What saying “I don’t have enough money to start investing” says about you

When people find out at social situations that I’m a financial advisor, they often say one of a few predictable things. First they ask semi-jokingly if I recommend the meme stock of the day. My answer is always a polite smile and a firm ‘no’. Then they’ll go one of two ways.

People that are investing their money ask about the market or what they should be investing in. Or, they tell me all about the successful investments they’ve made– they always lead with the successes– sometimes followed by a few they wish they had or hadn’t made.

What do people who are NOT investing their money say?

“Gee, I wish I had enough money to start investing*.” [Looks down at floor and smiles awkwardly.]

“My financial life is too much of a mess to hire a financial advisor right now, but some day…” [Trails off and changes subject.]

Imagine that you’re a personal trainer at a local gym and someone comes up to you and says, “gee, I’d sure like to lose weight/get stronger, so when I do, I’ll look you up.”

Why would you wait until you’ve already accomplished your goal to reach out to the person who can help you accomplish that goal? When has continuing to procrastinate helped you achieve something?

The people who aren’t investing and taking care of their financial lives are the very ones who need to start investing today, and they probably need a push from a trusted advisor.

If you haven’t motivated yourself yet, get someone who will

Be honest with yourself: are you putting off improving your financial life? Most of us are in this boat on at least one major area in life. I’ve been putting off getting into better shape and starting some important home renovation projects for years. Bringing on someone that IS motivated to help you– and will hold you accountable– is key.

60 second quiz to rule out bad free advice

If you’re not hiring a fiduciary, independent advisor like me–and for God’s sake do NOT hire a commission-driven scoundrel— make sure the ‘free’ help isn’t going to cost you an arm and a leg down the road. Give your generous friend or family member this three question quiz:

  1. Are you maxing out your own retirement savings accounts (401k/IRA)? The answer you want to hear is ‘yes’, or at least ‘not yet, but I’m working on it by increasing my contributions every year’. If they start telling you why some other scheme they have is a better investment than their own IRA or 401k, run the other way.
  2. What is the vast majority of your long-term savings invested in? The correct answer here is low-fee stock index funds, which includes my favorite, Target Retirement funds. Bad answers include real estate, gold, crypto/Bitcoin, and meme stocks.
  3. Do you carry any credit card debt from month to month? The right answer is ‘no’.

Three correct answers means your friend is probably ok. Take them up on their offer to help and schedule a meeting with them! One or more ‘wrong’ answers means politely declining their offer of help and finding another friend, or better yet, hiring me.

Bonus reason to start today: early investors have way more money later

Investing early–even with only a little bit– lets compound interest work its magic to the fullest. Consider two investors:

  • Proactive Patty saves $1,000 a month starting at age 30 and stops at age 60. The $360,000 total that she’s invested will be worth $832,000 in today’s dollars if it grows at 5%, a gain of over $470,000.
  • Procrastinating Pete waits until he’s 50 to start investing, but saves $3,000 a month, triple Patty’s monthly savings, and also stops at age 60. He’s also contributed $360,000 total, but it’ll only be worth $465,000, a gain of only $105,000.

Patty will have almost double the money as Pete just because she started earlier, and her investment gains will be 4.5x that of Pete’s, even though they both invested the same dollar amount earning the same annual return, just because she started earlier. Start being Patty today.

How about a real example of the power of compound interest from my investments?

I’ll show you a graph of my family’s investment performance over the last 10 years to further illustrate the point. The y-axis is the dollar value of our accounts (the numbers are hidden), and the x-axis is the calendar year. The height of the total = my total account balance, the green = my investment gains as a portion of the total, and the blue part by itself = the cumulative dollars I’ve been contributing into my 401ks, IRAs, and regular brokerage accounts.

You can see that at the very beginning, the green gains part is only a small fraction of my total, but over time it’s grown to be almost half of the value of my account. If you looked further back in time, the ‘gains’ would actually be losses since I invested before and during the Great Recession of 2008-2009, but over time, the stock market recovered (and how!) and has helped me nearly double all the money I’ve put in so far.

You can also see that while I’ve continued to contribute (the blue piece keeps getting taller), I’m finally getting to the point where my investment gains (green) are outpacing the contributions I’ve been able to make. This is the virtuous ‘snowball’ of money-creating-money that’s given me financial independence at age 38.

*I think part of the perception that you need a lot of money already saved up to benefit from financial advice is because people think financial planning is mostly about investment management. This is totally false. Good advisors focus a lot of attention on spending and saving, avoiding taxes and investment fees, cutting costs without cutting lifestyle, debt payoff, insurance optimization, estate planning, as well as investing.

Hear the great Charlie Munger speak at the 2021 Daily Journal Corp shareholder’s meeting

Munger and the Daily Journal Corp CEO hold forth of Gamestop and Robinhood, bankers, Wells Fargo, Costco vs Amazon, and much more! Munger is Warren Buffett’s right hand man at Berkshire Hathaway, and a wise old man!

Watch the full meeting here on Yahoo Finance: https://www.yahoo.com/now/charlie-munger-speaks-daily-journal-162005167.html

Avoid these 8 common financial mistakes

TL;DR – Avoid buying these things:

  1. cash value aka Whole/Universal Life insurance (buy term life instead),
  2. annuities
  3. credit card debt (pay it off now & set up autopay)
  4. car leases
  5. time-shares
  6. a new car before your old one is completely done for.
  7. Generally avoid buying vacation property or
  8. expensive remodeling your home, at least until you have $1+ million in the bank or are otherwise ready to retire comfortably and have extra money to burn.

Having advised a lot of people financially, I see the same mistakes holding them back over and over again. These bad decisions don’t seem to be bad moves to people at the time they make them, which is why they are so dangerous. The combination of friendly salespeople serving their wicked corporate overlords + our consumer culture makes wealth-destroying behavior seem ok and normal to us. It’s not ok, and it’s harmful, so let me help you recognize it so that you can avoid it and grow wealthy. Your future self will thank you.

Financial mistakes ordered from ‘Absolutely-Do-Not-Do’ (1 – 5) to ‘Be Careful’ (6 – 8)

  1. Buying ‘cash value’ life insurance like Whole or Universal Life insurance. 99.8% of people only need Term Life insurance, and that is what you should buy. If you think you’re in the 0.2% that could benefit from a cash value life insurance, you are almost certainly wrong, even more certainly if you’ve been convinced of this after talking to a salesperson who might be thinly, or thickly, disguised as an ‘advisor’ or some other financial person deserving of your trust. Most are absolutely not. Trust no one. Not your bank, not your credit union, not your mom, not your co-worker, and definitely not anyone who works for a financial institution or gets any type of payment from them. Trust no one. Except us, we’re the good guys.
  2. Buying an annuity. Life insurance companies are again the villains here. They push annuities to people who are afraid of ‘losing/running out of money’, which is… everybody. In reality, only 0.0001% of the population would probably ever truly need an annuity, and even this tiny fraction could find a better one than being offered by your particular salesperson. Pricey annual fees sneakily included so you don’t see what they cost you combined with all kinds of heinous other fees to prevent you from getting out of the product will steal a ton of your money over time. To illustrate, $100,000 invested in 0.1% fee stock index fund over 30 years will generate income of $508,000. In a typical 2%-per-year money-stealing annuity (it’s often even worse), you’ll only get $247,000 over the same 30 year period with the exact same investment risk, less than half as much! Where did the missing $261,000 go? Straight into the saleperson’s and the insurance company’s pockets. They’ll be quick to emphasize how wonderful it was that your gained $247,000, and if you hadn’t read this you would have never known that you actually lost $261,000 thanks to their evil machinations.
  3. Not paying off credit card debt when you have the cash on hand to do so, and not setting up autopay. This one baffles me a little since everyone ‘knows’ that credit card debt is ‘bad’, and yet even when they have cash in a checking account making nothing they sometimes don’t take it to pay off credit card debt costing them 12+%. This behavior is correlated with people who don’t enroll in autopay to always pay off their credit cards in full every month. The best way to avoid this problem is to log into your credit card account(s) RIGHT NOW, and turn on automatic payments for the full balance. Seriously, do it now. Here are the links for Chase, Capital One, Bank of America (instructions here), American Express, Discover, and CitiBank. If you’re carrying debt, transfer any cash you have on hand to pay off the balance right now (the same links above probably get you close to the right place to make a one-time payment. Do this now too!) With autopay, you’re not losing any control or risking a bounced payment because you’ll still get all the same notifications of a bill about to be paid and can always log back in later and turn off/reduce your autopay to a less-than-full amount if needed. You can still check your statement 20-something days prior to your bill being due in case there’s some charge you want to dispute, which there won’t be, because yes, it turns out that the suspicious SAM’S SUPER DUPER 1000 COMPANY charge for $38.93 that you don’t remember and are positive was fraud was just some gas station somewhere that you did indeed fill up at. One urban legend I’ve heard is that it’s “good for my credit score” if you run a ‘small’ balance. This is 100% false. On the contrary, paying your bills on time every time without fail is the best way to maintain a high credit score, so again, set up automatic payments for the full balance amount right now! There’s no danger, and much goodness, in scraping together all cash you have on hand to pay off an outstanding balance now. In the worst case scenario, if you need cash later, you can simply run up the debt again back to where it was.
  4. Buying a time-share. This is another ‘sold-not-bought’ product that you will almost certainly not get enough value from. They come with annual fees, are difficult to sell, especially for any kind of money close to what you paid for it, and make you feel forced to use them even if you’d rather do something else with your vacation time. Just rent a hotel/AirBnB like everyone else and you’ll enjoy more freedom, and almost definitely more wealth.
  5. Leasing a car. Unless you absolutely must have a new model all of the time, or can wangle some business tax deduction that your accountant has actually run the numbers on and assured you it’s worth it vs buying (it’s probably not even then), leasing a car is a wealth-destroying move. Instead, buy a reasonably priced, reliable car and drive it into the ground.
  6. Buying a new car before your old one is used up. Like leasing, buying another car before running your current one into the ground is a very costly thing to do, especially if you repeat this process many times during your life. Whether you choose to buy used cars as I recommend, or if you must have a new car, always drive your current vehicle into the ground before upgrading. This saves you a lot of money by driving your car long after you’ve paid it off. Switching cars every few years is a good way to burn through a lot of disposable income that you otherwise could have invested and become wealthy with. One simple rule to avoid temptation is always paying cash for your next car. This forces you to save for it in advance, and also to reckon with the true cost of upgrading as opposed to fooling yourself into thinking it’s not that financially painful by financing it in little bits each month. Rule of of thumb: Spend less than $10,000 for your next car, and only upgrade when your current vehicle has > 200,000 miles on it or would cost more than half its value to keep driving it.
  7. Buying vacation property. After time-shares, this is another popular way to sink money into something that you will never ever get enough value out of. Anytime you consider buying a vacation property, take the purchase price, and multiple by 5%. Write down that number, and decide if this annual ‘opportunity cost’ is close to the annual value you’d get out of your property. Consider a $300,000 remote lake-front cabin. Sounds nice and peaceful right? Well, 5% * $300 K = $15,000 per year, which is $1,250 per month. That’s roughly how much more you’d make over time on that money if you invested it in a low-fee stock index fund instead. Let’s say you spend a month per year at this resort of yours, which is pretty darn optimistic for most working people. 30 days divided into $15,000 = $500/day. For that price, you could rent a room in the Bellagio in Las Vegas and order champagne room service every day. You are not getting a good deal on your vacations spent at Lake Woebegone. Plus, if you buy a vacation place, you’re gonna feel obligated to ‘get your money’s’ worth and feel pressured to go there every time you have vacation. Maybe you’d rather go somewhere else instead! $15,000 per year can buy a lot of hotel or AirBnB stays, or an annual multi-week European vacation, or anything else you can think of, including a very nice lakefront resort property that you don’t have to own and can instead rent as you like! Vacation property is almost never worth it from a financial perspective. Even if you plan to rent it out part of the time to get some money back out of it, the math usually doesn’t work when you subtract the cost of the mortgage, taxes, insurance, property management and other fees, and maintenance from the revenue you expect (which always ends up being less than you think.) There’s also the headache associated with managing and maintaining property of any kind, which is even worse if you’re also a landlord. If you must buy vacation property, try to get it so cheap that even if you only use it a few weekends out of the year (the most likely scenario), your per-night/annual costs are still reasonable. For example, getting a few acres of raw wilderness land for $20,000 that you could camp on, or even erect a cheap tiny mobile home for another $20 K, might be worth it. 5% * $40,000 = $2,000 per year. 10 nights a year = $200/night, not bad, and the land might even someday increase in value if you buy it in a nice area that is experiencing population growth (but don’t hold your breath.) Rule of thumb: Spending less than $100,000 for vacation property, maybe it’s ok. More than $100,000, DON’T DO IT!
  8. Remodeling your home. People love to spend on their homes by telling themselves ‘it’s an investment’. Every single remodel/addition listed here shows that the value of your house will increase by less than the cost of the remodel. Think about that. As soon as you’ve spent $20,000 remodeling your bathroom to your unique tastes, maybe your home value when you finally sell the place has increased by $10,000, so you’ve instantly destroyed $10,000 in wealth. If that $10,000 loss was worth it to you because you love your new bathroom by that much over the life of the time you spend in the home, that’s fine, but don’t fool yourself into thinking you’re gonna recoup anywhere near the spending in a future home sale. Of course, there are some price-effective home improvements that you should do like adding insulation to save on energy costs, but these tend to be few-hundred dollar DIY projects that no one sees, vs $10,000+ projects that you pay other people to do and then show off at parties. Houses do not build wealth anywhere close to stocks, and the same goes for remodeling them. If you are skilled and can do a lot of the costly labor yourself and scrimp on materials costs, you might be able to add some ‘sweat equity’ to your property as well as enjoying the results of your labor. That said, even skilled people in my experience end up spending much more than the value they create. Rule of thumb: If your home improvement projects total less than less than $10,000, go ahead, otherwise DON’T DO IT!

Any other common financial mistakes that you’ve made, or seen other people make, that you think should be added to the list? Let me know in the comments.

Measure your Financial Fitness right now with this 2-minute quiz

It’s hard to gauge someone’s entire financial picture with only five questions, but I picked out the ones that I thought are most revealing about how someone is doing financially and put together a 2-minute quiz here:

https://www.surveymonkey.com/r/9T9XY5R

Take it to see your own results and see how you stack up to other readers of this blog (a high-achieving bunch in general!)

Let me know what you think in the comments here, or if you have any recommended improvements to the quiz that would make it easier to answer.