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OKAY GOOGLE, PLAY FOR THE LOVE OF MONEY BY THE O’JAYS

_{Disclaimer: I’M TERRIBLE WITH MY MONEY! I’m not a financial advisor. All items discussed are for informational purposes only not financial advice! Also, I’M TERRIBLE WITH MY MONEY! My imaginary lawyer told me to put this in here.} 

When I was a kid, my parents would give me money for my birthday and Christmas; they had seven kids, so I imagine they were tired of trying to figure out what gifts we liked and just let us choose instead. They would take us shopping to spend the money, and I would never buy anything! I just couldn’t do it. I liked the look and feel of money so much that I didn’t want to spend it on anything. I would pick something out and then get so nervous about spending my money that I would put the item back.

I remember watching Along Came Polly and was embarrassingly obsessed with the ferret, Rodolfo, that I decided to save up enough money to buy one. It was $200 for a ferret. I walked into the pet shop to get one, got anxious, and bolted out of the store. I wouldn’t spend my money on anything, no matter how bad I wanted it. 

If only 30-year-old Kelson had the same separation anxiety with money as 13-year-old Kelson did. I’m not sure where it started going wrong with my financial willpower. I think it was getting my first job at 16 and seeing a constant influx of money that changed my perspective on money, believing it was easy to come by, which it is if you are willing to put in the work.

It turns out that this type of thing doesn’t happen with only 16 year-olds. It also happens to doctors, lawyers, and even famous people such as Mike Tyson and 50 Cent, who are both known to have gone bankrupt. It comes down to how you think about money, which is the first lesson. JL Collins, the author of The Simple Path to Wealth, says, 

“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.”

After learning about compound interest, I like to think that if time traveling was available and I could go back to one part of my life to fix it, I would go back and invest 90% of the money I made from my jobs in high school. Looking back (which I suggest trying to keep to a minimum except for learning experiences), I had no bills to pay, no groceries to buy, and could have put a delicious chunk of money into investments. But, surprise, surprise, I wasn’t taught about finance in high school. 

I will list some of the most basic money advice that I wish I had when I first started in the workforce. 

Compound Interest 

Formula : A = P*(1 + r/n)^nt

A = the accrued amount

P = the initial principal

r = interest rate (expressed as a decimal)

n = number of compoundings per year

t = total number of years (time)

FYI: There are awesome compound interest calculators for free online (NerdWallets is my favorite) that you can use to help plan your road to financial freedom!

According to NerdWallet.com, the average return on the stock market is around 10% for “nearly the last century” (I think a safer number to base calculations off would be 8%). Of course, the stock market fluctuates year to year so this percentage can go up or down depending on the economy. To show you the power of compound interest, here is an example. 

Suppose you have $1,000 that you put into an investment that returns you 8% annually. If you plug that into the formula above, your first year return will be $80.

Year 2 you will get 8% return on $1,080, which will equal out to $1,166.40

Year 3 you will get 8% return on $1,166.40, which will equal out to $1,259.71

Year 4 you will get 8% return on $1,259.71, which will equal out to $1,360.49

What started as $1,000 turned into a $360.49 gain in 4 years without doing any extra work except reinvesting your earnings. Remember: this is only contributing an initial $1,000 and nothing more. If you were to add extra money to your investment, this would result in even bigger returns. If you continually reinvest your yearly earnings, at 30 years and a consistent 8% return, your scrawny $1,000 will blossom into the easiest $10,062.66 you ever made.

 I know that some people will look at this and think 30 years just to get to ten thousand dollars?! But if you put $1,000 from when you were 16 and just did absolutely nothing else, when you’re 46, you have an extra 10k to do what you please. I know that I have zero money to show for from when I was 16. I would guesstimate that I made over $10,000 from 16-18 years old. Just for fun, if I put $10,000 into an investment with even a 6% return (I imagine the market had more downs than ups). Thirty years later, I would be sitting on a lovely little nest of $57,434.91. 

Take Bigger Risks When Young

When you don’t have a family and aren’t drowning in debt, this is the best time to be the riskiest. Of course, be smart with your risks, meaning you wouldn’t jump out of an airplane without a parachute. Bigger risks lead to bigger rewards but can also lead to more significant losses. This is why you should take them when you’re younger because you will have time to recover your losses. You gotta risk it for the biscuit! 

Live Below Your Means

In today’s society, you see the majority of people upgrade their lifestyle with their raises. This doesn’t benefit them in the future in any way; it only creates better Instagram pictures. Warren Buffet’s nickname is the Oracle of Omaha because he is originally from Omaha, Nebraska and still lives in his house that he bought in 1958. As I’m writing this book, Warren Buffet’s net worth is estimated to be 100 billion. Be like Buffet.

If you live a lifestyle that is more than what you make, you will forever be enslaved to a job. The key to early retirement is living well below your budget, staying out of debt, trying to invest 50% of each paycheck. If you can get to a lifestyle that allows you to invest 50% of each paycheck while enjoying your life, you will be in the top 1%, no matter what your job is. 

Whenever you do receive a raise, use the extra money for investments. 

Avoid Bad Debt

Again, we have created a society that shows only the glamour of going into debt; a new car, a piece of paper showing your college degree, a Coach purse, the latest iPhone, and even most houses. As soon as you drive your car off the lot, it automatically begins depreciating and only continues its decline with each year of ownership. At the same time, with a house, if you aren’t using it as a rental property, it can become a burden and bad debt. 

If you do have debt and feel as though you are missing out on the investment life JL Collins suggests the following: 

• Less than 3% – pay off slowly and invest 
• 3-5% – do whatever you prefer
• Greater than 5% – pay off immediately 

If you aren’t worried about investing and just want to get rid of all your debt, Dave Ramsey has a method called debt snowball. According to his website, 

“The debt snowball method is a debt-reduction strategy where you pay off debt in order of smallest to largest, gaining momentum as you knock out each remaining balance. When the smallest debt is paid in full, you roll the minimum payment you were making on that debt into the next-smallest debt payment.”

401K 

 If the company you are working for offers to match a percentage of what you invest, you’d be silly not to do it; it’s free money. For example, say a company will match 4%, so you simply invest 4% of every paycheck into your 401k. The company will usually require you to be working there for a year in order to get the returns, but at the end of the year you just made a free 4% on top of the 4% you invested of your own money. 4%+4%=8%. 

Roth IRA

I think a Roth IRA is one of the best investment vehicles to take advantage of. After learning about it, it will be the first stop for my money-whenever I make money, that is. The only catch is that there is a limit that you can contribute to a Roth IRA. According to Vanguard, for the 2020-21 tax season, it’s $6,000 if you’re below age 50 and $7,000 if you’re above age 50.

 Let’s go back to our compound interest calculations. If you are in my shoes and are just learning about the magic of compound interest at age 30 but still want to retire around 65, which is what society teaches us is the average retirement age. You decide to max out your Roth IRA contributions every year. The breakdown would go like this: $6,000 a year at 8% annually for 35 years. Put that into the compound interest formula, and at age 65, you will have $1,205,325 of tax-free money at your disposal. You will retire a millionaire! Now just imagine if you started doing this when you got your first paying job. Remember: make sure you reinvest your dividends! 

Index Funds

“My regular recommendation has been a low-cost S&P 500 fund. A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.” – Warren Buffet

JL Collins recommends exactly the same advice and is a strong proponent of VTSAX which is Vanguard’s mutual fund class. It is composed of big companies so that your investment is diversified. If one of the companies starts performing poorly, they are replaced with a better performing company. According to Vanguard’s website, the top 10 largest holdings in VTSAX are: 

1 Apple Inc.

2 Microsoft Corp.

3 Amazon.com Inc.

4 Alphabet Inc.

5 Facebook Inc.

6 Tesla Inc.

7 Berkshire Hathaway Inc.

8 JPMorgan Chase & Co.

9 Johnson & Johnson

10 Visa Inc.

Not bad companies to invest $6,000 in. The expense ratio of this index fund is ridiculously cheap as well coming in at 0.04%. The expense ratio represents how much you will pay to own a fund. 

Diversify

The beautiful thing about VTSAX and index funds, in general, is that they automatically diversify for you. As you saw above, there are many companies an index fund can include. This is an easy solution to the overused saying, don’t put all your eggs in one basket. I’m not an expert on diversification, but I asked my brother-in-law, who graduated from Booth University with an MBA, what one concept he thinks people should learn before they are 30 and he said diversify. So, I’m putting that concept in here. 

Do Not Buy An Expensive House If You Dislike Your Job

Many Americans dislike their job, but they have to continue going to that job because they made some big purchase, like a house, when they first started working, trained by society that it’s the right thing to do. If you are looking for a home to live in, rather than as an investment, you will create a much happier life for you and your family if you enjoy your job. The right thing to do is first find a job that you aren’t utterly miserable at and then look at homes within your price range. Don’t go so far out of your price range that it traps you in your job. Doing this protects you from future unforeseen changes like new management or a Michael Scott boss.  

How To Live For Free

There is a loan for first-time buyers called the Federal Housing Administration (FHA) loan. It’s a loan that has a low-cost down payment–around 3.5%. This is a considerable advantage for younger people looking to add real estate to their investment portfolio. The great thing about this loan is that it works for multi-family homes as well. 

You can secure an FHA loan on a 2 or 4 unit property. The catch is that you have to live inside one of the units for at least a year, but that is barely a catch at all. When utilizing this strategy, you live in one unit while renting out the other unit(s), which will more than likely cover your mortgage payment. If you have more doors in a unit, then you will have positive cash flow. You can also get the FHA loan with a single-family home, but to live for free, you have to rent out the spare bedrooms and deal with roommates like Dupree.  

There Is No Such Thing As Get Rich Quick

If you see anyone advertising a product to you that allows you to get rich overnight, then it’s a scam. Nothing like that exists. There might be people who get extremely lucky and get rich overnight through a penny or crypto stock, but the probability of them believing they are a genius and losing all their money on their next trade is very high. Then these people who got lucky sell programs to uneducated people, showing their qualifications from one lucky trade. That’s where they make their money, from selling to desperate people. 

Generating wealth and assets takes time. So no matter how sexy these products look, stay away because you are smart and put your money into investments that you know will make you rich in the future; all it requires is patience. 

Read: 

Simple Path to Wealth by JL Collins

The Richest Man in Babylon by George S Clason

Think and Grow Rich by Napolean Hill

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