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

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

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

It’s been a little while since I’ve had that toy and I don’t love it anymore. It’s lying somewhere unloved and uncared for in my home. And we know the problem with fluffy toys. They collect dust. And dust means allergies. Plus spiders love to build their homes in it. Or on it. And I am terrified of spiders. So those are some very good reasons I should have thought twice before splurging my cash on that toy. Or any toy that I know I would throw away in a very short time.

Buying stuff we don’t need is one thing but what happens over time when we keep on buying things? It creates clutter in our homes. And no one likes clutter, especially my mom. So what does she do? She goes around the house and collects all the things that I don’t use anymore. She throws away the toys that are falling apart and donates the rest. But a lot of the toys eventually end up in trash. And since most of what we buy is made from harmful chemicals, the stuff that ends up in trash will remain on our planet for many, many centuries. If that toy ever ends up in the ocean, an animal could think it was food and eat it. It could die. So all bad.

The toy of course was not free. It cost a lot of money. My money. Plus my dad usually doubles the amount what I don’t spend and instead deposit in my savings account. So that toy actually cost me 60 dollars.

But could I have done something better. Like invest that money? By that I mean buying shares in a company that is in the business of making our world better. What if that investment earned 10% a year? What would that 60 dollars be in say a decade? 155 dollars. How did I know that? My sister wrote about this thing called the Rule of 72 and that’s how I found out. And it’s all about COMPOUND INTEREST where money makes money on money and that money makes more money on money. If you’re wondering how compound interest works, the formula below is one easy way to understand. That formula,

FV = PV (1+r)^t

where,

FV is the future value

PV is the present value

r is the rate of return

And t is the time in years.

So in this scenario, if we plug $60 for PV, 10 years for t because a decade is ten years, and 0.1 for r, we get about $155 for the FV.

Here’s an easier way to understand. Let’s say I have a hundred dollars and I didn’t know what to do with it so I invested it in my savings account that earns 10%. One year later, I look at my account and I have 110 dollars. All I did was leave my money there and it became ten dollars more. That’s because I earned interest. And if I leave that money invested, another year from now, I will have $121. Not $120. That is a dollar more and that is because of compound interest.

That 60 dollars that I in a way spent on that toy, guess how much would it grow to in 50 years at 10% a year? How about 7,000 dollars. Really. And that is a lot of money to spend on a toy that I hardly played with.

So these are some of the reasons why we shouldn’t be buying things we don’t need.

Thank you for reading. I’ll write more.

Cover image credit: Alena Koval

Now that you’ve got that right, a few obvious things first. If the rate of return is higher, your double will happen quicker. On the flip side, if it took you a lot less time to double your money, you know that you earned a high rate of return. So it would take a lot longer to double your money if it grew at a rate of 2% a year as compared to say 10%. And with this rule of 72, you can see that $100 growing at 6% will take 12 years to double (72/6). At 10%, 7.2 years and at 12%, 6 years.

Okay, you’ve got that now so how do you use this nifty little rule in helping you make daily spending decisions? Say you are 15 and a new gadget you desire just came out and it costs $250. You worked hard and earned and saved enough money to buy that gadget. No issue there. But that last year model you own works just fine but regardless, you go in for the kill. I mean you buy it. But was it really worth spending 250 bucks for a new one? Granted, it runs a bit faster, looks a bit nicer but was it truly worth it?

And what happens to the one you already own? It gets recycled, hopefully. Most likely, it’ll end up in a landfill. And then over time, that thing starts to decompose if it ever does. And the chemicals from that thing start to leak into the water (#savetheturtles) which at some point finds its way through the tap, into your Hydro Flask and into your body. So all bad.

But I digress, that money I just spent and almost destroyed the environment in the process could have instead been used for a more worthy goal. Like to fund a business idea to clean the environment in say ten or twenty years which by then, I would hopefully know enough on how to do it. Or say to someday be able to not work for money at all and work because I want to make a difference. So at 7%, that same 250 bucks would turn into $500 in 10 years. How did I get to that so quick? That rule of 72 (72/7 ~ 10 years) again. 10 more years and we are talking about another double. In 40 years, that same 250 bucks that I had no reason to spend to replace a perfectly working gadget at 7% would be 8,000 BUCKS. So I had a choice and I blew it.

And I am not implying that you need to become a monk and give up on things. All I am saying is to be conscious about how and what you spend your savings on and how it’ll impact your future and the world.

My advice, if you are about to buy anything that feels discretionary is to not buy it on the spur. Give it some time and come around in say a couple days and see if you still feel a need for whatever you were about to buy. If yes, buy it. If not, even better.

And don’t forget the rule. Keep a rate of return in mind and see how many doubles you are missing out on if you don’t defer that purchase. Your future will be bright and so will be our world.

Until later. 

Cover image credit – Artem Beliaikin, Pexels