Like everyone, I have seen a lot of articles and posts about the GameStop stock. I'm not going to write anything about why it happened and all of that stuff, but I did think about, what does all of this have to do with serious retirement and financial planning? I saw a tweet from Christine Benz, who is the director of personal finance at Morningstar and it said: "I’m casually watching some of the Sunday morning shows and it’s stunning how much the finserv advertisements focus on “trading.” It makes me want to scream. For the vast majority of people, investing successfully has nothing to do with trading acumen." It has even less to do with what is going on with GameStop and Redditt and hedge fund managers. Let me explain.
What Really Matters
In a previous blog post, I wrote about the Secret Ingredient when it comes to successful investing. The key is not getting the best return, or investing in GameStop, the key is getting the best return YOU can sustain over the longest period of time. Like, Christine Benz points out, for most of us, successful investing has nothing to do with trading. It has more to do with discipline and time.
The Exponential Point of Inflection
Have you ever seen a graph like this?
The circle is pointing out an inflection point. I found this when I was looking on the internet this morning. On an exponential curve there's a point on the x axis where the y axis starts increasing significantly. ... In calculus we use the term "inflection point" for when a curve changes between positive and negative.
When it comes to investing money in your retirement plan, that inflection point is where the increase in the value of the portfolio is growing more than the amount you are investing. I saw a piece on LinkedIn written by one of my connections named, Anthony Ruffalo. He pointed out that if you are investing the current maximum amount of $19,500 into your 401k plan, you will need to have $278,571.43 growing at 7% to be at that inflection point. In other words, when you multiply $278,571.43 times .07 it equals, $19,500.00. This is the point where your portfolio grows more than you are funding it.
How Do You Get To The Inflection Point?
Here’s a little more fun HP12C math. What’s the best, quickest way to get to $278,571.43? Is it rate of return or rate of saving?
To get to $278,571.43 in 10 years, you need to invest $18,843.34 per year earning 7%. To get to that number in 5 years requires $45,272.10 per year. I acknowledge these are big amounts of money to save, but I am trying to illustrate a point.
If a person were to save $5000.00 per year, what rate of return would they need in order to get to our “magic” $278,571.43 in 10 years? The answer is 30.09% each and every year. What about 5 years? The answer is 94.9%!
Houston, We Have A Problem!
So, what are you supposed to do? On the one hand, it looks like it is much more feasible to save more money than it is to get a 94.9% rate of return. On the other hand, I have enjoyed eating and having running water at my house. Here are a couple of suggestions that might help a bit.
Where Is Your Money Going? I still think most people have no idea what they really want and they also don’t know where their money is going. I think your spending needs to align with your values and what is important to you. I truly believe a lot of people spend their money, mindlessly on things that aren’t really important to them.
I listened to a podcast this weekend featuring a guy named Scott Rieckens. He made a documentary film called, “Playing With Fire”. Here is the link to the podcast I heard:
https://www.youtube.com/watch?v=SUPyRpBSbNo&t=3287s
In the podcast he talks about how he and his wife lived on Coronado Island by San Diego and were going out to eat sushi and driving leased BMWs. He had heard an interview with Mr. Money Mustache on the Tim Ferriss blog and was inspired to change. One of the first things he and his wife did was write down the 10 things that were most important to them. I don’t think driving fancy cars and eating fancy sushi dinners made the list.
They decided to move away from the beach, get rid of the cars, slash expenses and save as much as they possibly could. You’ll have to listen to the podcast, but I thought it was really interesting. I always struggle with the frugality concept. It’s easy to say you’re going to save 70% of your income, but it is immensely difficult to do. That being said, if you can align your spending with what is important to you, I think you will be able to find ways to save more money.
The Biggest Expenses! We have all seen the exercises where you stop spending money on the Starbucks latte every morning, take the money, invest it and you become a millionaire. Here’s some more time value of money math regarding that.
$4.50 latte X 30 days = $135.00 per month. $135.00 per month invested at 7% takes 651 months to get to $1,000,000.00! So yes, it can be done and it does work, but that takes too much time.
For most people, their biggest expenses are housing, cars and food. Mr. Money Mustache talks a lot about the relationship between where we live, where we work and the costs of transportation. This is more important in states like California where the cost of housing is outrageous, so people live far away from where they work in order to afford a house then spend tremendous amounts of time and money commuting. Here in New Mexico it isn’t quite as bad but it is still something to think about. If you have to drive 30 minutes back and forth to work, 5 days a week, you are spending 5 hours a week sitting in your car. Multiply that times your hourly wage and it can start to add up.
Let’s just assume you aren’t going to move, for now. Where else can you save big money? Besides housing the biggest expenses are cars and food. Whenever you buy a new car, our inclination is to think only about the monthly payment. But cars are expensive. You have the payment, gas, insurance, repairs and maintenance. I found this from Lending Tree:
The average monthly car payment in the U.S. is $550 for new vehicles, $393 for used and $452 for leased. Overall, Americans owe more than $1.2 trillion in auto loan debt. Auto debt makes up 9.5% of American consumer debt. On average, Americans take out about $51 billion in 2.3 million new auto loans each month.
Now you’re starting to talk about real money. The average cost of car insurance is $1548.00 per year. Then add in gas, repairs and maintenance (I saw $99.00 per month on a newer car) and the costs of licenses and registration. Add all of this up and you’re talking about pretty close to $1000.00 per month for one car!
Next, food!! Everybody knows eating out is expensive, so an easy way to save money on food is to not eat out as much. Duh! But where else can you save some money on this major expense? One thing to consider is to try to stay out of the middle aisles of the grocery store. That’s where all of the processed food is located. Try to stick to the outside aisles. That’s where the fresh fruits and vegetables, meat and dairy are located.
The only other idea I have for this, is to go to the store with a list. It’s way too easy to just go to the store without a plan and just pick stuff off the shelf.
Finally! The two points of this piece are GameStop doesn’t have too much to do with serious retirement planning and initially, saving money is more important than rate of return. I would suggest you and your spouse sit down and write down 5 or 10 ten things that are important to you and your family. Next, see where your money is being spent and figure out if it aligns with your values and what is important to you. If going to Starbucks and buying a latte everyday aligns with your plan, knock yourself out! However, if you find that you’re spending a bunch of money on something that isn’t in alignment with your values and goals, then you need to make some choices.
If you would like some help with this stuff, feel free to reach out to me. I love talking about this! As always, thanks for reading! KB