12 levels of personal finance black belt. Which level are you?

Many financial guides are a list of tasks or achievements: Make a budget, get out of debt, save for retirement, save for college, buy your first home, get life insurance, etc. Those guides are a prescriptive list of things that you should do and those list are great. But they rarely give you any guideline as to when you should apply and start those tasks and if there is any order to those tasks. Everything seems important and should be done right now. I think these guides are helpful but I often feel conflicted and confused because they are pulling me in so many directions at once.

This list, hopefully, is a different kind of list for personal finance. I'm attempting to offer a descriptive order of skills sets and knowledge that you must master to achieve financial control and wealth management. Each level requires complete mastery before you can move on to the next, I think going out of order would be inefficient and a waste of time and money. These skills set are not based on individual's net worth or income level. It's a measure of the level of control and understanding of one's personal financial health.

With that quick introduction, here is the list. Each topic can be expanded with much greater detail and I'll do that for future blog entries.


1. Read some new personal finance or personal improvement books every year.
2. Carry credit cards or other revolving debts for only a short period of time (< 6 month)
3. Live within your means
4. Have 6 month or more of emergency funds
5. Saving at least 10% of pre-tax income
6. Clear (5 to 10 years) long term financial goals and allocation plan of your savings to the various long term goals. (saving for wedding, car, house, kids college, vacation, retirement, new business capital, pay off long term debt, etc)
7. Allocation plan of assets across real estate, equity (domestic, foreign, and emerging), bonds, and other asset classes.
8. Diversify your income streams through real estate, hobby, eBay, side consulting business, business ownership, bonds, CDs, etc.
9. Complete your own taxes until you understand the applicable tax laws.
10. Find or hire your financial control team: accountants, mortgage brokers, real estate brokers, personal advisers, mentors, attorney, etc.
11. Adequate protection for your long term financial interests through insurance, estate planning, and trusts.
12. Estate and tax planning to minimize tax liabilities.

Is there another level beyond 12? I don't know. I can't think that far. I'm still working on level 10 and 11 skill set and can't see beyond the next hill that I have to conquer. Since level 12 covers the end of one's life and beyond, it's hard to imagine there is another level of skill set for "personal" finance.

I'm working on level 10 and 11, but doesn't mean all the previous level are completed. Obviously each level still have many prescriptive list of tasks that needs to be accomplished. Saving for college and retirement are some of the tasks from level 6 and I'm still a long way off from completing them. But as a skill set, knowledge, and the degree of confidence that the situation is under control, I feel that I have mastered that level.

I think this is a different and unique way to learn and master personal finance. To any reader of the blog, i'm curious if you think this is a helpful model for you to gain better control and mastery of your personal finance.

So let me know; Which level are you? 

What should I be when I grow up?

Son (2nd grade) asked a tough question today... "What should I be when I grow up?"

Here was a perfect learning moment. He cared enough to ask and he still value my opinion enough to ask me. I was filled with pride.. yet this was a very difficult question to give a straight answer.

Here was my on-the-spot answer .. Probably too abstract for him to understand right now, but hopefully it sets the foundation for more future discussions.

There are three kinds of things that you can do.
1) things that you like to do
2) things that you are really good at doing
3) things that people will pay you to do

Sometimes those things are the same, if you are lucky. I'm very lucky. I like to make software, I'm pretty good at making software and it's important to other people so they pay me to do it. I like to play with you but no one pays me to play with you. I like to read. Reading is important to me, but I don't know how to write a book. So if I want to keep reading, I have to pay money to people who are really good at writing books. Everybody is different so I can't tell you what those things will be for you. You will need to try really hard at different things so you can find out for yourself.

How would you answer this question if your young child asks you?

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Now, I look back at my answer. I'm not sure if Venn diagram or the pyramid is the best way to represents this list. If it was a perfectly rational world, you can only be good at things that you like to do and people will only pay you for things that you are really good at doing. People and work places are far from rational. People pay for many reason not related to talent or skill. Or there can be so much demand for a job that anyone that took 1 or 2 college classes can get a job even if they are terrible at it.

Venn diagram is probably the best representation.
- things that you don't like, but you are really good at and you get paid. You'll eventually get burned out.
- things you like and you get paid, but not ready good at. You'll reach a compensation maximum.
- unless you're a trust-fund baby, you'll eventually need to get paid.

So try it out, doesn't matter if you are getting your first job or Exec with 30 years of experience. You can make a list of things that you can to do that fits the different segments of the Venn diagram. Then think about how you can re-align your life and works choices for optimal balance by moving to the center of the diagram.

Evolution of a software engineering manager.

Many years of engineering and management experience and decision making strategy summarized in 5 simple paragraphs.


When I was in college, I learned about data structures and algorithms. Computer Science is basically a 2 dimensional problem: space vs time. How fast the code perform vs how much memory or disk space it needs? The goal is always to find the optimal balance between while trying to minimize both. I was good at coming up with solution so I moved up in rank.

When I became a senior engineer, I realized my job was really a three dimensional problem: space vs time vs complexity. More complex code, means more bugs and harder to maintain. One time inspiration, becomes a coding nightmare a year later, when I try to fix a bug but can't figure out how the oh-so-clever algorithm works. So the goal is to find the least complex code that meets the requirement while finding the optimal balance between space and time while trying to minimize both. KISS (Keep It Simple Stupid) became my golden engineering rule.

When I became an engineering manager, I realized my job became a 4 dimensional problem: space vs time vs complexity vs dollars. I had all the same problem as before, but now everything is measure against dollar / budget. Whether is person-hours, consulting dollars, missed opportunity, post-release technical support, etc. Every decision can be translated into different types of cost. My job is again, trying to find optimal path to balance and minimize all four dimensions of constraints. The good news is that complexity and dollar has strong correlation, spend the money upfront with great UI design will simplify requirement and simplify the UI will go a long way to minimize all the other dimensions. That's why I always hire the best UI/UX designer, and most senior engineers that I can find to seed the team, because they know how to avoid the traps of "over-engineering" a solution.

When I became an engineering director, I realized my job  became  a 5 dimensional problem: space vs time vs complexity vs dollars vs scalability. I'm referring to specifically the the scalability of the organization, the teams, and the inter-team and intra-team communication. This is a direct application of Conway's law. The desired product architecture must match desired organizational structure and communication processes. My job is to optimize the team, processes, and product architecture so each group can do their best to optimize the remaining 4 dimensions.

When I became an engineering vice president, I made it my mission to continuing my quest to articulate that one new key dimension. It took years of experience at each level before I found that one kernel of truth that clearly defines the role for each level. I have some ideas swirl in the back of my head, not yet a clear strategy. Stay tuned.

My Adventure in Tiffany & Co.

Valentine's day was getting close and I wanted to get a nice present for my wife. I had a beautiful necklace picked out. Then I googled "Negotiating at Tiffany". The search results were discouraging. Every credible posting indicated no flexibility on the price. But it never hurts to try and you don't know until you ask.. right?!? So with the most positive of attitude, I decide to try my hand at negotiating. Negotiation always feels like that magic thing that sales people knows how to do. Engineers are not suppose to be good negotiator. I don't have much experience negotiating with retail stores. I'm pretty good at searching for good deals on the internet. But I'm a total newbie at negotiations.

If you can imagine for a moment, I was about to walk into one of the most stuck up retail store, ever, and I'm going to try haggling. Crossing the massive and intimidating metal doors, walking pass the burly security guard with pinstripe suite and the earpiece, trying to approach the sales person with all the confidence that I could muster. I looked the necklace again then I asked for price discount in my best imitation of a polite and firm tone. The reply I got was also polite and firm.. "Tiffany has NEVER change an item price is its 175 year history". It's pretty convincing.

Do I gave up? Of course, not. Even though, i'm a newbie, I never do things without preparation. And the key to successful negotiation is preparation. I'm reading "Getting More" by Stuart Diamond, highly recommended by a good friend and follow blogger http://www.imeeshu.com/. I figured my little stunt at Tiffany & Co would be the perfect time to practice.

As recommend by the book, I have a plan in mind.
1) Connect with the sales person. Make it easier for me, I call the sale person on phone first to start. I had the sales person's email address too, but  negotiating over email is obviously a bad idea.
3) Ask a bunch of questions
4) Ask more questions when I met face to face
5) Always stay friendly and calm. I know I was going to get the piece, it's just a point of practice to see if I can "GET MORE".
6) Acknowledge Tiffany brand's power and appeal.
7) Ask for help.
8) Listen to what is not being said.


Did I successfully negotiate at Tiffany? I think so. Here are some things that I learned and successfully negotiated for.

- You don't have to be Newt Gingrich to get an interest free loan from Tiffany. They offer 6 or 12 month interesting free revolving balance loan if the account is paid in full. Anyone with good credit can qualify.

- You can negotiate for better service. I wanted the necklace to be extended by 2 inches. I got the fee  waived.

- I wanted the piece in time for V-day. The extension were done in N.Y. so I got express overnight shipping for free.

These were small concessions, but looking back, it was a lot of fun. I was proud of myself for trying to negotiate. I practiced many important points from the book. I believe the plan worked. The sales person could easily have said no to any and all these requests. She would have made the sale any ways. Because we connected, keep the process friendly, she went out of her way to try to clear the things with the manager. To give even more credit to the Tiffany sales person.. I received nice and very surprising thank you note from her. How often does that happen? A sales person that gives you a thank you note.

First science experiment with my son.

I want to foster scientific thinking and curiosity in my son. The first grade science topic was different states of matter (gas, liquid and solid). Like many 1st graders, my son thinks he knows everything about it already. So I asked him some questions about evaporation and water vapor. His answers were very good.  My final question was "what would happen to the water in an airtight jar?" I don't remember his exact answer, but I remember responding.. "so.. that's your hypothesis?" He replied, "Yes!"...

And that is how we kicked off our first science experiment. I found two identical glass jars, one closed and one open. We filled it with filtered water and use tape and marker to indicate the start date. The experiment got off with a very slow start. I thought there would be some evaporation indoors. Nothing happened after a few days so we moved the experiment to a sunny spot outdoor. 

Son photographed experiment result after 1 week

My son was very excited when he saw the result 1 week later. He carefully marked the second measurement and saw that the open jar had about .25 inch less water. More importantly, he noticed another key difference between the two jars. There are water droplets accumulated inside of the top portion of the closed glass jar. He described it as 'I could see that water had nowhere to go'. To him, it is the key proof that evaporation occurred and water vapor was trapped.

The experiment was a big success for him. It validated his hypothesis. It was an even bigger success for me. We immediately hit the library and borrowed books for more science experiments. Our next 3 experiments are in the works:

1. Test the effect of salt in the water on evaporation
2. Test the effect of different size of hole on evaporation by using saran wrap
3. Make sugar crystals by evaporation of a super saturated sugar water mix

Lego sorting methods

My son loves Legos (and I do too). He can play with them all day long, imagining, constructing endless scenarios. It's not a big set by any stretch. However, it's now large enough that the joy of playing with Lego is diminished by his inability to find the right pieces in a timely manner.

My computer science and engineering mindset kicked in. Is this a solved problem? Have people found a perfect way to sort and organize Legos? Is there a machine that does it already that we can buy? Google certainly return plenty of hits, but none of the results provide detailed analysis of the problem and the outline the solution trade offs.

I see 4 dimensions to the problem..

1) Cost of sorting in time.
1a) Frequency of error due misplaced pieces.
1b) Cost of a full sort vs a partial sort
1c) Sortable by a child

How quickly and accurately can a young child sort the pieces? I need to able to explain the procedure, and he needs to be to consistently apply the procedure and manage all the exception cases.

2) Cost of retrieval in time.
2a) Fun / imagination of the retrieval.
2b) Searchable by a child.

Of course, it must be fast and easy to find the right piece. And just as important, the pieces are not so well sorted that the process of imagination is eliminated or diminished. One thing I love about Lego is that I don't know what I'm going to end up until I finish. The process of searching, and visualizing how each piece might fit into my current project creates this infinite possibility that makes Lego fun. So the searching and imagining the possibilities is an integral part the fun.

3) Cost of space.

I don't want take large part of the room so the solution should be compact, stackable, and easy to move around.

4) Cost of money.

I don't want to spend too much money to buy all the material to manage this system with storage boxes, label makers, etc.

This is a classic computer science problem. How do you trade off cost of space vs time vs money?

Of course, there is no perfect soluion, but I will describe the evolution of my solutions and some analyze on the pros and cons for each solution.

1) The big bucket.

This is actually a great solution. We used this method for 2 years. We dump everything out on the table with raised edges (Thomas the engine table is perfect). Play to our hearts contend, the put all the piece back into the bucket. Easy to sort, easy to find on the table, doesn't take much space, and cheap.

- cost to sorting : 5 to 10 minutes for a full sort.
- cost to of retrieval : 1 to 2 minutes per piece
- cost of space : 1 to 2 liters  (very efficent)
- cost of money : < $5 for a Lego branded storage box.

This worked for about 2 years until we have more then 3000 pieces. 

2) The big bucket with multiple ziplock bags. Our first attempt to organize the Legos. We put different color pieces into its own ziplock bag. The ziplock bags are cheap. It's see-through so things are easy to identify. We dump all the pieces out to play with them the do a full sort each time.

- cost to sorting : 1 hours for a full sort.
- cost to of retrieval : a few minutes
- cost of space : 1 to 2 liters  (very efficent)
- cost of money : < $5 for a Lego branded storage box. Pennies for ziplock bags.

This was NOT a good solution because we have to pay the cost for all full sort after each play. The ziplock bags has a relative small opening so you can't easily access the pieces, even though you might be able to see it through the bags. So we had to dump all the pieces out for each play. The cost of a full sort  is just too much.

3) Clear plastic shoe boxes sort by high contrast colors Lego colors and odd shapes.

I spend hours in the Container store trying to find the perfect containers. There were so many choices. Ton of different craft boxes, tool storage boxes, document storage boxes, etc. In the end, the simplicity and scalability and low cost of this solution won out. The choices of 5 boxes is not random. Plenty of social experience that shows people can only easily remember 5 to 7 random things together at a time. I figured 5 or 6 boxes would be easily enough for a child to remember how to sort and retrieve.

Here is the picture of the boxes stacked so it's very portable, compact, and easy to manage for a kid.

How we sorted.
1) All the small single decorative pieces, Lego characters, and accessories goes into 1 box.
2) The large, and specialized pieces goes into 1 box. Tires, specialize frames, doors, windows, etc.
3) Grey / White pieces
4) Orange / Yellow pieces
5) Blue / Green pieces
6) Black / Red pieces



- cost to sorting : 3 hours for a full sort. 10 to 20 minutes for partial sort.
- cost to of retrieval : average of 5 minutes per piece (roughly, I didn't time it. I just estimated the play time and number of pieces used in the project)
- cost of space : est 10 liters  (no so efficient)
- cost of money : $2 per box, you can get much cheaper if you wait for a sale.


There is a lot of good things to be said about this method, but it didn't last a very long time. To avoid the cost of full sort, I don't want to dump all the pieces out of the boxes. We search of the pieces inside the boxes and only do a partial sort of the pieces we actually used. This is huge savings in the sort time. The top of the boxes are very wide, so it was easy to access. The problem is that all the pieces with the same color blends together so it's hard to see and as you move the pieces around the big pieces floats to the top and the small pieces sinks to the bottom of the box. The more you search the harder it's to find the small pieces. Also, my son is a purist about the color, the shape and function of the pieces is more important. The average of 5 minute retrieve time was very frustrating.

4) Clear plastic shoe boxes sort by shape and size.

So lesson learned. Here is the new sort method.


1) All the small single decorative pieces, any one notch pieces, Lego characters, and accessories goes into 1 box.
2) The large, and specialized pieces goes into 1 box. Tires, specialize frames, doors, windows, etc.
3) 1 row of notch and flat pieces (< 3 level in height)
4) > 1 row of notices flat pieces (< 3 level in height)
5) full height or more pieces.
6) Technic pieces (rods and parts)



- cost to sorting : 5 hours for a full sort. 10 to 20 minutes for partial sort.
- cost to of retrieval : average of 2 minutes per piece
- cost of space : est 10 liters  (no so efficient)
- cost of money : $2 per box, you can get much cheaper if you wait for a sale.

We are still using method after multiple plays. This is much more intuitive with how we play. I know roughly the kind of piece that I want. I can be as picky the color or not. Most of the time, once I find a piece that fits the situation, I use it. I might search a bit more to see if there is something better but I stop after a few search. The pieces are easier to find because they are all rough the  same size and dimension so you don't have these sinking and floating effect for the small and large pieces.

My son loves the character box. He is always making different characters doing different action and holding different tools / weapons. Everything is easy to find and easy to put away. I can see that he spend most of time playing with pieces here.

5) What's next?

Now at we are familiar with the sort method, I think we can scale this out to about 10 boxes and refine the separation a bit more. The wide flat pieces are still hard to find. The small 2 notch single row pieces are hard to find. I think we can use a different kind of box. The height of the shoe box is not efficient, and the top opening could be bigger. A wide flat box would be much better. I remember this 12x12 box  from the Container Store at $8 each would be better next time.

Anyone with a different sorting method or experience, please share. I would love to hear about it.

save money by refinancing with confirming loan + HELOC instead of a jumbo loan

There is a huge difference cost of the loan and the interesting rate for Jumbo vs Confirming. Here is one example for Schwab.com.

Conforming Loan

Rates as of 11/23/2011	Current Rate1 (%)	Points (%)	APR2 (%)	Monthly Payment2 (Based on $250,000 loan amount)
30yr Fixed	4.21 3.94	0.0 1.0	4.262 4.074	$1224 $1184.91

Jumbo Loan

Rates as of 11/23/2011	Initial Rate1 (%)	Points (%)	APR2 (%)	Monthly Payment2 (Based on $640,000 loan amount)
30yr Fixed	4.75 4.5	0.125 1.0	4.797 4.622	$3338.54 $3242.79

Lender Institution	Interest Rate	Prepay Penalty	Annual Fee
Schwab Bank	3.99%	No	No

Of course, if you have the cash to buy down to a conforming loan then the decision is pretty straight forward. However, there is another option. You can do "structured financing" and get two loans at the same time. Get conforming to the maximum amount, then get a second HELOC (home equity line of credit) for the remaining balance. Here is the break down to the pros and cons.

Pros:
1) Save money on the interest based on the primary loan
2) Save money on the cost of loan (initial down payment)
3) Save money on the current interest for the HELOC (at this time and likely the next few years, the interest rate for HELOC is lower then 30 yrs fixed)
4) With Schwab - you have 10 years interesting only payment option so you can reduce your monthly payment in case of emergency.
5) With Schwab - you have 10 year for draw period so you can access the paid off principle in case of emergency

Cons:
1) Extra paperwork. This is pretty minor, in case fact, with Schwab, they give you a discounted interesting rate if you applied for the 2 loans other.
2) Exposure to adjustable rate. This is a serious risk for long term, but most of HELOC has per annual interest increase limit, and life-time cap on the interest rate. If you very careful with your cash reserve, this is manageable risk. In fact, depending on how much risk is acceptable, you might want to reduce the fixed loan portion of the conforming loan and increase the HELOC portion to maximum your interest rate savings.

All in the all, the risk is manageable, and the saving is quite significant. My beef is that I haven't been told of this option. I refinanced many properties and many loans. I have used loan advisors with the bank, and 3rd party mortgage "experts". Not once, I been advised to take this option. When I saw the the difference between the jumbo and conforming, I racked my brain to think of ways to take advantage of this difference. I came up with this option on my own and asked around multiple banks to confirm this is indeed a viable option. I won't speculate if the sales agents were taking advantage of me, or if they were ignorant also. For this simple change in the application process, I would save tens of thousands of dollars over the life of the loan.

Either ways, this experience demonstrates one of my core belief. Nobody has your interest in mind except yourself. You must get educated on the key aspects any major decisions you made. You can't fully trust advisers, agents, Realtor, banker, CPA,  teachers, etc. You absolutely need to understand and expand your scope of knowledge. You might be able to depend on agents to do the legwork for you. However, you can't trust them to think and look out for your interests in a strategic way.