be adding money and buying shares regularly.  It is possible that you’ll buy a great company like the next Microsoft and be able to sell your 100 share certificate for hundreds of thousands of dollars in twenty or thirty years, but this is not that likely.  Instead, by buying shares in different companies you make a 10-15% return each year and maybe have one or two stellar performers.  By buying at different times, you can improve the price you pay for your stocks (because you acquire more shares when prices are low).  By purchasing different companies, you increase your chances of having several winners and a few big winners.

Figuring out which stock to pick is a whole different matter and will be the subject of future posts and the next SmallIvy Book of Investing.  In general you want to find a company that has a lot of room to grow and that is well managed.  Factors to look at are the number of years that they have had profits and that those profits are growing at a steady rate, a share price that increases regularly but not at an enormous rate, and the return on equity and debt levels for the company.

Got an investing question? Please send it to or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

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.