“I’m quite good at spending money, but a lifetime of outrageous wealth hasn’t taught me much about managing it.” – Game of Thrones
I need a better picture for this, but I give up. Here’s a dolphin.
I was talking with a friend the other day about personal finances, and we were discussing how we were both in pretty good financial shape, but we were (yet) in very different places.
Most of my money is ludicrously liquid, in fact, when I grab a quarter, it turns into a wet, squishy mess. But by liquid, I really mean that have the ability to use it, right now, right here for anything from purchasing a prodigious plethora of Pez® and pantyhose to just letting it sit and rot. Mainly my money has just been sitting and rotting slowly due to inflation.
As I’ve discussed before, most of my time (day and night, sometimes) had been spent out of the house actually earning the money, and I’d given very little thought to actively managing it and the best way to do that. I’ve missed some great deals, but I’ve also missed plenty of bad ones, like that Shetland pony farm. Never could get those seeds to sprout.
My friend, however, has a great financial structure going forward, but he’s fairly illiquid – he can’t really touch vast chunks of that money, in some cases he can’t touch it for 20 years into the future, or it would require severe penalties (like losing a kidney, or paying massive taxes – but I repeat myself) in order to get at it. I think his setup has him set up far better than me, 20 years from now.
In the conversation we were having, I came up with the epiphany – our money has different shape. Shape, like a fine pair of pantyhose, has two sides. Money shape has at least two – liquidity and risk.
Liquidity is when your money is available. The greater the liquidity, the more available your asset is. So, if I have $10 in my hand, I can use it immediately if I so chose. Or I can do like government and just light fire to it and watch the pretty flames. But let’s look at liquidity from liquid to solid of assets we own.
- Cash – As above. You can do anything you want with it. Well, most things. It can’t help you go faster than the speed of light.
- Checking Accounts/(Debit Cards) – Either way, the money is immediately and totally available, as long as you have money in your account or have recently paid your credit card bill. Many places still checks, which are becoming an obscure throwback to another age when men could actually sign their name. I pay bills with checks. I have never owned a debit card, but I hear they go great with fish.
- (Credit Card would go here if Credit Cards were an asset – they’re not, they’re a loan)
- Things – Some things are almost as good as cash, but they’re not cash. Silver coins, gold bars, Pez®. This could go nearly anywhere, depending upon the thing, the time of the day, and the tide. Beanie Babies® probably are about as liquid as land near a former Soviet nuclear/biological warfare testing site. Sorry if you thought those would pay for college.
- Stocks/Bonds – These are pretty liquid, it will still take a day or two to get a check and get paid.
- Savings Account – Different than checking – they can hold your deposit for a period of time if they want to after you ask for it, generally no more than 30 days. It’s actually a loan to the bank. Do you really trust those guys?
- 401k/IRA – The money is yours, but you get hit with a huge penalty for breaking that piggy bank, takes weeks to get a check. I think it’s just a plan for you to save your money and put it all in the same place so the government can find it easily and use it to buy Carmex™.
- Home – Generally takes more than a month to sell/close. Might take a year. Might take longer.
- Land – See above, but . . . location, location, location.
- 401K/IRA (no penalty) – Become 59 and ½ years old. So, if you’re 59.49999, pretty liquid. But easy to calculate how much time until you are liquid.
- Pension – Get it at a predetermined age, generally 65.
- Social Security – Can start drawing early, but you get less over time. If you die early, that’s a good deal. Wait, did I just really type that?
My issue is that I’ve been living too far up the liquidity tree. I’ve been serially under-invested, and have been for years. As I mentioned above, another dimension to money is risk of loss:
- Cash – 100% risk of loss. Inflation, over time will destroy cash purchasing power. It’s the way that government keeps promises – it taxes those who save and are responsible!
- Gold/Silver/Pez® – Only lost if you don’t know where you buried it, but values may vary greatly even during a year.
- Stock Market – Inflation adjusted, it’s probably one of the best defenses against the tide of inflation. Individual stocks are much more risky than index funds, but have the potential for much greater gain. Probably the best long term choice, but I hate to buy now, when the market is at an all-time high.
- House – Even if it blows up, you still own the crater. If only there were a market for craters.
- Pension – Generally, these are horribly underfunded. Good luck, especially if you’re a California government employee!
- Social Security – I’ve always felt that I’d never get any money back on this scheme. Still betting that.
The impacts of the shape of your money are significant. I have more choices now than my friend, and unless I do a good job managing those choices, I’ll have many fewer as I get older. The nice part of this, however, is the choices are mine, and I’ll live with the outcomes.
Now, to invest in an S&P index fund? Or maybe horde Pez® for the apocalypse?