Last month I sent some books to a 24-year-old who had just started a new job and said she didn't know what to do about the 401(k). The books I sent were The Millionaire Next Door, The Millionaire Teacher, Your Money and Your Brain, A Random Walk Down Wall Street, How a Second Grader Beats Wall Street, and Predictably Irrational.
This is the letter that I sent to her with the books:
Dear Sarah:
As we briefly discussed I have sent you several books on saving and investing ordered from Amazon. This stuff is important to learn since what you do or don’t do now will dictate your lifestyle when you do retire. And while I know that right now retirement is so far over the hill that you find it hard to conceive, let alone see, trust me (I was once 24 years old) that day will eventually and inevitably come either voluntarily or involuntarily because of health issues. What the financial services industry wants is your money so that they can take as big a chunk of it for themselves as they can. They are running a business, and the sole purpose for the existence of a business is to make money. They don’t give a damn about how well funded your retirement is. Never forget that.
Fortunately this stuff is not rocket science despite what the financial services industry would have you believe. In fact it is so simple that a second grader can do it as the title of the book How a Second Grader Beats Wall Street implies. I have my own portfolio invested in just this manner and it is performing as advertised. I recommend that you first read either that book or The Millionaire Teacher first. Another point not emphasized strongly enough is that the 401(k) with company match at 5% of pay or so is a starting point and is not nearly enough to fund a retirement. To do that you will need to save 15% to 20% of your pay, right off the top. Take any employer match first – that’s free money and anyone is a fool to not accept the maximum offered. After that further investment goes into a Roth IRA or 401(k) up to the legal limit. After that the savings/investment goes into a taxable account. This is called “Paying yourself first”. If you believe that “Gee, I can’t afford that!” I will say this: You can’t afford not to. The retirement clock is ticking, right now, and that clock does not stop for anyone.
I spend about ten or fifteen minutes a year managing our investments. Once you learn how it really isn’t that hard. And again, what you do now in your 20’s will have a huge effect on how your life will be in your 60’s and beyond. Your future self will either pat you on your back or say “What an idiot I was!” You know what it should be.
The other books are about psychology and exploring why you do the things you do with money. I’ve always wondered why people do the weird things they do, and some of the weirdest are with money. The short answer is that human beings evolved to survive on the plains of Africa, not do long-term financing. The result is that while your gut instincts and emotions will tell you to do exactly the right thing to survive for the short term, in the long term, what your guts and emotions tell you to do is the worst possible thing to do with your money. That is very difficult to do and it does take a while to learn to do it. And that, dear Sarah, is the hardest part of saving and investing: ignoring your instincts and emotions. You have to learn to ignore the sinking feeling and near-panic when the stock market drops half its value (and sure as tomorrow’s sunrise, some day it will) and with it half the value of your retirement fund. That’s when investing and staying the course is the hardest.
During the last Great Recession in 2008 when so many people panicked and sold their investments one investment broker said the only people buying stocks were people in their 80’s. “They had seen this movie before and knew how it ended.” You will read that in one of the books, I forget which one.
A mantra we have learned the hard way is LBYM, or Live Below Your Means. Spend Less Than You Earn. Pay Yourself First. The thing about loans is twofold. One is that in taking one out your future options and opportunities are limited by the amount of the loan and the interest you are then committed to paying on it. The other is that you are then funding someone else’s retirement and not yours. Not all loans are bad of course. You do need a car to get to work in and it does not have to be a new one. You also have to have a roof over your head and depending on circumstances buying on credit may be wise. But do make sure that whatever you buy on credit will still be around when the loan is paid off. You have by now been in the position of “paying for a dead horse”. Not fun, is it? Remember how that felt too.
One other thing, and then this already-too-long letter will end. Why am I doing this? Joan and I do care deeply about what happens to you. No child should have to endure what you and your sister did growing up. What we admire about you is what and who you are in spite of it. So many others turn miserable and take to drugs and alcohol and hate the world because of their circumstances and spend their lives as miserable people.
But not you. You got your act together, went to school (the hard way, paying for it yourself). Not many people have the self-discipline to do that. I also think that you are one of the few people who will actually do two things; read those books and then act on what you learn from them. While investing doesn’t take high intelligence or math skills (not to imply that you don’t have those!) I believe that what you do have that so few others do is the maturity to defer immediate gratification for long term gain. That’s another difficult part about saving and investing.
Please do not feel overwhelmed at the volume of material. It digests easily, but slowly, so take your time going through them, and I realize that you do have a life. There is no expectation that you will read them this month or even in the remainder of this year and there will be no quizzes. But understand clearly that what you do or don’t do with your money now will have a multiplying effect on your standard of living in the last half or third of your life.
If you can find a job that has a pension plan remember that every dollar of pension income is one less that has to be generated by investment income. But it is always better to be in a career that you enjoy. Too many people work at well-paying jobs they hate and get sick or die early because of the stress. But as retired employees of Detroit are learning to their dismay that promised pension may not materialize so it is best not to rely too heavily on promises. No one has a clue where the economy is going to be in 5 years, let alone 30. So while an employer that is financially sound now, as Detroit was in the 1960’s ‘70’s and ‘80’s, may not be when you retire. Plan on that scenario as well.
The best to you always,
Walt 34
