Thoughts on investing
There are two tried and true ways to create wealth. One involves savings, the other debt. It rewards those who are patient and can stomach the ups and downs of the markets. Holding cash is a loosing business, as inflation eats away your hard earned money. What to do? One way to make money grow is through index funds. More precisely exchange traded funds like this one
https://investor.vanguard.com/investment-products/mutual-funds/profile/vfiax
Congratulations, you are now a part owner of the biggest 500 companies in the US, and you can expect an average 10% return on your investment. Feel free to ignore the daily news cycles about inflation, recession, economic turmoil and other scare tactics. Please also ignore all the people who give advice on investing in this stock or that stock. As we’ve seen through the recent recession, even “solid” stocks like Netflix, Disney or Facebook can take a nosedive and crash hard. That’s why you should buy ALL of them. That’s the beauty of the index fund. I’ve lived through a few recessions, and I’ve never sold. (2008 subprime mortgage crisis, Covid recession). A $10,000 investment in 2010 is now worth a solid $50,000, and it will continue growing with compounded interest. That being said, the economy goes through cycles, and you might see your investments loose money, sometimes for years. This is a long term (more than 10 years) investment strategy, and you should always have 6 months of liquid assets (fancy word for cash, money market account or savings account) as emergency funds.
https://www.in2013dollars.com/us/stocks/s-p-500/2010?amount=100&endYear=2021
You don’t need to be an expert investor either to benefit from this type of investing. You’re well diversified by investing in an index, so the risk is manageable. Even Warren Buffett can’t beat the index. America is an economic powerhouse with a population eager to consume, and I don’t think that’s going to change anytime soon. Technology and computing power will also grow rapidly in our lifetime. It’s a golden century of innovation and economic growth and abundance. Wealth inequality is a real problem, but if you live frugally and invest wisely, you can reap the benefits of this system. With your money wisely invested and seeing it grow over the years, you’re also less likely to spend it on, well, consumerism. That again frees you up to be more generous, invest in your local brewery, or buy the occasional coffee with friends at your local business.
Another way to grow wealth is by investing in real estate. You can not build any equity whatsoever by renting. It only benefits your landlord. By investing in your own home, you can make debt work for you. That’s right, ever the frugal bavarian has debt. But it has to be the right kind of debt. Should you buy a new car with a loan? I mean, you won’t have to worry about repairs since it comes with a warranty, right? No, Nada Nein and Nope. Buying a new car is like flushing money down the toilet. First, you have to pay 10% sales tax, then there is the immediate and continual depreciation of your vehicle. The minute you’ve driven your new car off the lot, you lost $5000. You’ll have to pay a lot more for insurance on a new car, and your annual tabs will be sky high thanks to the 1.1% Motor Vehicle Excise Tax. That’s $500 every year on a $50,000 car, on top of all the other fees.
Back to the “good” debt. Say Hello to the 30 year fixed mortgage. It’s a tool that can be used to achieve homeownership while enjoying the benefits of building equity and making inflation work for you. That’s right, a little bit of inflation is good news for your fixed mortgage expenses and for your overall debt. My 2008 Mortgage payment of $1400 is fixed for 30 years.
It’s wise to have a 20% down payment, as this already counts towards your equity in the house. There are also numerous tax benefits to owning real estate. All interest paid on your loan is tax deductible. These include a home loan to buy, build or improve your home. Any improvements to your house also have tax benefits, because the cost of any additions or improvements count towards your “basis”. Basis is a fancy word for how much you paid for your house plus expenses for improvements like a new roof or kitchen remodel. Keep those receipts! When you sell your home, you won’t have to pay taxes on those expenses since they do not count towards a taxable gain. More about that here:
https://www.nolo.com/legal-encyclopedia/determining-your-homes-tax-basis.html
House expenses for repairs and upgrades must be included in your calculations for how much you can afford. But not all repairs and upgrades have to be done right away. The frugal Bavarian still lives with an “almost new” 1958 kitchen. Yes, you heard that right. It’s’ all original. The cookstove and oven are nostalgic, beautiful and fully functional. Ok, the oven is a little temperamental. This is another example of want vs need. Believe me, people cooked very delicious food in the 1950s. Watch Julia Child.
