Just one huge monthly payment could be killing your ability to build wealth. He hit the nail on the head with that statement.
I have first-hand experience with this one. I shared my experience on how I put like $200,000 in my retirement accounts just from paying off my $448.65 monthly car payment.
Cars are a financial suck for sure.
The average car payment in US is now $499. That is straight up stupid. That much invested would be over $5M at retirement.
The FT is basically doing the math that consumers need to do before making any major purchases like a new car. It was noted that, “The quality of the car park has gone up.” Meaning if you walk down many British streets you are more likely to see expensive cars.
That came straight from a report from the Federal Reserve Bank of New York stating Americans are unable to pay their bills.
Considering that the jobs report that recently came out stating job growth has surged by 266,000; it is missing key metrics in regards to whether or not families are staying above the poverty line.
If you are working multiple jobs and in line at the soup kitchen because you can not make ends meet, then something is seriously wrong.
For families that are employed, they have to get back and forth to work. Meaning a car is almost a necessity these days.
California Dreamin’ is better in a Mercedes-Benz than a Hyundai
The West Coast is infamous for its pricey luxury cars. Especially in places like California. Think Fast and the Furious.
Did you see Vin Diesel rolling around in a Prius?!!! Of course not.
Lift up the hood of any of those cars and you could find $100,000 worth of product.
As the F&F series progressed, the cars got more expensive not less!
Movies are prone to production inflation just as individuals are to lifestyle inflation.
For example, the 2014 Audi R8 featured in Furious 7 has a 4.2 coupe with manual transmission starts around $119,150 while the V10 model starts at $155,450, each including destination fees and a $3,000 gas-guzzler tax. Say what??!!!
And my favorite on the Fast & Furious list, the Lykan Hypersport, which was been unveiled at the 2013 Qatar Motor Show. W Motors will limit numbers of the car, which it heralds as “the first Arabian hypercar,” to just seven, each priced from US$3.4 million. What the heck will an oil change cost on this beast?!
Lycan Hypersport
Did the cast of The O.C. drive down to Tijuana (TJ as they called it) in a Kia? Absolutely not! Those young high rollers were riding around in high-quality luxury vehicles!
Places like San Diego and Silicon Valley do not have a mass public transit system the likes of the ones on the East Coast in New York or Washington DC metro. No sir. Those folks have to drive.
And if you have to drive everywhere from the In-And-Out Burger to CVS, then who wants to sit all day in traffic rolling around in a tiny Chevy Malibu.
You want the creature comforts you have at home on the road.
You are willing to buy all you can afford if you have to drive around every day in a car.
I understand why people are shelling out BIG BUCKS on the West Coast to drive Cadillac Escalade’s and BMW’s. Not only are they impressive driving machines, but comfortable too!
Luxury cars have a price beyond just the pricetag
Prestige vehicle sales are driving borrowers bankrupt. If you have to put $500, $600, $700 or even $900 into one household bill on top of a mortgage, then you can drive yourself right into the poorhouse quite literally!
Let’s do a little math. If you save $500.00 per month, your savings may grow to $2,797,302.30 after 40 years. This includes a starting balance of $0.00 and a 10% annual rate of return.
Starting amount
$0.00
Years
40 years.
Additional contributions
$500.00 per month
Rate of return
10% compounded annually
Total amount you will have contributed
$240,000.00
Total interest
$2,557,302.30
Total at end of investment
$2,797,302.30
That is a high price to pay just to have the BMW emblem on your steering wheel.
A lifetime of luxury car ownership and payments can leave your savings tank on $0.
Don’t do it.
With more American retirement savings on life support or at $0, you can make sure this doesn’t become your fate.
Forget buying expensive fast cars. I’d rather you drive a paid off Honda and get rich slow.
You ever drive by a neighborhood that ends in Estates or Hills and look in the driveway?
There are usually enough European cars around for these folks to start a dealership down the street and give Audi a run for their money.
You figure places like Beverly Hills, Miami Beach, and New York are places that can afford these types of cars, but what about places you would think those people may not make the type of money it requires to have those vehicles?
Unfortunately, in my few decades on this earth, I have seen things that you would not believe.
Since, many of you out there know my absolute fiscal pet peeve is new car ownership, you understand my ire as I write this.
I can teach you to get rich without having to sign a car loan document or sell your soul. I’m not Ursula. I will give you back your voice.
I rejected that notion that I must own a luxury car to feel good about myself and feel important. I paid off over $50,000 worth of debt so I could start investing more money in Mr. Market.
The goal was to try to always be increasing my investment portfolio by $20,000-$25,000 or more per year. It took me a decade, but I hit that goal. It’s raining dividends right now. All from just rejecting new car ownership.
I am going to share with you a few car buying horror stories that may very well give you nightmares. So hide the wife. Hide the kids. This is the part in the movie theater where you turn your heads, close you eyes and take a deep breath.
I am about to lift up the hood on the numbers behind what buying new cars will be in opportunity costs in this series of posts on rejecting new car ownership. So buckle up, sit back, and enjoy the ride.
Drip so hard or broke so much
First let me explain what drip is.
It is a slang term many rappers use and there are more or less elaborate definitions of “drip.” Offset and Cardi B use the term to refer to their diamonds and wealth, while Atlanta rapper Gunna told Billboard that “drip” refers to fashion: Drip is your attire, the clothes you wear.
For instance, he doesn’t own like 50 Rolex watches or chains, but only rotated the same like three on Instagram because on the world of gram it’s all about appearances.
He also has stated he had $8 million in Bitcoin, but really he owns $0. He just made up $8 million out of thin air! Why put on this show? For likes of course, what else?
This is nothing new. People inflate their salaries, income, accomplishments, and credentials all the time. What makes this case so sad is that he is telling the world, not just a few friends having a round of drinks while playing a poker game down at the local watering hole.
I have noticed that once you actually stop looking and start listening to what people have to say about their finances, that is when you uncover the truth. Behind all the expensive cars, clothes, and homes most people are stressed and broke.
What is wealth
I gave my definition of wealth in a previous post. Really it means you can meet all your basic needs and have some left over to last you several decades without you sweating whether or not the bills get paid.
For regular folks, a good week looks like this – there’s milk in the fridge, none of the kids got into a car accident or ran over any mailboxes this week, and all the bills got paid on time.
For the wealthy, a good week looks like this – enough food in the cupboards to feed an army, you taking the Rolls to work this week cause the Jag is in the shop being detailed, and you earned more in dividends than you spent last month.
Wealth is every bit as good as it sounds. Let us see the other side of the coin and how the lack of having enough coins can cause despair.
Dream cars are only for those with money in the bank
Here is where the horror stories are about to begin folks.
Brace yourselves.
I knew a guy who loved his dream car so much that it was keeping his bank account in the red. Let’s call him Edgar. Edgar grew up without a father. At one point, he was living in a shelter. After years of toiling in the salt mines, he was able to get an apartment and get on better financial footing.
At the ripe old age of 28, he decided to “treat himself” because he “deserved it” to a $30,000 BMW convertible and eventually he got a girlfriend to ride in that car beside him.
He felt that he had paid his dues so he should have a nice car.
I don’t know about all of you out there, but I look at paid dues as 10, 20, 30, or 40 years of busting your hump to build a security and a solid foundation for your future self and family. Buying a luxury car that costs $500 a month is not the way to having a life of abundance.
How else could he have spent that money?
Let’s say he saved up the $30,000 ($6,000 a year over five years) by taking public transportation to work and invested that money instead of trying t impress people with his wealth…er uh I mean debt that is masquerading as wealth in the form of a nice financed luxury vehicle. He could have also saved up a few tax returns and got a beater to get back and forth to work.
If you save $100.00 per month your savings may grow to $731,411.74 after 30 years. This includes a starting balance of $30,000.00 and a 10% annual rate of return.
Starting amount
$30,000.00
Years
30 years.
Additional contributions
$100.00 per month
Rate of return
10% compounded annually
Total amount you will have contributed
$66,000.00
Total interest
$665,411.74
Total at end of investment
$731,411.74
Year
Additions
Interest
Balance
Start
$30,000.00
$30,000.00
1
$1,200.00
$3,064.06
$34,264.06
2
$1,200.00
$3,490.46
$38,954.52
3
$1,200.00
$3,959.52
$44,114.04
4
$1,200.00
$4,475.46
$49,789.50
5
$1,200.00
$5,043.01
$56,032.51
6
$1,200.00
$5,667.32
$62,899.83
7
$1,200.00
$6,354.01
$70,453.84
8
$1,200.00
$7,109.45
$78,763.29
9
$1,200.00
$7,940.38
$87,903.67
10
$1,200.00
$8,854.41
$97,958.08
11
$1,200.00
$9,859.87
$109,017.95
12
$1,200.00
$10,965.86
$121,183.81
13
$1,200.00
$12,182.43
$134,566.24
14
$1,200.00
$13,520.67
$149,286.91
15
$1,200.00
$14,992.74
$165,479.65
16
$1,200.00
$16,612.02
$183,291.67
17
$1,200.00
$18,393.24
$202,884.91
18
$1,200.00
$20,352.54
$224,437.45
19
$1,200.00
$22,507.80
$248,145.25
20
$1,200.00
$24,878.59
$274,223.84
21
$1,200.00
$27,486.45
$302,910.29
22
$1,200.00
$30,355.08
$334,465.37
23
$1,200.00
$33,510.59
$369,175.96
24
$1,200.00
$36,981.65
$407,357.61
25
$1,200.00
$40,799.79
$449,357.40
26
$1,200.00
$44,999.79
$495,557.19
27
$1,200.00
$49,619.76
$546,376.95
28
$1,200.00
$54,701.76
$602,278.71
29
$1,200.00
$60,291.92
$663,770.63
30
$1,200.00
$66,441.11
$731,411.74
Back to Edgar’s story.
One night while going to see his soon-to-be ex-girlfriend, he was so tired (he would get tired doing like two sit-ups) that he fell asleep at the wheel. He got into a major accident, the car was in the repair shop for months, BMW lent him a loaner, him and the girlfriend broke up (she may have been with him for the car) and he got to drive that DREAM car for all of like 8 months!
He did eventually get it back, but I noticed that every couple of months or so the car would have an issue and need to go in the shop.
He bragged how he was so smart to get an extended warranty or the repair bills would be like $2,000 or more. However, what he is failing to realize is that when that warranty runs out, you will be the one paying those expensive repair bills because luxury comes at a price. A very expensive one.
Last time I laid eyes on him; he still had that car, was still single, and had moved into a more expensive apartment. Instead of investing money, he spent every dime and his bank account stayed on empty.
If he would have been willing to give up the car, he could have saved a small fortune. I tried to run the numbers with him, but he wasn’t really interested. Little did he know that his dream car was turning his life into a nightmare.
After he lost his job, he couldn’t afford to make the payments. His mother had to step in and help him. Maybe if he put the money he spent on those expensive Xbox video games in the bank instead, he might have had the money to pay his bills himself. He needs to keep that devil-may-care attitude in the video games where it belongs.
Dante in Devil May Cry for Xbox
And his motto was “live for the day.”
If living for the day means being broke for a lifetime, I’ll pass. He may have had a great car that made him feel like he had arrived and look like he had money, but he was really BROKE.
Do cars really equal freedom or are they a debtor’s prison on four wheels
I have owned only two cars in my entire life.
They are expensive money-pits with all-wheel drive.
I have seen people spend so much money on car repairs that it makes me want to cry. I have also seen people own three, five, or even seven cars by the age of 25!
Many people never even go on to pay the car off. They just roll over negative equity onto the latest new car purchase. Putting them in a never ending spiral of debt payments.
And do not even think about not purchasing gap insurance.
Gap insurance is an optional, add-on car insurance coverage that can help certain drivers cover the “gap” between the amount they owe on their car and the car’s actual cash value (ACV) in the event of an accident.
Even this can be something only the well-heeled can afford.
Gap can cost hundreds or thousands of dollars additional on top of what you are paying to purchase your vehicle. It must be paid for up front at the time of vehicle purchase. If you cannot pay out of pocket, they will add it to your loan. You are now paying interest on this insurance coverage.
Why do you need gap? I have a friend. Let’s call her Pam. Pam likes nice cars. However, Pam is in-between jobs right now, is several months behind on mortgage payments, and has been in two car accidents in two years.
At one time, she owed an Audi. When a maintenance issue arrived and the repair bill came in at $3,000, she couldn’t afford it so she sold it.
Speaking of repair bills, I have heard stories of people leaving the Jiffy Lube or car dealership after getting the repair quote, which they cannot afford, then go on to say, “I know someone that will do it for cheaper” or “I’ll fix it later” or “I’ll take it to my mechanic.” All just mean the same thing: Broke.
When you cannot pay the repair bills on your car, then how can you possibly afford to save for retirement?
Getting back to Pam, she ended up with gap insurance from a third party. Therefore, she was going back and forth trying to get the money for the car for over four months!
I don’t know many folks that can go without a car for this long. Her quality of life immediately went down. You could feel it with every passing month when you were around her.
One word. I will give you one guess. You give up? It rhymes with repair. Of course I mean despair.
She also has no cash savings and no retirement.
She was very young at the time. Maybe 22. This is what she could have done if she saved up that money and invested it instead.
If you save $100.00 per month your savings may grow to $1,464,646.73 after 40 years. This includes a starting balance of $20,000.00 and a 10% annual rate of return.
Starting amount
$20,000.00
Years
40 years.
Additional contributions
$100.00 per month
Rate of return
10% compounded annually
Total amount you will have contributed
$68,000.00
Total interest
$1,396,646.73
Total at end of investment
$1,464,646.73
Year
Additions
Interest
Balance
Start
$20,000.00
$20,000.00
1
$1,200.00
$2,064.06
$23,264.06
2
$1,200.00
$2,390.46
$26,854.52
3
$1,200.00
$2,749.50
$30,804.02
4
$1,200.00
$3,144.46
$35,148.48
5
$1,200.00
$3,578.92
$39,927.40
6
$1,200.00
$4,056.80
$45,184.20
7
$1,200.00
$4,582.47
$50,966.67
8
$1,200.00
$5,160.72
$57,327.39
9
$1,200.00
$5,796.80
$64,324.19
10
$1,200.00
$6,496.47
$72,020.66
11
$1,200.00
$7,266.12
$80,486.78
12
$1,200.00
$8,112.74
$89,799.52
13
$1,200.00
$9,044.00
$100,043.52
14
$1,200.00
$10,068.42
$111,311.94
15
$1,200.00
$11,195.25
$123,707.19
16
$1,200.00
$12,434.76
$137,341.95
17
$1,200.00
$13,798.25
$152,340.20
18
$1,200.00
$15,298.06
$168,838.26
19
$1,200.00
$16,947.87
$186,986.13
20
$1,200.00
$18,762.67
$206,948.80
21
$1,200.00
$20,758.93
$228,907.73
22
$1,200.00
$22,954.83
$253,062.56
23
$1,200.00
$25,370.31
$279,632.87
24
$1,200.00
$28,027.34
$308,860.21
25
$1,200.00
$30,950.07
$341,010.28
26
$1,200.00
$34,165.09
$376,375.37
27
$1,200.00
$37,701.60
$415,276.97
28
$1,200.00
$41,591.74
$458,068.71
29
$1,200.00
$45,870.92
$505,139.63
30
$1,200.00
$50,578.02
$556,917.65
31
$1,200.00
$55,755.83
$613,873.48
32
$1,200.00
$61,451.41
$676,524.89
33
$1,200.00
$67,716.54
$745,441.43
34
$1,200.00
$74,608.19
$821,249.62
35
$1,200.00
$82,189.02
$904,638.64
36
$1,200.00
$90,527.91
$996,366.55
37
$1,200.00
$99,700.71
$1,097,267.26
38
$1,200.00
$109,790.79
$1,208,258.05
39
$1,200.00
$120,889.85
$1,330,347.90
40
$1,200.00
$133,098.83
$1,464,646.73
I have actually seen people own multiple cars even though they can only drive one at a time. However, you have to maintain and insure all of them. Just give up the ones you are not using and fund your retirement with that money.
Instead of that money going into a 401k, the lender and insurance company was getting rich off these never ending payments they receive. Put that money to work for yourself by investing it.
Tow truck companies are winning
Have you ever seen that show on A&E called Parking Wars? Some of the saddest things I have ever seen to do with cars was on that show.
The struggle is real in the city of brotherly love. So many people in Philadelphia were getting their cars towed and booted for failure to pay parking tickets it was crazy.
Those meter maids were making like $20,000-$30,000 a year and they were on a mission! Giving out those tickets like gumdrops! And making revenue for the city in the process.
I have seen and heard some stories so heartbreaking it made my eyes start watering. I have seen or heard people lose their jobs, then their homes, and finally get their car repossessed with all their belongings in it.
One guy came out running to his car while they were lifting it on the tow truck. He had almost every valuable possession he owed in that car including the photo albums of his deceased family members.
All he asked is if he could go in the trunk and get his stuff (clothing, personal hygiene, photos, credentials). The tow driver said no.
Unfortunately, once the car is on the lift, it can’t be stopped unless you pay or have already paid and can PROVE IT!
And that guy went from being homeless and living in his car, to being homeless on the street.
I have seen people give up their cars due to debt, gambling, substance abuse, you name it.
I know someone who saved up $8,000 and sink every penny into a new car just to have a $100 lower monthly payment. Never mind that she was still living with her parents at the age of 42.
I have also seen people have to choose between paying the gas, electric, or phone bill on-time or pay the car note.
I even had an ex-coworker get her car repossessed twice! She just had to have an SUV. She was making like $12 bucks an hour at time and was only 20. She destroyed her credit and the possibility of home ownership for at least a few years just for the sake of looking rich instead of actually saving towards becoming rich.
She was broke. She had no wealth whatsoever! The little she had, she mailed in monthly installments to Chevrolet.
Society would like you to believe that owning a nice brand new luxury car will make you look like you have achieved success.
It really only means someone has allowed you to borrow money from them and pay them back with interest for the privilege of loaning you their money.
Real wealth cannot just been seen by the naked eye in the form of fancy condos, clothes, jewelry, furs and luxury cars. It is usually shielded from prying eyes in the form of investments and inside bank accounts.
For most folks, a luxury car does not mean you have wealth; it means you have debt. Reject new cars like I have and I promise you will actually start to build wealth.
Like Aesop’s The Ants and the Grasshopper, we must prepare our bank accounts as winter is coming.
When I woke up this morning, it was 44 degrees. Sweater weather indeed my friends. You know what also needs shelter from being left out in the cold, your money! Affluence is your duty.
Affluence Defined
I will define an affluent person as any adult that is saving and investing more than 25% of their income; with more money coming in than going out.
When you have enough income to pay your bills, save, and invest the difference, then you are rich compared to the rest of the world as most are living check to check.
Once you are able to save and invest more than 50% of your income, have more than $2 million in assets and receiving dividend income of $100,000 or more you are fairly wealthy.
When you make more in capital gains than you would from W-2 wage work, then you can kiss the working world goodbye after hitting a goal of $50,000 or more in income.
A salaried adult makes on average $40,000-$50,000 annually. Getting your investment income to this level means, you have created a passive income source large enough to replace a paycheck.
Good for you.
The bigger the gap between income and expenses is the difference between being rich and poor
Recently, I read two books; Evicted and $2.00 a Day: Living on Almost Nothing in America.
The premise is that welfare is dead and families no longer have access to cash assistance.
Those that do eke out a meager existence on modicum amounts of cash, SSI benefits and food stamps.
Within the book it also discusses how landlords were making a mint off the dregs of society, “the poor,” with one making $447,000 a year after expenses meaning he is part of the 1%.
Another landlord had an estimated net worth of $2 million.
The differences in their lifestyles versus their tenants were stark.
The difference between eating everyday or going hungry was just one of many. If this doesn’t scare and motivate you to save more money, then like Poncho’s owner in 101 Dalmations said, “no evil thing will.”
Evictions are on the rise all across America. Why? The reason is that there is no rent cap.
Rents are going up about as fast as a four-year college degree.
Having more than 50% of your income going out in rent leads to one word: Despair.
You must have cash in the bank.
I know that the price of everything feels like it has shot up overnight.
You are in the red and bleeding out money faster than a corpse does on The Walking Dead. However, you must save. The possibilities of something requiring your immediate cash assistance are endless!
All of the sudden Aunt Edna needs a new roof, the dog needs his shots, the basement flooded (for the third time this year) or junior needs braces.
I once had a Harvard educated orthodontist quote me almost $8,000 for treatment. And that was just for my teeth!
The human body has 206 bones and not any of them are receiving service from this guy. After, watching or hearing more stories of outrageous prices from car loans to purses (a Louis Vuitton handbag could set you back $400 or more), I knew that having liquid savings was the answer.
I’m as serious about saving money as Sarah Connor is about eliminating Terminators!
Cash. There is no substitute.
I refuse to lock up all my money in investments, but I know better than to just have all my cash sitting around earning no compound interest or dividends.
Pac-Man shows us how to get the job done
If you have ever played Pac-Man, then you know how the game is played. The player navigates Pac-Man through a maze with no dead ends.
Pac-Man’s favorite snack pellets — the tiny dots he munches as he moves around the video game board — were originally cookies. The “power cookies” are now the larger pellets he uses to eat the ghosts. The maze is filled with Pac-Dots, and includes four roving multi-colored ghosts: Blinky, Pinky, Inky, and Clyde.
The game was not designed with an ending.
You know what that tells me, that your money too should be looked upon as having no ending. You should save as if you are going to live forever.
I hope that last statements lights the fire you need to start saving this paper.
Using Pac-Man as an example, I want you to imagine the four ghosts are the following: debt, despair, denial and broke.
Your job is to eat as many power pellets “dividends” as you possibly can. The only way to do this is by investing your money.
You may be unsure where to start. I want you to start by opening up a brokerage account with a discount broker such as Vanguard, Fidelity, E-Trade or Charles Schwab.
Just FYI: Interactive Brokers (NASDAQ:IBKR) and Schwab (NYSE:SCHW) got rid of stock trading commissions, creating a major shake-up in the brokerage industry, and competitors TD Ameritrade (NASDAQ:AMTD) and E*Trade (NASDAQ:ETFC) quickly followed suit. Robinhood had already been offering this service, but now the big boys are getting in on the action.
Once you open up your account, you can purchase any 500 index or index fund that owns all shares in Mr. Market. If using Vanguard, that would be the VTSAX.
You put in enough money in Mr. Market and he starts to pay you for showing up in class everyday 365 days a year.
You earn money just for raising your hand and saying present.
How compound interest works
Compound interest is the difference between the cash you contribute to an investment and the actual future value of the investment.
In this case, by contributing just $8,000 per year with the annual contribution being increased by 1% per year (cumulative contributions of $278,779) you are able to accumulate $1,080,688 over 30 years. Compound interest makes up $801,908 of your future balance.
If you start saving $8,000 a year and earn 8% on those earnings, look what happens. You will notice in the beginning you earn only $680 bucks, but by year 30 you are earning $80k a year!
You must chomp away at collecting money to invest it and start collecting dividends.
Year
Beginning Balance
Savings @ 1%
Interest @ 8%
Ending Balance
1
$500
$8,000
$680
$9,180
2
9,180
8,080
1,381
18,641
3
18,641
8,161
2,144
28,946
4
28,946
8,242
2,975
40,163
5
40,163
8,325
3,879
52,367
6
52,367
8,408
4,862
65,637
7
65,637
8,492
5,930
80,060
8
80,060
8,577
7,091
95,728
9
95,728
8,663
8,351
112,742
10
112,742
8,749
9,719
131,211
11
131,211
8,837
11,204
151,251
12
151,251
8,925
12,814
172,991
13
172,991
9,015
14,560
196,566
14
196,566
9,105
16,454
222,124
15
222,124
9,196
18,506
249,826
16
249,826
9,288
20,729
279,842
17
279,842
9,381
23,138
312,361
18
312,361
9,474
25,747
347,582
19
347,582
9,569
28,572
385,724
20
385,724
9,665
31,631
427,019
21
427,019
9,762
34,942
471,723
23
520,109
9,958
42,405
572,472
24
572,472
10,057
46,602
629,132
25
629,132
10,158
51,143
690,433
26
690,433
10,259
56,055
756,748
27
756,748
10,362
61,369
828,479
28
828,479
10,466
67,116
906,060
29
906,060
10,570
73,330
989,961
30
989,961
10,676
80,051
1,080,688
Playing for keeps and dividends
Let’s say you start a Roth IRA at 20 and save $6000 annually, thereby maxing it out.
And please if you are going to max out anything, let it be a IRA and not a credit card.
Earning 10% interest, you would have $105,187.
Then you decide to stop investing and let it ride.
After about 23.5 years, you would have over $1M.
After 24 additional years of parking your money on the financial equivalent of Park Place with a hotel, you are sitting pretty on $1,036,063.83.
Investing your money for only 10 years would allow you to stop and not have to worry about your golden years.
Just some food, I mean power pellets, for thought.
Hey if Geoico can have Geicoween, then surely so can we.
On today’s spooktacular blog post, we are talking about why you should avoid the black cat of investing: fees.
They come in all shapes and sizes. From front-load, back-load and even fees you pay to trade stocks.
However, one of the most overlooked of all fees come from commission based salesmen disguised as your friendly neighborhood financial advisors.
They wear the greatest costumes 365/24/7: a suit.
And we are not just talking any suits my friends, but the kind you drop a month’s wages on; think more John Wick and less death of a salesman, as to portray a sense of wealth that make you feel like you be anyone or can do anything and believing you want to run up and kick that football that Lucy is holding.
You are unstoppable.
Then it happens.
You get that investor statement in the mail. You are so excited that you rip the envelope open to see how well you are doing. The market is firing off dividends and capital gains the likes of which you have never seen before. You just know you are making a killing in Mr. Market, right?
Then you see that 2% of your portfolio goes to the fund managers and realize that you just got punked!
You look to your left, you look to your right, but Ashton is nowhere to be found.
Why you must be your own financial advisor
I hate to be the bearer of bad news, but I must confess that being a DYI investor is best.
While reading a plethora of books on the subject of personal finance, I have learned the following:
Don’t invest in anything you don’t understand. It is not enough to buy the product. You must research the company behind the brand.
Know if a company has a competitive edge. For example, once digital cameras came on the market Kodak fell off the face of the earth. The last time I had a Kodak moment was right before Apple unveiled the iphone.
Don’t time the market. If you have money to invest, then do it!
Don’t invest in anything you can’t draw with a crayon.
Invest in index funds instead of individual stocks.
Only invest in funds with an expense ratio of less than 1%.
You can do exchanges between index funds you already own without paying any fees. This is pretty sweet!
Most millionaires are worth between $1 million and $5 million dollars.
90% of millionaires over the last 200 years achieved wealth by investing in real estate.
Forget buying the product and own the stock. Millionaires collect assets – stocks, bonds, real estate, and intellectual property – like monopoly pieces. The poor collect consumer liabilities like big houses, boats, and cars. An asset pays you. Collect assets.
No one cares about your money more than you do
Although self-explanatory let us dig deeper children.
Would you hand over all the passwords to your bank, credit card, and investment accounts over to strangers?
Of course not.
However, in an essence that is what we do when people hand over the financial reins to business partners, financial advisors, and handlers.
Instead of working through the struggles of figuring out how money works, many just give up the responsibility to someone else. Nothing screams “just take some” more than giving people free range access to your money. Nothing attracts grifters more.
Just pick up a few free library books on investing and get started right there.
Heck you can even search online for podcasts or website that talk about money! That is how I got started.
Why you want to have $100,000 in investments
It is simple. If Mr. Market does what he has over the last 90 years, then you can turn $100k into $1M in 30 years. Not bad for a kid that gets picked last to play dodge ball.
Once you hit this number, then the money starts finding you.
Depending on your rate of return you could double your money to $200k in less than 8 years. It took me about 2 to 3 additional years to get that next $50k after the first $100k.
Do you want chocolate Halloween candy or a rock?
If any of you out there have seen The Great Pumpkin Charlie Brown, then you know what I’m taking about.
The reason many of us invest is the same reason kids trick-or-treat because we want the treat, that is something that gives us great pleasure.
You go from house to house looking for a reward for putting together that perfect costume.
Investors buy investment after investment looking for the same thing.
Nobody wants a rock!
I remember a time in school that I sold so much for a fundraiser that I got a chance to go in the money machine (where you stuff money into your pockets for like 60 seconds). I wanted that reward!
But guess what? The night before the big event I stayed up late and overslept the next morning! I missed the whole thing. That could have been my seed money to start this blog! That could have helped me start a Roth IRA at 17! The funny thing about rewards is that you may earn them, but you still have to go and pick them up.
Now I write down everything in a journal so that I do not miss a thing!
I wanted to one day be able to have ‘F everyone’ money like Mark Cuban said: “‘F everyone’ money means you can have your favorite band in your backyard, not care how much it costs, and lend them your jet to get there.” You should invest for your future self to have that option.
If you take nothing else from this post, at least remember this: we like the kind of money that jingles, but we invest so that we can have the kind that folds.
Everyday is a bank account, and time is our currency. No one is rich, no one is poor, we’ve got 24 hours each. -Christopher Rice
It feels like it was just yesterday when the Great Recession hit. The stock market was crashing more than a 10-year-old computer’s hard drive. Folks were in a panic. I even overheard someone saying to a friend that she lost 50 percent of their portfolio! Yikes! I was aghast. In the illustrious words of Velma from Scooby Doo, “Jinkies!”
In speaking with a financial aid officer, they stated while working at a university in DC that parents and students were flooding his office stating they had just lost their job and it was one after the other. It was a revolving door of people just coming to his door and saying they had been give the pink slip. Layoffs were everywhere you turned.
During 2008-2009, you could not turn on the news without hearing that unemployment levels were on the rise the likes of which they had never seen. Food banks, free pantries, churches, and non-profits were flooded with requests for help. The need was so great that some soup kitchens and church pantries were running of of food within days.
After the dust settled, things started to look up. We had hit rock bottom. Now it was time for things to go back up. The bear market went into hibernation and the bull market came out in full force. The market was seeing the red cape and came barreling after it. Stock prices were on the rise. No one could have foresaw what was on the horizon, but for those with cash it was a golden opportunity to invest.
Some experts seem as if they have a crystal ball. People like Warren Buffet, the world’s greatest investor, sits on tons of cash. As of this writing, Buffet’s Berkshire Hathaway is sitting on a record $100 billion in cash, as he feels stocks are just too high to buy. Buffet’s partner, Charlie Munger, believes in being patient and getting a bargain price on stocks. How could he possibly know this will happen? According to Munger, if you are patient, you will see that 2-3 times every 90 to 100 years the market crashes and if you are prepared, you can capitalize on that.
According to Investopdia contributor James Chen:
“The longest-running bull market in history celebrated its 10-year anniversary on Sat., March 9, 2019. It all started from the post-crisis low of March 9, 2009. The S&P 500’s (SPX) closing price on that fateful day in early 2009 was precisely 676.53. As of the market close on Wed., Oct. 9, 2019, the S&P 500 settled at 2,919.40. That represents around a 330% rise in a 10-year period. Not bad for a large-cap stock index.”
If you read my post Stock Splits and Misfits, then you know how right Mr. Munger is indeed. I have actually purchased B class shares (NYSE:BRK.B) of Berkshire. I decided to buy some shares to celebrate my birthday years back. After the stock split, not only did the price drop, but I also owned more shares. I went from owning 5 shares to 35 overnight! No matter what the market cycle, I invest. I do so for the long term. I am not a fair-weather investor. And neither should you be.
Everything I have ever witnessed anyone ever have came for years of dedication, sacrifice, and hard work. If you want to know something about anything, then merely pick a book on the subject. Want a woman’s perspective on life in the 1800’s, then read Jane Austen’s Sense and Sensibility. If you want to be more knowledgeable about the world around you, might I suggest the reading list I published in my post Money Advice From Gossip Girl. But if you want to know more about investing, I say read the Berkshire Hathaway letter to shareholders that is published annually on their website.
Whatever it is, if you want something, then go after it with zeal. If you want something, make a plan and then put action behind your words. I knew that I wanted $100,000 in the stock market. I worked toward investing a minimum of 15 percent into my stock portfolio. Those things took time to do. At one point, I decided to move $26,000 from other index funds into just one: Vanguard’s 500 index fund. I wanted to have $100,000 working for me in just one fund as opposed to several different ones. Once I did that, then it was time to make sure my asset allocation was spread in different sectors that way if one sector tanked, the others ones would keep me afloat. So far, so good.
Never spend your money before you’ve earned it. – Thomas Jefferson
If I could rub on Aladdin’s lamp, I would wish for world financial literacy. Oh…And world peace.
However, what I really want is for more people to get involved with the family finances and build generational wealth for their future.
Within the last 72 hours, I have read that college students are unable to afford housing in Sacramento, Forever 21 went bankrupt, WeWork will be letting go of 2,000 employees, Sports Illustrated (SI) sacked half the staff.
In addition, that there is also an aging population and a doctor shortage due to issues with stress, debt loads in the $200,000-$500,000 range, not to mention under funding of residency programs; and that most of the growth in the job market is concentrated in only two areas: health services and education.
What your job is, should you choose to accept it, is to keep as many dollars in your bank account as possible. Unlike Tom Cruise’s message in Mission Impossible, this message will not self-destruct in five seconds.
If this were a financial hospital, I would want you to form a triage and determine which parts of your finances need most immediate care. Your bank account is the heart of your finances so let us perform a little CPR. Greenbacks Magnet style of course. This post is all about letting you know what you cannot do with your finances in order to grow your nest egg to a fortune. This reminds me of a sketch comedy show called You Can’t Do That on Television. Let me explain.
You Can’t Do That on Television is a Canadian sketch comedy television series that first aired locally in 1979 before airing in the United States in 1981. It featured preteen and teenage actors in a sketch comedy format similar to that of American sketch comedies Rowan & Martin’s Laugh-In and Saturday Night Live.
What I loved most about this show was that they would always say what you could not do followed by some hilarious punishments such as being covered in green slime. And nobody wants that! Who wants to have to wash all that slime out of your hair?
Let’s pretend that everywhere you go there is a bucket of green slime waiting to be poured on your head for any financial missteps that you make. You may think twice about maxing out that credit card or renting that posh pad in the SoHo district for $4,000 a month. I’m just saying.
Here is a list of things that you cannot do with your finances:
Overloading on Student Loan Debt such as paying $100,000 for a Sociology degree
Buying a car that costs more than your annual income
Paying for a family member’s vacation to Disneyland on your credit card because theirs is maxed out
Taking out Personal Loans for more than you can afford to repay
Buying a home for more than four times your salary
Spending on fancy jewelry
Going on shopping sprees at the mall just because its Tuesday
Now that we have gotten that out of the way, let’s talk about what you can do with your finances. The list is short and quite simple:
Save until it hurts aiming for 50% of your after-tax income
Invest in index funds such as the VTSAX at Vanguard
Open up a Roth IRA
Max out your Roth IRA
And that’s about it.
I know what you’re thinking. That’s it?! The list for what not to do was more than twice as long.
That is because there are endless ways to spend money, but the road to wealth is quite simple. Spend less than you make and invest the difference. Therefore, if your take-home pay is $75,000 a year and you spend $50,000 on living expenses, then you should invest $25,000 a year. No matter what the numbers are, the goal is the same. The way to get to your destination may change, as life happens, but keep the goal.
I must now bid you farewell. Do not worry. I will not be far away. I am only a tweet away.
This is not goodbye. As they said in the 1987 He-Man film, Masters of the Universe, we Don’t Say Goodbye, we say Good Journey.
