I don’t want any vegetables, thank you. I paid for the cow to make burgers.
I don’t eat them often, but, goodness, I enjoy grilling burgers. I’ll give you an incentive to read the rest of this article. At the end, I’ll give you my kick-(censored) hamburger recipe. I know. I’m about to go all Dunning-Kruger on you here, but my burgers are incredible. Read this article, fire up the grill, and thank me later.
Did I whet your appetite?
When I make burgers, I prefer grass-fed free-range beef as lean as possible. It’s as close to a sacred cow as I can get.
And with that terrible segue, let’s look at some of the sacred cows of personal finance and demystify the myths that you might have read about and come to accept as gospel truth.
Sacred Cow #1: Inflation is BAD!
First off, to understand this myth, we need to define inflation. It’s the underlying cause of constant price increases for goods and services. Cokes used to cost a nickel. A gallon of gas went for the change you kept in the ashtray in your car. A strip of bacon went for a dime. You get the picture. It’s also a result of a fiat currency; since the government can print currency when it wants, there’s more money in the system than there was before. More money chasing a finite set of things to buy means that prices invariably go up.
A little bit of inflation, though, is actually good for you and for the economy at large. If you’re selling products or services and can raise your prices a little, then that’s more money which you can spend. If you spend more money, others get more money, and the cycle goes on. That cycle is known as the money multiplier and how quickly it gets cycled through everyone’s pockets is known as the velocity of money. Wages go up in an inflationary environment and when people have more money, they spend more, and all is right with the television pundits.
Another good aspect of inflation is that, if you have debt (which, hopefully, you don’t), the effective cost of that debt goes down. The reason is that your wages should rise in line with inflation (if they don’t, maybe it’s time to consider a new job or to start a side gig), so you have more money. The debt remains constant, so, over time, in an inflationary environment, the percentage of your income that you’re using to pay off that debt decreases.
Does this mean you should go out and borrow a bunch of money because Helicopter Ben has forgotten to turn off the spigot on quantitative easing? NO!
Just like the Goldilocks story, inflation needs to be just right. Too little inflation (or deflation), and consumer spending ceases (except for those who have a lot of assets, and they jump for glee at being able to buy everything on sale). Too much inflation, and stuff becomes too expensive to buy before you get a chance to get to the store. Hello, Zimbabwe.
Sacred Cow #2: Cutting expenses is better than making more money
If you take a sample of all of the personal finance writing that out there on the Internet and in your local bookstore (assuming that any of them are still open), you’ll find that if you lined up the writing covering cutting costs on one side of the ledger and writing that covered increasing income on the other side of the ledger, the cutting costs team would win by a pretty hefty margin. Sure, it doesn’t take a PhD in rocket science (or Monkey Brain surgery) to understand that you need to live below your means – so much so that LBYM is a pretty commonly seen acronym.
I have no problems with cutting unnecessary costs in your life and spending money on the things which matter most to you rather than frittering it away on useless purchases that you made when you were going out for a little “retail therapy.” However, living your life with a mad obsession about cutting costs to the bone and recycling dryer lint to make sweaters borders on the point of ridiculousness for most people.
I liken it to the saying that I’d rather be cold than hot, because I can always put on more clothes, but I can only take off so many without getting arrested. You can only cut your costs to zero. Yes, you can live under a bridge and eat food that other people throw away and theoretically live on zero money. However, that’s it. Once you’re to zero, you’re done. No more cutting.
On the other hand, there truly is no limit to the amount of income that you can make. Yes, theoretically, there’s an upper limit, but you can always take a side job, start a side gig, and improve your value at your current job in an attempt to get a raise.
Let’s look at a very simple example to see how this plays out. Let’s say that you’re a 25 year old making $50,000 a year. Your expenses are $40,000, and you invest the rest. Your investments gain 6% per year and both your pay and your expenses rise 3% a year with inflation. What happens when you’re 65 years old?
- If you do nothing: You’ll wind up with a healthy $2,665,179.95 in the bank.
- If you cut expenses by 5%: You’ll wind up with an even healthier $3,198,215.94. That’s $533,035.99 better than the base case.
- If you increase your earnings by 5%: You’ll end up with $3,331,475.05 in the bank. That’s $666,295.10 better than the base case and $133,259.11 better off than reducing expenses by 5%.
Hips don’t lie and neither do numbers.
The answer for why this happens is simple math. Your income is a larger number than your expenses. Grow the bigger number, and it compounds more over time. Yet, people obsess over the smaller number. Yes, it’s usually easier to cut expenses a little, but the payoff goes to those who can grow their incomes over time.
Sacred Cow #3: It’s always better to trade time for money
As I mentioned, I love to grill. The food is healthier and I can usually cook better tasting food than I can get when I go out to eat. Nothing says culinary disappointment like getting salmon that isn’t half as good as what I can make, even if someone brings it to me, refills my water, and takes away and washes my dishes for me.
A couple of years ago, my last grill gave up the ghost. The igniter stopped working, and the cost to find a replacement igniter was nearly as much as the grill itself. Granted, I had a $99 grill, so the bar wasn’t set particularly high. After sticking a Bic lighter in the outlet a couple of times and nearly scorching my eyebrows, I decided to buy a replacement grill.
When I got to the store, the exact same model of my dead grill was available unassembled for $99 and assembled for $139. According to the instructions on the box, the assembly time was an hour.
I should have known better. Perhaps in microscopic print somewhere on the box was the disclaimer: “ASSEMBLY TIME ESTIMATED FOR PROFESSIONALLY TRAINED TEAM OF GRILL ASSEMBLING ROBOTS.”
Five hours later, after somehow installing the burners in the wrong direction and the knobs upside down, I finally had a completed, proper-looking grill that actually spouted reasonable amounts of flame when connected to the propane.
I know the limits of my handyman skills, or, rather, lack thereof. However, in the pursuit of saving $40, I blew 5 unenjoyable hours of my life. It wasn’t as if I enjoyed the project and was having fun while learning new grill assembly skills. No, I was cursing, hitting things, tearing skin off, catching my fingers in places I never knew existed, and, generally, accelerating my demise through my increased blood pressure. I traded 5 hours of what I perceived as drudgery and got a return of $8 per hour for my efforts.
The primary purpose of accumulating money is to meet your necessities. Once you have sufficient money to take care of your necessities, then a secondary purpose of money is to purchase conveniences and to trade money for time so that you can spend the time doing things which increase the happiness in your life.
It’s not always a straightforward calculation figuring out whether or not it’s worth your money to buy time. You might save $1 per hour of work but really enjoy it or save $50 per hour but really really hate what you’d have to do to save the money. Will you do something constructive with the time, or will you sit around flipping through channels bored out of your skull? In this case, opportunity and replacement costs matter, but not necessarily in a straightforward money sense. Still, defaulting to always trading time for money, particularly as you grow older and once you have sufficient income to comfortably make these choices is foolish. Just as you must spend your money wisely, you must spend your time wisely to maximize your eudaimonia.
Sacred Cow #4: You can beat the market over the long run
There are actually two variants on this theme, depending on who’s telling you the message.
The first is that you can actually beat the market. That’s what e*Trade, CNBC, and the financial media want you to believe. E*Trade and other brokerages want you to trade. They want you to trade often. They want you to purchase individual stocks. That’s because they make money on commissions for the trades. Their actual costs for executing those trades are microscopic. So, each time you get some wild notion that you’re going to catch the next Facebook IPO and make zillions (oops) and make a trade, the cash register dings and someone in a New York City office does a silent fist pump.
The same holds true for CNBC and other business and market news organizations. If they didn’t propagate the notion that the individual investor can somehow outsmart the collective intelligence of the entire stock market, then why would anyone want to watch what Jim Cramer had to say? The collective television and media consuming audience would shrug their shoulders, say “so what?” and move on with their lives to do more productive things, like starting up their own small businesses, spending more time with the family, and the like. So, they have to continue the myth to get you to keep watching.
The reality is that, over time, you are exceptionally unlikely to beat the markets consistently. If professional mutual fund managers manage to consistently underperform the market, then chances are pretty good that you’re not going to do any better. If you do happen to get a hot hand, it’s much more likely to be a result of luck than of skill, and it will take anywhere between 25 and 64 years to discern whether or not you’re good or you’re just lucky. By the time you find out that you were just lucky, it might be too late.
Sacred Cow #5: Life insurance is an investment
Here’s the Cliff’s Notes version of this myth: you buy insurance to protect you from big negatives in your life that you can’t afford to have happen, and you invest in investments which are expected to earn you money above the rate of inflation over time. Never shall the twain meet.
If you’ve ever heard someone trying to tell you that you can invest using life insurance (namely, whole life or universal life insurance), it probably sounds pretty tempting. You can have insurance and you can make money off of it. Let them eat cake!
Let’s dissect this just a little bit. First off, who would tell you that life insurance is a great investment? The life insurance salesman! Why would he do that? Because he’s going to make a sackload of commissions if he can get you to believe that gullywash. That conflict of interest should be a big, fat, blaring red signal to you right there.
But, let’s look a little deeper into this. How does a life insurance company afford for you to pay them a little bit of money each month, and if you kick the bucket early, pay out a large sum?
- Actuary accounting. This is a fancy term for saying that there are a lot of people like you who buy life insurance, and the smart accountants at the life insurance companies figure out how many of you will kick the bucket this year, next year, and so on, and price accordingly.
- Dropouts. This isn’t like the high school deadbeat kid who dropped out to pursue his career as the 7-Eleven clerk. These are people who start their policies and then, somewhere along the way, quit their policies without actually having peeled the garlic. The insurance company got all of the premiums and didn’t pay out a red cent.
- A profit margin on top. They have to pay for offices and marketing and pens that have their logos on top as well as rewarding their shareholders. I have no issue with companies making profits, and neither should you; after all, a profit is a customer’s way of telling a provider “well done.”
Notice that none of those methods included “beating the stock market.” Remember Sacred Cow #4? They are just as bound to that maxim as anyone else. However, if they can get you to pay more money to them, they can pay their salespeople hefty commissions, and they get to make money off of investing in the market for you. It’s a fancy, insurance-speak laden way to get you to give them money to invest while they take a hefty slice off of the top. If you ever look at the fine print of one of these insurance contracts, you’ll see lots of flowery illustrations of what la-la land could look like if you got some incredibly high investment return (which will almost assuredly not happen) while hiding in ultra-small fine print what they’re really promising. They assume that you’re not astute or sophisticated (or smart) enough to actually read the whole contract and that you’ll just go off of what the salesperson says. By the way, if you question the salesperson about the small print, you’ll probably get a blank stare, because he most likely doesn’t understand it either. His job is not to actually do what’s in your best interests, but, rather, to build up a relationship with you so that he can sell you whatever crap fills his pockets the most. Think of this as paying an enormously high front load for investing in a mutual fund and then rolling the dice with what remains of your investment assets.
The juice is worth the squeeze!
I promised if you got to the end of the article (and I hope you didn’t skip the article just to get here…if you did, SHAME! Go back and EARN these calories!), I’d give you my super secret recipe for burgers. Here it is.
- 2 lb ground beef
- 1/4 can of beer
- 1 egg
- 1 packet of cup of soup mix, mushroom and onion flavor
- 1/4 cup BBQ sauce
- 2 tsp Worcestershire sauce
Hand mix all ingredients together in a large mixing bowl. Fire up grill to 400 degrees. As you’re pulling out meat for burgers to go on grill, squeeze a little to get juice out so that the burger doesn’t go through the slats on the grill. I have lost many a burger (and shed many a tear) through the slats. After 5 minutes, flip burgers and baste with more BBQ sauce. Repeat until burgers have been on grill for 20 minutes. Drink remainder of beer during sequence. Toast buns for 30 seconds. Put burgers on buns. Condiments optional. Enjoy!