Stop Milking Me! - Cow’s Journey To Financial Freedom

We always hear people talking about how other people living above their means. So exactly, how to define “Middle Class’s Extravagant Life Style”? What is “extravagant” to the middle class that we should really stay away?

Every middle-class person probably has different opinions as what “extravagance” should be. So, here is my list:

1. Big Screen TV – I was house shopping lately and had perfect excuses to tour about 50 homes in the range of $300K - $390K in Denver area. Ironically, I have only found one 60 inch Plasma TV and another 60 inch DLP TV, Both families who own these large screen TVs are from the lower end Duplex homes. None of the single family home owners had those TVs. Plasma has become such a trendy thing that a lot of us, especially the young GenXers label the P-TV as a must have item. I think it is too extravagant for the middle class who makes about $60,000 a year to spend 3000 bucks on a TV. I once dropped $2400 on a 52 inch TV. To be honest, I think the flat screen big tube that costs 500 bucks works just fine.
2. Buying a house that is 4 times of our annual household income. We Americans want everything big! Big car, big hamburger and big house! In my mother’s little friend circle, everybody wants a 4000 sqft all brick home in the Brentwood neighborhood, which is the richest town in Nashville, TN. And most of them did buy these big houses. My jaw was dropping when I visited their homes this past Christmas. I don’t think any of us should go beyond the magic number of 3. If the house costs 3 times more than your household income, then let it go. Otherwise, you will be stretched so thin and your saving power will just disappear in the thin air if any unexpected events happen. And forget about saving for both kids’s college funds and retirement if you have a large house bill to pay.
3. Cars. Yeah, that sweet BMW coupe with the M-3 engine! A couple I know probably makes a combined income of 100K, yet they own $80K worth of cars. It’s a bit too much for car loans. As of me, I dream of having a Lexus 330 for some years! I almost bought one this year after wrecking my Honda. I make good salary and I thought I deserve it. But I only had $27K cash at that time; I had to let my Lexus go and bought a Toyota instead. I am happy that I don’t have any car loan and I intend to keep it that way. I will buy my dream Lexus one day if I can pay for it with cash.

So what is your thought on the “extravagant list”? Let’s hear it…

The trustees of Social Security and Medicare just estimated that the fund will run out of the money sooner than expected. So if you are a Generation Xer or younger and count on Social Security as part of your retirement, you are going to be very disappointed.

By 2017: System is not taking in enough in payroll tax to cover payments
By 2040: Social Security trust fund will be exhausted. The System will only be able to pay 74% of currently promised benefits.
By 2018: Medicare trust fund will be depleted

According to this CNN article, although the debate has been going on for a while as how to fix the system, nothing has been done and the debate itself is currently put on hold and nobody in the White House seems to care about this issue. So mostly likely, the corrective measures will include one of both of the following: tax increases or benefits reduction.

Yes, I am kind of pissed at what I see. I make more than 94K a year, meaning, I pay maximum amount of Social Security and Medicare each year, plus the 7.65% that my employer matches. You are talking about tossing 15.3% of my wage in a basket that is promised to be mine but may not be there in 30 some years.

Most of the Financial Advisers I have encountered suggest me not to include Social Security in my retirement plan. The whole purpose of the program is to pay tax now so we can collect our retirement benefits later. Now, seeing the promised benefits vaporizing little by little because of the government failure, I really feel that I am robbed. What is your take on that? Do you count on or partially count on some payouts from Social Security for your retirement?

If Social Security reform does happen, I would opt for privatizing the funds. Give me that 15.3% and I will invest the money myself. That’s like another 401K! It means a $50K salary can generate $7500+ additional savings each year! And I am sure a lot of us are capable of managing the money ourselves and do a whole lot better job than the govoernment.

Two Personal Finance Bloggers are talking about making more money vs controlling more spending, which one is better in terms of achieving financial freedom?

It’s very interesting to read the differences from their opinions while comparing their backgrounds.

Blogger A is a 37 year old lawyer. Based on the comments he left on other blogs, this guys’s networth is too large to be disclosed. And I assume he owns or jointly owns a law firm (just my guess).

Blogger B is a young software engineer who works for a company, just like majority of us out there.

Blogger A says:

What is your most valuable asset? You may be surprised. It isn’t your house, or your 401k, or even your 6-figure balance at Ameritrade (if you’re lucky enough to have one). It is your ability to earn an income. Over the course of your working life, your ability to generate income that can be saved and invested, will determine when you are able to retire, and what the financial quality of your life will be in retirement. No other factor even comes close.

If you want to get rich, focus on increasing your top-line.

Living Within Your Means is Important, but Won’t Make You Rich. Don’t get me wrong: keeping your spending under control is important. I have a number of friends who make several hundred thousand dollars per year, but who somehow manage to go through all of their income, and consequently have no net worth. However by and large, picking up nickels here and there by squeezing your cost structure it isn’t going to make you rich. Instead, controlling your spending is just what keeps you out of the poorhouse.

Even though compound interest is a powerful thing, if you only have a small asset base to begin with, it will only grow into a small number by retirement. The juice that really drives asset appreciation is the ability to invest a large sum of money. And the way you get a large sum of money, is by having a strong income (while controlling your expenses).

Here is the link to the entire article.

Blogger B says:

These posts state that many of us are concentrating too much on finding ways to save more money instead of finding ways to make more money. While I agree that increasing your in flow will impact your bottom line more than decreasing your out flow, I think they’ve tried to oversimplify things.

Sure, getting a 5% raise is much better than most every way to save more money in our daily lives. But the reality of it is, how often do you get a chance to get a raise or a boost in your income. My company gives raises once a year, so I have one opportunity to increase my income. Yes, I know, each work day is a chance to increase my income, but I strive to produce my best work every day anyway. That’s a given.

Just the other day, several people told me how excited one of our customers was after the demo of the new feature I put in our software. One person told me I needed to ask my boss for a raise. Is it that simple? I just consider it doing my job. It really ticked me off at my last company when employees would get recognized for doing something that they should be doing anyway.

[back on topic, please]
My wife is a teacher. Her salary is set by the county. She could be the best teacher in the county or the worst teacher in the county; her salary would still be the same. She doesn’t get merit raises either. They just don’t do that for teachers. So how can she increase her income?

It seems to me there are many more ways to decrease spending than there are to increase income. That’s why we all focus on decreasing spending. So, keep on saving money. And when your chance to increase your income comes around, be sure to get it for all it’s worth.

Here is the link to the original post.

Cow says (well, that will be me if you are not familiar with this blog):
I am not going to comment on both bloggers’ opinions. I just want to get back to the original topic about top line vs bottom line in a mathematical way:

Let’s say you make $50,000 a year. What is the max of the bottom line? Yep, $50,000 assuming you will eat snow, sleep on the streets and hide income from Uncle Sam. Bottom line must be less than your income. It’s common sense. What is the max of topline? Hmm, I don’t think there is a limit. It can be $80 above your income right now, like what I made so far from eBay and online Ads. Or it can be $5 million if I create a successful business.

I agree with both Bloggers, increasing topline is way harder than controlling the bottom line. And that’s probably why majority of the people are struggling with the bottom line while only those who dare to challenge the top line let the bottom line to take care of itself.

This morning I wrote a short post titled “Budgeting For Golf Clubs, Bridesmaid Dress, GPS and Bras”, I got the following interesting comment:

“How is it possible to spend $600 on bras? Not to be overly judgmental, but I find this expenditure ridiculous. Since I am not familiar with your blog, I went back and checked some of your earlier entries, including the one from March in which you wrote that “[a]fter working 10 years, I finally hit the moment that I can’t even pay my bills. … I had about four hundred bucks in my saving’s account.” If these are your financials, may I suggest that your spending habits are a tad bit out of control? “

Besides the fact that the person missed a lot of my posts and the facts that I save 45% of my paycheck, I own rental and commercial properties and I do have more than 400 bucks (they are just not cash I can use right away), he does have a good point: The 600 dollar bras does sound like ridiculous.

Yes, as frugal as I am, I would throw down 45 bucks on a piece of bra. But when it comes to a pair of nice shoes, I can easily pass and move on (Yep, not all women are crazy about shoes). My friend Paco who gave me his set of golf clubs is a very frugal person. He saves even more than I do. But these clubs are Taylor Made that probably cost him about a thousand bucks! And I am sure there are a lot of people out there who would spend hours cutting the coupons to save a few dollars but spend 50 bucks on a piece of whatever because it is important to them. You start to question what is frugality?

I don’t think there is a right or wrong answer out there. But I do believe that being selective frugal is probably the way to go. Like what I answered in my comment to that guy,

“As why I would spend 600 bucks on bras,.. I think as much frugal as we want to be, certain life quality we enjoy should not be compromised. My bra is one example…”

So if this is something you can live without, then go cheap and save the money. But if this is something that will make a significant impact to the quality of our lives such as the quality sexy bras or the recreation gear (such as Paco’s golf clubs and my rock climbing and snowboarding gear), then budget it and get it. After all, it’s all about how important that “stuff” means to us.

A lot of us (small business owners and investors) are puzzled by the form of business structure we want to establish to protect our personal assets. A while ago, I formed a S Corporation and here is why:

Tax
Both LLC and S Corp are pass-through entities in terms of tax. The income of your business becomes your personal income, thus eliminating double taxing. C corporation is the one that gets taxed twice, which is subjected to corporation income tax and personal income tax. So there is no difference here between a S and a LLC.

But the difference is the employment tax (Soscial security and Medicare). LLC’s owners are taxed on the entire net earnings, while S Corporation’s owners are only taxed on the salary they get paid. The rest are treated as Corporoation distributions and will only be taxed as income but not employment. (meaning, a 15.3% savings).

So for example, if your S Corporation pulls in 100K a year but you only pay yourself $50K a year. You only need to pay $7650 in Social Security and Medicare tax if you own a S. But if you own a LLC and makes the same amount of money, you pay double of that.

Although we are very careful with the salary payouts. There is absolutely no cheating here allowed. IRS will nail you if you make 100K but only take 5k a year salary.

Business Ownership and Procedures
S Corporation is owned by shareholders (no more than 75) and LLC has greater flexibility in terms of business ownership. LLC can be member managed based on your agreement. S Corporation however has to abide a set of procedures and processes such as record keeping and board meetings. The profit for S Corporation has to be divided up according to the shares owned by each shareholder. LLC however, can distribute its profits in whatever ways the owners/managers seem to fit.

We like the formality of the S Corporation and thinking long term, it is better for a S Corporation to expand and manage than a LLC. LLC is heavily depending on the agreements you have with other owners. S Corporation, however divides the profits based on the investment. There are records being kept from each board meeting to document major decisions. Since it is law so nobody has excuse NOT to do it.

Another difference is that S corporation has to be owned by US citizens and Legal Resident Alien. LLC has no such restriction. All of our shareholders are US citizens so we don’t need the advantage offered by LLC

If it’s a Mama-Papa shop, maybe LLC will work better since you can fight over the agreement in the bedroom at anytime you want. But if there are several investors working together, I would personally choose S over LLC.

A lot of us think that saving 50 cents on the cereal bar and 20 cents on a bottle of milk is a great thing to do for our finance. But aren’t we forgetting something? When did anyone in the history get rich by cutting coupons? Not to mention all the precious time we could use to do other more productive things to boost our financial health such as learning a new skill or just read money.cnn.com.

I have always been told by my parents, who both run businesses right now that the difference between poor people and rich people is the different mentality:

• Rich people (or soon to be rich) try to do everything they can to make more money rather than just saving every penny. They do whatever they can to boost their earning powers by either moving up the chain or start their own businesses.
• And the poor people (those hard working but still poor) focus on working every hour and saving every penny.

So the fundamental difference is the concept of “Making Money” vs “Saving Money”. As far as I can tell, the riches do both with the focus of “Making Money”, either by making the “saved money” to work harder for them, that is INVESTIING, or bringing in new fresh money from the higher paying jobs or business earnings.

We only have 24 hours a day. If we can spend the precious time to pick up a new skill, learn how to invest, get a degree, learn from others, or set up a business rather than cutting coupons or counting the pennies in the piggy bank, I am sure we will have a whole lot more money coming in than just $2 we saved from the coupons we cut.