Welcome to The Golden Sense! Fall is here and it is time to get down to business. The economy is struggling and many people are operating as they did before the financial calamity of 2008. In American society the use of debt is pushed onto us all. Mortgages, student loans, and credit cards are all extremely common. In short, payments are a way of life.
We all need money. As I said in previous editions of The Golden Sense, our problem lies with our relationship to money. Most people spend most of their life working for money. This may seem obvious. Yet there is a flip side to that statement. One can take a different road and live a life where money works for them.
One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation -- and money. (Russell)
The United States was once one of the wealthiest countries in the world. On any particular day, it is not uncommon to see a cluster of cars at a stop light that have an average value of $150,000 a piece. Lamborghini, Maserati, Ferrari, Bentley, and Rolls Royce – I’ve seen all of these. Now, occasionally, there may be an unbelievably wealthy person that paid cash for their ride, but most often, these cars are either leased or borrowed from the bank (making payments).
It’s pretty common (no matter where you live) to have a car payment, a mortgage payment, and a few other large-ticket payments (furniture, electronics, appliances etc.). Let's not forget about consumer spending on the credit card – food, clothing, and gifts. (Passive Family Income)
Most young people live pay check to pay check. Many have limited savings, if any. It's well known that we live in society of instant gratification. Living in modern America it is easy to over spend and have more going out than what is coming in (expenses are larger than the income).
Let’s say we’re short $100 every month. This is not unrealistic. It is easy to fall into this lifestyle. Lets say that this extra $100 gets added to our credit card at a 15% interest rate. A year goes by. Now we are $1,200 in the hole, and after interest, it equates to just over $1,300 on our credit card. That doesn’t sound so bad right? But what if we continued down this road? It’s time to see what compound interest can really do to you if you’re on the wrong end.
If you let the negative cycle continue, and you are $100 short every month for 15 years, you would expect to owe somewhere around $18,000 ($1,200*15). But remember, you are paying interest to the credit card company. Instead of $18,000, you actually owe $67,686.31!!
That is alot of money to be paying out to a credit card company. For all the good times and "must haves" over the years you end up with nothing more than debt and nothing to show for it. Going into debt is generally a bad idea. It amounts to living out of anticipated future revenues – which may not even be there. What it comes down to is that we want to avoid being in that situation. Remember, we want to get on the other side of the coin and have our money work for us and find financial freedom.
How do we even start down that road? Sell some valuables, get rid of a payment, and put the extra money into savings for an emergency. If you continue to save, you’ll soon find yourself on the positive end of compound interest.
Instead of using credit or loans to pay for consumable goods, save up and use cash. That way you enjoy your purchase without worrying about paying for it later. Sacrifice short term pain for long term gain. Consumable goods do not appreciate in value. In fact, most items depreciate soon after you use them.
Imagine using interest rates to your advantage? Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time. (Russell)
Lets say you faithfully contributed $2,000 every year until the age of 65 (at the theoretical 10% rate).
If, from the beginning of adulthood, you had adopt a strict policy of never spending more than you make, if you take extra savings and compound it in intelligent, income-producing securities, then in due time your money will come in daily, weekly, monthly, just like a rich man. You'll become a financial winner, while others continue to struggle and complain.
Okay Todd...get back to reality. Aren't 10% interest rates a thing of the past?
Yes they are. However, interest rates change and they will not be low forever. I see two options in regards to accumulating wealth by the method of saving.
1. Use the compound interest method. Make your money work for you.
2. Save money and accumulate something that retains its value compared to all financial instruments. Your best bet with this option is to buy (physical) gold. At any point in history, an individual who owns a large quantity of gold...is, was, and always will be wealthy.
In conclusion, acquiring wealth is possible. It just depends on the road you choose.
Over and out,
T. Norman
Recently, the markets have been in turmoil. There is a lot of news and forecasts out there. I decided to do this Golden Sense on something that had nothing to do with recent news. The reason being is that young adults have little power over what is going on. The most important thing to do is to focus on what one can do for themselves and leave all the hysteria to the people who just want to talk. Lately, stock market averages have plunged. Gold has been a talking point. Many 'know nothing' analysts have called tops and bottoms in particular markets. I think it is important to keep things in perspective. Lets look at year to date returns.
Year to Date Return (Morningstar as of 9/26/11)
Dow Jones Industrial Average (DIA) -3.1%
S&P 500 Index -6.16%
Gold (GLD) 13.6%
Silver (SLV) -1.37%
Oil (OIH) -4.19%
We just went to the happiest place in the world. Also known as Disneyland! I hadn't been in about a decade. Rebecca had never been. Disneyland is fun place, except for all of the people! The crowds are relentless and it is very tiring to wade through thousands of people all day long. In short, we had fun. I look forward to going again in about another 10 years.
Recently, I have been doing a decent amount of driving up and down the coast. I have noticed that the waves are picking up. Fall is good time to surf in Central California. The swells pick up and the water is not completely freezing. I even found myself out surfing a couple weeks ago. Besides the occasional fun ride, surfing is good for the soul.
As Tom Curren says, "surfing is a special kind of madness".
References:
Russell, R (2011) The Dow Theory Letters. La Jolla ,CA
http://www.passivefamilyincome.com/small-debts-grow-large-with-compound-interest-derek
