Tag Archives: lawyers

The Purpose of Investing

The whole purpose of investing is to turn money into more money – it’s to be able to buy more things than you bought in the past. However, why not put all your money into savings? If I can lose “all” my money in the stock market, why not play it safe and keep everything in savings? There are two reasons. 1) You probably want to grow your money, not simply keep it safe. And 2) the value of money goes down over time. Wait, you might be asking, isn’t $1 always worth $1?

Yes and no. While $1 will always be the same, the amount that $1 can purchase generally goes down over time. Let’s use an example. Let’s say you have a small collection of 10 Legos. While you really love Legos, you only have these 10, so you tend to be really careful with them – you like them a lot.

One of your friends offers you an apple for one of your Legos. You refuse because you don’t want to have 9 left. However, a few months later, after Christmas and a birthday, you have received 36 more Legos. Your friend comes to you again and asks to trade one apple for two Legos. While you don’t like the idea of giving away more Legos, you don’t mind as much any more because you now have 36. So you do the deal.

What changed? Why were you willing to give more Legos up for an apple when before you wouldn’t even trade one for one? That’s because the Legos became less rare. This has to do with supply and demand. While demand for Legos stayed relatively the same, the supply increased, which decreased the value of the Legos relative to the apples.

We could get really technical with economics but for now the general principle can ring true with money as well. As the amount of money out in circulation, both physical and electronic, increases, the perceived value, and therefore the purchasing power of those dollars, decreases. In the last 100 years, inflation has gone up at about 2 to 4% per year.

The scary thing is that inflation continues even when your money isn’t growing. For example in 2008 when the whole real estate market and stock market crashed, inflation continued. Meaning, not only did stock investors lose 37% on their money, they also lost an additional 3%+ in purchasing power! Ouch!

In times of great economic panic gold often increase in price because it can act as a fear mechanism for investors when times get tough. When people in the market see inflation increasing and economic certainty decreasing, they often view gold, which has been used as money for literally thousands of years, as a safer location for their money.

The bottom line: real estate and stocks are fantastic investments for anyone looking to outpace inflation over long periods of time.

Two Twenty-minute Tasks That Will Boost Your Financial Confidence

Most of the financially successful people we read about in magazines, books or see on social media are often portrayed as charismatic, energized, stage magnets. While a lot of them share many of these characters, what these men and women share more than any other trait is confidence. How did they get this confidence?

Confidence is often portrayed as something you can act or be or do. But while you certainly can “be more confident” simply trying to act this way won’t create the lasting change you’re looking for. When trying to build more personal confidence in yourself you have to be drawing this confidence from somewhere.

For example, while hosting at a sushi restaurant I have often heard fellow employees give me advice to “be more confident.” While I was certainly able to heed their advice and stand up straighter and with more confidence for short periods of time, I never was quite able to stick with it long term.

However the days I found it easy to be confident were the days I was diligently working, succeeding in customer service, and completing restaurant tasks with excellence. In a lot of ways it was a self-feeding cycle. I’d begin my shift with energy and confidence in my abilities and as the shift progressed my confidence would be reinforced by continuous action.

In our financial lives as well confidence can’t come from self-talk alone. Your mind has to feel both the emotional side as well as the logical side telling you to be confident. When you know that you are working hard, and have a plan it becomes easier for your emotional mind to reconcile the feeling of confidence with the logical one. Here are two major tasks you can do that each take about twenty minutes to complete:

1. Make a general (very rough) outline of where you want to be financially.

This doesn’t have to be complicated or long. Just take a piece of scrap paper out or grab your tablet and start brainstorming what kinds of things you really want to get out of your financially life over your lifetime. This task isn’t a one time event. You should be reinforcing this plan as well as refining the details of it, over the course of your life.

However this first basic exercise should catch the gist of where you’d like to be in the next year or two to help you get where you want to be with your long-term goals (5, 10 or more years down the road).

Organize your finances to see where you are

This step is just to catch a brief overview of where you money stands at this point. Get out your bank statements, look at your investment accounts, estimate the rough value of your home and the mortgage you have on it. Once you know your assets, liabilities, and the rough monthly budget you take in (income) and the expense you take out (expenses) you’ll have a very general picture of where you are.

These two, first steps alone will give you a sense of clarity about what really matters to you and where you are financially, thus what is needed to get you to the next step.

Can Debt Ever Be Good?

Most people have heard of Dave Ramsey. His financial advice has helped millions of people get out of debt and free up their financial inflow (their income). So is this simplistic advice the whole picture when it comes to debt?

The list of successful people who have made fortunes with debt says otherwise. When’s the last time you heard of a wealthy person who built a massive business without borrowing money in some sort of way? It’s not very common. In fact, the three richest people in the US, and the world for that matter (Jeff Bezos, Bill Gates, and Warren Buffet) have all built businesses or bought businesses that used debt regularly in their operations.

But why is Dave Ramsey so against debt? While I can’t get into his head, there are three legitimate reasons I can think of why he dislikes the idea of borrowing money entirely:

  1. Debt has to be payed back. While the future ability to pay off debt is uncertain, the requirement to pay it back is definitely certain. This represents risk.
  2. Debt gives control and responsibility of part of your financial life to someone else. While you are still responsible for taking care and utilizing whatever you purchased with the debt, you are no longer owning this thing altogether by yourself.
  3. Debt costs money and time. To borrow money it usually takes time and complications. On top of that there are costs associated with borrowing like origination fees, legal fees, and (of course) interest. While the rate of return you get on your money might be greater than the interest rate, you are involving more risk into your financial picture.

So, after close examination, do Dave Ramsey’s probable reasons and concerns for not using debt seem pretty well founded? I’ll leave that up to you. However they can be summarized in one word: Risk.

Debt represents risk. Whichever way you borrow money, whether for a home, real estate property, or college, recognize that debt is a risk that cannot be overlooked. While I believe debt cannot or should not be eliminated from our lives completely, taking a careful look at it can go a far way in eliminating pitfalls.

Everything Wrong With Making a Lot of Money

Let’s say you get out of college and are starting your first “real” job. You’re a young doctor so you already start out making more than the average person. Or maybe you’re middle aged and making the most money you’ve ever made in your life. Let’s just say you make a lot of money.

Where does the money go? Well most people who make a lot have a lot of expensive education required to get the job in the first place. That means student loans. If you were disciplined enough or lucky enough that your parents payed for you, then you won’t be in the same boat as most people.

Other wise, though, you’ll have student loans to pay on. That’s expense number one. The second big expense is more of an optional thing but most high-payed professionals usually opt in. It’s called lifestyle extravaganza.

Most doctors, lawyers, or well-payed professionals start seeing the bigger paychecks and begin making larger purchases to live up to what other people expect of them. It’s less of need for comfort than a need to impress and fit in with what people expect of them. “I have more income,” they tell themselves. “Why not?”

While most of us would like to think that these people are banking dough(and a lot of them are), most of the time, that’s simply not the case. People who make a lot of money are just like everyone else, they want to fit in.

The problem is they’re missing a valuable opportunity. Having a high income is not only a great thing for lifestyle, it can become a fabulous thing for your finances. Simply keeping your lifestyle low and investing the difference can make huge differences over 10 year timeframes. Still not convinced?

It might be hard to believe but putting off buying that boat today could mean, 10 years down the road, being able to purchase any home you want. Compound interest is simply that powerful.

Not only does making a lot of money come with disadvantages like the expectation of lavish lifestyle and larger student loan debt, it can also turn into a financial blessing if you manage your money well and stay disciplined. Just because you make double as much money as someone doesn’t mean it’s smart to buy a home double as large.

So if you are in the situation of making good money, be weary of the obstacles that stand in your way to having a better future. Realize what your income could turn into – both good and bad. And for students who think more income equals more net worth, be careful…