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Intro to Investing 3: The Value of Money

I wanted to add one final word concerning the world of Valuation and Psychology to our introduction to investing series. Particularly I wanted to talk about the value of money and what it means for your investment goals. I also will touch on when to start investing. Finally, we will finish out the intro series with a few links to some advanced investing topics, for those who are ready to continue to learn.

If you have missed it you can check out our prior pieces introducing investments here:

Anyway, let’s get started.

The Perceptive Value of Money

Money is just a store of value.    That means even the value of cash is inherently tied to your perception of how much it can provide you.   As you get older you will begin to perceive the value of money differently then it’s actual value.  Say you bought a house when you were young at 100K and now they are all priced at 500K.  Your perception that 100K will buy a house is anchored in your mind.    But that 100K no longer buys a house.  So you need to be careful that you define your future monetary needs not in their value today but in their value tomorrow.

There will come a time when your future need, or perceived lack thereof, will drive you to take a less aggressive investing asset allocation.  That might be the right choice, but I urge you to make every effort to keep abreast of the true value that money brings.

Estimating Your Future Money Needs

For those of you that might be saving for retirement, you especially need to watch the value of money.  You would typically estimate your future needs to fund retirement based on your projected yearly expenses.  In the case of retirement, the likely best estimate of projected expenses is today’s expenses.

There is some evidence that expenses decline during some phases of retirement, but they also may increase during some phases. Using today’s expenses plus any upcoming large expenditures probably gets you in the ballpark for most people. Don’t forget to include expenses like health care that might be deducted from your paycheck.

Calculating Retirement Needs From Projected Expenses

You can determine how much you need to support various yearly expense numbers using Retirement Calculators.  In general, you will need at least 25x your yearly expenses to ensure your funds last at least 30 years. This scenario assumes you adjust up your expenses yearly based on the rate of price change in the economy, known as Inflation. For longer periods of time you will need more funds. One great series recommends a rate closer to 3.25% for early retirees.

For those that have recently reached retirement, you can read up on our retirement withdrawal strategy here: Our Retirement Withdrawal Strategy  As usual, our plan is designed around minimizing taxes while maximizing our money.

When Should You Start Investing?

Leaving the value of money comes back to a basic truth.  The longer you are invested the higher likelihood you are to make more money.  When money is not investing you are actually losing it via inflation. You want somewhere you can park money and not need to touch it for years.

Should I Invest or Payoff Debt?

This leads us to a very common question asked about investing.   Should you pay off your debt before you invest? The answer really depends on what type of investment and debt.    But in general if you invest nothing in favor of debt you can lose out on a huge amount of return.

I personally prefer to leverage certain types of debt.  If I have debt with a lower rate of interest then I can receive investing, I am going to invest.  That’s inclusive of things like company matches on 401K contribution, which is a type of guaranteed return.

Invest When You Can Earn More Money Than Your Debt Costs   

The reality is, return is a percentage.  So the more money you have invested the larger in raw numbers your return will be.  Leverage, or taking debt to increase your money and then invest it, allows you to increase the number on which the return is based.    So as long as you are earning more on the investment than the debt your leverage is actually helping your financial position.     So if we take the decision of whether to prepay your mortgage or invest, with today’s low mortgage rates the answer is almost always invest.   However, if we are comparing a 17% interest rate credit card you are probably better paying off the debt.

Mind Investment Risk

This approach has its limits though.  Having to pay off debt at some point is a sure thing unless you declare bankruptcy.  As discussed above most investments don’t have a guaranteed return.    As such you really need to compare debt interest rates to the rates of lower-risk investments, not stocks.   In essence, I treat mortgage payoff in the same way I treat bond investment.    Both are low risk.  So when buying bonds I determine whether the bond has a higher return than my mortgage.  The answer defines which I invest in.  You can read more about this approach here Debt Payoff as Risk-free Asset Allocation.

Remember Liquidity and The Emergency Fund Requirement

A caveat to the above. Debt is highly illiquid.  You can’t sell your debt to put food on the table next week, unlike a bond.  So the above only can occur after you have your immediate and intermediate needs covered by an emergency fund. Really you need to cover that need before any type of investing.

Other More Advanced Investment Strategies

Well, that does it for the basics. As discussed one of the key goals for investing should be simplicity.  Most people will not need advanced strategies except where specific circumstances dictate.   Therefore I would advise most reading this to ignore this section. For those that are still interested these are the posts I have written to date in the area of advanced investment strategy or on specific investment vehicles:

Well, here we are after almost 15,000 words on investing. Did I miss anything you would like me to cover? Do you have any Questions?


  1. Xrayvsn
    Xrayvsn November 18, 2019

    Great overview FTF.

    I personally am shooting for 3.25-3.5% as my SWR. I think it will be overkill because the annual # I am shooting for has a lot of built in safety margins such as a large discretionary component. In lean times I could probably be fine with 1/2 that number or less.

    I paid off my mortgage but my rates were much higher than the current climate (I paid it off in year 9 of a 30 year fixed at 5.625% (this was 2005). I am glad I did because there is a lot of peace of mind that comes with being completely debt free.

    • FullTimeFinance
      FullTimeFinance November 22, 2019

      We just sent in our last mortgage check. I’m looking forward to the psychological feeling of our first month without a mortgage bill.

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