Finance: Part 2 (Money, What Did You Expect?)

What’s the answer to 99 questions out of 100? Money. 

— Vanilla Sky (2001)

In Part 1, we used sushi to introduce the fundamentals of finance, namely the time value of money and the related concept of risk vs. reward. We talked about why we would discount expected cash flows from the future to figure out what they are worth to us today and the opposite process of projecting the value of money in the future (compounding).

We also said finance is related to everything, which is a bold claim, especially to those who, let’s just say, outsource their thinking on the subject and get along just fine. Therefore, from here we could go in an infinite number of directions (I will recommend some books and other resources below each post if you want to go down any of the many potential rabbit holes). We will try to build up from where we left off, (which ironically again means backing up), summarize topics that we can expand upon with dedicated posts or entire series later, and keep it easy to follow.

Coconut City 
Here is a grossly oversimplified explanation of what I mean when I say finance is related to everything: It starts with people (how quaint) and economics. For a long time now, people have been trading their goods (e.g. Prozac) and services (e.g. foot massages). People created money because at some point, the way I imagine it, in a place called Coconut City, one caveman wanted some comfortable moccasins and another wanted a cheeseburger (a week before the Original Paleo Diet caught on). The problem became quickly obvious: How many moccasins equal a cow? The cavemen both agreed that they needed an easier way of dividing things of value, because there was no way the bovine caveman was giving up an entire cow for a pair of shoes. We won’t even talk about how offended the cow would be if he was turned into a cheeseburger over one pair of moccasins.

So, the one with the shoes says, “Look, we have 100 coconuts laying around and we are 500 miles from an ocean (meaning I can’t make anymore coconuts). I will give you 100 coconuts for your cow and you give me 5 coconuts for the moccasins. You can use the remaining 95 to pay me to do your laundry, prepare your tax return, paint portraits of you, and so on.”

Discerning readers will want to unpack the above scenario (including the latent control and obligations represented in the coconut, the advantage of owning the cow, and what happens if the moccasin man decides he’s done folding clothes) which we will save for later. As the example hints, the reason you have heard of all sorts of things being used as money is because it is less important what it is and more important what it means (for our purposes here, let’s assume that money is roughly the same thing as currency).

Updating our scenario, the best modern explanation of a currency I have come across is something you would be okay getting paid your wages in and you would be comfortable paying your obligations in (like your rent or mortgage payment). The implication is that the people using it have to trust the value of it and the stability of that value. As long as we feel good about those, it doesn’t matter whether we use dollar bills, electronic dollar bills, or coconuts. Imagine if you did a month’s rent worth of work (say $1,500), then went to pay rent, and they said, “Oh sorry the value of the dollar dropped, so we are going to need $3,000.”

Connecting this to the example above, it would be like our caveman going to use his remaining coconuts and finding out someone snuck 100 new coconuts into their system. As everyone gradually figures this out, they now want 10 coconuts for moccasins and 200 for cows, and our original seller still only has his 95, which buys half as much as he was expecting when he made the trade. This is called inflation.

If you know any Venezuelans, this isn’t a hypothetical nightmare for them, this is happening. Here in the US, not immune to such possibilities and wishing to avoid similar inconveniences, we go to the trouble to make sure the word trust is on every coconut bill (economics meets psychology and sociology). This is not a coincidence. The implicit premise is: Trust us that we won’t “print” too much money and inflate its value away. (They have printed a couple trillion since 2008.)

Odds are, even before the butchered economics lesson above, you understood the theme: Money is important and we don’t want anyone messing with the value of it. The basic reason is because that we need things and it facilitates transactions of those things between people. Without it, we would get bogged down trying to compare values of unrelated things and it would take much longer to get anything done.

So, we have loosely defined money and we know from Part 1 that the recurring inflow of money is called cash flow. And if there is one thing I know, it’s that everyone likes the recurring inflow of money.

If everyone likes this stuff so much, why does it cause so much anxiety?

As it happened, the other people in our fictitious Coconut City liked the coconut-as-money concept¹, so once things were up and running, the cavemen started getting used to their cash flow. This brings us to another fundamental observation: people build their lives around assumptions and expectations. At the extreme, we assume the laws of physics remain the same from day to day — for instance, we take it for granted the sun will be up tomorrow. Although it sounds goofy to talk about it like that, you would not argue against the importance of the sun for very long. In fact, we could spend the rest of the day listing things that depend on the sun, but that’s not what we came here to do. So how does any of this relate to money and finance? All business, and thus finance, is based on expectations. We spend money on our debit or credit card based on expectations of how much money we have or will have. These expectations likely include Wells Fargo storing our electronic money safely and securely on its servers to relying on someone to give you the money they owe you. Businesses do the same thing.

Which leads us straight into one of the central insights of finance, neuroscience, and essentially anything human-related: When something you expect/depend on happening does not, it becomes the most important thing in the world. Have you ever walked into a public restroom expecting to take a normal breath of air when suddenly you were blindsided with a whiff of such a horrid combination of smells that your nose refused to inhale until the rest of your body escaped? That visceral disappointment is the same feeling an analyst somewhere gets when Apple sells 78 million iPhones instead of the 85 million he projected in his (financial) model. That is the same feeling a manager gets when his team fails to meet its sales goals. It is the feeling Elon Musk has right now with his Tesla Model 3 promises.

Effectively everyone has some form of cash flow that they are expecting and any time that number is less than what they have in mind, they feel like they have walked into that public restroom².

This intuition makes sense, but a surprising number of people do not think in these terms; therefore, if we do, we give ourselves an advantage in an important game.

We could keep going, but as they say, Rome wasn’t built in a two-part blog post. The Get-Rich-Quick type who might have found their way here based on the title might be disappointingly thinking, “WHERE’S THE MONEY LEBOWSKI!?”

We will get there eventually.

¹ You might think that taxing authorities are big fans of improvements in transparency and the ability to count things of value. They are.
² The author is designing his life to avoid both the metaphorical and literal interpretations of this scenario.

See also:

Finance: Part 1 (A Primer)

I’m glad I learned about parallelograms instead of how to do taxes. It’s really come in handy this parallelogram season.
— Sage Boggs, Twitter (2015)

A poet once said, “The whole universe is in a glass of wine.” We will probably never know in what sense he meant that, for poets do not write to be understood. But it is true that if we look at a glass of wine closely enough we see the entire universe. There are the things of physics: the twisting liquid which evaporates depending on the wind and weather, the reflections in the glass, and our imagination adds the atoms. The glass is a distillation of the Earth’s rocks, and in its composition we see the secrets of the universe’s age, and the evolution of stars. What strange arrays of chemicals are in the wine? How did they come to be? There are the ferments, the enzymes, the substrates, and the products. There in wine is found the great generalization: all life is fermentation. Nobody can discover the chemistry of wine without discovering, as did Louis Pasteur, the cause of much disease. How vivid is the claret, pressing its existence into the consciousness that watches it! If our small minds, for some convenience, divide this glass of wine, this universe, into parts — physics, biology, geology, astronomy, psychology, and so on — remember that nature does not know it! So let us put it all back together, not forgetting ultimately what it is for. Let it give us one more final pleasure: drink it and forget it all!

 Richard Feynman, American physicist (The Feynman Lectures on Physics, Vol. 1, Lecture 3, “The Relation of Physics to Other Sciences”)

Guac Loyalists! Thank you for your patience. Newcomers, welcome. Amidst my absence, someone who works in finance recently asked me if I could explain how the stock market works. I was shook. During a haircut later that day, I gripped the armrests nervously hoping my barber wouldn’t ask how scissors worked. Joking aside, if you have ever received (ten million) credit card offers in the mail, heard the word stock or bond, or want to avoid being the person digging food out of a trash can in a San Francisco mall food court wearing a zebra print outfit (true story), this is a topic that is worth your time and energy to at least understand the basics.

I value my readers’ time as much as my own and I want to save anything that is better suited for a Google search for Larry Page, so I kept this one in both my mental & electronic Draft folders for a long time. The parallelogram quote, like many other Tweets and memes, has a deep truth embedded in it, which made me realize that the majority of people bump into finance by necessity or on a one-off basis, instead of have it incorporated into their worldview. Whenever I started writing about the stock market to address the original question, I kept thinking: “Well before we can talk about that, we have to talk about this.” So let’s back up and do that.

Therefore, this post has two aims:

1) briefly explain how finance works in an intuitive and approachable way
2) broadly lay a financial & philosophical foundation to build off and serve as an easy self-contained reference for future discussions that may (realistically, will) involve markets, financial assets, and business

If you are a practitioner, feel free to either skip this one or use it as a refresher. If this is new to you, you can read it at any pace you choose. If you get it on your first try, you are ahead of the game.

The Main Concept

First, we start with some critical definitions. Finance is the management of money, which generally involves assets (things you own/control) and liabilities (things you owe). An asset is something of value that is expected to make money in the future. A few examples:

  • coffee machine (a tangible asset; makes coffee that you can sell in the future)
  • academic degree (an intangible or non-physical asset; signals you allegedly have the capability to do something an employer wants you to do, for which they would pay you)
  • Netflix’s content licenses (they pay someone for the right to show their content (unless they make it themselves), then charge us monthly fees to see it – they are betting that over time you and I pay them more than it costs them to buy it)
  • share of stock (an ownership interest in a business that entitles you to a share of the profits)
Screen Shot 2018-07-06 at 10.57.19 AM

The value of every financial asset can ultimately be described by this formula:

Simple enough right? Well, the first kink in the hose is that the top number, cash flow, is uncertain because it takes place in the future. Cash flow is money coming in and out of an entity. If you make $10,000 a month in cash and spend $9,000 of cash, your cash flow is $1,000 per month. Same goes for a business.

Next, you may be asking “WTF is a discount rate?” I promised we would be quick, but the time value of money is so important in finance that we have to make sure we get it before we move on.

The good news is you already know it, you just might use different words or think about it less formally.

A Dollar Today is Worth More [To You] Than A Dollar Tomorrow

Aesop’s Sushi: A tuna in-hand is worth two in the ocean. 

Suppose you have $100 and someone you know and trust (just enough) asks you for $100. You initially tell them to get lost because you’re going out for sushi tonight. But then, he/she/they sweetens the deal and says, “I’ll give you $110 tomorrow.” Now you’re interested because if you wait until tomorrow and he pays you back, not only can you get sushi, you can also get two coffees before brunch the following morning. The additional $10 is called interest and in this case it worked out to be 10% ($10 / $100). This is the part you know. But what about a reverse scenario, where you know you are going to get $110 tomorrow, but you want to figure out what that is worth to you today? This is called the present value. Essentially, you have to quantify the value of time (hard), the chance that you may not get the money (also hard), and what else you could do with that money (slightly easier and more fun, but still hard). That process is called discounting and the number is the rate at which you do it, hence discount rate. In this case, we may determine that the interest rate is the best discount rate, so we use the same 10% ($110 / 1.10 = $100).

When figuring out the present value, we put a 1 in the denominator plus the discount rate to get a smaller number. Without it, as in the first equation, we are assuming that the top number (cash flow) will go on forever and that the bottom number (discount rate) is the right number forever. That is called a perpetuity, but anyone offering you a perpetuity (money forever) is probably giving you a crummy deal, so we’ll skip that for now.

Therefore, the more realistic and complete present value formula is shown below. Before you get intimidated, take comfort knowing that you already solved it two paragraphs ago!

  • m = number of payments per period (e.g. 1, 12, 365)
  • n = number of periods over which the amount is being discounted

Cash flow: $110
Discount Rate: 10%
Number of payment periods (m): 1
Number of years (n): 1

Therefore, this simplifies to $110 / 1.10 = $100.

It is important to point out that there is nothing magical about the 10% number we used. If you get 10 cooks in a kitchen, you are going to get 10 recipes. The same is true in finance. If you ask 10 financiers at what rate they discount their cash flows, they too will give you 10 different answers.

We have mentioned in a previous post that in the publishing world, if you want to sell fewer books, include math in your writing. Unfortunately, if you want to make or keep money, you need to be numerate.

This chart takes the sushi example above, puts it into numbers, and extends it over a period of years instead of one day.

Year 1Year 2Year 3Year 4Year 5Total
Cash Flow$100$100$100$100$100$500
Discount Rate  10% 10% 10% 10% 10%
Present Value$90.91$82.64$75.13$68.30$62.09$379

In words, this table is saying we would feel exactly the same between taking $100 in one year or $90.91 today. If we increase (decrease) our discount rate, the amount we would be okay taking today gets smaller (bigger).

It is also implying that we would be okay taking $100 each year for the next 5 years or $379 today. Above, we mentioned the reasons we might make this trade-off: 5 years is a long time (sushi today is better than sushi tomorrow), what if the person we expect the $100 from can’t or won’t pay us (risk), and/or we may have something else we would rather do or somewhere else we could put the money that makes more than 10% per year (opportunity costs).

In the table above, we use the same discount rate, but obviously two years is twice as long, so you discount it twice, repeating the process as needed.

Screen Shot 2018-07-06 at 10.57.23 AM
Screen Shot 2018-07-06 at 10.57.26 AM

If this is the first time you have seen these calculations in your life, open the iPhone calculator app, turn the phone sideways so you get the expanded functions, and try doing this yourself. If you are really curious or want to know what your finance friends have been doing for most of their twenties, open up Excel and throw some of these in there.

Repetition for emphasis: This implies we would be indifferent between getting $379 today and $100 every year for 5 years. It is also implying we would pay $379 today to get $100 every year for 5 years.

Regardless of the complexity, whenever I’m scratching my head looking at something financial, I always try to figure out how it comes back to these main concepts above. Whether it’s $100 or $100,000,000, coffee sold or income earned, the formulas still apply.

The key distinction in the formulas we have talked about is whether you are going forward or backward in time – whether you want to see what money today is worth in the future or what money in the future is worth today.

  • $100 x 1.10 = $110 (future)
  • $110 / 1.10 = $100 (present)

I named this Part 1 because it is such an expansive subject we could end up like Idiosyncratic Whisk, whose most recent post is Housing: Part 306.

Whilst this is less exciting on the surface than endurance races, heists, or Kim Kardashian, finance is connected to (nearly) everything in the same way that Feynman’s divisions of scientific disciplines in the opening quote are connected. Finance is versatile – it allows you to do things like assess the validity of a politician’s claims (cough) and figure out if you’re getting screwed on your next loan to making sure you can afford sushi and wine.

Or, in keeping with Feynman’s instruction, it may be time to drink it and forget it all.

Where’s the bag?

Wisdom crieth aloud in the streets.

Proverbs 1:20

Floyd Mayweather, Jr. carries around a bag that has $1 million cash in it. He often has an entourage with him, and if he’s not carrying it, he frequently asks to no one in particular, “Where’s the bag?”

There’s a case to be made that this is dumb, and other reported & rumored things Floyd does are loathsome. But, I look for good ideas wherever I can find them and it reminded me of a piece of advice Warren Buffet received and reprinted in his 1970 Letter to Shareholders.

Dear Fred & Catherine [Buffett’s uncle & aunt]:

Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time.

For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.

For a number of years I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business. There have been a couple occasions when I found it very convenient to go to this fund.

Thus, I feel that everyone should have a reserve. I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund by placing $200.00 in an envelope, with your name on it, when you were married. Each year I added something to it, until there is now $1000.00 in the fund.

Ten years have elapsed since you were married, and this fund is now completed.

It is my wish that you place this envelope in your safety deposit box, and keep it for the purpose that it was created for. Should the time come when you need part, I would suggest that you use as little as possible, and replace it as soon as possible.

You might feel that this should be invested and bring you an income. Forget it — the mental satisfaction of having $1000.00 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize on quickly.

If in after years you feel this has been a good idea, you might repeat it with your own children.

For your information, I might mention that there has never been a Buffett who ever left a very large estate, but there has never been one that did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well.

This letter is being written at the expiration of ten years after you were married.


The letter was written in 1940 and Buffett found it in 1970 (with the $1,000 still there haha). To modernize the advice, using an inflation calculator I found on Google, $1,000 in 1940 is equivalent to $17,623 in July 2017. Buffett’s company, Berkshire Hathaway, takes it a step further than Floyd, and keeps $20 billion. We can tailor our number to our individual circumstances. I like the advice (including the safety deposit box) precisely because it feels unnecessary and inconvenient.

Can you imagine one day waking up and getting this email from your bank?

“Sorry, we got hacked. We think you had $x in your account. You’re prolly not getting it back. Hopefully the FDIC has you covered. Maybe check out Bitcoin. If the power hasn’t gone out. Peace & Blessings.”

“Where’s the bag?”
— You, next year

The Financial Wisdom of Rap Music


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)

Earnings power.

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’m 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 advisor 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 advisor 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 advisor 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.