Money in Your 20’s: Take Big Risks, or Focus on Saving?

Break the bank and take risks, or just focus on saving?

Break the bank and take risks, or just focus on saving?

One of the interesting things about getting older is that we tend to have opinions about what would be good decisions for people younger than us.   It seems like this is especially pronounced the further removed we get from the age bracket we’re talking about.  At least that’s how it is for me.

It can be easy to look back and consider what we could have done differently, and many people seem to do that with money decisions.  Now that I’m a parent of two young kids, I also look at moves people can make when younger.  While my kids are small, I look to the future and think about what would be good for them and others when reaching their 20’s years from now.

I had a conversation recently with a friend of mine, the same age as me and also a parent of young kids, about money moves that would be smart for a 20-something out of college.  We both went to school together, and had similar beginnings to our career.  Much that we do is in parallel, with the difference being that he ended up really being a star in his field and has achieved a measurably higher level of financial success as well.   Thus, we have developed a different view of what people in their 20’s might consider doing upon graduating.

His View – Take Risks and Swing for the Fences

Now, keep in mind that he really didn’t do this himself.  He didn’t take big risks, and never started an entrepreneurial venture.

That being said, his life experience to date has given him the opinion that while he’s been quite successful to date – and he’s justifiably proud of it – a smart person with high upside should take risks when younger.  More than that, he thinks that a risk-taking mindset can be applied to different areas of life.

For example, he would suggest trying to learn as much as possible in a short amount of time after graduation in an entry-level position.  Ideally, this would be in an area of passion.  Then, start your own business and put 100% of your effort into truly making it work.  If it doesn’t, accept the failure and learn from it before moving on to the next venture.  Eventually, your cumulative failures will teach you lessons that will allow you reach big success with one of your ventures.

He also advocates traveling as much as possible when younger, dating as much as possible and not getting hitched in your 20’s so you can hold out for the optimal person.  This is just a side note not directly related to money and career, but adds context to this viewpoint.

Again, he didn’t to this – worked a corporate job, got an MBA, got married in his late 20’s, etc.  However, it’s what he thinks would be smart for someone in his or her 20’s now that he’s older  Go for broke when younger and try for the best with everything, knowing that you run the risk of striking out too.

My View – Focus on Saving and Investing as Early as Possible

Let me preface this by saying that if there is a time to take risks, it’s probably in one’s 20’s.

Nevertheless, there is also something to be said for getting off to a strong start and building a strong foundation.  To me, excessive risk-taking can have negative consequences that don’t manifest themselves until people are much older.

I’d say it’s smart to invest in your career when younger, and focus on that as your primary source of income instead of getting obsessed with going for broke or handling a collection of side hustles as the main way to make money.  Build your career, nurture it, and then you can have the cash flow and foundation to take on side hustles or bigger risks later.

I know people have that have taken different paths and approaches with money, a few at extremes and most in the middle.  At the extremes – and I say that based on society’s view of what is “extreme” – are people who have lived for the moment and those who really tried hard to save.  The latter included a few people who did well in school, got advanced degrees, and also lived at home for a few years after college to save money.  They also avoided expensive cars and other traps, while working hard to grow income through their careers.  Basically, these people saved early and often while avoiding debt like the plague.

Ultimately, these are the people that seem to be really flourishing and living with the least stress once they’re well past their 20’s.  Their investment in their career, and serious focus on saving money right after graduation, put them in a good position down the line after the money compounded.

That’s what I think works, and makes the most sense.  Eventually, with a foundation in place, you can take more chances later on with less downside.  Delayed gratification would seem to provide a better lifetime value, as long as someone can avoid temptations and peer pressure when starting out.

What do you think?

There is a middle ground of course, but I’m curious which point of view you lean toward:

  1. “Take risks, fail and fail more until you succeed when young, while being unafraid to spend on life experiences”
  2. “Focus on building a career, avoiding debt, saving as much as possible by delaying gratification”

15 Steps on the Path to Financial Freedom

financial freedomHow can you reach financial freedom?

There are many different factors in having a successful financial situation.  In some cases it might be a matter of doing the right things, while other times it’s a matter of avoiding mistakes.

I have been targeting financial freedom in the future – and have been taking some actions to help get there.  Based on these actions as well as observing others, discussions with a few folks who have done it, and reading about the journey, I’ve compiled a list of things we can do that can clearly help.

Here goes:

Invest Wisely in Education

I know some people will immediately disagree, saying:

a) Formal education is overrated these days

b) Education has become way too expensive

c) Both of the above

Okay, fair enough.  I can agree to some extent with the notion that education has become extremely expensive, and that too many people have taken out student loans that could cripple them.  In this case, it’s a matter of avoiding mistakes as we discussed above.

But education is not overrated.  I’d say that in a shrinking world, education has become even more important.  Here in the U.S., simply having a college degree a generation ago pretty much assured most people at least a modest middle class income.  Not the case today.  Now I think it’s more of an entry ticket than anything else, to have an undergraduate degree.

So while no education can be limiting, and an overly expensive education can inhibit wealth creation and create debt burden, it’s different for the right degree from the right school.  In those cases, education and net worth go hand in hand.

Keep on Learning

Okay, a formal education is important.  We already talked about it! But I’ve come to believe that it’s more important than ever to keep on learning.

When I came out of undergrad some years ago, I didn’t quite get this right away. My approach was along the lines of thinking that education was done, and that the rest of my learning would be “on the job”.

The reality is that I ended up going back to graduate school, so the formal education didn’t end.  More importantly, I came to learn that we have to do more than learn in the office.  We need to constantly keep current and aware of trends, changes in technology, shifting markets, etc.  The rate of change seems to be higher than ever, so we have no choice but to keep learning!

Cultivate Marketable Skills

I think the foundation of this might be one’s education, and a big part of it would also be the notion of continual learning.  That said, even if we know how to learn, we have to translate it into something that generates value.  Making sure that we have actual skills that are marketable is a way to ensure that we have income.

After all, we can’t save much money if we aren’t making money!

Build Your Network

It’s pretty hard to be a lone ranger, unless a person has absolutely extraordinary talent.  My observations have been that connecting with others and getting to know people at some level can really help with one’s career or entrepreneurial ventures.

People are often inclined to help those who they like, and also who might be able to help them someday.  Whether at work, in your industry, or with people in general, it’s good to build your network.  Not just with volume, but with quality relationships with people where each person values the other.

Overdeliver

Doing what’s expected of us in a given role is often enough for us to stay employed or keep customers.  For a while.

To insulate oneself and actually thrive, it’s great to go beyond what’s expected.  I’ve noticed that people who do that tend to not only survive but also have a reach chance to see accelerated growth.

Generate Multiple Streams of Income

This is all the rage in personal finance circles, and I tend to agree.  Getting several avenues of cash inflow can be a great way to avoid losses (as in Buffett Rule No. 1 don’t lose money) due to the loss of a single income stream.  Moreover, it can be a great way to add on to the primary source of income.  All this being said, we need to be careful to prioritize our time to focus on what’s most important.  The Pareto Principle and money go together, and applying 80/20 to our income efforts is key.

Persevere

Being a sports fan, I’ve seen so many examples of players that had all the talent in the world, but just couldn’t put it all together.  There are innumerable instances of players who were actually overlooked or underrated, but ended up being all-star or hall of fame players.  These guys just wanted it more.  They outworked the others.

It seems like this is the case with many careers.  While this guarantees nothing, it can be said that pushing past frustrations and really working hard and smart can often be enough to put someone over the top.  It can be a differentiator.

Differentiate Needs and Wants

In my suburban locale, I need a car.  However, I don’t need a really nice car.  I want one, but I don’t need one.  A roof over my head is needed, but buying a dream home is an example of focusing on something that is simply wanted but not needed.

Keeping this in mind, we can save that cost difference between the wants and needs.  It helps to think of opportunity cost, and consider that saving $1 today could really mean saving $5 down the line.  After all, if we take our savings and invest it, we would hopefully see it grow to much more in the future.

Save a High Percentage of Income

When younger, I saved money regularly.  However, I was never one of those super savers who pocketed 50% of my pay.  If I had been, financial freedom might have been much, much closer.

You know, it just makes sense.  The more you save, the more you will have for retirement.  Simple, right?  But so many people don’t save at all, and many just save 5% or 10% of income.  While it’s not so easy all the time to get out of decisions that might have already been made, it’s good to always strive to improve.

Start to Save Early in Life

The more money we can save when younger, the better off we are.  I know a lot of people advocate living it up and taking risks when young, but I think it can really pay off later in life if you save as much as possible as early as possible.  How many people, when older, wish they were more careful with their money when younger?

Focus on Rate of Return

This doesn’t mean obsessing over getting the best rate of return at all costs.  Rather, we should at least make sure not to ignore the importance of it.  An asset allocation that’s overweighted in “safe” investments such as cash or savings accounts

Manage Risks

Sometimes it just takes one or two mistakes to wreak havoc with one’s finances.  When it comes to investments, competitively chasing high returns while ignoring risks (as noted above) can be dangerous.  However, there can be other risks.  Some are personal, such as driving safely, marrying the right person (not divorcing), and the like.

Other risks can be mitigated to a large degree by insurance.  This is an area that many people just check the box and move on, but it can really pay to review your coverage and make sure that you have made the right choices.  Thinking in detail about your financial risks, based on your life activities and structure, can serve as a starting point for a personal audit of your insurance needs.

Be Goal-Oriented

Just doing all these things noted above can put someone on the right track.  But like anything else, it helps to know where we want to go.  At least for me, it helps to set goals.

I like SMART goals.  These are specific, measurable, attainable, relevant, and timely.

Help Others

I know someone who sees things as a zero-sum game.  He’s quite successful professionally, and even in some ways personally.  A good guy, but always skeptical if anyone wants anything from him.

If he just saw that helping others proactively is not a waste of time, the sky would be the limit for him.   Often times, it doesn’t really hurt us to give and try to help others.  There are instances when it just might be the right thing to do.  Anyway, good deeds and a positive approach can result in that clichéd “good karma” that can benefit us in the future.

Stay Healthy

If we don’t keep ourselves healthy, it can impact our ability to get wealthy.  If we aren’t healthy enough to work, we’ll have difficulty making money.  Even if work isn’t directly impaired, having health issues can cause our focus to be diverted and priorities refocused from making money to simply dealing with problems.  Not the way to reach financial freedom!

Best to eat well, exercise, manage stress, and sleep regularly.  I was actually pretty good at all of this when younger, but got away from it as I entered my 30’s and became a parent.  It happens.  But lately I’ve been refocusing on health and looking at life as a system, with health, wealth, and relationships all intertwined.

My Questions for You

Which of these steps do you follow?

Are there any that you think are particularly important, more so than the others?

Do you have any others to add?

Taking a Pension or Lump Sum: What Would You Do?

lump sum or pensionCash now, or regular payments later?  Would you rather take a lump sum up front, or take periodic payments over time that seem to add up to more money overall?

A lot of people like the latter, and prefer to take money over time.  That is, if they’re fortunate enough to have such a pension or similar arrangement.   I suspect that the idea of getting a lot of money all at once is also scary to some people, and they’d prefer to be on some type of payment schedule instead.  You know, kind of like a paycheck system where your life is based on your income.

That’s all great, but do you see any risks here?  This may or may not apply to you – it doesn’t actually apply to me – but it’s still fascinating how some of these decisions are made.   Personally, I would go for taking money up front instead of a promise to be paid later.  There is something about removing future risk, and maintaining control, that seems appealing.

I’ve read enough lately about pensions that are being impacted by change, and retirees potentially losing out on some benefits that they thought they were getting.   While much of this might not have been executed just yet, there have been discussions in the news surrounding pensions in Detroit, the state of Illinois, as well as people who have served their country.

Can you imagine being older and in a position of needing money, thinking that you had an solid arrangement in place that you had earned with prior work, only to have the terms of it changed?  Meaning, you weren’t getting more than you thought, but will see things get cut in some way, shape, or form.  While it seems flat out wrong to me, the reality is that “right or wrong” doesn’t always matter in the real world.  Sometimes it is what it is, and we just have to successfully navigate the landscape.

While pensions aren’t exactly common with younger workers, I think there are some lessons we can learn from the whole experience.   The big thing, to me, is that there is something to be said about actually having control over money up front.   In any situation, whether you’re asking if it’s better to take a lump sum or a pension, or just really any other situation of money now vs. promise later, this should be considered.

You just never know what could happen.  Actually, even if you have the money in your possession, anything could happen.  There was talk about a tax on bank deposits in Cyprus within the past year, so clearly there are reasons money in hand may not be risk-free either.  The bigger point is that the more control we have, and the more we can anticipate what might go wrong, the better prepared we can be to protect our hard-earned assets.  And, better yet, be in position to grow and prosper!

My Questions for You

Would you be naturally inclined to take a lump sum instead of a pension, or would you go for the opposite?

Are you risk-averse like me when it comes to future promises to be paid, or are you less concerned about promises being compromised or simply not kept?

Patience vs. Urgency with Personal Finance

patience_or_sense_of_urgencyThere are many people, including myself, that have the belief that life truly is a journey.  To put a running spin on it, this would mean life is a more like a long marathon than one big sprint.

Going gangbusters every day burning both ends of the candle isn’t a sustainable approach, and there are sacrifices to be made along the way.  Its possible working long hours can be bad for your health too.  Sometimes, it’s all about balance, at least from my experience.

That being said, I’ve come to look at things another way too.  While I still buy into the approach I just mentioned, I also think that there are times where it can be beneficial to move fast without any haste.  Taken in that context, maybe life isn’t a marathon, but maybe a series of sprints along with periods of walking.  Okay, maybe these are too many metaphors to handle:)  But what I’m getting at is that sometimes it’s smart to be patient and take our time, while other times it’s good to hustle and get things done as quickly as possible.

When it comes to money and our finances, I think it’s important to figure out when we need to take the right approach.  Here are a couple of examples that have come to mind for me, for each.

Being Patient with Money

Panicking With Stocks

For some reason, there are many people that get scared when stocks decline.  As in, fearful that they will lose everything.  If the market declines 20% over a couple of years, that’s no fun for most of us.  But some folks panic and get scared that their entire investment portfolio will be reduced to ashes.  Thus, they sell when things are headed downward.

Tell me, when have stocks as a whole declined to zero?  Now, individual stocks have the possibility of declining to low levels permanently, and destroying wealth.  But this is why we focus on diversification and investing in large baskets of stocks or even index funds.  When tracking the market, you’re highly unlikely to permanently lose wealth based on historical data.

For example, do you remember the fear regarding stocks and the U.S. credit downgrade in 2011?  There was fear that stocks would plummet, and they did in fact decline for a short period of time.  The sky was falling!  Except, it really wasn’t.  It actually turned out to be a money-making opportunity, as prices rebounded and the market went back up.  Those that sold in a panic lost out.

The same could be said for those selling at the market depths of 2008 and 2009.  Things recovered.  Even when looking at the financial impact of the Japan tsunami of 2011, we can see that this terrible tragedy did not cause a long-term impact on the NIKKEI.  After an initial decline, it bounced back in a matter of a few weeks.

Bottom line:  think long-term with stocks, and realize that with the broader market there will be ups and downs.  We don’t want to get caught selling on the downswing.

Buying Expensive Things

I think this is a trap that many people very easily fall into.  There is a desire to feel like we have made it, to live the good life we see others living.  The reality is that many of these are big hat, no cattle people.  Meaning, they have material things that convey an image of wealth that is misleading considering how modest the savings or income they have actually is.

I have several friends that bought highly expensive cars when younger.  One I’ve known forever since childhood, and he has always liked nice cars and driving very fast.  He bought a car right after graduating college that was probably 3/4 of his annual income in terms of its purchase price.  Another friend bought an expensive new SUV within a year of graduating, in order to “feel like I’ve arrived”.

Thankfully, both people rebounded and are now doing really well for themselves.  They’re smart guys.  But if they had just driven modest cars at that time and invested that incremental money that they had spent, think about what that could grow to in the future after investing?

This same concept can be applied to many other things, such as vacations, clothes, and homes.  With respect to the latter, I think that buying a “dream home” before having the means to buy it can be a dicey proposition.  Look at the people that stretched to buy a home before the housing bubble, only to see their mortgages go underwater?  Better to buy a home based on what you need, and within pre-defined financial parameters.  Sometimes emotions and money getting mixed up can lead to some unintended consequences!

Bottom line:  If we don’t have the money to buy expensive things, then we shouldn’t.  Being impatient with the desire for upgraded purchases can only hurt one’s long-term finances.

Having a Sense of Urgency With Money

Saving Money for Retirement

When someone is 30 to 40 years from an age that is generally considered with the “retirement” age bracket, it seems like a long time in the future.  I know, as I have felt the exact same way.

The thing is, time really moves fast, and seems to accelerate even more with each passing year.  Putting off saving and investing can really be harmful in the long run.  Conversely, the better we are at putting money away when young, the better our finances will be in the future.  There is something to be said for the time value of money, as barring deflation a dollar today is worth more than a dollar tomorrow.

For example, let’s say two people, John and Jane, are both 25 and want to ultimately retire at 55.  John enjoyed traveling, buying a nice car, and all the latest gadgets from ages 25 to 30.  Meanwhile, Jane cuts out those and similar extras and instead focused on saving more money during those years, to the tune of $5,000 per year.  Then John gets serious at age 30 and starts to save and invest at the same rate as Jane.

What does that $5,00o per year for those 5 years get Jane?  Reinvested and compounded at 8% annually, she would have greater than $200,000 more than John by age 55.  Just for setting aside that modest amount of extra money each year and investing it in her 20s.   By taking his time and not worrying about the future, John would lose out on a big opportunity.

Bottom line: understand that time is a powerful factor in growing net worth, and the earlier we save and invest our money, the better.  Start ASAP!

Paying Off Debt

When in debt, we are impacting our net worth in a negative way.  Even if someone owns a home worth $300,000 for example, if there is a $250,000 mortgage on it, the net ownership comes down to $50,000.  When we start adding student loan debt, car loans, and – worst of all – consumer debt, the picture can get murkier.   How can we build wealth if we carry such non-valued added liabilities on our personal balance sheet?

I’d say the best thing to do is avoid debt, and try to work toward a goal of debt-free living.  It may not be an overnight process, but eventually we can get there.  The sooner the better, as interest charges make debt balances grow.  It’s almost like a spiral with a gravitational pull downward; debt can get more onerous if not addressed quickly.   Effectively managing it and paying it off can help us move back in the right direction faster.

Bottom line:  have a sense of urgency in staying out of debt and paying off existing debt quickly, in order to help you build long-term financial stability and prosperity.

My Questions for You

Do you balance patience and a sense of urgency with your finances?

How do you approach each of the 4 examples noted above?

Are there any other areas of personal finance in which you think its important to demonstrate either patience or a sense of urgency?

Teaching Basic Money Skills for the Greater Good

financial_educationIf you’re reading this right now, you most likely have some interest in personal finance.   Everyone coming here to Squirrelers probably cares about money in some way, shape, or form.  Along those lines, there is probably at least a basic level of personal finance knowledge that many people have when reading posts here or on other personal finance blogs.  Some of you go well beyond that, and might fall into the “expert” category.

Sometimes it’s a good idea to stop and think about this for a moment, while realizing that there is probably a staggering number of people out there with zero knowledge of money or how to handle it.   One thing that reminded me of this reality is a study showing that many people don’t know with whom the U.S. fought for independence in the 1700s.  Sure, that’s not exactly a topic within the personal finance sphere, but it jumps out as an example of how basic knowledge can be missing in so many people.

1 in 4 people apparently did not know that the U.S. obtained independence from Great Britain.  Some people were unsure, and others even thought the U.S. broke off from places such as France, China, and Mexico.  Seriously.  And yes, these were actual U.S. residents surveyed.

I mean, if that’s the case, you can be sure that there are a ton of people with even less knowledge of money!

Here are some concepts that might be missing from the knowledge base of such folks:

  • The reason to have one’s expenses be less than income
  • Why a person shouldn’t automatically take on the maximum home loan for which he or she is approved
  • The difference between wants and needs
  • What rate of return is
  • What stocks and index funds are
  • Why saving for retirement is important
  • Why social security, “the system”, or anybody else won’t be there to automatically take care of you when you’re old
  • Why carrying credit card balances can be so bad

Not making fun of anybody, but just realistically saying that there have got to be plenty of people who simply just don’t understand the basics with money.  If there are people thinking that the U.S. declared independence from France, China, or Mexico, you can be sure that there are people who think credit cards are a source of free money.  Or something similar.

What’s alarming about this is that grown-ups with such knowledge (or lack of it) are actually advising their kids on careers and whether or not to go to college.  While education can lead to wealth, going to the wrong school with high expenses and low ROI compared to cheaper alternatives could saddle a kid with massive student loan debt when young.

The blind leading the blind?

Anyway, where this all leads me is to the idea that there really should be a lot more basic financial education in schools.  As in, starting at a young age.  If we’re teaching history in school and 25% don’t retain basic historical facts, then you can bet that a far greater percentage don’t know money basics since those aren’t as much of a focus academically.

Actually, if we could get it to where only 25% of people don’t know simple financial concepts but 75% do, that would probably be a huge improvement.  All that collective financial savvy could help a country make good financial decisions as well, including operating on a balanced budget and avoiding national debt.  Keep going at our current rate, and we’ll have to fight for independence once again – this time financial independence.

So, for the greater good, here’s to teaching kids about money at a young age!

My Questions for You

What are your thoughts on personal finance basics being taught in schools?

Do you think that those of who read (or own) personal finance blogs sometimes lose sight of just how many people out there don’t understand simple money concepts?

As a side question, what do you think about those findings about knowledge of U.S. history?

 

Knowing Your Limitations Can Be Financially Beneficial

Do you believe that each of us can really do just about anything, if truly put our mind, energy, heart, and soul into it?

I don’t.

At one point in time I might have, but as I get older, I realize that we all have our strengths and weaknesses.  Which isn’t exactly a revelation, but the degree to which we can or can’t do certain things is probably more than meets the eye.  And the absolutes, particularly in terms of our ceiling with certain things. 

Admittedly, I’m generally a huge fan of how being persistent can lead to success.  There is much untapped potential that we probably have on a vast array of different things.

However,  there are probably other things in which we simply have little chance to succeed. Maybe the trick is finding out what we can succeed doing, what we really have a chance in.  Then, make a reasonably quick, calculated decision to invest our time and money where it can make an impact and help us achieve our bigger goals. 

Anyway, this topic is one I’m writing about after reading a post by Evan at My Journey to Millions about knowing when it’s time to give up on a dream.  Basically, the premise as I took it was that at some point during adulthood, we should grow up and accept that endless pursuit of pie-in-the-sky dreams just might be dumb.  If we have others depending on us, it could even be selfish!

I can’t really disagree with the premise, honestly.  While not everyone will agree, I think that there are times when some people just don’t have what it takes to succeed in certain things.  No matter how hard they try, they just won’t make it.

My comment there, which I’ll summarize here, was an example of someone I knew who should have given up his dream.  There was a guy from college who left school well before graduating, dropping out with a sub-2.0 (on a 4.0 scale) GPA.   He just didn’t strike me as a serious student, and didn’t demonstrate a grasp of priorities or how important his college record would be for his future endeavors.

Yet, a few years later, I ran into him at a car repair place.  He was actually talking about how he was taking college classes again – albeit on a part-time basis of 1 or 2 classes per semester.  At that pace, he would have YEARS of classes ahead of him.  The crazy thing is that he was telling me how he wanted to get into medical school.

As I listened to him tell me this as he was in his car mechanic uniform with greasy hands, I couldn’t get past the reality that he had a GPA in the “ones” before dropping out.  That he was the type of person who would be one of the last you would expect to go to graduate school, never mind medical school!  Frankly, he didn’t even seem like someone serious enough to complete a college degree, period.

You absolutely knew that he had zero chance to reach this grand goal of his.  It was never going to happen, because he was not capable of doing that.  I don’t care if he put his heart and soul into it and studies as if the fate of the world depended on it, and the whole world was cheering him on.  His ability was limited.  He should have given up on the dream long ago, knowing that he did not have what it took to succeed, since he was sure to be a failure in that specific instance.

That’s not to say he couldn’t be very successful in other endeavors, or even other aspects of life.  But his life dream is one that he should have realized was not attainable due to his not being good enough.

But wait? Is that mean to say he wasn’t good enough? Is it wrong to limit ourselves, perhaps selling ourselves short?

I say no.  I think it’s good to realize that we are not capable of doing anything we want to.  Yes, there are some things that we could put everything into, but won’t succeed.  Others just might succeed much more, because they do have what it takes to get that particular dream.

An example: I would have loved to be a professional baseball player when I was younger.  I was obsessed with baseball.  However, I got cut in tryouts my junior year of high school.  I could hit, had very good fundamentals, and knew the game exceptionally well.  But I was of purely average athletic  ability, and had very modest potential at that level. Thus, it was clear that the party was over .  Obviously, no matter how much I put into it,  the dream would never materialize because I wasn’t good enough.

I’m okay with it :) But the thing is, sometimes physical limitations are easy to spot.  It’s clear I couldn’t with a slam dunk contest in basketball, given that I’m 6’0′ tall but could never dunk a basketball.  And that I’m now 40+ anyway, it’s never going to happen.  However, mental or talent limitations are harder to grasp because they aren’t as visible.  Thus, it’s easy to dismiss them as being non-existent.

There’s a line in an old Kenny Rogers song, that goes like this:

You’ve got to know when to hold ’em,

Know when to fold ’em,

Know when to walk away,

Know when to run

Perhaps it’s a matter of being able to differentiate the situations where persistency can lead to great things,  and conversely where persistency might lead to nowhere. 

What it comes down to is that realism is a good habit to get into, and maybe a profitable one.  Not only can we recognize dead end situations, but we can steer our time and energy toward situations that are better investments! I’m just thinking that sometimes calculated realism can trump unwavering optimism, and yield more profitable results.  That’s where realism can actually be more exciting!

My Questions for You

Have you ever found that giving up on something was actually a winning decision?

Do you agree with the notion that while we do have a lot of untapped potential in a lot of areas, there are some where we simply have limitations?

Do you find realism to be an important part of sound financial decision making?

The Value of “If I Won the Lottery” Thinking

How many of us have ever wondered what we would do if we won the lottery? I know I have! This despite not having any interest in playing it.

Actually, in addition to not playing the lottery or even buying tickets, I’m not too big on casinos either.  When younger, I enjoyed going to Vegas every so often, but my last trip there a few years ago ended up being the Vegas Cheapskates trip I wrote about back then.  None of us played much.

So, we have to pay to play sometimes.  Regardless, I’m sure the notion of what to do if you win the lottery has come up at least once.  It’s something that might have come up in conversation at some point, or been something that was the focal point of a daydream.

If you ask yourself that question, what comes to mind.  What would you do if you had a financial windfall all of a sudden?

For me, thoughts come to mind around the idea of financial independence and security.  Also, a future with more time spent with kids, and even WAY down the line grandkids.  More time traveling, and exploring.  Time to spend with friends and family, and time to focus on living a healthy lifestyle.  Every day would be fully enjoyed.

This got me thinking: if this is what I would want life to be like if money was no object, maybe it’s what I can work toward anyway? And, in some instances, maybe I can simply live out this life now as best I can.

If this so-called “ideal” life would be so incredible, maybe we can use this “if I win the lottery” question to get some clarity as to what’s really important to us and what we would really love to do with our lives.  Then, just try to do it – without the lottery of course, and without expecting to win it (because that’s incredibly unlikely to be happening) And, with a sense of financial responsibility while simply viewing this as an exercise in focusing on what’s important.

What it comes down to is that when we think about the role of money in our lives, it certainly helps us. But, it’s not the only thing.  Relationships and health are paramount, and are interrelated to finances as well.  They all feed off each other!

My Questions for You

What do you think about this type of thinking as a way to understand what’s really important to us if money was no object?

Have you ever wondered what you would do if you had a big financial windfall?

I shared what I would do – so I’m naturally curious, what would you do with a windfall?

 

5 Financial Lies People Tell Themselves

Accepting reality is a great habit for each of us to embrace.  The more we can see things for how they really are in life, the more likely we will be to succeed.

Being a typically optimistic person, I’ve usually woken up each day with the natural tendency to think about how it has the potential to be a really great day.  Not all the time, as there are some days you just know are going to be ones that you just have to get though.  But most days, yes.  That said, I’ve been taking a look at my own views on some things and lining them up with reality, and have been finding that blunt realism has its value and place at the table.  How I optimistically assume and hope things are doesn’t always match up with the pure, unvarnished, and sometimes brutal reality of things.

It’s not just me. I’d say this applies to all of us – and I mean each and every one of us.  We each have our own biases and perspectives that probably make it impossible to be 100% objective about everything.  Sure, maybe most things – but not all things.  This includes the way we approach health, relationships, and – yes, this too – money.

With respect to money, there is great value to being optimistic and reaching for the stars, so to speak.  If you expect to be exactly middle class, you won’t be wealthy.  If you expect to be wealthy, you have a chance to get there but you still might be middle class.  Having expectations and aligning behavior accordingly, is better than giving up before you start.

Back to that reality thing – it can only help if we balance optimism with reality.  Sometimes, our best moves can be made by avoiding the big mistakes.  Of course, recognition of such landmines requires that we be honest with ourselves and not tell ourselves financial lies.

Here are 5 financial lies we tell ourselves, and how they can impact us.

Financial Lie #1: Someday My Ship Will Sail In

No, it won’t.  There will be nobody to rescue us from anything financial.  Across the horizon, we won’t see a ship full of heroes that sail into the harbor of our lives, bestowing money upon us to bail us out of things or make us financially secure.  There is no “Prince Charming” to rescue us.  Be your own Prince Charming, whether you’re male or female!

I think that the illusion that someone will be there to take care of us is present with a lot of people.  It’s easy to just assume that things will work out, or that somebody or some “system” will help us when in need.  I’d say to that: just look at people that are homeless or begging.  Who’s taking care of them? Why would anyone take care of you or me, and who would that person or entity be?

This can also apply to aspirational thinking.  As if, someday we will just magically be rich.  Things generally don’t just happen to us magically.  Optimism without a realistic plan has marginal value.

This reminds me of a guy I knew a long time ago – as in 2 decades ago (yeah I’m getting older…realism, right?).  He expected to become a U.S. Senator someday, and seemed confident that he would be successful in that arena.  You just had to take one look at the guy and know that this would never happen (one could say the same thing about me…again realism).  If you talked with him for 5 minutes, it would cement your view that this would never happen.

Yet, he spoke with conviction that he saw himself doing this someday, as if he would be “discovered” as an up and coming political talent.  Clearly, he hadn’t thought it through well enough and had delusions of greatness.  Today, the guy is a regular middle class guy doing nothing out of the ordinary at all.  The ship never sailed in.

I think a better approach is to have dreams and try to achieve them, but be realistic about what you need to do to get there, and what your strengths and weaknesses are at the moment.  Don’t count on miracles happening without having a plan to make them happen, and be the captain of your own ship.

Financial Lie #2:  I’m Certain I Can Beat the Market

Why would anybody be sure that they could beat market returns?  Stats have shown that when looking at actively managed funds vs. index funds, in the majority of cases the latter perform better  This tells us that many professionals who specialize in this work can’t be counted on the beat the market averages.

So, if they can’t do it, why would you or I be highly confident that we could generate returns that outperform the market?  Is it that others are dumb, or perhaps not motivated enough? Or, is it that maybe we succeeded in one or two years and therefore think that we can always do it?

Now, I’m sure there are some people who can beat the market and do so.  There are plenty of very successful investors out there, and I do think much can be gained by examining historical trends and investing opportunistically.  However, counting on incredible returns to fuel future retirement dreams is delusional for most of us.

A better approach might be to consider near-historical averages as expected returns, and then strive to beat them by a little bit without blindly expecting it.

Financial Lie #3: I’ll Be Able to Work Into Old Age

No, most of us won’t be working when old.  If you’ve been visiting here for a while, you’ve probably noticed that I’ve expressed this view multiple times.

The idea that many of will probably need to work into old age is nothing to be embarrassed by, as it probably applies to most people at this point in time.  Not all, but most.  However, the disconnect is the opportunity to work when older might not be there for many people.  Sadly, being unemployable when older (ageism) is one issue, and a bigger one might be health.

With respect to that latter, there is so much rationalization out there that it’s insane!  Sentiment along the lines of:

  • I keep myself healthy, so I’m sure I’ll be fine in the future
  • My uncle (or aunt, father, etc.) worked until he was 85, so I see no reason why I can’t do the same
  • Most people in my family haven’t had any major health issues when older, so I have genes on my side
  • I’m sure I’ll figure something out, I’ve always been resourceful

Those are expressions of belief that don’t factor in the reality that if you look around you at people in old age, many simply can’t work demanding jobs much less any jobs.  Just look – how many have health issues, or simply seem too tired mentally and physically to work?  Not to mention the ageism issue alluded to earlier.

Bottom line: that nobody can count on being able to work when older, and should plan as if it won’t be on option.  If we take care of ourselves and get some good luck, maybe it will end up being feasible and then it’s a bonus.

Financial Lie #4: Education is Overrated

First off, I would absolutely say that undergraduate programs are generally not a universal slam dunk in terms of financial ROI.  The costs have really escalated, and there are many programs that are simply not comparable investments to others that are much less expensive.  So, I would say choose wisely rather than don’t choose at all!

Beyond that, I’ve heard and read a bunch of things that sound like wishful thinking.  For example:

  • All that matters is what you can prove on the job, not a piece of paper like a degree
  • Nobody has time to go to graduate school
  • You can learn anything you need to know by searching online

There is some validity to each in many cases, but ultimately they’re also excuses.  Sure, what we actually do on the job matters a lot, but some doors just won’t open without the right credentials.  Yes, graduate school can be a daunting commitment of time and money, but some people seem to make it work and even go full time.  Of course we can learn so much by doing quick online searches, but that doesn’t always substitute for structured academic programs.

I know that education is pricey, and can leave people in big trouble with massive student loans.  That can lead many to ask if it’s worth the trouble.  My opinion is that education and wealth are correlated, and the former is more necessary than ever.  However, not all schools are created equal in terms of return on money spent.  The pricey private school just might be a much worse investment than its public school counterpart.

Financial Lie #5: It Makes Perfect Sense to Prioritize Buying a “Dream House”

A home, especially one that seems really cool to us, can be very enticing.  After all, we spend a large portion of our time in the place where we live.  Plus, in our society, where one lives seems to have some impact on status and perceived social ranking for some people.

Most people I know would probably really like to have a truly amazing home, myself included.  However, where I draw the line is when we start deviating too far from the wants vs. needs paradigm.  In terms of personal finance needs, it makes sense to spend on shelter for ourselves and family.  We need to live in a place that’s safe, has decent schools, etc.  But we don’t need to sacrifice other needs to go overboard on our home.

It’s the going overboard part that I think some people rationalize.  The concept of “dream home” is one that just seems funny sometimes.  Since when it is the unalienable right of each of us to live in the home of our dreams?  Isn’t it more important that we are able to retire someday, pay for health care, and raise our kids – while living in a home that meets our needs?

It really seems like many people buy a home based on what they can afford instead of based on how much they should spend.  My line of thinking is that it’s not understandable that anyone would choose to work an extra 5 years for retirement, or neglect to help their kids, just for a home that has more bells and whistles than another home.  It seems like a lie that people tell themselves, when deciding that it’s totally sensible and understandable to stretch financially and go into deep debt to buy a dream house.

My Questions for You

What do you think about these 5 financial lies that I think people tell themselves?  I’m curious where you might agree or disagree, and why.

Do you have any others to share?

Mandatory Savings vs. Mandatory Financial Education

Here is a 3 step process to start as early as possible in one’s working years:

  • Make money
  • Spend less money than you make
  • Take the difference between the two above, otherwise known as savings, and invest it.

Do this regularly from early on, and you’re on your way to increasing net worth.  You’re also on your way to being far, far ahead of the average American in terms of putting yourself on a path toward being able to eventually retire voluntarily.

I say that because it seems as though the average person out there is simply not taking these 3 steps above.  According to this article at MarketWatch, only about 66% of Americans are estimated to save a portion of their paycheck.  What’s unfortunate is that for over half of the people saving money, the amount saved is under $25,000.

That’s simply not going to cut it for retirement.  I wonder how so many people are going to be able to handle their retirement years.  If there is no money, what do they do?  I’ve often wondered, and to me, it seems like they have to work deep into their senior years, until physically or mentally unable to do so.  Or, until they are no longer wanted in the workforce in any capacity.  Avoiding this type of scenario is a huge source of financial motivation for me.

The article I mentioned brought up the topic of mandatory retirement savings, and whether or not that should be put in place.  On the surface, I can see the appeal to it.  If people are forced to save, they might find themselves in a much better position down the line.  Lack of discipline might be made up for by the imposition of required responsibility.  That’s part of the benefit of automatic savings, right?

What are your thoughts about this?

To me, the notion of forcing people to do things isn’t one that seems like a viable long-term solution, nor does it seem to be a good fit with our way of doing things here.  I think that it’s up to each of us to figure out our own way to make savings and ultimately retirement happen.  We have the freedom to choose, whether it’s the freedom to be responsible or the freedom to lack personal accountability.

That being said, I do think that teaching people how to be financially responsible is something that would be a good idea.  A way to make that happen is to really take seriously the notion of comprehensively teaching personal finance in schools, to make sure that people graduate high school with a really strong foundation in how to approach money.  Frankly, if many parents don’t have a clue, how can the kids be expected be different without intervention or some exposure to teachings about money?

This would help many people avoid taking on out-sized student loans without really understanding the concept of return on investment.  People might then spend based on needs vs. wants, thus building wealth earlier in life through the 3-step process noted up front.

It could go a long way to increasing that overly modest sub-$25,000 savings amount that many folks have!

My Questions For You

What do you think about those findings, about 2/3 of people saving and more than half of those having less than $25,000 actually saved?

How in the world are most people going to handle paying for their needs in old age?

Do you agree that mandatory financial education is better than mandatory savings?