Wednesday, May 18, 2016

Boy, Was I Stupid - A Look Back On My Financial Life

"If only I knew then what I know now."

Man, do those words ring true. When I look back at my first 20 or 25 years of earning income, I am appalled by the investing mistakes I made. I easily could be a millionaire at this point in my life if I had the financial knowledge then that I have now.

Those Were Heady Times

I graduated college in 1992 with a degree in electrical engineering and got my first job that same year. I was smart enough to enroll in my company's 401(k) plan as soon as I was able. I also was smart enough to contribute enough to get the full company match, but that's about where my smarts ended. I didn't contribute anything more than that. I was on my own and getting a decent paycheck for the first time - thoughts of saving money never entered my mind. I had a couple student loans, but the payments were small, around $100 a month if I recall. I did not try to pay them off early.

After working for the company for about 3 years, I realized I would never be able to afford a home in the area. (I was living and working where I grew up - in Orange County, Southern California.) Home prices were approaching a million dollars. I was making just $25,000 out of college. The math didn't work.

I decided to leave the state. Housing prices weren't the only catalyst: The Rodney King riots had just happened. I got punched in the face at Knott's Berry Farm while trying to prevent a fight. Traffic was horrendous any time of the day. Air pollution was horrible. Despite growing up there and all my family living there, I decided it was time to leave.

I had a vacation planned to visit a friend in Connecticut and before I went, I managed to set up a job interview for while I was out there. The company liked me and offered me a position. They were also willing to pay for half of my moving costs, so I packed up and headed off to Connecticut.

This Is Not The State I Was Looking For

Once there, this Southern California boy experienced some serious culture shock. People tended to stay up later. They mocked anyone who liked ham and pineapple pizzas. And, something I never got used to, the sun rose from the ocean instead of set into it. That's just wrong. I was there for one winter, but wasn't really bothered by the snow. (Although come February, I was starting to get a bit tired of it.) I later discovered that Connecticut is one of the most expensive states to live in, so moving from California to Connecticut did not really lower my cost of living.

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Rising Or Setting?

When I left my company in California, I rolled my 401(k) into a traditional IRA. This let me decide what to invest in. Because I was working as an engineer in a technology field, I invested heavily in tech companies. It was what I knew. This was right before the dot-com bubble started inflating.

The Connecticut company was a publicly traded company and I participated in their employee stock purchase plan. Employees could purchase company stock through payroll deductions and get shares at a discount (about 15%) to the market price. I enthusiastically enrolled because, hey, instant 15% profit, right?

The company made Caller ID boxes and cordless phones. Cellular phones were still expensive and somewhat rare, so landlines were the norm back then. However more and more phones were being made with Caller ID built in and the need for separate Caller ID boxes was going away. Further, since we made mass-market consumer products, price competition was tremendous. Our stock price started falling.

After 1 year, I got a call from the person who used to be the president of the company I worked for in California. He was now heading the engineering department for a company in Arizona and wanted to know if I would be interested in working as a database developer for him. Even though I had only worked as a hardware engineer before, he felt I would be good at the job. I took the offer and moved to Arizona and this time, the new company paid for 100% of the move. (One lesson learned!) Shortly thereafter, the Connecticut company went belly up. The shares I had purchased were worthless. I wasn't at that company long enough to be eligible for their 401(k), so their stock purchase program was the only investing I was doing at the time. Continuing my trend from the previous years, I did not make any contributions to my IRA.

Back Out West

I worked for the Arizona company for three years. I learned SQL Server and that started me down the career path I am still on today. But the company made predictive dialers - the devices telemarketers use to call people - and I never really liked being associated with the telemarketing industry.

During this time, the tech bubble was in full swing. I was participating in the company's 401(k), but again, only enough to get the full employer match. I was also actively trading stocks in my IRA account. I wasn't a day trader, but I definitely was trying to time the market and was caught up in the bubble mentality. I bought high and sold low way too often. I remember owning a lot of Lucent and Cisco shares.

One of the few smart things I did during this time was to pay off my student loans early. I had finally gotten tired of making student loan payments, which I had been doing for four years. I started making payments more frequently, sending in a payment every three weeks, then every two weeks, instead of once a month. Eventually, I paid the loans off completely, two or three years early.

Chased Money, Didn't Like It

By this time, I had accepted a new position at the company because I was looking to increase my income. I left the engineering department and became the manager of the Professional Services department, which meant I was in charge of the teams that went to our customers to install our product and train the users. I was a manger! Now the money would come rolling in! I had a nice bonus package, but I quickly discovered it was unattainable. Upper management had structured my bonus so that it would get paid if I reduced costs and/or increased revenue. However, when I tried to do this, customers would call the CEO and complain about the fact I had the gall to ask them to pay for services. She would cave and give away for free what I was trying to charge them for (even though she had previously given me the ok to charge them). Tired of this and realizing I do not have the temperament for office politics, I started looking for a new job.

New Horizons

I found one with a company in the education field, still in the Phoenix area. When I left my old company, I once again rolled that 401(k) into an IRA. The tech bubble was still in inflating, so of course, I plowed my money in more tech stocks. This company, like the one in Connecticut, was also publicly traded. I also participated in an employee stock purchase plan here, but because I was stung the last time, I was a bit more restrained in how much I contributed.

Missed Signs

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The dot-com bubble began to deflate and then it eventually burst. Before it completely burst, in an attempt to boost our dropping share price, the CEO renamed the company to the same name, but with a ".com" on the end, which was the big trend back then. If there ever was a warning sign, that was it. Another warning sign I should have paid attention to: I was at the company for 5 years and no one got a raise that entire time. Can you say "RED FLAG"? It was also around this time that, while browsing though a book store, I came across Rich Dad, Poor Dad by Robert Kiyosaki. Coincidentally, the housing bubble was starting to grow.

At the time, Enron was wrapping up the final stages of its tremendous implosion. I did manage to make one smart stock move, although it was too little, too late. I managed to short Enron as it was collapsing. But I had never shorted a stock before and had read all kinds of horror stories, so I was very hesitant to pull the trigger. I ended up shorting Enron at $5 and change. (Stocks usually get delisted at $5, so I got in at the last moment). I covered at around $1, so I made some money, but just a couple hundred dollars.

My IRA however, took a big hit from the resulting market collapse. Cisco and Lucent tanked. I don't even remember what else I owned, but the total value of my already small IRA was cut in half. After 5 years, I left the company to go work for a video game developer where my high school and college friend worked. He hired me and became my manager. Shortly thereafter, the education company I just left was sold to a new company and went private. Again, I lost money on the shares I had purchased. My five years there was the longest stretch I had ever been with an employer. Considering I never got a raise during that time, it probably wasn't the best place to stay. However, inertia is a powerful thing and the whole economy was under a pall, so, right or wrong, I was happy to just have a job during those years and sat tight.

Reading Rich Dad, Poor Dad opened my eyes to the power of cash flow and passive income. I started investing in real estate and I started flipping houses and bought two rental properties. Around this time, I started my real estate blog. See that site for full details about this part of my life. I am pleased to say almost all of my real estate investments turned a profit. I sold one rental property for a profit, the other for a loss. (The loss was due to me just being stupid and buying something I shouldn't have. I was under the influence of the bubble mentality still.) All my flips made money, as did all my hard money loans. This is the period where I really began my financial education in earnest.

Finally Starting To Learn

I once again rolled my 401(k) into my IRA when I changed companies. Funny, this was the third time I had rolled money into it, but the total dollar value of my IRA was still about the same as the first time I did it 12 years prior. My new company was also a publicly traded company (THQ). I don't remember if they offered an employee stock purchase plan, but if they did, I didn't participate. Getting burned twice was enough for me. (I did get stock options when I was hired, but they soon were underwater and I never exercised them.) Around this time, I started realizing the stupidity of my frequent stock trading and chasing hot sectors. I invested my dwindling IRA assets in shares of the one company I found that I was pretty sure wouldn't collapse - Berkshire Hathaway. My love of passive income also saw me start to invest in real estate investment trusts for their high dividends.

The video game industry is inherently volatile. Gaming companies hire people to develop a game and lay them off once it ships. The process is repeated for each new title. As part of the IT department, I wasn't a member of the programming and artist groups that regularly faced layoffs, but it's still unsettling to see lots of your co-workers get let go on a regular basis. Eventually, the company started to flounder and THQ management started closing studios and laying off people to reduce costs. I survived two rounds of layoffs, but the third took me out. I can't imagine it must have been easy for my friend, who had hired me and was still my boss. Making things more awkward, our families had planned a dinner together for what turned out to be the day after my layoff. The dinner still took place. Luckily, we both knew the layoff was a business decision he really had no control over and we're still good friends to this day. Eventually, THQ went bankrupt.

A Year Of ...

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I was out of work for almost a year. I was collecting unemployment and had to drastically cut my expenses. By this time, I was married, so there was additional income coming in, but it was less than half what it was before. I had purchased a house and had a monthly mortgage payment to keep up, but no real emergency fund to rely on. During this period, I truly began to understand the power of passive income. If I had enough passive income coming in, it wouldn't have mattered that I was laid off. I resolved to build up my passive income streams. I took this opportunity to convert my IRA into a Roth IRA, as my earned income was pretty low, so the tax hit wouldn't be so bad.

Temp To Perm Jobs

Eventually, I picked up a couple temporary jobs which each lasted around 6 months or so. The second, again with a company in the education industry, turned into a permanent position. I worked there for a year or so before management changed and I began looking for a new place. They offered a Roth 401(k) and I participated in that, but I wasn't there long enough to become vested in the employer match, so I lost that money. Again, I did not contribute to my IRA while there either.

And Here We Are Today

I found a contract-to-hire position at the largest credit union in Arizona and got hired on as a permanent employee. Being in the financial industry, they've got a much nicer financial benefits package than the other companies I was at in the past. I am participating in their Roth 401(k) and this time more than just enough to get the full match. I'm saving 10% of my salary. They match 4%, so that's a net 14% savings rate for me. This is invested in low cost Vanguard index funds. The company also has a pension plan which I have now qualified for. It's not big, but almost no company offers pension plans any more, so I'll take it. It's at no cost to me and, as of now, I am eligible for an amount equal to 4% of my salary when I retire. My wife and I are now, finally, making regular contributions to our IRAs.

It's All About The Cash Flow

My journey has made me realize how important passive income is. That's one reason why my Tesla purchase will be paid for with passive income. I'm no longer interested in spending large sums of money on things. Things wear out or become obsolete or boring and then your money is gone. If I am going to spend big bucks on something, I am going to buy an investment and let the investment pay for the item. That way, I get the item and the money.

Reflections

Looking back, I cringe at how I handled my investments. I did so many stupid things. I lost years of compounded interest. I don't want others to make the same mistakes. I have two nephews who recently graduated high school and they each got a copy of The Richest Man In Babylon when they graduated. One more will be graduating in a year or two and he'll get the same thing. (Sorry to spoil the surprise, Matt.) I'm teaching my 12 year old daughter about compound interest and the power of time. Although I believe that one of the best ways to raise children is to let their mistakes be their own, maybe, just this one time, mine can be hers.

2 comments:

  1. Very nice post Shaun !! I've been following you since your Real Estate blog...thanks for sharing your experiences. It will help not just your family but hopefully anyone that reads this post and takes advise to heart - even if all they do is investigate what you are advocating.

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