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Friday, 18 October 2013

Finding your investment money

I interrupt my ‘mini-series’ on the corrosiveness of debt to answer a question that I get asked quite often - how to I find the money to invest?  You know, this stuff.....

With the overall economy in the dumpster, salaries growing less than inflation over the long-term, and especially for high-school & college kids who may work part-time but the pay is barely enough to fund the all-important beer money, how can I possibly find the money to invest? 

Easy – you just need to pay yourself first.  And you can implement it in about 10 minutes.  Interested?  Well then read on.

This particular technique took me well into my 30s before I mastered.  (Tragic, I know.  But remember, my concept of the NITK is to share everything I’ve learned over the past 20 years in an attempt to help the younger generations).  And it is so simple – and I believe fool-proof – that you can put it into practice when you first starting earning income, whether from a paper route, a waitress job, a temp position but, most definitively, your first post-school job.

So how does one go about paying themselves first?  You do just that – you pay yourself before you pay bills, buy late night snacks, purchase that morning latte…even buy food and, yes, tragically, before you buy beer.  You see, if you don’t see the money, you won’t (and can’t) be tempted to spend the money.  In short, paying yourself first means you transfer a portion of your income (in whatever form it’s in) to another bank account – a newly-established bank account that you do not live on and that you, most definitely, don’t have a debt card or check book to draw funds from.

As I write on the NITK website, first you need to pay off your credit cards (see recent blog entry), then you need to pay yourself first…and you know what?  It doesn’t really matter how much you pay yourself.  What really, really (REALLY) matters is that you start as young as you can.  And you take this ‘new-found’ money and invest it in the greatest wealth creating vehicles of all time.

One key point I’d like to make…and that is that this really isn’t very difficult….if you’re young.  However, it does get increasingly difficult as you age.  And I’m not referring to the discipline of paying yourself first but rather the ability to build serious long-term wealth by utilizing one of the most powerful forces in nature….time.  And add to time some knowledge & discipline and you are, truly, 100% able to forget about your financial future.  You can, instead, focus on the important things in life – family, friends, hobbies, and anything else that floats your boat.

How to implement?  How much to start with?  Where to put the money?  Well, I’m not going to spoon feed you on this blog.  You need to check out to find out the details.

Love Mondays?

For the Brazilians / Portuguese speakers out there, I found a wonderful site that gives internal insight into companies...information that you can use before you join as an employee.  

Why & how is this relevant to the NITK?  Well, left unsaid is that one needs an income in order to allocation some capital towards investing.  An active income is everyone's starting point.

The site describes itself as follows:
Considering a career change? Often you don't really know what it's like to work at a company until you start working there. And then if you don't like it, it's already too late! Love Mondays gives you access to free company reviews - all posted anonymously by employees of those companies. They say what they like, what they don't like about the company, how happy they are with the culture, management, salary, work life balance and much more. This way, you can make a well informed decision on what's the best place for your next career move. 

The link is 


Sunday, 13 October 2013

The corrosiveness of debt - part 2 (credit cards)

In part 2 of my look at the corrosiveness of debt, I am going to deep dive into credit card debt. In part 3 I'll discuss what constitutes "good debt" from "bad debt" and I'll finish this mini-series on the corrosiveness of debt with a look into our new bubble in the US economy – student debt.  So, in effect, you can expect a mini-series on debt before we turn to investing.

But why so much attention on debt, you may ask?  Because I strongly believe that debt is the key impediment, thrown up by our societal influences and/or our economic systems, to successful investing…

The dangers of credit card debt
First, two stories about my personal experience with credit cards in college as well as in my first post-college job. 

Back in 1989, I went on Spring break to the Bahamas with my Clemson University fraternity brothers.  I won’t get into the debauchery normal with Spring breaks – this is an investing blog after all – but rather, make the point that I had recently received a newly-minted American Express Optima card…that I was going to fully test drive!  (Let’s conveniently ignore the fact that AMEX would give a college student with no income a credit card with a $10,000 spending limit…)

A fraternity brother of mine & I agreed that we would buy stuff together (mostly Kalik, a local Bahamas beer) and at the end of our Spring break, he would pay 50% of the bill (my potential mistake number 1 – I took all of the repayment risk to the credit card company.  Fortunately, Scott was an honest person and did pay half of the bill).  My point in this little story is that by day 3 or 4, after charging far too much, incremental purchases on the Optima card (we actually started yelling OPTIMA in local establishments when we were about to make a new purchase) increasingly became ‘funny money’.  In other words, the balance was growing so quickly, I began thinking, what’s another $100?  From a percentage basis, it wasn’t sooooo much.  I had lost touch with the value of the underlying (and quickly growing) debt.  Fortunately, we did pay off the bill in its entirely when we returned to Clemson. 

Fast forward to my first job experience in New York City.  In 1990, the cost of living in NYC wasn’t cheap (I’m pretty sure that it’s still as bad, perhaps even worse).  I had a good paying job with Goldman Sachs but I still found myself running short every month (being a young, single bachelor in Manhattan requires a certain lifestyle!).  And so, every year (for the 3 years I lived in NYC) I would gradually build up my credit card balance (my actual mistake number 2 – in fact, a personal Full Monty mistake (Full Monty is a British expression meaning all out, complete) – I ran up a balance that I did not pay off each month). 

At the end of the year, I would have this monstrously-large credit card balance….that I would then have to use my annual bonus to repay in full.  Yes I was lucky to have this bonus available that I could use to repay my debt but I clearly remember to this day, nearly 20 years later, the horrible sinking feeling I would have using my ‘new’ money to repay debts for things that I had long lost forgotten I’d purchased.  Yet I would repeat this stupid mistake for two more years.

My lesson learned from these two stories - credit cards should only be used for short-term liquidity ‘float’ – i.e., you can borrow money at no-cost as long as you repay the balance every month, every time.  Because so many people fail this basic test every month, credit card companies make fantastic investments (think AMEX, Mastercard, Visa).  Why?  Because they are so profitable…due to those folks who have never learned the most basic of basic lessons – (i) credit card debt is NOT ‘funny money’ and (ii) don’t live beyond your means month to month.  I made both of these mistakes and learned the hard way.  Don’t do the same.

The cost of credit card debt – some numbers
As I write on, The credit card industry is a gimongously profitable business.  According to various sources (including a 2010 Federal Reserve Bank of Boston study - search for it, and others, this information is all out there), there are over 600 million credit cards held by US consumers.  Average credit card debt per household is in excess of $14,000.  This amount, no doubt, fluctuates over time.  I would venture to guess that average balances go up during the good times, when people consume more, and down in the dire times when people are concerned about the economy, their job stability, etc.  However, one could easily take the opposite position and believe credit card balances increase during bad economic times because people need the credit in order to pay bills and make ends meet.  Whether the former hypothesis is correct or the latter is doesn't matter - what matters is you should never, ever carry a balance on your credit card.  Why?  Simple mathematics.

The average APR on credit cards is over 14%.  Many cards charge far in excess of this amount.  This is extremely expensive money when one considers the cost of money to banks is currently close to 0%.  They charge this spread because they can.  No other explanation.  But rather than rail against these credit card companies your take-away here should be two-fold:
  • If the cost of this money is so expensive, I should prioritize paying off my balance....and keeping the balance at 0 every month (i.e., pay it off every month)
  • If they charge so much they are most likely very profitable.  Therefore, perhaps I should investigate investing in Mastercard, Visa and/or American Express?  This is an important mind-set change that I encourage you to develop over time.  One person's cost is likely to be another's profitable venture.

But back to my point - the cost of borrowing money from your credit card company is greater than the average returns from the stock market over the last 30-40 years.  Warren Buffett, perhaps the greatest investor in our lifetime has achieved 19.7% average annual returns in Berkshire Hathaway, his main investment vehicle, from 1965 to 2012.  The average annual return from the S&P 500 index (which includes the 500 largest publically-traded stocks in the US), including their dividends, was 9.4% over this time period.  Your takeaways?

  • If the cost of credit card debt is higher than the average stock market returns, then this is a bad trade.
  • Unless, of course, you're Warren Buffett - then you can capture a 4-6% spread by borrowing expensive credit card debt and investing this in the stock market!  Woo-hoo - road to riches, right?!  Well, no, as neither you nor I are anywhere close to Uncle Warren in investing prowess.

So, a final message to those currently carrying credit card debt – pay it off as soon as possible.  Use the ‘paying yourself first’ methodology that I cover on for credit card repayment.  Because, until you get control of this extremely corrosive debt, you will never ever become a successful long-term investor.  Unless you’re as good as Warren Buffett.  But you’re not.  And I'm not either, but I learned the hard way.  Don't do the same.  Pay down your that credit card balance to zero as soon as you can.  For your own good.

Next up – a look at what makes "good debt" and "bad debt" in part 3 and completing the debt series in part 4, student loans.  And why it impacts you and what you should do about it…

Until next time, read more about investing on

Monday, 7 October 2013

The corrosiveness of debt (and how we got into our current global predicament)

Debt can be a useful tool.  But it can also be corrosive.  So corrosive, in fact, that it can destroy hope, prosperity and, ultimately, even lives.

Debt is defined on Wikipedia as an obligation owed by one party (the debtor) to a second party (the creditor); usually this refers to assets granted by the creditor to the debtor.  In order words, someone lends you money (among other things) and you are expected to pay back this money, with interest included.

Debt comes in many forms, some ‘acceptable’, others less so.   A mortgage, secured by a property and a person(s) is a commonly accepted form of debt that has enables millions to ‘own’ a home (note – you truly only own the home when the mortgage is repaid…).  The traditional mortgage is relatively low cost (secured against the underlying property) and is, most times, a reasonable exchange between debtor and creditor. 

In the world of corporate finance, bank loans and bonds are secured against corporate assets and/or cash flows and, in the case of project finance, secured against a project’s cash flows and the equity capital of a sponsor.  These forms of debt are useful in a capitalistic society as they enable companies to leverage their activities with more capital than they would otherwise have at their disposal – and they do so by promising a portion of future value in some way, shape or form to repay the debt in the future.  But it’s a fair trade.

Prior to the year 2008 (perhaps even by 2006-07, when signs of over-indebtedness began to appear), debt was generally a useful - and non-manipulated - tool for capitalists to fund growth.  Yes its use increases financial risk of a company but, used prudently, it can be an effective lever to growth.  Even in the junk bond era in the late 1980s, when companies of dubious standing were able to raise a lot of debt in the high-yield bond markets, most of the resulting losses that occurred were suffered by sophisticated investors.  They knew the risks they were taking when they bought the junk bonds and if they lost money, well, that’s how a functioning capitalistic system should work.

Whereas the corporate sector maintained some semblance of reason leading up to the current debt crisis, unscrupulous mortgage brokers, borrowers, commercial & investment banks, federal agencies all worked in concert to effectively & completely “screw the pooch” at the retail level (excuse the American idiomatic phrase as I realize I have many non-American readers – it means that these actors have has made it difficult for the rest of us). 

This has, in turn, caused this New Recession that we still find ourselves in, 5 years later, after the start of the debt crisis.  I wouldn’t call our current predicament a depression….yet.  We seemed to have dodged this particular bullet with extremely loose monetary policy (think a lot of very low cost credit from institutions like the US Federal Reserve and the European Central Bank).  The level of societal debt has increased, dramatically, since 2008, as hundreds of billions of dollars in bad loans were covered by governments around the world (and, ultimately, tax paying citizens like you and I).  Look around you – do you think we’re in a better situation now that we were pre 2008?  I think not.

As many others have written about, this housing crisis was caused by a dishonest alliance of people who couldn’t afford loans; brokers who only wanted that upfront transaction fee; lenders who didn’t do the required due diligence because they didn’t intend to keep the loans on their balance sheet; the investment banks on Wall Street who took said loans, packaged them into CDOs (i.e., collateralized debt obligations – a fancy way to say a lot of loans jammed into an investment portfolio), and… stuffed them to stupid investors.  I should say there were also various enablers involved – think credit agencies like Moody’s, S&P, etc – who rubber stamped these CDOs, indicating they were solid investments.  In fact, most were a giant piles of sh!t…And we, as a global society, are still paying the price. 

So, this was (is?) clearly bad debt.  The original borrower had no capability to repay it (possibly even no intention of repaying it), brokers collected their fee and moved on, not caring about the loan’s performance, the lending banks also didn’t care as it sold this ‘asset’ into CDOs, the investment banks collected their fee as they found, with the credit agencies help, the sucker at the end of the line who thought they were buying a quality, yielding investment.  A dishonest alliance.

However, this only tells half the story of our current debt predicament.  As mentioned earlier, various governments around the world helped bail out the banks to restore solvency – leaving you and I to ultimately pay for others’ bad judgment & dishonesty.  And we’ll still be paying this bill for a generation (or more).  But what is this only half of the story?  Ironically, the damage of debt continues afoot in two other areas where debt, on the one hand, should be used a tool of flexibility, and on the other to benefit society at a macro-level.  Rather, corrosion has set in and may derail the United States (note – each of the two have much less impact in other parts of the world; so there is that).  I’ll address these forms of debt in my next blog entry.

One final point to make today:  you may ask yourself, why is, a website that aims to help young and novice investors get on the road to financial independence via simple & proven investment strategies, discussing problems with debt?  Simple.  If you have too much debt – of any kind – you must eliminate it before you can turn to investing.  If you don’t, you are merely taking capital from one pocket & shifting it to the other – BUT, you are taking all of the investment risk while “between pockets”.  What I mean by this is that you would be taking 100% of the risk that you can earn more from your investments than the cost of your debt.  And you probably cannot do this long term.  Warren Buffet can – and he has.  But you’re not Buffet.  Check out Finding the $ on to see what I mean.

Friday, 4 October 2013

1st blog!

I've been watching with interest what's been coming out of the One Young World ( conference down in RSA.  For those of you who don't know, OYW is an organization set up to provide networking opportunities for young people (below 30 years old); networking that creates lasting bonds that, it is hoped, will create real positive change in the future.

As Arianna Huffington posted on LinkedIn yesterday, Einstein believed we cannot solve a problem by using the same type of thinking that created it.  Meaning our youth need to think differently if we are going to solve the world's problems, including education, healthcare, climate change, globalization and outsourcing, automation, unemployment, famine, name but a few.

I've only recently 'discovered' OYW but will now be following it closely as its target audience - youth - is precisely the same people I'm keep to interact with on

First blog completed!