As we conclude the series on looking at buying your home as an investment and contemplate the next exciting adventure on this journey to getting comfortable investing, I thought it might be a good idea to step back a bit and look at an issue which transcends what you invest in.
This topic involves your brain, how it works, how it dominates what you do and how it determines the ultimate outcomes in your life.
Its foundation lies in a quote several hundred years old:
- Your thoughts cause your words
- Your words cause your actions
- Your actions cause your habits
- Your habits cause your outcomes (or your destiny)
Just an old-school way of saying: one thing leads to another.
What and how your life will be at its end, or at least in your old age, is the result not of a decision you make when you are, say, 65 or 70 — it is the inevitable result of the many things you do today. For my Ph.D. I studied management strategy, and one of the best descriptions I found was by Henry Mintzberg of McGill University. He defined strategy as patterns in a stream of actions.
Your life consists of thousands of actions (if not millions). You wake up in the morning. Then you kill the alarm. Then you yawn and say something. That something can be positive or negative, hopeful or critical. Then you get up, do your ablutions and get breakfast. At the end of every day you can look back and your day will have been filled by thousands of actions.
Most of those actions are the result of decisions. Will I be on time for work or not? Will I do something extra for no imminent reward or not? Will I reach out and help those around me or not? Will I smile or be a grump? Will I seek out opportunities to learn more or spend the time going to the movies? Will I network or play video games? And of course you wouldn’t expect me to omit: will I put money away for the future or blow it all now?
If you compare three, four, or any number of people, you will notice no two of them have the same patterns in their actions.
You will also notice some people have a “late life” more pleasant than others’. Those who spent their lives sharing and giving and being nice are likely to have more friends (and family wanting to be friends). Those who lived for themselves and their dreams are more likely to find themselves isolated.
Likewise, those who lived financially smart lifestyles are more likely to have comfortable retirement years.
What Is Retirement?
Everyone who talks or writes about personal finance defines the ultimate goal of everything they write about as “retirement.” If you make more, spend less, stay out of debt and invest, you will be able to retire earlier — that sort of thing.
Problem is many young people of today can’t relate to that. They say things like, “I don’t want to wear plaid pants and play golf all day,” or “I don’t want to play bridge till 4:00 every afternoon and then shuffle off to an early bird seniors dinner at 4:30.” Those tend to be the pictures we carry around of that nebulous concept we call retirement.
Retirement is somewhat like marriage, in that it has two components. There is the event (wedding ceremony) and then there is the life (happily ever after marriage… well, at least in the fairy tale version).
In life people make their money from one of only two possible sources:
- their labor (a job or business)
- their capital (investments, nest egg, pension)
Those interested in social theory understand capitalism is a system where everything happens for the ultimate benefit of those with capital, while in communism everything works for the ultimate benefit of those who provide the labor (i.e., workers).
Well, no matter if you like it or not, most of us live in the system we call capitalism. In that system, your goal is to become a capitalist, the fancy term for someone who makes their living from their capital (as opposed to their job).
Most of us grow up on the wrong side of the capitalist fence: we don’t have enough capital to live on. So we get a job or start a business so we can build our capital.
And that day when we have enough capital to live from, that’s the day we “retire.” Which brings up the question: what will you retire to?
In days of recent memory people did things like play golf endlessly, take packaged tours with buses, and play interminable games of bridge. Many young people look at that, shake their heads and say that’s hardly the ultimate ideal to live for.
Retirement is not those things, at least not necessarily. In essence, retirement is the financial freedom to do whatever the heck you want to do. Do you love video games? Well, all you need is enough to pay for a room, an internet connection and a supply of Doritos. Like travel? Perhaps you need a little more in order to fund trips to exotic locations like Machu Picchu, Bali and Morocco.
Or perhaps you always wanted to write (cough, cough) cook or start an art gallery. The point is your retirement is whatever you want to make it.
Only it’s funded by your investments, not a job where you have to be at work at 8:00 am in a blizzard.
Which leads us back to the beginning of this post: the process by which you end up with enough investment so you can do what you want (i.e. retire).
Good results come from good habits. And good habits come from intentional decisions, not by accident. When you’re, say, 25 or 35, it’s easy to blow off the future and do what you always wanted to do but your parents said you can’t. (Don’t ask me how I know that.)
You Will Live A Long Time
However, in this day and age, you are likely to live longer than any generation that came before yours. You are likely to spend as many years “in retirement” as you do working. The first time I realized that it was a bit of a shock. When I grew up people worked “forever” and keeled over within a decade of retiring. Without anybody verbalizing it, I got the impression retirement was little more than marking time before dying after their “real life” (job and kids) was over.
In fact, when the concept of a pension for those years of retirement was born, it was predicated on a long productive life and a short retirement. (In the beginning they were called widows’ funds before the more politically correct term pension became the norm.)
Well, thanks to better working conditions, healthier eating and more exercise, every generation lives longer.
That means you will have to depend on your investments like no generation before you. In turn, that means acquiring good financial habits as early as you can. There are plenty of sites on the internet focusing on specific areas, like getting out of debt, living frugally. Here is one by a good friend, J.D. Roth. I like it because it covers a wide range of topics and doesn’t have a post every day — even though I’m “retired,” I still have other things to to.
Your biggest expense (now and in the future) is likely to be your housing. Buying your own home, and getting it paid off, is the biggest single step you can take to ensure financial freedom in the era when you live from your capital and not your job.
But it is by no means the only thing you need to do. Setting up a budget, living within your means and setting aside money for the future are habits which pay off in spades down the road.
I’m not a betting man but if you don’t have a budget, I will wager a lot of money on the fact that your future will be troubled, probably before you even reach an age beginning with a 6. If you have to pick just one single habit to make you successful, setting and living by a budget is it. It can be as detailed or fuzzy as you prefer, but you need to have one and you need to stick to it.
Budgeting is the best way known to man to make “one thing leads to another” work for you and those long days of financial freedom. (Bet you did not see that coming. 🙂 But it is very true.)
As always, the goal here is to help you get comfortable investing, in both senses of the phrase:
- Help you become familiar with the concepts of investing, in order to…
- Help you live comfortably from your investments
And so, as we wind down this mini-series on your home as investment, we circle back to the beginning: for most of us, and under most conditions, your home is likely to be your best investment, primarily because of the combination of inflation and leverage. However, buying your home is not necessarily, and not always, the smart thing to do. If you plan to move a lot, or when the economy is at a high point, or if you live in an area where the rent to buy ratio favors renting, then, well, renting is the better choice. Either way, you won’t reach your goal of financial independence without a budget to which you stick.
With this series I hoped to stay away from a cheap and glib advocacy of one side of a complex argument, selecting only the facts which support my opinion. Instead, I hope I presented all the salient facts to allow you to make an informed decision, the one which fits your unique set of circumstances.