Financial Brain Dump

So, anyone that knows me knows that I've been wallowing in financial articles for the past few months. Basically, since I decided to repair my credit I've been trying to wrap my brain around how to manage my (rather limited) money to it's greatest effect. My mind is starting to get a bit full, so I figured I could dump some stuff on a blog entry and see what it looks like in a month or so.

Since this all started with credit repair, I may as well start there. It turns out, credit building is super easy. Pay off recent collections and lates. Wait out super old collections and lates (these fall off your credit report after about 8 years most of the time). Get a secured credit card, if you don't have a card already. Pay stuff on time, every time. After a couple of months get another credit card (unsecured, if you can), but watch out for cards with excessive fees. After a couple of months get another. Keep getting cards if you want, but I stopped at 3. Try to keep card balances below 10% of their limit. That's it. In 6 months my FICO has jumped from around 500 to around 650. It will probably keep rising to about 700+ over the next couple of years.

So, now I can borrow money (sorta). That takes care of today's needs. What about tomorrow's needs. My thinking on this is still hazy. I'm still learning a good deal, so most of the stuff I'm about to write may well be flat wrong. Time and research will tell.

I prefer to use a problem solving method, because it puts things into a real-world perspective. I think up likely problems and try to solve them before they happen.

What if my bike breaks tomorrow....I'll have to use credit cards to fix it and then pay them off.
That's pretty stupid. If I had money saved I wouldn't have to lean on an 18% loan.

What if I get fired tomorrow....I'll have to live on my credit cards until I can find another job.
Again, that's dumb. Doing that would ruin all the credit building that I've been working on this year.

Solution 1: Save up around 3k in a savings account. This should cover any immediate curve balls life throws at me, or pay my living expenses for 3-4 months. If I socked away 20% of my pay into a savings account it'd take about a year to build that big an emergency fund, but I could probably take care of it in 6 months if I really cut back on money-blowing fun stuff.

3k in savings = 20% pay cut for a year. Next!

Next up are a couple of short-term fears I've had for a while with no easy solution. What if I get in an accident, get hurt really bad, or get really sick. I'm a fairly young guy, but shit happens. The obvious answers are insurance. Catastrophic insurance and Long-Term Disability insurance. Unfortunately, this stuff isn't cheap. Bare minimum for a HDHP is 50 bucks a month (600 annually). Bare minimum for Long-Term Disability insurance is 25 bucks a month. So, for 75 bucks a month I can have a little protection in the event that I have to be fed baby food for the rest of my life. It's something to seriously consider, but I haven't made my mind up yet.

$900/year = coverage in the event of catastrophe

So, I've thought about today. I've thought about tomorrow. I've thought a little about next year. What about the next decade? I'm closing in on 30, and I'm betting 40 is gonna show up faster than I want it to. How am I going to ensure that I'm looking better in my 40s than I am now? Well, other than the typical career building song and dance (which I plan on following) I'll be investing. For me, investing makes the most sense if you think about it backwards. My Dad died at 62. My Grandfather died in his 50s. My Great-Grandfather died in his 60s (I think). With modern technology and a quasi-healthy lifestyle, I'll probably die at around 65-70. That said, I don't want to be working after 60. I'd rather not be working after 55, though that may be unrealistic. So, I'm starting my investing with my eyes on age 55+ (that's 2034).

I started with a Roth IRA. The conventional wisdom is that you should open a Roth as soon as you start working and chuck a little money in it every paycheck, and you'll be a millionaire when you retire. That is baloney. If you were born in 1939, started investing in 1959, and cashed out in 1999 then you'd be a millionaire. Because you rode the Econ-Bubbles up to the top and cashed out at the right moment. In short, you got lucky. I've heard the compound interest story so many times I could puke, and it always relies on that canard of, "The stock market historically provides a 12% return." HA! If you're lucky. Gone are the days of chucking money at a mutual fund and forgetting about it. Retirement. Accounts. Don't. Pay. Interest. They do provide returns, if properly managed. We can call this return "interest," but I've always found that word misleading about the amount of risk involved.

That being said, Roth IRAs are an incredibly useful tool for retiring. This assumes you are willing to study a lot on where to put the money inside the account. Since this is a 25-30 year project it puts me in an uncomfortable position of having to be patient and rush at the same time. I've decided to break my investing into 3 tiers. The first tier is a Roth IRA that won't be available to me until 2039. This is where I'm going to stick my long-haul purchases. Since I'm relatively young I'll try to buy some solid stocks with a good reputation for paying dividends and simply reinvest the dividends over time. Lucky for me, many of those stocks are quite cheap right now. Ford is way down. Alcoa is way down, and pays a decent dividend. Coke looks like it's going to dive after their 4Q Reports come out. There are a few others I've had my eyes on. There'll be a few other things I throw in there over time, but nothing too risky. I'm looking for stable, consistent bargains where I can find them.

My second tier is mostly for education. This is more of a medium-term trading account. I don't plan on owning anything in it for longer than a year, and I don't plan on dumping much money in it until the rest of my finances are sitting pretty. I may drop this idea altogether, but there is so much to learn here that I have to at least dip my toes in the water.

My third tier is for fun. This is for learning how to manage short term, high risk avenues of trade. This will be minimally funded. I'll be looking at stock-options, for the most part. I'm generally not a gambler, but a little bit can be entertaining. In addition, learning how options work is a great addition to learning how to protect investments once you've made them. Case in point, if you owned AIG last year and kept a few conservative Put Options covering it then you'd be sitting quite pretty despite their plummet to the bottom.

As I'm still in the research phase, I don't have a lot of budgeted numbers to go with this grand plan. Since my income is rather slim, then I don't expect huge returns. Even so, I see a solid investment plan as the only way I can avoid living out my "Golden Years" as a greeter at Wal-Mart.

I've had a couple of other ideas knocking around my head. I've thought of enrolling in a government backed IDA to help fund education and home purchase expenses down the road. I've considered enrolling in a few Drip programs to help grow my investment purchases over time. I've thought about enrolling in a HDHP and pairing it with a HSA to mitigate the high-deductible risk. I've considered, if my finances really improve in the next few years, starting an ESA or 529 account for my nephew's college education.

In addition there are a couple of things I've decided to avoid. Selling option contracts sounds like a bad idea in most cases. Covered Calls might be a decent income supplement, but I don't think I'd be comfortable with the Risk:Reward. Selling Puts might be a decent way to discount an intended long-term purchase, but I'd have to have the numbers down to the finest detail. In general, I don't like the notion of risking a lot of money to make a little bit of money.

Well, this has been a rant. There may not be much continuity, but like I said...this is a brain dump. I'll try to make a little more sense out of it in a week or two.