What Is Investing and How Can You Do It?
There is little debate, if you want to build wealth and you aren't a 7-foot phenom with a smooth jump-shot or a square jawed Hollywood big shot, you need to invest. "Invest in what?" you might ask. Anything you anticipate will hold excess future value.
I will admit, a great majority of the time--probably 90 to 95% of the time--when you hear about investing it revolves around either the stock market or real estate.
A distant third to the stock market and real estate is likely small business investment or entrepreneurship.
Technically, you can invest in anything. Not all investments are not created equal.
Hey, just because a pile of empty cigarette cartons presently holds little to no value, there is no guarantee that it will never hold value. Who knows, all you need is one person willing and able to purchase those empty boxes at a premium and you may be closer to financial independence than you realize.
The reason the above cigarette carton scheme this is a terrible investment example is because these cartons hold no present value and likely will hold no future value either.
If you purchase something and you do not reasonably expect it to be worth more in the future than it is at your purchase price, then you are probably making a poor investment.
Please, don't let me stop you from purchasing a dump-truck of empty cigarette cartons however.
If You Know You Need to Invest For Wealth, Where Does One Start?
Educate yourself. Read, study, and immerse yourself in money management, investing, and personal finance.
I am not saying be the next Warren Buffet and read financial statements all day for the next 80 years, but educating yourself would be a good place to start.
The two most common investment options, both with fairly small barriers to entry, are investing in the stock market or real estate.
How Do You Invest in the Stock Market?
You actually have many options. The primary options are through any of the following accounts:
So investing in the stock market is pretty simple. If you are interested in investing outside of retirement accounts, you can check out either Fidelity or Vanguard (or any other brokerage -- just make sure they are low cost to maintain an account).
If you want the simples investing strategy, look no further than index funds. Pick whatever you want but I personally use these:
You can definitely invest yourself and you will find that you will save a ton of money on expenses this way.
It's pretty simple, if you are younger, consider having at least 75% in stocks and 25% or less in bonds. As you get older, you want to adjust to less stocks and more bonds.
If you have any trouble figuring out how to purchase stocks/index funds, just call their toll-free number and ask how to purchase these in your account.
If You Started Investing In The Stock Market, What's Next?
"Set it and forget it".
My preference is to just keep adding money, whenever I am able, over time to the same funds that I originally purchased. My plan is to do this year after year until I am ready to start withdrawing this money which will be when I no longer need to work for money and can live off investment income.
Please, do not worry about timing the market. Do not worry about crashes. Do not worry about corrections. Just invest in low cost index funds for life and allow your money to compound over time.
Do not listen to any snake oil salesmen who can tell you they have "insider information". Guess what, they don't. Their "pick of the week" and "insider information" has never historically proven to be accurate. Consider that almost every single long term investment advisor has failed to even match the returns of the S&P 500. That's why I choose to invest in index funds to allow me to match the S&P 500 thereby beating 95% of all professional investment advisors.
What About Real Estate?
I have not personally began investing in real estate as of 2020, but I expect that to change over time.
One of the best real estate investment books I have read is How to Buy and Sell Real Estate for Financial Freedom by James and JW Hicks.
The two most common real estate investment strategies are:
These two strategies oppose one another greatly. Long-term rental strategies are geared for those looking for many years of residual rental income and who do not mind either managing the properties themselves or paying somebody else to do it.
"Fix and Flip" is exactly what it sounds like. Buy a crappy place for cheap, fix it up either yourself or with low cost contractors, and sell it for a profit after factoring in expenses to fix it up.
Regardless of how you start investing, whether it be real estate, stocks, or otherwise, you need to get your money working for you as early in life as possible.
If you are hoping to land the $500,000 salary or win the lottery I hate to break it to you, chances are you never will. Please let me know when you do and I will be the first to congratulate your windfall.
The most assured way to generate signficant long-term wealth is saving and investing. Boring? Maybe. But you can laugh your way to the bank someday when you are counting all the zeros behind a big number in your investment accounts.
What Separates Success From Failure in Money Management?
Investing is important. We hear it time and time again. The great wonders of compound interest. The significance of saving and investing over a lifetime is paramount.
Yet despite all the so-called passion around saving and investing, I hear very little discussion about where to start investing.
For many, investing begins first by saving. Putting your dollars to work for you. Many of the self-proclaimed "guru investors" will be quick to point out that you can invest first without saving. This is called investing on margin. It's actually what most of us do when we purchase a home.
A mortgage is actually an investment on margin. We borrow money that we don't yet have to purchase an asset that we hope will appreciate in value over time. For those who want to learn more about mortgages, check out this article.
I am a strong advocate that the only thing to ever invest in through margin is a home. Do not borrow money for cars. Avoid borrowing for clothes. Couches. Appliances. Sure, if you want to have a credit card and pay it off in full at the end of every month, have at it Hoss. I highlighted the benefits of a paid-off-monthly credit card in this article.
Alright, I know by this point many of you want the answer. The answer to the highly controversial question: "What is the most important investment decision of my life?".
Technically, the answer to that question is not anything tangible or a commodity purchased with money. The best investment you can possibly make is in yourself. I am the furthest thing from a soft and sentimental man, but I truly believe this is the honest truth. Investing in yourself through acquiring wisdom, attaining improved health and fitness, and building foundational relationships is the single most important thing you can do in your life.
That aside, I do believe that their is a less-important monetary decision that dramatically affects the trajectory of most young individuals' and couples' financial journey.
The Purchase of Your Home
I previously wrote about why a house is an investment, not a liability like many experts would argue.
So why am I writing about it again? Truth be told, I do not believe that purchasing a home is directly what generates wealth and increases net worth. I do not believe that a home is a significant appreciating asset either.
Rather, my belief is that the purchase of a home has the power to indirectly make one wealthy. One might ask "How is that possible?".
Let me explain. The purchase of your home, particularly your first home, sets off a chain reaction. Many of the successes (or failures) of your future financial journey depend on the decisions you make when you are young.
If you overextend yourself on the purchase of your home, especially your first home, you dramatically reduce the power of your savings. Trust me when I tell you that nobody actually cares what house you are presently living in. Nobody cares how many square feet it is, how many bedrooms it has, or if it has a pool or exposed wood beams. Truth be told, the only person any of these things should ever have any meaning to (aside from yourself) is whoever buys it from you some day. That's it. So technically, you need two people ever to value your home: YOU and YOUR FUTURE BUYER.
With that out of the way, the single most repeated mistake in American society is over-mortgaging themselves on a home. This is commonly referred to as being "house-poor" or being "married to your mortgage".
Even worse, the buck doesn't even stop there. Aside from a larger mortgage payment per month, you also will suffer the following:
All of this because you bought too much house. You spent more than you should have. You sabotaged your own efforts at saving.
If there is one thing that I consistently see that dramatically alters the trajectory of a financial journey, it is the purchase of your first-home.
If nothing else, making the decision to be practical and still leave plenty of room for investing while your are young, purchase far less house than you can afford. Plain and simple.
What would I do next? Invest the remaining savings in low-cost index funds. But hey, that's just me. Do whatever you want. I am no investment professional nor did I stay in a Holiday Inn express last night.
Until next time.
Where It All Comes Together
Two major steps are out of the way at this point. To review, they are:
When you finally cross the threshold of owning more than you owe, you will have a positive net worth. This is where the long-term journey truly begins.
From my point of view, for anyone under a net worth of $10 million, all debt is bad debt. Focus hard on paying everything off. Some of you may want to keep your mortgage, but please realize that the interest on the loan (even if it is only 3%) can dramatically reduce the amount of money you are putting toward investing over the course of 30 years (average mortgage duration).
Remember, over the course of a 30 year mortgage, the average homeowner pays 2.5 times the original purchase price due to interest.
Once You Cross Over "Into the Black", the Fun Begins...
The first two steps of this journey were highlighted in Part 1 and Part 2. If necessary, go back and review those. The sole purpose of putting those two steps together is to get to the point of attaining a positive net worth, even if it's only $1.
Now you can begin to focus on savings, or what is commonly referred to as a "savings rate". I define this as the percentage of your take home pay you put towards savings.
A) To help start to figuring out your savings rate, consider the following:
B) After you have determined how much you are contributing to the above areas, find out how much you are adding to the following accounts on a weekly, biweekly, or monthly basis:
To calculate your savings rate, find out how much of your take-home pay goes to accounts listed in section B) from above. Section A) is still useful in adding up to determine "how much your job is truly worth" as many of these items listed in section A) are significantly cheaper for you as an employee compared to if you purchased them on your own.
Once You Know How Much Your Saving, Find Out How To Increase It!
Now that you have determined how much you are contributing to saving, look at this figure at least twice per year to see if you can increase it.
Never stop doing this step. Ever. You want to see throughout the "seasons of life" if you can be more and more aggressive with your savings efforts. Only you will be able to determine for how long and how much money needs to be accrued before you relax this plan.
Many have used The Shockingly Simple Math Behind Early Retirement article as a means for figuring out their "FI number". Perhaps this will be your next step as well.
To increase your savings rate, you can focus on income and expenses. Ideally, focus on both for the biggest impact.
The goal: Increase income and decrease expenses simultaneously
Ways to increase income:
Ways to decrease expenses:
The wider the gap between income and expenses, the greater potential your savings and thereby investments will have.
If you only have $100 saved, who the hell cares if you invest in something that generates a 25x return... you'd still only have $2,500 dollars---hardly enough to make you rich. This is a 2,500% return on your initial investment of $100. Guess what, "the market" typically returns 8-10% over time, not 2,500%.
Remember, your most powerful weapon at your disposal is compound interest. The way you make compound interest even more powerful is by saving, early and often!
Step 1 - Calculate Your Net Worth or Figure Out Your Lifetime Earnings vs. Savings
Step 2 - Attain a Positive Net Worth (most often by eliminating debt) and create some breathing room with a fund of at least 3 months worth of expenses
Step 3 - Determine your savings rate and find ways to increase it
Money Management Series "Part 1" Recap
In Part 1 of this series, I discussed the importance of getting a grip on how much money has flowed into and out of your life. You had two choices on getting started: 1) Calculate your net worth or 2) Calculating you lifetime after-tax income and compare it to your total present-day account values.
We start here to paint a very clear picture and teach you just how inaccurate your lifelong story about money truly is. You need to understand what your previous money management routine has yielded because it creates an excellent way to track where all your money has gone over your earnings lifetime.
The first step of this program was to find out how much your worth. Now what?
What To Do After You've Calculating Your Net Worth(less)
Perhaps in calculating your lifetime earnings, you realized you've saved none of it. Maybe you are even in debt. In that case, congratulations---you have managed to actually spend more money in your life than you have ever even earned. That ends today.
The focus is on getting back to neutral. Back to zero. For most people, a worthy place to start is actually eliminating a negative net worth.
Whether you have mortgage debt, couch payments, car payments, or whatever the hell else you can finance in this day and age, if you have a negative net worth the focus needs to be breaking even as quickly as possible.
I am not going to get into good debt vs. bad debt. That is a bullshit conversation for multi-millionaires to sip mixers and jeer about. If you are in debt, and have a negative net worth, there is no such fucking thing as good debt vs. bad debt.
It's all bad debt if you owe more than you have or make. If you are living beyond paycheck to paycheck, stay away from the bullshit advisement and arguments about how "houses are good debt" and "cars are bad debt". It's all complete and utter nonsense. Stay away from it and get back to even. Soapbox over.
Begin with the debt snowball or debt avalanche methods. They have been hashed out in great detail and people love Dave Ramsey's Total Money Makeover book for strategies on how to kill debt as quickly as possible. To that end, I will not repeat what others have already outlined better than I. Go read Dave's book or Google search 'debt snowball' or 'debt avalanche'.
Now Make a Plan For Saving
Whether you already have a positive net worth, or you followed the advisement outlined above, you need to develop a plan for where to direct your savings.
You certainly could direct it into a savings account. Perhaps increasing your retirement contribution percentage is now feasible. Maybe you want to open an IRA or a Roth IRA. You have options.
Age old wisdom advises 3-6 months worth of expenses in your savings account. Above and beyond that, your income or savings can be invested. There are many advanced strategies such as saving your 3-6 month emergency fund in your Roth IRA. For now, let's keep it simple and easy to follow.
I personally believe that if you previously held significant debt, teach yourself the discipline it requires to save a 12 month emergency fund. If you have had a positive net worth for years or decades, then you can be more aggressive with a 3 month emergency fund.
The amount you should save in the fund is based on total monthly expenses for a given time period. If you spend an average of $2,000 per month, and you wanted to have a 6 month emergency fund, you would need to save $12,000 ($2,000 a month x 6 months). Pretty simple stuff.
It may be boring as hell, but eliminating all debt in pursuit of attaining a positive net worth---even if it's only $1---is an essential second step after you have calculated your net worth or lifetime earnings and savings as outlined in Part 1 of this series.
Part 2 of this series is all about understanding your financial picture. It is about finding out what action steps you need to take after you discover your net worth or lifetime savings and earnings as outlined in Part 1 of the series.
Thus far in the series, we have covered these basic steps:
Step 1: Calculate your Net Worth or Lifetime Earnings relative to present-day savings
Step 2: Attain a Positive Net Worth and Start an Emergency Fund
In part 3, we will discuss what to do once you have established and completed Steps 1 and 2 above.
How to Quit Complaining About Having No Money.
First off, you need to figure out where money inflows and outflows in your life.
First discover where your income actually goes each month. Does it go all to bills? Savings? A combination of things? Child alimony? You need to know where your money ends up every month so that you can begin to identify how you can keep more of it!
There is an all-to-common mantra out there about having no money. I hear people crying about it all the time. No money to pay bills. No money to save. No money to have one night out per week. The cries are endless.
Well, here is a newsflash for you: There was probably a significant amount of money that has already passed through your life since you began earning it. Don't believe me? Take a look at this example:
Most of my readers are actually probably making well over this amount, and they're still broke.
In the above example, I use the phrase "pass through" when talking about their money. This refers to the "in one hand, out the other" that typifies money management in the U.S. In this country, it is likely that all of your income goes out the door to expenses with little to no savings left over.
As of 2015, according to the U.S. Census data, the average single individual income is just north of $56,000. So how much money does a person making an average of $56,000 earn in their lifetime? The answer: $2.2 million dollars!
Why the Hell am I Telling You This?!
To prove a point. Somewhere along the ride you decided keeping more of your income was not all that important. You may have decided a new car, new clothes, a brand-new house were all worth having savings in the "slim to none" category. You may have decided that it was more important to own something, rather than own your own life. Your decisions make the indentured servitude of regular "nine to five" employment a guaranteed certainty until you meet an early grave.
You are responsible for this. Not your neighbor, Not your brother. Not a divorce. Not the weather. Not your injured knee. Not that tree that fell on your uninsured home. It's your fault. End of story.
Why do we need the pressure of it being "our fault"?! Because by assuming it is your fault, then you can begin to understand that you are the one responsible for changing it. Life happens to all of us. Unexpected expenses will continue to come. They do not end and they come at the worst time. Even innocent expenses like birthdays, holidays, baptisms, wedding, you name it, will continue to come at the most inopportune time. This is life my friend.
I take the extreme "my fault" approach to money management because it carries with it a zero-tolerance policy for excuses. Excuses are wasted energy. They rarely, if ever, do anything to change the actual situation at hand. Excuses are a bullshit coping mechanism that are designed to make you feel better about why you are not doing better. They are also used to help explain to other people why you aren't doing better in the hopes they won't judge you (trust me, they still are judging you unfortunately).
In the words of the late Jim Rohn...
"Don't wish it were easier, wish you were better".
You are the one allowing all of your money to be directed to accounts other than your own. In many cases, if you posses any type of debt, you are actually spending more money than you have even made in your lifetime. So while the lifetime earning numbers that we calculated above might be very impressive (especially if you make more money than the example I provided), you may actually find that you are spending more than your annual after-tax income.
To make the examples above more accurate, use your actual tax returns from previous years and add up what you have made in your lifetime (note: if you need these but don't have them, visit the IRS Website's "Get Transcript" page) . This can be a very empowering, or very depressing, exercise. If nothing else, it should merely demonstrate how little awareness you have about how much money you actually have made.
The concept of calculating your lifetime earnings is a great place to start to introduce you to your income and create a visual of how well (or poorly) you have managed it throughout your lifetime.
Although this is not completely necessary, I do feel it is an important first step to understanding how to manage your money. If you would like greater depth on this concept, take a look at one of my favorite personal finance books, Your Money or Your Life by Viki Robbin.
Where To Start If You Want to Improve Your Money Management Skills...
You have two options:
The reason why it is important to start here is to understand where you stand. You need to know where you are in order to understand where you are going. If I told you we needed to take a trip to Portugal and we needed to outline how to get there, we must know where we started (especially if we are already in Portugal).
If you insist that you cannot attain a positive net worth, or that you do not ever have enough money, how can you possibly know if this is correct unless you look at your inputs. I don't mean simply looking at your checking account every other week, I mean look at your longer term trends. If you were 100 pounds overweight, you would not assume that your dietary habits in the last 14 days was entirely responsible for this.
Pick one of the above, and get started. Increasing your net worth can literally be as simple as gaining a deeper understanding of your personal financial snapshot. Just knowing how much money flows into your life (lifetime earning) or simply understanding how much you have saved in your lifetime (part of net worth), you can begin to identify areas where you require significant input (expenses, savings, tax efficiency, retirement accounts, investing, etc.).
Part 1 concludes with encouraging you to understand where you are starting from. Two choices, 1) calculate your net worth or 2) calculate your lifetime after-tax earnings. Regardless, you decide. It is about getting started and this is proven to be an ideal way to get your ass moving on improving your money management skills.
Do I Need to Know the Simple Math Behind Financial Independence?
No matter where you are along your financial independence journey, "running the numbers" is an invaluable way to determine your financial health.
For many in the FI community, the details of years until retirement has already been written by a popular blogger (the mustache guy).
Aside from knowing your present net worth, why is it important to "run the numbers" at least annually.
We will cover calculating net worth in another post. For now, the basics are...
assets - liabilities = net worth
Assets are anything you can sell or utilize for future monetary value and are assessed at present value to the marketplace.
Liabilities are what you owe. Where is your money "spoken for". Include everything here. Even that stupid yellow couch you had to finance.
Why Should I? What if I Hate Math? etc.
First and foremost, you need to track your net worth because it allows you to always know where you stand financially. How close are you to your target? How much more money needs to be saved? Do I need to increase my savings rate? Decrease my expenses? You will need to keep track of the numbers. Keeping track of the numbers is the primary reason to calculate your net worth on an annual basis.
Yet that is not the only reason to "run the numbers".
The second reason to get your ass moving on the math is because of what you will become in the process. As the late Jim Rohn says (I am paraphrasing), 'Don't start doing something just for the sake of doing it, rather for what you will become in the process'. So if you think you are bad at math or terrible at tracking finances, then imagine how could you will get by practicing every year.
The third reason is because it helps keep you on track and motivated. By calculating your net worth, you are able to track your progress and stay motivated towards your goal. A word of caution: do not let this overwhelm you. Far too often I hear of this causing anxiety instead of providing motivation. You are only doing this to make sure you stay on track. Some years you will make large strides. Other years will seemingly be a standstill. Expect that. It is not supposed to be a nice, smooth, linear road along the way.
Fourth, you will be amazed at what you learn as you practice tracking your net worth every year. For example, four years ago I had no idea what the hell a 457(b) was... Now my wife and I have over $50,000 in one. I am not telling you this to brag---or maybe I am but who cares---but instead to illustrate my point. "You don't know what you don't know until you know it". Not sure who said that but it sounds profound, yet sound and true. You will discover things along the way that you never imagined will accelerate your net worth. It's like finding the login to your pension plan and discovering you have already contributed $70,000 to the plan which you can choose to withdrawal prior to retirement. You never accounted for that in your calculations, and now you get to add it all at once. Trust me, it will happen.
Fifth, you will identify where others are making mistakes. Use this superpower with caution. Don't be condescending. Be helpful. Point out to a friend the importance of investing in low cost index funds. Show your neighbor how to start investing. Inform your cousin of how you decided to choose your life insurance policy.
These points are all manifestations of you getting better at managing money by improving your ability to track and calculate your worth. It just happens naturally. Don't believe me... give it a try.
Quit procrastinating, and start tracking. Track your net worth. Track your expenses. Track your investment contributions and savings rates. If it causes you anxiety initially, that's alright... keep going. If you simply cannot get over the anxiety, then perhaps wealth and financial independence aren't all that important to you.
Leave a comment below. What have you learned by tracking your money over time?
Housing, Transportation, and Food
Let's face it, extreme frugality isn't that much fun.
To most folks, the idea of putting on 4 jackets in the winter and leaving the thermostat at 50 degrees Fahrenheit simply does not appeal. Standing in the grocery store comparing the cost per ounce of beans is, for many, not a recipe for a good time. Single-ply toilet paper is just too damn abrasive for the potential compounded annual savings over 2-ply for most people.
Don't get me wrong, my fellow frugal friends tend to be pretty weird. Some people actually blog about how they use industrial CO2 containers to make their own seltzer water. We tend to be a pretty strange flock.
If you are motivated by cost cutting and frugality on small ticket items, go right ahead. We won't stop you. Stay the course.
But if the idea of penny pinching on the little things drives you crazy then perhaps you need a much needed re-frame on your concept of frugality.
Enter "The Big Three" Expenses
Housing, transportation, and food.
For those of us who cannot tolerate the idea of skipping our latte factor items, there may be bigger fish to fry for you yet.
Saving on housing, transportation, and food is a hell of a good place to start. In fact, it may be the only strategy you will ever need.
Housing. Buy less house than you can afford, nothing more. Married with one kid and no plans for more? Why the hell do you need a 5 bedroom, 3 bathroom house? You don't. Be smart. Warren Buffet still lives in the home he bought for $31,500 in 1958.
Transportation. Don't buy a new car. Ever. It's really that simple. Buffet, one of the wealthiest men alive drives a midsize sedan, a 2014 Cadillac.
Food. Don't eat out. Split meals when you do go out. Cook at home a great majority of the time.
My Own Rules Regarding "The Big Three"
Housing. Give these guidelines to your mortgage or real estate professional if you have trouble computing a price range off of these numbers.
If you happen to know you need a budget, but cannot see yourself trading in your 2-ply toilet paper for 1-ply to save a few Shekels, then focus your efforts in these three areas.
Housing. Transportation. Food.
Comment below on how you have saved in these areas.
There Are Plenty of Skeptics and "Non-Believers" in Frugality
You might be one of them. I can hear it now---"how does saving $4 a day on my latte make me a millionaire" or "I enjoy my latte so it's not an expense worth eliminating if I need to feel deprived". That's just the story you tell yourself.
Perhaps you need to think differently. Our pals over at ChooseFI encourage "thinking a little bit differently". Frugality does not automatically imply you need to move out of your house, sell your car, ride a bike and live in a tent---all by tomorrow morning. It can, but the beauty is that it does not have to mean extreme deprivation.
In the financial independence and frugality community a term referred to as "the latte factor" has arisen. I believe the term originated with author David Bach. He even has written a great book titled The Latte Factor: Why You Don't Have to Be Rich to Live Rich.
But still, there are skeptics. I hear it all the time. Friends and family making excuses for why they just purchased a new car. New shutters. Remodeled their already remodeled kitchen. The excuses are always related to making themselves feel better.
Have you ever heard the statement "I am not making excuses but...". What typically comes after that statement. AN EXCUSE.
Take ownership of your finances and understand that the most important concept behind "the latte factor" is what you ultimately become in the process of eliminating a "fill-in-the-blank" expense.
The Real Cost of Your "Fill-in-the-blank"
What is your "latte"? What is the item that you immediately identify as a regular expense that you purchase at least once every few days, if not everyday?
Figure out how much that item costs you every month. Then take that monthly expense and plug it into this calculator.
For example, say I purchase a sandwich at work everyday of the typical work week. Say that sandwich costs $7. What if, instead, I could make lunch for $2 and bring it to work instead of buying that $7 sandwich? The immediate response is "I would save $5". Yes, but there is more! Now take that $5 per day and assume that you have approximately 20 weekdays per month which you would save that $5. For simplicity sake, that means we will save $100 just by packing lunch. Not bad. But it gets better.
Such a simple example yields over $100,000 difference over the span of three decades.
So imagine this, if you can adjust your mindset to think of "the latte factor", or rather, think of your "fill-in-the-blank" item that you do not mind giving up knowing it will add up over time.
Just assessing your lifestyle habits this way will change you. It will naturally adjust your mindset. It has the potential to train your brain to think differently. It might even eventually make you frugal. Who knows.
Taking this one step further, imagine you are able to find more than one item to save on over a lifetime. Now the potential savings can be in the millions instead of the tens of thousands territory.
So What's the Point if I Can't Every Have a "Latte"
The most common rebuttal to compounded savings is the concern that you will be depriving yourself. Yet that is not the point!
The point is that by choosing to limit yourself for a definitive period of time---like packing your lunch instead of that delicious hoagie for lunch everyday---you can ultimately choose to start purchasing that item again someday. The difference is that by limiting yourself for a defined period of time, when you ultimately choose to start spending that money again, you can restart the original behavior and then some! You can have your sandwich, and a new car, and a boat if you so choose. How? Because you chose to not spend on something for a defined period with the ultimate expectation to gain far more in the long term. This is the classic marshmallow experiment in action!
The Stanford marshmallow experiment was a study on delayed gratification in 1972 led by psychologist Walter Mischel, a professor at Stanford University. In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time. During this time, the researcher left the room for about 15 minutes and then returned. The reward was either a marshmallow or pretzel stick, depending on the child's preference. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures. A replication attempt with a more diverse sample population, over 10 times larger than the original study, showed only half the effect of the original study. The replication suggested that economic background, rather than willpower, explained the other half.
That's the power of choice. That is the power of delayed gratification.
Ultimately the choice to be frugal now is because you can. Because you will never be younger than you are right now. You can possibly handle more now. Work more now. Cut spending more effectively right now. Delay your gratification. That's what frugality ultimately is!
Leave a comment below. What's your "latte factor" item? How do you anticipate this delayed gratification to benefit you in the long term?
Misleading claims by the so-called "Real Estate Gurus"
Most of the gurus out there (especially the guy with "two dads") espouses that you cannot live in an asset. They spout nonsensical, yet convincing reasons why you primary residence is not ever to be considered an asset. I assure you, they are wrong.
They usually cite the returns of housing and real estate in terms of rental property income. They argue that real estate investing does not include your primary residence. This notion is supported with anecdotes of expected returns in excess of 10% annually for rental real estate. But wait, 10% is the goal, it's not necessarily the average expected return of real estate.
According to data collected by Jorda et. al. (2019) from the time period of 1870 to 2015---over a century's worth of data---equities (stocks) beat real estate returns 8.46 to 6.10% respectively after being adjusted for inflation.
That 2.36% difference (8.46 vs. 6.10) in returns is actually attributed largely due to the inclusion of rental yields into the equation. The reality is, capital appreciation is much closer to 1% over the long term, according to Shiller (2000).
Many will argue that the measly 1% capital appreciation on homes is bringing down the real number associated with rental yields. They insist that rental yields are much higher.
Here is the problem, rental yields are very wide ranging and very difficult to predict or forecast.
Why? The expenses associated with owning this property are variable and largely unknown. Many self-proclaimed real estate gurus will cite things like the 1% rule, depreciation, interest deductions, insurance, and refinancing all as tools and strategies to use against these variable expenses. Not sure about you, but this hardly sounds like a solid strategy.
If somebody is coming to you reporting they can tell you how to get your first 30 rental properties, all with $0 down and zero recurring maintenance, I have advice for you... run. This whirlwind strategy deals with highly leveraged properties and more mortgages than you can count.
Further, there are simply too many unknowns associated with rental real estate. Consider any one of the following unexpected costs associated with rental real estate:
Regardless, we are talking home ownership here, not rental real estate.
To evaluate a home as an investment, we will need to know how much a house appreciates over time. This will allow us to measure it's monetary value as an investment.
How much does a house appreciate over time?
Well, this is a tricky one. To find the real answer we should look at the Case-Shiller Home Price Index. There are several indices but the one we focused on was the national home price index.
This index primarily excluded new home construction (there is a separate index for that) and focused primarily on resale of existing homes within a given time period.
When digging through Shiller's website data (available on his website for free), I found historical data---measured with a 3 month moving average---since 1953 (I chose 1953 as a starting point because that appears to be the year they began updating the index on a monthly basis).
Now, the data is broken into real and nominal values. The difference is crucial. The real home price index is adjusted for inflation and is updated for "today's dollars". The nominal price index does not adjust for inflation.
Why worry about the difference between real and nominal values on homes?\
The real home price index from 1953-2019 increased by 54.16%
That's a huge difference!
So why is there such a difference? Well, the nominal home price increase is much larger in the bullets above because it fails to account for the fact that the market value of $1 in 1953 is not the same as the market value of $1 in 2019. This is primarily due to inflation. In other words, a single dollar went "much further" in 1953 than it does today. Plain and simple.
That is why the real home price index is a more useful tool in calculating the expected annual rate of return of housing. This is because it equates yesterday's dollars with today's dollars by adjusting for inflation.
By evaluating the change in real home price index figures from 1953-2019, I calculated an annualized rate of return of 0.81% per year of capital appreciation on your home.
Now that we have calculated the expected annual rate of appreciation of your home, let's dive into the discussion of seeing your home as an investment.
Plenty of confusion surrounding the word investment
Most people simply do not even understand the basics of what is considered an investment. An investment is something that you attain now with the prospects of benefit in the future.
Typically, this is referred to in terms of financial gain. However, this is entirely misleading due to the fact that there are many types of investments don't even generate a positive return.
Some examples of investments that fail to generate positive returns over the long-term:
These are all acknowledged as investments, yet they lose money. So sure, your house can still "lose money" if you sell it at the wrong time, but it's still worth something.
Technically speaking, an investment is simply something that you anticipate will be worth something in the future. You hope it will be worth something in the future that is of benefit to you. But remember, beauty is in the eye of the beholder. Your definition of "benefit" is not a universal definition, it is unique to you only. Many would simply be happy knowing that their house will be worth something someday, regardless of how it compares to the original purchase price--especially if it's paid for.
But can your house make your rich like other investments?
Yes. At least indirectly it can improve your overall net worth.
One of the best write-ups I have seen on this conversation is found here, written by Michael Bluejay. This guys does a great job of analyzing the entire circumstances of a home ownership in a simple, one-page article. He breaks down the concept of "Rent we didn't have to pay" as line item in expenses.
Rather than reinventing the wheel, Bluejay discusses how the average person will have to pay hundreds of thousands of dollars in rent over a 30 year period---which is also the length of the average mortgage.
He breaks down the difference in value of two scenarios:
The math is extraordinary but the numbers are very practical and they do check out. See them for yourself here.
The punchline in Bluejay's article is that by renting you lose over $300,000 over a 30 year period, even if you invest the difference between renting and buying. He recognizes in his example that home ownership may appear to lose money as well, but that's if you forget to include "Rent you didn't have to pay". Basically, this is what he considers to be an objective measure of "having a place to live".
Paying rent over 30 years--at $1,200 per month--would cost you a total of $432,000. At the end of that 30 years you have nothing to show for the $432,000 spent in rent. What's even worse is that this calculation does not even account for the fact that your rent will most assuredly increase over the course of the next 30 years.
Even if renting costed you $300 less per month than buying---which is lunacy because in many desirable areas renting is actually just as expensive, or even more expensive, than buying---and you invested that difference over 30 years with an 8% return. You would have $407,819. You didn't even break even! Not to mention that you also don't have a place to live after 30 years of hard work. That's a terrible trade-off.
So yes, home ownership is considered an investment.
Why Your Primary Residence is the Best Real Estate Investment out there.
First and foremost, let's address the intangibles. Home ownership, subjectively, is:
Objectively, a home is a place to build equity. To realize appreciation, even if it is only 0.81% per year. Further, the faster you pay off your home, the less interest you will ultimately pay.
Many will argue that mortgages and home ownership will leave you paying nearly 2.5 times the original purchase price. I agree with that math if it takes you the full 30 years to pay off the house. That is why I recommend early and aggressive principal reductions---or buying your house in cash if you are in a position to do so.
Your home is definitely an investment. Case closed. Show this to your pals who insist they have a helicopter leverage strategy to take out a second mortgage on their home to buy a 300 unit apartment building because it is a great investment. I feel sorry for your friend, I really do.
1. Shiller, Robert J. 2000. Irrational Exuberance. Princeton, N.J.: Princeton University Press.
First, Let's Clarify a Few Things
Mutual funds are professionally managed investment portfolios. They are funded primarily by the shareholders (investors) like you and I. Typically, their goal is to generate the highest rate of return annually for the shareholders of the portfolio. They do this by actively trading investments inside of the fund. Marketing and advertising for new shareholders (investors) is typically done by comparing recent returns of the mutual fund to that of a benchmark--typically an index fund.
Index funds are actually a type of mutual fund. An index fund is a passively managed that seeks to match a given index. The Dow Jones or S&P 500 are two of the most common indices.
So why is there so much confusion out there about mutual funds vs. index funds?
Although index funds are technically a type of mutual fund, they differ significantly in almost every other way.
For the sake of clarity, it helps to divide the entire category of mutual funds into actively managed and passively managed. Therefore,
What's the difference between mutual funds & index funds?
Fees and management style.
The typical fees of a mutual fund are in excess of 2%. The typical fees of an index fund are often less than 0.1%. Doesn't sound like much? Well, it is!
Let's look at an example headline from our friends over at NerdWallet:
Millennials have decades to save for retirement, but also decades of exposure to avoidable investment fees. NerdWallet analyzed a variety of scenarios and in one case found that paying just 1% in fees could cost a millennial more than $590,000 in sacrificed returns over 40 years of saving.
What is even worse is that this only looked at a 1% fee. Compounded over time, the loss of that measly 1% fee is extraordinary as outlined above. Remember, the average active mutual fund fee is well over 2%.
To make matters worse, if you happen to hold an actively managed mutual fund in a taxable brokerage account, you would need to beat the passive fund by 4.3% just to match the return of the passive fund. Why 4.3%? Professor Mark Kritzman of M.I.T. conducted a study reported in The New York Times.
So if your so-called "index beating" mutual fund was held in an taxable brokerage account.
If you held this actively managed fund in a tax-advantaged retirement account, you would still need to generate at least 2% higher returns just to break even with the passive index fund.
The average actively managed mutual fund consists of the following fees:
Why choosing actively managed mutual funds is a mistake...
There are professional money managers who spend their whole entire life's work trying to time the market and, guess what... 92% of actively managed funds fail to match the returns of the market (i.e. S&P 500 index) over a 15 year period.
If your investment horizon is 15 years or greater- which includes you unless you plan on dying in the next 15 years- you stand practically no chance of picking the 8% of actively managed funds that will outperform the market. What's worse is that not only would the actively managed fund you chose have to beat the market, but it would need to beat it by at least 1.5 to 2.0%.
Why would it need to beat it by at least 1.5%? Fees and expenses. The average index fund has less than 0.1% in fees compared to the 2 plus percent fees of active funds.
See why you are better off choosing index funds instead.
I know many are thinking that 1 or 2% in fees doesn't sound like a lot, but trust me, it is. For example, saving even just 1% on fees could result in big differences compounded over time. Remember, the cost of a 1% fee could cost you $590,000 over 40 years, which is a very typical investment horizon.
WARNING: Your Financial Advisor Will Sound Very Convincing!
Remember, index funds---i.e. passively managed funds---do not generate revenue for your advisor's company. The index funds simply don't make money for your advisor because they do not have all of the above fees associated with them. Beware, your advisor might still charge an "advisor fee" or an "administration fee" which is why I am a firm believer in the DIY method of investing in index funds.
I promise that your current advisor will pitch you something like this:
Our advisement provides you expertly managed portfolios with industry leading research tools that often outperform index funds. We have an experienced staff dedicated to selecting blue chip funds that have demonstrated superior returns in recent market conditions.
This is literally what my advisor emailed me when I exited a high-cost fund through a previous employer's 401(k) program.
It's bullshit. Complete nonsense. Even if they do generate higher returns, it does not last. Never has. Likely never will.
I am certain you will be able to find funds that outperform the market over 1-, 3-, or even 5-year periods. But outperforming index funds over your entire investment lifetime? Outperform for 30 or more years, in a row? They don't exist. Not one ever has.
Perhaps some of you are in a position to require a financial advisor. Some might need to receive tax advice. There are even some of you who are not willing to take just a few minutes to open your own account or call your advisor and inquire about fees and how to lower them by switching to passively managed index funds in your portfolio.
To those of you which this applies, I encourage you to seek the professional help that you require. Do not do so blindly however. Ask. Ask. Ask.
Ask about fees. Ask about expenses. Ask about commissions. Be inquisitive. It's your money and to them, it's just a job, so ask them about the costs associated with their account.
Your failure to ask could result in hundreds of thousands of dollars of expenses over a lifetime.
It's not unreasonable to think that if you start investing in your twenty's, and you live to be 90, you may be invested in the market for 70 years! Now imaging what those 2% fees will do to you compounded over 70 years.
Be smart. Be curious. Don't be shy and don't be afraid to ask some questions. Even if you were able to save 1% in fees just by switching to passively managed funds, it could result in you retiring much earlier with a lot more money someday. It's worth it.
Until next time...
Comment below with your experiences with active vs. passive funds. Index funds vs. mutual funds. Fees and expenses. Run-ins with your advisors commissions. Share with your community.
Financial Independence Retire Early (FIRE) Movement
You may have heard of it. It's all the rage lately. Financial Independence Retire Early. FIRE.
But is it for real? What is it all about? Is it here to stay?
Early retirement. Passive income. Side hustling. Sequence of return risk. Debt payoff. Taxable vs. retirement accounts. Roth conversion ladders. These common FIRE terms are on fire right now (all pun intended).
Truth is, I think it's all bullshit. Don't get me wrong, I am all for financial freedom and financial independence, but I don't want to join a cult to do it. I also don't think that the only way to do it is with retirement as your sole motivator. As a matter of fact, let me argue why retirement is the worst possible goal to shoot for!
Why FIRE is Misleading...
Most of the financial independence community is very encouraging. Great tips and helpful information are shared like never before.
What concerns me is that personal finance is, well, personal. It is unique to your own individual needs. Your path to financial freedom and financial independence does not have to be based on retiring early, although it certainly can be.
Most of us want to work. Hell, most of us are looking for enjoyable work. Problem is, most of us hate what we are doing right now.
The people of the FIRE community tend to discuss passive income strategies that allow you to sip pina coladas at the beach all while having a $5/hr virtual assistant (VA) drop-shipping shit from China to customers. Sound like bullshit? Well, it is.
Yes, there is certainly money to be made this way. How long will that last? Who knows. It might last for decades. The problem is it doesn't seem to drive at the real problem here, your lack of purpose in life.
Early retirement does not seem to encourage a blood-thirsty pursuit of purpose in life. We all need purpose. Dr. Viktor Frankl famously discussed the importance of purpose in his personal true story about surviving the holocaust, Man's Search for Meaning.
The FIRE movement is centered on the concept of achieving your number, the target net worth and savings so that you can have F-you money and walk away from your job. I agree, having F-you money is very valuable in life. But the real value is in attaining that number so that you can do the things you really want to do in life.
Trust me, as badly as you think you want to, you really don't want to "retire". Retirement means doing nothing. The Oxford dictionary describes retirement as:
Retirement - "the action or fact of leaving one's job and ceasing to work"
That's not what I am looking for. I am not looking to cease working. I am looking to find more meaningful and purposeful work. Most of you are as well.
Early retirement is what happens when you treat money as a means to and end. Treating others, and things such as money, as a means to an end is very dangerous and leads to greater self suffering. This concept is hashed out in best-selling author Mark Manson's work Everything is F*cked: A Book About Hope.
What society certainly does not need is a bunch of "retired" 30 and 40 year olds, aka early retirees. What society does need is more people pursuing purposeful work.
If you have a problem with being told when to come and go from work, when to take vacation, and arbitrary rules, then I will be the first to inform you, so do I!
Reaching financial independence, for me, is about permitting myself to do the type of work and choosing my own suffering in exchange for long-term benefit. Manson introduces the concept of choosing your own suffering as a form of "self-limitation". His example is choosing to "suffer" through the pain of physical exercise in exchange for greater strength, endurance, mobility and improved health.
So What Are We Doing Instead of FIRE'ing Ourselves?
We are setting ourselves up to choose our own suffering.
When you are paycheck to paycheck, in debt, too much month at the end of the money, you are not in a position to choose your suffering. You need your current job with all the bullshit hours, rules, and demands that come along with it. You rarely can afford to step away and fully pursue your passion. You're stuck. Many of us are there. Many of us have been there for decades. Even I was there. It wasn't pretty.
25x annual expenses. 4% withdrawal rates. Geo-arbitrage. Passive income strategies. These are all examples of common FIRE terminology.
You can use any or all of these terms from the FIRE community, but use them not as a means to an end. I propose you use them, not to retire, but to find your purpose. A pivot on FIRE is relating to "work optional" status wherein you can choose to leave your current job at any time as you are financially secure.
I encourage you to separate the "FI" from "FIRE". Actually, just get rid of the damn "Retire Early" and focus solely on financial independence (FI).
Financial Independence permits many opportunities for you to no longer be beholden to your present job, especially if you dislike it greatly and do not find purpose in your work.
The biggest problem in the FIRE community is the underlying concept that we should eventually be able to attain a life with freedom to recline in a hammock everyday if we so choose. The major flaw of this underlying ideology is that there will always be a part of your life that will suck. Always.
Assuming that we are chasing an environment that completely avoids suffering and "the suck" is completely impractical and in and of itself, ironically leads to greater suffering. We suffer more, not less, when we assume that life should be completely devoid of pain and suffering. That's a complete falsehood. There will always be pain. Suffering. Suck. Always. It is not avoidable.
The real power is when you are in control of choosing your suffering. Physical exercise is a great example. Me sitting down and writing this damn post when I would rather do just about anything else, is another example. I am choosing to do this, rather than something else, with the concept that there will be some future return---hopefully the future return will be you getting your head out of your ass but only time will tell.
Leave your comment below. Love it or hate it, life is not about retiring. Going through your entire life with one goal, to retire, seems like just about the worst form of hell on earth. I challenge you to look further and realize that your problem is not that you are not retired, your problem is that you just haven't yet found out why you are important to the world, however big or small that importance may be.
How to Make a Real Difference Saving Money
I read and hear about too many cost-saving methods that are impractical and simply do not produce quite the return they promise.
First, figure out why you want to save money.
Are you saving for a house? Saving for college education? Saving for an investment? Saving for anticipated expenses such as repairs or maintenance?
Second, please realize that saving money does not have to be difficult. It also does not need to lead to massive deprivation where you use candles instead of lights (plus candles are a fire hazard).
To prove my point, here are 3 stupid items that I save real money on every single year. Results may vary.
3 Crazy-Simple Ways to Save Money Every Year
1. Eating Almonds
Almonds, my number one snack food item.
I buy a ton of them. Not literally a ton, but damn close. I buy a 40 oz. bag of whole raw almonds online for less than $13.
A typical 16 oz. bag of almonds at the store is $8. The bag I buy online is 2.5x larger but costs less than twice as much. 40 ounces of almonds would cost me over $20 at the store therefore I save about $7 per 40 ounces. I go through a full 40 ounce bag every week which means I save $7 every single week. This adds up to over $350 of savings every single year.
2. Smarter Paper Products
Single-ply toilet paper and half-sheet paper towels. These two are game changers for me.
I can buy a 1000 sheet single ply toilet paper that lasts for 6 months for less than $7 at the store. Supposedly the average American uses $10 worth of toilet paper per month. By switching to single-ply TP I have been able to spend only $14 per year, per person in our household. This comes out to a little over $1 per month of TP usage. This equates to a savings of over $100 per year compared to the average American 2-ply user!
Half-sheet paper towels allows me to be significantly more mindful of how much paper towel I was using. Full sheets are bullshit. Rarely do you ever need a full sheet. I cut my paper towel usage in half my first year using half-sheets. How much could this switch realistically save? I use two less rolls per week at which saves me over $150 per year.
3. Drinking Filtered Water
Using a water filter could potentially save you big money every year. If the typical household purchases a case of water every week, and bottled water is approximately $5 per case of 24 (depending on where you live), you could save $250 in bottled water every year. If you buy two cases per week, you might be able to save over $500 per year.
Some of these companies even claim you can save up to $1000/yr, but that's a pipe-dream in my opinion.
There are two popular options depending on how often you want to change the filter and how easy you want your experience to be:
Saving Money is Easier Than You Think...
Here is proof that even these 3 ridiculous ideas can save you serious money every year without effecting your quality of life via deprivation.
These don't involve turning the thermostat to 45 in the winter or 90 in the summer. They don't involve biking 30 miles to work. They sure as hell don't include eating noodles everyday (just almonds).
What are 3 things that save you real money every year that might surprise fellow readers? Comment below with your answer.
Do you really know what a mortgage is?
A mortgage is a loan used for the purchase or refinancing of a home. Basically, it is the amount of money given to you by a lender for the financing of a home.
The mortgage loan typically has many variable parameters including, but not limited to:
Mortgages are typically used when you do not have all of the money upfront for the sale of a home. If you do happen to have the entire upfront cost, you might still choose to mortgage the property if you do not want to give up such a large sum of money, all at once.
Is a mortgage the same as any other type of loan?
Yes and no.
A mortgage is specifically a loan given as financing for a home purchase, or refinancing. As collateral for such a large amount, the home is typically put up against the value of the home just in case you stop making payments to them. If payments should stop, the home could then be used as collateral for "repayment" of the loan. I use the term "repayment" very loosely because you lose more than just a home in this process. In the process of losing a home due to missed mortgage payments (essentially a foreclosure), your credit score will be ruined.
Keep in mind that this black mark--i.e. foreclosure--stays on your record for 10 years. Avoid this at all costs if you ever hope to receive any other loans or favorable terms on lines of credit.
Lenders typically get into business to lend money, not to own homes. They want your money, not the house. I have heard of many people getting away with up to a year's worth of missed payments prior to the lender foreclosing on the property. This is proof of concept that lenders really don't want to be homeowners.
How Does the Whole Mortgage Process Work?
The initial process is pre-approval or pre-qualification. These two terms are often used interchangeably, but they are not the same thing.
A pre-qualification is solely based on information that you provide to the lender. This is simply a way to help you "ballpark" the amount of money you can hope to spend on a home. This is by no means a commitment nor is it a hard number to use when making home buying decisions.
A pre-approval is a much deeper dive into your history including, but not limited to:
How Does a Mortgage Work?
An offer, which almost always includes a pre-approval letter, is accepted by the seller for a specific property.
The next steps, aside from inspections and other contingencies, is to attain final approval for the mortgage financing. This is the part where you are looking to finalize and receive a set amount of money from the lender to help you purchase a desired property.
The lender will now perform any final verification of employment, income, and assets. The lender will also attain details on the specific property for which you intend to purchase following the seller's acceptance of your offer. The lender will look to have the following done prior to fully approving your loan:
If everything checks out and terms are acceptable (interest rates, loan duration, loan type, etc.), you will move towards closing on your mortgage.
Closing on your mortgage involves meeting with the lender and your real estate agent (and any other necessary parties depending on your state's rules/regulations). This is where you will sign your mortgage papers. This is also typically when your down payment and closing costs are due.
This is, by no means, to be considered as financial advice. Check your local rules and regulations as some of the information will ultimately differ according to where you live or desire to live.
Above is a summary of the basic "moving parts" surrounding mortgages. It is important to understand the nuts and bolts of a mortgage since it will likely be the largest financial transaction of your life.
The creation of mortgages permits many to attain home-ownership where it would otherwise be impossible due to limited income and finances.
There are many more things to know about mortgages. Learn everything you can. Knowledge is power.
Best of luck and happy hunting!
Why This Headline?
I am amazed about how many people recommend paying for everything in cash and proponents of the Dave Ramsey camp encouraging you to cut up your credit card.
Why do I have such a problem with this? Cutting up your credit card to avoid spending does not correct the actual behavior of overspending.
I agree, it adds friction to the process which psychologists believe will interfere with the participation in an undesired behavior. Another example would be to lock your cigarettes in a cabinet and hide the key in a separate location. Why do this? Your lazy ass will be less likely to smoke because you added a layer of friction by needing to travel and get the key, then go unlock it to have your cigarette.
Personally, I think it's avoiding the original problem and instead not attempting to recognize and regulate that you have undesired behaviors and urges that need some attention.
This is similar to cutting up your credit card. If you have poor spending habits, then recognize that and slowly work to control this issue. I am just not convinced that you have to cut up your credit card.
An Argument for Credit Cards
First, I love me some credit card rewards. The guys over at ChooseFI have a great section on their site about travel rewards and credit card rewards.
Cash back. Bonus points. Airline miles. Travel rewards and hotel credits. There are a lot of things to "game-out" and benefit from when it comes to credit card rewards.
No credit card? No rewards.
Let's address the elephant in the room. Why do credit card rewards even exist? At face value, they certainly do not exist to benefit you if you are an absent minded spender who is a glutton for marketing schemes. These rewards encourage spending behavior. Period. You are lying to yourself if you say that rewards will not encourage you to spend more. It will, unless you are hardcore about recognizing your spending habits and budgeting.
Next up, cards can help build your credit score if you pay attention to the following factors:
Why is building a credit score important? The benefits of a high credit score (720+) include:
Another benefit is the added safeguards of carrying a credit card vs. carrying cash all the time. If you think this doesn't apply to you, think again. Lost your wallet? Just immediately call and freeze your credit card. If there was cash in your wallet, likely forget you ever had it.
Pulling out your wallet or money clip and revealing some serious paper is asking for trouble. Remember, criminals are looking for targets. If they see you at the checkout shuffling through your $100 bills to pay for a light bulb you might have an expected encounter on your way out to your car in the parking lot.
Good Credit Habits
Yes, you can be both frugal and have a credit card. I won't tell anyone. Just manage it responsibly and it can be an asset instead of a hindrance. Spend wisely and continue to find ways to improve your saving habits and spending behavior.
Let me know your thoughts in the comments below.
Help, the sky is falling...
During a period of decline in the market, many individuals feel like they are losing their shirts (and possibly much more).
Remember, corrections happen often.
Technically, so do recessions.
How often do these things happen?
According to USnews, corrections happen at least once every 2 years. Sometimes they happen annually. They typically only last a couple of months and drop less than 20%.
Bear markets and recessions occur every 4-5 years. They typically drop at least 20% and last for about a year.
The worst meltdowns or recessions in recent memory was "The Great Recession". That sucker lasted 18 months and was the worst meltdown since World War II. During that period, the S&P 500 lost approximately 50% of it's total value.
Now that's scary stuff!
How long does it take to recover?
The biggest factor of a recovery is if you actually stayed invested throughout the downturn.
You see, if you choose to try and time the market and you get out while it's on the way down, you technically have to time it correctly twice. Once on the way down, and then once on the way back up when you "re-enter" the market. Market timing is a fool's errand.
There are professional money managers who spend their whole entire life's work trying to time the market and, guess what... 92% of actively managed funds fail to match the returns of the market (i.e. S&P 500 index) over a 15 year period.
That means if they cannot do it, why would you even try? You don't have the time to sit around and read financials all day like these guys do.
As for how long the typical recovery takes.
In a correction, you'll be back to square within a couple months.
Recessions take a bit longer but you usually get your shirt within 18 months, sometimes shorter, sometimes longer.
The point being is that they always come back. Always.
Sometimes it took a little longer (think Great Depression). And sometimes you were back so quickly you didn't even realize it happened.
What's a guy (or gal) to do?!
Or better yet, invest.
In what? Low cost index funds. Come on, you knew that was coming.
If you are an index fund investor, selling is the worst idea during a downturn. If you are in single stocks, and not in index funds like any smart person would be, then you might actually want to consider jumping ship and selling. My advice for the future would be stop trying to stock pick because you're no good at it.
It was the infamous Warren Buffet who said when the sky is raining gold do not go outside with anything less than a washtub. This is the very basis of the saying "buy low".
When you invest in index funds like the S&P 500, you are betting on the entire US economy. Realistically, in order to lose ALL of your money, the entire country would have to "go out of business". I wouldn't bet on that happening. Even if it did, who cares how much money you have in your investment accounts! Maybe you better start working on that underground bunker you've been yapping about with your buddies.
If you are invested in broad based, low-cost index funds, then I would plan to stay the course and avoid selling in a downturn. The only time that you could ever lose money is when you sell or the entire U.S. economy goes bankrupt. If you stay invested in a broad based index fund you won't have to worry about any single company going out of business because you are investing in hundreds of them at a time. They would all have to lose their shirts for you to lose everything.
If you had a crystal ball and could see things coming, perhaps you could adjust your asset allocation (i.e. more bonds and less stocks) prior to or immediately after the beginning of a downturn.
Take the onset of the coronavirus (COVID-19) for example. If you were someone who first heard of the potential outbreak on the news somewhere around January or February of 2020, you could have adjusted your asset allocation since bonds tend to hold there value better than stocks (conversely, bonds also tend to have lower returns than stocks over the long-term).
Then, once the "meltdown was in full effect", shift back from heavy bond holdings back into equities and enjoy the recovery as the market rebounds back to it's previous high.
In the end, no results are guaranteed. Past history does not indicate future returns.
Besides, I have no idea what the hell I am talking about and this sure as hell isn't investment advice. You have to take the good with the bad. Those reported 10% returns on equities in the stock market include the horrific 50% downturns like we experienced in 2008. Like I said, you take the good with the bad.
Remember, corrections happen all the time. Further, we are never that far away from a full recession. They are coming. They will continue to come. Be prepared. Be ready to see your accounts lose massive value. This are the harsh realities. If you cannot handle it, maybe you should go bury that money under the shed and let the worms get it.
Life Insurance Policies examined
Insurance in life is often important, but the needs of each person is very unique and individualized. Especially when it comes to life insurance. You need to consider your current situation, and get out your crystal ball to imagine what the future will look like, to decide how you will approach the decision regarding obtaining life insurance.
What is Life Insurance?
Basically, it is a contract. The payer (insured) is in contract with the insurance company. The exchange is a monthly premium for a "potential" lump-sum payout. To remain under contract, the insured pays a monthly premium to remain eligible for a "death benefit", which is often the lump-sum payout.
Common Types of Life Insurance
Basically, there are two types of life insurance. There are fixed term policies and there are lifetime policies.
Fixed term policies are often referred to as term policies, or term life insurance. This type of policy provides coverage for a fixed period of time, most often 25-30 years. Term insurance is the most popular type of insurance chosen by followers of the financial independence and financial freedom movements as it is typically the more cost effective form of life insurance.
Lifetime policies typically come in the form of whole and universal life insurance. These policies typically carry a much higher premium, however they are payable for the lifetime of the insured instead of expiring after a pre-determined period like a term insurance policy.
Essentially, for a higher monthly premium you stay eligible for a "death benefit" payout under a lifetime policy. In a term policy, if you are not deceased prior to the policy expiration date, there is no "death benefit".
Why I Chose Term Life Insurance
My thought process, like many F.I. followers, is that I chose the policy with the greatest amount of value.
Term insurance affords a much lower monthly premium than a lifetime policy. This allows me to instead invest the difference in cost between the two policies, month after month, compounded over time.
By investing the amount I am saving with a term policy, compared to a lifetime policy, I will take advantage of the effects of compound interest. While taking advantage of this investing strategy, I do not leave myself "exposed" to significant losses of income that my family would incur should I meet an untimely demise. This is because I still have a substantial "death benefit" payout with my term life insurance policy.
I chose to avoid a lifetime (universal or whole life insurance) policy because I anticipate reaching a significant amount of net worth and savings by the time my term life insurance expires.
In other words, if you anticipate saving and investing for the next 30 years, you will likely have a significant amount of money at the end of that term. The need for continued coverage beyond this point, like you would receive with a whole or universal life insurance policy, is unnecessary and very expensive.
Overall, everybody is different
Assess your needs on an individual basis. Consult with a financial professional.
Not everyone will benefit from a term policy over a lifetime policy. Your circumstance may be unique. Consider your overall picture (time horizon, investing strategies, savings rate, anticipated expenses, etc.) when determining what type of life insurance policy will best meet your needs.
In the end, whichever policy you choose, I do feel that life insurance in general is an excellent thing to consider for anyone with a spouse or dependents that will be deeply impacted by your loss of earnings upon the event of your death.
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Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.