Financial Smarts. You Probably Don’t Have Any.

In many ways I am referring to myself here. Lets look at a some facts:

*The average investor earned 1.9% over the last 20 years, while a stock/bond mix was around 5%.

*Studies show that giving people money doesn’t make them better off.

*The majority of wealthy athletes become former athletes who are broke.

*People who win the lottery are not happier and usually end up broke.

*Student loan debt is in the trillions, as people are getting boutique degrees with free money and massive loans, not degrees that train them to earn money.

I reference a lot of things here, and this is a blog, not journalism, so you can choose to believe me or not. People are educated in a lot of things, but are rarely educated in money. Unfortunately, if your lifestyle today is living with financial struggles, no matter how hard you work, or how much money other people give you, in the end it is very unlikely to change throughout your entire life.

Now for a quick political aside: if you hear someone giving away wealth or redistributing income, and let me assure you this happens on both sides of the aisle, you are either looking at a functioning moron, or someone who is buying votes with your tax money. Beware!

I developed many bad habits throughout my career and a few good ones. Of the few good ones, three stand out. Whenever I received any financial windfall, like a sale of an item or a bonus, I used a rule of thirds. I paid bills and debt down with 1/3, invested 1/3 and blew 1/3 on things that did not buy any more debt, but were fun. Secondly, I always paid extra on my home mortgage. It was like a game, and it turns out in the end it really paid off. And lastly, from the moment the program became available at my work, I contributed the max to a 401K. There were a few months where we got in a bind with young babies and had to back off, but that is the only exception.

Financial education is a journey, and one that few actually take. Advise comes from all angles, but the sources of that advice in a lot of cases are flawed. Take a close look at your broker: is he ultra rich, sporting a Rolex Daytona watch, owns an awesome house, and always on vacation, or is he in a $200 suit wearing a Seiko? You are assaulted on the internet about companies that will help you achieve wealth or eliminate your debt. Do you suppose they really want you to succeed or are they looking to reallocate some of your assets into their pockets? Your sources of information need to be many, and from people that can be trusted. In my personal research, I find bits of useful information in may places, and in all cases that information can be substantiated by multiple sources.

Lets assume you know the basics: Debt is evil and will not allow you any financial freedom, taxes are the single biggest expense in your life, lack of savings will ensure you live on Social Security in retirement, and you have to get your spend under control. Do you have that down yet? Lets review.

You have got to eliminate any debt other than mortgage debt, and that mortgage debt needs to be gone on the day you stop working, whether you are 35 years old or 59 years old. If you have debt, work to consolidate at lower interest rates, either thru special offers, services, or even consider a home equity for a short term boost. Note that none of this works if you continue to acquire more debt. Pay extra on your mortgage whenever you can. If you ever come across a windfall of money, step one is always to eliminate debt.

Taxes are tricky, and you can do what you can to gather deductions, but really you have to step out of the box if you want to impact this. The most common way is an income producing LLC that allows decent deductions. Rentals of things, not limited to real estate is a viable option, but the deductions can be somewhat limited. The question here is will you have time to do this along with hold a job, or could this possibly become your job. In business there is also high risk. As a rule of thumb, the first owner of a business bears the brunt of the costs for infrastructure setup, etc. After that, the business is evaluated on revenue, or the wholesale value of the assets when bankrupt. My preference here it to be a follower, unless you have that light bulb idea, but I have been involved in both models and I believe the decision is personal.

Savings are necessary. The first rule of savings is to put aside every penny you can afford pre tax, or avoid tax on gains, as an IRA or 401K. Legally avoiding taxes in every way is critical. Beyond that, post tax savings will set you free. If you cant afford much, do a little. Think of it like exercise, where a walk leads to a jog, and jog to a run, and a run to marathon, its okay to start small. Build a habit. There are a vast selection of on line places to put small amounts of money that gain interest so if its $25 a week, so be it.

As far as spend, we have previously discussed methods to set goals, cut back, and monitor progress. I want to emphasize again that you strongly need to consider being mobile. Living in a state with high cost of living that includes high housing cost, high local taxes, high property taxes, high state taxes, and high fuel costs in any combinations is a fast way to limit wealth, no matter your pay rate. I didn’t even have to write ‘California’ or ‘Washington’ or ‘New York’ for you to get that, right?

Now on to some more subtle points.

Assets can be a confusing topic. Classically, an asset is anything that has value, but forget that NOW, as its a trap to keep you from financial freedom. A quality asset is something that does not loose value, but gains value or produces income. A car, furniture, electronics, powersports toys, bicycles, RV’s etc are not quality assets. Those are things like property, stocks, bonds, gold, quality watches, etc. Remember the comments on the broker? I did not mention him owning a fancy car, but I did mention him owing a Rolex watch. Those are great examples of the bad versus good assets. If you do a little research, you will actually see high end watches appreciate nicely and cars do the opposite.

You have to have some depreciating assets, like a car, motorcycle, or in my case a high end bicycle. Consider a used model with low mileage, or a demo bike instead of a new shiny bike, to let someone else take the depreciation hit. My last bike purchase was a year old demo, at 50% original cost, but it was still expensive! I personally believe in owning depreciating assets that enable my lifestyle and health, but limiting my lifestyle to a few activities that I love to do. The next thing to do is keep them, until they are unrepairable, or the repair costs are bigger than the asset value. My wife is sad when something becomes unrepairable, but I do the happy dance, because I know we have extracted all the value from that item.

When I think of the importance of rapidly depreciating assets, I have a conversation burned in my head between a close friend and his wife. Her shoes she was wearing were pretty ratty. He asked her when she was going to get new ones, and she said she wanted to stretch them to a year of life. The backstory is that she is an avid trail runner at a very high level and those shoes are logging hundreds of miles month. I thought about my high end runners in my closet which in no way had over 50 miles on them. As a matter of fact, we interrupt this blog so I can go for a run… So as you purchase assets, remember what is really your number one asset. You. Your health, your mental stability, and your low stress level are everything. If that takes a $200 pair of running shoes you are going to put hundreds of miles, $4k bike you are going to ride for thousands of miles, a $20K side by side that it going to take you deep into the back country, that is not an asset but a tool. The key is to use it to its fullest.

The topic of investing has been covered before, and there are masses of information on the web in this area. At least a third of the opinions on the web are either wrong, or a means to extract your cash. A person who charges you for seminars on how to be successful is usually not successful in the areas you need help. Look for people and groups that live it. People who live off passive investments and are experts like Sam at Financial Samurai, people who built wealth from nothing like Robert Kiyosaki, full timers in RV’s, retired persons with no pension, and people who are living off the grid in a tiny home or a van. If you want a lesson, walk around and talk to full timers in RV parks. I have yet to meet one that can’t describe tax structures, health care, and optimal temperatures in great detail! These are people who invest in themselves, and have tidbits of knowledge that are valuable.

For most out there, investing using the classical model of 100 minus your age for a stock/bond mix will provide return well above inflation. If you are doing this, be wary of any financial advisor that delivers this as the sole product. Use a low impact Roboadvisor like Betterment or Fidelity Go, which are typically run 66% or more less fees, and provide more flexibility and access. I have been in situations where meeting my financial advisor is like getting an audience with the Pope, and I get the impression he is confused over who owns my money. You will find with some research you have the ability to manage your own money. Also, see previous blogs explainging you should invest in some things that don’t cycle with the SnP 500. That could be real estate and rentals, which are not my favorite due to high initial cost but can provide large returns, crowdfunded real estate equity (Fundrise), peer to peer lending (Lending Club), high interest savings (Ally), layered high interest CDs (Ally and many others). That list seems overwhelming, but its really not. When, not if, you are saving a few dollars, open a Roboadvisor account and use a classical investing model for risk. On top of that, pick another low entry point investment vehicle that is diverse from stock market and stick with it.

Simplify your life down to the things you want to do, use your knowledge to gain wealth, and shine the rest on. I ride bikes with a retired engineer who is 62 years old. He owns two homes in highly desirable locations, one in St George Utah and one in Cour d’Alene Idaho. He makes me look like a cheapskate when it comes to bikes. His stuff is ultra high end all carbon fiber, meticulously maintained, and he can easily outride me, even though he is 62 years old. In contrast, he drives a 19 year old van, proudly furnishes his house in the most minimal fashion, and repairs things until they are unusable. His thought process is to save money in all aspects so he can spend money where he wants. He has limited activities but does them at a very high level. He is the ZEN master of retiring well.