Guest Post: The Awesome Magic of Investing Like An 8 Year Old

Howdy everyone! Pretired Nick here. Both Pretired Baby and I ended up getting sick this week so I’m a little behind on my writing. I have some fun pieces I’m working on, but propping myself up at the computer hasn’t felt like a lot of fun. Fortunately, Joe Saul-Sehy of the very well-regarded Stacking Benjamins web site and podcast graciously offered to write a post about investing. Since I don’t consider myself an expert on investing (except for maybe in real estate), I jumped at the chance. Here is his post. Be sure to share your thoughts in the comments and hopefully Pretired Baby and I will be back in action next week! 

The Awesome Magic of Investing Like You’re An 8 Year Old

“Money is not the most important thing in the world. Love is. Fortunately, I love money.”
– Jackie Mason

Image courtesy of arztsamui / FreeDigitalPhotos.net

One of the biggest complaints I hear about money management is, “I just can’t get into it” or “I’m really not into checking investments and statements.” It’s as if these people think that money management is something geeks sit around and do after they trade baseball stats and Magic the Gathering cards.

The simplicity of the financial markets surprised me. Previously, I’d assumed they were filled with magical investments that moved in ways I’d have trouble grasping. That wasn’t the case at all.

Really, it’s more like an eight-year-old kid and a bike. Remember learning to ride? You’d jump on and were terrified that you’d fall. The first several times you wobbled and your biggest nightmares came true — you fell. Then you realized that the price isn’t nearly as hard as the payoff. Riding a bike is awesome when you’re eight years old. It’s a no-brainer when you’re an adult.

Are You An 8 Year Old With Your Money?

When I began road biking seriously I asked a friend if he’d ever been hit by a car. He answered, “The question isn’t if you’re going to get hit… the question is when.”

Just like when riding a bike, it’s always better to think about the payoff than the hurt. Sadly, the media generally focuses on the roller coaster economy and on the downsides of investing (“the Dow Jones Industrial Average today…” …plummeted? When else do you use that word?). You need to reframe investing if you’re afraid so the payoff climbs to the top.

Here is what investors know:

• There is no way to meet your goals without investing. Don’t think about the funds — think about them as fuel for those goals.
• Falling down is a part of reaching happiness. How will you know the magic of success if the goal isn’t just a little dangerous and exciting?
• By keeping that long term goal in mind, sure you might miss your mark, but look at all that you’ll achieve on the road to 95 percent of your hoped-for dream finish!

Your Investments And You

When I was in middle school I started saving for a bike. It had a saddlebag on the back and I was going to put a tent in the bag and ride it across the state.

When you want something badly, that’s where you begin. Not with “what can I do with these dollars?” Start with the bike you want. How much is it going to cost? How much will you need to put away to buy it by next spring?

It’s the same with pretirement, retirement, a new house, a sabbatical, whatever. How much will you need to live a year? What income can you count on? How much do you need to save to get there?

Pretirement, retirement, college, a new house — they all work better with this approach. If you want something special for yourself, start with the vision, translate that to money, and then do the simple math.

If you tell me, “I don’t like math”, I’ll tell you that, like investments, you need to look behind the weird formulas and instead focus on the giggles math can bring you. There’s an awesome power in knowing the answer to the question, “How much” for an adult. While a child will just get back up on the bike 1,000 times until they finally ride, an adult thrives on the answer to “How much pain before I’m secure.”

Once You’ve Answered How Much, You’re Nearly Home Free

I asked my mother, how much further? She answered, you’ll know when we get there. She was right every time.

Here’s the question: can you afford the cost of the bike? Is it currently possible for you to save enough money to get it by next spring? If not, now you have to ask an important question:

How can I lower my other expenses or raise enough revenue to get the bike? Maybe I have to cut out Big League Chew. Maybe I have to sell a little lemonade along the street for a few weeks. Maybe I can negotiate with mom for a bigger allowance. Whatever. Raise income or lower expenses — pretty easy, huh?

This makes shopping decisions easier. If I have no goals, I might accidentally shop at J. Crew. With goals, I become laser focused on my budget.

If your goal is big enough you know that you’ll need to invest your money. To get my big goal, I’m going to need an 8 percent return to make up for the money I can’t save.

….and that’s when the magic of investing happens

See what happens there? By the time I get to the investments, I could care less about them — except as fuel toward buying the bike. I know it’s going to take 8 percent to reach the bike goal, so guess what I’m going to do?

I’m going to search for investments that reach an 8 percent return with the least amount of risk.

It’s equally as important to recognize what I’m not gonna do. I’m not going to pay any attention to investments that pay 3 percent or those that pay 12 percent Think about how much work I saved myself, especially if I don’t really care about investments!

Now, when I get my statements, I know what the bottom line represents. Not some meaningless investment but my new bike, retirement, a new home, an education, whatever.

Less time, more fun, and with a bike at the end. What eight year old wouldn’t be happy with that approach?

Joe Saul-Sehy blogs about earning, saving and spending with a plan at Stacking Benjamins.com and is the cohost of the popular podcast series Stacking Benjamins. His first bike had a banana seat. Don’t be a hater about it. 

Now, tell us what you think! Does it help you to think like a kid when approaching your investments? Have you thought about investing like an 8 year old? Can you use this idea to help alleviate some of your fears?