Spend Less Than You Earn

So, lately I have been a bit obsessed by finances, investing, and saving for retirement.  I know this is a bit strange for someone who still has not officially started their "career" and not settled down by buying their own house, but it has been on my mind nonetheless.  I've been thinking about it for a while since we had some money sitting in a "savings" account, basically gaining no interest.  And plus, it is best to start young.

I watched a Frontline documentary last month on PBS called "The Retirement Gamble", discussing how many employees have seen retirement savings diminish due to falling on hard times and having to withdraw early, by mutual fund companies and others mismanaging their hard-earned money, or a combination of other factors.

One of the central figures that Frontline interviewed for their documentary was John (Jack) Bogle, the financial mastermind who created the Vanguard mutual fund company in 1974 after noticing what he calls "the tyranny of compounding costs" present in all other mutual funds.  He says the best strategy for investing in the stock market is to buy stock in the whole stock market and own it forever and this is exactly what index funds do.

Jack Bogle

Since costs really do cut into your long-term profits, it is best to find a low-cost fund that has the investors best interest in mind.  Studies have shown that low-cost index funds outperform most actively managed funds year after year.  Most importantly, past performance is not indicative of future success.  Even if you happen to choose a fund that outperforms the market, chances are that fund will not outperform the market long-term and this is where fees really cut into the investors margin.  On the other hand, index funds like the ones Vanguard offer can capture almost all of the markets value, while maintaining much lower operating fees (0.05%; 5 hundreths of 1 percent a year), as opposed to fees over 1% year in actively managed funds.  I was so intrigued by the topic, I checked out a few books written by Jack Bogle from the UCR library and read them quickly: John Bogle on Investing: The First 50 Years and The Battle for the Soul of Capitalism.  I suggest watching the documentary and reading some of his books if you want to learn more about it.

The documentary and books were very educational and enlightening, but one of things not discussed in them was the overall culture in America of spending more than you earn.  Buying things you don't have money for is not only allowed in our country, it is encouraged.  When you live in a credit card culture, you never have to wait for anything you want.  You just take out a loan and become a slave to your debt. J. Reuben Clark Jr. put it this way, "Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation. … Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you."

If there is one simple rule to living a stress-free life when it comes to finances, it is to spend less than you earn. And then second, to invest your savings in the right vehicle.  The more you can save, the better off you will be.  We want to be on the other side of the ledger; the people earning the interest, not paying it.  In order to save more money, you can either increase the amount of money you make or decrease the amount of money you spend.  The bottom line is: just because you are making more money does not mean you have to spend more money.  A person making $50,000/year, who saves $20,000/year will be more wealthy in the long run than a person who makes $100,000/year and only saves $10,000/year.  Marvin J. Ashton stated in his booklet on finance for members of The Church of Jesus Christ of Latter-day Saints, "Financial peace of mind is not determined by how much we make, but is dependent upon how much we spend."