How I Will Be Rich

Over at Brip Blap, Steve gave his advice towards investing. In the post he mentions that you should set up your investments and then forget about them. I want to go a little more in depth on how important that “forget about it” aspect is. If you are like me, you invest in index funds and ETFs and hold them for the long term. This has been the proven way to succeed in the market. If the buy and hold philosophy is the way that you invest, my best advice is to really forget about your investments.

Don’t check your portfolio daily.
When I first started investing I bought in to some stocks and checked them every hour. I would literally have a separate window open on my computer twenty four hours a day. I was obsessed with what the market was doing. Every time one of my stocks made the slightest dip, I panicked. I would get overly nervous every time it would move down one cent and I would jump for joy every time it would move up just one cent. It was crazy. For your own sanity’s sake, don’t check your portfolio too often. If you are in it for the long run, the day to day dips and peaks don’t really matter.

Checking too often leads to bad decisions.
I’ve made quite a few mistakes in the short amount of time that I’ve been investing. Most of these mistakes have been a result of panic selling. When you are constantly watching the market, hour by hour, you’ll be more inclined to panic at a slight dip and prematurely sell. I’ve had investments that I held for less than a week because in the first few days they dipped down a little. Of course right after I sold them, they would recover from the loss and if I would have held out, I probably would have made some money. Avoid the bad decisions that can be made. Keep clear of that stock ticker on a day to day basis.

Ignore what the media says about the market.
You are constantly hearing on the news that the DOW did this or the NASDAQ did that. You’ll hear about the fed lowering or raising the interest rates. None of this information should affect you if you are holding for the long term. Ignore what the media has to say about the market. Don’t let what the media says drive you in to a panic sell.

If you can have the discipline to invest in a safe fund and it ignore it for years and years, you will be a success at investing. The greatest thing for your investments is time. Take emotions out of investing and do what has worked for years and years. Buy, hold and ignore.

Photo Credit: rednuht

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I was talking to my dad the other day about our company and the way things were going over the last few years. With the economy the way it is, we’ve had some rough patches. Somewhere in the conversation he brought up a poem that he had heard that really struck a chord with me. The poem is about a person writing the autobiography of their life in five short chapters. I couldn’t remember the entire thing so I scoured the internet, looking for the poem. I wanted to make sure that if I repeated it, it was accurate.

Autobiography in Five Short Chapters
by Portia Nelson

I
I walk down the street.
There is a deep hole in the sidewalk
I fall in.
I am lost … I am helpless.
It isn’t my fault.
It takes me forever to find a way out.

II
I walk down the same street.
There is a deep hole in the sidewalk.
I pretend I don’t see it.
I fall in again.
I can’t believe I am in the same place
but, it isn’t my fault.
It still takes a long time to get out.

III
I walk down the same street.
There is a deep hole in the sidewalk.
I see it is there.
I still fall in … it’s a habit.
my eyes are open
I know where I am.
It is my fault.
I get out immediately.

IV
I walk down the same street.
There is a deep hole in the sidewalk.
I walk around it.

V
I walk down another street.

This poem holds a very valuable lesson.
This can be pretty much a metaphor for almost anything you do in life. You make a mistake once and you feel really bad, you make the same mistake again and just can’t understand it. At some point you must come to the realization that you need to take another path to avoid the same mistakes.

Take investing for example.
I made a huge mistake in the stock market when I was first getting in to it. I dabbled in penny stocks a little. I invested a lot of money in a stock that traded for less than one dollar per share based on a tip in a message board. Based on the theme of this post, it’s not hard to imagine what happened next. The company went bankrupt. Penny stocks are like gambling in a casino. I had to make my money back. I invested in a different penny stock, thinking that I could make all my money back and more. How could I be so stupid and make the same mistake twice? I learned from it and have never as much as looked at a quote for a penny stock since.

This advice holds true in almost anything in life.
The people in this world that are the most successful have gotten there by making many mistakes. The only way that you can really learn that some paths shouldn’t be taken is by traveling them yourself and experiencing it first hand.

I am really interested in hearing other’s interpretations of the poem. I’d also love to hear stories of people making the same mistakes repeatedly but eventually finding their way around it.

Photo Credit: Helga’s Lobster Stew

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This is a question that many people ask. Should I take the money from my bank account and pay off my debt with it or take it and save it in my savings account earning 4-5%? My answer to this question is that it depends on the interest rate of your debt. If you carry a balance on a credit card that is getting an interest rate of 17%, you are much better off paying the balance of your credit card than you are investing the savings. It is basically like getting 17% interest on your money guaranteed. On the other hand, if you have an ultra-low interest rate of something like 3%, you are probably better off paying down the balance monthly and earning interest on your savings.

Let’s look at some numbers to get a little more in depth:

I have $10,000 in credit card debt. My credit card has an interest rate of 16%. I have $10,000 in the bank right now. Is it better to take my $10,000 and completely pay of my credit card or take that $10,000 and invest it?

If I take the $10,000 and pay off my debt, I will save myself $10,101.57 in interest payments over a ten year period.

If I take the $10,000 and put it in a savings account that earns 5% (My current savings account) and don’t touch it for ten years, I will gain $6,288.95 over that 10 years.

Clearly, it is better to pay off my credit card. I would have netted a loss of $3,812.62 over that ten year period.

Let’s start over with a 3% Interest Loan:

I have $10,000 in student loan debt. My loan has an interest rate of 3%. I have $10,000 in the bank right now. Is it better to take my $10,000 and completely pay of my student loan or take that $10,000 and invest it?

If I take the $10,000 and pay off my debt, I will save myself $1,587.29 in interest payments over a ten year period.

If I take the $10,000 and put it in that savings account that earns 5% and don’t touch it for ten years, I will gain $6,288.95 over that 10 years.

In this case, I come out ahead after 10 years by an amount of $4,701.66 by slowly paying down my student loan but investing that $10,000 in the beginning.

I really want to touch on this subject a lot more. It’s actually something that I’m just starting to learn a lot about myself. I really do hold some debt between my truck payment and my credit cards. I’m still investigating my best course of action to get them paid off and to invest my money. There are a lot more details that go in to the analysis of whether investing or paying off debt is the better solution. I’m using all these complex calculators that I’m finding on various sites and really trying to understand what they all mean. I promise I will follow up with further analysis soon. One of the great things about this blog is that it is really forcing me to learn this stuff.

Feel free to comment and/or point out flaws in my (basic) analysis.

-M

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There is one investment out there that you absolutely must make. I’ve never heard of a single financial adviser or investment guru that will tell you any different. In fact, I even have a personal story that just solidifies this statement. Health Insurance is the one investment that everyone needs to have. There is no arguing with this statement.

I have this uncle who makes great money, has a great job and has very little expenses. He’s not married and lives in a two bedroom apartment. He was doing just fine. In fact, he was probably living a much higher standard of living than most people, seeing as he had low expenses and such a high paying job. He was in a great place in his life. He’s somewhat of a tightwad, however. That’s just how he was brought up. Unfortunately, he didn’t really know the difference between being frugal and being cheap. He wanted to save money wherever possible. The biggest mistake he’s made in his entire life was deciding to skip out on paying for health insurance.

One day, while out at a clients house, my uncle’s partner called my mom. He told us that he just wasn’t acting right. My uncle kept forgetting where he was and asking the same questions multiple times. Something really strange was going on with him. We really didn’t think much of it that day. The following day we received a call claiming that my uncle had not yet arrived at work. He was already an hour late. My mom made a call to my uncle to discover that he was sitting in the parking lot of his previous employer. Now we knew that something was definitely wrong. We told him to come over to our shop, which was less than a mile down the road, and he agreed to head this way. About an hour had passed and he still had not arrived. Once again, we called him on his cell phone to learn that he was completely lost. We told him to pull over on the side of the road, tell us what street he was on, and we would come pick him up. Luckily for us, he was in sound enough mind to do this.

We rushed him to the emergency room to get checked out and on the entire drive he kept asking where he was and what was going on. It was really strange and scary. After arriving at the hospital, they rushed him to get a cat scan. He had a brain tumor. We were told that if he had gone one more day with this, he may not have woken up. Luckily, the tumor was not malignant. They were able to place a shunt and, to this day, he’s been back to normal. That is to say, he’s been back to normal mentally. Financially… That’s a different story.

This uncle opted out of health insurance. Once all was said and done, he owed the hospital about $100,000. He was living well but he definitely didn’t have that kind of money. His family tried to help out as much as possible but to this day, he’s still paying for it. I can understand that it may be hard to justify paying for something when you’re not seeing the benefits but when that day comes that you really need it, it can completely wipe you out. My uncle could be paying for this for the rest of his life. The really unfortunate part is, now that he’s had preexisting problems, he’s having a hard time getting health insurance. He still, to this day, does not have any.

Don’t make the same mistake as my uncle. Invest in some good health insurance. If that day ever comes along where you really need it, you will be so thankful that you had.

-M

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The short answer to this question: As early as possible.

The slightly longer answer. (Well, actually it’s more like statistics.):
If you start investing about $19 per week at age 25 and earn an 8% annual return on that investment then decide to completely stop putting money into that account at age 34, you would have invested around $10,000 over that 10 year period. Without adding another cent to that account, by age 65, your funds would have grown to about $168,600. On the other hand, if you were to start investing at age 35 and put $1,000 in the account every single year until you turned 65, you would have invested $30,000 and you would be retiring with only about $125,000.

If you are reading this right now and you don’t have some sort of plan for retirement, start now. Invest in a tax sheltered account such as an IRA. Social Security is close to the point where the government will be paying out more than it’s taking in. You need to rely on your own retirement strategies and not what the government might provide in the future.

One way to look at retirement is that you are saving up to buy it. Think about it. When you want to go on a nice vacation, you save up to buy it or when you buy a home you need to save to buy that. The most expensive thing you will purchase in your lifetime is your retirement. You need to save up to buy that time, free of working. It’s getting harder and harder for people to have a comfortable retirement these days because people are living longer and the effects of inflation are lowering the value of our money. So think about retirement as putting away money every month to save to buy that freedom later on in life. Invest under a tax shelter in index funds and start as early as possible.

-M

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