The Real Employee Manual

Thrift and Asset Accumulation OR building enough financial security so you can fire your last boss at will and only do what you really want to do



The surest and most risk free way to generate a significant return is to avoid paying interest to banks and to aggressively prepay loans.  Banks charge you crazy interest and fees to borrow and pay you nothing when you lend to them, which is what your deposits are: a loan the bank can prevent you from getting back and for which they don’t necessarily have to pay you interest. They use your low or no cost loans as assets (though they are really liabilities) to  make speculative investments and benefit from the government’s authorization of fractional reserve lending to legally counterfeit more money that they are free to invest in more speculative ventures. This should tell you all you need to know about the banking business and whether you should trust them or the Federal Reserve System that works for them. Whatever anyone says, you can’t make up for interest expense in tax deductions and taking on risk while incurring the certainty of paying interest for the privilege is almost certainly not worth it.  If you haven’t paid off all your loans, you should be allocating at least 25% of what you earn to doing so.  If you can’t do that you are earning too little or spending too much. See my previous posts about this.  If you have college loans you are not in a position to take on a mortgage to buy a house and should be traveling under human power, driving the cheapest wheels you can buy with cash (e.g. Grandma’s 2005 Grand Marquis), or using mass transit. Period.

I’ll come back to using leverage to acquire real estate later on.  For right now, you should never be borrowing and paying more property taxes than what a prudent lender used to say made sense, namely about 1/3 of what you make in total payment for principal, interest and escrow for taxes. Any more means a sketchy deal and you should be looking to lower the percentage of budget allocated to your dwelling as much as possible as soon as possible.  At this point, that means most people are better off renting. Even though rents are high in most places people are flocking to, and typically go up faster than income, homes are not affordable and not worth what they currently cost to own.  Just remember this: the house where you live is not an investment — it’s just a tent with walls & plumbing and a box for your stuff.  If you want your home to be a palace, first make sure you can afford it. Most likely you can’t.

If you are debt free, have at least six months of living expenses in cash or the equivalent, are saving 25% of what you make each month and putting that in a safe place (there’s no such thing really, but FDIC insurance helps), you are ready to start thinking about investing.  You can’t invest without capital and the way you get capital is by saving, not borrowing.  There is no alternative to doing this and all the people who say you don’t need to and should use other peoples’ money are lying to you.  Yes, leverage is great when it works in your favor or you can buy politicians to make the problem go away or stick it to the taxpayer.  I’m guessing you can’t do that.

With investment, you are trying to create a balanced, diversified portfolio that prudently and consistently offers decent yield at acceptable risk. What that means depends on you. However, you should not get into investing until you have saved a significant chunk of money on which you get crummy interest but have peace of mind. Then you should take a portion of that that is equal to the amount you feel you can afford to lose and start to buy securities with it. You can’t legally get high yield with low or no risk and anyone who says you can is another Bernie Madoff. You can’t replicate the combination of asset accumulation with yield and protection from inflation and other forms of financial predation that securities offer without buying whole businesses that you will then have to be prepared to manage and for which you share liability. Plus, securities can be bought and sold in small amounts.  You can’t do this with a car wash or restaurant.  If you want one of those you first need to amass capital and that means being a successful investor, not a successful chef.  But there is a catch. You are flying without a net and it’s best to practice at a low height first.

So what are securities and what kind or kinds should you buy? First let me say, I am not telling you to buy shares or debt in any one company or entity. You need to do research on your own and not trust “experts.” If you want an expert, get a licensed professional but realize that you are the one holding the bag and you need to understand what you are buying, what the risks of holding are, and no less important, when to sell it.  That said I can give you some general guidelines.  I’ll offer a few brief words in subsequent posts on various types and their pros and cons. Realize that you can spend your life studying this and not master it because it changes all the time, like dining establishments in New York City. You will never be able to eat at all the good ones but you can keep trying.

By vitruvius1

Formerly an integrated marketing and customer experience consultant. Writer on moral philosophy and current affairs.

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