Interest: the rowboat analogy

Let's imagine you're in a rowboat on a lake.  Your rowing speed is about 5 mph, and that's exactly how fast the boat is going.  The faster you row, the faster you go

Now imagine you're on a river whose current is about 2 mph.  If you're rowing upstream, your overall speed will be 3 mph.  

Yes, I know that's not a rowboat; bite me

You're still rowing at about 5 mph, but the stream is eating away at your speed.  If you were to row downstream, you'd be going at 7 mph.

What's my point with all this rowboat stuff and the bad drawings?  It's a good analogy for interest.

If you've ever bought a car, had a savings account, or owned a credit card, you probably know what interest is.  It's the extra money you have to pay back on top of the money you spent/borrowed.  Interest can suck when it's working against you (when you're in debt), but it's pretty awesome when it's working for you.

When you're on the lake, you move as fast as you row.  That would be like a bank account.  Your money grows as fast as you add to it.  When you're rowing upstream, that's like being in debt.  You can throw $500 at your debt, but if your interest this month is $200, you really only chipped away at $300 of the loan.  Interest works against you in this case.

Rowing downstream is like having investments.  You add $500, and the interest that your money earned makes it grow.  So not only did your money grow by the $500 you added, but by an extra $200 that your portfolio earned for you.

This is why it's so important to get and stay out of debt.  Debt is a killer of financial independence and having a comfortable retirement.  Get out of debt ASAP, and save as much as you can.  Your future self will thank you for it.

Keys to success

This semester I've been taking a speech class, and all of my speeches have revolved around personal finance.  The kids in my class are all between 17 and 21, so I figured I'd try to reach as many of them as possible.  It's been pretty successful, and at least a dozen of them have told me that I encouraged them to start saving and investing.  Last week I had my final persuasive speech, and handed out a list of handy tips I call "Keys to Success," and here they are:

Spending

·         Don’t use credit cards for useless purchases. 

·         Avoid debt. 

·         Always pay off your credit card balance in full every month.

·         Spend less than you earn. 

·         Make sure you can afford it before you buy it. 

·         Spend money on the things you enjoy, and cut costs on the things you don’t. 

·         When your income goes up by a certain amount, don’t let your spending increase by the same amount. 

·         If you are unable to save anything, at least make sure you aren’t going into debt. 

·         If your basic expenses are more than you bring in, find a way to either spend less or to make more. 

Life

·         Have goals.  Write them down.  Everything you do should be with those goals in mind. 

·         Never stop learning.  Educate yourself, and strive for constant improvement. 

·         Exercise. 

·         Be disciplined. 

·         Network like crazy. 

·         If you provide a product or service that people want, or can solve a problem, you will become rich. 

·         No one owes you anything.  The world doesn’t care what you want.  Go out there and get it.  Be lucky you live in a country where you are able to move up, and the government can’t just take away your property. 

·         There is no job that you are too good for.  You may have to start small, but keep your mind on your goals.

Pay yourself first

Make sure you put money away right when you get your paycheck, similar to how you treat your bills or your rent.  Automate your savings and your bills (take money out before you even see it).

If you don’t find a way to make money while you sleep, you will work until you die – Warren Buffett

  

Financial Independence

·         The stock market returns about 5% in real returns (adjusted for inflation) in an average year.  Therefore, you can safely withdraw 4% of your net worth every year and the money will last forever

·         Save 25 times what you expect to spend in a year.  If you have a million saved, you can safely withdraw 40,000 a year (4%) and it will never run out.  That money will adjust for inflation.

Saving

The best time to plant a tree was 20 years ago.  The second best time is now – Chinese proverb

·         Start saving as soon as possible. 

·         Pay off all your high interest debt before you start saving. 

·         Interest can work for you or against you, so avoid debt and save as much as possible, as early as possible. 

·         If you start saving $100 a month when you are 18 and do that for only 10 years, then stop saving entirely, letting the cash grow until you are 65, you will have $345,000.  However, if you wait until you are 28 to start saving, you will have to save $100 a month for 41 years to reach the same amount. 

·         Save at least three months of living expenses in a savings account.  This will be your emergency fund.  Once you reach this goal, continue to save and funnel your money into your investment accounts. 

·         Don’t worry if you can’t save anything right now.  Just work towards it.

Investing

·         Make your money work for you instead of the other way around. 

·         Invest your money and let compounding interest do the heavy lifting for you. 

·         Plant your money tree now and enjoy the fruits when you’re older. 

·         Max out your tax-advantaged retirement accounts (401k, IRA) before you invest in anything else.  Generally Roth is better for both, if you qualify.  If you’ve maxed those out, use any extra money to purchase investments through a commission-free brokerage platform like Robinhood. 

·         Choose low-cost passive index funds.  Vanguard has some of the cheapest in the industry.  Avoid actively managed mutual funds, since they usually underperform the market over a long period of time due to their commissions and fees. 

·         When choosing a financial advisor, make sure they are a fiduciary, and they are fee-only.  This will make sure they’re looking out for your money, not theirs. 

·         Don’t put all your eggs in one basket – diversify.

Entrepreneurship

I know a few people who share my zeal for money. Some, however, don't have the patience to play the long game. They know they're destined for wealth and think of themselves as entrepreneurs (or may have started on the path), but may not have concrete ideas on what to do exactly. So they hatch up quick business ideas without really thinking them through.

For me, starting a business is not the way to go. I don't have the risk tolerance or patience to get it off the ground and make it succeed. I'd much rather just move money around: making investments in stocks, start ups, or personal loans. I don't even want to do rental real estate because it means I'd have to be hands on; looking at the properties, screening tenants, repairing the houses, etc. That's just not for me. I'm ok with taking the slow route. Working in whatever, saving as much as I can, and investing it, mostly in stocks.

A good friend of mine, who's getting a Master's degree in Entrepreneurship, came up with an idea for a business. He'd open up a window tinting business for homes, offices, and cars, and was reasonably certain it would succeed, since his uncle had one. He wanted to go to the bank for a $50k loan to get it started, and asked me if I could loan him a few thousand to pay off his credit cards to make him a more attractive borrower. He, like me, is very motivated towards wealth, and he doesn't really care how he makes it.

A few things that I came up with in that conversation, which I hope he would take to heart, were:

1) When starting a business, you almost always want to start small. See if you can actually do it, and if there's a demand. In his case, he was willing to borrow $50k to open up a shop without actually having tinted anything before. My advice was that he should start very small. Buy the bare minimum amount of materials and offer to tint the cars of friends for cheaper than established businesses would.

2) Never, ever, overextend yourself. This also ties into starting small. Businesses, especially ones that you don't have any experience in, can easily fail. In his case, if he had borrowed the money, he'd be out 50k. This applies to all kinds of stuff. Don't take loans on if you don't have a reasonable amount of certainty that it will help you make more money. This goes for opening a business as well as investing (with leverage), or taking out student loans.

3) Don't view credit card debt as any different from a car loan. Debt is debt, and while the interest on credit cards tends to be a lot higher, it's not impossible to escape from. All you need is a plan. Most people tend to fall into the trap of despair, and think they'll never get out of credit card debt. However, those same people don't worry about their mortgage or car loan, even though the loan might be a lot more than they owe on their cards. Why is that? It's because you know exactly when you'll be done paying off you car or house. There's a fixed payment every month, and people rarely stress out of it. Credit cards never end because they allow you to pay a very tiny minimum payment, ensuring you'll be on the hook for years or decades to come. The moral of the story is: treat your credit card debt as you would your car loan. Figure out when you want it to end, pay a fixed amount every month, and don't worry about it.

4) Making money for the sake of itself isn't a worthy goal. The most successful entrepreneurs got to where they are by solving a problem, some even solving a problem people didn't know was a problem. I read an article today where Mark Zuckerberg talks about entrepreneurs, and this part jumped out at me: "If you want to build something great, you should focus on what the change is that you want to make in the world," Zuckerberg said. "I see too many entrepreneurs who decide that they want to start a company before they actually know what it is that they want to build. To me, that seems backwards."

Anecdotes about my mother

I don't know if this will be a regular thing, but every now and again a funny (less in the funny sense, more in the interesting) memory of my mother comes up, more so now as she nears the end of her life.

A couple of weeks ago I was in Germany visiting her, and one of the many things we talked about is the US presidential election.  She's always been a staunch conservative; self-reliance and all that.  Though we were pretty poor growing up (we lived in a 2 bedroom apartment with 4 kids), my parents refused to go on welfare, seeing it as a cheat to the system.  Anyway, another thing I distinctly remember growing up was her distaste for Donald Trump.  For roughly the same reasons as mine today: he's sleazy, he made his money by cheating investors, not paying his debts (strict conservative no-no), etc.

Let's be honest.  Donald Trump is hardly a Republican, but many of my conservative friends who previously disliked him now support him merely because of his current role.  I was curious to see if she would too.

When I asked her, she said she hoped Trump would win.  I was surprised, until she went on to say that America needed a wake up call, and Trump would be the one to crash the country fast enough so people would wake up.  If Hillary is elected, we'd continue on our gradual slide, but that would take too long.

Yup, I guess.

Germany trip

I just got back from a week-long trip to Germany with my girlfriend to see my mother, who is in the late stages of cancer (renal, I think, though she has massive tumors all over her body, which are pushing on her organs and making it hard to breathe sometimes).  Still, she's survived longer than anyone expected (3.5 years and running, on a timeline of 6 months), and she's in high spirits, though she's weak.  She attributes her continued life to foregoing all forms of conventional treatment, reasoning that chemo and radiation therapy would do more harm than good, and even if it did give her an extra year versus six months, that year would be a sucky one.  Quality of life, you see.

Though she has been taking echinacea extract, which she swears by.  My mother has very strong ideas about a lot of things, and health is one of them.  She's German, and a strong (read: stubborn) lady.  I remember about a year ago, when she told us that "Ach, I'm so lazy, I can barely clean the windows anymore" when referring to the increased tiredness the cancer was giving her.

This is the view from my mother's hospital room.  She is really enjoying the stay, and compares it to a hotel

Anyway, it was a really good trip.  We flew in to Munich, and took the train to a small town (24k people, 4,000 within the city wall itself) in Bavaria called Nordlingen (there's an umlaut over the o, but I can't figure out how to type it).  Nordlingen is a town built on the site of an old meteor crater, and it's round as a result.  It also has the distinction of being one of only 3 towns in Germany that have intact city walls around the whole town.

It was also the inspiration for the anime show "Attack on Titan," though the shape was about the only similarity.

Germany is pretty cool.  Bavaria has a lot of countryside, many small towns interspersed with fields.  It's so green.  Here's an example of most of what I saw on train rides

The food is really good, and so cheap, compared to the US.  I know part of it has to do with the exchange rate (it's about $1.10 per Euro at the moment), but even at its height, the food was relatively cheap.  One thing Germany does real well is baked goods.  Best croissants I've ever tasted.  You could get them for 29 cents at the supermarket (50 cents to 1 euro at a bakery).  We took this picture at breakfast one morning.  Not the greatest, but there you have it.  Those striped ones were actually pretzel croissants.  The doughnuts actually tasted like American bread rolls, which are slightly sweet.



Every day, we'd walk to the hospital about 3/4 mile from the city and visit my mother for a few hours, and sometimes we'd just walk around the city.  On one early morning walk, before the jet lag had subsided, we spotted a familiar figure in a window.

Adolph Kitler

Or Katzler for my Germans.

The best parts of the town were the cathedral and the wall.  We went for a walk on top of the wall, which was covered for the most part.

This is what most of the wall looked like

There was a bar on/in the wall

Parts of the wall were repaired and made into an uncovered bride type thing

It's pretty crazy to see buildings with dates from the 13th century.  Then you get the weird juxtaposition of traditional architecture and modern technology, because, y'know, people live here.

The cathedral was a 90 meter tall (300 ft) church in the center of the town

Getting to the top was a lot easier than the last time I was there 3 years ago, and the view is killer.

Us at the top

I'm always reminded of the scene in the movie In Bruges where Colin Farrell's character tells the fat American tourists they'd be better off not climbing the tower, and they get pissed and do it anyway, and get a heart attack.  Pretty sure fat American tourists are the reason they had to reinforce the walkway around the top of the tower

Though it's so narrow I don't know if fat Americans could fit.

Towards the end of the trip we went to Schoss Neuschwanstein (which I pronounced Noishwangshwang up until pretty much the last day), which happens to be the inspiration for the Disney castle.

This is a picture from the internet:

And here's a picture of us with the castle in the background:

We did go all the way up, but holy schitt there were a ton of tourists from all around the world.  Though I can't really complain, since... so were we.  Here are some more pics of the castle:

On our last day there, we visited Munich, which, while being a large city, feels fairly spaced out.  It's very pretty, very old, and has a distinctly European vibe to it.  We went to a palace with these huge gardens out front similar to Versailles, and walked around downtown with all its restaurants and museums, walking through what I think was called the British Garden.  It was similar to Central Park, and there was a large river that ran through it.  Due to heavy rains, the water level was higher than it usually is, and when it flowed under the bridges, it would come out faster on the other side, which some people were using to surf. 

In summary, Germany was beautiful, and I had a great time.

Clinton's taxes

So Hillary just released her 2015 returns, and they look pretty good.  Last year the Clintons paid an effective tax rate of 34.2%, which is higher than what most millionaires typically pay.  It's certainly more than Mitt Romney who was criticized for paying a paltry 14% in 2011. Trump has been pressured to release his taxes in the name of transparency, because it'd be kind of hypocritical for him to talk about some of the stuff he talks about and then get away with paying negative taxes, Mr. Burns style.

Release the hounds!

I don't actually know how much Trump pays in taxes, though I'm sure he uses every trick in the book to avoid paying as much as possible, from deferring capital gains, which is very legal and something we should all try to do, to funneling his profits through charity and other borderline illegal schemes.  The reason the Clintons' effective tax rate was so high, from what I understand, is because most of their income last year came from speaking fees, which is what's called earned income.  Earned income is taxed at the normal rate, which caps out at just under 40% for federal.  However, most rich peoples' income comes in the form of unearned, or passive income from investments, such as dividends, interest, rental real estate, and capital gains.  Since the rich control Congress, tax laws tend to be favorable toward unearned income, most of which caps out at a relatively measly 20%.  That's why rich people tend to pay so much less in taxes (proportionally), but also why we all need to save and invest so we can take advantage of these tax benefits.

Did you know that if you're in the 15% tax bracket, you will pay nothing in federal income on capital gains?  It's true!  What that means is that a married couple who doesn't work but has investments can make up to almost $100,000 a year on their investments and not pay a penny in federal taxes.  That's insane.  Strive for that. 

Of course, non-qualified dividends, interest, and short term capital gains (stocks sold within a year of purchase) is taxed at the normal rate, but still...  It boggles my mind that it's possible to get away with paying little to no tax if you play your cards right and allocate your money appropriately.  And of course, the money you save on taxes can be rolled right back into your investments, making you even more money.

and the hounds!

Don't get mad at the rich for not paying their "fair share."  Or do; I don't care, and they don't either.  Your anger won't change a thing.  Politicians are bought by the rich and pass laws that benefit them.  Instead of getting mad, shoot to become one of these rich people who can take advantage of these loopholes.  The rich may be getting richer, partly due to their entrepreneurial mindset, high savings rate, and the aforementioned tax loopholes, but there's no reason you can't add yourself, your family, and your descendants into the ranks.  America has always been the land of opportunity, and while it may be harder nowadays to move up due to low entry wages and the extremely high cost of housing in big cities, it's far from impossible.  You owe it to yourself to achieve financial independence, and there's no reason you can't.

Trading is the key to wealth

Today, I'd like to share with you the true secret to creating wealth, and that is trading.  Buying stocks low and selling them high at key points, getting out before it goes down.  Buying and selling constantly is the true key to creating fast wealth.

Lol, no it isn't.

I have read thousands of articles on finance, and studied dozens, if not hundreds of finance books, and many investment styles, and one thing that stands out to me is that passive investing is a far superior strategy than gambling in the stock market for the average investor.  The more I learn, the more concrete this concept becomes.  That's not to say there aren't people who don't do very well by picking stocks.  Warren Buffett has handily beat the market by about 10% annually on average over the last half century.

But for every Buffett, there are a hundred wanna-be's, people who claim to have found the perfect strategy to beat the market.  They'll dazzle you with figures, and give you a specific timeframe in which their stock picks did very well, or show you a handful of stocks they recommended back in the day that went up by a whole bunch.  Of course, what they don't mention is that they also recommended a bunch of other stocks that didn't do so hot.  Incidentally, these people are either trying to make money off you by selling you their method, or are trying to brag.

Here are a couple of examples I want to highlight.  Both were teenagers, and in both cases, the financial media pounced on their stories, making it sound like these kids were investing geniuses.  The first was a 17-year old whose name virtually guarantees he'll get "randomly selected" every time he flies.  A Stuyvesant High School student by the name of Mohammad Islam (no, really) was rumored to have made $72 million trading stocks.

Apparently trading also adds a year or twelve to your appearance 

Here's an excerpt from the original article on Business Insider: "While having caviar and apple juice with his buddies, Islam acknowledged that his net worth was in the "high eight figures."  Later that day, he was going to meet a hedge funder who "basically wants to give us $150 million."  At only 17, Islam has already rented an apartment in New York, but his parents won't let him stay there until he turns 18.  He also bought a BMW even though he doesn't have his license yet."

I snorted when I read the bit about the caviar.  Anyway, the second one was a 16 year old with a name I can't pronounce, who has made $43,000 IN 3 YEARS! (capitalization mine) by picking stocks.  The financial media loves to highlight this kind of stuff, because, much like winning the lottery for poor people, rich(er) people want to believe they can successfully gamble in the stock market and beat out everyone else.

But when you look closely, the truth comes to light.  Turns out that tubby sack of sad with the most jihad name I've ever heard (and I spied on the Taliban for several years, so I've heard a few) had made it all up.  He hadn't made a dime in the stock market, and the apartment and the BMW were all imaginary.  He was just a teenager who liked the fame as long as no one asked very hard questions.

As for the second one, yes, he did make $43k, which amazed CNN, but when you look closer, it's less  than impressive.  This kid's rich parents let him play with a quarter mil of their retirement money (that's $250,000 for you squares).  He invested in popular stocks, got lucky, and STILL underperformed a total market index fund (his annualized return was about 5.4%).  Indeed, near the bottom of the article, it says that "like other investors, Sridharan has struggled this year, admitting he got caught up in a few bad trades."  So basically he got lucky for a couple of years, but his luck ran out.

That's why you have to be wary of anyone claiming to have a special system, or who claims they can beat the market year after year.  Statistically, they're full of shit.  Trading is a zero-sum game, meaning that for one person to win, another has to lose.  So anyone can do well one year, or maybe for a couple, but over time, traders tend to revert to the mean, which means their losses neutralize their gains, giving them an average of zero.  Actually, even less than zero.  A lot of traders end up in the negative, because of all the fees they have to pay every time they trade.

So take every trading success story with a huge grain of salt.  As an average investor - and let's face it, you're extremely average - your best bet to make money is also decidedly boring.  Regular, passive investing in index funds will probably make you more money than swinging for the fences and trying to play with stocks, or with derivatives like options.  And for the love of God, don't ever borrow money to invest.  That's called leverage, and it's one of the main reasons for the 2007 housing crash.  The one exception would be if the return is guaranteed and the interest rate is lower than your guaranteed return.  That's called arbitrage, a guaranteed profit.

My investing philosophy is pretty simple.  Dollar cost average into index funds, maxing out your tax-advantaged retirement accounts first.  For the layman, that means putting the same amount of money every month into funds that mimic stock indexes like the S&P 500, which contain the 500-ish strongest and largest companies in the U.S., maxing out your 401(k) and IRA before you invest in other accounts.

Of course, I have some positions in single stocks such as Tesla - which I think will do very well over the next couple of decades - but they only represent a portion of my overall net worth.  The majority of my money is in index funds.