Monthly Archives: August 2015

Why CPAs Are Terrible With Their Finances

As I write new posts, I do a lot of looking back to the past. I want to be able to pass along the mistakes I’ve made, so others do not make the same mistakes, and to share the things that have really put me ahead of the game.

As a kid fresh out of college, the people I looked to most for personal finance advice were my seniors at work. They were probably four or five years out of college, CPAs, and I thought they could enlighten me on getting ahead with my finances. This seems like a decent idea, but the problem was, the people I was taking advice from had car loans, overreached when purchasing a home, were day trading stocks, etc. I started to notice this when one of them was eating bologna sandwiches for lunch on the regular.

I was in my early 20’s and instead of saving up for an emergency fund, or accelerating my student loan payments, or contributing to an IRA, I was taking penny stock trading advice from my coworkers. I assumed that since they had their CPA, they would know about personal finance and personal income taxes. These are untrue assumptions based on a few reasons.

Number One – No personal finance education is taught in accounting classes

As I was getting my accounting degree, there was one class on tax and only a small part of the class was on personal income tax, and NO classes on personal finance. I did not encounter a class that involved personal finance until my masters program, and that class was an elective and therefore not required to graduate.

From what I recall, I’m almost positive that no personal finance knowledge was tested on the CPA exam. There are four tests which make up the exam, and only one part of one test was on personal income taxes.

Number Two – Accountants may become very specialized

Just like any career after years on the job, accountants find themselves in an niche, and perhaps specialize in one area of accounting. One year I had a question on qualified dividends and asked my buddy who is a tax accountant by trade, figuring he’d be able to help me out. Well it turns out he did corporate tax returns for one huge corporate client basically all year long, and had no idea about personal taxes and relied on TurboTax to do his 1040.

Number Three – “Financial adviser” internships in college are very deceiving

Some of my friends received “financial adviser” internships during college, some of which were accounting majors. What these jobs really were was a way for large insurance companies to peddle their high commission insurance products on the interns’ friends and families. From what I saw there was no actual advising going on, and this probably gave students and their friends a poor perception of what financial advisers really do or at least should be doing.

Number Four – Their bosses have very high incomes

This right off the bat leads to lifestyle inflation. When I started working I became very star struck by the partners in the firm I worked for. They made a ton of money, and some more senior partners at bigger firms push seven figure incomes. They all have summer homes, spouses that don’t work, and go on amazing vacations. One partner at the firm I worked for right out of college even raced Porches on the weekends (he owned the Porches).

This was very mesmerizing to a young 20-something professional. People start to think (myself included) “well if I’m going to be making hundreds of thousands of dollars in 15 years, why save now?” To try and keep up with their superiors, CPAs will start to stretch themselves financially. They’ll buy cars on credit, overreach for a home, and spend, spend, spend. Basically the “I’ll spend now and save later” mentality sets in.

Moral of the story is don’t go to your neighbor or coworker who has a CPA for personal finance advice, because unless they have been specifically trained, or they have taken time to personally research and teach themselves, you’re better off listening to strangers on the internet*. I know the strangers on the internet approach has definitely helped me the most.

Who did you take personal finance advice from right out of school? Has taking personal finance advice from strangers on the internet worked out for the better?

* – Just to be clear, take this with a grain of salt and consult professionals before you make any financial decision 🙂

The Cost of an Education

Last week I posted about how I just crossed the six figure mark with my net worth. Out of that post came some comments about my student loans which got me thinking. Everyone’s financial journey through college is different. Some people leave college debt free, while others are less fortunate and might be paying for their education for at least a decade. Below are a few examples of scenarios of people I’ve come across through my collegiate and working years:

  1. Parents had a college fund set up for them from birth, paid cash for whole education. Left college with zero debt.
  2. Lived at home for first two years while attending community college. Transferred to university after two years and maybe took out a couple small loans.
  3. Went to a private school, funded everything themselves. Left college with ~$100k of student loans.
  4. Grew up in single parent household. Grants, financial aid, and scholarships covered everything. Left college with zero debt.
  5. Killed it in high school. Was in all the clubs. Crushed the standardized tests. Scholarships paid for almost everything.

Personally, I was a mixture of many of the scenarios above. Below is a little peak into my pre-college and college years, mostly from an expense standpoint.

High School – I always tried in high school and got good grades. Once junior year rolled around I started enrolling in Advanced Placement and college cooperative courses. By the end of senior year I had over 20 college credit hours completed, all at a cost of less than a thousand bucks total. I also did well on the SAT’s and secured a half tuition scholarship to my state’s university.

College – Grandma and Grandpa covered my first semester freshman year. Aren’t grandparents great?! Loans covered second semester. After freshman year I calculated that I could actually graduate college in three years, if I stuck exactly to a course plan I mapped out. Since I knew I was responsible for a majority of the cost of my education, I figured out it was a no-brainer. Loans covered years two and three (with some help from my parents), and I graduated after my third year. At this point I had taken out approximately $29,000 in loans.

Master’s – A week after I graduated with my Bachelor’s degree I started my Master’s program. The program ran about $20,000 but my employer was footing the bill for half. Therefore I took out $10,000 in new loans to cover the rest of the balance. I worked while obtaining this degree, and it took me just over a year to finish. It was a tough year but I definitely wanted to get it over fast, and I wasn’t going to suspend my career while getting it.

I always had jobs in high school through college and that covered my books, eating out, trips, and of course beer. All said and done I walked away from college in about four years with a bachelor’s and a master’s degree and about $39,000 in student loans (not including interest that had accrued in the meantime).

Overall I think I made out pretty well. $39,000 in loans for two degrees wasn’t too bad, and I knew people who were far worse off. The monthly payments were definitely manageable for me and I was throwing any extra cash I earned at the loans with the highest interest rates as soon as my income started coming in. I even paid them down while they were deferred when I was obtaining my second degree. As you can tell I was not a fan of them and wanted them to disappear fast. Today my balance is below $8,000 and the interest rate is quite low at 3%, so I don’t have as much hate towards them anymore.

My key financial takeaways from my college years are:

  1. Take advantage of classes in high school in which you can earn college credits on the cheap.
  2. Apply to both public and private universities as the financial aid packages and scholarships offered will differ. I only applied to my one state university since it was the only place I wanted to go. I wish I had applied to some private schools as well since with my grades and test scores, I probably could have gotten a healthy financial package comparable or even better than what I received at the state school.
  3. Apply for as many scholarships as possible. I didn’t really take advantage of this, and I really wish I did.
  4. Major in a degree that will get you a decently well paying career right out of college. I’d definitely say go the STEM route or business (i.e. accounting or finance).
  5. Always have a part-time job to help pay for books, food, and fun activities.
  6. Take advantage of your employer and encourage them to help foot the bill of further education.

Sometimes I wish I just went into a trade such as carpentry or electrical, and began earning a decent paycheck at 18 right after high school. But then I think I wouldn’t have the finance and accounting background I have today to enable me to be diligent in my path down the financial independence lane. Also I don’t think I could put a price on the friends I made and my experiences. College was definitely the way to go for me, even after figuring in all the costs.

How did you finance your education? Any tips for people starting to plan their college careers? Was it worth it?

The First $100k is the Hardest!

Jason from Dividend Mantra recently asked “Is The First $100k The Hardest?” I can officially answer that question with a resounding “YES!” as I just crossed that barrier last week. Woo hoo!

Man was I ecstatic! It’s hard to believe that I just started on this journey to financial independence last year, and really didn’t get serious until the end of 2014. In the past 365 days I have been able to increase my net worth approximately 67% to over $100,000! And that was without any windfalls, just hard work and dedication.

Last year I was already somewhat “decent” with money, but I could have been a lot better. I was contributing over 10% to my 401k. I had sold my car as soon as I moved to NYC. I was paying down my high interest rate student loans first. I was never someone to just shop for the hell of it. I had a decent job. So I’m not going to deny, that the cards were already stacked in my favor. It just took one conscious decision to knock it out of the park and really pursue financial independence to really get the ball rolling.

To get to where I am, the first thing I did was take a look at my retirement savings. I didn’t have an IRA and I wasn’t maxing out my 401k. So I logged onto my retirement account website and reset my 401k contribution rate to a percentage that I knew would get me to the IRS contribution limit.

The second thing I did was look at my expenses. I canceled the stupid $60 a month clothing subscription service I was a part of. I reduced the amount I was going out to bars and clubs in NYC, and “but everyone else is doing it” was NOT going to be an excuse anymore. I began to cut down on meals out, and began shopping more at the grocery store.

Fall of 2014 rolled around which is open enrollment season at work. I selected the HSA medical plan option and set my contributions to max out for 2015. I then opened up a Roth IRA with Vanguard and basically threw all this “new” money from cutting expenses straight into my Roth IRA. Anything left over goes into an after-tax brokerage account with Vanguard.

That’s the quick and dirty of how I got here, now onto the good stuff. What are my numbers?

123

Cash – Checking account, plus money market account, minus outstanding credit card balances.
Post-tax investments – Mix of individual stocks and cheap Vanguard index funds in brokerage accounts.
Tax advantaged accounts – Pre-tax and Roth 401k, Roth IRA, and HSA. The Roth 401k is from previous years, I know better than to contribute to something other than pre-tax now!
Cash-balance pension – I have a cash balance pension plan with my current employer that I’m fully vested in. I believe if the balance remains small I can roll into an IRA when I leave, but if it gets higher I unfortunately would have to leave it alone until standard retirement age.
Student loans – These puppies are at 3% and I’m not really in a hurry to pay them off.

Man it’s been a wild ride, and it hasn’t even been that long! I’m just excited for what’s next. When I calculated my financial independence day I thought I would get to $110k by the end of the year, but as long as the market cooperates I should be able to beat that.

I definitely want to thank this whole personal finance community that doesn’t shy away from taking time to share their stories and best practices to help others like myself achieve their goals!

Is your net worth progressing as you planned? Have you crossed any milestones lately?