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

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

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

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