How This E-Mail Will Change Your Actions

You will Save and Spend Money more Effectively in Your 20's bringing you closer to the Intellectual Goal of Financial Freedom.

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The Modern Renaissance Man Financial System

One month from now I will officially have been working in the Real World for 5 years.

Over that time I have learned an enormous amount about Crafting a Successful Career, Personal Finance, Saving, Investing, and Building Your Net Worth.

While I only talk actual numbers with close friends (for a variety of reasons) I will say that I am on target to hit the original goal I set of $1 MM Net Worth by 30 well ahead of schedule.

I have boiled down how I’ve done this into a System that you can use (Systems are frameworks for thinking or acting that make complex tasks simple, repeatable and effortless).

My Financial System follows the Acronym C.R.E.A.M. (Homage to Wu-Tang)

C – Career with Performance Based Pay

R – Reduce Expenses

E – Extra Income from Side Business

A – Assets that Produce Income

M – Millionaire

Over time I will write a series on each of these (likely multiple articles on each letter) but today I am going to focus on R – Reduce Expenses.

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Reducing Expenses – What NOT to Spend Your Money On

I graduated in 2015 at the age of 22. I had a job in Investment Banking lined up and passed the CFA Level 1 that June. Things were looking good. I was headed in the direction of my Mission (at the time) – to run my own Hedge Fund. I set what I thought at the time was a solid goal - $1 MM Net Worth by 30.

Between the 22 and 24 I worked in Investment Banking for a year and then at a Hedge Fund. By all accounts, I made good money. Most people would have said I was “killing it” for my age. And relative to my peers I was, but that's not how I look at things. Between taxes and living expenses, Relative to my Goals, I felt like I was pushing a boulder up a hill – putting in an insane amount of effort to barely budge forward, leaving me frustrated.

But beyond the mental struggle due to the distance between who I was and who I wanted to be, another more insidious force reared it’s ugly head – Comparison.

For most people, getting a job/starting a career after college is the first time they have any real money. Because of this, many people start to feel comfortable, if not wealthy, with 5 figures in savings (sometimes less), as it’s the most money they’ve ever had. And when you feel comfortable/wealthy in your own mind and debt markets are flowing – you feel comfortable to spend. The World is your Oyster.

I began seeing friends from college posting pictures of new cars they were buying, new houses they had moved into, trips they were taking.

“How are they possibly paying for this stuff?” I’d ask myself. “I know I make more than them and I know that buying that would be a terrible financial decision.”

It left me angry. Wondering if I was doing the right thing. Should I be spending more? I could buy this stuff. Should I “Live a Little”? It was classic Keeping up with the Joneses.

Looking back three years later, as I close in on $1MM I can say with absolute certainty it was the right decision to avoid these large purchases with Zero ROI at all costs.

I realize now that these purchases would have been me breaking the Cardinal Rule - Do not let what you want now keep you from getting what you want the most.

And what I want most is Financial Freedom.

I call these Relatively Large, Zero ROI Purchases “Pitfall Purchases”. And while these Pitfall Purchases come in many forms here are some of the most common ones to avoid.

1.      New Cars – Large Purchase with Negative ROI (Immediate depreciation). If you can avoid owning a car, do it. If you absolutely need a car buy a reliable model, used, with relatively low mileage. I still drive my car from sophomore year of college.

2.      Non-Rental Property Homes – Large purchase with (typically) low ROI (Most owner occupied homes are not “investments” despite many people using that as a justification). My personal rule is “I will buy a house when I am using cash flow from Real Estate Investments for the down payment”. In modern times people move around far too often to get tied down to a location, stay away unless you know *for certain* you will be living in the area for +10 years and have a family. I still live in the same 1 bedroom apartment I moved into after college.

3.      Material Goods You Do Not Need (Watches, Designer Clothes) – Relatively large recurring purchases (White Shirt with Gucci Logo vs a Plain White Tee from Banana Republic) with Zero ROI – in fact potentially negative ROI as a Plain White Tee will likely look better than the Gucci shirt if you are in shape. These purchases are rarely made for yourself, they are simply conspicuous consumption. Avoid.

4.      Excessive Drinking/Partying – Relatively large recurring purchases with Negative ROI (Hangovers). Avoid excessive partying, particularly partying done to portray an image (bottles at the club every week). The Club is the Home of the $1,000 Millionaire. The guy who pops a bottle of Champagne on Saturday night but overdrafts to fill his car with gas to get to work the next Monday morning. This is an obvious avoid. The occasional celebration is fine, but you should not be doing this on a weekly or bi-monthly basis.

5.      Excessive Travel to Non-Exotic Locations – Relativelyl large recurring purchases with low to zero ROI. I am Pro-Traveling (as you will read in in the next section) I am anti-traveling to LA once a month with The Boys to drink IPAs at different bars and eat soy at different brunch spots then you would in your current city. If you’re going to travel, do something sick.

As always, there are exceptions to every rule (buying a house because you have started a Family and you want a Home for your Kids (Emotional reason as you can still rent a house, but I understand)) but avoiding these 5 Spending habits will put you well on your way to achieving Financial Freedom on the Expenses

side of the Equation.

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Spending Money Effectively in Your 20s

Now that you’ve implemented the advice from the last section and avoided making Pitfall Purchases with High Cost and Low ROI and are rolling in the dough, you might be wondering “What do I do with all this extra money I’m saving?”

The key to spending money in your twenties is, you guessed it, you must get something in return.

You must either receive a Monetary ROI (Business, Investment) or a Personal ROI (Peace of Mind, Improved Health, Personal Fulfillment) from any money you spend in your Twenties.

Here are 5 High ROI Ways to Spend your Money in your 20’s

Bonus (Yes, this Bonus comes before the List) - Emergency Cash Reserve – Build up an Emergency Fund, in Straight Cash Homie (CDs). People different views on how much you should save for a rainy day (3 months expenses, 6 months expenses etc). I personally target 1 year of expenses in cash as I’m relatively fiscally conservative. Occasionally I will go below this if an investment opportunity presents itself and I am low on investment funds, but then my immediate priority is to build it back up to prior level. This will be too high for most, but I love the peace of mind I get knowing I could fuck off from the real world for an entire year and not think twice about money.

Now to The List

1.      Health (Personal ROI) – If there is one thing worth spending your money on it is your Health. You could have all the money in the world but if you do not have your health it is worthless. Get a gym membership, buy high quality food, buy a good mattress, spend a little extra on supplements (if you have the money, not necessary to be healthy). This is the best long-term investment in yourself you could possibly make.

2.      Business (Monetary ROI) – Once you’ve built up your emergency fund to a decent level it is time funnel money you otherwise would have spent on material items to start a business. This comes before investment because the return you will get on a successful business will be much higher than an investment due to the sale multiple. If you make $1,000/Month from Stocks you make $1,000. If you make $1,000 a month from a business you can sell that at 5.0x Annual Net Income and make $60,000.

3.      Investments (Monetary ROI) – Any excess cash that you are not saving, spending on your Health or investing into your business can go into Investments. You can Dollar Cost Average into the stock market or try to develop a specific investment skill set by picking an asset class (Real Estate, Equities, Venture Capital), Picking an Industry (Multifamily in California, Oil & Gas, Consumer Technology), learning everything you possibly can about it and implementing.

4.      Hobbies/Interest (Personal ROI) – Spend money on your particular hobbies or interest. If you like Archery, buy a nice Bow, if you like Golf get some Clubs, if you like to sing pay for voice lessons and If you like cars, by all means, buy a nice car, just be smart about it. I love watches but I still didn’t buy my first real watch until I crossed the $500K Net Worth Mark (Rule of Thumb I use: Never spend more than 1% of your Net Worth on any single Material purchase). If you’re smart, you’ll eventually find a way to make money off your hobbies as well.

5.      Exotic Travel (Personal ROI) – Sky Dive in New Zealand, learn to Surf in Hawaii, take a tour of distilleries in Scotland. Your Travel is that is should be international and that you should have a specific activity you want to do so you don’t just spend the entire time boozing. The goal of travel is not only to relax and have a good time but also to become a more interesting and culturally aware person.

In conclusion, if you avoid large, negative ROI purchases and instead invest your money in activities and goods with High Monetary ROI and Personal ROI you will be light years ahead of the competition on the path to Financial Freedom.

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One Sentence Summary

Avoiding Large, Zero ROI "Pitfall Purchases" in favor of Purchases and Investments with Positive Monetary or Personal ROI will bring you significantly closer to the Ultimate goal of Financial Freedom

MRM

Twitter: @MikeRMedici