Investing

If I Was 20-something Now

Let me preface this post by stating it is not financial advice. I am not now, nor was I ever a licensed financial professional. I have never had a desire to be one.

This post exists because I’m now working with a bunch of 20-somethings and just don’t want to have the same conversation 500 times before I die. When you are working 60-80+ hour weeks on a high pressure project there inevitably comes that idle conversation during lengthy build sessions before a full QA test. Inevitably some form of the same question always comes up “If you had it to do all over again, what would you do differently?” Sometimes they end with “what would you keep the same?”

While it may be nice to take a tour down memory lane, it doesn’t really provide any useful information to those who ask, just some fun/entertaining stories. The proper question is “If you were 20-something now, what would you do to be at least as well off as you are now?” Here is my answer. Some of it will come from posts which have been on this blog before and some will sound familiar.

1) Don’t get married until you are at least 32.
2) Set yourself up as a Sole Proprietorship, not an LLC, Subchapter-s, or any of those other thing-a-ma-bobs.
3) Dividend paying ETFs (Exchange Traded Funds) are your best friend.
4) Don’t get your own place for many years unless you have to.
5) Take all of the out of state contracts you can in your twenties.
6) Always pay cash for a car.
7) Always have a tax professional do your taxes.
8) Always leave your overpaid taxes in the hands of the tax body.

I realize 1 is going to cause a massive flame war with the younger ladies, but it is true. Full disclosure time. I have never married. I should have gotten married once, and may yet, because I’m still very close with that lady. This life lesson I actually stumbled into. When I was a 20-something I was working a good contract at a big company quite far away from where I lived. There were 8 of us consultants all working in a double employee cube we called “the consultants pit.” (Actually the employees started calling it that too.) All of the guys were north of 40 and all but one had been divorced at least once. I remember one consultant in particular. Nicest guy you would ever meet. Do anything for anyone. He was a Viet-Nam veteran and the tail end of the “free love” generation. Got married after getting back. Purchased a duplex in one of the higher end suburbs of the day. Home birthed both sons. Not just home birthed, he caught. Was totally into being a dad, but he had come from a big family (a couple of his siblings were “Irish Twins” – born 9 months apart) so being into family life came kind of naturally to him.

This level of detail is necessary for you to understand just how big an impact his story made on me at that young age. Not long after the kids were born his wife decided to get a divorce. She got the duplex, he got the mortgage. Shortly after the end of the divorce she remarried and moved in with her new husband. He came into work kind of steamed one morning, well, as steamed as he got. Just had an argument with the ex. Now that property values had gone up he wanted to sell the duplex and put the money into a college fund for the kids. None of the money for himself, other than getting out from under the mortgage. His wife wanted to “keep it as an investment.”

You don’t see it yet, but the left hook is coming now.

We were working at the same client site billing at the same rate. Not a great rate, but average for the day. I was driving a nice new car and living in either a 2 or 3 bedroom condo (forget which one.) He was driving a $500 ride and living in a room at the YMCA. Up until that point in time I thought living at the YMCA was an Urban legend the Village People had created with their song.

Some years later I was eating at a Chinese place that had those paper zodiac place mats where you look up your birth year to find out what kind of animal you are. I don’t remember which 2 animal types it mentioned, but I do distinctly remember it told me to marry late in life. That stuck with me because it seemed like incredibly sage advice.

No, I don’t expect all of you will end up with that kind of train wreck. I do expect all of you will endure to some extent what I witnessed first hand while working my way through school. One of my co-workers was engaged, then got married. During one evening of work she told me how both sets of parents had started dropping clothing off for her, sun dresses and such. She then turned around and pulled the dress out at the belly and said “Room enough for two in there.” She had only been married a couple of months and already the pressure was mounting for them to become a grandchild factory.

Getting married and having children early in life places immense stress and financial burden on a couple. Even though you got married, you still don’t know enough about yourselves or each other to be certain this is the person you really want to stay with. I’m sorry, but it is true, just look at the divorce rate in this country. Divorces tend to be ugly. When kids are involved they become brutal. I’ve seen too many people go through them to ever believe couples “part as friends.”

This anti-young-marriage thing isn’t a rant against women. Otherwise level headed people with everything to live for get vindictive during a divorce. Some never change back. I know two different guys I grew up with who got divorced and never got over it. The entire focus of their lives became “the ex gets nothing.” I’m not talking about just during the divorce, but for a decade or so later.

One guy moved down to the part of the country which has perpetual summer. He had a great job in a career field where the base salary was north of $100K before bennies. Reports differ as to exactly when, if it was during or shortly after the divorce, but he quit his good job and started delivering pizzas. He does it for a few months out of the year then rides his bike the rest. Not a motorcycle working his way through a mid-life crisis. He doesn’t want the ex to ever get anything else so he leads a life near the poverty line and rides a bicycle through the country much of the year. Not training for Tour-de-France, just rides a bike.

The other guy started a remodel of his house around the time of the divorce. Word far and wide was the house had to be sold once the remodel was done. He tore up most every room leaving each in various states of completion and lived like that for over a decade. When the heat exchanger went bad on the forced air furnace he paid for just the heat exchanger to be replaced. Most of you are too young to know this, but when your furnace is pushing 20 years of age and a major component like that goes bad you replace the furnace because the rest of it isn’t far behind. He could have had a new furnace installed the next day. Instead he ordered the heat exchanger and lived without a furnace for however long it took to arrive. Stories circulate that he carried debts for over a decade paying interest only on them so when he died and the house was sold it would barely cover the debt if cover it at all.

I know some of you are laughing, but I’ve seen stories like this far too often. Some percentage of you who think you have it all together, even after reading those stories, will become one of these two guys when you get divorced. It is sad, but it is true. I’ve seen guys get divorced and turn into professional alcoholics, drinking themselves into a grave after losing their driver’s license due to a string of DUIs.

Number 2 is something I’m shocked most 20-somethings don’t know about. During one recent conversation a 20-something had mentioned how he had both a financial planner and tax person who advised him to set up an LLC. I was floored. You are young and have nothing to take, besides that an LLC doesn’t protect you as much as you are told. A 30-something who had an LLC for a number of years even volunteered that was true, as he had found out.

The beauty of a Sole-Prop is that you get to set up a Keogh as your retirement account. All of the other retirement accounts for all of the other employment types are severely limited. You only get to put a few thousand per year away tax free. With a Keogh type plan you can put up to 25% of your business income away. There are total dollar caps which keep changing, when I first started mine it was something like the lessor of 25% or 25,000. A quick trip to the IRS site mentions the cap is now around $52,000. Then their are those “make up” contributions allowed for people north of 50. Your tax man and the company you choose to host your Keogh can explain all of the limits and requirements.

My point is, if you are young and don’t have much to take anyway, don’t choose a business entity type which will starve your retirement. More importantly, since you are young and not used to actually having anything, dumping money into your retirement account shouldn’t be a burden, especially if you don’t rush to get married and have kids. Historically, it has been difficult for people suing you to drain your retirement account. That may have changed in the past few years, but I hope to never find out.

Point 3 goes against human nature, especially with the young and dumb crowd. Trust me, I’ve been there. For every story you hear about some “hot stock tip” which turned someone into a multi-millionare there are thousands of lesser told stories about people who lost everything falling victim to a pump and dump scam or a bubble bursting. Were I a 20-something now, in an era where on-line brokerage firms with low trading fees fill multiple browser pages in most search engines, I would be dumping money into dividend paying ETFs with a good track record of dividend payments, especially those which seem to increase their dividend every few years.

One has to change their investing focus from getting rich to getting stable. I put dividend paying ETFs into two categories: monthly and quarterly. There are many investment sites where you can research which ETFs are right for you. Rather than going into the ins and outs of Exchange Traded Funds I will simply explain the goal I would have as a 20-someting now. Accumulate enough ETFs in my brokerage account to have north of $1000/month average dividend income.

You will find no end of financial advisors telling you “to save up 6 months worth of expenses.” In today’s world with multiple credit cards in one’s wallet, you aren’t going to do that. If the cash is in some liquid account like savings or a money market, you are going to find some new toy you just gotta have and tap it, especially given today’s interest rates. If the money is tied up in dividend paying ETFs you have to physically issue a sell order for, wait for the trade to clear, then wait a week or so for a check to arrive from your brokerage firm, the impulse buy is somewhat stopped before it starts.

The other thing I like about this idea is it gets around “empty bottle syndrome.” Let us assume you did what many financial advisors say and salted away 6 months worth of living expenses in a liquid cash account. Now you hit an employment dry spell. At the end of 6 months, that bottle is empty. Yes, you can live like a gnome and stretch it some, but, the bottle only has so much in it. If you have accumulated enough ETFs to earn you roughly $1000/month in dividends, you simply have to trim all of your monthly expenses to below $1000 and you can ride out an incredibly long dry spell.

Points 4, 5, 2, and 1 are all related. If you are going to set yourself up as a company and do 1099 based contracting, you need to have some permanent business address which satisfies all IRS requirements. When you are young and not tied to a mortgage, apartment, or family, you can satisfy that young urge to travel. Here is where the IRS is your friend. No, they are your best buddy. The IRS will pay you to work someplace other than where you live. They don’t directly cut you a check, but for those who wade through the forms it is a major blessing.

For older workers, traveling out of state for months on end for work is a royal pain. It also leads to a higher divorce rate. The expense of working out of state is also quite a burden, especially since you may have to pay personal income tax in multiple states. (Rules vary state to state and some states don’t have personal income tax.)

The IRS used to put out Publication 1542 which contained all of the Per Diem rates for all locations in the country. Now the GOA publishes out the rates. These rates are used by companies and government entities when booking business travel. Sadly, in prime markets like Chicago, the corporate housing companies look at these rates, total up the rates for both food and lodging, then set that as the price they will charge you to stay in their unit for a month. This gouging has created various corporate housing Web sites where individuals offer condos and other units they own as corporate housing at, usually, significantly reduced rates.

Here is the gist of it. The IRS will only let you deduct that rate, no matter what your actual expenses were. Say you are going to spend 6 months in some location on a project. Say the total Per Diem for any given month allowed is $6000. If you are willing to stay in a hovel, or shop around and find a really good deal, under most circumstances, you are allowed to take the published Per Diem rate. (Please consult your tax professional for rules applying to your specific cases.)

Some short sighted people will think, “Hey, if I can survive on $2000/month on-site I the other $4000 is free money.” Well, to them I say, you are thinking small. Instead of blowing the money on a shiny new ride, or something stupid, if you are below your contribution limits, put the “free money” in your Keogh. That is right, take the gift from the IRS and take it off your taxes by putting it in your retirement account. There are very few retirement funding plans which can get you 100% return the first year, but if your tax professional says it applies to your case, this one does.

You have to do this when you are young. When it is still a thrill to see a new city and you don’t have the obligations or desire for creature comforts which come later in life. Someone who just came out of a dorm doesn’t have much of an issue shacking up in a $50/night extended stay hotel room. After all, it is more room than you had in the dorm and a bigger bed. It _sucks_ as you get older. After a certain age you will only stay in corporate housing units and most of them will cost you the entire Per Diem.

Free advice, under no circumstances consider trying to fly home on weekends. You will age in dog years. You will also waste a large part of your best years sitting in airports waiting on yet another delay or security line. Being away for 3-6 months at a time generally isn’t bad. It can be bad over “the holidays” when you really want to come home to be with friends and family but know the reality of what that trip will be like.

Plan ahead when taking out of state contracts. Make certain your contract will end, or provide a month off, during tax filing season so you don’t have to make a one week mad dash home to enter all of your receipts into an expense system for your tax preparer.

If you don’t have a place to maintain back home, just some cheap office space with someone to forward your bills and toss the rest of your mail in a box while you are gone, travelling out of state when you are young lets you get paid to see a lot of the country.

Point 6 is the most difficult for 20-something males. Been there, done that. I didn’t have a lot of choice though. During the 80s the EPA cracked down on steel processing and forced lead out of paint. This lead to nearly a decade of cars which would rot out in about 3 years. Some models were so bad, on a sunny Sunday afternoon, if you sat out by the driveway after washing your ride you could almost hear it rusting. Building a car with a 300K drive train was pointless because the body and frame would rot through long before it got near that mileage.

Today there are many higher end cars known for 300+K mile drive trains. Yes, to many these are “old man cars,” but, if you drive one, you will soon realize that 160+MPH speedometer on the dash is not there for show. With a little time surfing the Web it is easy to find one of these rides with just over 100K miles on it for roughly $10K. I recently picked up a 2006 Avalon with 113K miles on it that had new tires and brakes. It also looked like it had rarely been sat in. Yes, Camry’s are also known for 300K drive trains. When they are brand new I really like them. I would be leery of buying a used one unless I knew who had it. No fault of the car. The fault lies with the customer. Be honest. You 20-somethings aren’t so good about getting oil changed and doing the other maintenance a vehicle requires. The old people who bought those high dollar rides treat them better than most children get treated.

Yes, during my youth I financed more than one ride, traded far too frequently, and made a host of what can only be called financial blunders when it came to automobiles. I also didn’t live in a time when could easily run 300K miles were plentiful. I lived during a time when most cars on the market needed a regular diet of new parts starting at around 60K miles. Not just maintenance stuff like tires, brakes, and shocks. I was young during a time when there were many places rebuilding engines and transmissions. I’m not talking about shops doing it in-house, I’m talking about business which had factories just to reman engines and transmissions then sell them as complete units. Most of those businesses are gone today. A few are still around, but, back in the day, they seemed as common as burger joints.

Point 7 will generate much push-back, but it is the best advice I ever got. Yes, you can buy software which will let you file your own taxes, even for your business, but don’t do it. For someone who is a W-2 employee taking standard deductions, fine, but, if you are in business you need business services. I’m not talking about visiting some shop which sets up in a strip mall a few months out of the year. I’m talking about a professional which not only does your taxes but can provide other advice. Most importantly, a professional which appears for you at IRS audits.

Even if you did nothing wrong, with random auditing, if you live long enough you will get called in for an audit. I have seen so many people over the years who thought they would save money doing their own taxes go to an audit not knowing which way was up and come out of the audit not certain of what planet they lived on.

Point 8 is related to Point 7. If you are running a business and paying estimated taxes, leave whatever refund you have coming in to apply to next years taxes. People beat me up over this all of the time, but, the tiny amount of joy you get from receiving your refund will be wiped out when you have to pay estimated taxes a couple of weeks later. Besides, if you make some stupid mistake, like recording a previous year estimated tax payment made in January as a payment for this year, you don’t have trouble with the IRS. They simply send you a letter saying that unless you can prove their records wrong your new overage amount is calculated below. This is a far better event than taking a $10K refund only to find out you made an $11K mistake and the IRS now believes you guilty of all manner of nefarious activity.

There are 3 letters in this world you should never want trouble with. That’s the I, the R, and the S. Even if you win, you lose. There have been times when they sent me letters disallowing a deduction where multiple tax professionals could point to the specific place in the tax code which said that deduction was allowed, I never challenged it. The amount wasn’t gigantic and if that amount kept the child with a severe hygiene problem down wind, I was going to let them keep it. Yes, I know many of you round that phrasing humorous, but if you continue to think of the IRS that way, you will avoid deliberately doing something which makes them come calling.

That’s it. If I was 20-something now, that is what I would do. I’m not now nor was I ever a financial advisor. I’m just someone north of 50 thinking about how I would lead my life if I was 20-something now.