How to Become Rich With Patience Part I - Saving Smartly - How I Graduated College With $10,000 in Savings
This is the first article in a series entitled How to Become Rich With Patience. Although I’m not “rich” yet, I am confident that I will get there before long. My definition of rich is the point at which you no longer have to work to survive. In order to get to this point, you need a consistent net positive cash flow.
I decided to write this article after doing some keyword research and found that the words “How To Become Rich” received a lot of Google searches. After all who doesn’t want to become rich? In response to this great demand there are now countless books, e-books, DVDs and home learning courses that offer steps towards becoming wealthy; unfortunately many contain false promises and the ones that don’t require patience and diligence. Becoming rich is not a thirty day affair.
In this series I hope to shed some light on the different paths one can take towards financial independence. Though there are many components to becoming rich, I believe the most important first lesson is learning how to save smartly. In this article I will share four lessons I’ve learned about saving money during my college years.
If you’ve ever read any personal finance, wealth management, or “How to Become Rich” book you would probably have stumbled upon the often quoted message: save early and save a lot. The beauty of saving early coupled with compounded interest over decades is truly amazing. When I started investing in the stock market a little over a year ago my first goal was to calculate how long it would take me to reach a million dollars in my stock portfolio.
I decided that I would invest $10,000 per year and an assume an annual average growth rate of 15%. According to my calculations (see chart above), with my starting principal of $20,000 and another $10,000 invested annually, it would take me until 2026 to surpass the $1,000,000 mark. *Note* - The bottom two lines never reach the $1,000,000 even after twenty years. Although 20 years of compounded interest results in significant gains with only an initial investment of $20,000, the rapid growth shown in the top two lines is unachievable without additional annual investment.
15% return on invested capital may sound like a lot, or it may sound a little depending on what type of investments you are looking into. At the time I was considering only investments in the stock market. Most mutual funds offer realistic gains between 6-8%, which is a bit low for my taste. I decided that I would pick my own stocks focusing on high growth small caps. Small cap stocks are ones with a market capitalization between $300 million and $2 billion. Market capitalization simply refers to the price of one stock multiplied by the number of stocks issued.
Right now my stock investments have yet to yield a positive 15% gain, but I’m not too worried about them. The market is experiencing a significant downturn and temporary losses are to be expected. In order to protect myself against such downturns, I hedged my positions by selling options in the stocks I bought. Stock options can be tricky and I am by no means an expert, but they can be very helpful in protecting against sharp and unexpected price fluctuations. More on this in a later post.
For now I want to share how I managed to come up with $10,000 after graduating and some of the important money lessons I learned while I was in college.
Lesson 1: Credit Cards + Online Shopping = Lots of DEBT
When I started college I had no real sense of how to value money. Since I had never held a real job, earning money seemed like a painless and easy thing to do. Oh how wrong I was. During my freshman year, I didn’t work at all since I was too busy getting acclimated to college life, making new friends and spending lots of time doing school activities (I sang acappella). Freshman year was the first time I was on my own in terms of finances; so like most college students, I signed up for my first Visa credit card and began spending away. I bought books, computer accessories, school supplies and other items with no reserve. Amazon.com became my best friend.
The problem with online shopping and credit cards is that the upside comes instantly, while the downside takes approximately 30 days. It’s easy to purchase things via credit card, especially once the payment information is all entered into the database, without realizing how much money you’re actually spending.
I finished my freshman year with close to $2000 in credit card debt. By the time I realized the pain of finance charges, I was paying over $150 monthly in finance charges.
Lesson 2: Pay Down Debt ASAP
I finished my freshman year with the realization that if I did not find a way to make a lot of money in a short period of time, I’d never be able to get out of this cycle of debt. With the urgency of recurring debt on my shoulders, I found a job during the summer working as an assistant to a first time author. I made a decent amount of money and was able to use most of my earnings to pay off my debt. Since I lived at home, I had very few expenses. I also became extremely frugal; instead of eating out, buying the random candy bar, magazine or drink, I always brought what I needed from home and bought in bulk. I monitored every dollar spent.
When I started my sophomore year, I had approximately a quarter of my debt paid off, but the new school year would inevitably add new expenses; since I lived on the East Coast, but went to school on the West Coast, I was always buying plane tickets. These added up quickly. I was around $1500 in debt by the time sophomore year started.
The only way I was going to be able to pay down my debt was to take up two jobs while at school. Fortunately, I was able to get two work study jobs on campus that paid decently well. I worked about 15-20 hours a week on top of my school work doing research and working as a career counselor. 90% of every dollar I made was used immediately to pay off my debt. I paid my debt off even before the bill was due in order to prevent myself from spending it.
By the end of the year I was debt free. I was so excited that I called up everyone in my family and told them. It was a very proud moment for me.
Lesson 3: Saving Smartly and Staying Debt Free
The financial situation during the remainder of my college years was quite good. After experiencing the pain of recurring finance charges, I never went back into debt again. I only bought things that I had the money for in my bank account; I also became very selective about my shopping, often spending no money on luxuries such as extra clothes or other useless gadgets and toys. Being in college is great for living simply because no one cares if you wear the same set of clothes day in and day out. 
I continued to work throughout my junior year and even went abroad for a year between the end of my junior and the beginning of my senior year.
Going abroad actually helped me save more money because I ended up budgeting even more carefully; in fact, I spent less money on entertainment and food because things were cheaper in some of the places I went (China and Berlin, Japan was so so) I applied for scholarships that would cover my tuition while studying abroad and I was also able to land a summer job that paid decently well. The Federal Government also had a $1000 grant for Pell Grant recipients who were going abroad; that helped pay for my airfare.
I spent a year abroad in Japan, China and Berlin and came back with almost $8000 in savings. Since I was already getting a lot of scholarship for my tuition on campus, applying for study abroad scholarships gave me more spending money; but instead of spending it, I saved it all.
By the time I graduated I had almost $10,000 in savings and a little bit more in loans. Rather than using the money to pay off the loans, I invested them in the stock market. Federal Loans usually have a 6-9 month grace period before interest charges accrue.
Lesson 4: Your Effective Savings Rate is All That Matters
Well almost. Most people, especially college students, look at annual income when considering a job opportunity. However, if your goal is becoming rich as fast as possible, I would argue that your effective savings rate (the amount of money you can put away after taxes and expenses) is more important than your overall income. Sound confusing? Let me explain.
My first job out of college was working in a rural city in Japan as part of the JET program, a grass roots internationalization program funded by the Japanese government to promote international awareness in Japan; the program brings foreigners from all over the world to teach English and work in other capacities organizing educational programs and other community events.
One of the nice things about this job, besides getting to live in Japan, is that your housing is subsidized. Although I was making approximately $34,000 USD, my utilities and living expenses were less than $200 per month. On average I was able to save about $2000 a month, which was approximately a 76% effective savings rate. Since I was living in the boondocks, I had very few opportunities to spend money, which made it easy to save consistently. I left Japan in 7 months with over $10,000 saved; the extra cash went straight into my stock portfolio.
Compare this to an internship that I had in Tokyo where I was making the same amount of money for two months, but I was paying nearly $1000 a month in rent. My effective savings rate was less than 30%. Big difference.
Currently I am living at home and commuting to work in the city. My effective savings rate is between 50-75%. Although it’s not as fun to live at home, in the long run if your goal is to become financially independent as quickly as possible, it makes the most sense. Since I live in New York City, the cost of renting an apartment, even with a roommate, is ridiculous. One year of rent costs, on average, $10,000.
If you save for two years, that money could be used to put a down payment with a fixed rate mortgage on a $200,000 range house which could then be rented out as an additional income stream.
As a reporter I get paid pennies, but since I am able to save on housing and food (I pack my own), my effective savings rate is quite high. In two years i should have more than enough to start investing in real estate, which will further add to my income stream.
My goal is to build as many stable income streams as soon as possible so I can be financially independent. Although many of the things I did may not be applicable to everyone, I hope my own experiences can serve as an illustration of what can be done if you focus on a goal and get creative with saving and earnings.
The important take away from this post is that no matter how little you make, STAY DEBT FREE and save consistently. If you can manage to save $10,000 every year and invest that regularly, you can reach the $1,000,000 mark in less than twenty years with a mix of conservative and more aggressive investments. The more you save the faster it grows
Stay Tuned for part 2 of the series - How To Become Rich With Patience - The Fast Road to a Seven Figures
*Disclaimer* - My experiences and recommendations are meant to be sources for inspiration and education. I am not a professional financial planner or investor so please make sure you do your own due diligence before making any major investments!
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3 responses so far ↓
< ![CDATA[Nice Site layout for your blog. I am looking forward to reading more from you.
Tom Humes]]>
< ![CDATA[[...] has proved invaluable in helping me to save consistently. In my previous post, How to Become Rich With Patience I explained in detail how I graduated with $10,000 in savings by budgeting my income from part time [...] ]]>
[...] I first started budgeting my expenses and income in college when I was working part time as a career counselor and research assistant in addition to my school work and extra curricular activities. Budgeting was a means for me to keep track of my income and expenses, helping me to avoid overspending and credit card debt. Credit card debit is a young person’s worst financial nightmare (it also happens to be one reason why financial institutions are failing, but that’s another story for another time). I wrote about my experience with credit card debt and the process I went through to eliminate my debt and develop a solid financial plan for my future. You can read it here. [...]