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For the most part, over the 34 years we’ve been married at least one of us has been working. That handily solved the tough problem of health insurance. During the early 1990s, when we had an overlapping employer-less few years, we bought a high deductible catastrophic health plan. It is too long ago to remember the details and they likely wouldn’t apply today anyway.
The Simple Path to Wealth PDF Book by J. L. Collins
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But that’s what we’ll seek out if and when my wife decides to hang it up before we hit 65 and Medicare. For now, she loves working with the kids at her school and the time off it allows her for our traveling. What you’ll often see, if you scratch the surface just a bit, is an unquestioning acceptance of the single most dangerous obstacle to building wealth: Debt. For marketers, it is a powerful tool.
It allows them to sell their products and services far more easily, and for far more money, than if it didn’t exist. Do you think the average cost of a new car would be pushing $32,000 without E-Z financing? Or that a college education would cost over $100,000 if it were not for readily available student loans? Think again. Not surprisingly, debt has been promoted as, and largely embraced as, a perfectly normal part of life.
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Those who live paycheck to paycheck are slaves. Those who carry debt are slaves with even stouter shackles. Don’t think for a moment that their masters aren’t aware of it. As already described, I first accumulated the modest amount of F-You Money I needed to negotiate extra vacation time two years into my first professional job. By 1989 the amount and the freedom it provided had grown substantially.
Not enough to retire, perhaps, but easily enough to say F-you if needed. The timing was fortunate. I wanted to take some time off to pursue business acquisitions. When one morning I found myself and my boss in the office hallway screaming at each other, it occurred to me perhaps the time had come. I may not have owned a Mercedes, but I owned my freedom.
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Freedom to choose when to leave a job and freedom from worry when the choice wasn’t mine. Good thing. It turned out I was unemployed for three full years after 9/11. I’m really lousy at job hunting. On the other hand, I remember having lunch with a friend of mine in 1995 shortly before Christmas. He’d just gotten his annual bonus: $800,000.
He spent the lunch complaining that it simply wasn’t possible to make ends meet with just a lousy eight hundred thousand dollar yearend bonus. Somewhat stunningly, listening to him list his expenses, he was right. He was burning through more than $175,000 every three months. Financial independence was a distant dream for him. Money is a very relative thing.
Right now I have roughly $100 in my wallet. For some (very wealthy) people out there, $10,000 has less relative value to their net worth. For (even wealthier) others, it’s $100,000. For still others (the vast number of very poor in the world), $100 might be more than they’ll see in an entire year. I don’t mean to pick on Mr. Tyson. (I’m not NUTS after all.) In this attitude towards money, he is not alone. The Simple Path to Wealth PDF Book Download
The world is filled with athletes, performers, lawyers, doctors, business executives and the like who have been showered with money that all too often immediately flowed right off of them and into the pockets of others. In a sense, they never really had a chance. They never learned how to think about money. It’s not hard. Stop thinking about what your money can buy.
Start thinking about what your money can earn. And then think about what the money it earns can earn. Once you begin to do this, you’ll start to see that when you spend money, not only is that money gone forever, the money it might have earned is gone as well. And so on. Clearly, none of this is to say we should never spend money. Rather, it is to fully understand the implications when we do.
Consider buying a car for $20,000. Even the least financially sophisticated person should see that once you buy the car you no longer have the twenty grand. I sure hope so, anyway. Other academic studies suggest that when looking at longer time periods, even an outperformance rate of 18% is wildly optimistic. The Simple Path to Wealth PDF Book Download
In the February 2010 issue of The Journal of Finance, Professors Laurant Barras, Olivier Scaillet and Russ Wermers presented their study of 2,076 actively managed U.S. stock funds over the 30 years from 1976 to 2006. Their conclusion? Only 0.6% showed any skill at besting the index or, as the researchers put it, the result was “…statistically indistinguishable from zero.” They are not alone.
Brad Barber of UC Davis and Terrance Odean of UC Berkeley found that only about 1% of active traders outperform the market and that the more frequently they trade, the worse they do. In a deflationary environment, delayed buying decisions are rewarded. If you were considering a new house in 2009-13 you would have noticed that prices were dropping, along with mortgage interest rates.
Recognizing you could get both for less later, you waited. If enough potential buyers joined you, demand would drop pulling prices and rates down further. Delay is rewarded and action is punished. Too much of this and the market slips into a deadly spiral of crashing prices. But during periods of inflation, anything you want to buy will cost more tomorrow than today. The Simple Path to Wealth PDF Book
You have an incentive to buy that house (or car or appliance or loaf of bread) today and beat the price increase. Delay is punished with higher prices later and action now is rewarded. Buyers become ever more motivated. Sellers become ever more reluctant. Too much of this and the market slips into a deadly spiral of increasingly worthless currency people are desperate to exchange for goods.
Governments love a little inflation. They can add money to the system, keep the economy humming and not have to raise taxes or cut spending to do it. In fact, it is sometimes called “the hidden tax” because it erodes the buying power of our currency. It also allows debtors, like the government, to pay back their creditors with “cheaper dollars.”
Many years ago I had a martial arts instructor who was talking about effective street fighting. On the subject of high kicks he had this to say: “Before you decide to use kicking techniques on the street ask yourself this question: ‘Am I Bruce Lee?’ If the answer is ‘no’ keep your feet on the ground.” Good advice when you’re playing for keeps. The Simple Path to Wealth PDF Book
As cool and effective as kicks look in the movies, tournaments and in the dojo, on the street they are very high risk. Unless you are both very skilled and significantly more skilled than your opponent (something unknowable in street fighting or investing) they are likely to leave you exposed and vulnerable. Even, and this is critical, if you’ve had success with them before.
So too with investing. Before you start trying to pick individual stocks and/or fund managers ask yourself this simple question: “Am I Warren Buffett?” If the answer is “no,” keep your feet firmly on the ground with indexing. When you own a mutual fund through Fidelity or T. Rowe Price or any investment company other than Vanguard. The Simple Path to Wealth PDF Book
you are paying for both the operational costs of your fund and for a profit that goes to the owners of your fund company. If I am an owner of Fidelity or T. Rowe Price, I want the fees, and resulting profits, to be as high as possible. If I am a shareholder in one of their funds, I want those fees to be as low as possible. Guess what? The fees are set as high as possible.
To be clear, there is nothing inherently wrong with this model. In fact it is the way most companies operate. When you buy an iPhone, built into the price are all the costs of designing, manufacturing, shipping and retailing that phone to you, along with a profit for the shareholders of Apple. Apple sets the iPhone price as high as possible, consistent with costs, profit expectations and the goal of selling as many as they can make. It is the same with an investment company.
This is where we’ll want to put investments that are already “tax-efficient.” Tax-efficient investments are typically stocks and mutual funds that pay qualified dividends (dividends that receive favorable tax treatment) and avoid paying out taxable capital gains distributions. Such distributions are typical of actively managed funds that engage in frequent trading in their portfolios. The Simple Path to Wealth PDF Book free
VTSAX is a classic example of a tax-efficient investment. The dividends it pays are modest and mostly “qualified.” Because trading (buying and selling) in the fund is rare, so too are taxable gains distributions. Investments that are “tax-inefficient” are those that pay interest, non-qualified dividends and those that generate taxable capital gains distributions.
These are things like some stock funds, bonds, CDs and REITs (real estate investment trusts). These we want to keep ideally in our tax-advantaged buckets as their payouts are then taxdeferred. Let’s finish this chapter with the recommendation that, whenever possible, you roll your 401(k)/403(b) (but not your TSP) accounts into your personal IRA. Usually this will be when you leave your employer.
As we’ve already seen, employer plans are all too frequently laden with excessive fees and your investment choices are limited. In your IRA you have far more control. Personally, I’ve always been slightly paranoid about having my employers involved in my investments any longer than I had to. The moment I could roll my 401(k) into my own IRA, I did. One final note. The Simple Path to Wealth PDF Book free
We’ve touched a bit on tax laws in this chapter. While the numbers and information are current as of this writing, should you be reading this book a few years after publication, they are sure to have changed. The basic principles should hold up for some time, but look up the specific numbers that are applicable for the year in which you are reading.
If you are in the wealth accumulation phase you are aggressively investing a large percentage of your income each month. In a sense, this regular investing from your income is a form of unavoidable dollar cost averaging and it does serve to smooth the ride. But the big difference is you’ll be doing it for many years or even decades to come. And, of course, you don’t have the lump sum option.
But you are putting your money to work as soon as you get it in order to have it working for you as long as possible. I’d do the same with any lump sum that came my way. If you are in the wealth preservation stage, you have an asset allocation that includes bonds to smooth the ride. In this case, invest your lump sum according to your allocation and let that allocation mitigate the risk. The Simple Path to Wealth PDF Book free
If you are just too nervous to follow this advice and the thought of the market dropping shortly after you invest your money will keep you up at night, go ahead and DCA. It won’t be the end of the world. But it will mean that you’ve adjusted your investing to your psychology rather than the other way around.
Within that 3-7% range, the key to choosing your own rate has less to do with the numbers than with your personal flexibility. If as needed you can readily adjust your living expenses, find work to supplement your passive income and/or are willing and able to comfortably relocate to less expensive places, you will have a far more secure retirement no matter what rate you choose. Happier too I’d guess.
If you are locked into certain income needs, unwilling or unable to ever work again and your roots go too deep to ever seek out greener pastures, you’ll need to be much more careful. Personally, I’d work on adjusting those attitudes. But that’s just me. 4% is only a guide. Sensible flexibility is what provides security. The Simple Path to Wealth PDF Book free
Those are the kinds of simple cons my friend’s wife was thinking about, and she’s right. She is much too smart to fall for them. But those aren’t what had her husband worried. It is the clever scammers of the world who seek out the smart, the rich and the lonely. If you have not already done so, have these conversations with your own spouse or partner.
Don’t leave it to a tactless (although honest) friend of the family like me. Given the actuarial tables and her good genes, my own wife will likely also outlive me by a couple of decades. Since I handle our investments, we have this conversation on a regular basis. We review what we own and why. Fortunately, she understands the principles and their importance.