Poll Results

The survey for January was: What Are Your Plans For Your Money In 2009? The results were all about paying down debt. Now, given there were about five participants, that doesn't mean much, but it is interesting.

There's a concept called 'expensive money', and it's based on how much you have to pay to borrow money - i.e. interest rates. If interest rates are high, you have to pay more to borrow money, and if they're low, you pay less. Talking to long-term investors, the break-point is around double digits. If you can pay less than 10% on borrowed money, it's pretty cheap. If interest rates are higher, it's expensive.

In What Is an Investor, I put forth that an investor is a person who understands ROI, implying that they'll be on the winning side of that comparison. So as an interesting aside - if under 10% interest is considered 'cheap', then that implies a professional investor is confident that they can make over 10% on their investments. Otherwise 'cheap' would have a different level.

Now, most people out there can get interest rates under 7%, and many can get under 6%. This means that money is quite cheap. And yet people are still looking to pay down debt... So this survey tells me two things:

1. That fear makes cheap money still look risky.
   
2. That those surveyed are not professional investors, or have too much debt already.

What Is an Investor?

It's time for a definition. What EXACTLY is an investor? In this article, I stated that an investment IS a sacrifice. So if an investment is a sacrifice, what is an investor? The best answer I've come up with is that an investor is a person who earns a better return than they pay.

This means that an investor is a person who understands ROI. This also means that a person who buys a house with a 7% mortgage, and makes money renting out the property is an investor. A person who buys a home to live in? Only if that's cheaper than renting. A person who rents out a house for a loss? Not an investor! Unfortunately, I fit into that last example pretty well right now...

That also means that a person who buys stocks and waits for them to go up, or is selling now that they are dropping is NOT an investor. They're speculators, which is another word for a gambler. Same with the person banking on appreciation in their house. Not that there's necessarily something wrong with that, but this site is "dedicated to not daydreaming through life", as I say at the top... Let's see what's really happening here.

Most "investors" are really traders, and that is a game or a job, depending on how they approach it and whether they make money or not.

Funny thing, by this definition, Warren Buffett is an investor - as he buys undervalued assets that will pay a better return on his investment than he is paying (or could get elsewhere). But the people who own his stock (BRK-A or -B) are not, as it doesn't pay dividends and we're just expecting (or hoping) it will go up...

Emotional Costs

I recently wrote on this article on Get Rich Slowly that "This is the cost of emotion - if you didn’t have that reaction, you could save money." In retrospect, I think that sounded more negative than it should have. In my article last week, Making the Most of Productivity, I put forth that we might want to look at our productivity in financial, emotional, spiritual, mental, and physical areas.

So let's look at the other side: FESMP (an abbreviation of the areas above) costs. As I said, emotion has a cost - in the example, people were willing to give the government an interest-free loan (paying extra taxes for a big refund) because they knew wouldn't manage the money as well. So because of this emotional soft spot (not being able to stay firm in saving that money), they paid in lost interest.

Another example, from the Seven Laws of Money: the author(!!!), a financial planner and author, saved $2,000 by borrowing $2,000 from another bank, putting it in a CD, and paying the loan back. He only lost a little bit, on the spread between the rates, but he's a financial planner, and that's the best he can do??? Emotional cost.

Then I got to thinking about it... People pay for membership in a gym - physical cost. People give money to their church - spiritual cost. People get sick and take days off of work - physical cost. People take holidays to recharge - mental cost. By spending money, we save in other areas, by spending in other areas, we save money. Think of staying late to get extra work done - you make more, but you cost yourself physically and emotionally.

Looking at it now, I can't see an example where 'mind' and 'emotion' aren't being used interchangeably. Should I have two categories or just one?

It would be a good practice to sit back and look at your 'wealth' in each of these areas, and the 'exchange rate' between them. It's interesting that, as we get low in one area, we are often willing to buy it at a premium, and as we get high, we are willing to sell at a discount. Think of the rich man in poor health, and what he'll be willing to spend to be healthy again, or the other extreme - the poor young man willing to work 70 hours a week to make lots of money.

• Where are you wealthy, and where are you poor?
  
• Are you balanced?
  
• If you made a pie chart with these five (four?) areas, what would it look like?

Are You the Average of Your Friends?

"You can judge a person by the company they keep." I've heard this before, but didn't understand it the way I do now... Now I've come across a very interesting statement - you are the average of your ten closest friends.

It was stated about income, but it applies to a lot more. Take a moment and think about your closest friends, and ask yourself the following questions:

1. Do most of them like to stay out late and/or drink?
2. What are their favorite TV shows?
   
3. Do most of them smoke?
4. Do most of them like to read books?
5. What cars do they drive?
6. What is their average income?

Since, for the most part, like attracts like, I think you'll be amazed at the similarities when taken as an aggregate. Now I think this works both ways - you attract people who have similar interests to you, and you influence them and they influence you. For example, if you went to bed at nine every night, how long would you stay close to people who partied until 2?

How about - how comfortable would you be hanging out with people who made 1/5th the money you did? Or didn't know how to handle money, and were deeply in debt, while you had half a million in the bank? Along the same line, if you were working on a new business idea, would you want to be around people excited for you and with helpful experience, or a group of people who kept finding reasons your ideas won't work?

In Alcoholics Anonymous meetings, they tell the members that they'll have to find a new group of friends. The ones they got drunk with aren't going to help them stay sober. Likewise, if you want to make strides in your personal situation, it's probably time to take a good look at the people around you. Luckily, it doesn't have to mean leaving friends. When I asked a friend about this, his reply was, "Heck no, I'm going to help make my friends wealthy too. Then I'll have my same friends, and I'll still be their average."

Some Things to Consider

• Are you the average of your closest friends?
• Do you like what you see in them, or do you wish they would change?
• Do you honestly believe you can improve while keeping to the same environment?
  
• What can you do to, as Gandhi put it, 'be the change you wish to see in the world?'
  

Making the Most of Productivity

This is an extended apology for not writing in almost two weeks.

I have been in a very tight situation financially, and it's making me look very closely at a lot of assumptions I have and things I do. I do believe that everything you do is an outgrowth of what you think you are. When we act in a certain way, it is in accordance with our values - no matter how we act. So by simply sitting back and watching your own actions, you can gain deep insight into your core beliefs. Which will give you the ability to affect those beliefs, automatically affecting change on how you act.

Therefore if I say I value money, but act differently, maybe spending too much, I show that I don't really value money. Action speaks louder than words... Therefore, as we currently are having money difficulties, I see the hint of a belief that interferes with being wealthy. And given my beliefs about money, that will not do.

Thus I have been focusing on the following question:

How much money did I make today?

This has been very powerful, as it forces me to look at each action, and decide what to do based on the return. I have been doing quite a few things that haven't given me the productivity I need to have right now. Thus it is time to change. By asking myself this, or a permutation without the word 'money', I have been able to cut out some things that haven't pushed me forward as much.

Blogging hasn't made me much money yet, so it got pushed back. My jobs - especially online - have been making money, so they got moved forward. Time watching my son has been distracting, so I cut back and made sure the time we spend is more special and personal. I think the quality has gone up in my interactions because of this. I've really appreciated time with the family the last couple days, partially because I've been creating less of it.

Thus the focus has been productivity - financial, emotional, spiritual, mental, or physical. I am working out a system to follow my successes and label my mistakes, like we have dollars for the financial side. See, money is easy. At the end of the day, if you have more than you started with - you are ahead.

What about physical health? What is the 'bottom line'???

Should I Invest #3: ROI

Question #1 was about your timeframe. Question #2 is about your beliefs. Question #3 is about moving forward or backward. I think that the real difference between investing and consuming is ROI, or Return on Investment. As I said before, Investment = Sacrifice. When you invest, you give up access to something now (usually time, money, or access to some property) for an increase in future value - cash flow, appreciation, more knowledge, etc.

But by this definition, consumerism is sacrifice too. I buy a large-screen TV, I gave up money, and I get a return in value: better viewing, maybe more social interaction as friends come over, and something worth more money. So as a mathematician, it looks like this:

Investment = Sacrifice = Consumerism or
Investment = Consumerism

Is this true? No. One is sacrifice for more and the other for less. At the end of the day, did that sacrifice make you richer or poorer? To do this, of course, you'll have to know what you're actually spending. If you buy a TV for $800 on credit, you could end up spending $1,500 by the time you're done. Also a good thing to understand is the future value of money, which basically says that, all things being equal, you'd rather have $1,000 today over $1,000 in ten years, especially when considering inflation or interest earned.

An investor buys things that go up in value, and a consumer buys things that go down in value. If you borrow money to buy a TV, you're a consumer. If you borrow money at 5% and make 8% on it, you're an investor.

Things to take into account: interest rates, inflation, and taxes...

Some examples
If you take $100 and put it in the bank at 2% interest, in a year you have $102. You've increased your wealth, so that is an investment. Now say that inflation is at 3% - you really have more like $99, so you've lost money!

How about if you can make 8%? Say you're in the 28% tax bracket, now you're really slightly under 6%. If you have a mortgage, you could be paying that down instead, so if you are paying 6% on your mortgage, your money is equally well spent paying down the mortgage or investing it. Or is it? You get a tax break on your mortgage, so you're decreasing your tax savings by paying down the mortgage. Here inflation affects both equally, so we can ignore it.

Now, how about that TV? At 12% interest for putting it on credit now, plus inflation, we're looking at a negative 15% on half of the price. An easy way to think about that last thought - over the length of the loan, you owe on average, half the cost. So our $800 TV ties up an average of $400 over the length of the loan.

Another way to look at that TV - as the latest model comes out, it will be worth less. Now an $800 TV could be on sale for $600 in a year. Supposing you are willing to wait the year, you are looking at this: save $50 a month for a year and you buy it outright. Buy it now, and you'll pay $600 of the $800 + $96 interest, and you still will pay at least $300 by the time you're done with interest. Is it worth $300 to wait a year? Only you can decide, but if we up it by a factor of 3 for a TV worth $2,400 now, it gets a lot more appealing.

A good final point to remember is that money isn't the only way to keep track. Happiness, peace, friendship are all part of that equation too. This is why the final decisions have to be yours and yours alone.