As we shared our plans to leave our jobs and travel indefinitely, we’ve had lots of conversations with friends about investing and early retirement. Here’s my primer on how to invest money.
I’ll start with an acknowledgement of my privilege. I’m a white male born in the US. My family paid for my private-school college education and I graduated debt free. An inheritance from a grandfather gave me a head start on investing in my 20s.
Leena also graduated debt free thanks to a combination of scholarships, family support, and jobs during college. She went on to finance her MBA by attending evening classes while holding a full-time job, working as a bartender, and earning additional scholarships.
When I was about 12, my mom went back to work full time. This changed how the household was run. My brother and I became responsible for things like our own laundry, and we were given an outrageously large monthly allowance for our age – I think it started at $100/month. But it came with a catch: we had to manage our finances. The allowance was to cover clothes, shoes, hair cuts, movies, eating out with friends, etc. Soon after, we had checking accounts and co-signed credit cards. Mom took some heat from parents of our friends when they found out how much money we were given the fact we had credit cards and had to explain the all-important conditions. I remember saving all winter one year for my first set of golf clubs. I think the irons were $425.
To date, I’ve only carried credit card debt one time. I ran short one month in college and couldn’t pay a card in full. I don’t think Leena’s ever carried credit card debt. We’ve had a friendly rivalry over who has a higher credit score through the years.
We’re off to a great start: we’re debt-free upon graduation, and we both have the financial literacy to live within our means (i.e. not take on debt).
My first job after graduation was at STATS, Inc. I started in July of 1994 at a sports-statistics company that was then centered on baseball statistics. The original product that launched the company tracked baseball data on a pitch-by-pitch basis. The data and resulting analysis were first sold to individual teams, and around 1987 they started covering every MLB game to have a complete data set. This provided all sorts of new ways to evaluate players and teams. Do you want to know how someone hits in a 2-strike count? How they hit in a “late & close” situation (something like 7th inning or later with the game within two runs)? STATS could provide that.
Then, a month into my career, baseball went on strike. This was the primary revenue source for the company! I was something like full-time employee #25 when I started. This small company was near the brink. Hiring and salaries were frozen. We learned later that the president of the company took out a second mortgage to help finance things.
This presented a unique opportunity. The company made privately-held shares of company stock available to employees for purchase. I consulted with mom and decided to buy. The company had a unique value proposition in the market and had been making money. The strike would be short term. I was young; I had plenty of investing years to make this up if the risk didn’t pay off. And the market as a whole couldn’t take advantage of this; only this very small subset of employees.
I invested, one of just two employees to do so. The baseball strike was resolved the following spring. The company, meanwhile, recognized the risk of having most of their revenue in one sport, and spent the baseball downtime building up operations to cover the NFL, NBA and NHL. A couple of years later, the company struck gold with a real-time football scoreboard on AOL. It became the 3rd-most visited destination on AOL on NFL Sundays. Soon after, NewsCorp (parent company of Fox Sports) acquired the company. My investment returned 15x in just two years.
The next lesson is to invest where you get maximum ROI. This sounds obvious, and it is! If your company offers a 401k with a matching contribution up to a certain percentage), that is an immediate, risk-free, 100% (!) ROI. It’s hard to do better. Nike offered a 5% match on 401k contributions while I was there, so the first dollars invested were 5% into the 401k.
Nike also offered an Employee Stock Purchase Plan (ESPP) that was fairly typical as I understand them. You could deduct up to 10% of your gross pay to purchase Nike stock at a 15% discount. There were two purchase windows each year, and you actually got the 15% discount on the LOWER of the Nike stock price at the beginning and end of the window. So if the stock went up in the six-month period, you got the 15% discount PLUS any gains the stock made. This is another guaranteed positive ROI. I’ve also described it as an easy way to give yourself at least a 3% raise in salary (10% of your pay * 15% minimum ROI * 2 periods a year).
As you look at ROI for investments, you can also work on tax optimization. Traditional and Roth IRAs are different vehicles for retirement savings with different tax trade offs (pay now or pay later). There’s no simple answer, and the answer changes based on factors including how much you’re making, how old you are, when you plan to retire, and how much you plan to spend when retired. We’ve invested in both at different times over the years.
To recap my thoughts on how to invest:
- Live within your means (positive cash flow); manage a budget
- Pay off debt
- Take calculated risks
- Invest with maximum ROI
- Invest to optimize taxes
In a future post or posts, I’ll cover how to determine how much you need to retire and link to some blogs that have been very inspirational and instructional to our journey.
