Co-authored with Treading Softly.
You don’t have to go too far, either by driving, walking, or logging in online, before running into someone who has an opinion of what you should do with your money.
It should come as no surprise that there is a vast array of opinions, as through all of human history, we have never had a full agreement on what someone should do with their money. Secular viewpoints, religious positions, or even national agendas, all impact how we relate to the funds that we keep. Some people believe that money is simply the root of all evil and that we should have nothing to do with it and swear to a life of poverty; others seek money without limits and are willing to destroy all relationships to earn one more dollar.
Most of us fall somewhere in between. Surprisingly, if you look around and you offer people large enough sums of money, they’re willing to do very immoral or inappropriate acts, simply to try and get that money because, as one person famously said, “everybody has a price.” Unfortunately, financial education, financial management, and the ability to understand what really generates wealth seem to be at an all-time low in our current generation. This isn’t the young’uns who are just starting to work and earning money for the first time; this seems to be a generational problem over the last 3 to 4 generations. Americans claim that they want to save for retirement but overwhelmingly do not do so. The average retirement account balance when someone leaves the workforce is barely $100,000 – over ten times less than what was recommended by most financial analysts a decade ago.
As a professional income investor, it breaks my heart to see so many have a bad relationship with their financial position because of a lack of knowledge, willful blindness, or ignorance. So today, I want to be less of a financial analyst and more of a counselor. I want to sit down and talk about some aspects of your relationship with money that you need to fix today if you want to see financial success in the future. For some of you, this may be reminders and things that you need to get into gear to be successful. For others, some of this may be brand-new information that you can start applying today. There’s also going to be a third group who are extremely successful because they already make this applicable in their lives. You probably know someone who could benefit from this, and I would be honored and humbled if you shared it with them.
Let’s dive in!
Get on Top and Stay Accountable
If you have ever read any of my writing before, you know that I’m a strong believer that you should not make your money be your master. It’s been said that “money is a terrible master, but an excellent servant.” The issue is that so many of us have no clue what our money is doing. Having worked in banking for decades, I can tell you that the number one expense people have in their bank account is food. Two-thirds of all transactions that people make, on average, are food-related. I almost guarantee you that if you go to your credit card statements or your bank account and start scrolling through all the transactions, you will be either shocked, embarrassed, or surprised at how much and how frequently you spend on food. It makes sense though, and it’s a simple basic need. We all need to eat no matter how rich or how poor you are – food is a necessity.
The thing is, when it comes to your financial situation, if you have no clue what’s going on, it’s like owning goats and leaving the pen open – they’re just going to go wherever they want, and you’ll have no clue where to find them. The very first step to being financially successful is getting on top of your finances. That means taking some time to sit down and see where you’re spending every dollar. Once you have a handle on where things are going, you can learn how to adjust or fine-tune it. This leads to the second half – you need to be accountable. Make a budget, try to stick to it, and do a monthly check-in to see how you’ve done. Dave Ramsey made very popular the envelope method where you have your budget and have separate envelopes that you put cash into. When you want to spend money, you pull it out of the specific envelope for that budget category, and when the money is gone, it’s gone. While that’s not applicable or able to be used by most of us, it helps drill home the point that you need to stay on top of what’s going on with your finances, and you need to stay accountable.
It’s those little unexpected spending habits that we have that will rapidly turn you from someone who’s financially successful to someone who is financially struggling. It is the literal picture of death by a 1,000 cuts. I can almost guarantee you that if you have no idea what’s going on with your finances, you’ll never be a successful investor because you won’t have money to invest. That means that your retirement will suffer.
Take some time to sit down and figure out what is going on with your financial situation and make a plan to stay on top of it on a regular basis.
Debt Reduction or Investing?
Another big question that people have is whether they should pay off their debt or start saving for retirement. That’s a big question because both have long-term consequences. Some people will inappropriately broadly assume that investing means investing in themselves and buying themselves personal luxuries that they typically don’t need. While I’m all for giving yourself a reward for a job well done, it needs to be constrained by your financial situation as well. We live in an era of exceptionally-high interest rates, and I would not expect interest rates to fall to the previous 0% level for quite some time. The question that needs to be asked then is, “can your return on investment beat the interest rate on your debt?” Your answer is most likely “no,” given that high-interest rate debt is absurdly high, with credit cards sometimes having interest rates as high as 30%. Then you need to be paying down your debt, especially your floating rate, high-interest debt.
There are few investments in the entire world that you can guarantee a 30% return from immediately, so I will once again join a chorus of people who will tell you to focus on paying down your highest interest-rate debt first before you start saving for your retirement. However, if you’ve got a mortgage that’s at a 3% rate and you’re questioning whether you should pay off your mortgage or invest in the market, for many, mathematically, it makes more sense to invest in the market simply because the market has averaged a 7-9% return over its entire lifetime which means that it can reward you much more than your mortgage costs. This doesn’t include the mental aspect that many include of having their home fully paid off, which I totally respect, and sometimes mathematically, it means that you may forego better returns for that mental comfort.
It will be significantly easier to pay down your debt if you know what your money is doing, which is why the first recommendation or step that we gave you was to get accountable and stay accountable. Because then, you will be aware of any excess that would allow you to make extra payments on that debt. And as debt is paid away, you’ll have more excess money to put on against other debts and get that ball rolling. That leads us to the final recommendation we want to talk about today.
What’s your Portfolio Doing for You?
I’ve always enjoyed it when I hear financial conversations going on in public. So many will gripe or complain about their financial advisor or how their 401k is performing, and yet they don’t really know what their portfolio is doing. I really love when people save in their 401k or their IRAs and they sock money away for the future. The issue becomes the same issue that we dealt with above – if you don’t know what your money’s doing for you, then you’ll have no way to know how you’re doing.
If I ask you the question, “what is your portfolio doing for you?” and you’re not able to answer it in one to two sentences, then you need to sit down and evaluate your portfolio again. Look at every single holding and rationally understand why it is there. This means for some of you that you may have some trimming to do – removal of useless parasite holdings that are just simply there blocking you from unlocking your portfolio’s true potential. For others, you may have a major overhaul. You may be holding a bunch of holdings that somebody told you were great to hold that you have no clue otherwise what you’re doing with it – it’s just there taking up time.
While money makes a great servant, it also loves to be lazy, but mainly because its master is lazy. Money sitting in a savings account doing nothing is idle money. Money savings in your retirement account doing nothing is idle money that should be put to work for decades to unlock more potential from your retirement.
If you would ask me, “what is your portfolio doing for you?” I would tell you this: I would say that my portfolio is generating the income that I need to retire successfully. My portfolio pays for my retirement and all of my expenses in retirement. If you ask me how it does that, I would love to explain to you the Income Method. In short, we are income investors who look for opportunities in the market to earn outsized income as returns from the market. These holdings that we buy pay us strong dividends, month after month, quarter after quarter, and that money pours into my investment account. I can use that money to buy more shares, I can use it to buy lunch, and I can use it to travel.
If your portfolio simply rises or falls in value based on the winds of sentiment within the market and does nothing else for you, then you’re standing on a piece of wood drifting in the ocean. That piece of wood isn’t taking you anywhere, but in particular, you have got to hang on when the winds blow because a wave might tip it over. A bunch of random strands of wood floating in the ocean does not make a boat. It has the potential to be a boat, but it is not a boat. This is why I believe so strongly in my unique Income Method because it has the ability to take all of your random strands of wood and get them organized into a wonderful ship that you can bravely sail across the ocean of the market, rewarding you all while not having to constantly be adjusted – that makes for one beautiful retirement.
So once you are financially accountable and you know what your money is doing, I recommend that you get your debt paid off – get rid of that high-interest-rate debt. Your next step is to invest in the market with a purpose. Don’t blindly buy different holdings; know why you have them and own them. If you choose to be a growth investor, know why you’re buying. If you choose to be an income investor like us – outstanding! You know why you’re buying because you want to buy for income, and you make sure you buy steady income providers.
I want every single one of you to be the most successful you can be and achieve the financial security that so many long for – you can do it!
That’s the beauty of my Income Method. That’s the beauty of income investing.
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