Thursday, May 17, 2007

ADA: You Need a Goal

Alternate Dimension Andy (ADA):

I think we may have gotten a bit ahead of ourselves, here. I mean, I'm telling a starving man how to cook a steak. What the hell good is this stock market info if you're still spending most of your excess money on debt? (You are doing that, right?)

It's just a road map, ADA. Please calm down. Lower your voice.

I'm telling you about these things 'cause the more you know about them now, the better you'll be able to make good decisions now.

Still, I've put the horse before the cart, taught you to run when you were still learning to crawl, and subjected you to a host of other cliches. I have to give you a clearer road map so you can understand why you should give a shit about the stock market.

You need to do two things today:
  1. Determine what your ultimate goal is in the arena of personal finance.
  2. Plan for that goal.

Very Exciting Example

It is my goal to retire by the time I am 55 with enough money in savings that I can earn my pre-retirement salary for the rest of my life. How do I plan on doing this?
  • First, I will aggressively attack my debt. By putting a little extra into my student loan payments, I aim to be debt free within five years.
  • Meanwhile, I will invest as much as I can into my 401(k), making sure I'm taking full advantage of my company's matching plan.
  • Once my debts are paid off, I will take the money that would have once gone into paying off my loans and invest that into my retirement and savings.
  • I will also set aside a little bit extra from every paycheck which I will use to invest aggressively. This, of course, after I've maxed out my yearly contributions to all of my retirement plans.
Some things I'll do that will help:
  • When I need a "new" car for myself, I'll buy a used vehicle and pay with cash. If I can live without a car, I will.
  • When it comes time to buy a house, I'll pay down at least 20%. I will pay off my house as quickly as possible, paying off at least an extra $100 a month beyond my minimum mortgage payment. I will not buy a house until my student loans are paid off.
  • I will go to graduate school to increase my earning potential (and [just as importantly] to get a better job in the field I love). I will bend over backwards to find funding for grad school: fellowships, scholarships, etc. I will not go to graduate school until I've paid off my undergraduate loans.
  • I will stick to my spending plan. This is not negotiable.
  • I will encourage my wife to save aggressively as well. We will both live simply and never beyond our means.
  • We will not have kids unless they are free. (Yes, I'm kidding. We won't have kids unless someone pays us.)
  • If I can get a job at Google, where they'll match up to 60% of your annual paycheck in your 401(k) plan, I will do that.
Some reality checks:
  • As far as being debt-free within five years goes: I can wish into one hand and... Damn, I'm just full of cliches today.
  • Aggressively saving for retirement might not actually work if I'm not taking home enough to pay my rent.
  • Waiting for grad school 'til loans are paid off: not sure that's necessary. It might even hurt me, since I'd be missing out on a couple years of higher earning potential.
  • My wife doesn't like being convinced. She is the boss, you see.
  • Kids are -- I was surprised to learn -- somewhat expensive!
  • Google does not give jobs "all willy-nilly." Indeed, there is very little willy or nilly involved in their recruitment process. That's why it's such a super-awesome place to work; they want the best and the brightest to want to stay with them. Still... a boy can dream.
So, ADA, I'd like you to do something similar for yourself. If you have a blog, we could even call this a "meme!" True or false: this is exciting enough to make your genitals tingle.

Me too, man. Me too.

Thursday, May 10, 2007

MMM: The Stock Market, Part 2

Alternate Dimension Andy (ADA):

The stock market is much more complicated than a flea market to facilitate the trading of parts of goatee wax companies. In fact, in the real world, there is not a single "goatee wax and wart remover" company that sells stock. (I'll talk more about this in a future post, "MMM: Starting a Goatee Wax And Wart Remover Company.")

For starters, there are dozens of different types of companies: automotive, software, oil... even comic book companies.

Plus, "the stock market" isn't even an actual place. There is a place where stocks are traded; that's called a "stock exchange." The stock exchange you're probably most familiar with is the New York Stock Exchange (NYSE). Worldwide, there are hundreds of exchanges. When people talk about "The stock market," though, they're just talking about the activity that is buying and selling stocks.


The most important thing for you to know about the stock market is that it's risky. If you put money into the stock market, it's not going to grow at a fixed, predictable rate like your savings account. One day, a company's stock might go down 20%. A company might go out of business, making your shares worthless. If you put all of your money into the stock market, you might very well lose it all.

Why on earth would rich people put their money into the stock market, then? 'Cause there's an even better chance that your shares will gain money. Not only that: on average, they'll gain money even faster than if they invested it in something else. Bonds and other investments typically bring in between 6 - 7%. The stock market, on the other hand has, over the long haul, averaged about 10.5%.

Asterisk. Footnote. Bullet point.

It is not the case that a given stock is guaranteed to bring in 10%. It's just the case that the whole market will, on average, over many years, return about 10%. So... if you put $d into the stock market, then waited n years (where n is at least 20), in the end you'd probably have about $d(1.10^n).


Some years, you might go way up, some years you might go way down. What's even more nuts is, this "10%" number isn't even for individual companies. It has to do with the market as a whole. Like, if you added up the value of all the shares of stock, then a bunch of years later, added up the value of all of those shares of stock, the number would be 1.1^n times larger. But for an individual stock, the numbers could be much more whack. Hella whack, even.

There is another downside to spending your money on a stock: it doesn't put cash into your pocket. If you want to cash out of the stock market, you have to place a "sell" order and wait for someone else to agree to your price. If there aren't a lot of people trading the stock, you could be waiting for weeks.

Some companies are all, "That's bullshit, yo! People who own part of this company should get a paycheck!" So, every so often, they send those people money. This money is called a dividend payment.

Coca-Cola (NYSE: KO), for instance, pays out dividends every quarter (three months). Usually, they pay out about 0.5% of the share price. So, if you bought a share of Coca-cola for $100, Coca-Cola would send you a check every three months for $0.50 (along with a note that said "DON'T SPEND IT ALL IN ONE PLACE LOLZ!").

What's particularly awesome about dividends is that you can still cash out on the stock. So in the Coca-Cola example, you'd still be able to place a "sell" order and get your $100 back. (Well, sort of. Once Coca-Cola pays out that $0.50, the shares are worth $0.50 less 'cause the company is worth slightly less. But for the sake of simplicity, let's just say you could sell the stock for your $100). Over time, while the shares are increasing in value (as most stocks tend to do), you're receiving dividend payments.

A possible way to be totally rich: buy d dollars worth of shares of a dividend-paying stock every week when you get paid. Do so for 30 years. If we assume that the dividend stock grows at an average of 8%:
  • You'll own about $6413d in shares of the company.
  • You'll receive dividend payments every quarter for 30 years.
  • At the end of those 30 years, every year, you'll be getting back $32.07d every quarter (about $2.46d every week) forever.
Forever, ADA. Think about that. Free income forever. You can give it to your kids or starving kids in Africa or kids from space. You could even give it to some dude from an alternate dimension who gave you financial advice.

Think about it.

Sunday, May 6, 2007

ADA: Cavemen Want Your Bling

Alternate Dimension Andy (ADA):

Back when human beings really were cavemen -- that is, when human beings literally lived in caves -- competition was pretty stiff. Among males, we wanted all the women, all to ourselves. Among females, we wanted the best man possible to look after us and our babies. We all wanted the tastiest cut of meat, the best hunting grounds, the best atlatl, etc.. Back when we were cavemen, we would maim and kill one another for such privileges.

Nowadays, we're cavemen who are stuck in a modern world. We still have all the caveman urges: "I must kill;" "I must eat;" "I must care for my baby;" "I must fuck;" "I must look after my family/ tribe;" "I must appease the gods." But now, we're educated, we have a society that urges us to control ourselves.

But we're still cavemen.

Among us are some cavemen who would do anything to make themselves the strongest; in today's world, these cavemen measure their strength by wealth. They're not the wealthiest, but they're willing to do anything to get there. They're willing to predate on their own species to get to the top. (FUN TIP: Once they're at the top, they'll do anything to maintain it, so it's a never-ending struggle.)

Those people, ADA, are why everyone needs to give a shit about money. Some are predatory lenders who will trick you into a mortgage you can't afford. Some are huckster salesmen who convince the elderly to put your retirement savings into an investment that doesn't really exist. Some own mining companies, and are willing to risk the lives of people with families (their own employees) in order to make a few extra bucks. Some aren't even willfully malicious; they just create great products that you spend your money on instead of, you know, saving for retirement.

How do we protect ourselves from these people? There are two well-known ways:
  1. Never trust anyone who wants your money.
  2. Know the ins and outs of finance.
Among people who opt to protect themselves, most choose the first method. I think it's the wrong one. When protecting yourself from the cavemen, paranoia will only get you so far. A grocery store wants your money; are you going to stop buying groceries? Do you want to live in L.A. without a car? Do you want to put your retirement money in a coffee can and hide it under your bed? Do you want to rent a home forever (and if so, how do you know that that's less of a scam than buying a home?) ADA, you're going to be faced with financial choices everyday. Don't kid yourself about inaction being the safest course.

You have to accept that greed is part of human nature; I'm not saying you're a necessarily greedy person, but I am saying that there will always be greedy people who wouldn't think twice about preying upon you. The best way to protect yourself isn't by hiding from them; it's by being good enough with a club that they'll know better than to come after you.

You're an actor, so I imagine you understand at least the basics of what I'm saying here: human beings have an inherent nature. Some elements of that nature are good: we love one another, we care for our young, we share, we mourn the dead; and some elements are evil: we lie, cheat, steal, murder, rape and torture. I am of the opinion, ADA, that if you want to live life, you have to accept these facts of human nature, and you have to be prepared to deal with them.

Watch out for cavemen, bro.

Saturday, May 5, 2007

MMM: The Stock Market, Part 1

Alternate Dimension Andy (ADA):

The stock market is one of those magical money machines (MMMs) I was talking about before. You've heard about it. There's always some boring-ass news story about the DOW dropping seventeen points (or some such bullshit). People talk about buying "shares" of Coca-Cola. There was even that unit in high school social studies about what the stock market is.

Let me just begin by saying, I totally agree with you that this shit can be boring as hell. But since I'm here to preach to you about mastering the art of personal finance, you're gonna have to sit through this anyway.

Pretend that in your dimension, a dude named Horace invents goatee wax. Since everyone in your dimension sports a goatee, Horace is bound to make a kajillion dollars, right? Other than the fact that a kajillion isn't actually a number, Horace also has to make the goatee wax before he can sell it and make money off of it.

So, Horace makes up a few batches of goatee wax and the small-time local shops put it on their shelves (it is labeled as Horace's Amazing Fun Time Momme and Poppe Shoppe Goatee Wax And Wart Remover. Oh yeah, I didn't mention before: the goatee wax is also a wart remover). Well just as fast as Horace can make batches of this stuff, it's jumping off the shelves. Some of the other shop(pe)s in town get in touch with Horace and offer to sell his wax too.

As the number of shops carrying the product grows, the demand for Horace's product grows exponentially. The goatees just keep coming. There are too many of them. It's like a zombie movie, but instead of zombies, it's goatees, and instead of shotguns, it's goatee wax.

So Horace gets an idea. "Ah ha!" he says aloud, perhaps creating an awkward moment for all the people around him until he explains, "I shall make a machine that will facilitate the easy creation of my wart-removing goatee wax!" (Everyone then nods in silent, profound approval.)

The problem is, Horace (rich though this wax is making him) just doesn't have enough money to pay for such a machine. Even though the machine would help him make the wax a hundred times faster, even though there is demand for his product, Horace just can't afford to make a machine.

Then, Horace hears from an investment bank (What's that? We'll talk about it later.). They've heard about his amazing wart-removal wax; they use it to wax their own goatees. They want to help him raise money to get his company running. Their idea: they'll sell "pieces" of Horace's company. They'll have a total of 1,000,000 pieces, and they'll sell them for $10 each. Each of those pieces -- let's call 'em "shares of stock," -- is a tiny piece of every machine, every chair, and every potted plant that Horace's company owns. In return, Horace will get $10,000,000 to build factories. He'll also use the money to hire workers, advertise, and generally get his company running.

Now the owners of the shares of stock -- "shareholders" -- each own a bit of Horace's company. If the company sells a lot of extra goatee wax, they'll bring in a lot of money from those sales and the value of the company will increase. So too will the value of the shares increase. If the company starts buying private jets and spending too much on advertising, the value of the shares might decrease.

Now, Horace's company isn't going to make more shares of stock. If another person wants to buy shares of stock in Horace's company, he would have to find someone who already owns shares and is willing to sell them. The buyer and seller would then negotiate a price.

That might be easy if there were only a few people who knew about the shares of Horace's stock, but that brokerage that helped Horace out before made sure there were lots of shares of the stock. Lots of people know about it. And lots of people want to buy or sell shares of that stock. Wouldn't it be nice if there were a sort of flea market people could go to to buy and sell those shares of stock?

ADA, that's what the stock market is. It's a flea market where people sell pieces of companies. I'm not even fucking kidding. But instead of just imaginary facial hair wax companies, there are all kinds of companies. Hundreds of 'em.

So how do the rich make money in the stock market?
  1. They find a company that is going to make a lot of money.
  2. They "go to the stock market" and buy shares in that company.
  3. When that company is done making money, or when they need some cash, the rich sell their shares of stock in that company (for more than they purchased the shares).
It's the basic MMM formula. Now, there's certainly a lot more to say about the stock market than just this. We haven't even scratched the surface of what a dividend is, what happens when people "go to the market," and how to use the stock market effectively. This is just the beginning, and understanding it is key to understanding most of the upcoming MMMs.

Go wax your goatee. We'll talk more about this later.

Tuesday, May 1, 2007

ADA: Rich People Have Magical Money Machines

Alternate Dimension Andy (ADA):

I know you don't necessarily want to be rich. Not much point, as long as you can eat and do something that you love (amirite?). You agree with me, I'm sure, that having more money will not, on its own, make a person happier.

On the other hand, rich peeps are kind of an interesting academic topic. How did they get so rich? How do they stay rich? Why rich peeps gots to be like that, yo?

Don't pretend that you don't love sitting around just thinking about academic shit. I know you do, dude. I know you love to just puzzle things through. Arrogant bastard that you are, I'm sure you think you're smarter than all of your starving actor friends (side note: I don't think those people are starving in this dimension). I assure you, ADA, that you are not smarter than they are, but your willingness to puzzle about the finer points of the universe's operation is an admirable quality that I hope you never lose.

Stop stroking that goatee and we'll get back to the topic at hand: how do rich people get rich?

Think about it.

I'm not fucking around, really think about it. Ponder. I want real details. Go sit in a quiet place for ten minutes and really pound away at this question.

Give up?

Answer: I don't really know. If you know an absolutely flawless formula for getting rich, I'd love to hear it. I'm not a rich dude myself. Of course, I think I have a pretty strong theory. Ready? Theory: they use Magical Money Machines (hereafter MMMs).

I have not gone off the deep end, ADA. There is such a thing as an MMM. Only, they're not called that. They're called other things with really arcane names like "The Stock Market," "Certificates of Deposit," and "Oculus Repairo." Okay, not that last one, but the other two are legit. Seriously, there's a million of these MMMs. Each MMM works a little differently, but they have one thing in common: the way the rich use them. Here's the recipe that wealthy people follow:
  1. Put money into an MMM.
  2. Wait.
  3. Slowly, the MMM spits out more money than was put in.
That's it. Seriously.

And now for the point of this message: you can use them too. Anyone with a little bit of money is allowed to use these MMMs.

Excited? Intrigued? Can't wait to learn more? Are you literally sweating bullets?

All right. Calm down. Let's just take a breather.

Here's what I propose to you, ADA. I am going to teach you magic; in exchange, you will use that magic for good. I'm going to tell you about the internal workings of dozens of MMMs, in the vain hope that you actually learn to use them. Maybe you'll actually get rich...ish.

From now on, any post whose title starts "MMM" is about one of these Magical Money Machines. Enjoy, yo.