In the last few days, several readers have shared a video with me that’s been floating around on Facebook. The video is titled Financial Mistakes You Must Avoid in Your 20s and it features “entrepreneur and author” Grant Cardone discussing a bunch of what he considers to be financial mistakes that people make early in life.
I watched the video, hoping for the best. Instead, I found a bunch of outright nonsense mixed in with some “kinda true” things, baked together into a pie that would make for financial disaster.
Here’s the reality of personal finance, folks. It’s actually really simple. Spend less than you earn. Do something worthwhile with the difference. If you invest early and diversify, it’s hard to mess up because compound interest does all the work for you. That’s really the recipe for success. Everything else is just details.
This video tries to turn all of that on its ear in an effort to stand out from the crowd, but it simply misses the target over and over again in just a minute and a half of video.
Below, I’m going to walk through some of Grant’s points with direct quotes from the video and discuss how they’re either a misleading truth or outright nonsense.
Borrowing Money to Go To College?
From the video:
Number one is borrowing money to go to college. […] The idea that you would borrow money to go someplace for four or five years and not make money is ludicrous when you put it down on a piece of paper.
To an extent, I agree with Grant here. If you’re just borrowing money to go to college for five years without any sort of gameplan or mission while there, it’s probably not the best idea. You’re not earning any money while you’re there and you’re building up debt in the process. If you’re going to college without a purpose, then you’re probably making a financial mistake.
The problem is that Grant goes far beyond this, taking the point to a ludicrous conclusion. His argument is that borrowing money for college is never a good idea.
I completely disagree with that. If you approach college knowing what you want to study and approach it with seriousness and intent to get as much value out of the experience as possible, college is very much worth it.
A bachelors degree is worth about $750,000 in additional lifetime earnings compared to a high school diploma, according to this US News and World Report article. That article doesn’t account for additional earnings benefits beyond that from people who approach college with the intent of building professional relationships along the way, using the resources there to build a professional portfolio, and so on. If you use the college experience to its full benefit, it can easily be worth a million or more in lifetime earnings.
Again, college is probably not worth it if you’re just trying to “find yourself” or if you have no idea what you want to study, but if you approach college with direction and intent and a work ethic, it’s a great investment.
Here’s a second quote from the video:
“The second thing is the idea that you would try to save money. Save for emergencies? Save for a rainy day? Save for the future? Save for retirement? You don’t want to save for any of those reasons!”
Right here, things go way off the rails. I can’t agree with anything that’s said right here.
Here’s the reason. Your future is unknown. You don’t know what’s going to happen to you in the next year or the next 10 years or the next 20 years. You might have every career option go perfectly for you and you’re making a mint… or not. You might be married… or not. Your health is wonderful… or not.
You simply don’t know what’s coming. However, you do know a few things.
You know that, over time, your health is going to gradually, slowly decline. That’s part of getting older.
You know that, given a significant period of time, there are going to be some good events and some bad events. It’s extremely unlikely it’s all going to be good… and it also is extremely unlikely that it’s all going to be bad.
Given those things, it makes a lot of sense to save right now for the future. Right now, you’re likely in better health than you will be down the road. There’s also a very likely chance that some additional undesired events are going to occur between now and then.
An emergency fund helps you deal with those negative events. Retirement savings helps you deal with getting older, so that you don’t have to keep earning as much when your energy level and physical health decline even a little bit – you can just retire or move on to a lower paying job. (Remember, “retirement” doesn’t have to start at age 65 or 70 – it can start earlier than that if you plan for it.)
The only way that the advice from this video works is if literally nothing goes wrong in your life. If every single career move you make is golden, every single investment move you make is golden, you never have any major accidents or crises, you never have any health problems or accidents, and neither does anyone in your family, then you don’t need an emergency fund or a retirement fund because you’ll be rolling in the dough. (You also might have “The First National Bank of Mom and Dad” backing you up, but that’s another situation entirely.)
You’ll also be extremely rare, because life simply doesn’t work like that. Bad things are going to happen, and even if they don’t, you’re going to naturally decline. If you don’t prepare for them, those events are going to smash into your life like a freight train. You’ve got to prepare for the future!
Make a ‘Play’?
So what does this video propose that you do instead? From the video, once again:
“What you want to save for is the opportunity to one day make a play. When you make that play, you want to NOT diversify. You want to go all in on one thing, and you want that one thing to be a sure thing. I’m looking for sure thing investments that will multiply over time, and I want to be guaranteed that when I go to sleep that in three months, six months, nine months that the product or thing I’m invested in will still be there in the future.”
Instead of actually saving for the future, protecting yourself against unexpected events, and planning for a situation after your career is over, this guy’s recommendation is to invest everything you have on one thing you happen to be sure of, some mythical investment that’s going to multiply in value over time but is also something that’s such a sure thing that you don’t even really worry about it.
Those investments don’t exist in reality.
No one in their right mind puts all of their money into one investment. All it takes is one corrupt businessperson to wipe your entire life’s savings out very quickly. All it takes is one supposedly hot market to suddenly turn cold for you to lose most of your money. All it takes is one R&D project to fail for your entire future to deflate.
At this point, you’re essentially buying a lottery ticket, because that’s what it amounts to. The odds are somewhat better than the lottery, but the odds of a big win are still pretty slim. You’re also betting your entire life’s savings on it.
No rational investor would suggest this. I understand the logic of betting big on a single thing, but even large-scale investors, the ones with lots of money and resources, don’t put all of their eggs in one basket. They might bet big on a single company, but they usually bet big on several companies at once and spend much of their waking time really understanding those businesses. This guy expects you to save up your money, then “make a play” in your spare time with all of your savings into a single company? That’s just… bizarre.
The best thing a part-time investor can do – meaning someone who isn’t investing as their main employment – is to widely diversify as inexpensively as possible and try to ride the market, so that the failure of an individual company doesn’t drown you and you’ll get very solid returns over time. The easiest way to do that is through index funds.
Don’t Invest Early?
Another key quote:
“Don’t invest early, like all of the financial magazines tell you.”
This is the one quote in the video that blew my mind more than any other.
The advantage of investing early is obvious to anyone who can do a bit of back-of-the-envelope math. Let’s say you can invest in something that returns a steady 7% a year. (The stock market in the United States on the whole isn’t purely steady, but it has roughly a 7% long-term average.)
If you invest in that with $1,000 and let it sit for 10 years, letting the returns just stay there, you’re going to wind up with $1,967 after 10 years. Not bad.
If you make it 20 years instead, you wind up with $3,870.
If you make it 30 years instead, you wind up with $7,612.
Make it 40 years, and you wind up with $14,974.
Now, imagine that’s your retirement account and you want to tap it at age 65. The first example – $1,967 – is what you’d get if you put in that initial $1,000 at age 55. $3,870 is what you have if you put in that initial $1,000 at age 45. $7,612? That’s starting at age 35. $14,974? You get that much cash if you put in $1,000 at age 25 and just never touch it until retirement.
Your returns are far bigger if you start as young as possible, because the more years you allow your investment to grow, the more time you allow your returns to build on themselves. Your interest earns interest, then the interest on your interest earns interest, and so on. The more years you give it, the bigger and faster and more powerful it all becomes.
That’s the power of starting young. This person just discards all of that because it’s inconvenient and acting as if you don’t have to save when you’re young is probably flashy and attractive to people in their twenties who don’t actually want to save.
Don’t Use a 401(k)?
Let’s hear another key quote!
“Don’t do the 401(k). It’s a trap! You can’t even get the money! You have no control, but you want control, you want your money now.”
First of all, saying “you can’t even get the money” in your 401(k) is a lie. At age 60, you can start withdrawing it pretty much as you like – it comes to you like a paycheck. Before age 60, you can take withdrawals provided you can demonstrate that you’re retired, you can sometimes borrow against it, and you can take withdrawals for any reason provided you’re willing to pay a 10% penalty.
Second of all, if you want your money now, you’re not going to use a 401(k) anyway. The point of a 401(k) is to throw your money in a figurative lockbox so that you’re disincentivized to touch it until you’re of retirement age. During those years, it grows for you using the power of compound interest described above. It does exactly what it’s supposed to do – it preserves money for you for retirement.
Third, most 401(k) plans offer a lot of investment options. Admittedly, they’re sometimes a mixed bag of options, but there’s virtually always at least a few decent options in there.
Fourth – and this is a big one – many 401(k) plans come with employer matching, meaning if you contribute some money, your employer will match it as an addition to your salary. Not taking advantage of that is equivalent to saying that you don’t actually want part of your salary and that your employer can keep it.
Finally, contributions to a 401(k) right now reduce your tax bill next April because the money is contributed before taxes. 401(k) contributions reduce the amount of taxes you pay, which means that every dollar contributed is less than a dollar in terms of your take home pay.
To just discard 401(k)s as a scam or something is absolutely ludicrous. They’re a very useful financial tool for anyone who isn’t highly wealthy and isn’t willing to take on high levels of individual risk.
Don’t Invest Until You Have a Lot of Cash?
Let’s keep going!
“Don’t invest one penny in one stock until you have at least $100,000 in the bank and until then I would invest only in myself. That should be the first investment, because that’s a sure thing. You know you.”
So, wait, let’s back this train up.
The number one place you should invest is in yourself, but going to college with any loan money is a terrible idea?
You shouldn’t save for emergencies or retirement at all, but you shouldn’t invest for any reason until you’ve saved up $100,000 in cash?
Look, I’m a huge advocate for investing in yourself. You should work hard to make yourself as prepared for the next step in your desired career as you can. One big part of that is a well-considered college education, whether for a bachelors or a masters degree or even a doctorate. That’s investing in yourself and it’s just bizarre to act like it isn’t. A well-planned college education where you’re focused on a degree that you’re going to use and you put your nose to the grindstone while there is worth borrowing money for.
However, much of what you can do to invest in yourself requires time, not money. It takes time to get in good physical shape, not money. It takes time to build a strong professional network, not money. It takes time to build a nice portfolio, not money. It takes time to be involved in projects and prove yourself in leadership positions, not money. Investing in yourself is usually an investment of time and energy above all else.
Onto another part of that quote: it’s absurd to think that you shouldn’t invest in any way unless you have $100,000 in the bank. If you get a new job with a great 401(k) plan that matches your contributions dollar for dollar and you say, “Nope, not doing that until I have $100,000 in the bank,” you’re intentionally losing money. You’re leaving it on the table for no real reason.
Not only that, the $100,000 amount is completely arbitrary. I understand what his intent is – he thinks you need at least $100,000 to make one of his patented “big plays” that he talked about earlier – but there’s a big problem here. The average American makes about $60,000 in household income a year and brings home a hair under $50,000. This guy is suggesting that the average American has more than two years of annual take-home income in their savings account before making any other financial moves. That simply doesn’t make any sense.
First of all, save a little bit. Save up until you have an emergency fund – maybe a month or two of living expenses. Then get rid of any personal debts you might have, because those things are just a weight around your neck. Get rid of the credit cards first.
After that, ask yourself what you want your life to be like in, say, five years or 10 years and start working toward that in the smartest way possible. Do your homework on that big goal and start doing what you need to do every day to make that happen. Spend as little as you can and don’t spend any more than you have to on the things that you don’t really care about. Contribute to your 401(k) at work, especially if it offers any matching money, and if you don’t have one, open up a Roth IRA on your own (it’s not hard). Try to contribute 10% of your income – 10% of your take-home pay if it’s a Roth IRA – and shoot for a little more if you’re over 35 and haven’t saved anything yet.
That’s the real recipe for success in your 20s – and 30s – and beyond. With this recipe, if the wheels fall off and things don’t go as planned, you won’t find yourself on the street, but if things go reasonably well, you’ll find yourself being able to retire comfortably with a lot of healthy years of life ahead of you to do whatever you please.
The real story here is that there are a lot of people out there sharing nonsensical advice online. The stuff in this video doesn’t stand up to any sort of closer look, but the guy in the video sells it well enough that it can seem like a great idea. He’s effectively selling a lottery ticket and telling people to invest all of their life’s income into that lottery ticket, but you wouldn’t know that from how he pitches it.
You have to look closer at everything. Personal finance isn’t complex, but the key principles it’s based on make sense from the ground up. Spend less than you earn. Cut back on the areas of spending that are less important to you. Eliminate personal debt, sooner rather than later. Save for your long-term goals starting as soon as possible so that you can minimize the risk and let the power of compound interest do the work for you.
It’s not rocket science, but it’s hard because it requires us to make lots of good principled choices over time. It’s made even harder when people share nonsensical advice like this guy does.