The world will drown you with financial advice, thus I thought I’d take a moment to pare it down to the basics to provide a solid approach to improving your financial future.
Don’t work for money, let money work for you!
Step One:
Forget about how wealthy or poor you are compared to others. This isn’t about winning, it’s about improving your personal finances.
Step Two:
“Pay Yourself First” – this is a common phrase of financial advice so let me give my own definition of what this is. Paying yourself first is creating your own mini “comfort crisis”, you are giving up something now in order to have a better future. This means taking some money and investing it regularly. Perhaps every paycheck? Perhaps every month?
If at this point the only thing running through your mind are excuses of why you “can’t” then you have two choices. Either you start doing it (you can) or give up and accept your financial situation (and stop wasting your time reading this – go enjoy your life).
Step Three → Choosing your investments:
Where do you put your money? Keep in mind that almost every investment is a leap of faith.
Buy stock? That’s just a fantasy number until you actually sell the stock!
Put money in a savings account / CD? Guaranteed you are losing value because of inflation. But a high probability that you’ll actually be able to cash this in when you need to.
Buy real estate? Are you really buying it or are you just borrowing from another entity to place a claim on the real estate? Even once you have it paid for, you still have obligations such as property tax and maintenance. Also don’t believe the “common wisdom” that real estate always increases in value (it doesn’t). Again, this is a fantasy until you actually sell it (easier said than done!).
My suggestions:
First buy gold. This is your conservative bedrock. Nothing else has as long of a track record of being universally used and valued as money. When you need to you can sell it. Gold protects you from inflation. My advice is that at minimum 10% of your investments should be gold. Perhaps a maximum of 50% in gold. More if you are conservative, less if you are a risk taker. This is real gold, not some exchange traded fund that “tracks” gold. Consider that a large part of the reserves held by all Central Banks is a stockpile of gold!
I would advise a combination of physical gold that you have access to (stored safely somewhere) and physical gold held in a vault by a company such as Cybermetals or Glint. The big advantage of Cybermetals and Glint is that that they allow you to buy really, really tiny amounts at no penalty. Very flexible! Very easy to sell.
Stocks!
This is where you can make significant growth of your wealth… long term! Don’t “play” the market. Invest in solid businesses and enjoy good long term growth. The market will bounce up and it will bounce down, so avoid getting yourself into a position where you must sell when the market is down. Be patient!
Buy when the market is crashing (down) and if you wish to sell, then sell when the market is booming (up). But mostly don’t do anything, just let it sit!
What stocks should you buy? That depends on whether you are a risk taker or a conservative play it safe person. There are two kinds of stocks. Growth stocks gain in price, dividend stocks primarily pay out dividends but maintain a fairly stable price. You might want to buy some of each. If you don’t have good gut intuition and don’t want to pick stocks yourself, then hire a financial advisor, you won’t get great gains but you should do decently. My personal example is comparing my own investments vs my 401k that is managed by the financial company hired by my employer. Hint: my own decisions blow away theirs.
Think about what will be valuable in the future, what companies today are building that business? It’s also fun to “vote with your money”. Don’t like a company? Then don’t buy it’s stock. Want to support a company? Buy it’s stock!
Real Estate, the only real estate I prefer is to buy your own home. You’ve got to live somewhere, right? Typically this means borrowing a lot of money. Don’t buy for status, buy for comfortable living. Costs to maintain a home may turn out to be a lot more than you expected. An advantage of owning a home is that eventually you’ll get that loan paid down a good bit and potentially you can “downsize” to a cheaper home for retirement and obtain a good pile of cash (to invest to generate a retirement income).
But what about the coming apocalypse?
Remember that physical gold you have been hoarding? There you go, that’s your apocalypse wealth. Seriously, if a “Mad Max” scenario comes then you should have been prepping. You are prepping aren’t you? Building wealth is not the same as preparing for an apocalypse.
If you take anything from this article, take:
Start! Anything is better than nothing. Small efforts can yield large results (over time).
Invest in both gold and stocks.
Thanks for an interesting write-up on the idea of building wealth. I'd like to contribute a few thoughts of my own.
The first involves saving money. Instead of trying to tell yourself "No" to the idea of buying non-necessities, maybe a better strategy is telling yourself "Wait." Over the course of my life, I've often seen things that I desperately wanted. All of the factors that make us want to buy a non-necessity were there. If I had to make a permanent "Yes" or "No" decision in that moment, the answer would have been "Yes." The desire was just too strong to tell myself that I wasn't going to buy that item.
Instead, I told myself to wait. I went home with my money in my pocket and continued to consider the item. In some cases, I bought the item a week or two later. Off the top of my head, I don't remember what they were specifically, but there are items that I've bought twenty years later. In other cases, I haven't yet gone back to buy the item. Maybe I never will. Maybe I'll buy something next week that I've wanted for over forty years.
This strategy does two things. First, it removes the pressure to make a "do or die" decision. I don't have to walk away feeling that the item is forever beyond my reach. Secondly, it allows me to make interest on the money that I would have spent. Granted, that interest is meaningless if I buy the item the next week. On the other hand, money that is invested wisely might grow enough in five, ten, or twenty years that I'm essentially getting the item for free.
The second thought is tied to investing. My advice for anyone who is starting to get involved in investing is to realize that no matter what you do, some blowhard will insist that you're doing it wrong. You can talk about your portfolio to one blowhard who will insist that your portfolio is so conservative that you might as well just stick your money under a mattress. The blowhard twenty feet across the break room will insist that the same portfolio is so risky that you might as well just take hundred dollar bills and light them on fire. I let myself become paralyzed by conflicting information when I was young and needed to start investing.
On the subject of advice, a financial planner can be valuable, but financial planners can also be morons. Many people will try to become stock brokers because they see that career as a path to wealth. Many of them are not capable of an analytical thought if it were necessary to save their lives. They watch the same talking heads that everyone else watches on TV and read the newsletters that their brokerages send to all of their employees. The brokerage newsletters are written by talking heads who have connections to the executives at the brokerage but aren't good-looking enough to be on TV.
My first investments were through the 401k plan at work. I talked to my dad about a very basic investing plan for a diverse portfolio. I picked a few funds that he recommended and didn't think much more about the whole thing. I was getting a 6% match from my employer in the company stock, so I was doing okay.
When I was let go, I moved my account to a stock broker who was a friend of as friend. She wasn't very good. She immediately recommended that I sell all of my company stock so that she'd have cash for other recommendations. Immediately after selling, the stock went up dramatically. She invested in the trendy things of the day. As the market crashed around the year 2000, I took big losses. Eventually, I started investing again and mostly just picking my own stocks and having her make the trades. She moved once and paid for my account to go with her. I think that she was moving again but couldn't pay to move me. I left her and moved everything to Fidelity where I could make all decisions and have inexpensive trades.
I have invested a little bit in gold, but I'm less of a gold bug than most conservatives.
Ultimately, gold doesn't do anything. Gold has been a medium of trade between humans for years, but gold just sits there. That gold has been a good investment over the past forty years says that for the past forty years, something that just sits there has been more valuable than the ideas and effort put into making things or doing things. That's a sad commentary on the human condition.
Another point is that the stocks that have grown rapidly have been those that made things. Investors put their money into the ideas, capital, and labor that go into making a product or service that people will want. Investors put their money into that productivity. That productivity makes something that has value to people. People spend the fruit of their productivity on that product or service. During times when companies are offering worthwhile products or services and people's productivity has real value, that productivity is more valuable than a piece of gold just sitting there.
From a prepping point of view, I see the value of gold, but I see the value of other things in a different light. If I have to choose half a pound of gold or half a pound of ammunition before walking into the woods, I'll choose the ammunition. Even though I might be able to trade a small amount of that gold for several pounds of ammunition, the person who has ammunition can just shoot me to get the gold. For that matter, the person who has a rifle and ammunition can hunt rabbits with the rifle. I can buy the rabbits, but the seller is still in the position of power. Again, he can just wait until I die of starvation and then take my gold. A wool blanket will keep me from freezing to death. An equivalent weight of gold might allow me to buy many blankets, but the person who has the blanket could just wait for me to freeze to death and then take the gold. In a post-apocalyptic world, the person who has skills and tools will eventually have the gold.
I'm not against gold, but I also see limitations to gold. I would never weight my own portfolio beyond fifteen or twenty percent in gold unless I were certain of an upcoming market crash.
I guess the final investing advice I would give to young people is to try to find a way to live within a budget so that one can get whatever matching 401k the company offers if the company offers that kind of program. Most companies offer a 6% match, and if one can maximize that match, one is essentially getting 100% return at first. Even if one just puts all of the investments in a fund that returns only a few percent, one is getting a good return on the money that one has invested. Part of making this work is staying with a company long enough to be fully vested in the company's matches.