Introduction: Case for Saving Money
Of course, one cannot invest without saving. How does one save? By living underneath one’s means. Of course, sometimes saving isn’t possible (taking loans to invest in a college degree and earning no money during studies).
“The purpose of a budget is to protect your most cherished dreams from your most casual desires.” – The Wealthiest Man in Babylon
It’s best to save and invest more earlier. For example, most mutual funds or index funds pay 2% per year in dividends. Even if the stock market does not climb (and it does due to inflation), if you invest from age 30-70, you will make 120% profit (1.02^40=2.20). If you only invest from 40-70, you will only make 81% profit (1.02^30=1.81). Not to mention, if you start saving earlier you would have put more money in your account.
Steps to Take Prior To Investing
Before you invest, it would be wise to (in order of importance):
(1) accumulate an Emergency Cash Reserve: i.e., sufficient cash/liquid assets to live for one year without any income (at least 3-6 mos but more depending on uncertainty of your income)
(2) retirement – match your employer’s 401k contribution (to the point that you get their max benefits)
(2) eliminate ALL debts in your life (including your cars, homes, etc.), paying highest interest loans first
(3) retirement – possibly max your Roth IRA and/or Traditional IRA (combined contribution up to $5,500/yr) – See 401k section below
(4) retirement – possibly max your 401k contribution ($18,000/yr) – See 401k section below
and, only then you should finally: (5) create an investment-bank account for the excess
Before buying your first home:
Max out your 401k until you hit $100k – You are able to take at most $50k as a loan to yourself to buy your first home (half of your 401k or $50k, whichever is lower)
Max out your Roth IRA until you hit $10k – You are able to take at most $10k as a loan to yourself to buy your first home
After buying your first home:
It is logical to save more for kids and other expenses, than to max the 401k.
Tips and Techniques to Save Money
Food and Restaurants and Bars
Eating out everyday can severely lower your income. Pack your lunch and cook at home! If you must eat out, eat out when you have to (ie lunch at work) and have snacks on hand for breakfast and cook something easy and small for dinner.
Know where the cheap eats restaurants are nearby, so you can offer alternatives if your friends/date want somewhere expensive or if nobody knows where to go and would be picking a random spot
Bars – Carry a flask in your purse, back-pocket, or jacket. Drink in the bathroom so you will not get kicked out.
Have alternative activities – Cheap or Free Activity or Date Ideas
Movies – At least sneak food/candy/drinks into the movies
Museums – Tours, Lectures
Parks – Hiking, Garden Tours
Concerts – Possible to find free ones
Other Shows – Comedy, Magic
Social Clubs – Lectures, Events, Activities. Examples of Social Clubs: Rotary
Hobbies – Sports
Skip Cable TV (or even skip owning a TV entirely!)
Cell Phone – Sort of a necessity to maintain communications with everyone
Automobiles – This has potential to be disastrous to your savings. It is best to go for reliability and best value. Buying new at ~$23k might be the smart idea, since you know you drove it gently and it will last longer. However, buying used ~$9-12k, if the car is reliable, is best as you basically save half the car’s worth, and will probably get the majority of its life out of it. It is always best to get a car that you will drive for a very long time with little issues.
Diatribe: How to Invest
In the past, failed Hedge Funds, like Madoff’s, literally zeroed-out their clients. Seven figures, eight figures, whatever, just gone, poof, like a puff a smoke. One day, they simply closed. There was nothing left to “sue”; not another word and they were just gone. Things like this happened to millions in The Great Depression which began in 1929 and lasted until WWII. The banks just closed. There were many people who never put another dime in any bank.
Always remember that, when you put money with anyone else, it can simply disappear. This includes banks and governments. All investments are risks. Be very slow to turn over your savings to anyone.
Conversely, you can’t keep all your savings in cash, because The Real Taxation is the rate of inflation, which reduces the purchasing-power-parity of your cash. The problem is that the government lies about the rate of inflation, claiming it to be 1-3%, when, in fact, it’s likely 10-15%. At 11% annual inflation, it takes seven years to reduce the buying power to near zero. Income taxes are tough, as are gift and estate taxes, but The Real Tax is Inflation. The government causes 99% of all inflation by simply printing more paper money to chase the same amount of goods.
Diligent hardworking people work very, very hard studying and investing in “The Market”, meaning stocks. Making money and losing money, BUT, in the end, net-net, the majority lose money. Even using all available tools, reading dozens of financial services constantly and spending most of every day doing so. If you are smart, doing so will allow you to learn a lot. However, even as you accumulate lots of data, most of it won’t help that much, for many reasons – not the least of which: Wall Street is operated in a crooked manner; there are too many (old and new) ways to cheat ignorant investors. Almost all Financial Advisers don’t really help much, who really just sling ideas to you or “bless” your self-researched ideas, and consequently move your money for you and earn their commission.
It has been shown time and time again, that past performance does not guarantee future results (doing great one year doesn’t mean they will do great the next). This is true for financial advisers, mutual funds, hedge funds, etc. There are not many people who claim to have “made money” in the market over a several decade time-frame. This is not cynicism; it is the actual experience of many very smart, hard-working students of investments. “Financial Advisors” do not know. Hedge Funds Managers do not know. No one knows. It is comical that kids go to college and grad schools, take a few courses, and then become “financial advisers” to people who have actually earned and saved money.
Why pay someone to pick stocks for you, when Stock Indexes perform better year-after-year and charge no fees, impose no restrictions on withdrawing your money, allowing INSTANT withdrawals.
Yes, we SHOULD invest in The Stock Market (as there aren’t many options), but there are several things that years of experience will exhibit:
1) Do not attempt to pick stocks. If you must, allow no more than 10% of your INVESTMENT dollars for race-track bets, and put those funds in individual stocks.
2) Do not rely on Financial Advisers. Their good years equal their bad; they will NOT beat the Indexes over time.
3) Hedge Funds are ill-conceived and allow crooked conduct. MANY folded like Madoff’s. Many will cost you a huge chunk of your net worth. There were dozens of big hedge fund collapses. They didn’t make press much, because they’re bad for the big investment-banking firms, who advertise heavily with the media.
4) BUY STOCK INDEXES.
5) Invest in stock-indexes no more than you can afford to lose (25%? or so of your investment dollars).
The safest thing is to find a way to generate recurring revenue without your labor. This generally means a business you own, co-own, or some form of rental property. Sometimes it pays to own one small system that grows instead of having lots of wee 5% interests. Raw land in the boonies can be good, if you have 10-20 years to wait for appreciation and can afford the taxes to carry it. Rental real estate can be good, if you can rent it for enough to pay taxes and maintenance. Just breaking even would be fine, as appreciation would offset the erosion of inflation.
The best investment will be your own business, if you can find one and afford one. It may be impossible for many to do that. You can lose money in start-ups, but you can also make much more than you lose, in those that survive. When you have a hand in these start-ups, it will be failure or success by your hand. It works better and even failure seems less painful; you did it to yourself; no one stole it from you.
But you may not be able to find any business worthy of doing yourself! Whether you do or don’t, you should be creating investment dollars (all earnings that you do not spend). What is the prudent use of those Investment Funds?
To diversify everything. Use multiple banks, multiple indices, multiple safe deposit boxes, multiple advisers, etc. “Multiple” meaning five or so and no less than three. Whatever Investment Funds exist beyond the foregoing diversified among the following:
(1) 25% in cash (in addition to your one-year’s Emergency Cash Reserve, to invest after Crashes, when things are low)
(1) 25% real estate (apart from your home),
(2) 20% stock indexes,
(3) 20% bond-indexes,
(4) 10% in gold (physical metal only, as a hedge against a currency collapse)
The main message here is: NO ONE KNOWS. EVERYONE IS WRONG a substantial amount of the time. Cash is king, personally and in investments. Don’t bet on Financial Advisers, Hedge Funds or other Wise Men. Don’t try to pick individual stocks. For stocks, buy stock Indexes. If you can do it, YOUR OWN BUSINESS is generally the best place to invest. If you’re a professional (doctor, dentist, vet, lawyer, architect, etc.), invest in your practice. If you’re an employee, be the best one on the planet, arrive early, stay late, expand your job with creative contributions; never stop thinking and creating.
In life, the joy comes more from the journey than from the goals achieved. Make every day into a game, striving to find a way to make your maximum contribution. Most of us don’t trust ourselves; but we must learn to do so. It’s never too early to start being SELF-RELIANT, and you can’t be an “adult” until you’re 100% self-reliant. So, be smart: Start thinking, planning and working towards that goal now. Make short, medium and long term goals, and, as you achieve them, celebrate! You can and should make it FUN.
There are no simple answers, as with much of life. Now go return to your constructive endeavors.
Summary Investment Advice: It is better to invest safely. Index funds, or stocks with high-paying dividends (albeit if you’re not diversified you are taking a big risk).
Note: If you must trade individual stocks, a good place to start is reading the text “Edwards and Magee: Technical Analysis of Stock Trends” [Amazon]
William Ackman: Everything You Need to Know About Finance and Investing in Under an Hour