A Guide to Personal Finance for My Kids or Yours

“If every instinct you have is wrong, then the opposite would have to be right”

One of my favorite Seinfeld episodes is called “The Opposite.” In it, George (the perpetually unsuccessful main character) realizes that every decision he has ever made has been wrong, and that his life is the exact opposite of what he wanted it to be. His successful friend Jerry convinces him that if every instinct he has is wrong, then the opposite would have to be right. That feels pretty logical and George goes on to experiment with doing the complete opposite of what he would do normally. I won’t tell you what happens so as not to spoil it for you, but the basic concept from my favorite sitcom applies to investing.

The average investor tends to buy stocks when they are going up in price and tends to panic and sell when they fall. That is a very natural human behavior. However, it is not what leads to wealth creation. In fact, this basic behavior is probably what holds back most people who are actually on the right track (after all, not everyone even decides to save money to invest). There is a lot of literature on this but basically, the reason this holds people back is they tend to buy stocks when they are relatively high and sell when they are relatively low.

While the opposite strategy would be optimal, nobody can perfectly predict the highs and the lows. That’s why I tend to invest all the time (there has not been a month when I didn’t invest in at least 12 years but more likely in about 20 years). It’s not because I am so privileged that I can do this. I’ve invested various amounts, sometimes only a few hundred dollars in a 401k. It’s all about the discipline that helps me ultimately get the average price through time (not relatively low or high). I’ve written about dollar cost averaging in past posts (for example, here).

But this post is not about dollar cost averaging. I held back against my instinct to invest everything I had during the stock market party of 2021. Instead, I continued dollar cost averaging some money every month and holding some cash on the sidelines. I held off some cash so I can do the opposite of most people’s instincts. Most people sell during the “selloff,” when the market seems to be in free fall with the looming recession, Federal Reserve is steadily increasing the interest rate, and a major war is happening in Europe. I won’t perfectly find the bottom and I am not trying to. I’ve just increased the size of my monthly investments to make sure I get more of the “discounted” prices. I am still dollar cost averaging, but I am doing more to bring down the average.

For me, this is the time to put more of my cash to work. Like Warren Buffett, I expect to be a net buyer of stocks over the course of my life, which means I plan to buy more than sell. That means, I generally like it when stocks experience declines in price in the same way a shopper likes to shop during holiday promotions. As Mr. Buffett would also say, the world has gone through many selloffs and all kinds of calamities, but the stock market continues to grow when you zoom out far enough.

It’s a scary time for sure and I will most likely continue to see my portfolio go down in value. But 5-10 years from now and maybe even sooner, I will be glad I followed Jerry’s advice to “do the opposite.”

Here is a clip from that Seinfeld episode for further inspiration and a laugh.

Get kids started early

I was reading Kiplinger and saw a reference to an app that helps parents to introduce kids to saving and investing. This app is called Greenlight and it allows you to send your child or children money to be used for various use cases: spending, saving, investing, and allowance.

It’s probably most useful for older children because one of the key features of the app is a debit card. However, I set it up for my 7-year old to get him exposed to some key personal finance concepts early.

I got him a debit card with his face on it for security and fun. The debit card he will use when he goes to the bookstore or toy store with me or other family members.

I was also very excited to get him to finally buy some stocks. We’ve been talking about buying shares of companies for a while and he’s been getting excited to become an owner. Finally, Greenlight was an easy way to get him going, without having to open some formal brokerage account.

Essentially, I took some money that he received for his birthday and sent it to his Greenlight account. Then, the fun began. He had $100 to work with and he really wanted to invest in companies that he believes are doing well. According to him, the companies he sees him or grownups using a lot are probably doing well and could grow in share price. For a basic analysis, that was good enough for me. That’s how he chose Disney and Apple, both very popular stocks in the app. I then guided him to also get some VOO (S&P 500 Vanguard ETF) to diversify his risk a bit and to have him be an owner of a lot of companies all at once. He really liked that idea.

At first he wanted to only invest $1 or $5 dollars into each stock, but I got him to really develop some conviction about his positions and he leaned in with $20 each. So, he invested $60 into the stock market and kept $40 in his Savings account.

As soon as he invested, the stock market took a hit, so he experienced that part of investing when you see your holdings go down in value. I was a bit bummed at first because I wanted him to really get excited about growth and investing. However, I felt it was good and real for him to also experience the downturn and to display some discipline to not sell. After a few days watching his stocks going down, he was definitely antsy to sell, but he held strong.

On the other hand, his Savings account gets 1% interest, so he also gained $0.02, which was small but nice to experience. Parents can increase this interest out of their pocket if they want the lesson of interest and compounding to be more clearly learned.

There are so many possibilities to explore and lessons to teach through this app, or a similar app. I get excited about thinking what results he might be able to see if he keeps investing small amounts into ETFs, such as VOO, and holds it for decades. Compounding makes young age so much more powerful than meets the eye.

The table below is from The Money Guy Show, one of my favorite podcasts on YouTube. In the table, you can see just how powerful age can be. For example, my son starting at age 7 has a ~394 money multiplier, which means his money will grow roughly that much from this age onwards without any additional contributions. That means that his invested ~$60 could turn into $23.6K by the time he is 65 years old. It also shows that if he puts away ~$26/month from now going forward, he will be a millionaire by the age of 65. It gets much harder to grow money when you start later; it’s obvious, but I hope this serves as a good visual reminder.

Note that there is a monthly subscription fee to get access to the app. I think it’s totally worth it to teach life-long lessons, but it will only make sense if he continues to be interested.

Disclaimer: If you click on my Greenlight link above and signup, we both get $30. All proceeds go to my son’s account and I recommend you do the same.

Be an owner – prioritize equity

Thankfully, my first job out of college was at one of the most important companies of our time – Google. It was also the first stock that I owned and I owned it because tech companies typically give all employees some stock (stock options in earlier stages and Restricted Stock Units at later stages) that vests (becomes theirs) over some period of time. Typically, you have to work at least a year at such a company for some portion of the stock to vest (typically one quarter of the initial grant because the most common vesting period is four years).

I started working at Google before it was a huge public company. Over time, as the company went public, more of my stock vested and the share price grew, the equity portion of my compensation became more meaningful. My initial cash compensation was only $35K/year, though that also grew over time but not as fast as the value of the equity.

So that first job gave me my first taste of ownership. Although I was a junior employee, I benefited from the success of the company just like the CEO, although on a much smaller scale. Of course, everything is relative and for me, it was an amazing start. The other thing Google gave me was a crash course on equity compensation and investing more generally. I had to understand how my equity worked so I learned all about it (tax implications, etc). Google also brought amazing speakers (like Jack Bogle of Vanguard) and offered personal finance classes. Since many people generated significant income from the stock, I think Google’s leadership team thought it would be appreciated if they offered some guidance about what to do with the new found cash.

Since then, I only worked in companies that give equity, except for one year and a summer in management consulting. That was a pure investment of my time into building out the consulting skill set that I thought would be helpful in my business career. It was painful to not get any equity but I am glad I had the experience.

The other two tech companies I worked at after Google either went public (now worth ~$15B) or was acquired (for ~$8B). I now work at a new early stage company that I hope to help grow to success.

It’s not just money and the feeling of ownership that drives me. I love building companies and growing myself in the process. That is also the other advantage: with experience, my equity % has been increasing (size of stake typically grows the more senior you get and the better you are at valuing the equity and negotiating it).

You don’t have to be a founder to own pieces of companies, but it really helps to own parts of companies and not just work there if you want to build wealth. I think of myself as an investor: investor of money and time. I invest my time in companies as an investment in their and my future.

Why is Warren Buffett wealthy?

I admire Warren Buffett and very much look up to him. Unfortunately, I only started to follow him closely when I was in my 30s, after I met him in person. He has such a wonderful way of turning complex financial topics into simple digestible concepts that are very easy to understand and put into action.

When I look at his financial journey, I admire his annual return of about 20% vs. the S&P average (1965-2021). For me, the key reasons for his winning record are 1) picking the right companies to invest in, and 2) not trading their stock often because he thinks of them as businesses and not stocks.

But I think there is another reason why he is so wealthy. He has been investing for a very long time. At the time of this writing, Warren is 90 years old and he started investing when he was 11 years old. So he has been in the market for close to 80 years. Thanks to the power of compounding, one of Buffett’s favorite concepts, you don’t even have to be a financial genius to become wealthy if you have that kind of time horizon.

So, invest as early as possible (time in the market is more powerful and lucrative than timing the market), stay healthy to live longer, and make sure your kids get excited about investing and the freedom long-term investing will offer them.

Importance of goal setting and taking a step back

Taking a step back and evaluating my life goals at least once a year without distraction is one of the most important things I do.

Over the last several years, I have focused on creating structured processes for teams and companies to develop strategy, establish goals, and execute on those goals. I have lead strategy offsites, driven OKR setting and scoring, and developed frameworks to guide resource allocation to top priorities. A few years ago, I decided to apply my learnings to my own life and set up an annual ritual I call Personal Offsite.

What it is:

A personal offsite is a ~24 hour journey I take every year somewhere away from home to reflect on the year that just passed and to set goals for the upcoming year. I also take the time to evaluate if my longer term goals are still relevant and on track.

Why I do it:

I started doing this when I was moving from one job, in which I spent six years, to another. I had the idea of driving somewhere from my home in San Francisco until I ran out of gas and then finding some place to spend the night to reflect on my life. The whole experience was meant to be a time for me to reflect on what I ultimately want to accomplish on many dimensions of my life, including professional, personal, family, etc. I organized and was part of many strategy setting offsites in my professional life, so I thought why wouldn’t I do the same for myself.

As I sat in a coffee shop in San Luis Abispo, deep in reflection, I realized that I should have probably done an offsite like this before I made the decision to change jobs, not after. It may have not changed my decision but it would certainly have helped provide better context for me to think through the decision. That insight led me to turn this personal offsite into a regular annual ritual. Having done it now three times more, I really find value in taking this time to reflect deeply away from the day-to-day to-do lists and the familiar environment of my home and city. I now use it to evaluate the wins and misses of the year that passed and set goals for the upcoming year – in a way, this is my new year resolution setting time but it’s a bit more involved than setting a weight loss target.

What does it practically look like – the mechanics:

The prep:

I really take very little time to prep. The main elements of preparation for me are

a) arranging with my wife the date when it will be convenient for me to disappear and leave her with our two kids,

b) picking and downloading a book for the journey there, and

c) picking a destination (usually a place where I’ve never been before or never stayed overnight that’s at least an hour away from my home),

d) booking a hotel for the night.

The journey there:

The journey is an important part of the experience. I like to use it as a) a separation from my routine, and b) to get excited for what I am about to do with some new book. I typically download a book on Audible and listen to it on the way to my destination (previous books included: Awaken the Giant Within by Tony Robbins, Your Best Year Ever by Michael Hyatt). I usually finish the book either on the road or subsequently in the hotel.

The two pronged experience:

Leisure: My Personal Offsites started after I was married and had kids. For those not yet at that stage in life, being married with kids tends to mean that I don’t have much “me” time. So I use the Offsite as a way for me to treat myself. I typically leave my home before dinner so once I get to my destination and check into my hotel, I find a nice restaurant (typically sushi) and go sit at a bar, have a nice feast and finish listening to the book from the journey, if I haven’t already. It is important to note that this experience of eating by yourself may feel awkward at first. The whole experience is a bit of an introvert heaven, but I truly don’t think only introverts can benefit from this. If you are a good, smart, interesting person, you can enjoy your own company for a few hours – it won’t kill you. Introverts and extroverts alike probably don’t do this kind of introspection enough. Back to my dinner…, once I am done with my feast, I head back to the hotel and after doing a bit of planning for next day, I turn in relatively early and set my timer (not alarm) to 8.5 hours. For me, this is an important luxury that is roughly 50% greater than my average day. In the morning, I like to take the time to pamper myself. As an example, on my 2018 Offsite in Santa Cruz, I started with a trip to the treadmill, then some sauna, then jacuzzi, then the pool, back to the sauna, and then shower. I then treat myself with my favorite breakfast, which is lox bagel sandwich and coffee. Then it’s time to do some planning.
Planning/reflection: Once I find a good coffee shop (e.g. Verve in Santa Cruz), I spend the afternoon on my iPad in a google doc, reviewing my goals from last year, jotting down wins and misses, and setting goals for the year ahead. It’s important for me to have long term goals (Someday & Five Year goals) that I set up some time ago and that I revisit annually, but I spend the bulk of my time seeing what I need to do next year around the various aspects of my life to have a successful year and to make sure they are aligned to my longer term plans. There are books written on goal setting, so I won’t go into depth here, but I like to have SMART goals (Specific, Measurable, Achievable, Relevant, Time-bound) around areas that are important to me: Personal (physical health, hobbies, intellectual), Family (wife, kids, parents/siblings), Financial, Professional, Community (charity). It’s very important to not just write down the specific goals, but to also articulate reasons why those goals are important and to develop an action plan. Also, an interesting technique I recently developed around goals is to hide affirmations in a password for something I use daily (e.g. your computer). For example, imagine how powerful it could be to have to type in “I_will_have_a_million_bucks” every day. Try it! Affirmations can be powerful in helping achieve our goals. I like to leave the offsite having set some recurring calendar invites on my calendar (e.g. finish my monthly book). When I am ending my offsite, I tend to pick out one of the goals that is most important to me. Usually it’s about getting to sleep earlier, since that’s a big missing piece in my life; succeeding here helps me achieve many of my other goals (yes, sleep is that important). When I get home from the offsite, I share the goals with my wife and ask her to commit with me to those things where I need her help to succeed. This step is very important if you have dependencies in your goals.

Conclusion:

I put this simple ritual down on paper because every time I mentioned my personal offsite to someone, people got excited and later told me they went ahead and did one of their own. The reality is that we are running around from one task to another, from one screen to the next, and we don’t take time to think and evaluate our lives. Before you know it, your career, family life, etc. evolved on their own and you may not like the current destination. This is a small but meaningful tool to put you in the driver’s seat of your life. Sounds corny, but it’s amazing how much more in control I feel every time I spend these 24 hours on my Personal Offsite.

Investing in education (529 plans)

Books are cheap but education is priceless.

I enjoy investing and ever since I came to live in a capitalist country, I’ve been hooked. That said, even when I lived in a communist country, I knew that the most important investment one could make is in education. Education can set you up not only for a more lucrative career, but also for a more informed and interesting life. My parents invested everything they had in my education and I benefited from that investment mightily. So, as soon as my kids received their social security numbers, soon after birth, I set up their 529 plans.

I looked at different options (e.g. custodial accounts, etc.), but ultimately thought that setting up a Vanguard 529 plan was the simplest and best thing to do. Basically, you can put away money that can only be used for education related expenses, but if you use that for education expenses, you don’t have to pay federal taxes on the gains from those investments (some states also give you a tax break). So, if you plan to pay for education at some point and you believe that investing money will produce better financial results than keeping it under your mattress, this could be something for you to consider.

For a married couple, you can automate your plan to add $2,500 per child per month, without hitting the gift tax (this number could change year to year). Whatever the amount you choose, I recommend automating it so that you are constantly investing in the future and don’t let human nature get in the way.

You have to be careful to not over invest because these funds can only be used for education, although they don’t have to be used for the originally intended recipient (you can change to another child or to a grandchild, yourself, etc).

The way I look at it: Education costs are not going away and they will probably only increase. Moreover, you can now use these funds to pay for kindergarten and up (not just college expenses), so it may make sense to put away more than you originally thought if you plan to send your kids to a private school.

A nice advantage of the 529 plans over some other education savings options is that the owner of the account maintains control and can move the money to someone else at any point. That means the beneficiary can’t just go and spend this money on whatever they want. Also, and probably because of this, this type of account doesn’t reflect as poorly on financial aid applications as some other options that make the money look more like they belong to the student asking for financial aid (e.g. grandparents opening up a savings account in the name of their grandchild is worse for financial aid purposes).

The only question in my mind is whether to begin to take some of this money out when kids are in elementary school, etc. on one hand, I want the money to keep growing and compounding for college years. On the other hand, K-12 now costs per year close to what college costs (in the San Francisco Bay Area), so it might be helpful to leverage some of this money earlier than college. Ultimately, I think it depends on your specific financial situation and how much money you need during the K-12 years.

Set up 401(k) and never look back

Ever since I started working, I’ve been putting money away into a 401(k), except for the two years I spent in grad school and wasn’t working in the US. I certainly max it out now, although I don’t recall if I was maxing it out in my first few years. I probably was. In any case, it’s almost impossible not to have a million dollars saved in a 401(k) account at retirement age if you regularly max it out throughout your working life.

A 401(k) plan is an employer-sponsored retirement account defined in subsection 401(k) of the Internal Revenue Code. It basically allows you to put away a part of your paycheck before it gets taxed. Eventually, you get taxed on this money when you retire and withdraw the funds, but that’s after years of compounding growth and probably at a lower tax bracket than when you were working and putting this money away.

I love this piece of the IRS code because it comes from an understanding of human nature and helps people develop a very financially healthy habit without much effort.

Here are the key benefits I love:

My favorite benefit is that once you set this up at work, it will just automatically pay your future self first every two weeks before cutting a paycheck for you to take home.
The other benefit I already described: it doesn’t take out income tax until later.
Some employer plans come with an additional benefit of matching employee contributions up to a certain amount. That’s what people call “free money” and most financial advisors would recommend staring with a contribution amount that at least maximizes that match.

The only downside to this kind of account is that you can’t withdraw this money early (before you are 59.5 years old) without a penalty. So, if you wanted to retire early, you better have other savings to last you until 59.5 so you don’t have to get hit with that penalty. I actually think of this penalty as a key feature that helps many people save themselves from themselves. It forces you to keep the money there longer, and time is the tastiest ingredient when it comes to wealth building. So I think the penalty is a feature, not a bug.

Now, how much money can you put away in a 401(k) account? That changes from year to year. In 2020, that amount is $19.5K, and if you are over 50 years old you can add $6.5K more as a catch-up contribution. That’s because those older people are closer to retirement and every dollar they put away won’t have as much runway to grow and compound as a dollar of someone younger. Remember how I said time is tasty?

So, if you put away $19.5K every year for 45 years from the working age of 22 to 67, not accounting for any employer matches or growth and compounding, that adds up to $877.5K. If you assume a modest 5% annual return (conservative for the stock market), compounded annually, you should be able to retire with over $3M. You will still pay taxes on that as you take the money out in retirement, but that’s still a nice number, don’t you think?

Play around with this calculator to get a taste for what delicious time can do.

What does it mean to be financially independent?

Where would you be and with whom if you didn’t have to be anywhere else?

From an early age, I heard about the importance of financial stability and standing on my own two feet. I heard that some things should only be undertaken when that stability has been achieved. For example, I heard that one should only get married and certainly to have kids once one is financially stable. Why? What does that even mean?

A huge percentage of Americans and the World live paycheck to paycheck. That means they don’t really have any savings and spend the money the get from their employer throughout the month after getting it. This is one of the reasons 40% of Americans don’t have $400 for an emergency. You could live like this for a long time, but you would be highly vulnerable to the random events that may occur and not really in control of your life.

So, one way to define financial stability is when you have enough savings to handle random events and not have to spiral out deep into debt, etc. Some financial advisors (e.g. Dave Ramsey) say you should have 3-6 months of cash to cover your regular expenses in your “emergency fund.” That’s a great step on the path to getting control and to be able to take a punch of a job loss or a health emergency.

Still 3-6 months is a short period of time and can only get you through a short-term emergency. I think that true financial stability is when you can be truly independent and not depend on anyone for your financial health. One way to describe this is through the 4% rule. This is a rule of thumb that says you can withdraw 4% of your portfolio value each year without incurring a substantial risk of running out of money, even if you don’t have other income coming in (e.g. from a job). Using this rule, for every $100,000 you have, you’d withdraw $4,000 a year. In other words, if your annual expenses are $40,000, then your portfolio should be $1,000,000. It’s important to note that for this to work, the suggested $1M is not just a cash pile, but a portfolio of stocks, bonds, etc. It should be generating a return. There are many different nuances associated with this rule of thumb, but the basic concept is backed by lots of research: that you can take your annual expenses, multiply them by 25, and that’s how much of a portfolio you should have for financial independence (meaning that you don’t have to work to survive if you don’t want to). Directionally, if you plan to retire early, the rule goes down to 3.5 or 3%, which means your portfolio needs to be larger to provider for a longer time horizon.

There is a financial movement happening now called FIRE, Financial Independence Retire Early. I like the FI part of it but I don’t necessarily think everyone should strive to retire early. Instead, I encourage you to do what you love so you never want to retire and you just get better in your field of work over time and more excited about waking up each morning to get to work. Warren Buffet, who is a very successful investor and is currently 90 years old, says he tap dances to work each day. I wish you the same. That is more likely to put you on the path to financial independence and happiness than many other things.

What’s your Net Worth?

Net Worth is a very important personal finance term that I’ll describe below. Before I do that, I want to make one thing clear: while it’s perhaps my favorite personal finance metric, it is a dangerous phrase because some may mistake it for a person’s actual worth. Despite economists’ attempts, there is no financial way to value a person’s worth. Each one of us is so much more than the money we have in the bank. We are parents, children, spouses, brothers, sisters, friends, doctors, pilots, teachers. We are funny, smart, kind. We are so many things. We are complex.

Since this blog is about personal finance, let me share my thoughts about Net Worth anyway.

At a high level, net worth is just a number that is a sum of two things: Assets and Liabilities. Assets are those things which you own, and liabilities are those things which you owe. Assets are things like savings, brokerage, retirement, college savings accounts, as well as tangible assets like house and car. Liabilities are things like credit card debt, college loan, car loan, mortgage.

Net worth is a great measure of your overall financial health. If you have more assets than liabilities, you have positive net worth. Congratulations. If your liabilities outweigh your assets, then you have negative net worth and it’s time to address your financial health. If your assets are larger than your liabilities by $1 million, then you are a millionaire. Big congratulations!

I like tracking metrics because I am a big believer that what you measure is what you improve. I started tracking my net worth in my twenties in a spreadsheet. In my 30s, I discovered a free app called Personal Capital and have been using it pretty much daily. Once you connect all your accounts, you can see where you are today in terms of net worth – all in one place. The app also lets you track the ins and outs of your money, which I find quite helpful to see when I earn dividends across different brokerage accounts and when my purchases go through (it’s a good way to occasionally catch fraudulent credit card transactions).

I don’t think everyone needs to check their net worth daily, although transactions could be good to check frequently if you have many. I do recommend establishing the cadence that’s right for you and sticking to it. If you do well, you’ll probably increase the check-in frequency. If you start to fall behind, you’ll gravitate towards not checking. I encourage you to stay close to it in good times and bad.

It’s never too early to start building wealth

The earlier you start, the better off you’ll be. This applies to many things in life, and certainly to personal finance. Here are some specific steps you can take:

Whether it’s your first paycheck or the first time you get money for your birthday, put some of it away into a brokerage account. A simple savings account is better than buying stuff, but you are much better off investing in stocks. The $100 you invest early in your life will do a lot more work for you than the same amount of money later in your life through this amazing thing called compounding (like a snowball, your money will grow faster and faster because it will keep adding to the base).
Set up an automated way for you to invest. I put money away towards investing every month automatically, and so should you. This will protect you from yourself and from human nature. The future you will really thank you for it. One of the coolest things about investing regularly is that it lets you dollar cost average (essentially, if a stock price for a given investment goes down, you are able to buy more of it with the same $100 and less of it if the price goes up).
Stocks is probably the asset class that will give you the highest return, so I recommend putting whatever you can allocate to investing to stocks. I think it’s fine to spend a little money on individual stocks of companies you know and in which you see potential. However, I recommend you invest in index funds (these funds simply track a number of companies). Key reasons why I like index funds are: a) they give you an easy way to diversify your risk across many companies, b) they are inexpensive because they are not actively managed.
Vanguard is my favorite brokerage company. John Bogle, who founded the company, is one of my heroes. He invented the concept of index funds and set up his company in such a way that really benefits investors with low costs and simplicity. Check out the index fund VTSAX (Vanguard Total Stock Market Index Fund). This fund basically covers the full United States stock market.
Consume content from which you can learn about personal finance (books, blogs, videos), especially from people who know what they are talking about: Warren Buffett, John Bogle, Napoleon Hill, JL Collins.
Invest your time wisely. You will spend most of your time in your job/career, so make sure that it’s something you love doing. Financially, if you pursue the business field like I did, strive to not just work for a paycheck. You can do this by either owning your own business or by working in companies, which give you stock as part of the compensation package. I have done the latter and have seen a significant return on my investment of time in the companies where I’ve worked.

Key takeaways and actions:

Always put away some portion of your income and do it regularly, ideally into a Vanguard index fund, such as VTSAX. Be a sponge and learn everything you can about personal finance. Be very strategic about your job and lean towards having ownership of the company stock.