Wisdom on Wealth

Shelly never realized how simple retirement would be.

“Will I have enough money coming in each month to live like I want to live?” she said. “And will it last as long as I do?”

Very simple.

But really hard. 

At first, she thought it would be as simple (and easy) as saving enough into her 401K plan. So, she just maxed out the amount she could withhold from her paycheck each month and put those withholdings into her company’s 401K plan. The company matched her contributions up to a certain amount, and she knew she’d also get some Social Security.

She was all set. Or so she thought.

When she turned 50, Shelly thought it might be a good idea to go see a financial planner to see if there was anything she might be missing. And good thing she did.

“This is awesome!” she smiled. 

Her tiny craft seemed to almost float over the smooth waves. The water was a deep turquois blue set against baby blue skies marked with wispy white clouds. It was a beautiful day to be sailing.

Until the weather changed. Almost without warning, dark clouds lumbered their way across the sky. The wind picked up and the once peaceful waters turned choppy and violent. The little boat struggled to stay afloat during the fierce storm. She soon had a very unpleasant reminder of what she’d had for breakfast.

“This is terrible!” she wailed, heaving over the side of the boat. “Whose stupid idea was this to go sailing today?!”

Weather on the water isn’t always easy to predict and when it turns ugly, things can get dangerous quickly.

The same can be said of the investing environment. Everyone wants to see their investment and retirement accounts grow, and “as fast as possible” may sound like a good idea…at first. But then the weather changes…

Suppose you were an Englishman 200 years ago wanting to cross the English Channel to go to France. Any crossing must be done by boat. The kind with sails. 

You have several choices to make.

When I was in junior high, my parents thought it would be a good idea to take my three brothers and toddler sister on a European family vacation.

I’m not sure who was more traumatized by the end of those three weeks – my parents or the Europeans. June in Italy was hotter than June in Louisiana and air conditioning was as common as ice water in restaurants….not happening.

This was pre-European Union, so it was every country for itself. Borders were rather porous, so it was not easy for a 13-year-old riding in the back of a VW van to know when he crossed from one nation to another.  I recall trying to buy stamps in in a German post office using Swiss francs. I had no idea where I was.

The pudgy Bavarian postal official with a walrus mustache tried to explain to me in frustrated and very broken English, “Here (pointing to the Swiss franc) is not here! (pointing to the ground beneath his feet). 

That was when I learned that otherwise perfectly good money is worthless in the wrong situation (or in my case, location). In those days, the Germans were not interested in having me pay them with Swiss francs.

I have often thought of that experience when I see well-meaning clients trying to spend the wrong kinds of money for a given situation. Here are some examples. Can you see yourself?

“How much?”

When considering the purchase of anything, that’s usually the first question we ask. Often, it’s the only question. 

That’s too bad. 

Most of the time, when someone asks, “How much?” they mean, “What is the price?”

That is a useful question, but it doesn't begin to give you enough information to skillfully make a significant purchase.  

Let’s say you want to buy a house. After a bit of looking around, you find two you like and are considering. So naturally, you ask, “How much?”

$100,000 for house A and $250,000 for house B.

Does the choice seem obvious to you at this point? It shouldn't, because all you know is the price. 

One seller obviously thinks his house is worth two and a half times more than the other guy. Maybe he’s right. Maybe he’s not. We won’t know until each house eventually sells. 

“How much?”

When considering the purchase of anything, that’s usually the first question we ask. Often, it’s the only question. 

That’s too bad. 

Most of the time, when someone asks, “How much?” they mean, “What is the price?”

That is a useful question, but it doesn't begin to give you enough information to skillfully make a significant purchase.  

Let’s say you want to buy a house. After a bit of looking around, you find two you like and are considering. So naturally, you ask, “How much?”

$100,000 for house A and $250,000 for house B.

Does the choice seem obvious to you at this point? It shouldn't, because all you know is the price. 

One seller obviously thinks his house is worth two and a half times more than the other guy. Maybe he’s right. Maybe he’s not. We won’t know until each house eventually sells. 

“How much?”

When considering the purchase of anything, that’s usually the first question we ask. Often, it’s the only question. 

That’s too bad. 

Most of the time, when someone asks, “How much?” they mean, “What is the price?”

That is a useful question, but it doesn't begin to give you enough information to skillfully make a significant purchase.  

Let’s say you want to buy a house. After a bit of looking around, you find two you like and are considering. So naturally, you ask, “How much?”

$100,000 for house A and $250,000 for house B.

Does the choice seem obvious to you at this point? It shouldn't, because all you know is the price. 

One seller obviously thinks his house is worth two and a half times more than the other guy. Maybe he’s right. Maybe he’s not. We won’t know until each house eventually sells. 

You knew debt was bad. 

Maybe worse than you even thought.

But here’s the good news – the thing that makes debt worse than you thought can be the very thing that can make your situation better than you could imagine.

Most of us are familiar with interest rates. That’s what a lender charges a borrower for the privilege of using their money over a period of time. 

So a mortgage company charges a home buyer 4% to borrow money for 30 years to purchase a house. A car buyer may pay a bank 6% over 5 years to buy a car. A shopper pays a credit card company 18% to make consumer purchases. 

Other than the credit cards, most of those interest rates sound pretty low.

But now we need to consider another perspective on interest – interest volume. 

The volume of interest is the amount of interest charged during any specific interval of time. This is not the same as the rate of interest, as we’ll see.