ISBN: 1476757801 READ: January 2015
This is the book that ignited my passion of personal finance, although it is about much more than boring dollar and cent strategies. It gets you thinking about where you want to be in life financially as well as the quality of life and happiness you want to achieve. It paints money as the vehicle to a better life instead of the end goal. There are actionable steps that you can take after you decide what type of life you want to lead in the future.
This book had such an impact of my life and how I thought about investing, I didn’t want to butcher it with my own sub par notes. The following are notes from John Garvens
Step 1: Dedicate money for saving and investing.
The first step to financial freedom is determining how much of your money you will save and invest. While simple, this decision is not easy for most people because it creates a feeling of deprivation.
“If I save and invest my money, then I can’t do all of the fun things that I want to do,” most people say to themselves.
The majority of my readers are 25-45 years old. While it sounds far-fetched right now, human life expectancy could increase to 100+ years of age within the next 25-30 years which raises an important question: Will you outlive your retirement?
If you think it is hard to make a living when you are young and healthy, imagine how hard it will be to make a living when you are old and frail.
“That’s impossible,” you say. “What about Social Security and my 401(k)?”
What about your Social Security?
First of all, Social Security only pays a fraction of your income. Don’t believe me? Try this Social Security Retirement Estimator provided by the Social Security Administration. Once you account for inflation, your Social Security income will barely cover your cost of living when you retire (if you are lucky).
Secondly, I doubt that Social Security will even exist by the time Millennials start to retire. Millennials should get used to the idea of working until they die because that is the most likely scenario.
I did not write that to make you feel depressed and incite fear. Instead, I wanted to make you wake up and realize that many of the platitudes that we have been fed since birth are anything but true.
- Buying a house is a great investment. (False.)
- Investing in your 401(k) is the way to financial freedom. (False.)
- Getting a college education is the only way to become successful. (False.)
What about my 401(k)?
If you seriously believe that you can save a paltry 5-10% of your income for 40 years and live off of the savings for another 40 years, you need to wake up.
As Tony points out in his book, most 401(k) plans are loaded with fees which strip you of your wealth and keep you poor. In fact, the average mutual fund company takes 3.17% per year in fees of various kinds. That has a serious impact on your investment returns
While I understand their need to make money to stay in business, I believe that mutual fund companies need to be responsible stewards of their customers’ hard-earned money, keep administrative costs as low as possible, and make their money on the volume created by millions of happy customers.
Bottom Line: Your future is in your hands.
Whether you like it or not, you must save and invest your money aggressively for your future. Is it fun? No. Is it sexy? No. Would you rather buy a huge house, a fancy car, and luxury vacations? Of course!
Saving and investing money aggressively may not be fun, sexy, or cool, but it will help you sleep at night. You owe it to yourself (and your family) to save and invest aggressively and protect yourself from the storms and squalls of life.
Step 2: Know the rules of the game.
In this section, Tony reveals nine myths about personal finance, mostly centered around mutual funds and 401(k) plans. To be clear, Tony does not blindly object to mutual funds and 401(k) plans. He simply highlights some commonly marketed claims made by the financial industry and shows how many of them are completely false.
Here are some of the myths:
- Mutual funds beat the market. I hate to break it to you, but your mutual fund manager probably sucks. I am sure that they are a smart person, but they cannot, despite their best wishes, beat the market. In fact, 96% of mutual fund managers fail to beat the market. You are better off buying index funds that mirror various asset classes and calling it a day. As the saying goes, “If you can’t beat ’em, join ’em.”
- Mutual fund fees are worth the cost. Imagine that you invested $10,000 in an actively managed mutual fund, contributed $1,000 per year to the fund, and received an 8% average rate of return for the next 40 years. With an expense ratio of 3.17%, your mutual fund cost you $294,415.93. If, on the other hand, you had invested your money in an index fund with an expense ratio of .17%, your index fund would have only cost you $24,585.88–a savings of $269,830.04! Now, let me ask you a question: Who deserves that money–you or your mutual fund company? If you want to discover how much money you are losing in fees, try this expense ratio calculator. To say the least, it is an eye-opener.
- You can trust the rate of returns listed in a mutual fund prospectus. I will spare you the details because they can be found in the book. Just know that mutual fund companies are sneaky. What you see is not necessarily what you get. In fact, what you see is rarely what you get.
- Your broker cares about you. The sad fact is this: your broker does not give a damn about you. If they did, they would not sell you expense-laden funds designed to line their pockets simultaneously emptying yours. While a financial advisor can certainly benefit the retail investor, you need to be careful where you turn for advice. The world is filled with sharks. If you do not know how to spot them, you will be eaten alive. Thankfully, Tony offers some solid advice on selecting a financial advisor. In short, seek out a fee-only fiduciary.
- A 401(k) is all you need. Your 401(k) is a piece of your retirement plan, it is not your entire retirement plan. In addition to your 401(k), you need to find other ways to invest your hard-earned cash: Roth IRAs, annuities, insurance policies, etc. It is only through asset allocation (which Tony discusses in great detail) that you can ensure your financial freedom.
- Target date funds are the perfect solution. Target date funds look great on paper. Unfortunately, many of them contain high fees similar to the mutual funds that I mentioned earlier. Often times, they contain compounded fees where you pay a fee for the target date fund itself plus the fees of its underlying funds. Fees, like taxes, are one of the biggest barriers to wealth accumulation.
- Annuities are evil (and for old people). Annuities sound old. That is because they are old. In fact, Julius Caesar created the first annuity over 2,000 years ago. Think of an annuity as an insurance policy for your income. You give the insurance company your money; they give you a steady stream of income until you die. (Morbid, but true.) Since there is no way of knowing when you will die, an annuity is something worth considering as a part of your retirement plan, especially if you are nearing retirement age or are already retired.
- You must take huge risks to get huge returns. You do not need to be a venture capitalist in Silicon Valley to get a good rate of return. In the book, Tony shares portfolios recommended by some of the world’s wealthiest individuals that receive consistently high returns for relatively low levels of risk. By diversifying your investments across a spectrum of asset classes, you can spread the risk while maintaining consistently high returns.
Step 3: Make the game winnable.
In step three, Tony begins by describing the levels of financial success as he defines them: financial security, financial vitality, financial independence, financial freedom, and absolute financial freedom.
You must decide for yourself what level of financial success you want to achieve. Some people want to live a life filled with luxuries, and that is okay. Some people want to live a simple life and keep their standard of living low, and that is okay. Whatever you decide, you need to decide what is best for you.
Regardless of your desired level of financial success, Tony offers five strategies to accelerate your progress:
- Save more money and invest the difference. “Your current middle-class life is an Exploding Volcano of Wastefulness,” writes Mr. Money Mustache, a personal finance blogger from Colorado who declared himself retired at the ripe old age of 30. By saving half of their income, keeping their cost of living low, and investing the extra money, Mr. Money Mustache, his wife, and son live a life free of financial worries with ample time to spend together as a family. If you find it difficult to believe a random blogger on the Internet, the late multi-billionaire Sir John Templeton followed the same principle.
- Earn more money and invest the difference. What are you going to do with that salary increase, end-of-year bonus, or special gift from grandma? However you receive income, consider investing all or a portion of it toward your goal of financial freedom. I plan to invest 100% of all salary increases, bonuses, etc. until I am saving and investing half of my income. Only then will I allow my spending to increase.
- Reduce fees and taxes and invest the difference. As stated earlier, fees and taxes are one of the biggest barriers to wealth accumulation. Each year, the government takes approximately half (yes, half) of your income through various taxes to pay for its wastefulness. The remaining money is the target of the financial industry who wants to help you “invest for the long run in a mutual fund that beats the market.” (Gag me.) Use low-fee, tax-advantaged accounts like your 401(k), Roth IRA, annuities, etc. to reduce fees and taxes and keep more money for yourself.
- Maximize the rate of return on your investments. Diversify your investing activities across asset classes to avoid catastrophic loses while maximizing your upside potential.
- Alter your lifestyle and invest the difference. How much does it cost you to live where you live? How much less would it cost you to live somewhere else and maintain the same standard of living? Sure, it may be cool to live in New York City. But, how much are you spending to simply exist? By moving to a smaller (but still cool) city, y0u can easily save 10-15% per year on expenses, invest the difference, and retire faster.
Step 4: Learn where to put your money.
The experts (read: billionaires) agree. Asset allocation is the key to successful investing and the only way to truly diversify your portfolio.
“But, I diversify my portfolio,” you say. “I invest my money in an S&P index fund.”
That’s great! But, what if the stock market takes a dump? Then, you’re screwed.
Asset allocation goes beyond simply owning a bunch of stocks. Asset allocation is about owning a bunch of unrelated asset classes: domestic stocks, international stocks, emerging market stocks, bonds, real estate, treasuries, commodities, etc. It is about putting your money into different buckets. That way, if one of your buckets springs a leak, you don’t lose everything.
Step 5: Create a lifetime supply of income.
The goal of Step 5 is to create a lifetime supply of income. The basic strategy is this:
- Accumulate a mass of wealth by investing in a portfolio of low-cost, tax-advantaged, well-allocated investment vehicles.
- Convert your wealth into an annuity that pays you a consistent stream of income every month for the rest of your life.
All Seasons Strategy
In order to convert your wealth into a lifetime supply of income, you first need to accumulate a mass of wealth. To assist with this, Tony shares the “All Seasons” strategy developed by legendary investor Ray Dalio.
According to Dalio, there are four economic “seasons” that move the price of assets: inflation, deflation, rising economic growth, and declining economic growth. As such, different assets perform well in different seasons.
- Inflation: commodities, gold, and Treasury inflation-protected securities (TIPS)
- Deflation: Treasury bonds and stocks
- Rising economic growth: stocks, corporate bonds, commodities, and gold
- Declining economic growth: Treasury bonds and Treasury inflation-protected securities (TIPS)
Because no one knows what the future holds, Dalio suggests that investors invest their assets to benefit equally from each economic season: 25% for inflation, 25% for deflation, 25% for rising economic growth, and 25% for declining economic growth.
You can find Dalio’s recommended asset allocation on page 391 of the book.
Income for Life
Imagine how you would feel if you knew that you would never run out of income. While it sounds too good to be true, there are a number of ways to convert your amassed wealth into a lifetime supply of income.
As Dr. Jeffrey R. Brown, a professor of finance at the University of Illinois at Urbana-Champaign, wrote in his paper A Paycheck for Life: The Role of Annuities in Your Retirement Portfolio:
Put simply, if an individual annuitizes enough wealth to cover the gap between his monthly income and his necessary expenses, then the retiree has the freedom to invest and spend the rest of his portfolio however he wishes, knowing that his basic needs are covered no matter how long he should live.
In other words, if you can amass enough wealth, you can flip a switch make money every month until you die. You may not care about how you will make money when you are 90 years old. But, it sounds like a lot more fun to collect checks while playing checkers with the cute gal down the hall than to struggle through a shift as a Walmart greeter at 90 years of age.
Step 6: Invest like a billionaire.
While Tony interviewed a slew of millionaires and billionaires for the creation of this book. From those interviews, Tony synthesized four principles that tied all of them together:
- Don’t lose money. Warren Buffett is famous for his two rules of investing: (1) never lose money; and (2) never forget the first rule. If you simply avoid losing money, you will eventually acquire quite a bit of it over time. How much you keep is more important than how much you make. Even if you start with nothing, you can end with something as long as you are patient.
- Seek asymmetrical risk/reward. Not all investments are risky, and you do not need to bet the farm on a long shot to retire wealthy. Slow, simple, calculated investment decisions win in the end.
- Anticipate disaster and diversify your investments. All investments involve some degree of risk. They key is to spread the risk among different asset classes to ensure that one shot does not sink the whole ship.
- Never stop learning. The most successful people in the world pursue knowledge relentlessly. They know that the acquisition of knowledge is paramount to their personal and professional growth. Like money, knowledge compounds and builds on itself. The better you get, the better you get. Endeavor to learn something new every day of your life. Over time, you will astound yourself with how much you can learn and grow.
Step 7: Live a rich life.
In the end, MONEY Master the Game is not about money. It is about living your best life. Money is simply a tool to help you do that.
A Bright Future
Even if you do not have a lot of money, the future still looks bright. As technology advances, more products, services, and experiences will become available to more and more people leveling the field between the haves and the have nots.
Today, we take so much for granted. Using a smartphone, we can access the sum of all human knowledge in a matter of seconds. We can ride inside of our mechanical horse to a building filled with a limitless supply of fresh food. We can use specialized 3D printers to print new body parts for people who need them.
Who knows what the future will bring? The only thing that we can say for certain is that human potential is virtually unlimited.
The Key to True Wealth
At the end of our lives, it will not matter how much money we made, how well we diversified our portfolio, or how many times we beat the market. What matters is how you improved the world around you.
As Tony writes near the close of the book, “Being the richest man in the graveyard is not the goal.” Instead, the goal is to live a life of meaning, whatever that means to you. For most of us, that means giving your time, energy, and money to others.
Giving to others puts things in perspective. When you give to others, you realize that you have something to give. When you give to others, you realize that your life really isn’t that bad.
So start giving your time, energy, and money to others and start living a truly rich life today.