We are a short-sighted lot, we are. I have been reminded of that fact several times this week. I’m going to select one instance for this post: it was the first one I encountered, and one I struggled with for a long time before recently tackling.
The Wealthy Accountant’s blog post entitled: A Non-Political Look at Income Inequality and the Wealth Gap brought this idea back to the forefront of my brain. It was a great read, and I suggest checking it out after you’ve finished this post.
To summarize the Wealthy Accountant, there are two (non-political) ways to reduce income inequality and the wealth gap. Bad events like war, destruction, natural disasters, and plagues bring the wealthy down (not advised) or we can use time-tested methods to bring the lowly up. In both cases, politics will just mess it up, so he suggests keeping politics out.
I prefer the idea of bringing people up. I’ve found that in any area, when someone is trying to bring another down, it’s based in envy or fear. When politics are involved, it’s usually easier to bring one group down than to do what is needed to bring others up. That is as political as I’ll get here.
I want to focus on the article’s comment about stock ownership. True stock ownership is long-term thinking. You buy shares in a company because you want to be an owner of that company. That means unlike most activity (or maybe just news) related to the stock market these days, you plan to hold onto that stock for a long time. You care about the share price more as it relates to how many shares you can buy and not so that you can trade it hours, days or weeks later when (and if) the price increases.
Citing a report of historical stock ownership, the Wealthy Accountant states that in the 1950’s 90% of American households owned stock. By the 1990’s household stock ownership was below 50%. There are many potential reasons for this reduction. One important reason is the decline of long-term thinking and the rise of the instant gratification mindset. Someday I’ll do some deeper research into this, but it would not surprise me to find that in some period between the 60s and the 80s, our society had a subtle but massive mindset shift. The widespread acceptance and availability of credit cards and other consumer loans, the mobility of society, the reduction of the influence of family and increase in dependency on the government all combine into a perfect storm and one of the results is that we don’t think long-term anymore. I’m not trying to affix or transfer blame, I’m merely trying to understand how we got here.
I like Robert Kiyosaki, the author of Rich Dad, Poor Dad. He often mentions the three types of income: passive, portfolio and paycheck. It’s worth reading Rich Dad, Poor Dad to get his explanation. He emphasizes that one does not want to put all their eggs in any of those income baskets. The problem with the decline of household stock ownership without a real corresponding replacement of that income/investment is the result that people nowadays rely almost completely on one type of income: paycheck. Kiyosaki points out that not only is it dangerous to have all of your income eggs in one basket, but the paycheck is the worst of the three baskets. It is the type of income that receivers have least control over, has the biggest risk of being lost in case of accident or poor health, and this income is taxed the highest.
So, not only are many people in a worse situation because of lower stock ownership for it’s own sake, but their situation is all the more tenuous because they rely more heavily on the least reliable type of income.
On to my experience. Sometimes I have a hard time writing about topics like this because I don’t want to come across as bragging, or that I have all the answers. Those who know me will know that I made many mistakes on my journey. While I don’t have many regrets, as any change in step in my past would likely lead to a different place, and I absolutely love where I am, there are some hard lessons that I wish I learned the first time and didn’t have to repeat. At any rate, I use myself as an example to demonstrate that even a dope like me can do it, so you don’t have any excuses.
About a year and a half ago, I started talking to my kids about the different types of income and some of the things that they could begin thinking about as they started to want to get more money. I talked about our rental property with regard to passive income: when the rent covers all of the bills, whatever is left over is income. After buying the house and installing a tenant, there is little work to do. That’s passive income.
We talked about paychecks. Like most kids, they think about what they’d like to do when they grow up and get a job. I talked about all the various jobs that I’ve had in my life. I’ve had some that paid well and some that didn’t. I had easy jobs, and very difficult jobs. In the end, when you have a job, you’re under the control of the one who signs the paycheck. If you get hurt or sick, or the company moves or goes under, then you don’t have a job anymore.
With portfolio income, we talked about the stock market and what it means to be an owner of a company. We talked about the brands that they like. We made a list of their favorite brands, brands their friends like, and brands they know of just from living in the US. We went online and looked up the stock prices of each of the brands on our list. We talked about why some like Amazon have a very high stock price, and others are low and many are in between. We talked about the two ways to make money from owning a stock: dividends and selling.
That year for Christmas, I bought each of the kids 4 shares of Nokia stock. I made up my own stock certificates for them. I wanted them to get a little taste of what it was like to be an owner and not just an employee. They got their first dividend last summer. It wasn’t much, but nobody else was giving them money for owning something.
Every day, we experience people who have things that we want, or who tell us that we need something that we don’t have. It can be difficult to resist the urge to go out and buy the thing that we want. That urge to buy is short-term thinking. That’s the type of thinking that gets us in the financial, social and political mess that we’re in right now.
I think that we need to get back to long-term thinking. Patience is a virtue, and it needs to come back into fashion.
I know that it can be hard to save money. I’ve been there before, several times. Start small. There are many low cost index funds that have no minimum dollar amounts. A good, low-cost S&P 500 index fund can be started in any number of ways. I use Charles Schwab. Many bloggers promote Vanguard. I set mine up online from a hotel room in about 30 minutes. I set it up so that the dollar amount I wanted to invest automatically gets moved from my bank account to Schwab once a month. I don’t have to think about it.
Index funds are a good way to start in a diversified way. I got my first dividends this past December. It was a great feeling. As I continue to invest small amounts monthly, those dividends will increase. It’ll take a long time to get them up to any point where it’ll replace any part of my income, but you have to start somewhere.
So, next time you want to buy a new pair of shoes, a new tv, or a car, think about what you’re going to spend and think “what if instead of buying this product, I bought part of the company?” Change your way of thinking, and someday you could own a good-sized portion of that company. On one hand, being an owner increases security, as your income comes from multiple sources. On the other hand, when you get to the point where the annual dividends are a decent amount, you can use them in the same way that most people use their income tax returns: a way to buy larger ticket items, take a vacation, or make an extra student loan or mortgage payment.
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