By Stephen Buller
Save for a rainy day. Invest for the future. We all know these nuggets of wisdom, so why – by recent surveys – Junedo one in four Americans have less than $1,000 in savings and only around half feel ready for a $400 emergency expense?
The obvious answer is wages are too low and costs are too high. This is one symptom of our broken monetary system, but it’s an oversimplified view of a complicated issue. Because you and I have no real influence over our monetary system, let’s look at something we can influence in our daily lives – our culture around money.
Disclaimer: I’m not a money manager or financial planner. I can’t give advice, and you should take my perspective with that grain of salt. I am a certified public accountant, business owner, and avid researcher of all things money.
Are you still keeping up with the Jones’s? Or perhaps the Kardashians? Social media has warped our perception of how “successful” other people are as much as debt has. That friend who posted their Ferrari outside Caesars Palace? Don’t envy them; they’ll be paying off that expense long after the feeling of “success” has worn off.
But if you’re honest with yourself, you probably know when you’re spending too much on something you don’t really need. The most important thing you can do on the expense side is avoid, like the plague, putting charges on your credit card you won’t be able to pay off in full. This is the beginning of a downward spiral because of the power of compounding interest.
Einstein called compounding interest the eighth wonder of the world, and if you understand why, you may be motivated to use this power to your advantage: If you’re paying $100 interest on your credit card each month, and you’re able to pay down the principal so you only owe $75 interest the next month, you haven’t just saved $25 – you’ve saved $25 you could use to pay down the principal further, and further, until you’re out of debt.
Once you’re out of debt, you’ll have disposable income that used to go to the credit card company you can now spend on more dinners out, a nicer car, and all kinds of toys! Or … you could live the same lifestyle you have for years and make your money work for you. This is called investing.
Now that we’ve covered spending, let’s distinguish between investing and saving: It’s a good idea to have some funds readily available in a “savings” account, but the interest you earn there will be less than the loss in value of the currency through inflation. In my opinion, precious metals are savings. They don’t earn interest or pay a dividend, but they also don’t lose value from inflation. They are real money and a store of value.
If you’re out of debt and have an emergency fund or comfortable savings level, now it’s time to invest. This order of operations is paramount. You could get a 25% rate of return by paying down your credit card. This is nearly unheard of in investing.
But how to invest? Warren Buffett, arguably the best investor of our time, has a simple rule: Invest in what you understand. This is why he doesn’t own Bitcoin. Even though he admits there could be something there, he doesn’t understand it. How can you make a smart investment if you don’t know what you’re buying?
This is where the current investing landscape quickly becomes a quagmire. If you invest in a 401(k), do you know what you own? If you have a 60/40 portfolio, do you know what this means? If you invest in an index, have you looked at the specific vehicles purchased? And for all of these, do you know what fees you’re paying?
Like any industry, investments have become more and more complicated over the years. I think the main thing to be careful of is owning something you don’t actually own. For example, if you think you should own some gold, and you purchase some GLD, you may find out the hard way that the ounce of gold you think you own has been sold to 180 other people – by recent calculations.
GLD is a “derivative,” meaning it represents something real, but is not the thing itself. Indexes are derivatives, so are options, and so are leveraged funds. Just like our entire monetary system, there are far fewer of the real thing than notes and IOUs. Because of this, I think it’s smart to own the real thing.
Instead of buying the SPX (an index meant to follow the S&P 500), consider becoming a shareholder in a company you believe in. Then, you own an actual piece of the business itself. Better yet, start your own business which you own and control completely.
Instead of buying a REIT (real estate investment trust), buy a single property and rent it out. This may be more work, but you have more control over the success of the investment. You understand what you own and can make intelligent decisions because of it.
There are financial planners out there who spend their entire careers studying investing. They will know better than I the choices available. My perspective is that most choices are overly complicated to the point that individual investors will be violating Mr. Buffett’s rule.
In summary, personal finance doesn’t need to be complicated. Start by spending less than you make. Avoid debt unless it allows you to achieve a greater rate of return than its rate of interest. Build up an emergency fund. Then put your money to work for you. If you can save a small amount each month, and put it to something that generates income for you, this compounds and makes life easier over time.
If you have $30K in credit card debt, $300K in student loan debt, and you bought $500 in Bitcoin, I’m sorry, you’re not investing. You’re gambling, hoping, and praying. It’s okay if that’s your intent, but set goals for yourself, and be honest with your progress towards them.
