Alternative path to wealth

Dollar signLast 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.

The Myth of Investing to Wealth

WarrenOur 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:

  • Not enough initial capital

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.

  • Have to live on the returns

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.

  • Not really an expert

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?

 

*This rags-to-riches through a great investment is woven into our DNA across all cultures. Jesus told a popular parable about this with a twist – investing everything you have to acquire the truest treasure of life.

Order

Benedict Option“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:

  • Discovery of The Order, the logos, that God has written into the nature of creation and seeking to live in harmony with it.
  • Realization of natural limits within Creation’s givenness, as opposed to believing that nature is something we can deny or refute, according to our own desires.
  • Disciplining one’s life to live a life to glorify God and help others.

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 600lb Life – 8 financial observations

600lb-lifeMy 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:

  1. Real change takes two years

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.

  1. Surgery doesn’t fix it

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…..

  1. It always starts with a choice

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’.

  1. Caused by trauma

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”.

  1. A million small choices

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.

  1. This will change your life

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.

  1. Takes a team

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.

  1. A persistent spark of Hope

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.”

Financial Peace Classes

fpuTen 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.

Loan Forgiveness and PSLF

Tnythis article surfaced in The New York Times a couple weeks ago:

They Thought They Qualified for Student Loan Forgiveness. Years Later, the Government Changes Its Mind.

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.

Two Causes of Poverty

powell-poverty-quoteWhat causes poverty? Thinking about this question can teach us a lot about how to create personal economic mobility. Those are big words for get out of debt, build an emergency fund, save for retirement, and create stability for our children.

In my post-election reading, I came across this long interview (actually made and posted before the election).  The author makes a case that endemic poverty is caused by two main factors:

  • Social Structures That Harm. These are cultural forces that are weighted against the poor and against upward mobility. These aren’t unique to our society, the author of Proverbs 22 points out as a matter of fact that the “The poor are always ruled over by the rich.” In the past I have used the term “Risks” to bring personal awareness to some of these structures. Examples of these cultural forces include redlining neighborhoods, the town factory closing, poor educational systems, payday lenders, having bad parents, and corrupt governments. You might call these “Things that happen to you.”
  • Personal Choices. The interviewee calls this “helping people make better moral choices.” This is the personal responsibility that is required to change your life. Proverbs also address this in a number of says such as “Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows over time.” Examples of “Things you do to yourself” include substance abuse, not living on a budget, spending on wants vs needs, not deferring gratification, a poor work ethic, and having a negative attitude.

Here are two personal questions to ponder:

Do my thoughts and beliefs lean one way or the other?

One of the points the interview makes is that Liberal leaning folks tend to over-emphasize the social structures and those that bend Conservative tend to over-emphasize the personal responsibility.* This makes me think that you and I probably overemphasize one side or the other in our thinking and beliefs:

Do I think poor people are lazy? Do I believe it’s impossible to get out of debt in today’s society? Do I tell people that there aren’t any good jobs out there? Do I complain about my lack of money while wearing these sick new Jordans? Do I define my employability by the time I was laid off? Do I believe that employer really isn’t looking for someone of my age, sex, or color?

The biases and beliefs I carry will dramatically affect my ability to change my story.

Where is my personal greatest return on investment?

If you are called to change the social structures, I encourage you to go for it. I believe these are evil institutions of oppression and that Jesus was directly addressing these when he said the Kingdom of Heaven is advancing and the “Gates of Hell” won’t prevent good from eventually breaking these down.

However, practically for us today complaining and worrying about these cultural forces isn’t helpful. To personally change, we need to First recognize the cultural forces so I can artfully navigate around those to the best of my ability and Second accept the moral responsibility for that which God has entrusted me, managing my life.

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*Footnote:  An interesting side note on this I heard this week. The fundamental difference between a liberal and conservative world view is the condition of mankind. A liberal worldview leans humanist, meaning that given the right circumstances humans will move toward goodness. A conservative worldview lends itself toward humans in their nature doing the wrong things.

As I understand it, the Biblical worldview is more centric, that humans are created good and to do good (“In the image of God”) but that because we are infected with the virus of sin we will inevitably do what we don’t want to do (Romans 7:15-20).

Election day and Worry

merleWorry is one of the most destructive emotions to winning with money. Jesus commanded “Don’t worry about your life.” The prayer for “this day’s bread” is a continuous reminder that regret of yesterday’s bread wasted and fear of tomorrow’s lack is worthless.

35 years ago Merle wrote this beautiful poem/song:

I wish a buck was still silver
It was back when the country was strong
Back before Elvis
Before the Vietnam war came along

Before The Beatles and ‘Yesterday’
When a man could still work, still would
The best of the free life behind us now
And are the good times really over for good?

Wish a Ford and a Chevy
Could still last ten years, like they should
Is the best of the free life behind us now?
Are the good times really over for good?

Are we rolling down hill
Like a snowball headed for Hell?
With no kind of chance
For the Flag or the Liberty Bell

People were worried and scared and afraid 3.5 years ago, 35 years ago, and 350 years ago.  Fear destroys Faith and Thanksgiving, both of which are overwhelming indicators of happiness. “Do not be anxious about anything.” Including money. Including elections.