Hacker Finances: Adopting a Saving Lifestyle

As a lad, I had the basics covered. Basics like a roof over my head, a new shirt under the Christmas tree and a freezer full of hamburger from the side of beef my parents bought twice a year. If I wanted anything more than that, I was on my own. So I kept a list of the things I wanted; a pair of mountain boots, a new set of speakers, Led Zeppelin IV and a 10-speed bicycle with ram horn handlebars.

That list stayed in my otherwise empty wallet, waiting for enough money to accumulate from birthday checks so I could buy the next item. It was a long wait until classmate Chas told me that the news agency was looking for someone to deliver papers in my neighborhood. I could make $2.35 a week dropping the Sun Times and Tribune on people’s doorsteps. I used the arithmetic I’d just learned in 5th grade to calculate that with a mere 40 weeks of delivering newspapers, I could get those Jensen speakers I wanted. I took the job. It turns out that even an eleven year-old has time to think in the wee morning hours and it wasn’t long before I realized that that the hours I was spending weekly, divided into the pay, amounted to about 37 cents an hour. So when one of my customers, Lee Lococque, offered me $5 per week to cut his lawn, I called my boss at the paper and told him what I thought of his pittance.

My approach to saving and spending, not surprisingly, reflected my family’s approach. There were things we wanted and things we needed, and there was never enough money to cross everything off the lists. So any time there happened to be enough cash in the bank at the end of the month to buy such items, that was when they got bought. Things like a washing machine, carpet for the living room, or a new bed for my little sister were acquired infrequently, no matter how badly they needed replacing.

Here’s the thing: Each time something was crossed off the list, it meant that the family’s savings were set back to $0.

As well, my personal savings suffered the same fate.

In adulthood, my wife scoffed at my list-of-things-I-want. ‘Why would you even think about what you want to buy when you don’t have any money in the bank?’ Well, that is how I’ve always done it. And how my parents did it. And their parents (as far as I knew). My wife was resolute: We should think about buying a new stereo system after we’ve bought a house and have $20,000 in savings. Whoa. Wait. What? That can’t possibly work. Here I am, an engineer, already making more than my music teacher dad, and I still have to wait for the things I want?

Yes.

It was a hard lesson, but in retrospect, it turns out to be obvious. It’s pithy but true: It takes money to make money. Saving some of our earnings and investing the savings is how we can leverage our work into far greater earnings. It just takes time. Not a short time, mind you, but not forever, either. Take $1, invest it at 10% for the 30 years you’ll most likely be working, and it becomes $17.45. Adjust it for 2% inflation, and it is still $10.06. That means that, in effect, that $12 lunch with your colleagues is actually costing future you $120.75, adjusted for inflation.

I know what you’re thinking. You’re thinking that you read Hacker News, too, and if you’ve learned anything, it’s that true, lifelong happiness comes from fulfilling relationships and rich experiences [1]. What is the point of denying oneself such a life for such a long time, when so many things may happen to make ‘then’ never happen? Touché.

So yes, plan on a life that includes establishing and nurturing relationships, and enjoying memorable experiences, whatever those may be for you. But wedge out a little cash for future you as well. I am future me, and I really appreciate what I did for myself all those years. You will, too, and much sooner than you imagine.

Ok, so, where to find it? Or, “I know I had a paycheck laying around here somewhere…”.

For some people, cash just accumulates in their checking account. Payday comes, they pay their bills, they live their life and they don’t really think about it. If that is you, great, you’ll have an easier time of it. If not, you’ll need to do some exploratory accounting to see where it goes. Even if it does seem to accrue on its own, it is still very worthwhile to see if some minor changes can increase your rate of savings. So, just like you get a physical exam every so often, do a deep dive on your spending. Not all the time, and not obsessively, but once in a while, and for sure, start now if you’ve never done it.

Log in to all of your financial accounts: savings and checking, PayPal, credit cards, debit accounts, or any other accounts that have cash flowing through them. Download the last 3 months of transactions in csv format and paste them all into a worksheet. Flag them as a type, like groceries/sundries, restaurants, gasoline, auto maintenance, insurance, rent, NetFlix, DropBox, Spotify, ad infinitum. Or, if you are using a service like mint.com, this analysis may already be done. Even Mint can mis-categorize things, so review the spending to make sure it’s accurate. For some people, the results will be completely unsurprising. For others, it’s more like ‘whoa, no way I am spending $212.92 a month at Starbucks. That’s $2,555.00 a year!’

Yes, way. That’s a Grande Latte plus pastry a day (stay with me, it’s an illustration). Instead of spending on the latte and pastry every day, let’s say I had a coffee and Costco croissant at home, and, used the savings to invest in Starbucks. Assume the savings would be $2,000 per year[2], and let’s say you used the savings to buy SBUX shares each June, starting in 2006. Take a wild guess how much your shares would be worth today, in spite of (well, because of, actually) the Housing Bubble Financial Crisis.

Ready? Your SBUX shares would be worth $68,472.80. And you would have received dividends of $2,267.63. Total return: $71,732 on an investment of $20,000 and sacrificing the Starbucks lifestyle [3].

That’s a lot of lattes.

Ok, so for that to be real, it means you chose your investment reasonably well and most likely, putting the savings into a mutual fund would yield much less risk for a similar return. So do the analysis and look for small things you can change that might add up. Check your monthly services like cable, if you still get it, or your smart phone. We’ve cut our cable bill in half, for example, by eliminating the TV packages (we had gradually stopped watching any TV and hadn’t noticed it) and scaling back to 10MB bandwidth for the cable Internet because we just don’t need 100MB. Our auto, home and life insurance policies were with three different insurers. We shopped around and combined them under one insurer, and cut the total annual cost by 30%. The money is out there.

If the analysis doesn’t produce much, another place to get savings might be from tax returns. If your withholdings are somewhat greater than needed and you get a refund each year, think about banking it, rather than splurging. Or, maybe bank some and splurge less. There are some pretty interesting things you can do with even $2,500. We’ll discuss that in the segment on FinTech.

Speaking a little more on FinTech, one new entry, digit.co, is targeting personal saving [5]. Digit is an AI robot that will monitor your accounts and spending, and when it thinks you won’t miss it, sneaks a few dollars into a Digit savings account. If needed, you can transfer the savings back to your checking account in 24 hours. You can’t spend directly from your Digit account, so it does present a small barrier to impulse spending. For a lot of folks, that’s all they need to start saving. Ideally, the money will be used to invest, down payment on a home, or other major expenses.

Finally, let’s talk about the 401(k). If you have one available from your employer, just start. Make whatever changes you need to, even if it means finding a cheaper apartment or less expensive car. On top of doing the heavy lifting for your retirement, 1) the 401(k) withholdings are not taxed until you take them out, 2) many employers match your contributions. Think of it this way: if you put $10,000 into your 401(k) and your income tax rate is 28%, you’ve got $2,800 more net worth at the end of the year than you would have otherwise. If your employer then matches your contributions at 25%, that’s another $2,500. So by moving $10,000 of income into your retirement account, you’re increasing your effective income by $5,300. That’s a 53% return, just for walking in the door.

Moreover, the power of compound growth really kicks in when you start early. $2,000 contributed to your 401(k) now and invested in a mutual fund that returns 10% annually will be worth around $34,899 in 30 years. $20,000 would be $348,988. $20,000 added to your 401(k) every year for 30 years, and invested in the NASDAQ-indexed mutual funds will land you $3,250,000 at about age 55 [4]. That’s a perfectly retireable situation. If you’re an engineer earning, say, US$100k+[6], this feat is feasible, particularly if you’re single in a shared apartment. Even if you’re earning less, any savings you can muster and invest will ease your future finances. Just do it.

Circling Back to my first raise, it took 2 hours to mow Lee’s lawn. So with that first job change, I went from earning 37 cents per hour to $2.50 per hour. Believe it or not, that was my first experience with optimizing my salary. There are many reasons to change jobs, and possibly more reasons to not change jobs, but increasing what you earn is probably the most effective way to increase your savings, particularly if you don’t change your lifestyle. So at a minimum, think about it and include a salary strategy in your career planning. In particular, if your current company is doing well, don’t be shy about asking for a raise. If you’re not really happy anyway, keep feelers out. In current tech arenas, it is fine to change jobs every 3 years or so, and bumping your salary 10–20% is typical. Moreover, check on how much people in your line of work are earning, and aim to earn above the median. If not this year, then next.

Part of my strategy was to ask for more responsibility to justify the raise. I started as engineer, then asked for more responsibility and was made project lead, then project manager where I started managing other engineers. There is plenty of data available to put in front of your boss to justify an amount to ask for.

As another reality check, in the first years of my career, my engineering salary went like this:

End of Year 1: +22%, Job Change

Year 2: +20%, Job Change

Year 3: +19%, Raise, promotion

Year 4: +20%, Raise

Year 5: +17%, Raise, promotion

Year 6: +7%, Raise

In year 7, I was earning 2.6 times my year 1 salary. I worked at small companies in the first 7 years. The smallest had 5 people. The largest had 20. A few years later, I worked in a mid-sized company of 3,000, and the raises were from 5% — 10% and roughly tracked business levels.

To be the most effective, work on increasing your income without increasing your spending. This can be a huge payoff and enable you to put a large percentage of your earnings into savings and investments. By the time I got to year 6, I was living the same lifestyle as in year 1, but was banking an amount equal to my first year’s salary. I invested that into the Fidelity Contrafund mutual fund, which has yielded on average, 11.75% per year over the last 25 years. This illustrates the whole point: Generate as much discretionary cash as you can by spending less and earning more, do spend some on relationships and experiences, and then invest the rest. For me, every dollar I invested in 1991 is sixteen dollars today, giving me a retroactive 1,600% raise. That is leverage.

Up next: “Hacker Finances: Stocks Versus Mutual Funds, Part I”

[1] https://news.ycombinator.com/item?id=10231967

[2] As of this writing, a Grande Latte and Almond Croissant at Starbucks costs $7. A coffee at home, including milk & sugar is about 35 cents, and that plain Costco Croissant is 50 cents. So that’s $7 — ($0.35 + $0.50) = $6.15 per day saved, times 365 days = $2,317.35. Round down to $2,000 for incredulity, and you skip days here and there. It’s an illustration.

[3]

*Yes, it would have been really scary to be buying stock in June of 2009. That is why it’s necessary to keep an eye on the economy. Master investors like Warren Buffet went on a feeding frenzy at that time because stocks were so cheap, and his lifetime perspective told him this was an extraordinary opportunity: http://theweek.com/articles/459166/how-warren-buffett-made-10-billion-during-financial-crisis

[4] Based on a 9.5% annualized market return, which has been the NASDAQ performance over the last 25 years, and encompasses both the .COM and housing bubbles.

[5] I don’t use digit and I’m not endorsing it. It’s an example of the type of support you can get for establishing and growing your savings.

[6] That’s US$. If you’re living in another country, insert the typical salary for engineers. Such as $8,000 in India or $80,000 in Japan, for example.