Monday, February 12, 2018

If I Could Turn Back Time...

We can't turn back time.  But if you are young, you might learn from the mistakes of those that came before you.

A reader writes:
I discovered your blog last year and I have been reading it off/on ever since. I was curious if you were able to give me some advice as a young person on how I can become actually wealthy instead of "pretend wealthy." I'm a college student and of course I am not eager to be incredibly stingy and miss out on experiences that can be afforded to me, but I thought you might be able to help. Some questions I have are: 
What should I look for in a credit card? 
What would be good to start investing in and what tips would you give to someone looking to jump into investment? What would be good investments early on? 
Finally, and this is a little bit more of a curiosity about the lifestyle you live, how often do you fall back into your old ways? In what areas of your life does that happen?
I hope you can get the opportunity to answer my email..
So many questions packed into one e-mail! I don't know where to begin.

First of all, I am not an advice columnist, so I cannot provide advice.  Furthermore, any advice from anyone over 30 is suspect.  How you succeed in this new economy is something I have no idea about - just as my parents didn't understand why I was obsessed with "computers" back in the 1970's.  After all, who could afford to have an IBM mainframe in their home?  The electric bill alone would be staggering!  Old people are clueless, let's face it.

Today, people make money by tweeting.  I am not sure exactly how, but I would have said that was a stupid thing to do.  Hell, some six-year-old made $11 million last year just playing with toys on YouTube.  The world is a crazy place.   But don't think that just because people like that strike it rich without any apparent effort, that it will happen to you or that you are entitled to it Being hit by lightning is a rare event.  It doesn't happen that often.  The rest of us have to work for a living - so have a plan in place to do just that.

But in a way, our reader has already won the game, if he is thinking of personal economics at age 18 (assuming the e-mail is not a troll).  When I was 18, like most young men, all I was thinking about was where my next beer was coming from, how to score some pot, and what sort of sorry thing I was going to stick my dick into next.   Sounds like our reader is light-years ahead of me at that age!

I wrote before - several times in fact - about a quote from Norman Mailer's The Naked and the Dead which jumped out at me when I read it the first time.  He mentioned something about wishing one could live their life over again and do things differently.   And he mentions that it is a common thought - and a waste of time, too.  Because you can't live your life over, you can only look forward.

At age 18, it may seem like the "adults" have all the cards - have all the money, the good jobs, the fancy cars, the big houses - the power.   But we all wish we were you - or at least could be 18 again and this time around not screw it up by being... well, 18.   If we had the wisdom and knowledge of the years, and the time and health of youth - what a potent combination that would be!  We could rule the world!

The problem for me at that age - and most 18-year-olds - is that we were big goofy kids who had no common sense or an idea about the future.  We wanted money - sure.  But we wanted it so we could squander it.  And what little we accumulated, we squandered on dubious things that didn't last long.  And when we "invested", well, it was like these get-rich-quick schemes you read about online.  We didn't invest for the long-term, because that was slow and boring.  We wanted to make huge amounts of money right now dammit!  And that is hard to do, unless your last name is Zuckerberg and you get struck by lightning.

So I can't offer any "advice" but I can tell you all the really stupid things I did, and maybe if you do only half of them, you will do better than I did.   Because you will make mistakes - we all do.  I am a college dropout and a "failure" on many levels.  But on the other hand, I am a millionaire and in the top 5% of wealth for the US and top 1% of the world (easily)I have no right to complain about how rotten I have it, because quite frankly, I did quite well, thank you, in spite of myself.   Others could do much better, quite easily, by not doing half the bonehead things I did.

Which is why I am not jealous or resentful of those who make more money than I do.  Sure, many of the guys I went to law school with, are today partners in big firms drawing huge salaries.  Maybe that could have been me, too.  But I made different choices and am happy with that, which is good, because I have to live with that.   There is more to life than just money, but being comfortable is important.

Today, of course, we have a new economy and new pitfalls for young people.  We didn't have staggering student loan debt back when I was in school.  And many today don't have it either - because they don't borrow more money than they can realistically pay back.   Borrow as little as you need - that is always the best route to take.  Borrow not at all, if you can.

One of the biggest life mistakes I made over the years was to borrow too much money.  Borrowing money for a worthwhile college education (I borrowed about $38,500) isn't a dumb move, but I easily borrowed twice as much as I needed - as evidenced by the fact I remodeled my kitchen with some of the money.   Borrowing money for a house wasn't too bad a deal.  Buying more house than I needed or borrowing more than I needed would have been dumb.  Refinancing my mortgage again and again was really, really dumb.  Of all the bear traps I stepped into, debt was probably the worst.

But what about life experiences?  Our friend doesn't want to be "stingy", but to drink deep from the well of life - like most young people do.   But the funny thing is, having fun and having experiences doesn't mean spending a lot of money and in fact, often spending more means having less.

For example, I mentioned my friends who hitchhiked around the world - twice - on a very small budget.  I also have some friends who are heirs to a fortune.  They took a cruise around the world that easily cost $100,000 in today's money.  Guess who had more fun?  Guess who had more experiences and really experienced foreign cultures?  I am not saying you should hitchhike around the world, just using this as an example of "less is more".

Or take my old BMW.  I bought a 1974 BMW 2002 for $700 and fixed it up.  It needed everything, and I took apart that car down to the last nut and bolt and rebuilt it.  I found a Korman 2200 cc 10.5:1 engine that a customer had ordered and never picked up - and snagged it for $1500!   That car ran like a scalded rat when I got done with it.  I sold it to buy a 1999 BMW M Roadster from my wealthy friend.  It was a nice car.  I put gas in it.  That was the extent of my interaction with that car.

Of the two cars, I had more fun for a lot less money with the old beater 2002 than the nearly brand-new "poster car".   You don't need to spend a lot of money to have fun, and often spending more means less fun.  It takes no talent to sign a check or swipe a credit card or sign a loan document.   Do things that require skill, artistry, effort, labor.  It doesn't matter your skill level - the fact you do things is important in fighting off depression and learned helplessness.

Going to college can be a good thing if you are getting a worthwhile degree.  The pitfall of college, as I have noted before, is to spend a lot of money for a degree that leads nowhere.  It was true when I was in college (all 14 years of it!) and it is doubly true today with staggering tuition increases and student loan debt.  Taking hard subjects and being realistic about job prospects in the field both served me well.  In my case, I had the job while I was going to school.  It staggers me that people can be smart enough to get into college and still clueless about where their chosen field of study will take them.  A degree in "Sociology" isn't going to take you many places, but can cost a lot of money to obtain.

I was fortunate to go to GMI, which put me to work in a General Motors factory as a salaried employee at age 18.  It was like boot camp, without the drill instructor.  They threw us off the deep end and saw whether we could swim or not.  And Engineering classes weren't easy - but then again, nothing worthwhile really is.   I flunked out after three years (in a five-year program) and one of the bonehead things I did was cash in a $2200 retirement account from GM instead of rolling it over into an IRA.   One of the biggest mistakes young investors make is to cash in or borrow from retirement accounts for "emergencies"or in my case, to buy a motorcycle.

For most young people, starting an IRA or 410(k) isn't in the cards.   IRAs generally are not tax deductible for college students (consult your tax adviser - laws change!) and most college students are not employed, as I was, with a big company.   That doesn't mean you are without options.  Building up an after-tax savings account is a good start - to have that "rainy day" fund you can tap into, rather than use a credit card or cash in or borrow from your IRA or 401(k) later in life.

How to build up that savings?  The two mistakes I made were undersaving and oversaving.   Undersaving is to say not saving at all - just spending every penny and borrowing more.   When I decided to "save" I did the typical young person bonehead move of putting money into an investment without figuring out where in my budget the money was coming from.   By the end of the month, I was out of money and wondering what the hell happened.

I finally figured out that the smart move was to cut some small, unnecessary item from my budget - cable TV, designer coffees, and so forth - and put just a few dollars a day or per week into a basic savings account.  No, it won't grow very fast, but over a year or so you might have a thousand or two, and it will grow from there.   Being patient was the key - I wanted to see results right now!  And many people give up on saving or investing when the $100 they put in the bank doesn't magically turn into a million overnight.  You think I am being sarcastic - look at the savings rates of Americans.

Once you have some savings, you can invest.  But what to invest in?  At first, just building up a buffer of savings is important.  But later on, you can put money into mutual funds, bonds, or even stocks.   When you qualify to start an IRA, you'll have money to put into it.  The key is to diversify and to invest in fairly rational things.  Younger people can afford to take more risks, to be sure - but gambling is not "risk-taking" - it is just throwing money away.

Diversification bears special mention.  I was having dinner tonight with an old friend and he mentioned putting 1/3 of his retirement account into a "tech" stock back in the day.  It went from $10 a share to $55 a share.  "You then sold half of it, right?" I said.  "No, I rode it all the way down to $5 a share!"  The expression on his wife's face was, well, interesting.   Diversify into a number of things, and if something does make a lot of money, consider selling off part of it to lock in your gains.

The main thing is to establish financial discipline - something I was lacking well into my late 20's and even early 30's.   Today, I enter every expense in Quickbooks and monitor all of my accounts on a daily basis.  When I was 18, I never even balanced my checkbook and bounced checks all over the place.   Learning to keep track of money is important - as you start to realize how hard it is to accumulate, and it forces one to think twice about spending.

The big problem for me was the company I kept.  I hung out with people who drank too much, did lots of drugs, and squandered every last penny on dubious car modifications.   As a peer group, this was a bad influence on me morally, mentally, and financially.  In that group, the best thing you could have as a "bitchin' car" and they would go into hock to get one - working a job to have a car, so they could drive to work.   It was idiotic, and we were all in debt up to our eyeballs just so we could have bling today, instead of wealth tomorrow.

Debt was not a big problem for me - at least initially.  They didn't have credit cards for 18-year-olds in 1978, but by the 1980's (when I was still in college, at the age of 25) it started to be a "thing."  It is tempting, as a young person, to think you should get a "rewards" card and earn all that cash-back!  But the interest rates are murder, and if you miss even one payment, the rates can jack to 25% or even 30% - and you'll never pay it off.  Instead of building credit, you are ruining it.

Young people are the most likely to have emergency expenses with little or no savings to fall back on (which is why it is important to build up that after-tax savings!).   So they are very likely to fall down on a rewards card and end up in a credit card crises - intractable credit card debt, ruined credit rating, late payments, and endless debt that never seems to get paid off.  Most Americans do this at least once in their lives - if you can avoid this, you will avoid a lot of pain.

By the way, getting back to coveting, it may seem a lot of your peers have nicer stuff than you do.  Fancier cars, the latest electronics, the designer fashions, and so forth.  Some may come from money, true.  Others are merely borrowing huge sums and are in desperate credit card trouble.  One thing I have learned in life is that it is possible to put on a front of "pretend wealth" leveraged all with debt, for at least a few years, before it all comes crashing down.  In the long run, however, such folks often end up desperately poor later in life.  And it ain't pretty.

Today, I have a lot of after-tax savings, so I have a "rewards" card and I watch it like a loaded handgun and pay it off several times a month.  No playing the float!   But not long ago - when I started this blog, I had a low-interest card with a LOW LIMIT, because I was getting into credit card problems and it was biting me on the ass.  I would suggest this for anyone starting out or anyone who is having trouble with financial discipline as I was (and still struggle with).  And yes, I still keep a low interest rate credit card "just in case" I need to make a large purchase that I can't afford to pay off in a single month.   These rewards cards are great if you treat them like a loaded handgun and are careful.  They are deadly if you don't!

I would think that a low interest-rate card with a low limit is the best choice for anyone with little or no assets or no access to ready cash.  When you don't have a "rainy day fund" your credit card becomes that, and in that case, you want to have a low interest rate and a reasonable limit - so you can pay it off in short order, rather than spend years and year paying off a transmission repair, with ruined credit to show for it.

Of course, your friends will shout that down.  Get the highest limit possible!  It means you are successful!  Get all the rewards!  That's the "smart" way to do things!   Talk to them in 10 or 20 years and ask them how that all worked out.  70% of Americans carry a balance on their credit cards, and I think 100% do at one time in their lives.  A credit card is a debt instrument, first and foremost.   Treat it like unspent nuclear fuel rods.

Credit cards are very, very dangerous, and I have had friends in their 20's declare bankruptcy over credit card debt.  It is very, very sad!   Low interest rare, low limit.   Don't be fooled by the bank "congratulating" by raising your limit - they are setting a bear trap for you to step in.  If you can avoid the problems that I had with credit cards - the problems my friends had - and the problems most Americans have, you will come out way ahead.   And don't think it can't happen to you.   We all like to think we are made of kryptonite - we aren't.   Understanding your own weaknesses and planning for them is the smartest move possible.

Buying a brand-new car is another bone-head thing I did when I was like 25.   I thought it was a sign of my financial independence and fiscal responsibility (like credit cards!)   Then I got a few speeding tickets and my insurance cost more than the car payments.  Oh, well, at least I didn't lease it like a friend of mine did - who ended up paying three years on a lease, and then another four years on car payments!  And all that high-dollar insurance the whole time.  Ugh.

And it never ends, either.   We all make dumb mistakes, to be sure.  What separates successful people from unsuccessful people is that the successful people learn from their mistakes rather than repeat them over and over again.   I've tried to learn from my mistakes in the last decade, and that is the reason I started this blog.   I was making many of these mistakes up until a decade ago!

And I still make mistakes, but they are getting smaller and smaller.  I wake up in the morning and realize that maybe we could have split an entree at the restaurant last night and saved money and ate less.  Or maybe some electronic toy was a waste of money (I haven't done that in quite a while, thank God!).   That sort of thing.  The real boners?  I am making less and less of them - at least I like to think I am.  Maybe I am living in a fool's paradise.

That pretty much sums up all the dumb things I did when I was young.  Like I said, when I hear a young person thinking about how to get ahead financially, I think they are already way ahead of the game.  Because most young people don't think about finances, and when they do, they think idiotic things like "Maybe I should buy bitcoin with my credit card!" or "I could make money selling Amway" or whatever other scheme or scam is going on these days.

But then again, maybe what I am saying here - which is not advice - will fall on deaf ears.  Because I am not saying what to do, but only illustrating the bonehead things I did and my friends did.   And they are all the bonehead things an 18-year-old desperately wants to do.  The credit card company dangles out a 25% interest rate "rewards" card, and the car dealer dangles out a set of keys to a shiny new Camaro.   It is tempting, and the best thing to do is leave your pen at home - particulalry in an era where an 18-year-old can sign his life away before age 21.   But most Americans, they fall into these traps, and then spend the rest of their lives bitching about how awful they had it and how unfair it is that someone else has more money than them.

Just don't do what most Americans do.  I guess it is as simple as that.

I'm 18, and I don't know what I want... that describes me at that age!