 Sometimes laziness kicks in when you're at a lecture in college or university and you find it easier to just snap a picture of the blackboard instead of writing things down in your notebook. Try to keep that to a minimum. An undergraduate degree is a wonderful thing and college or university can be an amazing experience. You’ll learn a great deal, but almost as importantly as your educational experiences in college, you’ll expand your horizons and your mind beyond basic academic pursuits and you’ll grow personally into a more interesting, sophisticated, and happier (hopefully) person. However, to have an amazing college experience, you’ll want to make sure you to do the below 8 things - they’ll help you manage expectations and reduce both financial and personal stress so that you can focus on school. They’ll also set you up for a successful financial and professional life once you’re out of school. 1. Understand What an Undergraduate Education Really Means in the 21st Century An undergraduate education isn’t what it used to be. Today, a college degree is more like a high school diploma than a ticket to a great job and a great salary. You must understand what an undergraduate education really means in the 21st century for your learning and for your career if you are to make the most of your college or university experience and if you are to avoid being disillusioned and disappointed in the future. We won’t go into the history of education here, but since the end of World War II, a Bachelors degree was an almost sure fired way to get a good job and earn a good income for your entire life in the Western World. Almost regardless of what you studied, if you graduated from a decent college or university, you would very likely be able to enter the workforce and earn a good income as some sort of white collar worker (or a more technically-oriented blue collar worker). You would have a stable job with a stable financial life. Since the turn of this new 21st century, however, things have been gradually changing. The 1990s saw a massive proliferation of high-powered, connected, and affordable technology for both consumers and enterprises. Today, that technology is reaching even the most remote and forgotten parts of the world. That technology, which was a novelty for many years, is now permeating deep into everything and is beginning to transform enterprises around the world in ways that are too numerous to describe in this article, but here are just a few:
Who would have thought ten or twenty years ago that so many smart college graduates would be working in places such as Starbucks - this would have been almost unimaginable to someone int he 1980s, for example, where a Bachelors degree from a reputable college or university meant you would almost surely find a decent career. Today, however, too many college graduates can’t get good work or are forced to go to graduate schools to pursue a Masters degree or professional degrees in order to have the same shot at a good job their parents or grandparents had just by obtaining a Bachelors degree. Whether or not this is “right” or “wrong” or why this is occurring are are very interesting discussions, but they are beyond the scope of this article, which is intended to make sure you’re very successful in your undergraduate education and beyond. What you need to understand is that times have changed and that your college degree might just turn our to be the equivalent of a second high school diploma. Your college degree might be very useful to your personal and intellectual life, but it might not be very useful for your career unless you choose one of the handful of majors whose graduates are very in demand with only a Bachelors degree (majors such as certain types of engineering, accounting, data science, or computer programming). Don’t take the above as anything more than it isn’t meant to be - a simple statement of what seems to be currently occurring. The above discussion is not at all meant to dissuade you from pursuing a college degree. An undergraduate education is way more than a ticket to a job - it is an opportunity to grow both personally and intellectually, it is an opportunity to become a more interesting and well-rounded person, and it is now an opportunity to see what you might really want to do with the rest of your life. Unlike past generations, graduating with your Bachelors degree will just be a starting point for most students in terms of their careers and their professional development. Check out the very interesting (and slightly dark) video below for one take on what the future of work means and how the "rise of the machines" will affect employment: 2. Save at Least $1000 for a Small Emergency Fund
Having a $1000 emergency fund before heading off to college is a must and a bear minimum - do your best to save more. There will very likely be unexpected expenses that come up and you’ll want to have the cash available to take care of them without going into debt and without stressing out too much over them. Here are just a few examples of possible finical emergencies in college:
You might already have $1000 or more saved up from gifts you’ve received over the years or from a job or two you’ve had during high school. If you don’t have that $1000 saved up, then start saving it now. You can easily save up $1000 with a part-time job (or two) during the summer before you start your freshman year at college or university. You probably won’t want to work hard the summer before college and that’s understandable, but if you can manage to work hard anyway and do the right thing of putting a starter emergency fund in place, you’ll set yourself up for a much better college experience with a lot less financial stress and worry. Remember, $1000 is a bare minimum - try your best to save as much as you can. A big cash cushion for when you’re in college will almost never be a bad thing. Don’t worry so much about where to keep the money - keep it in a simple and safe savings account and don’t invest it until you’re really ready. Now, as a young college or university student, it might be tempting to spend some of your money on frivolous and unnecessary things. That’s not good, but it’s understandable - we’ve all made financial mistakes (and other types of mistakes too). However, you must have the discipline to not touch the money unless it’s an actual financial emergency or unless you’re going to purchase something that is fundamentally important for your education, career, or health. Don’t waste the money you sacrificed to have (you either sacrificed by earning it or you sacrificed by not spending it if the money was a gift) on frivolous and useless pursuits no matter - your future self will thank you. 3. Set up a Ride-sharing Profile (eg. Uber or Lyft) Ridesharing services such as Uber and Lyft are transforming transportation around the world and have the ability to create a much safer world. If you’re heading off to college, you will be wise to make sure you have a profile properly set up on at least one ridesharing service so that you will never drive under the influence of alcohol or any other sort of mind-altering substance and so that you will have a ride in case your only other option is riding with someone who is under the influence of alcohol or some other mind-altering substance. If you’re under 21 in the United States, you shouldn’t be drinking at all per the law, but students don’t always follow the law on most college campuses - in fact, it’s statistically very unlikely that someone will reach the age of 21 in the Unites States without having had an alcoholic beverage. So, you have to be smart and prepare beforehand. A ridesharing profile will allow you to be able to leave your car at home if you know you’ll be drinking. Even if you didn’t plan to drink but decided to drink anyway, you can leave your car at your destination and take an Uber or a Lyft home safely if you have ridesharing profile set up - you can return the following morning to your car in a sober state. Additionally, if you happen to ride as a passenger with someone who ends up drinking, you can safely ride home using Uber or Lyft instead of having someone who is under the influence drive you home. 4. Read The 7 Habits of Highly Effective People Read The 7 Habits of Highly Effective People by Stephen Covey. There are many great books you can read (both fiction and non-fiction) that will expand your mind and heart and make you a more effective college student, but the 7 Habits of Highly Effective People is a book that can be counted on in many different situations and for many different people - that’s why I am comfortable recommending it to pretty much every reader. The book is slightly geared towards an older individual than an 18-year-old freshman. There’s a book written by Covey’s son titled The 7 Habits of Highly Effective Teens as well, but a person entering college is too old for that book. An entering college freshman is sort of in a limbo zone between the two books (People vs. Teens), but I would recommend reading a book that’s a bit out of your league than a book that you’re already too old for. As you grow older and mature in your personal and professional life, you’ll be able to refer to the book and reread parts of it (or all of it). 5. Make Sure Your Health Insurance Is Set up Properly Your college or university will likely require that you have health insurance in place. You’ll either still be on your parents’ health insurance plan or you’ll have to purchase it on your own or from your school. This is basic stuff, but it is important. You have to make sure you have good and proper health insurance in place because you don’t want to get sick or injured and have to incur debt to pay for your medical bills while you're pursuing your undergraduate degree. You want your college or university experience to be safe and fun, but if it somehow ends up unsafe or unhealthy, you want to make sure your medical treatment is covered and that you won’t have to stress out too much about it. Speak to your parents about this to make sure you're on their plan but take initiative on your own - you might want to call your health insurance provider and let them know you’re going to school and see what they say if you’re planning on remaining on your parents’ health plan. If you’re going to purchase health insurance at your college or university, take the time to see what’s covered, what doctors you can go to, and what the copayments are - you’ll likely be able to find this information on the college’s or university’s website. 6. Check Your Credit Score (and Monitor It Consistently) Your credit score is important because it roughly is used by lenders and other institutions to determine your creditworthiness - to determine how reliable you are financially and how likely you are to pay back a loan based on various metrics. A good credit score isn’t a necessity for finical success (especially if you have a lot of money and won’t be borrowing money throughout your life) but it is very useful to have a good credit score and a strong credit history. You’ll likely have none or maybe one credit card of your own as an entering freshman and you probably shouldn’t be applying for more during college, but you still will want to know your credit score and monitor your credit score and credit history over your time as an undergraduate and beyond. It’s a good idea to check your credit score and credit report at least once a year, but I recommend that you do it at least every six months. There are a lot of free online tools that can help you do this. Credit Karma is a popular and free tool but there might be other products and service that do a better job. Credit Karma is free, but there is advertising involved - they pitch various credit cards and other financial products to you. Every time you check your credit score, see if your credit score dropped since the last time you checked. If it dropped, find out why. Additionally, check your credit report to see if there are any new things on it that you didn’t do (eg. new credit cards, new loans, etc.). Finally, check to see if there are any derogatory remarks (eg. late payments) on your credit report. Your credit score is going to start out low because you don’t have much of a credit history as an entering college or university student, but you’ll want to make sure your credit score doesn’t fall and that your credit history doesn’t have derogatory remarks. If your credit score is low in the future, you might find it difficult to purchase a car, rent an apartment, get loans for graduate school or professional programs, open up new credit cards, or get a good loan for the purchase of your first home. You have your whole life ahead of you and you hopefully won’t go into debt, but you might - you might need some sort of loan. You want to make sure your credit score is top notch so that you actually can get the loan and that when you get it, you get it at a good interest rate. 7. Create a LinkedIn Profile You probably have a Facebook profile set up already (Like us on Facebook if you do!), but there’s another profile you should create before you begin college - a LinkedIn profile. If you don’t know what LinkedIn is, think of it as a Facebook profile for your professional life. Your LinkedIn profile is like an extensive online resume where you can list not only your work experience, education, and skills, but where you can also:
LinkedIn will become more useful as you go through college or university and then enter the workforce, but it’s a great idea to get a head start now. Here are a few things you can do on LinkedIn starting in your first semester or quarter at college or university:
If you do the above, you’ll have a solid LinkedIn profile when it’s time to look for part-time jobs, internships, and even full-time positions after graduation. 8. Sign up for Khan Academy Khan Academy is a very useful free online learning platform that’s great for anything but especially seems useful for mathematics. You can use Khan Academy to review basic things before you start classes, but it also proves useful during actual exam preparation for many students. Khan Academy has short videos on a variety of subjects such as mathematics, life sciences, physical sciences, economics, finance, and other useful subjects. Surprisingly, Khan Academy’s videos are of decent quality and seem to provide quite accurate information in relatively easy to understand video bites. What if you’ve already started college or university? If you’re already in college or university (whether you’re a freshman, sophomore, or junior), you can and should still do everything on this list if you haven’t done so already. Just because you didn’t read this article before you started college (it might not have been around then) doesn’t mean that it’s too late do do the important and useful things above - it’s never too late to do the right things and it’s surely not too late for a young college student like yourself to move forward in your life and make some wise moves.  After a financial emergency, big or small, that affects your rainy day fund, you must quickly rebuild it to get your financial house back in proper order If you’ve had a financial emergency that forced you to dip into your emergency fund, rebuilding it quickly is crucial to your financial success even though it might seem like a difficult and unpleasant task. Read the article below to get motivated and to find out how you’ll be able to rebuild your emergency fund very quickly. If you have weathered a financial emergency by tapping into your emergency fund, I want to take a moment to congratulate you. I know things might seem difficult now and even if the financial emergency is gone, it never feels good to have to tap into your emergency fund. However, I congratulate you anyway because the fact that you even had a rainy day fund in place puts you above so many others who must weather financial emergencies with no rainy day fund - they must either resort to going into debt to pay for the financial emergency or they must liquidate some of their investments. You, however, planned ahead and had a rainy day fund in place to guard you and your household against life’s financial storms - instead of hoping that those storms wouldn’t come, you knew they would one day arrive and you set out to put an emergency fund in place between you and the harsh realities of the world.
Now, however, it is time to once again buckle down and quickly rebuild your emergency fund. You can’t waste time by slowly rebuilding your emergency fund. At Pennies and Pounds we recommend building up your emergency fund very quickly and, in the same light, we recommend rebuilding your emergency fund very quickly after a financial emergency. First, You Need to Get Motivated Don’t Have the Energy to Do It Again? I know how hard it is to weather a financial emergency and to see the emergency fund you built with your sweat, your toil, and your sacrifices be depleted to take care of something that shouldn’t have even happened in the first place. You might not feel that you have the internal energy to build up your emergency fund quickly again - you might feel like you’re not up for it. This is an understandable feeling, but you cannot let it prevent you from putting in the necessary effort into rebuilding your rainy day fund quickly, an integral part of your financial success and well-being. It’s Not as Hard as It Might Seem The truth is that even if you feel like it’s too much trouble to rebuild your emergency fund, you’re probably wrong. It’s not as hard as you likely think it is. You built up your rainy day fund once and you can do it again. In fact, it will be easier to do it again because you’ve already done it once before - you have proven yourself capable of achieving the important task of putting a proper emergency fund in place. Building up your emergency fund won’t take much time, but it will take some concentrated effort. The good news is that the effort you will have to exert isn’t particularly difficult as you will see below - it might be slightly physically taxing, but it won’t likely be overly mentally or emotionally taxing. You’ll need to buckle down for a bit, but it won’t be long or particularly arduous. Use the Following Strategies to Quickly Rebuild Your Emergency Fund After a Financial Emergency The recommendations below are exactly the same as those given in our article on how to initially build up your emergency fund quickly. They work in this situation just as well. 1. Get a Temporary Second Job Get a second job doing something on the side. Dave Ramsey's pizza delivery job has been the classic recommendation, but today many more options are available. You can drive for Uber or Lyft if your car meets the requirements. You can tutor if you have skills that are in demand. If you have the skills, it might be possible to do some freelance consulting. Even a weekend job as a cashier is a decent short-term gig if it helps you supercharge your emergency fund savings. 2. Sell Stuff Selling stuff is a tried and true way of getting your hands on some cash quickly. Some people have more to sell than others, but if you have things that you aren't using anymore, try to put them on eBay or Craigslist. 3. Cut Down Big Time Most households have some fluff-room (that's not a technical term). What I mean is that most households aren't just buying the basic necessities, but are instead buying extra luxuries. It might be possible to buckle down and cut out a lot of unnecessary (although pleasant) expenses for a short while. It obviously won't feel great while you're doing it, but it's not for long and once you have your emergency fund in place you can go back to a normal lifestyle secure in the knowledge that you have a cushion of cash in place against all of life's crazy unpredictabilities. Using the above strategies, you can quickly rebuild your emergency fund after a financial emergency. We highly recommend you rebuild your rainy day fund as quickly as possible so you can sleep easier and so you can return to focusing on your other long-term financial goals such as investing for the future and building wealth. Takeaways 1. Even though it might be hard to rebuild your emergency fund after a financial emergency, it is a necessary action and you must do it in order maintain your financial house - in order to keep a buffer between your household and the financial storms that might come your way again. 2. Now that you’ve already had a rainy day fund and weathered a financial storm, it will be easier to rebuild it than you think - you’ve just got to start and you’ll see how quickly you can rebuild your emergency fund using the tried and true tactics above.  A Mercedes E Class owned by a family member of mine in California, a place where they say "you are what you drive." This is a beautiful car, but only if it's within your means. It wasn't within their means, unfortunately, and it almost brought down their financial house. To be successful and to live a life of dignity and self-respect, every independent adult who is of sound mind must live below his or her means. Living above your means is just unsustainable. Living at your means might work, but it isn't enough. You Cannot Reliably and Reasonably Build Wealth If You Are Not Able to Live Below Your Means Assuming you are not set to inherit a large sum of money and that you won’t have a large and unexpected windfall such as winning the lottery, to truly have a stable financial life and to build wealth, you must live below your means. In fact, even if you do inherit a lot of money or win the lottery or have some other financial windfall, you must still live below your means if you are to maintain and grow your newfound wealth. The principle of living below your means is a fundamental principle of personal finance and wealth building - it lies at the bedrock of your financial future and without the ability to live below your income (be it earned income, investment income, royalties, dividends, or any other sort of income), you will never become rich. There is a quote that is relevant here from the book The Richest Man in Babylon - “a part of all you earn is yours to keep.” That quote is deeply fundamental to building wealth and every person who has accumulated riches throughout history has understood the principle the quote is elegantly trying to convey. What that quote means is that when you earn some money, you shouldn’t give it away to everyone else - don’t give it all away to your supermarket, to Apple, to Samsung, to Microsoft, to AT&T, to Verizon, to Comcast, to T-Mobile, to Netflix, to your favorite stores at the mall, to Amazon, to your favorite restaurants, to Starbucks, to your mortgage company, to your car company, to American Express, to Visa, to MasterCard, to Discover, and to all of the other people and businesses who work tirelessly to get some of your hard-earned money (and even if your money wasn’t hard-earned, you still shouldn’t give it all away). If you give all of your money away, you will have none for yourself. And if you have none for yourself, how can you become wealthy over time? This concept from The Richest Man in Babylon is deeper than you think. I understood it right away when I first read the book at the age of 18, but when I told people in my family and some of my friends about this concept that I found so intriguing, they were puzzled. I got two types of reactions: They either thought it was too simple of a concept to be intrigued by. “Of course, you should save,” they would say to me. I realized these people didn’t fully understand how profound this concept was, even though they were probably on the right track. Others, however, were far more deluded. They thought that it was a ridiculous notion because whether they had money left over for themselves wasn’t in their immediate control. They said they had to make credit card payment, mortgage payments, car payments, insurance payments, purchase food, purchase water, purchase clothes, and do all of the other things needed to live a decent life. They argued that it was naive to think that they could magically have money for themselves - naive that they could magically save money every month. I understand both perspectives, but I know they are both confused and deluded. I also believe that purely explaining it won’t work - one has to actually take the effort and put some money aside one month and see what happens. It will provide you with dignity A wise man once said that “there is no greater dignity than living below your means.” This is very true. Humans need dignity and self-respect. As adults we have a deep desire to find our own way, to pay our own way, and to earn our own way. We don’t want to depend on the assistance of others or the assistance of the government (which is the same as the assistance of others). Of course, I don’t suggest that assistance to those who are in difficult times should not be given. Nor do I suggest that those who are in difficult financial times should feel even a little bit unpleasant or ashamed by receiving help - we are all brothers and sisters on the Earth. However, I do have a basic understanding of human nature and I know that no matter what, an adult wants to be self-sufficient and make their own way. I believe a part of the reason we want to make our own incomes and make our own way has to do with our ancestral past. Living in small communities in antiquity, everyone had to contribute or else the entire community would suffer. We have a desire to please others, to create value for the world, and do something good for our fellow brothers and sisters. This value creation is rewarded financially (although only usually and imperfectly). Additionally, the knowledge that you are able to live below your means will give you dignity and self-respect because you will know you are a disciplined person who is able to steer the course of his or her own ship instead of being blown from place to place by the wind. By living below your means, you will have the knowledge that you can make it, that tomorrow will be ok, and that you don’t need to depend on others to survive or thrive (again, not that there is something wrong with depending on others for brief or long periods of time). By living below your means, you will have the comfort knowing that there is robustness in your life - that you are a resilient person who can thrive even in the face of difficult times and uncertainty. A person who consistently overspends is a person who lacks disciple and who cannot be confident in his or her ability to whether life storms well - that person will wonder about what will happen should things get worse. Instead, we must strive to live life well, but in a manner that reflects our understanding of financial principles, our disciple, our courage, and our resilience. Takeaways
"A part of all you earn is yours to keep." It seems that in most things in life that we try, we quit right before the big payoff. Just like a tiny plant that is about to break the surface of the Earth, our life is about to change but we seem to get frustrated and stop trying. Sometimes we look back in hindsight with regret that we didn't continue on just a bit further - we ask ourselves why we stopped watering the plant at exactly the wrong time?
This phenomenon seems to hold true with investing. Many people attempt to invest their savings in a wise way. They want to make their money grow and I’m sure they do their best to invest well and invest properly. Most of the time, however, we’re all really bad at actually accomplishing that goal. I’m not quite sure why that is, but I'll postulate. One problem might be that we pick the wrong stocks at the wrong time. Instead of buying based on the fundamentals of a company, as traditional investment theory would advise us to do, we buy a stock because we got some hot tip or the financial media seems to be covering the company more.It also might be because of a general lack of financial knowledge, which causes us to not fully understand the risk-reducing benefits of proper diversification. Maybe it's because we’re trigger happy, too quick to buy and too quick to sell on impulse and not able to stick with our investments over a relatively sufficient period of time for momentary market fluctuations to not matter much. But when you think about it, it doesn’t seem to be in human nature to think for the long term or to be calm and collected in the face of mass hysteria or bad news. It seems like it’s more in our nature to go with what the whole pack is doing. It’s also in our nature to minimize worst-case or catastrophic scenarios, however, slight the chance of them might be. That may be why we’re sometimes too quick to sell. If we just wait a month and then rethink it, maybe we wouldn’t sell. But we don’t wait the month because we don’t want to lose our entire investment. It’s better to leave with a small loss than lose everything we’ve invested. A big win isn’t the equivalent of a big loss in our minds. A big loss holds more weight. We can’t escape the inner workings of our minds, minds that have been shaped by thousands of years of evolution and minds that aren't equipped to handle the concept of patience or to perform a logical analysis of risk. Knowing that, it’s pretty amazing that we’re even as good at investing as we are. I guess, when it comes to it, we have to admit that we weren't meant to be investors. If you believe current science, we were meant to run on the plains of Africa, eat, sleep, and have sex. The deepest parts of our minds have not placed for what is required to be an excellent investor in today's artificial world. Some of us are great investors, however. Why is that? I postulate that the greatest investors are able to be so successful not due to their ability to fully embrace their human nature and potential, instead of trying to fight against it. But, that's a story and a discussion for a different day. Takeaways
 Life was more simple in the past - including your financial life. In today's world, however, much more financial flexibility exists than in the past. Today, if you live in the developed world, you have an unprecedented financial flexibility that will allow you to get your hands on cash very quickly - unlike most of human history. So, do you still need a rainy day fund in the 21st century when you can just use a credit card or sell your investments easily? The answer is YES - read the piece below to understand both sides of the argument and to find out why you still need an emergency fund even in today's modern financial landscape. Can you not have an emergency fund in place and still be in excellent financial shape? That’s a tough question because a rainy day fund lies at the bedrock of a good financial house and is recommended by most in the financial media and by most financial advisors. However, some say that an emergency fund is an outdated concept in today’s world of very liquid assets and easy access to credit - they argue that you can be in great financial shape without allocating some of your net worth into an emergency fund held in cash. Instead, they would argue, you can have the money you would have allocated to your rainy day fund invested in the market where it would earn a higher return. Are they correct or are is an emergency a timeless piece in your financial puzzle and still required even today? First, we’ll begin with the argument that AGAINST an emergency fund today… The World Used To Be Different Let’s go back 100 years into the past and look at an average middle-class person’s financial house. That person likely had:
So, 100 years ago, and basically any time in human history, your financial situation was a lot less complicated and much less flexible. You would find it difficult to finance a semi-major purchase. Additionally, if you needed money quickly to pay for some sort of financial emergency, you wouldn’t easily and quickly be able to obtain it. Today There's Much More Financial Flexibility Today, those in first world countries live in a world filled with more financial options than was ever available. Today we have:
So, do you really need a rainy day fund when you have all of the above options to handle financial emergencies? Yes - you still need an emergency fund in the 21st century. Although we live in the world with much greater financial flexibility and with a bigger societal safety net, you should still have a 3-month to 6-month emergency fund in place to protect you. It is the case that if you didn't have a rainy day fund today, you would likely fare better in a financial emergency than you would 100 years ago, but that isn't relevant. An emergency fund will still protect your financial well-being by allowing you to weather financial emergencies:
Additionally, a rainy day fund will keep you calm - it will help you sleep better at night. Regardless of the financial innovations that now allow you to have much greater financial flexibility, an emergency fund is still a crucial part of your financial house. Further Reading: The Most Complete Explanation Ever on Why You Need an Emergency Fund
We've been told (especially millennials) that we are in control of our lives - that we can achieve literally anything we desire as long as we put in the right effort. If we try hard enough, we are told, we can achieve anything.
First, I would like to point out that this is a very unusual thing to be taught in the grand scheme of human history. Throughout history, most people lived within maybe a few hundred miles from where they were born and had, for the most part, their career path (if you can really call it a career path) determined at birth. What you would do was determined simply by what your parents did. You were of your parents - you even introduced yourself based on your family lineage. The movement towards a more modern and a more affluent society in most nations after the Industrial Revolution brought many good things to the human condition, one of them being an ability to move around in the world and to move up in the world. You could throw off your past totally and become whoever you desired to be (at least that's what we have generally been told in the last few decades). Now, some people don't agree with the almost idealistic idea that you can be anything, go anywhere, and achieve anything as long as you work hard enough. Some people, myself included, believe that the luck of the draw plays a big role - you've got to be smart and have some innate talents to be very successful. Many people believe that although you can learn facts and work hard, there is something we're born with that we might not be able to alter (maybe you can call it IQ - but I'm not quite sure). Some of us are born with more innate abilities and some of us are born with less. Some people are very talented and smart and others are just average while others are below average and some are developmentally disabled with no chance to achieve anything truly great as defined by most people. This is just the nature of the world. It's based on biology and the stochastic (random) way genes from parents are combined to create the genetic makeup of an offspring. This might sound unpleasant to some. I understand why it would sound unpleasant. We don't want to think that things are out of our hands. Instead, we want to think that everything is under our control. Malcolm Gladwell's Outliers takes it a step further. Not only does Gladwell not believe that absolutely everything is under your control, he also argues that even innate talents and skills cannot explain everything - they cannot explain why some people become incredibly successful, why some people become outliers. So, even if you have innate abilities and talents, even if you were lucky enough to be born a genius in math or have world-class music abilities or possess tons of any other useful skill or talent, you aren't guaranteed extreme success no matter how hard you work. To become extremely successful, to become an outlier, Gladwell argues that luck plays a role. Gladwell discusses what is called the "10,000 Hour Rule" which states that you must do something for 10,000 hours to become a master at it. To be an outlier, you've got to put in your 10,000 hours. Even an absolute genius has to put in their 10,000 hours to realize his or her full potential according to Gladwell. The book is filled with very interesting examples that help to demonstrate Gladwell's theory that circumstances and luck play an enormous role in where you ultimately end up. If you've got to practice for 10,000 hours, won't those individuals who were lucky enough to get that practice early on have an enormous advantage? Additionally, random things can happen that will either put you on the path to becoming an outlier or derail you from that path. Gladwell's Outliers is filled with many real-world examples. This is a truly remarkable book written by a man with an ability to think outside the box. What makes it great is that Gladwell is an excellent writer in addition to being an excellent thinker, so he is able to convey things clearly and without too much excess dialogue. I highly recommend this book. It was in vogue a few years ago, but it has timeless aspects to it. The book will not only open your eyes by showing you that you might have relatively naive and childish views about what brings on success in our world, but it will teach you to think in a more cause-and-effect fashion.
Further Reading: More Books You Must Read
Are book reviews on websites such as Amazon and Goodreads biased? I'm not sure about this - it's a question I have had for a while now. Let me know what you think about it below in the comments section or email me. Why do I think that book reviews might be biased? I think book reviews might be biased because of human nature. When you purchase a book and read it, you are investing a bit of money in and a lot of time into the endeavor. Now, as a human, I feel like we have a cognitive bias to prove ourselves right - we don't want to buy a book and read it all of the way through just to say it was a total waste of time. Is it possible that we will somehow justify the investment and find some kernels of beneficial information to hold up as returns to our investment of time and money? Like I said above, I'm not sure, but it wouldn't surprise me if this was the case. Further Reading: Book Reviews by Pennies and Pounds - Do you think they are biased?
 A little baby can be a big responsibility - both today and for many years to come Are you planning to have a baby? Did you already have a baby? Below are 8 essential things you must do after your baby is born - do them and set yourself up for financial success and tranquility. 1. Pick a Guardian in Case of Death
This isn't pleasant to think about, but you should think about it once so you don't have to think about it again and so things are properly in place. Many people don't do this, but you're a responsible adult and that means you sometimes have to think of unpleasant possibilities and plan for them. You should plan on who will take care of your child or children should you and your spouse both pass away. Obviously, you will want to screen your potential choices according to criteria that are important to you. It's hard to give advice on this - you have to do what feels right for you. You will obviously want to speak to the person or family that you choose about your decision to make sure everything is ok. 2. Write/Update Your Will You and your spouse should already have a will. If that's the case, it's time to update it. If you don't have a will, now is the time to create one. In your will you'll want to include information about who you choose to look after your child or children in the tragic event that you and your spouse both pass away. You'll want to include other important things that belong in a will. We won't go into detail here on what to include in your will, but make sure to include what you want to happen to your assets in case of death and how things will proceed if your child or children are minors when you and your spouse pass away. Wills are governed by state law generally (as opposed to national law) so you'll want to look into your state laws on this. There are resources online for easy and affordable will creation. For more complicated matters, it might be a good idea to speak to a licensed attorney in your state. Note: A will might not be sufficient for your situation - a living trust or something more sophisticated might be required. If you believe this to be the case you might want to consult with an estate planning attorney. 3. Make Sure Health Insurance is in Place for the Baby You will want to make sure or double check that proper health insurance is in place for your new baby. If you have a regular "W2" job, your child is likely covered by your health insurance - but you should obviously double check anyway. If you and your spouse don't have health insurance from work, check to make sure that your new baby is covered under your insurance policy and for how long. In situations where you don't have health insurance yourself, you will want to make sure that your baby is covered - either purchase health insurance immediately on your own or seek some sort of governmental assistance (eg. subsidies or government provided health insurance) 4. Put Proper Life Insurance in Place For the vast majority of people, life insurance is an important part of financial planning, especially after the arrival of a new child. We won't go into the "whole life vs. term life" debate or discussion here (although that is an important discussion worth having), but it suffices to say that you should have proper life insurance in place so that your baby and your spouse are taken care of financially should you die. If both you and your spouse earn an income, both of you should have life insurance in place. Even if your spouse doesn't earn an income, however, you should still very likely get life insurance for your spouse because if one of you dies, there will be upheaval in the family of a caretaker at home is no longer there - that caretaker will have to be replaced or the income earner will have to stop working and stay at home (at least for a period of time). Therefore, even stay at home wives and husbands should very likely have life insurance in place. In the tragic event of untimely death, the income earner will know that he or she can comfortably stay at home with the kids during a very difficult time without having to worry about earning an income. Don't neglect to understand how important this can be. How much life insurance should you purchase? The typical advice is 10 times to 20 times your annual income. I would err on the side of caution and purchase more rather than less. This is a decision you should think about in light of your net worth, family situation, and lifestyle, etc. If you cannot comfortably make this decision on your own, consult with someone (such as a financial advisor) who has a responsibility to you as a fiduciary. There might be situations where you don't need life insurance of any kind, however. If you have a lot of assets that can provide for your family in case of death, life insurance might not be required. I would recommend being conservative here: make sure you have enough assets for a 4% drawdown rate to fully replace the combined family income. For example, if the household income is $100,000, you will want to have at least $2.5 million in assets before you totally avoid life insurance - this will allow the beneficiaries to withdraw $100,000 a year (pre-tax) without touching the principal. A 4% drawdown rate would be considered on the conservative side by many, but we don't want to fool around with your family's and your children's well-being in the case of your untimely death (especially when term life insurance is generally not very expensive). 5. Set up a 529 Account for College Savings Who knows what will happen in 18 years, but I would bet that colleges will still be around and that a college education will still be a useful thing both for a person's career and for their self-development. I do believe that online learning, self-learning, and other non-traditional forms of learning will grow in use and will compete with traditional expensive college educations, but I don't think colleges will be eliminated by any means within the next few decades. You'll want to prepare for your child's college education as best as you can so that you can give your progeny the gift of a debt-free undergraduate degree, something that many former students (especially millennials) in the US wish they received. A 529 college savings account is a tax-advantaged savings account that can only be used for educational purposes. Of course, if you think that your child is very unlikely to attend college (eg. mental or physical disabilities, lifestyle choices, fatal illness, etc.), you might want to skip this step and save money in a place that you can access for any expense even though that place might not be tax-advantaged. 6. Begin Saving for Other (non-college) Expenses Beyond college, here are other potential expenses that your child might incur throughout his or her life:
I recommend keeping this account in your name until you are ready to bestow the gift. You don't want this money to harm your child - you only want it to benefit them. If your child becomes a cruel adult or a spoiled adult or a dug-abusing adult or an alcoholic adult or an uneducated and lazy adult, you might decide that it's better to hold on to this pile of money for a little bit longer (or for a lot longer). Make sure you retain this flexibility by only keeping it in your name (or your and your spouses name). 7. Consult With Your Accountant to See About a Tax Deduction Now that there's another dependent in your household, you will likely save on taxes. Consult with your tax professional (or TurboTax) to see how your new baby will affect your tax situation and to get the best possible tax advantage from it. 8. Begin Thinking About Elementary School You'll want to start thinking about elementary school for your child. This is especially important if this is your first child, as schooling decisions have likely not been made yet. You'll want to ask yourself whether you're satisfied with the schools in your current area or whether you would like to move in the future in order to get access to better schools. You'll also want to think about whether you want to send your child to a private school or some sort of religious or cultural after school program. These are important lifestyle and educational decisions that also have financial complications attached to them - plan ahead so that you can do what's best for your child without sacrificing all of your other financial goals. If you can do all of the above quickly, confidently, and well, you'll set up a very strong foundation for your family's financial future. When your little baby (or babies) grows up, they'll thank you for being such a mature and proactive parent or guardian. What if you're adopting? The above does apply to adoptive parents as well. It was simply written from the perspective of a biological parent because that's what occurs in the vast majority of cases. If you're adopting a child you likely have a good financial base (most adoptive parents do because there are often financial requirements for adopting a child), but you might find it slightly more difficult to accomplish certain savings goals (specifically items 5 & 6) because your time frame is likely going to be shorter - the older your adopted child is the closer they are to college and the less time you have for the magic of compounding to work. Keep this important item in mind and plan accordingly.  Investing can be a difficult road for most people, but it doesn't have to be if we can overcome a few hinderences Are you a typical investor? Research shows that the average investor in the United States significantly underperforms when compared to broad indexes such as the Dow Jones Industrial Average (Dow Jones) or the Standard and Poors 500 Index (S&P 500). Read the article below to find out the five main reasons for this disappointing phenomenon - and to make sure you don't fall into the same trap. Too Many Investors Stink at Investing Research shows that individual retail investors are not doing a good job at investing. Much research has come out showing that retail investors, on average, get much less than the overall market for the same level of assumed risk. This is ridiculous. This means that retail investors don't beat an index such as the Dow Jones Industrial Average (Dow Jones) or the Standard and Poors 500 Index (S&P 500). Instead, retail investors earn half of the return of the broad indexes on average. If this doesn't surprise you, it should. How can the average investor earn half of a broad market equities index such as the Dow Jones or the S&P 500? Why wouldn't that "average" investor just invest in the index and get the index return? The reason must be because investors don't just invest in the index. They must do something else on average or else they would at least get the average index return minus trading fees and other incidental fees. Below are the five main reasons your or an average investor (hopefully you're an above average investor) fails to do well and fails to beat index returns. 1. You Trade too Often The first reason that the average investor underperforms the market is because he or she trades too often. As we said above, if you just invest in the index you'll get the average index return minus any trading and incidental fees. There's a caveat there, however - you have to stay invested! You can't go in and out of positions consistently. By trading too often, you incur more fees and fees can really add up and eat away at your potential wealth. For example, say an investor invests $750 a month in the stock market and the transaction fee is $7.50 (a reasonable amount at the time of the writing of this piece). That $7.50 will equal 1% of the investor's monthly investment, a non-trivial amount. If our hypothetical investor invests every single month and doesn't sell, he or she will have paid out $90 in fees. This is reasonable. If, however, our investor is more erratic and buys and sells in a futile attempt to somehow time the market, he or she will pay a lot more in fees. Let's say the investor buys every week instead of every month, splitting his or her $750 monthly investment into $187.50 weekly investments. Additionally, our frantic investor also sells some amount every month. It doesn't matter how much he or she buys and sells in reality because most modern brokerage fees are usually flat (instead of a percentage of the invested amount). So, now we have the following costs:
Now, many investors don't invest $750 a month. Many invest more, but many invest less. Some investors can only invest $100, $200, or $300 a month. For them, the above situation would seem like a dream. For them, trading as often as the frenetic investor above would absolutely devastate their portfolio, requiring consistent extraordinary returns just to break even. By trading too much, you put the breaks on your portfolio's growth. You might think you know what you are doing (eg. timing the market) or you might be scared of a downturn so you pull out for a while when the market dips, but all of that is incorrect for most investors as evidenced by their abysmally low performance as compared to a broad market index. For most investors, trading too much isn't a good an idea. They should stick with a good and suitable strategy and stay invested even if the market goes day. They should not be overconfident in their ability to predict price movements, understanding that there are thousands of well-trained, highly educated, and high-incentivized market participants attempting to do the exact same thing they are attempting to do. 2. You Hold Losing Positions too Long Investors, by and large, tend to hold losing positions too long. Most top financial professionals and top investors seem to sell off losers quickly. Good investors are disciplined and are able to acknowledge losers when new information comes in. I've experienced this desire to hold on to a losing stock in my own portfolio. I invested in a stock in an emerging market. My reasoning for investing in the stock was sound and many top financial professionals recommended purchasing equities in that specific market and of that specific firm. Two years later the position not only didn't move anywhere, but it had declined more than 10%. Things changed in the global economy - the country was doing poorly and exchange rates negatively impacted my investment. I didn't want to acknowledge the fact that I had chosen a loser because I bought the stock with a lot of conviction and spoke about my belief in the stock's future performance to others. However, I was disciplined enough to sell and free up the capital. I knew that the situation wasn't going to get better - it wasn't a momentary downturn in an otherwise great situation but was instead a structurally poor situation. the new information that had come in since I first entered into the position indicated that a prudent investor would exist and so I exited. It wasn't easy, but I'm glad I did it for two reasons. First, it freed up useful capital for investment into other stock. Second, it strengthed the "disciplined investor" muscle withing me by going against myself and forcing myself to do the prudent thing. I believe it will be easier (slightly easier) the next time a situation like this happens. Why do investors tend to hold losing positions too long? That's a tough question to answer, but behavioral finance has attempted to answer it in recent years. It seems that investors only care about realized losses, not potential. Realized losses occur when you actually sell the position. When I sold my losing stock in the example above, the loss became realized. Investors generally seem to be fine with unrealized (or potential) losses because they are able to imagine the stock going back up. By selling the stock, they realize the loss and lose the opportunity for a price recovery. However, this is not a rational approach. Investments shouldn't be held because you can't stomach locking in your loss. Investments should be kept because they are still good investments and they are investments you would make today. whenever you're facing such a situation, ask yourself the following illuminating question: If I didn't own this stock (or any other type of investment), would I buy it today? If the answer is no, that's a good indication that you should sell it. 3. You Sell Winning Positions too Quickly Investors typically hold on to losers too long, but they don't hold on to winners long enough. The average retail investor sells winners too quickly in an attempt to lock in the gains. It is possible that the same realized vs. unrealized phenomenon is at play here - investors prefer realized gains to unrealized gains. The problem is that selling to realize gains isn't a good reason to sell. Just as we discussed above, you should only sell a stock you own when it is no longer a good investment. You can ask yourself the same question we asked above: If I didn't own this stock, would I purchase it? If you would, then you shouldn't sell just because you made money with it. If you believe it's still a good investment and that it will rise in value, you should stay invested in it and you shouldn't sell it. 4. You're too Greedy Greedy investors don't do well over the long term. Greedy investors buy and sell too often (Reason 1 above) and they often sell too quickly (Reason 3 above). Additionally, greedy investors get in at the wrong time and get out at the wrong time. I'm sure you've heard of the popular investment saying: Buy low and sell high. Well, greedy investors often buy HIGH and sell LOW. They don't do it consciously, but they do it because they are unaware of what is driving their desire to enter or exit the markets. Greedy investors look at the market after a nice long bull run and ask themselves why they didn't get in earlier. Instead of rationally analyzing the current situation, they get in. Greedy investors take stock tips from people or get into speculative investments that have big upside potential but also a very big downside potential and where the chances of success aren't great. Great investors, however, try to find investments with big upsides but very little downsides (or no downsides at all - yes that might be possible). When greed drives your actions there is little room for prudence and rationality to enter into the equation. You should attempt to keep calm in both bull markets and bear markets and do your best to objectively look at the situation. Additionally, it is important for you to keep in mind that quick money is very rare for the average investor because there are thousands of highly-trained, highly-educated, and highly-incentivized people in finance attempting to beat the markets. Do you think you can outdo them sitting at your computer at home or in your office? The answer is mostly likely "no" because you don't have a competitive advantage in this space. Instead, it is better to use your time and energy to play wherever you do have some sort of advantage. The desire for excellent returns and wealth is healthy, but greed is a destructive force both to your being and to your portfolio. 5. You're too Fearful In the same vain as greed, fear also can be destructive to your portfolio. Fear can cause you to buy and sell too much (Reason 1 above). We said above that investors typically don't sell soon enough when they have poor-performing investments, but there are occasions where investors actually sell losing stocks too soon: panics. During times of panic such as the Great Depression or the Great Recession (and even during less severe panics such as sharp market downturns and corrections), average investors seem to get scared and exit. This usually is a very bad idea, especially if you're diversified well. If you are diversified well and the entire stock market declined due to a major recession, everything is going to be down (correlations between asset returns usually go to one in times of panic). If everything is going down, that might mean that the situation isn't totally rational. There are some goods stocks and some bad stocks in almost every market - everything going down usually means that there's an irrational drop going on because of fear. If you sell, you're locking in the losses - something investors usually don't like to do but seem to do too often during great crises. A better strategy would be to hold it out and wait for a recovery. In addition to waiting for a recovery, great investors relish downturns and panics because they are able to buy more stocks at discounts - they buy the good companies that are down not because of the companies themselves but because everything is down due to a crisis. You Can Become a Better Investor What we can learn from the five reasons above is that most people and most investors:
Further Reading: Are you investing or speculating? - Find out now!
 This picture was taken off the Golden Gate Bridge in San Francisco, CA Don't cry about money, it never cries for you. (Kevin O'Leary) This is an excellent quote I heard on a podcast featuring famous investor and Shark Tank co-host Kevin O'Leary. O'Leary comes off a certain way on Shark Tank (a bit harsh and uncompassionate) but he is not that way at all. I've listened to a few interviews with him and he's a very intelligent, wise, and compassionate individual. I really enjoy watching him and listening to him. This quote is in true Kevin O'Leary style for me - that's partly why I like it so much. The quote is correct, you shouldn't cry for money. The quote is also deep because there are various reasons why you shouldn't cry for money. You shouldn't cry for money because
Now, the above might seem harsh, but it's really not. Charity, assistance, compassion, and other similar things are all important in life, but in business you have to be tough and single-minded. There just isn't room for crying about money in business. It's too competitive to do that and you'll likely get no compassion from your peers who are in it to improve their own situation, not give you a shoulder to cry on. Did you enjoy this quote? Click here for another!
 I love infographics - they can represent interesting and useful data in ways that are easy to understand. Sometimes, the very good infographics can provide you with very useful insight very quickly. The above image is a map but it is also a proper infographic in my opinion because it conveys more than just geographical information - in conveys the density of slaves in the Southern States during Abraham Lincoln's presidency, based on the Census of 1860.
The map, titled Map Showing the Distribution of the Slave Population of the Southern Sates of the United States Compiled from the Census of 1860 specifically focuses on the Southern States and divides each state into counties. The darker the county is shaded in, the higher the density of slaves. It might be hard to see this on the above image (so I've included a downloaded file of a high resolution capture of this infographic), but the darkest square on the bottom left corresponds to a slave density of 80% +. This is astonishing to me. This means that in some counties in the United States, a nation that was founded partly based on a desire for freedom, allowed such perverse things to occur within is boarders. The same nation that wrote what I would argue is the greatest document in testament to humanity's inherent freedom and the inherent right of every individual to self-determination had, one hundred years after its founding, counties where over 80% of the residents were slaves. Abraham Lincoln referred to this map on more than one occasion in an attempt to see how the cause of freedom and the emancipation of slaves would actually affect the troops on the ground. That makes great sense to me. If I was a general during the Civil War a map such as this might be useful to me. It doesn’t show armies or troop numbers or terrain, but it shows the sentiment of people on the ground. It shows the counties where there are few slaves (and therefore likely little resistance to emancipation) and counties where there are many slaves (and likely much resistance to the cause of emancipation). Of course, in a county with over 90% of its population composed of slaves, would there be much resistance? I'm not sure what the answer to this is - it's just a question that popped into my head. I would think that as the Northern Army moved down and as the North's victory seemed more likely, counties where slaves outnumbered non-salves by a factor of almost 10 to 1 would quickly overthrow slavery in rebellion. I don't think this occurred, however, in the history of the United States. I'm not a historian or a military expert, so this is pure conjecture. This is just one example of amazing infographics. We think infographics are a modern phenomenon, but the above map shows that information-rich images existed a long time before the digital age.  Scarcity - A single oyster. You better make it count. Scarcity is a fundmental principle in economics that lies at the bedrock of the elegant social science. Scarcity in economics refers to the limitations inherent in our world and universe. We live in a scarce world. There are finite amounts of all of the resources humans find useful. There's a finite amount of timber, coal, oil, land, cattle, chickens, iron ore, land, etc. Additionally, humans have a finite amount of time in the day, in the year, and in their lives.
Because of scarcity, choices must always be made regarding what to produce, what to spend our time on, what to spend our energy on, and what to spend our money on. There are alternative uses to land, resources, capital, and time. All of the possible uses cannot come to fruition because there is not enough land, resources, capital, and time for them. It is the role of economics and economists to assist with finding the best uses for the scarce resources, the best uses generally meaning those uses which create the most utility. 
Cosimo de' Medici was one of the greatest financiers and investors the world has ever known
Investing is one of the best ways to grow and preserve your wealth, but you shouldn't start investing unless you've done the 7 things below. Read the article below to find out how to create a proper foundation before you being investing.
1. Pay Down Your Credit Card Debt
Before you start investing, you must make sure to pay down your high-interest credit card debt. I'm not saying you have to be free from all debt here. For example, many people successfully invest with a mortgage and with student loans. There's a debate in the financial community regarding whether or not you should be totally free from all debt before investing. I am in the camp that believes that investing with some low-interest or asset-backed debt can actually be a reasonable financial plan. There's more to this analysis and we won't go into it in this piece, but it suffices to say that even if some debt is acceptable when beginning to invest, credit card debt is not. Credit card debt is a terrible form of debt. It is debt for things you've already purchased or experienced and in most cases they can't be reliably sold off to pay off the debt. Additionally, most credit card debt is at a high interest rate (10% + on average). Credit card debt can be like a ball and chain on your leg as you attempt to run toward financial freedom and wealth - it won't allow you to go very far. You must remove the burden of high-interest credit card debt and vow to never take on such an insidious form of debt ever again before you being investing. Do not put any money in the stock market or any other market when you have an opportunity pay off your debt first. By paying off your credit tcard debt, you'll effectively be earning a return on your money equivalent to the credit card's interest rate. 2. Have Your Emergency Fund in Place Before you start investing, you must make sure you have a rainy day fund in place to protect you and your household from life's financial emergencies. An emergency fund will help you withstand life's storms and it will protect your soon-to-be wealth in the form of investments from liquidation should you need funds to take care of a financial emergency. Check out the links below to get one of the deepest looks at why you need an emergency fund and how you can build one up incredibly quickly. Further Reading: Why do you need an emergency fund? Further Reading: How to quickly build up your emergency fund 3. Have Proper Insurance in Place Before you start investing, make sure you have the proper insurances in place to protect you and your family. Here is a non-exhaustive list of possible insurance policies:
You obviously don't have to purchase every policy above - purchase what you need in your current situation and adjust things as you move along in life and in your financial plan. If you're not capable of deciding which policies to purchase on your own, it is advisable to speak to someone who knows about these things. This could be a knowledge friend or a family member, but it might be wiser to speak to someone who would have a fiduciary responsibility such as a financial advisor or consultant. 4. Decide on Whether to Invest Alone or to Use Some Sort of Financial Advisor After you've paid off your credit card debt, built up your emergency fund, and put proper insurance policies in place for your current financial and lifestyle situation, you must ask yourself the following question: Can I go it alone or do I need assistance? Many people successfully invest alone, but many also fail miserably when investing on their own because they can't do one or both of the following importing things:
What this means is that if you want to be a successful investor you've got to have some basic knowledge about why things go up and down in price (both short term and long term). Additionally, you have to have the discipline and emotional control to not panic and not get greedy, two things which are poisonous to your financial future. If you don't think you are capable of both of the above, consider using the help of a financial advisor or a financial consultant (at least for a short period of time). It's not easy to find a good financial advisor. There are a lot of salespeople or charlatans in finance, but there are also a lot of excellent, inteligent, and kind-heated people. The dififcult part is differentiaing between the two. Don't hesitate to interview your financial advisor and ask questions - it's your money they will help yu manage after all. 5. Take a Risk Tolerance Quiz Take any online quiz with a grain of salt, but I strongly suggest that you take a reliable online risk tolerance quiz to help you better understand your risk tolerance and your emotional capability to handle volatility within your portfolio. Here are two quizzes which I found useful and reputable:
6. Think Abut What You're Investing For Before you start investing, think about what you are investing for. Are you investing to:
When you think about what you're investing for, you will get a picture of a very important concept called time horizon. Your investment time the horizon will help you determine the risks you can take in your portfolio - the longer the time horizon the riskier your portfolio can be because you will have more time to ride out the ups and down. 7. Give Some Money Away Before you start investing, and once you have paid off your credit card debt, built up your rainy day fund, and put proper insurance policies in place, you should give some money away. You can give it to a non-profit organization like the Red Cross, to a person asking for money on the street, or to a friend or family member hat is in need. The fact that you're now ready and able to invest means that you're better off than most people on this big blue planet of ours. You should be thankful for this and that gratitude should compel you to do something nice for your fellow human beings, especially those who aren't as fortunate as you are. You don't have to give a lot, but it should be a meaningful amount of money for you. I promise that this action will warm your heart and it's likely that you'll keep on giving throughout your life. Is anything missing from the list? Comment below or email so we can add it. P.S. Make sure to put your first investment dollars in accounts where you get a "free money" (eg. some sort of match). This is usually an employer-sponsored retirement account such as a 401k. With such a match you get immediate returns. For example, if you get a 100% match, it's like getting a 100% return on your money right away with no risk. You can't beat that.
Further Reading: Why you need an emergency fund?
Further Reading: How to quickly build up your emergency fund
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Emergencies happen because life is unpredictable and chaotic. Be wise and be prepared for the unexpected by having a proper emergency fund.
You know you need an emergency fund in place, but do you know why? All of the financial media says you should have a rainy day fund in place, but few discuss the reasons for such a recommendation. It might seem obvious, but it's a pretty interesting discussion. Read the article below for a very in-depth analysis on why you should have a proper rainy day fund in place and you'll likely know much more than most on this often-overlooked topic.
Does anyone in the financial media or the financial press even address the question of why we need an emergency or rainy day fund? I feel that the idea of having an emergency fund is so deeply ingrained in the personal finance world that no one in personal finance discusses why you actually need an emergency fund. I don't think that's wise. If we are going to save up 3-months to 6-months in living expenses (a serious pile of cash), we better have a good reason for it. Otherwise, why bother with it? We could either spend that money on things we enjoy, give it away to someone in need, or invest it in the markets where the money has a chance of obtaining a return and growing. Why would I just have a pile of cash sitting around earning abysmally low rates or return if there isn't a solid foundation to it?
First, let's define a term - Stochastic Something is said to be stochastic in nature when it is randomly determined or when it's probability distribution cannot be precisely predicted. Stochastic is sort of the same as random. So we can say, "this is a stochastic process" or "these events are stochastic." Here are a few examples of stochastic processes or things that have stochastic components to them:
The term stochastic is heavily used in mathematics, but we don't need to give the term any more treatment than we have already. I didn't use the word "random" because I wanted to really bring home the fact that the physical and life sciences, mathematics, and even the social sciences recognize the fact that the world is random and unpredictable in many ways. For many things that have a material effect on our lives, it might be possible to understand the general distribution of things (eg. what will happen on average) but it is not possible to understand what will happen next. The World is Stochastic in Nature As stated above, the world is stochastic in many ways. The world is filled with randomness and random processes and occurrences. There's no way to tell exactly when your car will break down, when a major weather event will require a window replacement, or when your body will have some sort of medical emergency. There's not a way to predict when you'll get into a car accident, trip while walking off a curb, or when the economy will fall into a recession and you will lose your job. Hopefully, none of the above ever happens to any of us, but there's no guarantee. And so, we must be prepared as best as we can. One way we can be prepared for possible emergencies is to be financially prepared. We can be physically prepared, mentally prepared, emotionally prepared, and spiritually prepared, but we must also strive to be financially prepared to weather life's inevitable blows to our peace and tranquility. Now that we understand that the world is random, we can see that this randomness might cause financial emergencies - things we weren't anticipating that require the use of money. How can we react to such financial emergencies? There are 4 main ways you can react to a financial emergency:
4 Ways to Handle an Emergency 1. Sell Your Investments One way to handle a financial emergency is to sell your investments (if you have them,). If you're invested in the stock market, for example, you can liquidate enough shares to take care of the financial emergency. That's easy, right? Wrong. If your emergency occurs after at the end of a long bull run, then that selling your investments to pay for your financial emergency could possibly be a reasonable idea. But what if your financial emergency occurs during a recession? Isn't it more likely that a financial emergency such as losing your job will occur during a downtrend in the stock market. What if there is no recession or downtrend, but your particular portfolio is down? Selling your shares to cover the financial emergency will be very unpleasant and it will further compound the already bad situation. You'll basically be locking in the losses and losing an opportunity for a possible recovery. You want to have the opportunity to ride out the downtrend should you so desire. The example with stocks can be extended to investments in commodities, real estate, bonds, and derivatives. You don't want to have to sell when things are down. You want the flexibility to be able to stay invested and ride things out. 2. Cash Flow Through the Emergency Not everyone has investments and even if they do, they might not have enough invested to cover a financial emergency. So, if you can't sell investments to pay for it, maybe you can just cash flow through the financial emergency - maybe you can just pay for things with the income you have coming in every month. But what if your emergency is such that your ability to earn an income is diminished or eliminated for a period of time? What if you just don't make enough to cash flow through your financial emergency? It's pretty risky to rely on your ability to earn your way through an emergency. Say you need a car repair that costs $500? You can cash flow through that relatively easily. But what if you have a medical emergency with a high deductible? That's more difficult. What if you have a major repair that needs to be done to your house? That's pretty difficult too. 3. Go Into Debt to Pay for the Emergency If you have no investments to sell and you can't cash flow through the financial emergency, you'll probably have to go into debt to take care of things. That's obviously a bad situation. You're again compounding the bad stuff by going into debt. But what if you can't go into debt? What if you don't have enough on your credit cards? What if you can't get a loan? Now you're totally stuck aren't you? No money and no ability to obtain funds elsewhere will mean you'll have to resort to asking your friends and family for assistance or for loans, a pretty unattractive proposition. So, the above three options for dealing with a rainy day are obviously not optimal. There's a fourth option: have a rainy day fund. 4. Use your Emergency Fund It should be obvious by now that an emergency fund is the optimal way to deal with life's financial emergencies. It's better than having to sell your investments to deal with a financial emergency because the emergency fund acts as an insurance policy, protecting you from having to liquidate your investments. If you don't have investments yet (keep reading Pennies and Pounds and you will soon), then the insurance policy allows you to move forward after a financial emergency without going into debt and without stress and anxiety. It allows you to take life's financial blows and get right back up again instead of staying knocked down. So, we see that random stuff happens and that the best way to protect yourself and your household is to have an emergency fund. An emergency fund will benefit you whether you have lots of investments or no investments at all. But there's one other reason to have an emergency fund in place... Not Every Expense is Monthly Most people think in terms of monthly income and monthly expenses. The more sophisticated or the more financially nerdy among us (myself included) might think about yearly expenses. But there are many expenses in life that are not monthly. Expenses can happen: Every year
Every few years
Every 5-10 years
Only a few times in your life
I hesitated to discuss these expenses in this piece because they aren't proper emergencies in my opinion. Emergencies are surprises that are unforeseen, but the above expenses are not unforeseen - I just wrote about them and named off a bunch of possible expenses that are not monthly. We should plan for them because we can obviously anticipate them, unlike an actual emergency such as a car accident or an injury. So, why did I include them? I included these expenses because of my awareness of human nature. Humans aren't great at anticipating the future and planning ahead. I know that these expenses aren't proper financial emergencies and I know that we should plan for them, but I also know that we're humans and the reality is that most people will neglect to plan for them. That's just human nature. Studies show that most people fail to even have a basic emergency fund, let alone save for far-off expenses. People have a tendency to focus on the here and now and to not pay attention to what is coming down the road. Therefore, I do believe that an emergency fund can act as a certain protection against our human nature, against our seeming inability to see too far ahead. It acts as a cushion not just against life, but also as a cushion against our own minds and our own selves. If, in a moment of rationality, we can understand this about ourselves (our poor ability to plan for such expenses) we might be able to set up a very strong foundation for our financial security. An Emergency Fund Just Makes Sense An emergency fund is important. It just makes good sense. An emergency fund is one of the simplest and most prudent financial moves you can make. Since antiquity, the wise have understood the importance of storing something away for a rainy day. There is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up. (Proverbs 21-20)
So, make sure you have a proper emergency fund in place and do the hard work needed to get one set up quickly. You already knew that you need a rainy day fund I'm sure, but now you know why with what is probably a much deep and much more sophisticated understanding than most people have.
P.S. Let's get a bit philosophical - Do emergencies even exist? I couldn't help getting a bit deeper and philosophical here. Let's think about this. We figured out that life and the world are random and that random and unpredictable (stochastic) stuff will happen. So, are there really any real financial emergencies? By definition, an emergency is something unpredictable. But, although we can't exactly predict when something bad will happen because of the stochastic nature of things, we can definitely be sure that the world is random and that something might happen at any time. So, we should never be really surprised when we have a financial emergency became we should already know that it's a possibility. Regardless, we still need to have a rainy day fund set aside. So maybe there aren't really emergencies after all - maybe there are just those things that we know will happen and those things that could happen but shouldn't surprise us if they do. What do you think about this? I'm interested in your opinion on this - comment below or email
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Expensive Italian sports car in the beautiful Italian village of Assisi - a demonstration of wealth and prosperity and an example of an uneven distribution of goods and services. Should we produce expensive sports cars or should we produce something else instead?
Economics, at its core, is about answering three elegant but important questions. They lie at the foundation of the subject and must be answered by every nation on Earth. Read the lengthy article to find out what the three questions are and to get a good perspective on what the core of economics is about.
Do you really know what economics is about?
Unless you've taken an economics course (and maybe even if you have), you probably have the wrong idea of what economics is. Economics is obviously a very complicated and broad field of study, but what is at the most primal core of economics? Throughout my conversations with people unfamiliar with the subject, I have realized that people generally have a misconception of what economics really is at its most fundamental core. Some people seem to think of it as something close to accounting. Other people seem to think of it as close to business or entrepreneurship. Others still think of economics as having something to do with the political realm. Although they are all moving in the right direction with these definitions, they are pretty much all wrong. Economics might touch on accounting, business, entrepreneurship, politics, and many other human endeavors, but it does so only incidentally. It touches accounting because accounting is the language of finance and economic sometimes deals with things related to finance. It touches business and entrepreneurship because firms and individuals act in rational ways that economists attempt to describe. It touches political science because economists attempt to answer important questions about how societies organize themselves to produce things. It touches other things also, but only incidentally. Economics, narrowly defined, is actually something quite different than what most people believe it to be - something very different than accounting, business, or politics. Economics, at its most basic core, is the pursuit of something much simpler - it is an attempt to answer just three basic questions Question 1: What to produce? Question 2: For whom to produce it? Question 3: How to produce it? These three questions are more macro-oriented (economics can be divided into macroeconomics and microeconomics). All societies and all nations must answer these three questions. Why do they have to be answered? Why do all nations have to answer these questions? Because we live in a world of scarcity and we want to efficiently allocate the scarce resources that exist. In a world of unlimited resources without any scarcity of any kind, these three questions wouldn't make sense because no choice would need to be made - everything could be produced for everyone. In a world of scarcity, however, a choice must be made, either implicitly or explicitly. By its very nature, the scarcity in our world imposes constraints upon our actions and forces an answer to those three questions. But that might be a bit too philosophical for our purposes here, so we'll continue. Are you surprised? Looking at those questions, you might be puzzled. If this isn't what you thought economics was about that's ok. Economics is obviously a very broad field of study and goes way beyond those three questions, but pretty much everything that economics is and does emanates from an attempt to answer those three questions. That is why I love economics so much and that is why I am so intrigued by it. Now, Let's Dig Deeper Into the Questions 1. What is to be produced Every society must answer this question and has answered this question since antiquity. To sustain life, water and food are required. Some for of shelter is also a primary necessity for life and safety. Society has managed to move beyond the basic necessities of life and much of the world (specifically the Western world) lives in a state of such affluence that past generations would not even be able to comprehend our lifestyles. A society, whether that society is a small tribe in our distant past or a modern nation, must decide what is to be produced. Economics looks at this question at both a macro and a micro level, but we'll focus on the macro level here for the purposes of explanation. Asking, "What to produce?" might sound a bit confusing, but it shouldn't be. The question is simple and straightforward. Economics literally is concerned with the final mix of goods and services produced by a society during a certain time interval (usually a year). The question's answer is also easy to see or observe. You just have to look at the final mix of goods and services produced by a society. For example, we can observe the final mix of goods and services produced in the United States in a given year. Obviously there are a lot of things produced and it would be extremely difficult (if not impossible) to count or list them all, but that isn't a problem and that isn't a concern. The point isn't to count or list the goods or services produced. We can understand in our mind that every year a certain mix of goods and services is produced in the United States and we can understand that this mix of goods and services is society's answer to the question of "What to produce?" Here are a few examples that might help illustrate the meaning of the question:
2. For whom to produce it? The next logical question after it is determined (somehow) what is to be produced, is "for who?" This makes a lot of sense. After all, everything produced is for the benefit of the society. Whenever anyone makes something, it is either to benefit himself or herself directly, or it is to obtain income by selling that product or service to another. The only way to do that is to provide some sort of value to the other. Obviously, this is a bit idealistic, because sometimes useless things cloaked in a lot of marketing are sold to unsuspecting buyers, but we won't go down that path in this piece. Here are a few examples that might better illustrate the question:
3. How to produce it? Finally, once we decide what to produce and for whom, we should think about how to produce it. This question might not seem as important as the other two at first glance, but it is actually very important. How we produce something reflects our beliefs and values. It also downstaters our society's technological abilities. Here are a few examples to better illustrate what this question is getting at:
But wait! - There's a fourth question! The above 3 questions really are the main questions that economics attempts to answer, but in answering those 3 questions, a fourth question organically arises: Question 4: Who decides? This question is a very interesting one to answer. It makes sense to ask it, doesn't it? We're answering three questions. So WHO should answer them? Who should decide what to produce, for whom to produce it, and how to produce it? Question 4 has been answered in man different ways throughout history. Let's examine two of the main ways we can answer this question: Capitalism - We all Decide (Sort of) In capitalism, the entire society decides how to answer the three economic questions using a magical mechanism called prices operating in what should be a free or laissez-faire market. Prices cause the invisible hand (an important economic concept first articulated by economist Adam Smith in the Wealth of Nations) to direct the flow of resources and energy towards certain things and away from others. In a properly working society or nation, the invisible hand guides the economy toward the optimal mix of goods and services and allocates those goods and services in an optimal way among the members of the society or nation. Now, what does optimal really mean? That's beyond the scope of this piece of writing, but it is safe to say that, generally, capitalism does work in making things pretty good for most people. The United States, Wester Europe, and many other modern countries are capitalist or quasi-capitalist societies where prices guide the flow of resources and a free-market system prevails. Prices are a pretty magical thing when you think about it. Prices are sort of like a voting machine, expect you to get more votes if you have more money. Though the price function in a free market, resources are somehow magically allocated to their most efficient use without the participants of the economy having to do much more than observe what is happening in front of them and making rational decisions based on those observations. If a certain product or service has a very high price and profit margin, you might be induced to produce some of that product or service yourself. It's as if the economy magically communicates to producers what the society wants (Of course a society can't "want" anything in the proper sense of the word because a society isn't a sentient being, but I hope you understand what I mean). No planning or discussion or analysis is required in such a free-market laissez-faire society, only observing things and acting in a rationally self-interested way. It's pretty cool in my opinion, although drawbacks, inefficiencies, and inequities do exist in a free-market capitalist society. Command Economy A command economy is where a central governmental body answers the three basic economic questions. The former Soviet Union is an excellent example of a command economy. In the Soviet Union, private ownership of businesses didn't exist and economic participants could not decide for themselves what goods or services to produce. Everyone was a government worker and a private sector didn't really exist. You couldn't observe extremely high prices for a certain type of product or service, for example, and then decide to open up shop and produce that product or service yourself. Instead of the messy capitalist system where prices give us information about what to do, the government body decides most things in a much more formalized approach in a command economy. The government body decides how much bread to produce, how many cars to produce, and how to produce them all. It also decides who gets them. In reality, a command economy is extremely difficult to implement well because of the nature of knowledge and, specifically, of the knowledge that is required to answer the three economic questions in the most efficient and optimal ways. The knowledge needed to answer the three questions is generally time-specific and localized. Those who have the most knowledge of what needs to happen at a particular moment (the participants of the economy) are not the ones making the decisions in a command econnomy. Instead, a government body that is far-remvoed makes the decisions, but it is almost impossible for that government body to have as much knowledge as the colelctive "mind" of the paritcipatns fo the economy. Look for articles on this later, as this is a very interesting but somewhat esoteric and difficult concept. A Word of Caution About Capitalism vs. Command Economy It's importnat to understnad that what we presented above was a very basic description of capitalism and command systems. Additionally, it's importnat to realize that no nation fits a mold perfectly. Most nations that are capitalist, for example, have asepcts of a comand system (eg. some socialism with a generally capitalist framework). Sometimes command economies have capitalist pockets in place (eg. relatively sophisticated black markets where a more capitalist structure prevails). Other Ways to Answer Question 4? Those are the two main ways the questions can be answered, but let's examine a few other possibilities for answering Question 4 (Who decides?): Answer Question 1 (What to produce?) via voting? It's possible to imagine everyone voting on how to answer the three economic questions, but that would obviously be unfeasible in a complex economy such as that of the United States. Answer Question 2 (For whom to produce it?) with an essay-writing contest? Doesn't that sound like a good and fair way to decide who gets what? Everyone writes and essay arguing why they need and deserve something. It might work in a utopia, but that's obviously not feasible in the world we live for many reasons, the main one being that it would take an enormous amount of time to process and read the essays. That's the beautify of prices and a open and free economy - no essay contest is needed! With the price function, there doesn't have to be anything centralized deciding who gets what. Instead, things somehow work themselves out based on the forces of supply and demand. It's a pretty incredible and elegant thing in my opinion, but it's not very easy to deeply understand how profound the price function in a free-market economy really is without studying it and thinking about it for a long time. Answer all three economic questions yourself? What does that even mean? How can only YOU decide the answers to those questions? Well, if we lived in a world where each person produced every single thing for themselves, you would decide what to produce in your own little world (Question 1) and how to produce it (Question 3). Question 2 (For whom...) wouldn't need to be answered in this self-sufficient world because everything would be for you. The problem with this is that if you had to produce everything for yourself (total self-sufficiency), you would be in poverty along with everyone else in the world. There would be no specialization, trade, or economies of scale and everyone would live as humans lived many thousands of years ago - in destitute poverty. Humanity used to live in a much more self-sufficient way, but it was never totally self-sufficient in my opinion. Some trade and some cooperation did occur even in the distant past. In Conclusion... This was a long piece on what started out as three simple questions. The thing is, they are not that simple. They might sound simple, but they are incredibly deep and it takes years of study and thinking to truly understand how profound the questions are and how beautifully economics attempts to answer them. That's one of the many reasons I love economics.
Further Reading: The Greatest Infographic Ever Created
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