Fred Jung: Money isn’t real, George. It doesn’t matter. It only seems like it does.
Young George: Are you gonna tell Mom that?
Fred Jung: Yeah, that’s gonna be a tricky one.
— Blow (2001)
Disclaimer: These are rap lyrics and the songs may be offensive. If Starbucks’ Red Cup at Christmas bothered you, perhaps you will find this more appealing.
My evolving theory is that rap music is the purest commercial form of ego expression (perhaps its own post one day). In the proper context, it also offers valuable financial guidance. If I can combine three things I like: finance, rap, and offering my unsolicited advice, I will take the opportunity.
The inspiration for this post was Kanye West’s recently-publicized $53 million debt burden. Before we get started, one of the most important things in your financial life is to simply care about your money—hopefully somewhere in between Paris Hilton and Ebenezer Scrooge. After all, it is the physical representation of your work, it is limited, and many people in the world are trying to shift it from your bank account to theirs. If you are under the age of 35, have less than $2 million (if you have more, be careful), and finance is not your Love Language, then these ideas may be beneficial to you. If you fall in this category and it takes you longer than 10 seconds to tell yourself 1) what your monthly cash flow is; 2) what your fixed monthly expenses are; and 3) what your net worth is, then you should figure those three things out—after you read this of course.
All right, here we go.
- I got the key to the boat, I got the key to the jet
I got the key to success: Get money, invest
Read up with the rest
— Lil’ Wayne, Over Here Hustlin’ (2006)
Work. Read. Invest.
Weezy F Baby implies here that the “F” is for finance as he succinctly provides the simplest recipe to all material pursuits. However, simple rarely means easy, especially with that “get money” part he skims over. Getting money is hard and investing it wisely is arguably harder.
The #1 thing you can do to improve your odds of success is to acquire wisdom and learn more, specifically through reading. A lot of people think it’s boring but it’s all about getting interested. If you won the $1 billion lottery in January, the next day you would have thought tax law was the most interesting thing in the world.
Book suggestion: If You Can: How Millennials Can Get Rich Slowly by William Bernstein (it’s $1 on Amazon)
- Every day I’m hustlin’
— Rick Ross (2006)
The difference between someone like you & me and someone like Kanye West, is if we were $53 million in debt, we would have problems coming up with that much money even if we had a shotgun. Kanye, on the other hand, has to tell his agent to schedule a 2017 tour (perhaps “Yeezus: Water into Money”) and suggest Adidas bump up the release date of his next shoe. This is called earnings power and it is highly dependent on your skills. If you are struggling to come up with blockbusting offensive lyrics and your wife’s Emoji app is making less than $1 million per minute, then you may need to get to work on your earnings power. Our society rewards specialization, so become the best at something. Imagine this scenario: there are two children and all they want to do for one year is play an instrument. The first one gets a piano and a guitar for Christmas where he spends half his time on both, and the second one gets only a guitar and spends all of his time playing it. When next Christmas rolls around which one is a band most likely to hire?
Regardless of what you choose, remember what Rick Ross is doing.
- Make a little money, leave a little on the dresser
— 2 Chainz, Dresser (2014)
In order to save, you unequivocally have to spend less than you make. If you make $100 this year and you spend $101, next year you can only spend $99, unless you have cash or borrow more. However, if you borrowed the extra $1 you spent, then you also may have to pay interest to whomever lent you that $1. A 6-year-old gets this concept, but the average American household had $15,762 in credit card debt and $130,922 of any type of debt as of year-end 2015.
You have probably heard the concept of good debt and bad debt. The difference is what you’re using the debt for and how expensive it is. If you have debt with an interest rate higher than 5%, your best strategy is likely to be paying that off before thinking too much about leaving a little money on the dresser. Begin with the highest interest rate debt (e.g. credit cards) and move down to the cheaper debt (e.g. student loans). Once you have your debt level where you want it, we can begin talking about being on the other side of those interest payments and making them work for you–we will cover this in #7.
You can have anything you want. Just not everything you want. If you like bags, buy the best bag. If food is your thing, shop at Whole Foods. If you’re a stalker, buy the nicest binoculars. You get the idea. But you have to be disciplined in the other areas. It’s expensive to be a stalker trying to fit both your organic groceries and Zeiss binoculars into your Louis Vuitton bag.
How about something financially impractical, “What if I want a jet with a fur interior?” If we break that “want” into its component parts, we will find what it is you really want, which is ultimately something you can obtain with the right amount of focus and sacrifice.
I have never met anyone who regretted saving money, except gold bugs. In fact, a recent survey showed 53% of people said their biggest financial regret is not saving enough money. Well, the good news about that strange statistic is: unlike Lil’ Wayne’s Lean habit, you can control it.
- I had a dream I could buy my way to heaven
When I awoke, I spent that on a necklace
— Kanye West, Can’t Tell Me Nothing (2007)
Restrict impulse purchases.
Millennials are smart and know instant gratification is old-fashioned — that’s why soft drink consumption is down in the US.
Most things financial require discipline, this one in particular. There are budgets online you can find, but entering your monthly expenses into a spreadsheet probably falls inside one of Dante’s circles. Simply be mindful of every purchase you make. One easy gimmick that works well is: when you come across something big you want, write it down. If you still want it in 60-90 days, then wait another 30 days.
- I heard it’s not where you’re from but where you pay rent
Then I heard it’s not what you make but how much you spent
— Outkast, ATLiens (1996)
Everyone has an opinion on housing. If you are considering buying a house I encourage you to think deeply about that decision. If it is because you think it is an investment or you are dying to post a picture of your new home on Facebook, watch The Big Short five times. If it is for starting a family, your studio apartment is in the worst school zone in the country, and your mortgage payment is reasonable…then you may convince me that home ownership is for you. You will probably want to shoot the messenger here when he reminds you that the rule-of-thumb back in the day for what to pay for a house was 3 times your salary (i.e. if you made $100,000 your house should be ~$300,000). The only reason that number may seem low to you is because debt is extremely cheap today and the bank will give you more money. Remember too, things never cost what they cost. What I mean is most things require maintenance. My coworker owns a home and replaced an A/C unit that cost more than my annual rent. Sadly, within a year of that, his house also flooded and the repairs were about 4 years worth of my rent (insurance didn’t cover it).
To address the investment aspect, name 3 people who have moved into a less expensive home once they made a profit from selling theirs in order to use the cash. Odds are you couldn’t. However, you could probably flood my inbox with people who sold their house for more than they paid and then moved into a bigger home. The problem is, for it to be a true investment gain, you need more purchasing power than you had before you bought it, and it is very hard to use your house to buy things. When calculating your profit, you must also include all of the money you put into the house in your cost basis. Human nature is such that we are very good at remembering the points we score, but we conveniently forget some of the points scored against us.
In practice, the closest most people come to cash from the equity in their home is in the form of a home equity line of credit (“HELOC”), which—although nice—is not the same as cash.
I am neither a housing Grinch nor a multifamily tycoon with an agenda here (I didn’t even go into the hassles of home ownership like cutting the grass). It is good to question why we do the things we do and especially the merit of what I am saying. If you have given it the appropriate amount of thought and really want a home, get one. If it feels like the next step in adulthood, perhaps you should consider alternatives.
Book Suggestion: Irrational Exuberance by Robert Shiller
- Be having dreams that I’ma gangster,
Drinking Moets, holding Tecs
Making sure the cash came correct then I stepped
Investments in stocks, sewing up the blocks to sell rocks
— Nas, New York State of Mind (1994)
Ok, so you’ve saved all this money and you’re thinking to yourself, “Wow, this savings account earning less than 1% interest isn’t exactly Wolf of Wall Street money.” Well, there are 3 legal ways to get rich in this world:
• Being in, or marrying into, a rich family
• Using leverage (other people’s money) and being right
• A combination of saving money from your labor and investing it in risky assets to earn a return. Everything that is not risk-free (e.g. Treasury Bonds) is by definition risky.
It is time to open a brokerage account.
If this is new to you, I would like to provide some practical advice to make this a realistic next step for you: I prefer the more traditional self-directed firms (Bank of America’s Merrill Edge, Scottrade, E*Trade, OptionsHouse, etc.) compared to the trendy options (Betterment, Wealthfront, etc.), but obviously do your homework and pick the option suitable to your needs. You will have to complete some paperwork and send it in, but it is worth your time.
Side note: Figure out the incentives. This applies to everything involving a fee or commission in the world. Most low-cost brokerages require no face-to-face interaction and you handle everything at your computer–they simply get a small commission for your trading activity. If you engage a financial adviser they will be more consultative and hands-on, which means they cost more. In the same way you never ask the barber if you need a haircut, you want to make sure you understand how your financial adviser gets paid (prefer fee-based over percentage-of-assets-managed if you can). Some get paid on the number of trades you make, meaning they are more interested in your activity than your wealth. Among the many questions, ask if they have their money invested in the products/fund that they are asking you to invest in. Finally, there are some financial advisors that provide much more than simple investment advice and products. I personally know some that eat/sleep/breathe their clients’ well-being and help them with everything from retirement and estate planning to taxes and trusts. This is a rare breed, so proceed with skepticism.
After you have done your homework, you will inevitably ask, “What do I invest in?” Only you can decide, but I’m about to tell you two of the most important investment ideas in the world:
• Buy low-cost broad market index funds (e.g. Vanguard’s S&P 500 ETF; ticker symbol: VOO). This part is relatively easy.
• Hold. This part is not so easy.
There is an entire industry dependent on people not doing those two things. The only reason money managers should get paid is if they 1) consistently earn risk-adjusted returns that beat their benchmark and/or 2) prevent you from panicking and selling at the wrong time.
There are several other blogs, books, etc. that do a great job describing the benefits of and differences between 401(k)s, IRAs, etc. but the one thing you should do immediately is open up a Roth IRA (unless you make more than $131,000) and contribute as much as you possibly can to it (up to $5,500/year). 2015 contributions can be made until April 18th, 2016! This is money that will never be taxed again.
- Your money’s too young
See me when it gets older,
Ya bank account grow up
— Jay Z, Money Ain’t a Thang (1998)
Patience & compound interest.
Let’s say you are 30 years old and have $75,000. Here is what that might look like when you’re 70 under different investment scenarios—if you have ever been to a financial adviser they LOVE showing you this type of simulation:
• 40 years compounded at 1% (current rate on Savings account at Ally): $111,665
• 40 years compounded at 8% (hypothetical return going forward): $1,629,339
• 40 years compounded at 9.7% (historical annual return on S&P 500 1965-2015 assuming reinvestment of dividends): $3,043,171
There are important lessons baked into these examples. Not doing something is doing something (Option 1) and it is expensive because of what you could have done with the money. If the inflation rate turns out to be more than 1% in Scenario 1, the $111,665 in the future won’t buy you what $75,000 would buy you today. All of your friends at the Glacier Peaks Retirement Community are going to be riding around in their brand new Tesla 9000 flying electric golf carts while you’re trying to sell your extra arthritis medicine at a lemonade stand.
At first glance, the 1.7% difference between Scenario 2 & 3 appears to be too small to matter, but over time that difference is $1,413,832. Just for fun and to really make the point, if you got Warren Buffett’s rate of return from 1965 to now (20.8% compounded annually) then your $75,000 would be worth $143 million. If you don’t like finance, you now know why people do.
And finally, I often hear “I’ll start saving more when I’m older.” In Scenario 3 above, the value of the investment is $913,356 when you’re 57 and grows to $3,043,171 by the time you’re 70. So those 13 years are where most of the growth occurs. If you waited until 40 to begin, to achieve the same goal would take you until you’re 80.
The main flaw in models like these is the growth doesn’t happen smoothly in real life. One year you’re up 10%, next year you’re down 6%, etc. At some point we are all tempted to sell an investment when it is down. If you are in a broad index, it is unlikely that all of the composite companies go bankrupt, so you can sleep comfortably knowing that over time, the odds are in your favor. I call this the Rip Van Winkle style of investing: Go to sleep for 30 years. But unlike Rip, you wake up with much more money than you had. Without getting too far into behavioral finance, never sell something out of fear. Figure out why it is down and whether it is temporary or permanent. Temperament is more important than intelligence in investing.
- $1,000 shoes and all they do is make my foot hurt
— Que, Woodwork (2016)
It has been said that envy, not greed, makes the world go ‘round. Once you get up Maslow’s pyramid, buy things that enhance your life, not what appears to enhance someone else’s life, and especially not what the world tells you to want. When people don’t know what to do, they look to others to figure it out. I know people that couldn’t care less about watches who want a nice watch because that’s what other people do.
Another way of thinking about your expenses/habits/life is asking yourself what do you have to show for it. That can take the form of either memorable experiences or tangible possessions.
In Maryland once, I met the guy who did the landscape architecture for Sisqo after the Thong Song came out. Apparently, the lingerie lyricist spent over $1 million on the garden alone because he thought it was something celebrities should have. Unable to discover Victoria’s Secret, Sisqo had to sell his home.
- All his cash, market crashed
Hurt him bad, people get divorced for that
— Kanye West, Pt. 2 (2016)
Money (or lack thereof) causes stress.
Prudently arranging your financial affairs may not get you a reality TV show, but it may give you peace of mind, provide for your family, and allow you to do things you would like to do. If you are stressed out about money, there is no Sleep Number that makes you sleep well.
When you walk out of the movie theater after watching a romantic comedy, you think that people fall in and out of love for noble reasons. Saying money doesn’t buy happiness can miss the point. If you are a billionaire and your spouse is unfaithful, the billion dollars is irrelevant. But it would cut the same whether you had one dollar or ten billion. So, you might as well have more money.
Having said that, beyond a certain financial level, you may drift into a more complex debate about the marginal benefit of adding dollars to your net worth to the sense of purpose you have in your life. If you come away from that debate feeling your only purpose is to make more money, then #10 is the last thing the Good Witch wants you to know before you walk down your road of golden bricks.
- — 2 Chainz, A Milli Billi Trilli (2015)
The hook involves Mr. Chainz changing the chorus during the song from wanting a million dollars at the beginning, to a billion dollars in the middle, and finally to a trillion dollars at the end…
It is never enough.