Common Cents # 47 - Invest & Save

 

Common Cents – Save and Invest

 

When I was a teenager, we had a family friend who had had some serious success in the music business. For several years in a row he was at the top of his field, bringing in the big bucks. Now he was back in our hometown, working at the local radio station.

One day he was at our house giving my brother and me our music lessons, when he happened to mention how stupid he had been to spend all that money. I remember he said that he could have bought a farm for the money he had made in just one year, but instead he had spent it all, and he didn’t even know where the money went.

That comment made a big impression on me. I realized the huge fallacy of assuming that if we are making money now, that it will continue. It should be obvious that if we have a hit record, get a pro-athlete contract, or even make a huge sale, that there is a good chance that we will be a “One-Hit-Wonder,” and that we need to invest the money because it may be our only shot.

Most people don’t think that way about their job or career. We assume that we will never go back to the measly salary we had last year, so we buy new cars, bigger houses, and all the other things we thought we wanted. Then we find that the company has been sold, or we lost the big account, or maybe we have health issues. In retrospect, we missed the chance to get money ahead, make good investments, or otherwise secure our future.

I have always been self-employed, so I assume that there is a chance that the last gig really was the last one. One day I will have been right. That means don’t presume on the future and make every dollar that goes through our hands count.

That also means saving and investing. Savings means to spend less than we make. Investing means to put the money some place where it will produce an income and grow on its own.

In deciding where to put the money we have many choices. The first thing is to invest in things we understand. If we are an expert on antiques and collectibles, that would be a good choice for part of our investments. If we love to fix up houses and don’t mind dealing with contractors and renters, investing in real estate can be a great strategy.

For those of us who don’t like midnight phone calls because a tenant’s furnace is out, or who get distraught because our classic car needs parts that are outrageously expensive, there are investments that don’t need daily maintenance, don’t eat, and don’t need any special care. Financial markets are by far the easiest place to put money that will grow, are easy to track, and are extremely liquid when we need to get cash out.  The stock market that includes mutual funds can satisfy the advice we receive to diversify our resources and can also allow us to assess our risk tolerance to invest accordingly.

With my “Rock-star” friends advice ringing in my ear, we started investing in mutual funds when I was twenty-five. Mutual funds are a collection of stocks and bonds managed by professional account managers. We should probably have started earlier, but that was when we felt that we had control of debt and also began the practice of giving first, then paying ourselves with our investment choices, and then living on the rest. I cannot image how our life would be different today if we had not had that long-term view of saving and investing.  My hometown friend provided the incentive to learn from his early mistake but it was up to us to act on the wisdom he provided.