Gamestonk

2020 was a rough year. That goes without saying. It was hard to find motivation in writing a blog about Quitting Your Job when so many people were losing their jobs and seeking unemployment assistance. Their jobs quit them. So I watched and waited, trying to find that spark for inspiration to return to the blog-space.

Then came The Big Meme Short.

Because this event is playing out better than any movie that came out in 2020, we’ll take it one step at a time. It will also be partially subjective, because I “took part” so to speak, buying into the market — more for the experience than in any attempt to actually make money. Personally, I believe in investing and do so. I believe in acquiring assets and utilizing dividends (read my post on building a dividend ladder portfolio here). I bought up stocks in April last year and did well. What happened this week was not sane investing and I don’t recommend getting involved (it’s not over as of this writing) and if you do please exercise caution.

That being said: I am not an investing professional or hold any certifications or fancy paperwork that shows I’m a qualified analyst or that you should listen to me. Trade accordingly and consult a financial professional!

Prologue

Beware the average man the average woman…

Charles Bukowski “The Genius of the Crowd”

GameStop had been mentioned in investing circles over the past year, primarily because of Dr. Michael Burry taking a sizable position. Burry, if you didn’t know, was one of the prime movers of The Big Short (played by Christian Bale) and one of the first to bet against housing. As of June 2020, his fund, Scion, owned 4.26% of available GameStop (GME) shares. Fast forward to this past Monday, where Burry’s position of 1.7 million shares rose to $271 million — and that wasn’t even GME’s weekly high.

Meanwhile, on the other side of the internet, subreddit r/wallstreetbets, essentially a stock trading club of retail investors who discuss stock market strategies, was turning into an angry beehive. It’s worth noting that around the time the GME play got going, the subreddit had about 2.2 million subscribers. It is now up to 5.7 million ‘degenerates.’ Having lost large amounts of money in previous market plays to the big guys on Wall Street, the…shall we say, collective…of wallstreetbets came across the perfect target for revenge.

It involved shorts (I’ll try to keep this brief, but some context is needed). Yes, the same as Burry’s The Big Short. A short is simply a bet against a stock or asset. ‘To short’ something is to bet against. That’s the general term which comes from a ‘short selling’ action where you sell a stock short. An investor on the street can do this by borrowing shares from their brokerage, selling them immediately at market price, collecting the money as profit but owing the brokerage the shares.

Example: I short sell 100 shares of Big Company stock at $10/share. I collect $1,000, but I owe my brokerage (Fidelity, E-Trade, Schwab, etc) 100 shares of Big Company. The stock goes to $5/share, I buy 100 shares of Big Company and return them to the brokerage. I sold for $1,000 and bought back for $500, a difference of $500 which I keep as profit. Brokerage gets their shares back, the trade is over.

Shorting can be dangerous. Imagine if I sold Big Company shares at $10/share and it went to $15/share. Now I’m OUT all the profit AND still owe my brokerage the shares. In most cases, if the trade goes against you, the brokerage will demand their shares back (cause they’re losing money on the value increasing, this is called a margin call). They could also have the power to start selling other stocks in your account to buy back the shares you owe them.

Shorting is a common tactic on Wall Street; it’s done by big banks and hedge funds all the time. The ugly part of it is that with so much weight and money behind it, these funds can actually move the price of stocks in the direction they want them to go. Imagine being able to short Big Company stock and short so much of it it drives the price down in your favor (this is because of volume; when sellers outnumber buyers, the price goes down and vice versa).

So back to r/wallstreetbets. What they discovered was that GameStop (GME) was shorted by Wall Street by over 140%. What does that mean? It means GME stock was heavily bet — the number of shares shorted OUTNUMBERED the amount of available shares. And, if you remember from the example above, the shorted shares must be re-bought to close the position. So, ipso facto, there wasn’t enough shares available to close the position. When the trade was due to close on Friday, January 29, 2021 (last trading day of the month), Melvin Capital, and the other funds behind the short, would need to buy shares to close the short.

As anyone who invests knows, the law of supply and demand rules.

Part One: Short Squeeze

I don’t know when the move to buy up GME started exactly. From the stock chart, the first big move was January 13, where volume spiked and the price rose sharply. For the purposes of this post, we’ll start there.

r/wallstreetbets was at a mere 2.2 million followers or so, but had garnered full buy-in from it’s members on the GameStop play. The price started to climb, more joined in. By the end of last week, I was seeing news about GameStop and ‘short squeeze’ in my news feed, but didn’t bother to look into it.

A ‘short squeeze’ occurs when the price of shorted stock suddenly and sharply rises. In order to ‘stop the bleeding’ (e.g., stop taking losses) a trader or hedge fund will begin to buy the stock back to fulfill the short trade. This, of course, causes the stock to continue to rise because the short seller has started buying too, and it feeds off itself. Stock rises, short seller buys to cover before the price goes up further, which causes the price to rise more, which causes the short seller to buy back more…et cetera.

To use my earlier example of shorting Big Company stock. I borrowed 100 shares and sold at $10, expecting it to go down. Instead, say it goes down to $6 but then starts to come back up. Panicked (and not wanting to lose my profit), I buy 25 shares at $6 — which adds to the increase in price. I still owe my broker 75 shares and the price is rising. So I buy 25 more shares at $8, still owing 50 and my profit is shrinking fast… If it goes to $10, I lose profit on my remaining 50 shares and if it keeps going over $10 I’m losing money. The phenomenon of the price rising against my short and me adding to it is a short squeeze: I’m the one getting squeezed.

I first checked the price of GameStock (GME) on Tuesday at the market open, finding it at about $143/share. My first response was “this is absurd,” the company is in no way worth that. This is a stock that back in October was under $10/share and their business model wasn’t very forward thinking (brick and mortar as games moved online). I checked the stock chart of GME:

At this point, I still had no idea r/wallstreetbets was behind it or what was even going on. From a chart and price perspective, this just looked like a pure mania play. The RSI (relative strength index), the green blob in the top right corner, showed 98+ which means the stock is white hot and severely overbought. My first instinct was to bet against the move using puts.

First: Why bet against it? The reasoning is that it continues to take more money to push a stock price up. Someone (or some fund) must be willing to buy at the current price. In order to sustain huge price gains, there must always be another buyer. The minute no one wants to buy a stock at a certain price, the selloff begins. This is what happened with the dot com crash and any subsequent crash of a stock or market after parabolic moves. I had played a similar trade back in April 2011 in silver:

In late April 2011, silver had climbed to incredibly high levels very quickly. The RSI was high and I knew it couldn’t stay up forever. I bought puts on SLV and within a week the price of silver collapsed. Most money I ever made trading in a day. So, to me, it looked like a similar setup for GME.

I went to make my trade in my Fidelity account but found I wasn’t registered to trade options (my silver play was done in an E-Trade account I’ve since abandoned). I applied, but had to wait at least three days. So, with no trade to make that day, I decided to research exactly what was going on — would I still get a chance to buy puts later in the week? Would the stock mania still be going? So I started to dig.

And I realized something incredible was happening.

Part Two: Can’t Stop. Won’t Stop. GameStop.

It turns out that the story behind GameStop’s ridiculous rise wasn’t the typical ‘rumor mill’ drive up found in past stock manias (remember JDS Uniphase?). It wasn’t a case of “Blue Horseshoe Loves GameStop.” It was a grassroots movement to ‘strike back’ against a faceless enemy in the Wall Street hedge fund. Resentment towards Wall Street for the 2008 housing crash was channeled now into this new play.

What savvy users like /DeepFuckingValue, Roaring Kitty, and r/wallstreetbets discovered was that the big players were extremely exposed on GameStop stock and would be required to buy it at any price. They could create an extremely painful (and expensive) short squeeze against the hedge funds shorting the stock, particularly Melvin Capital. So word was spread, and the degenerates of r/wallstreetstock began to buy GME stock. More importantly, they didn’t just buy — the message was to HOLD.

They would buy up as many shares as they could get their hands on and deny them to the hedge funds. Then they would get their friends, family, and anyone who would listen, to buy and hold too. Because GME was shorted over 140%, more shares were needed to cover than were available, so denying ANY shares further would make things exponentially more painful. Supply and Demand was on full display as GME price rose.

As the price climbed, the redditors’ strategy appeared validated. The truth is, it was a smart play. They caught Melvin with their pants down. Why such a huge short play on GME? I don’t exactly know; GME had a been the target of short plays over the past two years. Maybe Wall Street knew they were a weak target whose stock price could be easily pushed down, particularly with GameStop closing their stores during the pandemic last year. A more insidious theory would suggest Melvin and others wanted to short GME to zero, folding the company and not having to buy back ANY shares, thus keeping 100% of their profit. Regardless, GME’s price was starting to “moon” as it climbed faster.

By Tuesday I noticed the stock and its chart. The grassroots movement was working. Profits garnered interest in what was going on. Interest prompted more buyers — but for the redditors it wasn’t necessarily to get rich, it was to be part of the experience. The GME play had gone viral…like a meme. GME was the first “memestock.” The real memes was also appearing.

When the pandemic started in 2020, lockdowns began and people on the street found themselves stuck at home, receiving stimulus checks and $600 Federal unemployment bonuses. With nothing else to do and/or no work, many took to the retail trading platforms Robinhood and M1 Finance. According to the NY Times, in the first three months of 2020, Robinhood “users traded nine times as many shares as E-Trade customers, and 40 times as many as Charles Schwab customers,” and according to CNBC, retail brokers in 2020 saw “record new account openings…despite the pandemic.” Credit where credit is due: Robinhood and M1 Finance and their $0 commission fee for trading helped force other larger brokers to compete, like Charles Schwab and Fidelity, and drop their commission to $0 as well.

These new retail investors moved like a swarm in 2020, charging after hot name stocks like Tesla (TSLA). The GameStop phenomenon presented itself as the next big target to buy. r/wallstreetbets (now up to 7 million followers in the second day of writing this post) would soon attract these millions of new street investors to their cause. Together, they pushed GameStop up to dizzying heights.

By Wednesday, GME was over $300 and Michael Burry — up 1,500% on the rally — was now calling the GameStop price rocket “unnatural” and “insane.”

Then something else began to happen. r/wallstreetbets continued to dig and found heavy short positions on other stocks too (just not has hefty as GME). From highshortinterest.com here (as of the end of the week of January 25th) the stocks with the highest short interest (GME lower than the 140% originally, down to 121% which means some shares were bought to cover some of the short):

On Wednesday I decided to enter the fold, just for fun. I had no plans to dive into GME stock head first and my options trading still hadn’t been approved by Fidelity (and still no word). For my own entertainment, I chose AMC stock — I love movies and it seemed an interesting play. It hadn’t rocketed up quite like GME did and maybe it would. I got to play a company related to movie and feel like part of this cultural event.

Someone clearly wasn’t happy with r/wallstreetbets. By Wednesday afternoon the subreddit was knocked out of commission, going ‘private’ and not being available to anyone who visited. Even further, the WallStreetBets Discord channel was banned outright. The subreddit would appear public again late Wednesday evening or early Thursday morning, but to this date, the Discord server is still gone. Was this a co-ordinated attack? There’s no doubt at this point WSB was pissing off powers that be.

I would personally experience the coming “fuckery” first hand the following day. It would also validate my original thesis on why GME was a good put choice back on Tuesday (again, before I knew anything about r/wallstreetbets involvement). As if things couldn’t get any wilder, Elon Musk tweeted that day just after market close, driving the price up even more with foreign investors:

Part Three: The House Always Wins…Or Does It?

On Wednesday I was in the game. There were struggles out of the gate; most major brokers were suffering delays in filling orders, likely due to heavy volume. At Tuesday’s close, AMC was just over $6. By pre-market, it had climbed over $12. I was able to finally get my trade through after the bell at 9:30am at $16.50. On Wednesday AMC climbed and closed at $19.90. News came out after the closing bell that Melvin Capital and Citron had exited their short (after getting absolutely leveled). The amount lost by these two hedge funds has varied in the news — Melvin Capital has supposedly lost $7 billion, 53% of their assets under management. GME was over $340/share and the trade was moving in the direction the Redditors planned. Wednesday evening, investing commentary site ZeroHedge reported “Hedge Funds Are Puking Longs to Cover Short-Squeeze Losses.” “Puking longs” means hedge funds are selling long positions to get cash to cover losses incurred due to losses caused by the short squeeze. This is what being margin called looks like.

On Thursday morning, the pre-market price of AMC hit $22. GME was up over $400. Both had been pushed up overnight by foreign traders in India and Europe. North America was getting ready for the next round of the fight when something I’ve never seen before happened.

Brokerages began to restrict only buying not selling. In fact, users were reporting Robinhood (and TD Ameritrade) had REMOVED the buy button for certain equities, namely GME and AMC.

So for all the “meme stocks” (e.g., the heavily shorted stocks pointed out by WSB), Robinhood and TDA were not allowing their users to buy. Promptly, the price on these stocks began to fall. With the retail traders shut out en masse, the sellers would overwhelm the buyers. My shares of AMC were down to $12 when the market opened, wiping out over $7/share in profit. GME price took it on the chin.

Robinhood was blasted across social media for the restrictions, prompting many to suggest alternatives. A Change.org petition appeared to remove Robinhood from the App Store. “How to delete Robinhood” was quickly trending on Google later that day as well. Protestors appeared in-person on Wall Street to demanding that “Robinhood has got to go.”

Robinhood was claiming they were restricting the stock purchases to protect themselves AND their investors. What it looked like was Robinhood was trying to prevent the dreaded failure to deliver (FTD) that would destroy Robinhood and its capital investors. By failing to deliver, they open themselves up to lawsuits and bankruptcy. By restricting purchases, it helps protect against FTD, but the PR damage was total. RH was a accused of being complicit with the hedge funds to help cover their GME shorts. If retail investors couldn’t buy and only sell, it helped drive down the GME price for the hedge funds to recover. In addition, only being able to sell and not buy might cause panic to the retail investor to get OUT of their Robinhood account, making them hit the “sell” button, thus driving the price lower.

Anyway, at this point I could see the severe shenanigans going on. AMC dropped to the $8 range and I was in the red in my tiny position. I debated just holding and waiting. Then I noticed that every time AMC started to climb back up, the price would halt. Somebody was enacting a trading halt on AMC and GME; I counted no less than 10 halts on the price of AMC before noon alone. Something was happening. After some debate, and the price climbing back to $10/share, I got out. I could have held — I thought about it — but I didn’t like the manipulation and dark forces at work. I took the loss and I’m totally fine with it. It was fun to play and dip my toe into this cultural event.

But Robinhood preventing people from buying shares of GME or AMC was only half of the situation. According to several RH users, the app was also selling their GameStock without their permission. Robinhood later denied this had happened, but users took to social media to share screenshots showing the confirmations their accounts had executed sell orders:

One redditor, Palidor206, described everything happening with Robinhood as such:

And meanwhile…

Part 4: Welcome to Thunderdome

This is a long post, so let’s recap:

  1. Savvy Redditors and a YouTube identified an exploitable play on short sellers of GameStock (GME) shares. They began buying up shares and holding, which encouraged others. The price of GME began to climb.
  2. Early this week GME climbed over $140/share and the number followers of the subreddit r/wallstreetbets exploded. On Wednesday at market open, brokers (including my own, Fidelity) lagged and struggled to keep up with volume.
  3. On Thursday, Robinhood and TD Ameritrade began restricting purchases of the ‘meme stocks’ — GME, AMC, NAKD, BB, NOK, etc. At first the buy button for these stocks was removed; eventually users were restricted to only 1 share. The sell button was always available.
  4. Public backlash at Robinhood exploded, with people protesting and flooding the App Store with 1-star reviews of the app (which Google later removed 100,000 of)

On Friday, although Robinhood restricted purchasing, GME price was back up. AMC was back up (dammit). Nokia (NOK) and BlackBerry (BB) either didn’t have the same force behind them or truly were just a meme as they slid, apparently due to lack of interest.

By this point, the emotions behind this retail investor flood went far beyond greed. Followers of r/wallstreetbets began sharing personal stories of why they were doing this. To them, it was personal. They remembered 2008 and what the hedge funds had done to their friends and family. It was payback. Braveheart memes abounded. Perhaps most fascinating about this whole thing was that many of these investors were on suicide missions: it didn’t matter if they made money or if they lost it all. They just wanted to make the hedge funds hurt.

Here’s the story of Space-Peanut on reddit (which has since been removed by a reddit mod, but is available here)

Here’s another one from chickenweng65:

These people don’t care if they lose everything. They don’t care if GME goes to $0. To the reddit investor this is war. They don’t care if it crashes everything down. It’s a new form of populist revolt. As Space-Peanut put it, “Taking money from me won’t hurt me, because I don’t value it at all. I’ll burn it all down just to spite them.”

It’s like being in a gunfight with Doc Holliday — he’s not afraid to take a bullet because you’d just be doing him a favor.

By the way, while writing this, r/wallstreetbets is now up to 7.5 million ‘degenerates.’

The redditors with new found money are now using it to taunt Wall Street publicly.

5. You Are Here

GME is at a mania pitch. The memes are coming hard and fast. There’s reason to think there’s some panic on Wall Street, or at least concern for the chain reaction caused by the Robinhood debacle. See, on Wall Street, everything is interconnected. Brokerages deal with banks and clearing houses. You buy and sell stock in your broker account and it seems instant, but a lot of time it takes days to settle or ‘clear.’ Worst of all, perhaps, is no one knows how deep things can go from one short squeeze.

It’s Sunday afternoon and markets will open in a few hours. What will tomorrow bring? Will GME continue its meteoric rise? Where will the reddit ‘hive-mind’ turn to next? This event with not be without consequence — hedge funds will probably need bailed out. Expect government regulatory commissions and investigations. Will things reach 2008 levels again?

Maybe. Who knows?

WSB has kicked over a rock, exposing what was beneath it. Then they picked up the rock and threw it at a bees’ nest. I expect WSB to be demonized by the media and ‘powers that be.’ These market distortions are they’re fault, after all. If only they had left GME alone this wouldn’t have happened.

What does all this have to do with Quitting Your Job? This blog is certainly not advocating jumping on a bandwagon or chasing the herd for profit. But the biggest takeaway here is the old Boy Scout maxim of “Always Be Prepared.” Weeks ago redditors found a great stock market play. Who knows when the next one will arrive. That also applies in the event the market crashes; if you’re ready, stocks or assets can be bought for cheap while everyone is selling. The other thing I see happening in r/wallstreetbets and Twitter is people on the street becoming interested in financial education — how the stock market works, how stock is traded, what terms mean what. They’re a long way from being savvy, but the interest and desire to learn more is there.

I’m still out on all these meme stocks. But I’m bingewatching the show and it’s fascinating.

Disclaimer: I do not own any of the stocks mentioned in this post. I do not hold GME. I also do not use Robinhood. Caveat emptor.

Why Isn’t Personal Finance Taught in School?

Internet Meme

Think back over your school days. In elementary school we had the basics: writing, grammar, English. Maybe American history. Math. Nature studies. Middle school? English literature, algebra, European history, and civics. High school? College level classes, more English literature, biology, physics, and more history. There were shop classes and home economics. And there was always gym classes.

If the purpose of education is to prepare a young person to go out into the world, find a job, make it in society, then our students are woefully unprepared. After twelve years of education, not one student is better prepared to manage their personal finances — or even understand how taxes and interest work. Over the course of our lives we, of course, use English. We use some math. History might come in to play at some point in the future. But we use financial knowledge. Every. Single. Day. So why is it not taught?

This latest post began while watching an interview with Robert Kiyosaki about the origins of Rich Dad, Poor Dad:

Kiyosaki recalls asking his fourth grade teacher why they don’t learn about money (10:30). She replied that they “don’t teach money at school” but couldn’t answer his question as to why. Kiyosaki continues, saying he eventually asked his father — who worked for the department of education — why money isn’t taught in school. His father’s reply? ‘Because the government doesn’t let us teach it. It’s not in the curriculum.’

So I began to wonder: how is education curriculum set? Why doesn’t the government allow personal finance to be part of public schools? (Note: I never attended private school, so I cannot speak to if it is taught there or not, but feel free to comment if you did. I’d love to know!) It seems not only common sensical that it would be taught, but given these horrendous metrics, Americans are in desperate need of financial literacy:

  • 41% of Americans use a budget (inversely, 59% of Americans don’t track or understand how much they spend every month)
  • The average American college graduate leaves school with $37,172 in student loans, most with no immediate plan to pay them off
  • Two-thirds of Americans would have trouble scrounging $1,000 for an emergency
  • 35% of Americans (!) have debt in collections with the average amount being $5,178
  • A National Endowment for Financial Education study found only 24% of millennials show “basic financial literacy” while 69% of the surveyed rate their own financial knowledge as ‘high.’

So what’s the deal? Before diving into a ‘Conspiracy of the Rich’ that keeps the average person money stupid, I wanted to learn the origins of our public education curriculum. I began to dig to find out just why what’s taught is taught.

It begins with the Prussian Education system.

The Prussian Education system was founded in 1763 by Frederick the Great. The system became the model for compulsory attendance (e.g., you have to go to school), national testing, and, per Wikipedia, “prescribed national curriculum for each grade, and mandatory kindergarten.” It also maintained a specialized training for teachers, essentially teaching teachers how and what to teach. This might be the most important facet, as teachers were not existing specialists or professionals, but professional teachers. The person teaching math or science would not be a mathematician or scientist.

The Prussian system was imported to the United States in the early 19th century, with early advocates including American education reformer Horace Mann (who eventually went to Germany to inspect German schools first-hand). The Prussian system was designed to serve the kingdom, training the populace to be soldiers, farmers, and eventually factory workers when the Industrial Revolution arrived. This is why you hear contemporary education referred to as “factory model” or “industrial era.” Indeed, it freaked me out a little bit when I realized that the reason for “bells” to signal start and end of classes was to train young people for the bells and whistles of the factory, denoting shift changes.

The Prussian system would later be refined in 1892 by the Committee of Ten. The committee’s recommendations became the basis of our modern education system: 12 years of education, eight of which are elementary followed by four years of high school. Curriculum was focused on English, mathematics, and sciences (such as chemistry, physics, and astronomy). The higher sciences such as psychics and chemistry were reserved for the high school level. English, mathematics, civics, and history would be taught at every level.

In the report linked above, there is no mention by the Committee of Ten of finance, money, or taxes.

So is our current system just outdated? What would it take to add personal finance to the curriculum? Why hasn’t it been? In 2013, a poll from Harris Interactive (sponsored by Bank of America) showed 99% of adults agree financial literacy should be taught in school. A 2013 Time magazine article entitled “Why We Want-But Can’t Have-Personal Finance in Schools” cites four major reasons finance has not been part of the curriculum:

  • Only one in five teachers feels qualified to lead a personal finance class, according to a University of Wisconsin study. So we don’t have enough instructors.
  • Personal finance concepts are not part of standardized tests like the SAT or ACT. As the saying goes in education circles: If it’s not tested, it’s not taught.
  • Education is run at the state level. So there is no federal authority to mandate personal finance classes, and each state has its own ideas on how to go about it.
  • There is little academic agreement as to what kind of personal finance instruction works. Many educators are waiting for clarity before they sign on.

There seems to be a catch-22 in regards to ‘feeling qualified’ to lead personal finance classes. Teachers don’t feel qualified to teach it because they never learned it themselves. In fact, these surveyed teachers may be struggling with their own financial literacy.

I’ve personally always been amazed that taxes are not taught at some level in school. These are something every American must file once per year, yet there’s no education or even explanation on how it all works. But, according to the Time magazine article above, teachers don’t really understand it either. I would say financial literacy should start at home, but parents weren’t taught in schools either. A 2011 Charles Schwab survey of 1,132 teenagers between 16 and 18 revealed 42% wanted their parents to talk to them about how money works. Only 32% of the surveyed teens knew how credit cards and interest worked. But if the parents aren’t knowledgeable (or comfortable enough) to talk about it, then the ignorance is passed on. It’s a death spiral of financial ignorance.

I couldn’t find an explicit reason why finance was left off the educational menu. One could infer that it wasn’t important in the 19th century — money still existed, bills had to paid with interest, although there was no personal income tax (except from 1861-1866 where it was enacted to pay for the Civil War) but property taxes and tariffs existed. Kiyosaki seems to insinuate that it’s more sinister, that financial education is left off the table explicitly to keep people dumb about money. His entire modus operandi for his Rich Dad series is to teach people about financial literacy because it’s not taught in schools.

He is right in that the failure to teach financial literacy in school falls on the government. Some states have taken the initiative, but it appears lacking, according to “Survey of the States“, a Council for Economic Education report. Seventeen states require high school students to take at least one course in personal finance. However, the report also shows “there has been little increase in economic education in recent years and no growth in personal financial education.” So states are aware of the problem, some have made an attempt to change it, but overall it appears to be half-assed or not a priority. I suspect it will take adding personal finance to standardized testing to get the ball rolling, coupled with education of teachers so they can teach the subject.

Until then, hopefully people like Robert Kiyosaki or Dave Ramsey will continue to get guide people. Or maybe blogs like this one can help someone find their way. Perhaps it will be those who are financially literate that will teach future generations.

How to Build a Budget

The dreaded “B” word

“Either tell your money what to do, or end up wondering where it went.”

Dave Ramsey

I used to hate budgeting. Not that it seemed like too much work…just something about that damn “B” word used to cause me to groan and not want to do it. Maybe there was some stigma attached to the “I’m on a budget” mentality. It made me feel poor, cash-strapped, and destitute. The truth is, I can’t live without a budget now. I’m not poor. I’m not cash-strapped or destitute. I’m in control. Every month I fill out my budget and my money gets to work.

I started budgeting in December 2017. I was doing a good job of putting every spare cent towards my debt. The bills got paid first, then everything left went to credit cards or student loan. When December 1 hit, I knew I had to set some aside for Christmas presents, but I wasn’t sure how much I’d have. I knew I DID NOT want to use credit cards for gifts (and undo all the payoff work I had spent the past six months accomplishing) so I made a budget. I determined all the “had to pays” like bills, gym memberships, and minimum student loan and car payment. From there I determined what I could spend on gifts and then what extra I could pay on credit cards (I was not going to let up on my momentum).

The next thing I knew, I had done my first budget.

I used that formula for the next month, then the next, and all of 2018. I still use it. It became more intricate. I put in formulas. I began to estimate what I thought my paychecks would bring in and budgeted accordingly; I was always conservative on my income estimates so I didn’t actually over budget. And you know what happened? I ALWAYS had money left over each month.

So let’s walk through it. For the columns, I have “Expenses”, “Budget”, “Actual”, “Percent Met”, and “Notes.” The first column is self explanatory. “Budget” and “Actual” are my estimated amount and actual amount I end up paying or can afford. For some of the expenses, like “LA Fitness” and “Hulu”, those are the set amounts every month which I just pay (LA Fitness is on there twice because I pay for my wife’s membership). That’s why the Budget and Actual amounts always match. “Percent Met” is just math porn for me: I like to know how far over or short I am on my estimate. For example, my savings this month I was able to pay extra to so I was way over 100% to my estimate. Lastly, notes are for personal comments or reminders. The $100 to my emergency fund was replenishment (I keep $1,000 in an immediate emergency fund for when shit breaks…not sure what I had to use it on back then but the $100 was to make up the shortage).

The second group of rows starts with “Current Bank.” Current bank is what I’m starting the month with. Because pay days didn’t always fall on the 1st of the month, I had carry over money from the previous month. This row shows what I’m starting with. The next two rows are pay days with my estimated pay and actual pay (I was wage plus commission, so it was impossible to predict my actual paycheck). The fourth row is money made from freelance work. I also have a row reminding me to pay myself 10% — I’m a huge fan of this ‘rule’, where I immediately put 10% of my income into savings. This line had a formula to determine immediately what 10% of my income that month was. “Remainder at end of month” showed me what I had left over, so I knew this was money I could either spend, save, or invest. I also tracked retirement contributions, and how much of my expenses were mandatory (i.e., gym memberships, hulu, stuff I couldn’t miss payments on or were on autopay) and optional (putting money aside for a movie project or E-Trade).

You may have noticed that some of the big bills were missing: mortgage and car. How about utilities? Food? Gas? For those bills, my wife and I split them. We have a joint bank account for paying those bills. Long ago we determined the monthly cost of our mortgage, car payment, utilities, and estimated food and gas costs. We each contribute the same amount from each of our paychecks into the joint account, which then pays those bills. This ensures 1) we don’t mix all our money and end up arguing over personal purchases and 2) all those bills get paid first. This is why my income looks so low on the spreadsheet — I’ve already deducted the amount that goes into the joint account. The rest are my personal bills.

Regardless of how you do it, those bills still need to be paid! So if you’re making your own budget, please make sure you include them on your month budget. I guarantee if you make a budget, you will find money. Maybe you’re overspending somewhere. Maybe you can cut an expense out or save somewhere. When I was trying to determine my wife and I’s monthly expenses for the joint account, I tracked every purchase for a month: grocery bills, gas for the car, weekly take out meal…I kept all the receipts and determined what we spent on average per month.

Budgeting is about being in control. You’re in control of you money, which helps you be in control of your life. It doesn’t have to be a rigid lifestyle either. Budgeting doesn’t mean not doing anything fun or enjoying yourself. Every month I allocate $100 to blow on whatever I want. It can be more if there’s leftover money in the budget. Or, I can save it away for a future larger purchase or trip. It’s not a monastic lifestyle. I don’t wear ratty clothes and have an empty house devoid of furniture and appliances. If you’re going to Quit Your Job, you must be in control of your finances!

If you’re interested in learning more about building a budget or getting control of your finances, check out these books below:

5 Ways to Build Your Savings Fast

Savings is a key component of having a healthy lifestyle. Having savings means not worrying about the “what ifs” — What if the car breaks down? What if I need a new roof on my house?

It also means having money when opportunity appears — whether to take that vacation or invest in a startup idea. Having money waiting in the wings gives you freedom.

#1. Pay Yourself First

If you take away anything from this post, let it be this one. I saw my savings grow exponentially when I started paying myself first. The idea comes from the book The Richest Man in Babylon, a book of financial advice told through parables: take 10% of what you earn for yourself.

This means save 10% of everything you make BEFORE bills, expenditures, and anything else in your budget. If your paycheck is $1,000 you save $100 before anything else. The $100 goes in to savings, and you have $900 to spend on bills, entertainment, etc. If you do nothing else to save, you’ll have tucked away quite a bit in a year. I love this rule and I follow it every time I get paid or make money.

The psychological effect of this is huge. I know what it feels like to get a paycheck and it’s gone. You feel like you’re not getting anywhere, you work for bills. When you pay yourself 10% first, it gives a sense of accomplishment and more importantly — worth.

#2. Keep the Change

No 8,000-year-old Babylonian wisdom here; I came up with this one myself. When I began my financial transformation, I started using a budget to keep track of spending. I would estimate my next paycheck (I was wage plus commission, so no two paychecks were ever the same), determine what bills must be paid during those two weeks, and determine what I could spend. I always gave myself a $100 buffer from each paycheck — this gave me breathing room so I wouldn’t fret about every penny plus if a friend wanted to grab lunch or something small caught my eye, it came out of the $100 buffer.

That way, I wasn’t living like a monk every two weeks.

But I rarely spent the full $100. Sometimes there was a dollar left, sometimes much more. When the next payday came, I would take whatever was left in my checking account and move it into savings. By sweeping up the leftovers, it would eventually build up in my savings account. $10 may not sound like much, but when you put it into savings every two weeks, before long you’ve got $100s in there.

#3. The Waiting Game

A big part of building wealth is knowing yourself. That means knowing your (bad) habits, like for me impulse purchases was something that got me into trouble. It plagued me throughout my 20s, and helped run up big balances on my credit cards. Amazon made it easy to get anything in two days and it was so easy to put things in the cart and hit “buy now.”

I knew my weakness. I knew how I behaved. So I made myself institute a waiting period on Amazon purchases. Any thing I add to my cart I wait three days to buy. What happens in three days? The impulse dies away. I forget about stuff I put in there. When I go back in, a lot of times I’ll delete things or move them to “save for later.” I have literally hundreds and hundreds of items “saved for later” in my Amazon account…but I didn’t buy them. It’s money well not-spent.

It’s an added bonus that sometimes Amazon will lower the price of things in your cart to draw you back to buying! So if there is something you plan to buy, Amazon might put it on sale to get you to pull the trigger.

#4. Think on a Full Stomach

This may sound dumb, but going to the grocery store hungry will cost you a fortune. I noticed a big difference in grocery bills just by going after a meal instead of before. I mean, it makes sense, right? But it’s one of those things you never think about. I certainly didn’t, but I was looking at my own habits to find out where I could cut down on spending, I started to study my grocery shopping.

If you’re hungry when you push the cart down the aisle, EVERYTHING looks good. You’re shoveling extra snacks into the cart. Fantasizing about giant meals you’re going to make — all of which need massive amounts of ingredients. By the time you get to check out, you’ve blown up the budget.

If you’re full, however, you don’t really want to think about food. You just want to get out of there. Get what you need and get out. It’s much easier on your cart – and your wallet.

#5. Separate Your Savings

If you haven’t caught on by now, each of these things has a psychological component. “Save more, spend less” is really just a mind game. You have to know yourself, how you are, and what you can do to beat yourself to the punch.

I recommend separating your savings from all your other money. Make it hurt to draw from it. When I first started saving, my first $1,000 was in cash. Why? Because cash feels real. You have it in your hands instead of seeing a number on a computer screen. You don’t want to part with it. I also kept it in $100s, because I didn’t want to break any of those nice, big bills.

When it was time to move to an actual savings account, I opened up a savings account with the same bank as my checking. It was easy to funnel money back and forth. So easy, in fact, the savings account became an account for several things (like where to put aside my tax withholdings). It got so convoluted I didn’t know what my actual savings were — what was savings and what was meant for taxes? How much of it was set aside for an upcoming big purchase? Money was coming and going, and my savings was getting caught up in it.

I finally got my savings its own account, isolated from everything else. I have a nice, easy number to look at and know “that’s how much I have saved.”

See, it’s all psychology.

Required Reading: 5 Takeaways from The Millionaire Fastlane

One of the segments I want to do with this blog I’m called “Required Reading,” which essentially is a combination book review and recommendation. I’ll write a post on a particularly educational or useful book and break down the top 5 takeaways.

If you read my “Top 10 Books For Financial Freedom” post, you’ll know that MJ Demarco’s The Millionaire Fastlane sat at my #1 spot. For me, this book changed everything in my journey to financial independence. Moreover, because I read it after reading so many other common authors on personal finance, DeMarco’s book came as a shock.

The first time I read it, I had to actually put it down after a few chapters because it scared the crap out of me. DeMarco’s arguments were sound, rational, and completely countered the more conventional ‘gurus’ and authors out there. I was midway through my personal financial transformation when I picked up The Millionaire Fastlane and it made me rethink my process. So without further ado, let’s get into it:

#1. “The Promise of Wealth…The Price? Your Life”

“By working faithfully 8 hours a day, you may eventually get to be the boss and work 12 hours a day.” ~ Robert Frost

The conventional financial ‘wisdom’ of financial gurus such as Dave Ramsey, Suze Orman, or Tony Robbins is build around the idea of using time to compound investments. By continually contributing to a 401k or IRA and allowing it to compound (e.g., increase in value and reinvest dividends) over time, it becomes your method of financial freedom. As Ramsey calls it, a “Cash Mutual Fund Millionaire.” The key to this, of course, is time. Work a job for forty years, investing all the while. Take the employer 401k or IRA match. Let it grow, and when you retire at 65, you’ll have millionaires to “retire with dignity.”

DeMarco refers to this strategy as the ‘Slow Lane.’ He counterpunches: “It’s a lie so deceiving that when uncovered, decades of life have passed…The driving force behind behind wealth under Get Rich Slow is time — time employed at the job and time invested in the markets. Your glorious tomorrow might arrive after 40 years, when you’re living your last presidential administration and on your second hip replacement.”

DeMarco goes on to point out the best way to enjoy wealth is when it’s lived young, when you have “health, vibrancy, energy, and yes, maybe even some hair.” The idea of waiting to enjoy life when you’re older, breaking down, and possibly even bedridden does not come across as appealing. You give up the good, healthy years to be free during the older, medically-dependent years.

Even worse, what’s the guarantee you’ll even make it? The average life expectancy (as of 2018) in the U.S. is 76. That means working for 40 years to enjoy 11 (if you retire at 65). The math isn’t worth it. DeMarco brings up the fact that, even if you do live long enough to retire, there’s no guarantee you’ll be a millionaire. The gurus’ plans don’t work without a job, or if the market goes south, or if a housing crisis wipes out 40% of your illiquid net worth in a year (as the 2008 crisis exposed to many).

#2. Your Definition of Wealth Has Been Corrupted

“Money doesn’t buy happiness when it’s misused,” DeMarco writes. “Instead of money buying freedom, it buys bondage.” The idea is that people want to feel wealth, so they buy things they cannot afford to look wealthy. By craving respect and admiration, you expect wealth to bring you into happiness. “Society says wealth is “stuff,” and because of this faulty definition, the bridge between wealth and happiness collapses.”

Indeed, wealth has become something of a dirty word in society in the era of “We Are the 99%.” Wealth is equated with sports cars, big houses, and showing off lavish vacations on Instagram. These objects of wealth are sources of envy and disdain, leading many people to sneer at the mention of wealth or money. However, DeMarco says, “used properly, money buys freedom.” Freedom buys choice. Those that chose to use money to flaunt fake wealth end up deeply in debt trying to maintain it, and are forced to work to pay that debt and keep the cycle going.

DeMarco illustrates wealth as freedom further:

  • Money buys the freedom to watch your kids grow up
  • Money buys the freedom to pursue your craziest dreams
  • Money buys the freedom to make a difference in the world
  • Money buys the freedom to build and strengthen relationships
  • Money buys the freedom to do what you love, with financial validation removed from the equation

These are nothing to be ashamed of.

#3. “Wealth is a Process, Not an Event”

Earning wealth is not a sexy process. Sexy is winning the lottery, opening your front door to find Ed McMahon with a giant check, or hitting it big at the casino. However, these events are highly, highly unlikely and cannot be planned or earned, no matter how much effort or time is put into it. As DeMarco puts it, “Millionaires are forged by process…self made millionaires create their wealth by a carefully orchestrated process.”

The ‘process’ never makes the headlines. DeMarco uses the examples of an athlete scoring a $50 million contract or an Internet wiz selling his company for $30 million. The ‘event’ (the contract or deal) is “showcased for all to admire.” People read about it and say “gee, if only I could be so lucky.” What’s not lauded is the amount of work it took to get there. Years of shooting free throws alone in a gym or endless nights coding alone in the dark are unsexy. The process is hidden from the headlines, buried deep in paragraphs or tucked into the end of the story.

Wealth takes time. Don’t plan to inherit a family fortune, to win the lottery, or file frivolous lawsuits trying to win big. Do it one step at a time. Put the hours in. Be okay with things taking time; learn to respect and enjoy the process. As a reminder, 70% of lottery winners go broke because they didn’t have a process. They won money through an event and quickly spent it away because they didn’t earn it.

#4. Never Start a Business ‘Doing What You Love’

This one was a bit of shocker. Not because I started a business out of doing what I loved, but because it’s such a common saying. Do you love animals? Open a pet grooming shop. Do you love doing yoga? Open a yoga studio. If you’re going to put time and money into a business, why not do what you love? It only makes logical sense right?

DeMarco points out the fatal flaw: opening a business doing what you love does not guarantee business. Most business started out of a love of something end up shuttering their doors due to lack of customers. They weren’t started to satisfy a ‘need’ or no ‘need’ was identified to build a business around the solution. Without a guarantee of customers who have a need for your solution, it’s not going to work.

“Stop thinking about business in terms of your selfish desires, whether it’s money, dreams or “do what you love.” Instead, chase needs, problems, pain points, service deficiencies, and emotions.”

I can testify to this. I started my business in 2014 after identifying a need working at Apple. Business owners and customers all wanted on-site support or installation, which Apple refused to provide (for a myriad of reasons). It eventually got to the point where customers were offering bribes to get me to come to their house or office to resolve issues or help them. I eventually quit my job to build a business around these needs. Five years later, the company is doing more business than ever before.

So what does DeMarco suggest to finally do what you love? If you go back to #2 on this list, the answer is have wealth first. If you build a business around a need, you’ll have customers. Customer will bring wealth. Wealth will allow you to do whatever you want, including pursuing what you love to do.

#5. Instead of Digging For Gold, Sell Shovels

I love the wisdom of “What’s the best way to get rich in a gold rush? Sell shovels.” Being a producer is the fastest way to become wealthy. What is a producer? Someone who has something to offer. As Robert Kiyosaki says, “Have something to sell. The poor have nothing to sell.”

DeMarco: “Instead of digging for gold, sell shovels. Instead of taking a class, offer a class. Instead of borrowing money, lend it. Instead of taking a job, hire for jobs. Instead of taking a mortgage, hold a mortgage. Break free from consumption, switch sides, and reorient to the world as producer.”

The point is, make yourself valuable. If you have a valuable or useful skill, people will seek you out. If you have something to offer, customers will be found. A lot of the mentality I find — especially among coworkers and family — is based around “what can I buy” or “how much can I have.” It’s a consumer culture. We are bombarded with advertisements and incentives to consume. It’s up to you to change your way of thinking, “switch sides” as DeMarco calls it, and become the one offering to consumers. “If millions seek you,” he adds, “you will be paid millions.”


I highly recommend The Millionaire Fastlane to anyone interested in breaking free of The Slow Lane or even The Sidewalk. It will change your way of thinking and hopefully set you in a direction to prosperity and financial freedom. I could easily have expanded my top 5 takeaways to top 10 or even 15, but this post would have gone on forever. DeMarco followed up The Millionaire Fastlane with a sequel, called UNSCRIPTED, which I will cover in another blog post! Pick up a copy of The Millionaire Fastlane (you can do so by clicking the book above) and take off down the Fastlane.