MMM: Mutual Funds

Alternate Dimension Andy (ADA):

That stock market shit is nuts. I mean, there are thousands of stocks to pick from, and each of those stocks has about, oh, a kajillion factors that could make it a good or bad pick.

OMG WHAT TO DO

My first instinct is, "Christ, I wish there were someone who was not a fucking moron who would just pick stocks for me." Yeah man, that'd be nice.

HOLY HELL, THAT ALREADY EXISTS

It's called a mutual fund. Here's how it works:

1. You put money into the fund. (This is an intentionally-vague black box, but the precise "hows" are left for a future post/ as an exercise for the reader).
2. A fund manager uses that money to buy stocks, bonds, futures, and whole bunches of other shit. Exactly what she buys is determined by the type of fund.
3. Based on how much you put in, you are given a percentage cut of the mutual fund. So, if you put in a total of 10% of the money into the fund (you'd have to be rich as hell to do it, but let's just pretend), you'd own 10% of the fund.
4. You can cash out at any time. If the overall value of the fund has gone up, then so has your share.
   

Why this is rockin' awesome:

1. The mutual fund is automatically diverse. I'll talk more about what that means in the future, but the short version is this: you're not putting all your eggs into one basket.
2. Someone else is doing all the work for you. All you have to do is give them your money.

What is not rockin' awesome about this scheme:

1. The mutual fund manager, believe it or not, is not doing this out of the kindness of her heart. Indeed, she's probably taking a cut of about 2% of the total fund for herself every year. If the fund is worth 100 hojillion dollars, she keeps about half a hojillion dollars for herself every quarter. FUCKED UP, RIGHT
2. Because you don't have all your eggs in one basket, you're less likely to make a shit ton of money. On average, over the long haul, you'll probably make a little bit of money every year.

Precisely how to choose a mutual fund is a task far beyond the scope of this post. I will say that I recommend against choosing one solely because it has a cool name.

There's a lot more to know about mutual funds, and I'll probably talk about that more in the future. For the time being, just know that they exist, and that they're a good way for a typical investor to invest safely.

Yes, even a jackass like you, ADA.

Free: Bankrate

Alternate Dimension Andy (ADA):

There's another website in the tubal internets that I want to tell you about. It's called Bankrate.com. What is it? Well duh, it's a website that lets you look up bank rates and shit.

If you want to know where to get the best rate for a 1-year CD, check out Bankrate. Want to know what an average mortgage payment is for someone with your credit rating buying a $200,000 house? Bankrate. Want to know how much term life insurance should cost you? Bankrate.

Think about this: there are a whole bunch of banks and insurance companies out there that make money by charging interest, fees, monthly payments, etc. A lot of them get away with murder. If you take the first mortgage you're offered, you could end up paying many hundreds of dollars more per month, for instance.

Now, zag with me and think about it like this: pretend you'd never bought a banana in your life. Also, pretend that there are two grocery stores within a block of your house. So, you walk into one grocery store and see that bananas are on sale for $550 a bunch. You'd have to be crazy to buy them at that price, but even if you didn't know that was a terrible price, you'd be crazy not to go to the other grocery store and compare prices, since you're spending so much money.

In this day of interwebal communications, doesn't it only make sense that you should shop around before you spend hundreds of dollars? You know, just to make sure that shit is on the up and up? That's what Bankrate is all about. Of course, if you're a fucking moron, you can just stick with the first offer that comes your way.

Also, they have whole bunches of articles about personal finance, written by people who (unlike me) have a fucking clue as to what they're talking about. Imagine that!

Hope you love it. Cowabunga, over and out.

ADA: You Need a Goal

Alternate Dimension Andy (ADA):

I think we may have gotten a bit ahead of ourselves, here. I mean, I'm telling a starving man how to cook a steak. What the hell good is this stock market info if you're still spending most of your excess money on debt? (You are doing that, right?)

It's just a road map, ADA. Please calm down. Lower your voice.

I'm telling you about these things 'cause the more you know about them now, the better you'll be able to make good decisions now.

Still, I've put the horse before the cart, taught you to run when you were still learning to crawl, and subjected you to a host of other cliches. I have to give you a clearer road map so you can understand why you should give a shit about the stock market.

You need to do two things today:

1. Determine what your ultimate goal is in the arena of personal finance.
2. Plan for that goal.

Very Exciting Example

It is my goal to retire by the time I am 55 with enough money in savings that I can earn my pre-retirement salary for the rest of my life. How do I plan on doing this?

• First, I will aggressively attack my debt. By putting a little extra into my student loan payments, I aim to be debt free within five years.
• Meanwhile, I will invest as much as I can into my 401(k), making sure I'm taking full advantage of my company's matching plan.
• Once my debts are paid off, I will take the money that would have once gone into paying off my loans and invest that into my retirement and savings.
  
• I will also set aside a little bit extra from every paycheck which I will use to invest aggressively. This, of course, after I've maxed out my yearly contributions to all of my retirement plans.

Some things I'll do that will help:

• When I need a "new" car for myself, I'll buy a used vehicle and pay with cash. If I can live without a car, I will.
  
• When it comes time to buy a house, I'll pay down at least 20%. I will pay off my house as quickly as possible, paying off at least an extra $100 a month beyond my minimum mortgage payment. I will not buy a house until my student loans are paid off.
  
• I will go to graduate school to increase my earning potential (and [just as importantly] to get a better job in the field I love). I will bend over backwards to find funding for grad school: fellowships, scholarships, etc. I will not go to graduate school until I've paid off my undergraduate loans.
• I will stick to my spending plan. This is not negotiable.
• I will encourage my wife to save aggressively as well. We will both live simply and never beyond our means.
  
• We will not have kids unless they are free. (Yes, I'm kidding. We won't have kids unless someone pays us.)
  
• If I can get a job at Google, where they'll match up to 60% of your annual paycheck in your 401(k) plan, I will do that.
  

Some reality checks:

• As far as being debt-free within five years goes: I can wish into one hand and... Damn, I'm just full of cliches today.
  
• Aggressively saving for retirement might not actually work if I'm not taking home enough to pay my rent.
• Waiting for grad school 'til loans are paid off: not sure that's necessary. It might even hurt me, since I'd be missing out on a couple years of higher earning potential.
• My wife doesn't like being convinced. She is the boss, you see.
  
• Kids are -- I was surprised to learn -- somewhat expensive!
• Google does not give jobs "all willy-nilly." Indeed, there is very little willy or nilly involved in their recruitment process. That's why it's such a super-awesome place to work; they want the best and the brightest to want to stay with them. Still... a boy can dream.

So, ADA, I'd like you to do something similar for yourself. If you have a blog, we could even call this a "meme!" True or false: this is exciting enough to make your genitals tingle.

Me too, man. Me too.

MMM: The Stock Market, Part 2

Alternate Dimension Andy (ADA):

The stock market is much more complicated than a flea market to facilitate the trading of parts of goatee wax companies. In fact, in the real world, there is not a single "goatee wax and wart remover" company that sells stock. (I'll talk more about this in a future post, "MMM: Starting a Goatee Wax And Wart Remover Company.")

For starters, there are dozens of different types of companies: automotive, software, oil... even comic book companies.

Plus, "the stock market" isn't even an actual place. There is a place where stocks are traded; that's called a "stock exchange." The stock exchange you're probably most familiar with is the New York Stock Exchange (NYSE). Worldwide, there are hundreds of exchanges. When people talk about "The stock market," though, they're just talking about the activity that is buying and selling stocks.

Snore.

The most important thing for you to know about the stock market is that it's risky. If you put money into the stock market, it's not going to grow at a fixed, predictable rate like your savings account. One day, a company's stock might go down 20%. A company might go out of business, making your shares worthless. If you put all of your money into the stock market, you might very well lose it all.

Why on earth would rich people put their money into the stock market, then? 'Cause there's an even better chance that your shares will gain money. Not only that: on average, they'll gain money even faster than if they invested it in something else. Bonds and other investments typically bring in between 6 - 7%. The stock market, on the other hand has, over the long haul, averaged about 10.5%.

Asterisk. Footnote. Bullet point.

It is not the case that a given stock is guaranteed to bring in 10%. It's just the case that the whole market will, on average, over many years, return about 10%. So... if you put $d into the stock market, then waited n years (where n is at least 20), in the end you'd probably have about $d(1.10^n).

MATHS YAY

Some years, you might go way up, some years you might go way down. What's even more nuts is, this "10%" number isn't even for individual companies. It has to do with the market as a whole. Like, if you added up the value of all the shares of stock, then a bunch of years later, added up the value of all of those shares of stock, the number would be 1.1^n times larger. But for an individual stock, the numbers could be much more whack. Hella whack, even.

There is another downside to spending your money on a stock: it doesn't put cash into your pocket. If you want to cash out of the stock market, you have to place a "sell" order and wait for someone else to agree to your price. If there aren't a lot of people trading the stock, you could be waiting for weeks.

Some companies are all, "That's bullshit, yo! People who own part of this company should get a paycheck!" So, every so often, they send those people money. This money is called a dividend payment.

Coca-Cola (NYSE: KO), for instance, pays out dividends every quarter (three months). Usually, they pay out about 0.5% of the share price. So, if you bought a share of Coca-cola for $100, Coca-Cola would send you a check every three months for $0.50 (along with a note that said "DON'T SPEND IT ALL IN ONE PLACE LOLZ!").

What's particularly awesome about dividends is that you can still cash out on the stock. So in the Coca-Cola example, you'd still be able to place a "sell" order and get your $100 back. (Well, sort of. Once Coca-Cola pays out that $0.50, the shares are worth $0.50 less 'cause the company is worth slightly less. But for the sake of simplicity, let's just say you could sell the stock for your $100). Over time, while the shares are increasing in value (as most stocks tend to do), you're receiving dividend payments.

A possible way to be totally rich: buy d dollars worth of shares of a dividend-paying stock every week when you get paid. Do so for 30 years. If we assume that the dividend stock grows at an average of 8%:

• You'll own about $6413d in shares of the company.
• You'll receive dividend payments every quarter for 30 years.
• At the end of those 30 years, every year, you'll be getting back $32.07d every quarter (about $2.46d every week) forever.
  

Forever, ADA. Think about that. Free income forever. You can give it to your kids or starving kids in Africa or kids from space. You could even give it to some dude from an alternate dimension who gave you financial advice.

Think about it.

ADA: Cavemen Want Your Bling

Alternate Dimension Andy (ADA):

Back when human beings really were cavemen -- that is, when human beings literally lived in caves -- competition was pretty stiff. Among males, we wanted all the women, all to ourselves. Among females, we wanted the best man possible to look after us and our babies. We all wanted the tastiest cut of meat, the best hunting grounds, the best atlatl, etc.. Back when we were cavemen, we would maim and kill one another for such privileges.

Nowadays, we're cavemen who are stuck in a modern world. We still have all the caveman urges: "I must kill;" "I must eat;" "I must care for my baby;" "I must fuck;" "I must look after my family/ tribe;" "I must appease the gods." But now, we're educated, we have a society that urges us to control ourselves.

But we're still cavemen.

Among us are some cavemen who would do anything to make themselves the strongest; in today's world, these cavemen measure their strength by wealth. They're not the wealthiest, but they're willing to do anything to get there. They're willing to predate on their own species to get to the top. (FUN TIP: Once they're at the top, they'll do anything to maintain it, so it's a never-ending struggle.)

Those people, ADA, are why everyone needs to give a shit about money. Some are predatory lenders who will trick you into a mortgage you can't afford. Some are huckster salesmen who convince the elderly to put your retirement savings into an investment that doesn't really exist. Some own mining companies, and are willing to risk the lives of people with families (their own employees) in order to make a few extra bucks. Some aren't even willfully malicious; they just create great products that you spend your money on instead of, you know, saving for retirement.

How do we protect ourselves from these people? There are two well-known ways:

1. Never trust anyone who wants your money.
2. Know the ins and outs of finance.

Among people who opt to protect themselves, most choose the first method. I think it's the wrong one. When protecting yourself from the cavemen, paranoia will only get you so far. A grocery store wants your money; are you going to stop buying groceries? Do you want to live in L.A. without a car? Do you want to put your retirement money in a coffee can and hide it under your bed? Do you want to rent a home forever (and if so, how do you know that that's less of a scam than buying a home?) ADA, you're going to be faced with financial choices everyday. Don't kid yourself about inaction being the safest course.

You have to accept that greed is part of human nature; I'm not saying you're a necessarily greedy person, but I am saying that there will always be greedy people who wouldn't think twice about preying upon you. The best way to protect yourself isn't by hiding from them; it's by being good enough with a club that they'll know better than to come after you.

You're an actor, so I imagine you understand at least the basics of what I'm saying here: human beings have an inherent nature. Some elements of that nature are good: we love one another, we care for our young, we share, we mourn the dead; and some elements are evil: we lie, cheat, steal, murder, rape and torture. I am of the opinion, ADA, that if you want to live life, you have to accept these facts of human nature, and you have to be prepared to deal with them.

Watch out for cavemen, bro.