Personal finance writing is full of the saying pay yourself first.  This made sense to me theoretically since you need to save, to build wealth.  However, from a practical sense I didn’t know what that meant: How exactly do I pay myself before I pay a bill?

After further inspection, I came to the conclusion that sticking to a budget is a way to pay yourself first.  The idea of a budget is to set an upper limit, the most you will spend for a time period.  The complement of the budget is the minimum saving you will accrue in that period.  In this sense, the budget allows you to pay yourself, with the remainder.

Finally after deliberation and a moment of eureka, I came to the conclusion that you could rearrange your bank accounts so that the only cash flow inlet your expense account sees is the budget.

This flow ensures that you invest a minimum amount, which is the mathematical complement of the budget.  This is a way to ensure that you pay yourself first, at least as I understand the statement.

My pay goes into a high interest savings account, which then gets separated into investing and an expense budget.  With the investment income going to expenses, my flowchart has a Rich Dad, Poor Dad influence.  The arrow doesn’t necessarily need to go there, depending on personal interests.

For setting budgets, my personal favorite book on the topic is Your Money or Your Life.  I like that book because it provides a rational way to set up a budget and ensure that you are not over nor under, on spending.  The method is subject to change, scale, and variation, not a one time recipe.

I try to spend as little time thinking about investments, but some times it gets the better part of my brainz.  The metric I focus on most is passive income: how much I earn by just being.

I update my Google Document a couple of times a month.  In the document, I have:

• individual data: the points above are a sum of dividends, interests, and the like
• a 10 period rolling average
• a regression
• and, a 95% confidence interval.

I know focusing on one metric is not a good idea; however, as an advocate for sustainable designs and graphs with dense and easy to understand material, this is my favorite metric.  I usually see people track net worth.  To me, that is a more complex way to imagine retirement/laycation cashflows.

I have only seen one retiree’s cashflow, the Canadian Dream’s.  I’m interested in non-conventional, home-made trackings. To me, conventional is a brokerage statement.

For some reason when I hear the word capitalism, I think of the characters Randolph and Mortimer Duke from Trading Places. The Duke brothers, Randolph and Mortimer, are crooked investors on Wall Street.  The two only care about themselves, which is apparent in the plot.  The brothers make a friendly bet, for $1, over the welfare of one of their employees and a street begger, whom they force to trade places.

These brothers are the antagonists.  They have so much money that they need not worry about anyone else.  After dabbling in readings about economics, I’ve come to a turnabout.  These characters are capitalism’s heroes, regardless of their poor morals.  Their income thrives off of their investments: their company’s equity, assets, and employees’ knowledge.

Investors in capitalism encourage spending: Investors get cashflow from consumers.  I think society has a misunderstanding that the rich have assets or the potential to consume assets.  But in reality, the “rich” people are the ones who have a sustainable, passive income that is higher than their expenses, like Mortimer and Randolph.

A sustainable, passive income that is higher than your expenses does not require a lot of buying power, i.e. cash or assets.  And, this cashflow is one form of retirement that will last forever, so you can rest your worries from Social Security, 401k, or whatever other method the government encourages.

America’s status quo is to have a job that covers your expenses.  A lot of Americans live at a level they cannot afford, including maintaining an average credit card debt of $8,000.  Investors have interestingly marketed irrational consumer behaviors, solely for selfish reasons.

I’m not the first to these thoughts.  Rich Dad, Poor Dad is an interesting, light read detailing cashflows more indepth.  Early Retirement Extreme provides a unique paradigm the stereotypical American would probably find absurd, as he retired in his early 30s due to his low cost of living.  I find a view considering time as a key factor for investing to keep investment thoughts and plans optimistic.

Often times I will see an image encouraging people to invest earlier than later. Here is the first picture I found on a Google Image search for “investment 401k.”  These graphs emphasize that time is a key factor for investing: The sooner you invest, the faster you compound your returns.  (And, also the sooner you give an investor your money.)

This concept returned to my thoughts after playing with some of my personal financial goals.  I saw the same pattern, in a visual graph, no matter how I adjusted the dependent variables, such as time, initial investment, annuity investments, and interest rates.

This second image has an initial investment of 100 over 30 periods, in the upper left hand corner.  In the same image, the other two graphs display an independent, 20% increase in time, from 30 to 36, and also in the initial investment, from 100 to 120. This is when I realized that the first graph always has at least two scenarios to show perspective. Otherwise, the pattern is a fractal. “Zooming in” or “zooming out” of the time periods will render the same image (unless there is perspective). Natural fractals are seen on the shoreline, mountains, or even man-made buildings. Often times something of known dimensions, like a person, is included in the picture to give the observer perspective on the relative size.

Unless you overlap the lines onto one graph, the latter rendering with graphs on different axes is a cumbersome display of the importance of time in investing.  This is why perspective is added on the investment literature I have seen so far, like in the first graph.

My next curiosity is to quantify how important time is in investing.  Using the same basis, how much time can I lose if I invest 20% more of the initial amount, for a total of 120, at a later time?  By balancing a future value formula, for 100% of a present value and then for 120% of a present value, the answer is 3.74 time periods, at a 5% interest rate.  This graph should visually confirm that.  This is intuitive.  It is simply catching up on the opportunity cost of compounding interest.

This lost opportunity cost in time can be generalized, as a function of how what percentage of money can offset.  In my example above, the offset would be 0.20, and the interest would be 0.05.

As the real rebel that I am, I plotted time as the independent variable, even though in the formula above I have time, “n,” as the dependent variable.

I used my perspective learning, and plotted two different interest rates.  I feel like the plot summarizes opportunity cost of investing well.  It is also interesting to note that money can be doubled in 15 years, based on median historical rates.  I feel like this calculation is just a generalization from the ideas of net present value and internal rates of return calculations, which makes it that much better of an adventure in missing the point!

I find it interesting when a person, who rarely makes stock trades, reacts to a short-term stock or market trend.  The short-term could be a day, a week, a quarter, or whatever.  That’s not my point.  People, specifically during this downturn*, seem concerned about low stock prices.

To me, low stock prices seem to be the easiest decision I know of: buy, buy, buy!

*Perhaps, this downturn and my relative life experiences have something to say.  People who have lived through the Great Depression probably have a greater emotional reason to save the last pieces of their soap bars, like my grandfather did. . . as opposed to keep buying pieces of paper, I mean keep buying a part of a public company.

But when the prices are high, I think more reflection is required.  For example:

• How long am I looking to hold, without cashing out?
• When do I think particular stocks will peak?
• What time do the Simpsons come on?
• Is there a better investment at this (most likely upturn of the economic) time?

As with all things though, it probably depends on your relative situation.  Being a 20-something that is young, dumb, and full-of-cum, it is probably easier for me to say “risk it man,” as opposed to a parental figure with a mortgage, insecure job, and/or a coke fix.

. . . and, maybe when you are in the situation of low-risk, barrowing (at these times) may seem just as obvious.  Low interests rates, let’s do it and barrow!  . . . because I have a secure job, secure lifestyle, and secure securities.

You say potato; I say potato.