Introduction to Investing and Economics

Of the first seven months of the year, only two dealt with money. In February we learned about the basics of personal finance and in May we dove into the intersection of money and happiness.

The rest of the year had been spent on topics like life planning, productivity and time management, health, the science of happiness, and the philosophy of happiness.

In August we made our triumphant return to money with an exploration of investing and economics.

You Need to Invest!

We opened August with a strong message: Investing is necessary.

Our parents’ retirement plan was based on having access to a pension, Social Security, and personal savings. Now, one of those three is gone completely and another is constantly being threatened. Personal savings and investing are your only solid option.

And while your response may be that you don’t need to save because you’ll just never retire, that’s not a great option either. Not because I’m against work, but because your retirement may not be by choice. Jobs are disappearing, wages are dropping, and automation and globalization are trying to replace you. The gig economy is looking to replace your full-time job with benefits with a part-time job without.

In short, working is getting harder and less rewarding.

So let’s get investing.

Hard Work Doesn’t Pay

If you’re not convinced, it’s worth revising our discussion on the decline of work.

If you want the stats, feel free to check out the original article. For this summary it is enough to know that the value of investments is going up, while the value of old-fashioned hard work is going down.

Workers are more productive than ever, but since the 1970s, companies have stopped rewarding this increased productivity. Instead, you’re working harder and harder and the investors in your company are getting richer, not you. If you want to benefit, you need to join the investor class rather than toiling with the worker class.

We should fix the economy so that workers get the benefit of their effort. But in the meantime, stop banking on your hard work and start putting more into investments

Disappearing Jobs

In addition to the value of work declining, the good jobs are disappearing.

Automation is already starting to kill some jobs and will speed up in the next couple decades.

Regardless of what this means for the long-term health of the economy, it will be a disaster for Millennials. We’re looking at a situation where huge numbers of us will need to start at the bottom of the ladder for a brand-new career in our 40s and 50s. If there are enough jobs around at all.

Even if there are still enough jobs to go around, the good, solid, middle class jobs are disappearing. This is not a prediction of what is to come. It is a fact about what is already happening.

The loss of unions is hurting workers as well as deregulation and globalization. These trends are already documented and show no signs of reversing.

The train is leaving the tracks and saving and investing is a way to prepare yourself to jump.

How to Invest

Once you’re convinced, it is time to learn how to start investing.

The first step is to determine what kind of account you’ll be using. Ultimately, you’ll (hopefully) be using more than one account but starting with one is a good way to avoid feeling overwhelmed.

The first choice for most people should be employer accounts. These are 401(k)s, 457(b)s, and 403(b)s. The reason you want to start here is that there are great tax benefits.

By working with your human resources department, you can make sure that a portion of every paycheck automatically goes into your account. You don’t have to take any other steps to make sure that you are consistently investing in the market. You don’t have to worry about buying low and selling high. You don’t have to worry about transaction fees and day trading and market timing. Just set it and forget it.

Once you’ve mastered your employer account (or if you don’t have access to one) it’s time to learn about all the other types of investing accounts that you could be using.

Where to Put Your Money

Once you’ve decided what account you’ll use, it’s time to decide what to invest your money in.

Here’s the important thing to remember: We’re bad at investing. Professionals who spend all day studying how to beat the market still fail 2/3 of the time.

And that’s just trying to beat the market for a year. Only 10% beat the market over a 15-year period.

And individual investors are even worse! So what should we take away from this?

  • Don’t time the market.
  • Don’t trade often.
  • Don’t try to beat the market

Instead, we can invest in low-cost index funds that are specifically designed to move in tandem with the market rather than trying to beat it.

Don’t Buy the Dip!

And when I say “Don’t time the market” I mean it. Don’t even buy the dips!

There’s a long-running debate in the personal finance community between dollar cost averaging and lump sum investing. Dollar cost averaging is when you invest the same amount consistently over a period of time. Lump sum investing is when you put one big bucket of cash into the market at once.

The numbers show that the best option is whichever method gets your money into the market the fastest. If that means dollar cost averaging directly from your paycheck, then do that. If it means throwing a whole windfall into the market at once, then do that.

What you shouldn’t do is set aside cash and wait until the market drops to invest it. It may feel like you’re successfully timing the market, but you’re by the numbers you’re probably just losing money.

Find More Cash

Maybe you want to invest, but just don’t have the money. In that case, it’s time to find more cash.

The key to building wealth is simple (although not necessarily easy): earn more, spend less, invest the difference. If you’re looking for more money to invest, you can work on earning more and spending less.

Earning more can be either active or passive.

Active income is basically trading your time and effort for money. This is the type of income you get from your day job.

The most fruitful option for increasing your active income is often to work on earning more from your day job. Negotiate a raise, get new certifications, network, study something new. Spend your time setting yourself up for either a promotion or a new job elsewhere.

You can also earn more money by putting in more time. Working overtime, picking up a side job, doing some gig economy work, and adding freelancing to your portfolio are all options here.

Passive income comes when you put in all of the time and effort up front and get the money for it later. This can be something like writing a book or recording music. These tend to be more speculative and would take longer to pocket the extra cash.

As for spending less, I am all about focusing on the big wins first. Couponing and deal hunting feels productive, but you’re going to save a lot more with far less effort by spending less on housing or transportation.

Other helpful ideas are avoiding lifestyle inflation and cutting spending that doesn’t make you happy.

If you get a raise, then invest most of it. You won’t miss the money because you didn’t ever really have it in your life.

Figure out what spending doesn’t make you happy. We replaced cable with Netflix and Hulu, saved $100/month with one phone call, and are just as happy. These are generally smaller wins than cutting your housing or transportation costs, but if your life is going to be just as good, why not pocket some extra cash?

Your House is Not an Investment!

We made it almost all the way through the month before touching on buying real estate. And there’s a reason for that: Your house is not an investment.

If you want to buy a house, then buy a house. There are plenty of good reasons. But don’t pretend that it is an investment. It’s a home.

As I was drafting my summary for this article it was quickly becoming as long as the original article. So here’s the super short version:

Home prices since 1890 have just slightly beaten inflation. Homes provide a better return than a bank account, but not much else. There are also all sorts of other reasons that a house is a horrible investment, and if you want to learn more about them you should check out the full article.

Preparing for Recession

After a contentious journey into the real estate debate, we wrapped the month by learning how to recession-proof ourselves.

Nobody can accurately predict when the next recession will happen. What we do know is that based on historical trends, we are overdue. To be on the safe side, we should prepare as soon as possible.

Here are some keys to that preparation:

Track your spending. Find places that you can cut without negatively impacting your happiness. Think through some more places that you could cut in the future in the event of a job loss. If you have a plan ahead of time you can control what gets cut first and maintain some sense of control over your financial life.

Build an emergency fund. If you lose your income unexpectedly, you’ll want to be able to keep paying your bills. This means you should have a pile of cash that you can draw from if your boss suddenly decides to stop paying you.

Have an income Plan B. That emergency fund isn’t going to last forever, and your job hunt could take a while in a recession. One way to take some of the burden off your emergency fund is to be ready to add a little bit of income from other sources. Even if side hustles and freelance work can’t replace your full salary, they could help your money last a bit longer while you look for a new full-time option.

Be ready to look for a job. The emergency fund and the income plan B are both designed to buy you more time while you look for a new job. Do yourself a favor and do what you can ahead of time to make your job hunt as short as possible. Keep your resume updated. Network regularly. Talk to other folks in your field. Make sure you have a good reputation.

Job loss is never fun but following these steps will make a transition to something new as painless as possible.

Join the Conversation!

And that was our trip through the world of investing and economics. What do you think? What did I miss? What are your reasons for investing? Let us know in the comments!

One thought on “Introduction to Investing and Economics”

  1. Interesting starter kit for anyone who’s interested in personal finance and hoping to jump into the FIRE trend. Having no assumptions in the stock market is probably the best advice here, Matt. Because I see a lot of people just putting all their money in there and waiting with bated breath. Does not work that way, imo too.

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