Avoid Advice That Will Waste Your Time and Money

Personally, I have read hundreds, if not thousands, of articles and books, and watched countless hours of video (besides sitting in classrooms) about personal finance, investing and economics. There are certain principles that remain timeless; I'll focus on personal finance here, but there are certain principles for investing and economics that can be consolidated in just a few ideas.

But first let's mention some things to avoid, in my opinion. In most cases, the message will be the same, and your time is valuable, so I've already wasted my time for you; no need to waste yours.

You'll see headlines and memes like this:

   1. How to Retire with $2.6 million When You Only Have $1,000 to Start
   2. Turn $535 into a Million
   3. 9 Simple Steps to Become A Millionaire by Investing Just $200 a Month
   4. How to Turn $100 into $500,000 in the Stock Market

And then they get really inventive:

   5. $300 - $500 Everyday with Just 5 Minutes of Work
   6. Make $600 a Month Dropshiping [sic]
   7. How to Make Money in Just Minutes a Day
   8. $80,000 Every Single Month

Number 1 wants you to start when you're a teenager. And maybe not quite $2.6 million. How about $1 million? Talk about misleading headlines. The object here is to get you to the blog site so you can buy things. Really, that's how you're going to be a millionaire?

Number 2 above requires you to save $535 per month for 30 years with an average return of 9.1% a year. Your savings and/or investment will be worth $1,007,667. The challenge here is to have the $535 per month for 30 years.

Number 3 has a 40-year time span with a 10 percent annual rate of return. The only problem with these assumed rates of return is they are not historically realistic. Over the last 30 years, the average investor had a return of 3.66% a year and the SP500 returned 6.7%.  According to Vanguard, the expected return over the next 10 years is 6.6%.

So let's take #4 above, and see if we can turn $100 a month into $500,000, using a different rates of return. If we use the expected return rate of 6.6%, then you'll end up with $113, 412 after 30 years. To get to $500,000, we need to earn 13.6% a year over 30 years. Not impossible, but probably unlikely for most investors.

However, Schwab's ETF portfolio wizard claims to be able to build a moderate portfolio with an annual rate of return of 9% (also over 40 years). So that may not be impossible. This type of portfolio considers growth, with relative stability. It consists of 35% large cap, 10% small cap, 15% international, 35% fixed income and 5% cash investments (money market). So let's use this to see how you could become a millionaire by the time you reach 65. (You can use the savings calculator at NerdWallet to compute your own scenarios very easily.)

Here's the plan. You're 30, and you have no savings. But decide you can do $100 per month right now. You have 35 years until you retire. So you open an IRA so your interest and earnings will grow tax free.  You save $100 a month for the first five years, $200 for the next five years, $300 for the next five, and so forth, until you're saving $700 a month for the last five years.

Year 5: $7,756
Year 10: $27,343
Year 15: $65,611
Year 20: $133,128
Year 25: $246,443
Year 30: $431,466
Year 35: $728,766

Better than what you started with, but you see the challenge. You have to save your ass off and make the best return on investment you can. Notice how compound interest accelerates during the later years.

The better plan -- and the best I can find -- is to structure your budget to save 10% of your earnings. It should be the top line of your budget, not the bottom. Pay yourself first, then spend the rest. Based on figures from CNBC and the U.S. Bureau of Labor Statistics, here's average monthly earnings for different age groups:

25 to 34: $3,627
35 to 44: $4,428
45 to 54: $4,442
55 to 64: $4,762

So we begin with monthly savings of $363 and increase that to $443, then $444 and finally $476. This will be in 10-year increments, instead of the 5-year in our first example.

Year 10: $71,022
Year 20: $258,543
Year 30: $720,413
Year 35: $1,164,165

So we've reached a million dollars plus. What's noticeable about this example is we started with a higher savings rate early on, but our savings rate in later years was not as high as required in our first example. This is why the 10 percent rule works best for most people. If you start later than when you're 30, you'll have to increase the rate to 15% or higher.

You can use the compound interest calculator to explore different scenarios on your own.

Going back to our list above, I won't waste your time on 5 through 8. They're about the same. You're not going to be a millionaire by wasting time on these types of web sites. You can't realistically make $500 a day (every single freaking day) with 5 minutes of work. But hey! Buy my program for just $39.95 and I'll give you the secret to my success. That's how this guy gets rich. But not you.

Besides, if your goal is to be just a millionaire, ask yourself why? In my opinion, your goal should be financial security, by not living paycheck to paycheck, being out of debt, with the freedom to have flexibility in your career and life. If that's a million bucks for you, fine; but it doesn't have to be. You decide. Honestly, I don't have a million in assets, yet I feel free to do anything I want, except maybe lease a Gulfstream 550 when I want to travel. But I can afford first class on American, so who cares. Road trips are fun anyway. And I'm retired.

I've found that most successful people are willing to share their "secrets" for free.  There is one thing everyone will tell you: Get serious about a budget. After you've managed that: Get out of debt. The third leg is have an emergency fund. This last will kill your finances more than any other problem you might run into. Do not use credit as an emergency fund.

These are all possible, but you have to change your behavior. As Dave Ramsey says, and I believe him to be correct, is that financial security is 20 percent knowledge and 80 percent behavior.

But don't take my word for it. Start with studying successful people. Here's some to get you started.

Jim Rohn was invaluable to me. I especially like his statement that you need a personal philosophy.
Your personal philosophy is the greatest determining factor in how your life works out. Success is neither magical nor mysterious. Success is the natural consequence of consistently applying basic fundamentals.
Dave Ramsey, of course, has a solid program for getting out of debt. I used it and it worked. No short cuts though;  you have to do the work.

Phil Town has a solid approach to investing in individual companies, based on the work of Phil Graham and Warren Buffett. Most of his information is free, either from his web site,  or his YouTube videos.

Reading is fundamental. If you want to succeed at anything, develop a habit of reading. You can get started with the suggesting on this blog: Must Reads and Advanced Reads.

Finally, make this journey of discovery that will last your lifetime. I believe firmly that the more you do it and apply it, the more fun you'll have with it.

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