One of my 2018 goals is to write a short & simple book on investing. I’m passionate about the subject, do a lot of it and have been both teaching and coaching people on it for quite some time. Instead of sharing the same ideas over and over again through my spoken, and sometimes written words, I wanted to put a bunch of notes together in a small read. I liked the Tao of Charlie Munger, and I’m going to write mine like it. These posts will be a series of random ideas, which I’l later refine and put into a simple, self-published book. My goal isn’t to get rich of this, be a best selling author or anything. My goal is simply be able to share, in a succinct way, all of the key ideas/principles/philosophies/best practices and short cuts to investing for those who want to become financially free sooner.
Becoming financially free is all about continuing to invest your money, over and over again into assets that grow in value. Ideally providing you both appreciation value and cashflow to live the life of your dreams. The more money you earn, save but then quickly invest, the faster you’ll reach that goal. Thus the more effective you’re able to do that, the better off you are. Automation is one of the most effective vehicles to help you do that.
Like everything in life, getting good at something generally requires persistent effort, and eventually building good habits. With automation you can get there quicker. Once you know the rules, you can automate some of the actions to help you win the game quicker.
One of the most challenging parts of investing is the psychological one. Most humans have a tendency to spend what they earn, many, more than what they earn. When you see your spendable income in front of you, it becomes a lot easier to just spend it. One of the absolute best ways to reduce this tendency, is to just not have the money at all.
When you generate profit as an entrepreneur, or receive your payroll as an employee, instead of manually transferring money to a savings or investment account, automate it. Ideally, on the date you receive profits or payroll, automatically transfer it to the following accounts; savings and investment accounts, possibly brokerages, and or other vehicles.
Not only will you then not have access to spend all of your money, even if you spent it all, you’d be ok, because you already saved and invested your money. This is much easier to manage, and you don’t have to think about it. Not only does it save you from spending, your money is now growing. Even more important, you’ve done what most people will never achieve, to consistently invest.
You’ll hear time and time again, that if people continually to invest throughout periods of time, they’d be ok. But because most people don’t do it in an automated fashion, they just don’t do it and lose. And just because you’re automating your savings and investments, it doesn’t mean you still can’t do your manual transfers when you make a large profit or bonus.
We have a saying, that savings are for losers. I don’t recommend just saving a ton of money in cash always. It’s good to always have at least 6–12+ months of cash on hand, but after a certain point it’s advisable to put your money to work, because inflation will eat away at your savings. Even though I recommend automated savings, when it gets high I’d recommend moving your assets to other vehicles, i.e., stocks, real estate, peer2peer lending, or any other chosen investment vehicle of your choice. This savings, is essentially cash to invest later. I’ll write another post on asset allocation and re-allocation later, as it’ll be an ongoing thing throughout your life.
You can automate transfer to your stock brokerage account. You can have the account setup to automatically buy certain stocks, or index funds if that’s your thing, or just have it sit in cash, and invest when you see a good deal. If you check the stock market regularly, by having a few companies you believe that will do good 10–20–30+ years form now, you can monitor them for dips in the market, and buy when you feel like it’s a good price.
For those just starting out, I always love recommending peer 2 peer lending. While the returns aren’t the best in the world, around 10–12% net if you’re investing in higher interest rate loans, it at least is one of the first places people can truly start to automate their money. With as little as $25, you setup automated investments into Prosper.com, and be on your way to being an automatic millionaire. It’s not about the money. Even if you’re broke, I advise starting out with $25/month transferring, or $1/month. The principle is more important than the money. It’s important to build the habits and starting to automate your investments. Most people I set this up with, they soon have more money than their checking & savings combined, and time never seems to end. Compounding does happen.
There are some things that can’t be automated well. I personally love real estate, for a ton of reasons, for which I’ll save for a later post. Generally once my savings, stocks, peer2peer notes, or other investments may be doing well. I will sell some, realize a gain, and swap assets into more stable real estate investments. The automated investments are really a way to build cash, build quick investments, and then for me, later roll those into large, more leveraged, more cashflow, more controlled, more value-added, and more tax saving real estate deals. Purchasing real estate can’t be automated as well, unless you’re buying REITs, but that’s not quite the same, and there are some crowd sourcing real estate deals, those which provide K-1 and depreciation benefits that may be good. But again, I’m getting off track.
Automation can be taken further. I used it to automate building my credit score. I’ll write another post on this, where I have 10–20 credit cards, with my own merchant processor, I charge them all a few dollars every month on auto payment, and have them all setup to paperless statements with auto-pay. It automatically builds my credit score and the credit scoring agencies think I have amazing credit because of my low usage, and tons of history.
Habits are the key to an extraordinary life. Automation with computers allow you to create habits instantly.
Don’t worry about the amount right now, even if it’s $1. If you can’t figure out a way to physically, create an automated habit, with a computer program with a small amount then you’re going to have trouble accomplishing much. Most people think they can’t afford it, yet they waste money on liabilities all day, all month, all year and their entire life and say they can’t afford it. It’s nuts, don’t let that be you.