What the what? $149,816? I could, like, pay Taylor Swift and Katy Perry to have a threesome with me for that much money. I could travel to Antarctica, capture a penguin, and then eat it when it inevitably dies. (I’m assuming it tastes like chicken) I could pay someone to do my bidding for five whole years, assuming I could find somebody for $30,000 per year. I could afford to give 30 women breast implants, with the caveat that they’d let me squeeze them whenever I wanted in exchange for free enhancements.
In short, I would have a lot of fun with $150,000 if I wasn’t such a naturally cheap bastard.
But still, who couldn’t use an extra $149,816? Everyone, right? And just how are you supposed to get it? It’s actually really simple. Don’t have an emergency fund.
At this point, I think I’ve crapped on emergency funds more than I’ve crapped on The Simple Dollar. I’ve said before that you shouldn’t have more than 5% of your net worth as cash, mostly because having $10,000 just sitting around as an extra insurance policy makes no sense. I’ve always said that you should invest it in bonds, and make it the lowest risk portion of your portfolio. Have available credit just in case it hits the fan, and draw on it if you ever need cash. Then you can sell your bonds at your leisure, and our little problem is solved.
A few of you disagreed with my hypothesis, pointing out that available credit lines will go away quickly if you lose your job. There are a couple retorts to that. First, how would your credit card company know unless you told them? I don’t think credit card companies get informed when you get whacked. As long as you keep paying, they’re cool.
And second, it’s not like you won’t have any money. Remember, the second part of my plan, which is to sell your bonds when needed. Unlike with equities, bonds tend to have stable prices. Even if you get laid off during a stock market slump, bonds should still perform relatively well.
Let’s crunch some integers, math bitches!
Let’s assume that you get some sort of return on your emergency fund, but it’s not much. These days high interest savings accounts yield around 1%, but rates are lower than your great aunt’s sagging bosom. For our example, we’ll assume that you’ll be able to average a 2% return on your emergency cash.
Meanwhile, over the last 50 years, U.S. Treasury debt has returned 7.24%. Because I’m good at math, I know that 7.24 > 2. Assuming you do this for 40 years as an adult, just how big is the difference between the two types of emergency funds? I ran the math, and the difference is…
Wait. You already know the answer, cause some moron put it in the title already.
If you have $10,000 in an emergency fund earning 2% over 40 years, it’ll grow to $22,167.
If you have $10,000 in Treasury debt and it returns 7.24% over 40 years, it’ll grow to $171,983.
By leaving your emergency fund in ultra-safe investments, you’re forfeiting $150,000 over your working career. That’s compound interest working against you, and last I checked, that’s bad.
It gets even worse if you have credit card debt. How many times have you heard
experts personal finance dumbasses tell people in credit card debt to have a $1000 emergency fund? That advice is dumber than trying to seduce the ugly girl from Two Broke Girls. (It’s a trick. They’re both ugly.)(Although, upon further thought, maybe that wouldn’t be so dumb, since they’d probably be likely to please.)
If you’re sitting on credit card interest of 18%, paying it off is the best financial move you can make. I would sell all of you into slavery to our secret alien overlords if it would guarantee me an 18% return on my money. If you have a spare thousand dollars and credit card debt, YOU SHOULD PAY THE F’IN CREDIT CARD DEBT. God, how bad are you people at math?
And here’s the beauty of it. If on the off chance that you do have a legitimate emergency that would cost $1000 to fix, you have a credit card that has $1000 worth of credit available, since you just got finished paying the damn thing down. You could just charge the thing back up again, and be back in the same spot you were in before, except you’d likely have saved a few months interest. Six months worth of interest on a $5,000 credit card debt is enough to buy a lot of chips, which I assume you eat exclusively because of me.
Emergency funds are for personal finance amateurs. They’re just additional insurance. But as you can see, they’re costly insurance. If we’re all gonna get rich, we need capital working for us, not sitting in a bank somewhere for an unlikely emergency.
Sometimes people (usually women, let’s face it) like to think about how their lives would have been different if they had made some different decisions. What would have happened if they’d pursued that relationship? How different would life have become if they’d taken something different in college? We all know that seemingly small decisions can have large impacts, thanks to luck and all that junk.
Although I’m no woman, (checks pants to confirm) I’d like to take you back to the year 2004 and the story about my series of interviews with one of Canada’s largest money managers, Investor’s Group. I promise, the story has a point. It does not, however, contain any gratuitous nudity. The internet is filled with porn, go nuts you horndog.
I was 21 years old, working in a grocery store. I was also a business channel addict. When I wasn’t working, I was watching and learning everything I could about the markets. I was also starting to dabble in buying stocks, basically doing a less refined version of the contrarian investing that I do now. I was single, naturally, because I’m always single. Watching BNN for 5 hours a day probably had something to do with it, but I digress.
One day, I noticed an ad in the paper. Investor’s Group was looking to add a second rep to my town. As you can probably tell from my BNN addiction, I desperately wanted into the business. Naturally, I applied, and got a call back for an interview. I’m sure I celebrated by dancing like some sort of white guy with no rhythm.
Aside: Go check out that time I was “recruited” by World Financial Group.
Before we continue, a little background for those of you unfamiliar with Investor’s Group. They’re a wealth management company with many billions under management. Reps have their own office space, supplied by the company, and they’re responsible for building up their business. The company offers mutual funds with some of the highest expense fees in Canada, they also offer life insurance products and some (at least last I checked) really horrible mortgage products. Like any financial company, they want all your money. Back to the story.
I go to the first interview and it’s pretty uneventful. The guy interviewing me is nice and we’re joking and laughing a bit. I was there for all of about 15 minutes. I’m assuming the first interview is a way to weed out all the crap, people who would have no chance of selling a thirsty traveler a Coke.
I go to the next interview, like the first it’s conducted in the local rep’s office. This time I’m armed with some questions. Just how much is my base pay? (bupkis) Where would be my territory? (Half my town, half a neighboring town, meaning 3-5 hours of travel per week) Am I forced to only sell the company’s funds? (No, but selling in-house funds paid a much nicer commission)
The guy conducting the interview had definitely drank the company’s Kool-Aid. Yes, he explained, the fees on their mutual funds were much higher than comparable ETFs, but that was because Investor’s Group reps did such a good job educating investors. The difference in fees was more than made up with the terrific service.
In my head, I’m disagreeing with every word he said. Fees kill the average investor’s return, anyone with a grade 6 understanding of math can figure this out. The whole reason for the financial plan wasn’t to educate investors, it was to identify areas where a rep could sell other financial products to someone in need.
As we concluded the interview, I was given a homework assignment for the week until my final interview with buddy’s boss. I was supposed to talk to 50 people and ask them if they’d be willing to commit to doing business with me as an Investor’s Group rep within the next 6 months, and to ask specifically how much money they’d be willing to invest with me.
I was flabbergasted. Firstly, I was trying to keep this whole interview process as quiet as possible, since I didn’t want my employer to find out about it. And secondly, why should I go and do all this work when I was guaranteed nothing? I wasn’t looking forward to doing this but, undaunted, I started to call people.
I got about 8 callers in and promptly declared the whole operation stupid. So I faked it. I made pretend notes for 50 actual people I knew. Armed with my pretend prospective customers, I went up for my final interview.
As soon as I walked into the guy’s office, I knew this wasn’t going to go well. He was the stereotypical finance type, talking brash to his secretary, wearing an expensive suit, and let me to an office with autographed hockey memorabilia all over the place. He begins the interview.
“Why aren’t you wearing a suit?”
I look down at my dress shirt (no tie) and dress pants. I fire back.
“Because you don’t need a suit to sell mutual funds.”
He looks a little surprised, and then proceeds to lecture me for 5 minutes about the importance of impressing your client with your clothes. After he’s finished, he asks where I’d rank my financial knowledge on a scale of 1-10.
I think about it for a minute and say I figure I’m about a 7.
“No you’re not.”
“Oh really. How would you know?”
“Because you’ve never worked in the industry.”
I frown, almost shocked at the lack of logic. He continues.
“What kind of car do you drive?”
“I don’t have a car.”
“What? Why not?”
“Because I’d rather invest the money instead.”
“How do you expect to work for us if you don’t have a car?”
“I have the cash to buy one.”
He looked at the notes I had made about my imaginary prospects.
“How come you didn’t ask them specifically how much they’d invest with you?”
“Because I thought it would annoy them.”
We wrapped up the interview shortly after that. It was pretty obvious I wasn’t going to get that job. I later met the girl who did. She was not unattractive.
Anyway, what’s the lesson here? There’s 2.
1. Investor’s Group sucks. Although I’m a little conflicted because I bought some of their stock back in 2006
and still own it. (EDIT: That stock was sold in 2014) Still, Investor’s Group sucks. Balls.
2. I am much more comfortable being a blue collar guy. It would take me a few more years to learn this lesson after a failed attempt at being a mortgage broker starting in 2007, but I’ve learned it now. That’s the important part, right?
You hit back like 5 minutes ago? Yeah, I don’t blame you.
If you’ve been paying attention, I’m kind of anti-college around here. I believe that college should be path to get to a specific career. If you want to be a nurse, or a teacher, or an engineer, or a crap-ton of other things, then your path will need to go through a college. If you go to college just to read up on interesting things, that’s probably not the best use of your capital. Going to college to learn specific skills is (usually) a terrific investment. Going to college to get a degree in Women’s Studies isn’t going to get you much more than a job at Starbucks, which I’m pretty sure even you could get without going to college.
So you’re 18, and you haven’t a clue about what you want to do with the rest of your life, like a lot of 18 year old kids. You’ve heard that people who go to college get paid more than their
dumbass non-educated brethren, and you want some of that scratch. You can buy all sorts of stuff with extra money, even love. (although only temporarily) But what to do? Hopefully, you have some awesome relative who will forward you this post when you’re about 17.5. Maybe that awesome relative will also buy you booze.
The gist of the plan is simple – you take the capital you would have invested in your college education and plow it into investments. After 4 years your investment is hopefully churning out some serious passive income. If you reinvest those distributions, you can really kick some ass after a few years. Here’s how you do it.
You’d be living like some sort of cheap-ass in college anyway, so step 1 in my plan is to live as cheaply as possible.
Ideally, you’d take up residence in your parents’ basement, since they’re going to be nice and charge you sweet bugger all for rent. Thank them by cutting the lawn once in a while, you slacker. If your Mom makes you dinner, at least pretend it tastes good. You’re going to want to load up on the freebies, since you’re going to want every spare penny.
If you parents are bastards and kick you out of the house once you hit 18, it’s time to hit up Craigslist to find the cheapest place to live you can find. Unless you live somewhere ridiculously expensive, finding a bedroom for less than $500 a month is achievable. While you’re at it, find the cheapest transportation you can and try to avoid all the expenses that come with being 18 years old.
If you do all these things and work hard, saving $15,000 per year is an obtainable goal. Now, what to invest it in?
What To Invest It In?
I just asked that. Who writes this crap?
There are two routes you can take. Since we’re looking for perpetual income, we want to either invest in debt (or highly secure stocks that almost act like bonds) or real estate.
I think real estate is the ideal path for this strategy, providing you don’t live in the parts of Canada that have crazy expensive real estate prices. If you buy a rental property (or you mix up the investment in a few REITs) you’re looking for a 10% return on the total investment after expenses.
A real life example. Say you buy a $40,000 rental property that rents for $500 per month. There are $2,000 per year in expected expenses, mostly bribes to the mob for not burying squealers in your backyard. In the U.S., these types of properties are common. In Canada they exist, but not in the big markets.
If you buy your first rental property when you’ve saved up $10,000, that leaves you with a $30,000 mortgage, assuming my 5th grade math skills aren’t failing me. At the end of year one, your mortgage can be down to $25,000 without spending a dime of rent. After putting your $15k towards the mortgage during year 2, you’re mortgage is down to $10,000, and you’re on pace to own a rental house outright by the time you’re legally able to gamble in Vegas.
If you do it again at the beginning of the 4th year, you’ve got an extra $750 per month you can add to paying down the mortgage on a second property. If you continue to save $15,000 per year and add $8,000 per year of rent to the mortgage, it’ll take just over a year to pay off that second house.
By the time you hit 23, you can own two rental properties that should spin off $750 per month after expenses. Not bad for some moron who didn’t go to college.
If owning rental houses doesn’t get you aroused in the pants, you can basically do the same thing by buying conservative stocks or somewhat higher risk bonds that will get you to that magical 10% return.
These days, getting a 10% return isn’t easy, since it seems like low interest rates are here to stay, at least for a little while. You’ll certainly have to take your time to scour the markets for investments with a relatively safe 10% return, but they exist.
You guys know I love the sugar business. I’ve held Roger’s Sugar since about 2005, and that bad boy has given me a steady 10% return without anything close to a hiccup. I also hold the Dreyfus High Yield Bond Fund, which has consistently given me a 10% return since 2007. If you diversify your holdings a bit and keep an eye on the underlying earnings, maintaining that cash flow is very possible.
After year one, your $15,000 initial investment will be poised to return $1,500 per year, every year, plus it has the potential for capital gains. If you reinvest those dividends, you’re looking at $6500 per year in dividends by the time you’re 22 years old. If you want to supercharge these returns even more, use leverage. That adds risk though, so be careful. Do whatever the financial equivalent of putting on a condom is.
Yeah, It’s Hard. Stop Whining.
I’ll admit, most 18 year old kids don’t have the maturity to pull this off. Financially, this plan isn’t really that hard to pull off, it just takes commitment. It isn’t really much harder than going through college. Saving money can be pretty easy when you still live at home with few expenses. Instead of pissing away that money, maybe it’s time to encourage young people to get a head start investing. It’s better than spending it on beer, anyway.