You Have More (To Give) Than You Think
If you’ve ever done Dave Ramsey’s famed Total Money Makeover, you know that one of the final steps is to start giving money to others. He suggests setting aside 10% of what you make to give to those less fortunate than you.
“Once you are completely debt-free, you have that much more money to spend, invest, and give,” Ramsey writes. “Just remember that money given produces more joy than it could ever buy.”
I applaud this philosophy. But I also recognize that money is emotional and we all have varying levels of attachment to it. No matter how generous you are, it can be difficult to shift from a wealth-creating mindset to a wealth-spreading mindset.
However, you might be able to help your fellow humans in a way you haven’t yet considered, by passing along your understanding of finance and investing. I often wonder how many lives would be improved if more people had a basic understanding of how money grows — or doesn’t.
Carl Nassib, an NFL defensive end and star of the most recent season of HBO’s Hard Knocks, made me think of this topic. In my favorite moment of the season, Nassib teaches his Cleveland Browns teammates about the “Rule of 72.” He starts by asking a room of fellow massive linemen whether they know how compound interest works. It’s great television, and Nassib’s explanation gets him dubbed the team’s “financial advisor.”
The “Rule of 72” is an investing maxim that says you can estimate how long it will take to double an investment by dividing 72 by a projected annual return rate. For example, if your investment makes a 10% annual return, it would take you 7.2 years (72/10) to double your money. (In reality, it would take you 7.3 years, but the point remains).
Nassib’s explanation isn’t the most nuanced piece of financial advice you’ll find. But I like that he’s thinking about compounding and how his money can grow in the long term. Even more, I like that he shares his knowledge and enthusiasm with those around him. That’s something we all can, and should, do more often.
Consider a 2016 study from the FINRA Investor Education Foundation, which found that Americans “demonstrate relatively low levels of financial literacy and have difficulty applying financial decision-making skills to real-life situations.” The study asked five questions about economics and finance in everyday life. And fewer than 40% of Americans got more than three correct.
Translation: Too many of us don’t understand the basics about money. If you’re someone who does, you could do a great service by sharing your knowledge.
If you want to take the leap, here are a couple of things to consider discussing with your loved ones and neighbors, and a couple you shouldn’t.
The importance of saving
An emergency fund should be one of the first topics in any money discussion. Since, as the old Nationwide commercials pointed out, “Life comes at you fast,” it’s important to be ready to face any financial hardship. To do that, the experts suggest setting aside enough to cover three to six months’ worth of fixed expenses, such as rent, food, utilities, and transportation. I’m reminded of this point as I see the aftereffects of Hurricane Florence on the Southeastern seaboard.
Regardless of whether your neighbors or family members act on your advice, you’re doing them a world of good just by getting them to think about saving. If they do act, rising interest rates have made some savings account options fairly attractive, and many accounts allow auto-withdrawals to make the process of saving easier. Nerd Wallet has more information.
How compound interest can work for (or against) you
Every dollar you consume today is a dollar (or more) you won’t have in the future. And depending on your time horizon, even a small commitment to savings could grow into a substantial source of wealth. A 25-year-old who saves $300 a month, invests, and generates an 8% return on his or her investments would have over $932,000 by age 65 — all through the power of compound interest.
While compounding can be a miracle for savers, it can crush people paying off a credit card balance. If you pay only your minimum balance each month, your high credit card interest rate will force you to make seemingly endless payments. Assuming a 17% rate, a consumer who’s racked up $10,000 in credit card debt would need over 10 years to pay it off if he or she only ever paid the monthly minimum.
Lots of people could move themselves toward a better financial future just by saving, avoiding credit card debt, investing with a long time horizon, and letting compounding do its thing. My life was changed forever when a college friend explained all this to me. Giving a similar explanation to those you care about is definitely worth your time, and theirs.
Hot stock tips and individual investment advice
The problem is, most discussions of budgeting, saving, and avoiding credit card debt don’t ignite people’s excitement levels the way discussions about making money through individual stocks do. After I passed the CFP exam last summer, a friend who had never before shown an interest in investing said, “Now that you’ve passed your exam, tell me what stock I should buy.” When I explained that passing my exam didn’t make me a stock-picking expert, I got a blank stare.
Since we often lack a full picture of the financial lives of our friends and neighbors, a stock that makes sense for you to own, given your age, risk tolerance, and time horizon, might be wholly inappropriate for someone with different circumstances. That complicates our ability to give individual investment advice. An asset allocation that works for you, or even for Suze Orman, might not work for your neighbor.
And do you really want someone else acting on your stock-buying advice? Are you ready to have follow-up discussions if your stock tanks and your friend asks you what happened? Would you be speaking from a place of expertise? If not, you might be doing more harm than good. Stick to broader financial planning and investment lessons, and you should be in the clear.
Bottom line
We’re about two months away from the holiday season, the time of year when gifts take center stage. Whether we buy presents, volunteer our time, or make charitable donations, we’ll have plenty of giving opportunities and decisions. Some of us might be in a position to subscribe to Ramsey’s 10% giving rule. Others might not. But chances are good that we all know someone who could use some financial savvy in their stocking this winter. If you pass yours along, you could end up giving them more than you realize.
