Building Legacies – raisingBuffetts

Remain Poor Saving Or Get Rich Investing…

What is money? Yes, we know how we make it and spend it but that’s not its only utility. Money is stored energy. It buys us options. You might love going to work today but abruptly things change. Like say your company gets acquired and they now deem you redundant. Suddenly you are out of work. Or say your work environment takes a turn for the worse. Imagine all that stress and anxiety that comes about due to situations that you had no control over.

Money gets you that control. It puts you in the driver’s seat. It gives you that ability to dictate how you want to spend your time, with whom you want to spend that time and for how long. Not only does it buy you options, it also buys you freedom.

And that path to freedom starts with savings first. You have to set money aside, whatever the amount, to get to a point that first takes care of emergencies. Like a car breaking down, an unexpected medical expense or in the worst-case situation, a job loss.

So a healthy savings pile is crucial to tide us through such emergencies. And the data shows that we as Americans are failing miserably at this first step towards stability.

Now some of that is not our own doing. Circumstances prevent us from taking this first step because incomes have not kept up with the rise in the cost of living. And that is so unfortunate.

But with that aside, some of it is behavioral as well. Consumerism runs rampant in our society and Americans are the best at that. I mean worst at that. We are expected to spend because our global economy relies upon the fact that when no one consumes, Americans will pick up the slack.

That is sad and we need to reverse that because not only does it wreak havoc with our personal finances, it also destroys our world. Literally.

So we need to not heed that proclamation to spend but instead, save. I say start with setting aside at a minimum six months of living expenses in something that is highly liquid and accessible. Like a bank. And when an expense emergency strikes, you are ready with ammunition to blunt the impact.

Now liquidity and accessibility has a cost and that cost comes in the form of lower returns. Or interest rates to be more precise. You don’t earn as much on your money because it is designed to not earn as much. As of this writing, we are looking at less than one percent interest rates on bank savings accounts. And that is where this money should reside.

So that’s for the shorter-term goals. But we know we can’t keep stashing our cash in the bank for longer-range goals like say saving for retirement. We need rates of returns that are higher, much, much higher than what a bank account yields.

And the only way that is possible is through the process of investing. And investing means risks but the longer one can remain invested, the lower the risks become. One of the easiest ways to invest and participate in our global economy is through the stock markets. Plural because there is not one stock market. There are many. And we need to participate in all of them.

Stocks as we know are ownership stakes in businesses and they have historically delivered a higher rate of return than what a bank account yields. They have to by design. In the long run of course.

But words are just words. Let’s look at the numbers to see why invest rather than just stash our savings in a bank account. We’ll start first with a single one thousand dollar set aside in these two different vehicles and compare the outcome.

Seven percent for stocks is just about right in the current interest rate environment. It could turn out to be conservative in the long run but as they say, better to be safe than sorry.

So we see the difference.

Now a single one thousand dollars of investment is not going to do much. So instead, say we save a thousand dollars each year. And this is what we get…

So much better. But say the amounts even with that are nowhere close to what you need to buy that freedom.

And you realize that pretty late, say when you turn 60.

So you try to accelerate the savings amount by doing 10x or $10,000 a year for the remaining years. What do we get?

So there is a difference but not as big as you would have expected. And that’s because your contributions did not have as many years to compound.

But what if you realized sooner and could do the same acceleration of saving $10,000 when you turned 40. And you did it for that same 5 years.

A big difference.

And those stock market returns are not going to come easy and this is how bad it could get every now and then.

At least, that’s how bad it has been historically. So expect that but keep on investing.

In parting, a few things:

Emergency reserves are a must. Six months living expense is the right amount. And this money needs to be liquid and readily accessible.
And we can’t rely on ‘safe’ investments to meet our long range goals. That money needs to be invested. But that also means small and big declines in the value of your portfolio every now and then. Be ready and willing to endure through those times.
And Captain Obvious, the sooner we get our savings into investments, the faster we can buy our way to freedom. Not freedom from work but freedom from working on somebody else’s terms.

That’s all I have to say for now.

Thank you for reading.

Cover image credit – Karolina Grabowska, Pexels

Who Wants To Be A Millionaire?

I know a million dollar is not what it used to be, but it still is a MILLION dollars. So, who wants to be a millionaire? Or what does it take to become a millionaire?

Spending less than you earn and investing the difference is the first thing that comes to mind. But a bigger deal is time. Let me show you why.

Say I turn 25, start working (late start much) but have no clue about any of these things. So, I earn and spend. A few years go by and just like that, I turn 30.

And then I get to see the light of what I missed and how much harder it just got if my goal was to retire with a million bucks by the time I turn 65.

I know, I know, I am still a spring chicken and thinking about retirement is something only old people do. But remember, I am old. I just turned 30.

Though it’s not late yet but we all know that the more we put it off, the harder it gets. How much harder?

At 30, to get to a million dollars by 65, I need to set aside 701 dollars each month assuming my money grows at 6 percent rate of return each year. That is lower than what the stock markets have historically returned but I like to assume the worst and hope for the best.

But say I delay it to 35 and now I have to save 996 dollars to get to that same goal. At 40, it is 1,443 dollars and then it’s over. I mean it gets exponentially harder.

The word exponential is important because if you noticed the top end of the bars, they tend to curve up and curve up fast. That’s exponential growth. That’s compound interest. Nothing magical but then it is.

Here’s another take on the power of time and systematic investing. And all we are talking about is a mere 100 dollars one time or 100 dollars a month for 50 years. Yes, there is a difference but setting aside 100 dollars each month is a manageable sum for literally anyone.

The difference in final wealth though between a one-time investment of 100 dollars versus investing that amount every month for 50 years at that same 6 percent…

Not even in the same galaxy.

And all you had to do was set aside a cup of Starbucks worth of change each day.

Thank you for your time.

Cover image credit – Ron Lach, Pexels

Own Rather Than Lend…

You have an idea for a product that you think there is a market for. But you have no money (capital) to turn that idea into a business. So you go looking for that. I mean the capital. You can turn to friends and family who might be able to loan you the money but if your capital requirements are large, you would turn to businesses who are in the business of lending money i.e., the banks. We see them all around us…for now until they go completely digital which they are in the process of going.

And if you can convince the folks at the bank that you have a viable business at hand, the bank will lend you money. And lending means a periodic interest expense that you as a business owner will incur depending upon the terms you signed up for. Plus the money you borrowed to run and grow your business will have to be returned someday.

So your business must earn enough to not only cover all the expenses associated with building and selling your products but also enough to cover the interest expense plus eventually paying the loan off. And then whatever is left over are your profits.

What could you have done instead of borrowing that capital from the bank? You could have convinced the same folks at the bank to give you the money in return for a small piece of your business.

So now the folks who provided you with the much needed capital are partners in your business.

Plus there is no ongoing interest expense because the partners (investors) in your business now are in the same boat as you. And the money doesn’t have to be paid back…in theory. They are now part owners and they want you to succeed because if you succeed, they succeed.

Plus look at it from the bank’s point of view and their risk-reward situation. Their risk if you borrow the money is that your business fails and the bank not only loses the interest income but also the capital they lent.

But if your business turns out to be a startup that becomes the next Apple, they don’t get to participate in all that upside. All they are left with is collecting that measly interest income instead of the gusher of profits that would have flowed to them if they owned a stake in the next Apple. Or Amazon. Or Google.

Because with an equity stake in the business, they own a piece of that business and hence a piece of the profits made by that business.

So owners of businesses inherently make more than lenders because:

As Naval Ravikant, the founder of AngelList says and I am paraphrasing here – when you are the owner of a business, you own the upside as well as the downside. But when you are a loaner to a business, you do own a guaranteed revenue stream (interest payments) but you also own the downside. So capped upside as a loaner with all the downside.
Public businesses are run by some of the smartest folks around. We do occasionally hear stories about abuses here and there but in aggregate, these folks are running our businesses the best they could. And no business manager will borrow money at a cost (interest payments) that exceeds profits. So if you own a collection of them, you are bound to out earn a loaner.

The only advantage of being a loaner (lender) is that regardless of what happens to the profits in a business, the lender must get paid their ongoing interest and towards the end of the lending term, the entire loan amount (principal).

So there is a bit of a stability in the value of your investment being a loaner but that’s in the short-term. And that’s assuming the business survives.

As an owner, if business conditions deteriorate, profits decline and the value of that business declines. If that continues for long, the business could permanently shut down and the value of your ownership stake in that business will go to zero.

So stockholders (owners) suffer as well as the bondholders (loaners).

But that is if you own just one business.

The stock market and the bond market allow you to spread your money into hundreds of businesses and not all of these businesses will shutter.

If they did, the stocks will go to zero but so will the bonds. And you’ll have far worse things to worry about than worrying about money if that happens.

So if you are saving money towards goals that are more than a decade out, being an owner must pay out better than being a loaner.

But being an owner (stockholder) over a shorter-term means you are exposed to the full brunt of the volatility in business cycles and volatility as we know cuts both ways.

Thank you for reading.

Cover image credit – Jose Francisco Fernandez Saura, Pexels

Critical Mass…

Wealth means different to different people. To some, it is living it up – fancy cars, McMansions, exotic vacations – all that defines a consumerist ideal.

And then there are the minimalists and there is a spectrum amongst them. The hard core ones are the planet-first kind who do everything they can to conserve and preserve. Think living off the land and off-grid.

And then there are the pseudo-minimalists who are the mindful consumerists. They do everything within reason to conserve and preserve but prefer not to take it to extremes even if they could afford to.

But wherever you are on that minimalist spectrum, that conservation and preservation mindset by default leads to wealth accumulation.

But ask any 6th-grader who between the two – the uber-consumerist or the minimalist – they think is wealthy and by default, they’d pick the uber-consumerist.

That’s how we are wired. What shows is what counts.

But it’s the minimalist likely swimming in cash while the uber-consumerist is one paycheck away from disaster. That’s the classic rich vs. wealthy debate. People who look rich might not be wealthy and people who appear run-of-the-mill own real wealth.

And you’d think the rich and the wealthy are the same and though there are similarities, there are big differences.

Rich is a state which is more current or transitory. Lottery winners, newly discovered celebrities, star athletes, folks working in high-paying professions such as medicine and law are the rich. They have quite a bit of money flowing in with most of it derived from a single source.

And the rate of outflow sometimes equals or exceeds the rate of inflow. The rich as a state can happen instantly and then it disappears.

Wealth on the other hand is more permanent. It comes through ownership of income-producing assets – enough assets that allows for a life full of choices.

And the income that these assets produce grows with time to a point where it surpasses income needed to support one’s daily existence.

So whether you work or not or if the skills you possess are in demand or not, your standard of living remains unaltered. If the same thing were to happen to a merely rich person, he would quickly become poor.

Wealth buys freedom. Enough wealth that the income it throws surpasses the income you need to live comfortably. Enough wealth that you can stop doing anything remotely resembling work and instead do something that you always wanted to do but couldn’t. You want to work for a non-profit that hardly pays anything, you have the freedom to do that. That business you always had an itch to start, you can do that. Or if all you wanted is to sit back and retire, you can do that too. All of that without impacting your quality of life. That’s critical mass.

And the only path that I know of that is guaranteed to get you there is a slow-boring one because it’s the most tried and true one. There is a reason why we come across many “get rich quick” schemes but never any “get wealthy quick” ones.

Yet behaviorally, the slow-boring path is the hardest to adhere to.

Charles Kinderberger, economic historian and an author of many investment classics, once said that there is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.

And there will always be folks getting richer than you on some of the dumbest things you could have ‘invested’ your money in. Don’t let that take you off the rails away from a well-crafted plan.

And sure, you can strike it rich a million ways but holding on to wealth without a process, without a plan is tough. Because there are a million ways to lose it all.

I am not saying you have to hoard wealth to a point that you forget to live in the now and defer everything to that proverbial future. Because as they say, you can’t go snow-boarding in your nineties.

All I am saying is that there must be a balance between consumption now versus consumption later. That’s consumption smoothing where we tweak and optimize our spending to design a life that has a base level of happiness with occasional spurts of exoticism blended in. Because of course, YOLO.

And forget worrying about what we’ll leave behind for our heirs to inherit. That’s going to be dissipated anyways. I mean we can try but it’s going to be tough because of the human condition and hence the saying ‘shirtsleeves to shirtsleeves in three generations’.

And it makes so much sense. Say you are in the minimalist camp, your kids will absorb all those experiences and maybe implement some or most of them into their own lives. But then that minimalist mindset automatically means wealth accumulation which then gets passed down to your kids. Or at least that’s what most people do.

But then your kids someday have their own kids and now the setup is completely different. Their kids never get to see the struggle. They never experience frugality and choices being made. Life is easy. There is no drive and hence slowly but surely, wealth gets frittered away and the cycle repeats.

So is it any wonder that 70% of wealthy families lose their wealth by the second generation and a stunning 90% by the third¹.

Of course that does not mean you don’t try but many a times, it would be an exercise in futility and it’s good to have that perspective.

So coming back to you, the timeframe to reach critical mass is different for different people. And it’ll come down to two things – your burn rate and your investment returns. Investment returns beyond what’s statistically likely based on the risk-return characteristic of your portfolio are not in your control and neither should you base your financial plan on.

Burn rate is in your control and of course the lower the burn, the sooner you’ll reach critical mass. And one big side benefit of a lower burn rate is that now you are used to living on way less than you could since you’ve designed your life around that. I mean you were able to get to that base level of life satisfaction that your burn buys. And that should be the goal.

So increase the earn, reduce the burn and take the difference and deploy it into a plan that is tailored for you. Do that for some time and critical mass would be within reach far sooner than you realize.

That’s all I have to say. Thank you for reading.

Cover image credit – Joel Santos, Pexels

¹Chris Taylor. “70% of Rich Families Lose Their Wealth by the Second Generation”, Reuters. June 17, 2015.

The Mechanics Of Financial Planning…

Financial planning is a process, not a product so the saying goes. But what goes into the making of a financial plan? Of course there is a lot of uncertainty around the many twists and turns in this journey of life and your plan should adapt to that. But there is also a construct and there are some numbers that need to be crunched to have a good shot at the life you want to live.

So first a snapshot of the many goals you might have to plan for…

And with life after work (retirement) being the most expensive amongst them, we will use that as a use case to lay out the construct since the same process can be replicated for other life goals.

But before anything, a thing or two about perpetuities. Back in the day in 1751, the British government issued something called Consolidated Annuities or Consols that paid a fixed 3% rate of return each year (cash flows) and had no maturity date (cash flows go on forever).

The modern day equivalent of a Consol is a perpetuity as in the cash flows continuing forever.

And quite elegantly…

The present value (the price today if you were to buy it) of a perpetuity = C/r

C is the cash flow you receive each year if you were to buy this perpetuity and r is the interest rate or the rate of return.

Most long duration assets are perpetuities. Stocks, especially of the growth kind, in theory are the ultimate perpetuities because the present value of the cash flows that they’ll generate that’ll flow to you in the form of dividends twenty, thirty, fifty years down the road is very close to zero. And hence their valuation today can be condensed to a very simple perpetuity type model shown above.

So that was some necessary sidetrack but not to dwell on it much, the most important takeaway is the estimation of the present value of a perpetuity.

Back to planning for retirement, this is what the accumulation and the distribution phases look like for that goal.

Though two different rates of returns are assumed for the two life phases, there is not and there should be not a clear demarcation between the two. Those rates of returns should change gradually, abruptly or none at all depending upon individual circumstances and market conditions but let’s assume these two distinct phases exist for you for now.

And we’ll start with the ‘in retirement’ phase first to help us quantify the $ value of the goal and then work backwards.

The first thing you’ll need to know are your income needs in retirement. I know it’s not easy to know that yet when you are like 25 but you should have some idea about the amount of money it takes to afford you a good life today. You then inflation adjust that to the year you retire and through retirement.

So during retirement, you’ll know the cash flow you’ll need and you have an estimate of the rate of return that the portfolio you’ll own is expected to deliver (r2 in this case).

Hence,

The $ value of the goal at retirement = The present value of a growing perpetuity that you buy right when you retire – The value of a growing perpetuity that you’ll buy at 100, discounted to the year you retire

Growing perpetuity is another flavor of a perpetuity where you assume growing cash flows (inflation-adjusted income need in retirement) instead of the constant cash flows we assumed in the original perpetuity equation.

So now that we know the $ value of the goal, we tackle the first phase of planning for retirement. And these are your accumulation years where you need to set aside a fixed amount of money each year to reach that goal.

We start with first discounting the $ value of the goal and bringing it to the present (at 25 in the plot above) using the assumed rate of return (portfolio growth rate = r1). Any savings (earmarked for retirement) that you already have now needs to be subtracted from the present value of the goal to calculate the gap you have to fill over the years to reach your goal.

That is…

The Gap = Present value of the goal – Savings you already have, earmarked for retirement

With this gap in savings required known, you can then reverse calculate the amount you need to set aside each year using the same perpetuity logic.

That is…

The Gap = The present value of a perpetuity you buy at 25 – The value of the perpetuity you buy at 65, discounted to the present (at 25)

You know the gap, you know the years to retirement and you know the portfolio growth rate during accumulation years and with that, you can back calculate the amount you need to save each year to fill that gap.

There is a lot that I skipped over to give a brief overview but for those interested in diving into the nitty-gritty of how this is done, a video tutorial is in the wings that I’ll release when ready.

Thank you for reading.

Cover image credit – Pixabay

Plan For The Worst, Hope For The Best…

Benjamin Franklin once said “A penny saved is a penny earned.” But I say there is more to that. Not only is a penny saved is a penny earned but a penny saved today is worth quite a bit more than say saving that same penny tomorrow or the day after. Hyperbolically speaking, of course. And here’s why.

Say you are 20 years old today and you invest a dollar at say 8% annual rate of return and leave it invested till you are 65. What would that dollar become? 34 dollars.

But say for some reason you waited till you were 30. So instead of the thirty-four dollars before, you’d have less than half of that or about sixteen dollars. Wait another 10 years to invest and you’d have a mere $7. Wait till you are 50 and you’ll have just $3 at age 65. Another ten years and it’s over.

So start early.

But of course a few tens of dollars will not change anything for you. You need more, a lot more to meet goals that are much bigger than what a few dollars can provide. We hear all the time about what you have to do to become a millionaire. But that is so last century. I’ll revise that to how to become a multi-millionaire.

Or at least a double millionaire. And say that is the goal. And you want to get there as fast as possible because you don’t have a lot of time. You’ve got just one life and you have many things you probably want to do with it than just think about money.

So say you are fresh out of college and you are fortunate enough to be making a great income. What’s a great income? How about $100,000 a year.

I know it sounds big but I see and hear that a lot of college graduates make that kind of money nowadays, at least in the Silicon Valley that I live in.

So say you take $10,000 of what you make each year and are able to invest that at 6%.

Oh wait, why 6%?

Yes, I did talk about 8% before but remember what we are trying to do here – we are planning for the worst and hoping for the best.

So let’s plan for our $2,000,000 goal assuming a 6% rate of return and $10,000 of annual savings.

And this is how it looks…

So 44 long years to get to that goal. That is way too long.

Can you speed that up? Yes, but it doesn’t come easy because that requires you to save more.

But I say it’s doable because you are making great income. All that’s needed is a little bit of discipline and expense management. It’s your life we are talking about here after all.

So here are four scenarios with four different saving amounts…

So going from saving $10,000 a year to $25,000 drops the number of years to reach your goal by almost 14 years. That is a lot of life you are getting to buy just because you were able to squirrel away more.

But what if you could earn a higher rate of return, say 8%. Now this is an aggressive assumption and it is completely possible but I wouldn’t count on it. But what would that do to your time scale?

So of course, you get to your goal faster because the rate of return is higher but did you notice that the gap in years between saving $10,000 vs. saving $25,000 is not as wide anymore?

Maybe it’s not as evident so let’s try two more rates of returns – 10% and 12%. I would definitely not count on that kind of a rate of returns for the near future but let’s just see.

So as the rate of return increases, the effectiveness of saving more decreases. And that makes sense. With a lower rate of return, the amount you save is a bigger proportion of the total accumulated wealth, especially in the early years as shown below.

But with a 12% rate of return, the proportion of total wealth that comes from pure savings drops at a much quicker rate with growth taking over. So you don’t have to try as hard. I mean you don’t have to scrimp and save but I hope it is not a sacrifice.

But we know that we are supposed to plan for the worst and hope for the best so with that in mind, what if you want to reach your goal in the same number of years as 12% rate of return does but assuming only a 6% rate of return? You can but you just have to save more as shown below.

So like before, the saving component is a bigger contributor to your total wealth. And you didn’t have to try as hard. I mean you didn’t have to take undue amount of risks to avail of that mystical 12% rate of return. For each and every year. For decades.

All you had to do is save more which is a much safer bet. And $25,000 a year might feel tough in the initial years but over time, as you grow and as your income grows, it gets easier and easier.

That’s about it.

Thank you for reading.

Cover image credit – Anna Shvets, Pexels

I Committed A Personal Finance Sin But…

I hate driving. And that in spite of having won the commute lottery of spending a hair under 30 minutes to get to and from work. But even then, if it were not for books on tape and the best thing that Amazon sells (Audible), I would be road-raging all along.

So I have to commute and commute means cars. No way around it with a big thank you to how we have designed our cities and our obsession with the way we have chosen to live. Even if there was a will, there’s no way an efficient public-transport system pencils out except in places where density is abundant.

So we are screwed, our quality of life is screwed and our environment, incrementally and then all of a sudden, screwed as well. There’s this thing floating around the enlightened alleys of the net that talks about how stupid and implausible an idea it is to think that we can have a backup to Earth. There’s no backup. This is all we’ve got. And what we do and how we choose to live is what’s going to make a difference in preventing an environmental apocalypse we’ll one day face.

But I digress. So I need a car and car means $$$$. We as a family are big on used cars. And the collective price we’ve paid when we paid for the entire fleet we’ve owned for almost a couple decades could be had at half the price of what an average new car costs today.

Our fleet…

They are great cars, still going strong but with paint literally falling off, they don’t look anywhere as pristine as you see them in these pictures. But I don’t care. And I have no interest to care. A vehicle to me is just a machine that takes me from one place to another, reliably and safely. That’s it.

A side-perk of driving older cars – you don’t care where you park and who you park next to. No need to shell out extra $$$ on collision and comprehensive insurance like forever.

And if you think I am an outlier, my wife is outlier-squared. I’ve basically won the wife lottery with near perfect compatibility in how we have chosen to live our lives. But we don’t skip a beat to splurge on experiences that we know are bound to enrich our time on this planet.

Oh and I have a milestone to report on the chotu (small) car that I drive. I mean that thing delivered on its promise like a charm.

Will report back at the 300,000 mile marker 😉 .

And buying used and driving until the wheels fall off means that you get to literally drive for free for the rest of your life. How? Some numbers…

We bought the van (2000 model year) in 2004 right before our oldest daughter was born. I think we paid about $10,500 for that. The tiny one (2004 model year) we bought in 2006 for $7,000.

A new one at the time could have easily set us back $25,000 a pop. And that’s for a run of the mill car. So some numbers on the impact of our decisions…

The van first…

Purchase price (bought in 2004) = $10,500

What we could have spent = $25,000

Difference = $25,000 – $10,500 = $14,500

Cash in hand at the end of 2020 if the difference was invested @ 7% annual return for 16 years = $43,000

For the small car next…

Purchase price (bought in 2008) = $7,000

What we could have spent = $25,000

Difference = $25,000 – $7,000 = $18,000

Cash in hand at the end of 2020 if the difference was invested @ 7% annual return for 12 years = $40,000

Total cash in hand because we decided to buy used instead of new and drive till they eventually fell apart = $83,000

So where’s the sin? We were in the market for another car but then someone showed me crash test videos of some of the cars we were considering and holy $#@&. Now we are all safety with reliability and economy taking a way backseat.

So we went looking for a used car again with the safety features we desired but not having the bandwidth to spend the extra time and effort required to secure a deal, we caved. We committed that sin that we promised we would never commit and went all YOLO. We bought a new car. Not just any car but an SUV. Not just any SUV but the safest of the breed in our price range (~$38,000) knowing perfectly well that the moment we drive that thing off that dealership lot, it’s going to lose 20% of it’s value.

But so be it. We could afford it. It’s got adaptive cruise control this, lane departure warning that and a myriad of other safety features that we are still in the process of figuring out.

But then we didn’t commit no sin because we know we will drive that car into the ground. Or until say autonomous driving completely takes over. That’s an easy 15 years. Until then, the remaining pile of money ($83,000 – $38,000 = $45,000) compounds away into a bigger and bigger pile which we will use to someday draw upon to buy that next car. And the car after that and so on. There is a maybe somewhere there but we’ll see.

So a few tips…

Buy used when and where possible. A three to five year old model gives you that perfect mix of relative newness and a minimal depreciation hit.
Pay cash when you can. If you had to borrow, keep the loan term at or below 36 months. If you need more months to payoff that loan, you are buying too much car.
Skip the luxury. I bet you’ll find more multi-millionaires driving around in Camrys than in BMWs. Nothing against BMWs though. Oh and on BMWs, I can’t find the source but I think it was William Bernstein, an investment writer extraordinaire, who once wrote and I am paraphrasing here that a BMW is not a motor vehicle. It’s an IQ test that measures one’s ability or inability to save towards a decent financial future. So don’t fail that IQ test.
And the best, if you are in that fortunate position where you can walk or bike to work, school, stores etc., chuck this whole car buying thingy. Not only can you shave years off of your time to reach your money goals, you and many more millions like you will slowly and then suddenly save this planet.

I have committed the sin. Don’t commit yours.

Thank you for reading.

Until later.

Cover image credit – Oleg Magni, Pexels

What’s Asset Allocation?

So basically, when I started this, I had no idea what this meant. I only wrote this because I eavesdropped on my dad talking to someone about it. Okay, I know I eavesdropped but what harm could be done. But after some intense research, I figured out its meaning and it is…

Spreading your money into different types of investments to reduce risk of you losing your money when you need it the most. When picking out an asset mix, you want to choose investments in the right proportion that maximizes return while controlling for risk. That describes asset allocation.

Stocks, bonds and cash are the common components that make up an asset mix. And depending upon how much time you have to retire, that asset mix could look something like shown below.

How do they decide on the mix? Fluctuation in the value of a portfolio is a key part of choosing an asset mix. Stocks fluctuate a lot more than bonds or cash, but they tend to make the most over time. Bonds don’t fluctuate as much as stocks and cash is just cash. It stays the same.

And if you look at the plot above, you see a pattern. The more years you are away from retirement, the more stocks you own. Then why not buy more stocks when you are in retirement? Keep in mind that stocks tend to drop more frequently so when you need the money to live on, you might be forced to sell stocks at a low point. And once you sell and when eventually stocks recover, you will not participate in the recovery. And that is why you also own bonds and cash.

So that’s asset allocation.

Thank you for reading.

Cover image credit – Andrea Piacquadio, Pexels

The Products I Use And The Businesses I Own…

Today was just like any other Sunday of my life. I was curious to go around and recount all the products that I use every day and the kind of businesses that made them. I also wanted to see if these businesses were publicly-traded or privately-owned. So what’s the difference? We’ll find out.

So starting out this weekend morning, I woke up and went downstairs to do the first thing I was supposed to do. And that is to brush my teeth. I use Crest toothpaste. Who makes that? Proctor and Gamble (P&G). You can buy shares in that and become an owner of that company. I am one, a teensy-tiny owner but still an owner. I then ate breakfast that my mom made. And no company out there can make the kind of breakfast like my mom does so too bad. I then drink water out of my Hydroflask. That’s made by Helen of Troy. And guess what, that one is also publicly-traded and I own shares in that one too. I also play with lots of Lego. Because I love playing with them, I thought maybe I should also buy a stake in that business. But unfortunately, I can’t because the company that makes Lego is privately-owned.

A privately-owned business does not trade on the stock exchange whereas a public-traded one does. So you can buy shares in a publicly-traded business and become a part-owner of that business but you can’t with a private company. Or let me just say that it is not easy to buy a share in a private company but if you really, really want, you could. But not easy.

Anyway, let’s get back to my Sunday. I read a lot. Mostly paper books but sometimes on my Kindle. The Kindle is an Amazon product. Amazon is a publicly-traded business so I also own a very, very, very small piece of Amazon. The paper that was used to make the paper books I read likely came from the International Paper Company. It is the largest paper producer in the world and guess what? It is publicly-traded as well and I own stock in that too. You can use the words shares and stocks interchangeably but they mean the same thing.

And there are companies that make the ink and the metal that make up the printing machines that are used to make those paper books. There are also companies that ship those books around the world. Most of them, if they are publicly-traded, I likely own.

A few hours later, I ate my lunch. The ingredients were from Trader Joe’s which is a private company so I can’t own shares in that company. After lunch, I would often spend some time drawing and I use Microsoft Surface Book for that. And of course I own shares in Microsoft.

I do some math worksheets after that and as a reward, I get to play outside later in the evening. I wear my Adidas hand-me down jacket that my sister used to wear before me. I don’t like that part as much but then again, it is almost like new. Plus it saves money and of course, don’t forget the environment. I put on my Nike shoes and then go outside to play with my neighbors. And I own shares in both.

I come back and wash my hands with a soap brand called Soft Soap. That’s made by Colgate-Palmolive which also makes toothpaste that most of us probably have used at one point or the other. I own shares in that too.

But that was not the end of my day yet. I eat homemade food for dinner. Then I take my shower and I use Dove shampoo and soap. Dove is made by Unilever. I use a conditioner brand called Pantene that comes from P&G. And…you know what I was about to write, don’t you?

Then it’s bedtime.

I also wrote this on Google docs which is part of Google. I own shares in that too.

So that was my day. And now you know about all the products I used that day. And you also know about the businesses that make these products and the fact that I own shares in most of them.

So can you.

And if you think it takes a lot of money to become a shareholder in these wonderful businesses, it doesn’t.

Thank you for reading.

Cover image credit – Oleg Magni, Pexels