From a Charles Schwab survey of Chicago residents.
From a Charles Schwab survey of Chicago residents.
An article passed along to me this week with a lead that caught my attention:
A couple of brief observations:
1.) 2/3 Borrowers with more then $50k in debt aren’t paying down their balances. It’s ‘compound interest’ in reverse – if you owe a lot, the minimum payments just barely – or in some cases don’t – cover the accruing interest. I noted this has a striking similarity to Negative Amortization Mortgages that contributed to the financial meltdown a decade ago.
2.) One of my major concerns two years ago was that the government could change it’s rules anytime on loan forgiveness. This article mentions several proposals that are on the table to do just that including eliminating the Public Service Loan Forgiveness plan altogether. It’s one of the main reasons I don’t think using any version of the loan forgiveness plan should ever be your primary payoff strategy.
3.) We’ve noted before about how the government makes over $50 Billion in profit from the student loan program each year. That enormous cash cow for those in power is the primary reason I don’t predict significant student loan reform for the benefit of the borrowers. In fact, this article says the proposed reforms will earn the government an additional $104 Billion over the next ten years. Incredible.
4.) If the government was actually serious about reform for the benefit of the American citizen, there are a number of options. For example they could put a hard cap on total student borrowing at the median household income ($55,775 in 2017), limit borrowing to the cost of tuition, or financially involve the educational institutions.
Last week I teased that aside from hoping to strike it rich with a miracle investment, there was a better route to go. Here is my brilliant three-step plan:
One: Earn More
Dave Ramsey teaches that your most important wealth building tool is your income. To build wealth, you need to generate income. Saving money (income minus expenses) and investing (return on saved money) are impossible without generating income. Obviously more income increases your chances (but certainly doesn’t guarantee) of having a surplus. If we aren’t currently generating a surplus, we need to either (or both) cut expenses and/or generate more income. Here is some advice on generating more income.
Two: Get rid of Debt
Getting out of debt accomplishes two super important things. First, you take over control of your income. Debt is a lien against your future income. Take control of your future income – it will allow you to save which is step one in accumulate wealth. Second, if you are paying interest on debt, you can have a guaranteed return on an investment by keeping that interest for yourself. See this.
Three: Save cash
This seems counter intuitive, but having a large cash reserve is valuable for several reasons. First, you can negotiate significant discounts on things you are forced to buy. Second, you are prepared when assets that we know and understand become significantly discounted. Like when we get our next recession. There is a lot more to be said about the advantages of liquidity, but I recommend trying it to see how it feels.
Concession from last week. While I’m steadfast that we should let go of the myth of being a great investor, it’s really important to understand that yielding a couple of extra percent yields a massive difference in returns over time. Over 20 years, the difference between earning 6% and 12% on an investment isn’t 2x the return, it’s 3x. This goes up even more over time and/or return.
Our country loves the “Horatio Alger” story – the old rags to riches. In our culture, one of the most popular narratives to riches is through being a great investor.* If I can figure out the market, I’ll be able to see something others don’t and it will make me wealthy. Warren Buffett is the hero of this story. I poured through his biography (The Snowball, 832 pages!) when it came out looking for secrets and clues. One potentially controversial belief I’ve developed:
I don’t believe being a “great investor” is a reasonable path to wealth.
We need to let go of the myth that we are one hot stock tip away from financial success. This narrative is baked into our entire culture. TV networks like CNBC and Fox Business are built on this myth (Here is the 8 best TV shows ranked by a website dedicated to investors). Entire print industries (Money magazine, financial help books) have this narrative intertwined in their unspoken promise to the reader.
I’m convinced it doesn’t work and in fact it’s a massive waste of time and distraction from actually accumulating wealth. Why? Here are three of many reasons:
A friend of mine recent came and asked for some advice on which stock to buy with a $1,000. I didn’t have the courage to tell them it didn’t matter. Warren Buffett, the wealthiest person in America and perhaps the best investor in our history has earned around 20% compounded return. Maybe you’re a better investor then Warren Buffett, but if you’re as good as him in 10 years your $1,000 will be worth $7,268.
The point is that most of us don’t have enough upfront capital to take advantage of outsized returns, even if we were to get them. Does this mean we shouldn’t save or make wise investments? Of course not. It should pop the bubble that I’m only one key investment away from financial freedom.
There is a huge separation between how it feels for my $1,000 to be up (or God forbid down) 8 points this morning and the actual impact that will have on my life. That’s why some of the best investors don’t follow the market or invest in individual stocks. That’s why it “doesn’t matter”. There are a dozen other more important financial decisions each month that will affect my financial future far more than the short term fluctuations a $1,000 investment.
My dad went to a three-day seminar on how to use stock shorts and options to make a killing in the market. One major problem (beside the fact that nobody actually “beat’s the market”) is that if my dad did this from home he’d still have to pay for his regular living expense from his earnings. For example, if he earned 20% on a huge sum of money like $250k, he would clear about $50,000 in income before taxes. The problem is that he’d use most of that money up, you know, eating and stuff. It would make it almost impossible to actually accumulate wealth unless you had your living expenses covered by an actual income or you had some amount of money large enough ($2M+) that $50k wasn’t a significant deduction from returns.
Another example. People have asked me about real estate investing. I think it’s a wonderful investment, but unless you have a significant amount of capital don’t plan on making a living doing it for many years. It’s a great side job, but if you’re living on the returns it’s a poor way to accumulate wealth. In fact, almost everyone I know that has done well in real estate has done it by working (improving, changing use, managing, etc.) rather then passive investing.
This one hurts a little. My pride tends to try to convince me that I know more then I really do. I’ve noticed that the professional investors from books like The Big Short and The Snowball spend a tremendous amount of time and attention learning their craft inside and out. I know several professional investors personally, and I’m continually taken aback by how much they put into understanding each investment. Even after exhaustive consideration, they build investment models around the inherent acknowledgement that they will be wrong some of the time.
If someone says you should invest in such-and-such because the kids are using it or something, I beg you to stay away. Virtually all public information is trash. One of the core tenants of all investing is “Invest in what you know”. Being honest about what I really know isn’t easy, but it will save me a lot of dashed expectations and refocus me back on activities that pay huge dividends.
Next week: If you aren’t going to waste time/effort/dashed expectations chasing the next great investing tip, what should you do instead?
A little mini-roundup today.
We’ve discussed at length the business model that is our student loan system, which earns the government over $51 Billion in profit per year. Cracks continue to show around the sustainability of this system.
“If a defining characteristic of the modern world is disorder, then the most fundamental act of resistance is to establish order. If we don’t have internal order, we will be controlled by our human passions and by the powerful outside forces…”
That quote opens Rod Dreher’s discussion on Order – one of the Rules for Living in his latest book The Benedict Option. As I read the book, the intersections of our personal finances and living a counter-cultural life are everywhere. Some obvious (forgoing materialism for simplicity), some subtle.
One common characteristic of people that win with money is that their personal finances are in Order. It doesn’t have to be a fancy system. It doesn’t have to be electronic with spreadsheets and apps. It doesn’t have to be super nerdy with detail down to the last penny. However, people that win with money have their “house in order”. They display what the author of Proverbs called “diligence”.
It might be infinitely practical; I might need to track my spending in writing. Maybe create a file folder for next year’s taxes. Do a simple budget every month. Balance my checkbook. These are all examples of creating a life of order.
It can also be a grand vision of my place in the universe. Dreher highlights three understandings of order:
This week, if it is as grand as seeking to live in harmony with the universe or as imminently practical as opening and processing all our mail each week, lets seek a life of order.
My wife and I fell into a rabbit hole mini-binge watch of TLC’s “My 600lb Life”. Besides being very motivating, the show is a fantastic look into human behavior. It isn’t a coincidence that many financial teachers have used weight loss as a picture of getting our personal finances under control.
As I watched these episodes, I noted a couple observations:
The show follows a subject’s story over an extended period of time, generally about 2 years. It’s obviously not easy to lose 300-400lbs, but it’s easy to forget that a huge change can take a long time. For people in large amounts of debt, I’ve also noticed it takes about 2 years to get out of a massive financial hole. This could be discouraging – but I choose to think of it as encouraging. No matter how big your problem, there is a decent chance that two years from now you could have a completely different life.
The people on the show are there because they’re seeking to get a lap band surgery to help them lose weight. It’s interesting that the doctor doesn’t let them get the surgery unless they lose a significant amount of weight first. He understands that surgery isn’t the solution – the patient has to be willing to change first. The first step is always a change of the heart and mind. It’s helpful to remember that there isn’t any financial fix (more money, better job, lower interest rate, rich uncle) that will ‘fix’ your life. Instead…..
Any big life change will always be initiated by being ‘sick and tired of being sick and tired’. It’s being ‘mad as hell and not going to take it anymore’.
It’s heartbreaking to hear the back story of the people on this show. Nearly all of them can trace their physical problems back to a major trauma – often being abused (physically, sexually) in some fashion. It seems obvious to this amateur physiologist that there is a direct connection between an event that caused the victim to hate their body and the ensuing weight gain. Finances aren’t always like this, but often we can trace our attitudes and behaviors back to the way we were raised to understand money. Often students I counsel will start our conversation with some version of “My parents weren’t very good with money”.
Nobody gains 400lbs in a day, week, month, or year. Similarly, most of us got into debt over a period of time through a lot of small choices.
Losing 400lbs over 2 years will change your life. The show’s participants are always so grateful to have made the journey. Nobody loses that much weight and says “You know, my life is pretty much the same just with smaller jeans.” When I’ve felt the crushing burden of too much debt, it expands into my mental and spiritual spaces. I’ve found myself thinking about money throughout the day, or trying not to think about it and feeling guilty about ignoring my problems. Getting out of debt will change your life. Once you’re out of debt, your life won’t be “pretty much the same just without any payments”. No, I think you’ll find it affects lots of decisions and emotions that you never considered.
The story of the show isn’t just the main character, it’s always the supporting cast. There is usually a massive enabler or two that helped the protagonist get to their current state. Once they are ready to change, a team of doctors, nurses, personal trainers, nutritionist, friends, and family all come along side the person and help them toward their goal. Finances are similar – if you can build a team of encouragers around you it is wildly helpful. Here’s some more info on working toward a goal with a team.
When things are dark, we need to remember that it will be worth it. In “The Pilgrims Progress”, Christian is helped in his darkest times by his companion Hopeful. When we’re ready to quit, what we really need is Hope. Hope that all the sacrifice will ultimately be worth it. Watching the TV show I’m reminded what Paul taught:
“We also glory in our sufferings, because we know that suffering produces perseverance; perseverance, character; and character, hope.”
The best way to get and stay out of debt is to live very frugally. You can’t get more frugal then enjoying a full day of entertainment with those you love completely for free. If you live in the Denver area, I hope you find this useful:
Ten years ago exactly this month, Noelle and I opened the credit card statements from Christmas and realized we owed over $7,000 on those two charge cards. We also owned a condo that wasn’t rented, had a car loan on a sweet Mustang GT convertible, and one more student loan for old times sake.
That week I was playing basketball on a Monday night at Smoky Hill Vineyard church and saw a sign there for a class: Financial Peace University. We had missed week one, but the next night – week two of the class on a Tuesday in January, we were there.
It didn’t happen overnight, but we sold the condo, sold the mustang, lived on “beans and rice”, and paid off all of that within the year.
It isn’t a coincidence that these classes start this time of year. January is a time of new year resolutions and new beginnings. If you’re “sick and tired of being sick and tired”, now is a great time to push the reset button.
You can find a class at a local church. CLICK HERE FOR LIST OF LOCAL CLASSES.
Feel free to reach out to me for more on our experiences and what we’ve done in the 10 years since.
This article surfaced in The New York Times a couple weeks ago:
I’ve written several times including this long post in September of 2015 that I thought the Public Service Loan Forgiveness program was risky and I did not think it was wise to plan on the PSLF program to be your primary loan repayment strategy.
The risk that the government could change the rules at any time was one of the original reasons I wrote that I didn’t like the program. That is exactly what happened to the subjects of that NY Times article and we’ll see how the pending litigation plays out.
There are other alternatives. If you’d like some help working through those then hit me up.