When I was a child, my mother had this tendency to pull me over to her side while we watched television in her bedroom. She would stop watching the tv and begin telling me a story. Often these stories were lessons. Lessons that she wanted me to take to heart. I suppose it was an effective way of communicating to a child, because I still remember those lessons and stories to this day.
One day, my mom told me this story about a friend she had growing up (for simplicities sake lets call him Smith). Smith was a smart man, he worked very hard, and had a decent job (let's say making $50,000 a year). He did everything by the book. He was a clean, honest, hardworking, and respectful individual. He had a deep respect for the rules. He admired structure, and disliked anything that lacked rigor, as well as people who differed in his philosophy.
Smith had a single dream in his life, which was to get married and buy a home. However, the man was a cautious individual. He hated taking risks, and believed on always erring on the side of caution. He disliked people who took risks, he found them irresponsible and immature, and because of this he stayed away from people like that. But, he was a respectful individual and played the part. So he was never rude to anyone and had no enemies.
Smith was gainfully employed and could get a home after a few years of saving, however he did not want to take on any debt. He had this fear that if he lost his job, then he wouldn't be able to pay off his loan and would be in financial ruin. So, the man lived at home, and made a commitment to keep saving his money until he could buy a house outright. The man was diligent, and he saved a large portion of his paycheck every year so that he could fulfill his dream (let's say he saved $10,000 a year).
He was a prudent man so he didn't want to invest his money, and he didn't trust banks so he kept his money safely stowed away in his mother's home. And for years the man did this. From the age of 20 to the age of 30 he saved $10,000 every year. At the age of 30 he had saved $100,000. He was so excited that he had so much cash on hand, but he still hadn't realized his dream of purchasing a home. He realized he needed more money in order to purchase the home of his dreams. So he made a commitment to save even more money (let's say $15,000 a year).
So the man stayed to his commitment and kept executing his plan. By the time he reached 40 he had saved a total of $250,000. Quite a sum!! But, he couldn't find anything that he liked. The homes he would want to buy were three times as much money as he had. The homes he could afford were below his standard.
As the years passed he saw his friends and relatives move ahead of him. People who were less diligent than him had advanced in their careers. He had never taken any risks at work to share his ideas and step out of his comfort zone to promote himself, so he never advanced (Check out my post on Reach which is about stepping out of your comfort zone after this when you get the chance).
He saw friends and relatives get married, and go on to start families. Yet, he never did because he never rallied the courage to ask anyone out. And even if he did, who want to date a 40 something year old living at home?
Smith, convinced that he was doing the right thing and approaching the problem in the right manner, figured all I have to do is save even more money and make even more sacrifices. So he said I'll save half of what I make, and surely that will be enough!! So the man did. He saved $25,000 every year for the next ten years. He gave up any and all luxurious that he enjoyed. He never ate out. He never saw a movie. He never dated.
At the age of 50 he had $500,000 total. Yet, in his 50th year of life, he realized he had a made a terrible error. Even after all his diligence, sacrifice, and hard work, he would not realize his dream.
He had not married, and felt he was too old at this point. He had never moved out of his mom's home, and still could not afford to buy the home of his dreams. Entrenched in his ways, his beliefs, he could not understand where he went wrong. All he knew is that he had failed to accomplish the two things that he wanted out of his life.
I remember hearing this story when I was about nine or ten. There are several of morals in this story, and I hope you can extract your own meanings from it. Nonetheless, I would like to share to you, what this story meant to me.
Having a set of beliefs is extremely important. Each person needs a North star to follow when living their life. However, being so rigid and dogmatic can have its detriment even if it is a belief in living your life by the book.
My wife and I were talking one day about becoming parents. She shared with me that in her discussions with others, the advice that she received was that part of being a good parent is having a philosophy to adapt your philosophy as you grow older.
Lesson 1 - Have a core set of beliefs but have some flexibility in your philosophy. Your life changes as you get older, and your philosophy should correspond with that.
From a personal stand point, you have to be willing to make yourself vulnerable in order to form meaningful connections with people. Whether it is making friends or asking someone out, you have to be willing to initiate contact and deal with the potential backlash of being rejected. However, the reward of potentially meeting the love of your life or forming a lifelong friendship with someone is far greater than dealing with an awkward moment or being told no.
Lesson 2 - Don't be afraid of rejection. It is far greater to take a risk and lose, than to stand idle and watch a potential opportunity pass you by in your personal life.
The link below is an excellent talk on being vulnerable.
From a financial standpoint, you have to be willing to take risks with your money. Risks can take multiple forms, but for most of us it is in the form of debt and investment. As our friend from the story has taught us, it is almost impossible to buy a home that we want outright. If a home costs $500,000 today, it may costs significantly more in ten years. If it is a desirable home to you, then it is probably desirable to other people, and when there is an increase in demand and a limited supply, then the price and value can only move in one direction.
If Smith had just been willing to take on a mortgage, he probably would have been able to purchase the home he always dreamed of back at the age of 30. But he didn't, because he let his fear of getting fired and defaulting on his loans get the best of him. At that point in his life he had $100,000. The homes he desired were three times the amount of money he had, so his ideal home would have costed him $300,000. He could have easily covered 20% of the cost ($60,000), had $40,000 in savings, and managed a 30 year mortgage of $240,000 (approximately $1,300 a month against a $50,000 year salary).
My mom always taught me that debt can be a bad thing, especially credit card debt or predatory loans. But manageable debt, such as a mortgage is essential in realizing some life goals, such as purchasing a home. Do your research on your home, on the banks, and on the mortgage to ensure that you are being treated fairly and getting a fair deal. Furthermore, make sure you have enough money in savings to sustain you for six months in the event of an catastrophic event such as getting laid off, getting sick, or whatever it may be.
Lesson 3 - When taking on debt, make sure it is manageable. For example: If you have $100,000 in the bank, only take on a loan that you know that you can pay with ease. The ideal amount that you should take on is 1/3 of your monthly income. For example: If you are buying a home, your mortgage, property tax payments, and insurance should be 33% of your income. So if you are making $50,000 a year, you probably take home somewhere around $3,000 a month, so your debt obligations should be around $900 a month. I also understand that, that may not be enough, so 33% is the ideal, but you could stretch yourself to 40%, but try to stay under that threshold.
In addition, set aside six months worth of savings. So if you have debt obligations of let's say $1,000 a month, and you need an additional $1,500 to cover your other expenses (these are per month values). Then you should set aside at least $15,000 ($2,500 times 6 months) in savings.
So let's recap the scenario, our friend has $100,000, who wants to buy a $300,000 home. He could put down 20% to purchase his home thus that would've been $60,000. His mortgage (at a 4% rate for 30 years) will be $1,146 per month, but with taxes and insurance let's just say $1,300 a month.
His monthly expenses outside of housing is $1,500. He thus has $200 a month remaining for other ventures. In addition, he has set aside $15,000 in savings, and he still has $25,000 that he can use to do something else with.
Here is a simplified look:
A macro view of things
Beginning amount - $100,000
Down payment - $60,000
Savings - $15,000
Money remaining for other ventures - $25,000
A monthly view of things
Monthly income - $3,000
Mortgage/Insurance/Property Taxes - $1,300 a month
Other life expenses - $1,500 a month
Money per month for other ventures - $200 a month
So we know that we do not want to be like Smith and not take any chances. We have set aside money to cover ourself for six months in the event that we get laid off or some disaster happens. What can we do with the remainder of this money?
I have written a few pieces on investment ideas that you can take a look at in the link below.
In summation it is important to evolve your personal beliefs and take risks in life. Search to evolve your core values that correspond with your life. The values you held as a teenager are not the same as the ones you hold in your 30s. Make sure that the beliefs you use to navigate your life reflect that.
Take risks in meeting people and forming new relationships. You cannot grow in this aspect of your life unless if you are willing to make yourself vulnerable.
Take calculated risks when it comes to your finances. Have 6 months worth of expenses in your savings to protect yourself. Then do the math to figure out how much money you need to live. Your living expenses should not exceed 40% of your income and ideally should be 1/3 of it. Use the remainder to develop passive income, such as investing in index funds.
Thank you for stopping by and thank you for reading!!
Please subscribe by hitting the button on the top of the page.
If you have any comments or feedback please write on the board or reach out!!