Throughout most of our lives, we go to work, money comes into our bank accounts, money goes out, and most of us never think about it too much. We are too busy living our lives to get too philosophical about money… but that is pretty much my job, so what follows is the basis of everything you need to know. These are the foundations of personal finance that everything else is built on, most of which is just noise. You don’t need to know about P/E ratios, discounted cash flow models, or any of that bullshit. These five things are so simple, they almost seem stupid.
1- The only purpose of money is to spend it or give it away
This seems pretty obvious, but any time I ask someone what is important to them about money, I get some pretty weird answers. They attach all sorts of value judgments to money, both positive and negative, but there is only two things you can do with it. Just generally being alive (and staying alive) costs money1, and hopefully you have some left over to do some fun stuff or give some away2 to people or causes you care about. I tell clients all the time I don’t care what they spend money on, as long as they are on track for their goals. Hell, I actively have to try to force some to spend more!
2- Any dollar you spend now can’t be spent later
Again, this is super obvious. But “I can always make more money” is a pretty common attitude. You can absolutely make more money, but you have to spend more time doing it, and you can’t make more time. We all have an extremely finite amount of time, and that invisible clock is slowly ticking down toward zero every second3. I am not even remotely anti-work, but there is a big difference between choosing to work and being forced to. Saving (and investing) ultimately gives you control over your time.
3- The purpose of investing is to spend more later
Duh. Every dollar you save and invest now will be multiple dollars later, and the earlier you start, the more those dollars multiply. If you (or your kids) start early, this game is much easier. Here is the opportunity cost of $100 at different time horizons, given an 8% return4–
- 10 years- $215
- 20 years- $466
- 30 years- $1006
- 40 years- $2172
- 50 years- $4690
In other words, by saving and investing now, you are paying your future self. By failing to do so, you are borrowing from your future self.
4- Match your assets to your liabilities (cash for short term, bonds for mid term, stocks for long term)
One of my most hated phrases in finance is “Risk Tolerance”. It references how an investor feels about risk, and may be wildly out of balance with their Risk Capacity, which measures how much risk an investor can take given the time horizon of their liabilities (future spending). If you are doing home renovations in 6 months, stocks are way too volatile; just keep that money in cash. If you are saving for a big family vacation in 3 years, cash will earn you nothing; use bonds5. For retirement expenses 10+ years out, you have plenty of time to weather the volatility of stocks to reap the returns.
5- Once your assets exceed your liabilities, you are financially free
If you do a good job of consistently saving and investing throughout your life, you will end up accumulating a good chunk of change. As part of our financial planning process, we can make some pretty good guesses about what your future spending (liabilities) will look like, and at some point, you will have enough assets to cover those liabilities. At that moment, you are in complete control of your time. You can flip off your boss and go play golf instead. You can spend all day arguing with people on social media and be a menace to society. You can volunteer at the local animal shelter and take naps with the animals, like Terry in the picture below. Or, if you actually enjoy working, you can continue to do so, knowing that you are absolutely free.
Kyle Thompson, MBA, CEPA
Founder/Lead Advisor
The content contained herein is intended as education and entertainment, and does not constitute investment, tax, or legal advice. Please consult the relevant advisor before making any decisions. Additionally, any opinions expressed here are solely those of the author, and do not represent the opinion of Leetown Advisors or its affiliates.
1 Unfortunately, dying costs money too!
2 Taxes are mandatory giving. This makes precisely zero people happy.
3 I apologize if I just triggered an existential crisis.
4 This is actually lower than the average of 11.5% for US stocks since 1950.
5 Preferably a bond ladder, so returns are more predictable.
