Sports analogy time!
Adopting the logic of most people who dispense personal finance advice, the Kansas City Royals are the standard to which all other American League baseball teams should aspire. They’ve set an example that the rest of the league, indeed the rest of the world, can only look at with awe.
The standings don’t bear that out. The Royals have the 9th-best record in a 15-team league. They’re in 3rd place in the Central Division, 7 games back of Detroit. The Royals are also 4 1/2 games behind Texas in the wildcard race, with 4 other teams between them. They’re about as average and nondescript as a baseball team can be, all the way down to those godawful homosexual blue road uniforms that most major league teams had the good sense to get rid of in the ’80s.
Here’s what makes the Royals special: they’ve allowed only 555 runs, fewest in the league. In personal finance terms, they’ve incurred as few expenses as possible. The Royals are the baseball equivalent of the blogger who makes his own laundry detergent from leftover dish detergent and hand soap, leaves used wet paper towels in the sun to dry for reuse, drives across town because GasBuddy told him that a station 10 miles away is selling 87 octane for 4¢ a gallon cheaper than the station across the street, and makes his own dish detergent from leftover hand soap and laundry detergent.
What the overbearing voices of groupthink will tell you is that frugality – keeping the other team off the basepaths – is the only metric that matters. The fewer pennies you surrender, the happier and more fulfilling your life will be. Assuming, of course, that you enjoy denying yourself the pleasures that only spending money can bring. Yes, sunsets and the smiles on your kids’ faces are free and priceless. Great. If that’s all you need out of life, why are you looking at a computer screen right now?
There are two components to building wealth, and their relationship is every bit as symbiotic as that of the rhino and the tickbird. Your money can’t grow unless it exists in the first place (which is the lament of the frugality zealots.) Equally important is that you can’t just spend all your time amassing a modest pile of post-expenses cash and then trying your best to keep that pile from decomposing. Being adept at scoring runs gives you far more margin for both error and creativity on the other side of the ledger. The Boston Red Sox have a sense of proportion. They’ve allowed 8% more runs than the Royals have, putting Boston in the middle of the pack as far as defense goes. The Red Sox have also scored the most runs in the league, and not coincidentally have its best record. (The Royals are 11th in the league in scoring.) Offense without defense is useless, and vice versa.
You gotta make money, and holding yard sales isn’t going to cut it. So what’s the quickest and most efficient way around that conundrum? You could make yourself more valuable at your place of employment, but a) we can’t help you with that and 2) your employer will still be profiting off your hide. Instead, you have to learn how to leverage: how to defer current rewards for larger rewards down the road, ones that are positively disproportionate to the time elapsed. You need to know the difference between an IRA and a 401(k). And between a Roth and a traditional version of each. What a mutual fund is, and why it’s not a choice between investing in a mutual fund or a 401(k), etc. Learning about investment vehicles might not sound all that gripping to you. It might not be, and almost certainly isn’t, what your formal education focused on. Consider basic financial knowledge to be part of the price of being a functioning and productive member of society.
You know the rudiments of physical health, right? Smoking bad, grilled salmon good, sitting on the couch bad, riding a bike good etc. You didn’t need a degree in dietetics to comprehend that. Similarly, you don’t need a CPA designation to understand how tax brackets work and what the difference between credits and deductions is. We’re leading to yet another plug to buy our book here, but that’s not the primary purpose of this. Rather, we’re beseeching you to stop being fanatical about saving as much money as possible. Per hour committed to the task, it’s far more efficient and beneficial to look for ways to increase your existing stock of wealth than to look for ways to cut spending a little more. No worse advice has ever made it into axiomatic form than “A penny saved is a penny earned.” Nonsense. Once you start building a positive net worth, earning pennies becomes far easier than saving them. Also, the opportunities to earn greatly outpace the opportunities to save. You can only save so much. Your powers of accumulation are greater than that, and probably greater than you can imagine.
Or as we say over and over again, buy assets and sell liabilities. $7 spent on our book beats $7 saved by making your own toothpaste and placing the proceeds in a jar. Even if you’re saving orders of magnitude more than that, you can still do even more by buying assets. $2000 in an index fund beats $2000 negotiated off the price of a car. The former is dynamic, the latter static.
Now excuse as we hit you with the hard truth. The post up to this point was written for the benefit of those who aren’t carrying consumer debt. If you have a credit card balance or outstanding student loans, forget everything we said. Different, more spartan rules apply to those with a negative net worth. If you’re below zero, that’s where (and only where) the frugality kooks have a point. Do everything in your power to pay off those debts. Wear cheap clothes. Amuse yourself. Don’t be an idiot and plan a $20,000 wedding. You can’t build anything until your net worth starts with a +, however unassuming that number might be. Having a little bit of money puts you on a different and better continuum than the one the indebted are on. A failure to grasp that is why almost all poor people stay poor.