Sunday, July 19, 2009

Frugal to Fabulous

There is much to be said for living a frugal lifestyle, and much more to be had by living a bigger lifestyle. The former can and often will lead to the later. As I begin my quest for a second time of wealth generation I feel a need to reflect on the way my former frugal lifestyle led to a bigger lifestyle.

Considering we are broke with no real current assets we need to get back to living a frugal lifestyle which in time will allow us to grow assets and live a bigger lifestyle. The irony in this is that even though I want to be in a position to live as big a lifestyle as we would feel comfortable living the reality is the first time I built our assets to a substantial level I seemed to lose focus on the things that led us to begin acquiring these assets. This will not happen a second time.

Life for both my wife and I started very simple. We are both the product of parents who lived a typical blue collar lifestyle. Each set of parents provided for us when we were young and each in their own way taught us lessons we would use in our life as we grew into adulthood. Our parents did not give us a mind set to live in any way beyond our means but rather taught us how to live within our means. They provided advise on how to save our money for things we wanted, possessions we wanted. but also provided us with little guidance regarding the accumulation of assets to grow wealth. Neither one of us blame them for this because they themselves did not know how to grow wealth. From their perspective they were happy doing the things they did to earn enough to support their families. There is no wrong in this way of living. Each person needs to make an independent decision on the way they want to live life.

My wife grew up in a small country own in the Northwest. She lived in an area where farms were the norm and she had the fortunate opportunity to have her own horses on a small family farm when she was a girl. She also had grandparents who owned a small farm where they had a tractor, cows, and chickens and plenty of dogs. Through a divorce she and her two siblings were raised by a single Mom. Her Dad was still around and involved in her life but he remarried and had a new family. Her dad was a typical blue collar man working in the lumber industry predominant in the area. After the divorce her mother worked the graveyard shift to make rent on a small apartment and to provide for her girls. There wasn't a lot of extra money left for things other than life's necessities. In her own words they were happy but poor. She had to buy her own school clothes which more often than not meant she would buy fabric to make her own clothes. These early life lessons had an impact on her and taught her how to be a frugal consumer.

In contrast I grew up in a suburban town in Southern California. I was a city boy. Both my parents worked hard everyday to support four kids. They earned enough to buy us kids what we needed including plenty of clothes, and many extras. My parents were hard working and instilled in me a strong work ethic. My Mom worked in the bakery industry as a clerical worker which has a side benefit of many goodies in the cupboards. My Dad worked in the grocery business as a butcher so we always had plenty of meat in our household. My Dad was raised on a dairy form in Arizona and started out as a cowboy. He even lost his two front teeth as a teenager riding broncos in the family corral. As much as he talked about the country life when he was older he couldn't wait for his opportunity to leave the dusty old farm life when he was younger. He finally got his chance by enlisting in the US Air Force as a 17 year old. In the service he was made a butcher and developed a talent as a maser BBQ'er.

My Dad was probably one of the few people to serve in Vietnam for all of a whole weekend. His BBQing skills were so well regarded by his military base commander that this commander wouldn't let him be deployed. However, at the request of an army general who was having a big shin dig in Vietnam he was deployed along with 100's of pounds of meats to BBQ at this party in Vietnam. So he was flown to Vietnam to BBQ for the Generals party. He was then sent back to the states after the weekend party to his base in South Carolina. After leaving the service he came out to California, met my Mom and they married. We lived in a small home they bought where my three brothers and I shared a bedroom while my little sister had her own. As a kid I never really wanted for anything as my parents were able to give us a lot by any standards. We had motocross bikes, motorcycles, skateboards, and plenty of sports.

Most of my days were spent playing football and baseball 24/7. I just couldn't get enough of either one of these sports. I have often told my own kids that one of the best teachers in life is sports. A person can learn many things about success while competing in a sport. I am reminded of one of these lessons in my own childhood. I think on e of the best lesson I've ever learned came at age 7. I remember begging the President of our Little League, who was on of my classmates father, to let me play baseball when I was 6 years old. But the league had a rule that you couldn't play until you were 7 years old. So I waited and signed up to play the next year, and I was placed on the 7 year old Red Sox team. I wanted to play so bad but I wasn't very good. In fact I was the worst player on my team. I was the kid they put out in right field for the minimum amount of time they were required to play me. I was crushed. I wanted to play so bad but I couldn't throw very good and I couldn't catch fly balls. I also had a hard time hitting. I just want very good and I knew it. My coach was a nice enough guy. He wasn't mean or hard on me. I think he knew how much baseball meant to me. So after our last game he did something for me I'll never forget. He pulled me aside and told me what I should work on during the off season. He told me to play catch with someone everyday, and to ask my Dad to throw the ball as high as he could so I could practice catching fly balls. He told me that if you worked hard everyday you could be one of the best baseball players next year.

As I reflect back this was the best advise anyone could have every given me. "If you work hard every day you could be the best". I remember his words. These same words can be applied to anything, at any point in life. I have often thought of this advise. I remember my last day working in the corporate world and thinking back on those words of advise. I used these words to work hard everyday so I could be the best. I have been the best at just about everything I have done, except for the most important thing which is hanging on to money. I have been the best at earning, but as I said keeping it was more difficult for me. I was good at playing offense but I struggled at playing defense. I need to change the way I approach defense so that I can give my offense and opportunity to win.

Back to baseball. I used my coaches words as new found ammunition to play catch every day. My brothers and neighborhood friends got tired of me asking them to play catch. In fact it became a running joke in my neighborhood that I would make the rounds to everyone and ask them if they wanted to play catch after school. Even my own Dad couldn't keep up with me. He lasted about 10-15 minutes and that was about all he could handle a couple of times a week. My work during the off season resulted in considerable arm strength and this didn't escape my new coach the next year. As irony would have it our first game was against my old coaches team and guess who was the starting pitcher. Not only did I pitch several shutout innings, but I think I hit a couple of doubles. He asked my mom after the game what had happened to me. She told him he just followed your advise and played baseball everyday. She also told him I signed up for every baseball training camp I could find. There wasn't much in terms of baseball training for kids back then but I was able to find a couple of good camps put on by the Los Angeles Dodgers near my home. And as luck would have it I also made friends with a major leaguer who played for the Kansas City Royals and home recovering form a bad leg break that summer. He was a great inspiration to me and helped me quite a bit with my hitting technique. I never forgot this and remembered him many times.

You see he ended up being the neighborhood drunk who hung out behind the local tavern and in front of the liquor store next door asking for money. My friends used to laugh at me when I was a teenager because I always went out of my way to give him a little money or took him next door and bought him something to eat at Jack in the Box. He did me a great favor when I was young and I did everything I could to remember that every time I saw him. I ended my second baseball season and many subsequent seasons through high school as on of the best baseball players on the field. If we keep our minds open to learning, and remember those who have taught us, we can all reflect back on situations that enabled us to succeed.

GO in to greater detail about being frugal out of necessity.

When my wife and I were in our early twenties just starting out we painstakingly set money aside to provide for a future we envisioned. The future we saw for ourselves was one of living in a nice big home in a safe neighborhood near the ocean where she could stay home and raise our yet unborn children. For better of worse we thought wanted to to be able to give our kids a chance to experience things we were never able to experience when we were children. A life of abundance filled with luxury.

We lived a simple but fun lifestyle in the early years of our marriage. We went skiing on winter weekends, and spent the spring and summer months living on our sailboat anchored in the harbor during long weekends. This was a time when we could afford these luxuries as we did not have the responsibilities of kids. We both worked full time jobs but we knew we needed to save and invest money if we were going to be able to break away from the corporate world.

So we began to save and invest. Our first investment was a one bedroom condo we bought and lived in. We bough this condo a year before we were married. All of 20 years old and we had a mortgage. I had been reading the Wall Street Journal for several years (my aunt got me started reading the paper when I was a teenager) and my interest in stocks was increasing. Even though our lifestyle and our household expenses didn't leave that much left every month we stayed focused on living frugally so we could save and invest in the stock market.

Living frugal can sometimes be misinterpreted. We lived a frugal not cheap lifestyle. We kept a watchful eye on our debts only paying for things when we had money to but them in cash. We lived well and spent money on having fun but watched what we spent. We didn't take vacations, we didn't buy jewelry, and we didn't buy things on credit cards. We had one credit card which was an American Express green card and that balance had to be paid of at the end of each month. So if we didn't have the money for something we didn't buy it. We did however begin the establish some credit and made our one and only purchase of stuff using a JC Penney's credit card. We had a new house with no furniture and when our families and friends came over to visit us they had no where to sit. The only thing we had was a couch my wife's Dad bought us for $50.00 at a garage sale. So we bought four new living room chairs and a foot stool for $900.00. This was the biggest purchase on credit we made besides our house which cost us $69,500 dollars. This remained in place for many years. We just didn't like the thought of having debt. We knew that if we were frugal with our money we could do the things we wanted but would still have money left to start investing.

I followed the market at the time by looking at stocks in the Wall Street Journal and by reading Business Week and Forbes magazines. When we had saved $2,000 I opened a brokerage account at a discount brokerage house. Although my account was opened sometime in early 1987 I didn't buy any stocks when I first opened the account. Coincidentally I also opened an unsecured credit line with a bank for an additional $5,000 which we originally intended to be use only in case of an emergency. Little did I know the market was about to provide a big opportunity.

On a Monday in October of 1987 the stock market experienced its largest single day decline. This decline sent markets around the world whirling. The very next day I took a check from my emergency credit line and deposited it into my brokerage account. I then bought as much Apple Computer stock as I could. I held this stock for several months following the decline and in a short period of time had doubled the amount of my original investment in my brokerage account. I sold all of the stock and returned my original credit line to my lender. The money I made on this stock investment wasn't a whole lot in the scheme of things but it allowed me to see how you could make money from knowing something about companies and following markets. I only made a couple of thousand of dollars but to me at the time was a lot of money. this also allowed me to make more stock purchases with the monies I now had in my brokerage account. couple of years later this money provide the seed capital allowing me to leave the corporate world for the world of the self employed.

To fast forward, I left a secure job with outstanding health and retirement benefits for the life of a self employed professional. I can tell you when I did this my family and my wife's family thought we had lost our minds. You see we had one child under 2 years of age and while my wife was pregnant with our second child. We also lived in a one bedroom condo which meant that with our family growing we were going to need a larger place to live. My wife continued to work so we would have health insurance for the birth and for the first couple of years while I established my business. We ended up selling our condo for a tidy profit and I took the earnings a put them in a savings account. I then bought us a house on a land purchase contract for $5,000 down from a couple who was being relocated and needed to sell. I sold our condo for $116,500 dollars, taking back a note for $15,000 dollars for three years which left us with a little less than $30,000. The interest rate on the note was 12% interest so we also had a little income coming in from the note.

Business was difficult during the recession of the early 1990's, but I followed my little league coaches advise and I worked hard everyday so I could be the best. And I did become the best at what I did. Within three years I was making a million dollars a year in a very cruddy economic environment. I was fortunate to have learned business in a bad economic environment as I have fallen back on the the skills I learned during this period many times during my career.

Once I started earning money we did what most young people do, we moved up. We bought a big home, in a safe neighborhood near the beach. We bought a mid level new car, on payments, and we started to think about ways to invest some of our money. After making a lot of money for several years and being accustomed to a smaller lifestyle our new bigger lifestyle started to catch up on us. I had a new big lifestyle to support with a new big mortgage, a new car payment, private school tuition for my oldest child, and preschool tuition for the youngest. I also had new business obligations as I took on a partnership interest that I had to cash flow every month. By the end of the first year in our new big home we were about broke.

After the scare of this money shortage I started to refocus on putting our earned money into investments that would pay us cash every month. We made a conscious decision to put every dollar we made that was above our monthly living expenses towards some kind of investment. And we did. We bought stocks, and two investment buildings that next year. And these investments took every dollar we had and paid us almost nothing in cash flow. After the mortgage and all the building expenses we did have any cash flow. We took on some risk in buying these buildings but it was a calculated risk. We bought the buildings because I knew I could turn them around due to the current tenant situation once we closed escrow. The seller I bough the buildings form had a long standing feud with the tenant occupying both buildings. And the tenant and landlord had already sued each other and were not on speaking terms. I also knew the tenant wanted to exit his leases but he knew the landlord wasn't about to release him from the leases.

Armed with some information in just a couple of months I was able negotiate a new long term lease on one of the buildings with a company across the street which alleviated the original tenants rent obligation, and he was very happy about this, and within a couple of more months was able to find another tenant for a longer term lease on the other building. The original tenant was paying $7,000 in total rent for both buildings when I bought the buildings. My two new tenants agreed to pay me $5,000 each in rent for these same buildings. So in just a couple of months I was able to increase my cash flow on these buildings by $3,000 per months and have two new long terms leases on the buildings. Our original investment, cash out of pocket, was less than $100,000 which I borrowed on a credit line. I bought these buildings on a ten year note and the rents were covering the fully amortized ten year mortgage and all the other property expenses. Now I had an investment that was almost paying for my household living expenses and the tenants would be paying of my mortgage in ten years.

Just as things started to seem to get back on track we started to get entrenched in our new life in our new neighborhood with our new friends. We met many new friends through many new activities, swim team. little league, bobby sox, youth football, etc. Many of our new friends invited us to dinners, ballgames, boating trips, ski trips, vacations to foreign countries, and many other fun things. And we wanted to do a lot of new things with these new friends. So we did. And this was the start of our new lifestyle, one based on fabulous instead of frugal. We started living an out sized lifestyle. We sacrificed spending our passive income from investments on extra curricular activities. This also led us to upgrade our life with yet newer more expensive cars, a boat, and many other extras. Upon reflection this was a time when a Y in the road and we chose the lessor of the two roads.

Living a big lifestyle is something that drives people to excel. And it is this desire to excel that drives most entrepreneurs. After several years of living in an affluent community living a bigger lifestyle I could see that I was beginning the lose some passion for what I was doing for a living. I continued to work hard because I had to in order to keep up with my new lifestyle but I just wasn't getting the fulfillment out of it like I used to. I had hit a bump in the road. I had been operating at a break neck pace for so long I had become totally burn out. However, I couldn't diagnose this burnout as I was living through it. It is only now that I can clearly see that maybe a bit of time off would have helped me to rejuvenate myself. But you know the old saying, everything is 20/20 in hindsight.

As I continued to struggle with long hours at the office and being away from my family most of the week I started to think about ways I could start a new business that would allow me to be closer to home more often and would also allow me to earn more than what I was making. After all I wanted to coach my kids in their sports and be there for all of their activities. I had also met a couple of friends who were like me investing regularly in both real estate and other investments. One of these friends approached me with the idea of starting our own real estate develeopment company. At first I was a little reluctant in accepting the idea but the moe we talked about it the more I found the idea intriguing. Both of our backgrounds could compliment each other and we knew the timing would be pretty good as we were just starting to recover from a recession so the market would more than likley be there for new developments.

I need to say, I think the world of this friend, and at the time thought we would work well together. After all we were family friends with each of us having a good relationship with each other and the others spouces. We had spent much time togeher with our families doing things in and out of our community. But, and this is a big but, you need to be careful in the parners you keep.

My new business partner and I started our new real estate development company in ealry 1997. This company was to be focused on building business parks in California. We got of to the races with a slow start. It was much moer difficult to begin as a developer than either one of has envisioned. In hindsight I know know our problem was a lack of capital. Had I know then what I know know I would never had started this company. But at the time we moved forward with litle regard to having capital as we were being told by "exeperts" in finance that if we had the projects the money would be there. We found plenty of project to to work on and spent many months, a couple of years, working on these projects. Only to find that when we got into some deals that my new partner had very little practical expereince in putting developments together. He had always worked for a larger developer as a land improvement attorney and land specialist but the further we got along in looking for development projects the more I noticed he didn't have the experience I thought he had. I will also take my fare share of the blame for our eventual failure as I to didn't have all the experience I thought I had once we got into projects. With two inexperienced guys trying to run a development company we made a lot of mistakes.

The most important mistake we made was listening to the "experts" in finance and taking their word that the money would be there when we needed it. Because it wasn't. Neither one of us had the real capacity to cash flow the various things needed to be done in the early stages of development in order to get the development to the point of getting financed. What we should have done is find investment partners to share in the development who could have put up the the seed capital each development needed in oder to get the construction financing we would need to complete each development.

This was an expensive lesson for me. We ended up spending just short of three years of our life not making a dime on any of these developments. And I was still living this bigger lifestyle and because I wasn't sure how things were going to workout I also kept my old buisness partnership and had that monthly cash flow obligation. By the time we closed the development company I was totally upside down in my personal finances. I had taked on more debt to finance my lifestyle and was was using every bit of my passive income and this new debt to keep on living. This caused a huge cash flow crises for us just prior to us closing the development company. I was asset rich but cash poor. And I had to do something about it quickly.

Around this time one of my tenants in the two buildings I had bought several years earlier approached me to buy his building and the building next door. He was in an expansion mode and said he needed to use the neighboring building once the lease on that building expired. He had asked me to sell him the buildings six months earlier but I had declined. I told him I wanted to keep the buildings as a long term investment. In the interim I had received notice I was going to have a couple of major repairs to the buildings as they were both going to need a new roof soon, and one of the buildings had some foundational issues that neede to be fixed. These were not goint to be inexpensive repairs. We were looking at $150,000 to make these repairs. This was in addition to my current cash flow crises. After talking it over with my wife we decided that maybe we should start to think about selling the buildings to the tenant who had asked to buy them earlier that year.

When I approached the tenant to see what he thought about buying the buldings he immediate said he was interested. He asked me what I thought I would be willing to sell the buildigns to for and would kind of terms. I told him I would need for him to make me an offer, never be the first to make an offer when at all possible, so he did. He offered me about 20% more than I thought the buildings were worth. He also told me he would buy them at this price but that I would need to agree to carry a 2nd Trust Deed for 10% of the purchase price. After discussin this with my wife we agree to his price and terms.

The sale eventually closed and we now no longer had the repairs hanging over our head and could solve our recent cash flow problems. The problem was we now had a lot of cash but a reduced amount of passive income. The note payment was helpful as it paid is $2,000 per months in interest but it was only for five years when the baloon payment would be do. This is were I thik we made our biggest mistake.

We did not re-invest the sale proceeds from our sale into other investment income producing property. Instead we used part of the proceeds to pay off our debts and then used the rest to invest in the stock market. This was early 2001 just months before the tech bubble exploded and we were fully invested in the market. When the market crashed we took a very large loss in our stock portfolio. In fact we lost clsoe to 40% or our invested assets. This loss was huge, and accounted for a good deal of our investable assets. We now had sold our buildings that paid us a very good passive income and had used part of the proceeds to pay off a good amount of debt, and now had lost a major part of our assets. Big, big mistake!

I look back at these losses, the building sale and the stock market losses, and can see the error in our decisions. We would have been better served to have taken the building sale proceeds and bought more investment income producing assets which would have over time increased our income and increased in value. The buildings we sold were rented for $12,000 when we sold them and today would be paying somewhere in the neighborhood of $20,000 a month today. You can see what poor planning can do to your income and assets base when you don't have a plan for the continuation of asset growth. Please use my experience to plan for the growth of your assets. You do not need to learn this the hard way, as I did, if you plan properly.

I also went on to start yet another business and experienced a total loss in this business during the recession of 2008-2009. The business was a very large business and cost us millions of dollars in losses. Half of the losses were capital we invested in the business and the other half in debt. As I'm a person of principals I have not and will not consider bankruptcy. Its just not an option for us. We are now confronted with high six figure debt obligations and a reeduced lifestyle. I can handle the reduced lifestyle just fine. But I still have a mortgage to pay and two kids now in college.

Ok so I've told you little about some of the mistakes we've made which brings me back to the beginning. We are starting to rebuild our financial life and need to start from nothing. We still have our home which has no equity, I'm even with the sale vs debt, but it is somewhere we'd like to remain for our kids and in the coming years grandkids to have as a home base. Plus we're tied into the comminuty now with many friends and church and would prefer to remain here. My wife and I have discussed how to begin again from scratch and we've decided to go back to living a lifestyle we lived when we fist started to invest and acquire assets. We will begin by living frugally, not cheap, but frugally and take every dollar we make a distribute it according to a plan we have mapped out for living expenses, the repayment of debt, and the accumulation of assets. Below is a rough draft of this plan.

Income Distribution

Income Taxes 25% of gross income

Essential Household
College Tuitions

Hard Assets 35% of Net Income
Real Estate
Silver & Gold

Soft Assets 25% of Net Income
Stocks (Soldi High Yielding Dividends)
Dirivatives (Options, ETF;s)

Debts Repayment 35% of Net Income
Personal Loans
Business Loans

Tithe 5% of Net Income

Get out of current immediate mess THEN build 4 to 6 months of living expenses THEN distribution of income as above

The most dificult part of this plan will be to remain disciplined. Grow assets. Assets, and income from assets, only buy more assets

Every month we will account for all incoming income. From the gross income we will use what is needed for household and education and THEN taxes. We will then build the cushion of 4 months to six months living expenses to account for the unreliability of our income. Once we reach 4 months cushion we will begin to distribute income in accordance with this schedule. This will allow is to continue to live in our home, repay debts, and to accumulate assets to insure our future.

While not detailed in this post I do plan to aggresively accumulate real estate assets with the assitance of partners. Experience in the field of investment real estate should allow me to access capital and bring on strong partners to accelerate the production of passive income.

To your,

Health, Wealth and Happiness

The information contained in this site consist of a series of articles which comprise "My Story and I'm Sticking to it". The information contained herein is sole opinion of the Baron Von Savings. The Baron is not a professional money manager, tax expert, accountant, attorney, or stock broker. You should consult with an appropriate professional before making decisions concerning your personal finances.


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