June 13, 2005

  • Saving and Investing


    The conversations that take place in the kitchen at Mimi's give me hope that maybe the next generation is going to do things a little smarter than I did when I was their age.  I know that they are thinking about things way differently than I did at 21.  Yesterday Roxie had a question.  It's been bothering her, trying to figure it out.  And so over a bowl of soup and a sourdough baguette, the break area became a mini-discussion group on financial savvy.


    Her question, "how is it that you get out of the trap of working for someone else?  I mean look at us, we come here, we sell the food, we serve the customers, and someone else is taking the profit we've generated and sailing off to Cancun for summer on the beach.  Do you have to just be born to the right parents?  What's the difference between us and them?"


    Everyone started chiming in with ideas - yes, you have to be born to wealthy parents in order to be wealthy.  Only well, there's Ericka who does have wealthy parents, but they believe that your character is built by making your own way in the world, so they aren't providing her with housing, buying her groceries, or even contributing to her college education.  She's working at Mimi's like the rest of us. (And personally, I think her parents need to be slapped for their attitude. Their wealth disqualifies Ericka from any financial aid that she might use to help her get through school, so she's racking up debt to pay for the classes she takes at night.  And in my opinion, allowing your child to go into debt when you have means to prevent that is criminal.)


    Maybe the answer is education, you get your degree and then life just opens up before you with cushy salaried jobs and benefits lining up to entice you through the doors of Corporate America.  Only we have more than one person waiting tables who already has a degree and didn't find that life worked that way at all. 


    So what's the point?  Is there a point?  Is there a way out?  Or are we doomed to work in jobs that provide us with hand to mouth existences until we are old and destitute and happy to have an occasional can of cat food to eat.  (yeah - someone actually said that.)  And these kids mostly come from families where their parents divorced, so they see it all as interrelated.  As they look to their own future they have fierce beliefs about the responsibility of fathers and mothers to care for their offspring.  They are determined to nurture their own children physically, emotionally, and finanacially.  But they are struggling to see a way to make it happen.


    Here's my take on it.  People aren't taught in school, but they desperately need to understand how to save and how to invest.  I listed to these kids talk about savings as a waste because interest rates are so low that you don't accumulate anything.  I heard them say that investment is scary because it's not secure - you could LOSE money with investment. 


    And yes those things are true.  But the only way out of the rat race is to get to a place where you have assets that are working for you and providing more income than you require for your basic needs.  An asset is a vehicle you own that gives you a return.  Which - I'm sorry to have to break it to you, but the one thing that most people consider to be their biggest asset - by my definition, isn't an asset at all.  Its a liability.  I'm talking about your house now. 


    There are excellent reasons to purchase a home.  You do build equity so you eventually own the place you live in.  Unless you are attracted to refrigerator boxes, it's good to have a stick-built home.  Getting into a mortgage gives you a hedge against inflation because whereas rents will increase year by year by year - your mortgage payment is "fixed" so you reap the benefit of the difference when your income rises. 


    But a bad reason to buy a house is because you have been convinced that it's an "investment."  You aren't going to ever receive an income from your house.  Just face that and deal with it.  Don't let a realtor talk you into more house than you can afford.  AND make sure that YOU are the one who is determining what's comfortable for you.  Realtors (God love 'em, and they need to make a living too) but their income is derived from selling you the most expensive house they can.  So what they estimate to be "comfortable" payments, may cause you to feel you've been stretched like a rubber band. 


    Oh, I can hear you now saying, "But my house will appreciate in value."  Yes, and so will every other house on the block.  So you get ready to sell your house ... and SURPRISE any other property that you'd be interested in occupying costs just as much as the one you're leaving.  So that business about the house appreciating ... be wise about that, okay?  Unless you are willing to trade down from the big house to the condo, you are probably not going to have much in the way of a Captital Gain from the sale of your home.  And even if you are willing to trade down, you may find that the retirement community of your dreams isn't that much if at all less than the value of your house.


    None of the 20 year olds are thinking about retirement.  Their dreams are more about how to enjoy their lives now, how to have a little more left at the end of the week, and how to get into a financial position so that they aren't one car accident, broken arm, week of pneumonia ... away from bankruptcy. 


    The break was over before I had a chance to jump in with my own take on it.  I would have said to them, "the answer my friend - is boring.  You have to save a portion of every dollar you earn, and you need to invest a portion of every dollar that you earn.  Invest in a mutual fund, an IRA, create intellectual property, anything you can do that will take the dollar or time you put into it and multiply that dollar before giving it back.  Buy a property you can rent out.  Buy a property that you aren't living in so that when you sell it the appreciation truly is a return to you.  Start a business that will allow you to benefit from the labor of others.  There's nothing dishonorable about Captitalism, folks.  In the end its the means by which you can realize your dreams of financing the life you want to live. 


    "Yes, get a job.  I'm not telling you that you can start off at 20 without working for "the man".  But be wise about it.  Live within your means - NO CONSUMER DEBT.  Pay yourself first.  Save money for the rainy day.  Most financial advisors (and yes, even I with my sad little limited means right now, I have a financial advisor - so they aren't just for the rich guys.  And my guy is coming over tonight to talk with me about insurance because I want to set something up that will take care of my kids if something happens to me before they are grown-up and able to support themselves) say that you need to have 3-6 months worth of income set aside in case of unemployment, illness, injury, or natural disaster.  Start paying into an account that will be your umbrella when that rain comes as it inevitably will.


    "Look around right now for a vehicle that you can invest in even if it's just a tiny little bit - $25 a month is better than nothing.  Make it your goal to increase the amount you put aside for yourself every time you make a positive adjustment in your financial circumstances.  If you get a pay increase, put that increase to work for you with your savings and investment strategy."   


    That's what I wanted to contribute to the conversation.  My two cents of investment in their future. 


    This morning - I'm on my way to the bank to make a deposit that will bring my savings balance to exactly double what it was two weeks ago.  It may take me longer than two weeks to double it again, but I'm determined to not just hand out advice, I'm following it. 


    And then just in time for the lunch crowd - I'll be at Mimi's.  Smiling, recommending my favorite soups, sandwiches, pasta and dinner entrees and all the while I'll be thinking about what's next for me.  How to get from point A to point B.  


     

Comments (8)

  • I agree with much of what you have written here.  I teach a money course for older kids at our church and the three points I always try to make are:  live below your means, pay yourself first (vs. always saying you'll put something away at the end of the month, which never happens), and if you can't pay cash, don't buy it.

  • There are few things I kick my own butt over for financially, but the BIG one is that I  did not buy stock in a place here called Waccamaw Pottery when I worked there at 19 or so. They offered it to everyone for two or three paychecks...and I thought spending any of my 125 bucks on it was stupid. Within three years they had gone from a hole in the wall building that sold cheap glassware and pots to locals and tourists to a HUGE complex that also was located in three or four other states. Stupid, stupid stupid...LOL

  • Damn the man,

    I could hole this entry and a comment into Davy Jones locker. But what good would it do? People may understand the concept, they may even understand the foundations, but no-one teaches them to apply it! Talk is cheap. Action is everything.

    You suggest, "allowing your child to go into debt when you have means to prevent that is criminal" By default then would allowing your parents to go into debt when they have the means to prevent is also criminal?

    Sail on... sail on!!!

  • I don't believe children should be spoiled by having everything in life handed to them.  On the other hand, if parents can afford to help with education, they certainly should out of love.  That girl may  eventually come to resent being treated so shabbily.

    I could take up too much of your space if I answered all points in which we have experience.  I still have some resentment about the fact that our daughter was not eligible for scholarships, aid, etc because we were not in debt.  We were in the process of building a home and pay as you go, our 2 cars had almost 200,000miles and were paid for, and husband had a job.  If we had been paying on a loan, car, boat, etc. she would have been eligable for help.  That Ain't right!  I have this info correct as the lady from the college sat in our livingroom and explained all this to us.  I feel that we paid for 2 students.  Another class mate whose parents refused to help was given a free ride.  Or as I think of it, we made it possible for her. I need to shut up before I get worked up. 

  • I've never minded being a working stiff.  Owning a business has headaches I don't want.  But I guess I've been lucky.  Special circumstances allowed me to make some money in the stock market, retire early, and even though I've had to rejoin the work force, I'm still comfortable.

  • I agree with your point of putting aside something from each pay check, no matter how small, and not touching it. Going into debt for small things too is a no no if you cannot pay cash, do without. But where a house is concerned, yes, when you sell it does not truly give you any major money back as all the profit goes into the new home - the difference is you are not paying for some elses house investment, but to yourself, and that is a huge thing if you can afford the initial down payment and the other factors that come into play with ownership. It is also a great collateral if you ever need a loan that may be vital to your welfare.

  • With a little technical knowledge, you could be a financial advisor. You have the right principles down pat. I also read an article this morning that list financial advisor as one of the top five jobs to have. Mike

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