Financial folks tend to overcomplicate things.
So, let me uncomplicate things for you: Many people only need a bank account.
Why? Because stocks can be volatile, and most people have terrible instincts. They pile in at the top of the market and sell on the lows, no matter what the experts tell them about holding stocks for the long run.
People are human beings, and they screw up all the time.
It is hard to screw up cash in a bank account.
So, the first step in investing for retirement is to go to a bank, open a savings account, and put as much money in it as you possibly can. You cannot lose cash in the bank, provided you’re under the FDIC’s $250,000 limit.
There is an incredible amount of value in not losing money. A professional would say that you have a max drawdown of zero.
Now, some of you are wondering, “How am I supposed to save for retirement if my money isn’t compounding at 8%?”
You just have to save more. Or as I often say…
“Save until it hurts.”
Which I’ve certainly done.
When I was 22, my fiancée (now wife) and I moved to Washington state for my first job. I drove a Toyota Tercel. We got an apartment for $350/month. Our weekly grocery bill was about $45. We almost never ate out.
I was getting paid about $860 every two weeks, after taxes. My fiancée was making about the same.Most of it ended up in the bank. Every two weeks, I jammed as much money as humanly possible in a savings account, which was yielding about 5%.
A couple of years later, we had saved about $40,000. It was pretty powerful—two 24-year-olds rolling around with $40,000 in cash and very little debt.
You don’t hear many stories like that these days because young people (regrettably) have more student loan debt, which is an issue for another day.
Also, saving isn’t as fashionable as it used to be.
Thirty or forty years ago, it was simply what people did.
Yes, interest rates are incredibly low now. But still, the contempt with which people hold savings in a bank today is incredible. People think you’re a chump for earning zero and not buying Amazon (AMZN).
Saving is about delaying gratification. In some respects, it is an act of faith. You put off buying something today to buy something else tomorrow. You don’t know what that is, but it might be something good.
So, you wait.
Wealth is typically the product of one or two large decisions.
It comes from buying a house at the right time or getting a job with a growing company that gives you stock options. Even better, it comes from starting a business, like we discussed last week.
Stiffing ten thousand servers on their tips isn’t likely to get you there. And even if it does, it could cost you your reputation. People who are tight with a buck—the ones who never pick up the tab—simply aren’t well-liked.
Please don’t interpret that as license to buy $20,000 worth of Christmas gifts. If you want to save enough to achieve some degree of financial freedom, you will have to disappoint some people in the process.
Try to be reasonable about it. Save money where you can. But remember, the smaller decisions are smaller than you think they are.
And the big decisions are bigger than you think…
My wife and I took our $40,000 and moved to California in 1998. We wanted to buy a condo—I’m not really sure why.
At the time, I didn’t know anything about owning property. I certainly didn’t know how a mortgage worked. I knew absolutely nothing.
But there we were with a real estate agent, looking at condos. We finally found one that we fell in love with. It cost about $176,000.
We took most of that $40,000 and used it as the down payment—a staggering amount of risk. Of course, 1998 was a good time to buy a condo in California. We sold it a little over two years later for $297,000.
Our investment had nearly doubled in two years.
We were lucky, for sure. But it was possible because:
We had no debt,
Which allowed us to save,
And take a calculated but concentrated risk,
Which paid off huge.
When I started working at Lehman Brothers, most of my colleagues had no savings and were struggling to pay off student loans. My wife and I had multiple six figures in the bank, despite having incomes that would have otherwise given us a lower-middle-class existence.
All of it was possible because we had cash in the bank.
P.S. Years later, I’m still a big fan of cash. There’s a good reason it makes up 20% of The Awesome Portfolio—the low-risk investing strategy I developed to limit volatility (the main reason people make dumb mistakes in the markets).