My Dad’s Financial Common Sense

I did not have a rich or poor dad. My dad was not rich in material goods. He didn’t have many assets (money), a formal education (he did get a high school GED when he was in his 40s) or a white collar job. My dad was, however, very well read, talked with anybody that he met, had very good common sense and street smarts. Dad told me a number of financial ‘rules’ when I was young that I did not understand until I got older. I wish I had understood these rules at a much younger age.

Financial rules of my Dad:

• You need money to make money. When I understood how the rule of 72 worked (http://www.moneychimp.com/features/rule72.htm) I understood why this was a very important financial lesson. This is how the rule of 72 works; if you have 7.2% rate of return on your investment you will double your money in 10 years (72 / rate of return = time it takes to double your investment). If your returns are 3.6% it will take 20 years to double your money. For example, if you have $1 million of investment capital and your rate of return is 7.2% you will have $2 million in ten years. It is very hard (or impossible) to save $100,000 per year for 10 years. This is why, when you start working, you want to start a program to save money so you will have investment capital in the future. To understand this rule is to understand the time value of money.

• In the depression some people still got rich. There are always ways to make money in any economic environment. A number of investors made large sums of money using credit default swaps when the housing bubble collapsed. There will always be ways to make money whatever the economic environment or financial crises. For example, if you think there will be high inflation and interest rates in the US, short medium and long duration US bond funds or US government treasure bonds. You don’t always need a growing stock market to make money. What you do need to do is to stay positive, and you may have to think outside the box to make money in a difficult economic environment or during financial crises.

• The only things money buys is freedom and the time and means to help others. When you have accumulated sufficient assets that you don’t need to work anymore you are free to do what you like to do and help others. You can continue to work at jobs that motivate and interest you or, if the job is no longer fun or interesting, you can quit at any time or find a new job. You can help others financially or use your time to help them. 

• You always need a nut (money).  You should always have an emergency fund in near cash assets (for example, money market funds, layer CDs, etc.) of at least 6 to 12 months of your monthly living expenses. For example, if your fixed and variable living expenses are $5,000 per month you should have at least $30,000 invested in near cash assets. I prefer to have 12 months of living expenses. This is very important if you lose your job and there is an economic downturn at the same time. You don’t want to sell assets that may have decreased in value or use your retirement savings to pay for your living expenses (which can be very costly in the long term). If you do not have emergency savings or liquid investments you could lose your house, automobile or other assets due to lack of ready cash.
 
• Money talks, bullsh*t walks.  It’s put up or shut up. You can talk all you want about wanting to buy a house, stock, automobile, etc., but at some point you need to have the cash to buy it. It’s great to talk to somebody about buying a house, but the person selling the house will deal with the person that has the most money with which to buy it. If you want something you need the cash to be able to purchase the asset.
 
• It’s only worth something if someone is willing to pay for it. Your house may have been worth $1,200,000 on zillow.com in 2007. If you are trying to sell your house today and somebody will only pay $900,000 for it, it’s worth $900,000 not $1,200.000. You could wait a very long time to sell your house at $1,200,000. If a stock price was $100 on January 15, 2010 and it is now selling for $35 it is worth $35, not $100. The asset’s value is only what somebody will pay for it, not what an ‘expert’ says it’s worth.
 
• Never fall in love before you purchase something. If you fall in love with something before you buy it you cannot make an unemotional decision. You lose all power to negotiate and you can’t walk away without buying it. If you’re able to walk away from a negotiation at any time, you have the upper hand. For example, ask yourself if you could get the asset cheaper if you waited two weeks, can you negotiate a decrease in the price (the world is a flea market), would a competitor charge less, etc. You need to view an asset from the standpoint of its actual, true value. An automobile’s value is that it is used for transportation, not picking up women.
 
• Never be forced to buy or sell something.  If you are forced to buy or sell an asset, you will lose your ability to negotiate - you'll have no ability to walk away from the deal.  Avoiding this situation requires planning and/or an emergency cash fund. Money (nut, emergency fund, etc.) buys you time. If you know that you are going to need $30,000 to pay for your kid’s college tuition in 9 months you should start planning on how you are going to pay for it today. You do not want it in risky investments that could lose a lot of value just before you need to convert it to cash; you may want to put it into a CD or money market today.
 
• If you want to buy something over $100.00 go home and sleep on it and see if you still want it the next day.  This was in the early 1970s - with inflation you may want to increase the amount to $300. This is a great way to save money and not buy goods on impulse. For example, you go bike shopping and you find a great bike that costs $1000. You take it out for a ride and you love the bike. Do you buy it now? No. You tell the salesperson you will be back tomorrow to buy the bike (he will give you a lot of reasons why you cannot walk out of the store). You start asking yourself questions, for example, do I really need a bike, can I get a used bike for less cost from craigslist or eBay, can I get it on-line for less and not pay sales tax, does it cost less at another store, can I negotiate the price, can I fit it into my budget, etc. This has saved me money over the last thirty years and I have not ended up with a lot of stuff that I did not really need.
 
These lessons that I learned from my dad should be taught to every high school/ secondary school student around the world. Some of them took me a long time to fully understand and incorporate into my financial planning. I have to admit, when I was in my teens and twenties, I didn’t always think my dad was such a smart guy. To young people now, I would offer this thought: sometimes your parents know more than you think - you may want to listen to their advice. It could come in handy down the road.

Please chime in with comments on any financial lessons that you learned in your lifetime.

© 2010 Paul Cusick
Paul