Back by popular demand, I answer subscribers’ most pressing questions! I did the first round of questions and answers back in March and the mailbag has been filling-up, so it’s time for me to answer the most pressing questions on your mind. Without further delay, here are the latest questions from subscribers and my answers:
Question: I’m sick and tired of earning essentially nothing on my savings. You talk a lot about saving money as a key component to wealth building, but how in the world can a person get ahead in life earning only 1% on their savings? It just seems like a bad idea to let my money just sit there earning nothing when it could be earning a bigger return somewhere else.
Answer: There’s a very common fallacy when it comes to building wealth, and that is that our money has to be doing something. We work so hard to earn it, it’s frustrating to think of our money not working for us. It can feel morally wrong to let money just sit there doing nothing, like we’re not being good stewards. This is especially true when your neighbor brags to you about a hot investment opportunity he just jumped on, one that he’s sure will double his return in no time! But here’s the thing – what if he’s wrong? At that moment you would most likely feel much worse than had you just left your money where it was, earning very little but safe and sound. With the type of investing I do (value investing), there are many times when it’s best to just focus on the accumulation and safety of capital, instead of returns. It’s more important for me to know that the money will be there when I need it (when a great investment opportunity comes along), rather than finding an extra percentage point somewhere. I will tell you that some of the biggest advances in my wealth came right after many years of my money doing absolutely nothing. You see, when the opportunities came (and they inevitably do), I had the funds to seize them and seize them in a big way. My advice is to be patient and build savings not just for savings sake. Rather, so that you have investment capital to take advantage of great opportunities, not some pie-in-the-sky stock tip. Remember Mark Twain’s advice: Sometimes it is better to be more concerned with the return of our money, than the return on our money.
Question: I need to you to settle a dispute between my husband and I. We are both in our early thirties. I contribute the minimum each check into my 401K to get my company’s match. My husband isn’t contributing to his 401K yet. He says we still have plenty of time to save for retirement and that we should “live a little”. I see his point as you only live once, but I have this nagging sense that we should be doing more for our retirement even though we are young. Who is right?
Answer: You are. I like to explain things simply. As Einstein said, if you can’t explain something in simple terms you probably don’t understand it well. With that, here’s an easy math exercise that you can do with your husband to help him understand why you both should be saving as much as you can for retirement now: The average savings rate in this country is below 5%. The median 401(k) has a balance of only $100,000 and the average 401(k) balance at retirement age 60 is around $230,000. Now, if you add the average Social Security payment per person of $18,000 a year to an average 4% withdrawal rate on that $230,000 in retirement, guess what you get? You get a paltry $27,200 a year to live on happily ever after, for the next couple of decades. Doesn’t sound so great does it? Know this, if you continue to put in an average effort on retirement, you’ll get an average result. In other words, you’ll spend 40 years of your life working, only to live off of minimum wage for the next 20 years in retirement. Tell your husband that blowing a lot of money now may be fun, but only if you want to live like a pauper when you’re old. I’m sure he’ll wise-up and see things your way.
Question: My teenage son started his first part-time job about two months ago. Earning $9.00 an hour, and working 25 hours week, results in some nice income for a teenager. I want to teach him the basics of money management and investing now. What advice do you have for a father trying to teach his kid about money?
Answer: Well, first off I want to congratulate you for taking this on with your teenager. I see too many parents avoiding the subject altogether or making things worse by caving-in and buying their 12 year old a $500 phone when they are just trying to make ends meet. I realize it’s tough to say no to an insistent teenager who swears that their life will literally end if they don’t have the latest gadget that their friends have. However, I believe a parent’s first job is to nurture and their second job is to teach. And if a parent doesn’t teach their children about money, who will? Answer: Nobody. Now onto your question. Here’s my best advice: Require him to save half of his earnings to be used for purchasing his own car, for use when he goes to college in a few years or for investing. The other half is his to spend however he chooses. Tie his earnings to a financial goal. What this does is teach your child about the value of money, patience, goal setting and also the basic idea of investment – invest now for something better in the future. Also, there’s nothing wrong with a parent introducing basic investment concepts at this age through simple investing such as in a low-cost mutual fund. Jim Rohn said that everyone should have a goal to be a millionaire in their lifetime, not just for the money but for the person you become during the process. Set a goal for your son to be a thousand-aire and watch the transformation in him. He’ll become more discerning, disciplined, and decisive with money – all great traits to help him become a financially savvy adult. I’m sure your son will do great as he already has a very thoughtful parent to teach him.
Question: I desperately want to be in the 1%. In your experience, what’s the main difference between the 99% and the 1% when it comes to money? I really want your opinion because it seems that you were in the 99% and were able to move into the 1%, so I would like to hear your perspective.
Answer: The main difference is the story that each tell themselves. I find that the 1% tell themselves a story whereby they create their future. On the other hand, the 99% tend to tell themselves a different story – that the future is largely out of their control, that they are a victim to circumstance. Whereas the 99% have great excuses for why they are not wealthy – the economy, whichever political party is in the White House, their crazy relatives and that the dog ate their investments, the 1% ignored all that nonsense and just got busy creating their future. Here’s the key: The concepts of self, what you think about yourself, determines your reactions to life. And your reactions to life give you your experiences of life. You hold the magic wand and that wand will only create a life that matches what you think you are capable of. Nothing more, nothing less. As they say, as the creator goes so goes the creation. To summarize, my best advice to you is to truly believe you can be in the 1%. Have zero doubts. Then get busy creating the 1% life for yourself, which means eliminating all the excuses that the 99% find convenient.
Question: What is the best lesson we can learn from the financial crisis?
Answer: Great question. I think the best takeaway is to be prepared. As scary as the meltdown was, to those who were prepared it was an enormous opportunity. As with any crisis, the key is to isolate yourself from the stupidity – to not get sucked into the bubble and to have cash to maneuver and do the right things. I invested through both the housing bubble and the internet bubble, and the housing bubble was much, much bigger than the internet bubble. We have had financial crises in the past and we will most assuredly have them in the future. As Mark Twain said, “History doesn’t repeat itself but it rhymes.” When it comes to your investments and financial crises, it’s best to just focus on the underlying businesses and their potential to weather the storm and bounce back. It’s also important to have the courage to follow through with your decisions even if it goes against the grain. When everyone else is losing their head, stay detached emotionally from stock decisions and do what you know is right based on your homework.
Question: What traits make for a good investor?
Answer: You need to have the right philosophical framework. Success in investing comes from emotional stability rather than intelligence. It’s more about temperament than IQ. Someone who is patient, can think for themselves (not follow the herd) and has the passion to do the necessary homework are traits needed to be successful in the markets. Also, someone that looks as stock ownership as partial ownership in the underlying business (think like an entrepreneur) will do much better over time than someone who is just buying the stock for quick share appreciation. This type of thinking vastly improves the decision making that goes into stock selection and also narrows the possible selections down considerably. As Buffett says: “If you aren’t interested in owning that stock for 10 years, you shouldn’t own it for 10 minutes.”
If you would like to have your question answered in a future blog post, then subscribe to the blog. We’ll provide you with a link where you can submit questions to be answered. That’s it for this round folks. Thank you for the great questions!
Be free. Nothing else is worth it.
Want to read more articles about achieving financial freedom? Click below to continue reading:
What Albert Einstein Taught Me About Wealth Building
The Bridge Between Goals and Achievement