This article is in an updated version here
I decided to make a comment on an important area: money. (After all, how can you enjoy the beautiful things in life if you are strapped down?) What I say is very simple, and very basic. But I wish somebody had told it to me many years ago. In five years I have gone from having a crippling debt to having savings that far exceed what I once had in debt. (I got the following letter about the article below: "As a professional investment advisor who has been in the business for 35 years, I can tell you that the financial advice you provided in your newsletter today is the best summary of those truths that I have seen. You were right on target with each point!" - David R.)
The Trick To Money Is Having Some
By Eolake Stobblehouse
(Apologies to Stuart Wilde for ripping off the title of his wonderful book.)
You know, it makes sense that if you should take advice about money from somebody, you should take it from somebody who: a) is doing well, and b) is not gaining anything from giving you advice. For instance me. Not a bank "advisor" (read salesman) who is on office wages and is not allowed to recommend anything but the bank's own services, no matter how overpriced. (Ever wonder why banks own the best buildings on any street? Always the corner.)
So if you agree, listen up. I have spent some time in the past couple of years reading up on various aspects of money, and I feel a lot better about it. And in the end I have discovered that 1: the basics are really simple, and 2: most people don't know them. (I am indignant that school taught me differential math, but not how to wash a shirt, how to get along with people, or how to manage money...)
Don't take my word for it, there is a recommended book list below. But here are some of the basics as I see them right now:
1: Live below your means.
Obvious? Maybe, but you have to do it.
Don't take credit. If you don't have the money you can't afford it yet.
2: Save 10% of your income.
Set this aside *before* you use money on anything else. You'll find you can live on the rest. And if you earn good money, save 20% or 30% instead.
3: Don't use money on anything you don't really need, or which does not give big returns either financially or spiritually.
This means for example that significant alcohol or tobacco consumption is a dead loss. Or things you buy just for status. Remember, wealth is not defined as the size of your car, but as how long you could live without income if you had to, at your current life style. (Oh, and your house is not an asset, it is a liability.)
4: Earn your money on something you love.
Your love and interest are the strongest forces you have.
5: Prioritize your time.
Example: get rid of the TV. (You'll feel better too.)
6: The money you don't need right now, put in the best savings account you can find.
Some of the best are online, not in your local bank.
7: The money you won't need for many years, put in Index Funds. (See update below)
Many independent studies show that index funds (due in part to low charges/fees) do significantly better than both bonds and savings accounts and most mutual funds, over any long period of time you want to choose in history. Real estate can do well, but might not, and takes a lot more attention.
8: Occasionally, give something back to the world.
We don't live in a vacuum.
9: Occasionally, invest in something fun.
One can go overboard with frugality: why die with millions in the bank, a frown, and an ulcer?
The first goal (for many) is to be debt-free.
The second goal is to have reserves for one year of your current life-style without income. (Known as f*ck-U money, because of what you can say to an abusive boss.)
The third goal is the point where the returns from your investments are bigger than your expenses. At that point you will never again have to work with anything that does not interest you.
I have now rounded off a couple of years of studying personal economy, how to get money and how to handle them. I was occasionally afraid of becoming a money-motivated person, but the study was necessary for the simple reason that they don't teach these essential subjects in school. (I am sure that if teachers did teach kids to save up, the teachers would be shot on sight, because the big financial institutions (as well as the short term economic health of the system) depends on spending and an indebted population.)
One thing I have learned is that beyond the basics outlined above (and even those you can find plenty of controversy about), nobody agrees on anything. Just when I thought I had something pinned down, in the next book I read they would say the opposite. What does this mean? It means that you are on your own, buddy. You have to study and decide for yourself what is true.
Furthermore, if you hope to do really well with money, you have to keep at it. You have to know a lot, and you have to know what is going on all the time. Just one example: it has become clear to me that while one might do well investing in individual stocks, it takes a hell of a lot of knowledge and work to do so. And even the experts regularly make huge mistakes. (70% of managed mutual funds do worse than the overall market!) (For the investors that is. The managers have their big fees.)
Honestly, I had hoped to get to a point where I could do well investing without a lot of continued study and worry. But I have not found that point, and I don't think I will. And since 1) I don't have nerves of steel and 2) I really am not very interested in money, I have decided it is not really worth it for me.
The attention I have to put on it has to come from somewhere. And I would rather put that attention on where I like to have it: on production, and on art and philosophy. I suspect even economically that will pay off better for me, not to mention spiritually and emotionally.
Even the best solution I have found in investing, Index Funds, would take my attention. Because when the market as a whole goes down, I would lose money. And while historically it has paid off on an average, there has been periodes where it took many, many years for the money to even come out even. (The 1930s and the 1970s.) And it is just not worth it for me. So I have pulled out and just gone to the best savings account I could find. (And it pays to shop around.) (It should be noted that it appears that such accounts are both more profitable and more trustworthy at the moment here in the UK than they are many other places, like the US. Also I will be looking into high-quality bonds and gilts.)
Even this took a little bit of courage: what if the stocks I didn't buy go up? That is a missed opportunity. There is just no way one can be certain. One has to make a choice. And my choice personally is to make as much money as I can without working more than I like, and live well beneath my means, and put my surplus in the best savings account I can, and forget about it, and concentrate on my work and my life. And also, while I have no scruples being a capitalist (making money from money), I still consider it more interesting to make money from actual production and value, so that is where I will put my attention.
Unless one inherits great wealth, these are issues one simply has to deal with somehow. And how one does it is a personal choice.