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The Thing We Never Talk About is an educational podcast about personal finance for creatives and other weirdos. We'll discuss managing cash flow with a lumpy income, when to save & when to invest, and how to reduce stress & build confidence when it comes to your money. No hot stock tips, no complicated strategies, and no finance bro jargon. We'll hear from artists, musicians, creative professionals, and other weirdos about how they navigate these questions for themselves. The Thing We Never Talk About is hosted by Timothy Iseler, CFP®, a former recording & touring audio engineer with 18 years experience in the music industry.
Timothy Iseler: Hi, everyone.
Welcome to The Thing We Never Talk About.
My name is Tim Iseler.
I'm a certified financial planner, and I
run my own independent financial advisory
business, helping musicians, artists,
and other people with weird jobs make
smarter decisions with their money.
You can learn more at iselerfinancial.com.
If you have a question about money
or personal finance, please send it
to me at iselerfinancial.com/podcast
and I will answer it in a future episode.
And if you like what you hear,
please share this with a friend.
After that, you can like and
subscribe wherever you're listening
to this podcast right now.
One of the big problems about giving
people broad, general advice about money
is that money has different jobs or solves
different problems at different times, and
that can lead to a lot of confusion, since
what works best for one type of problem
is often totally wrong for another.
Here's a really common example.
The money in your bank account needs
to be super stable and secure because
you might need it at any moment.
But the stock market is anything but
stable and secure in the short term,
which also happens to be the only
thing that gets covered in the news.
A big mistake that I see all
the time is people wanting
their long-term money, i.e.,
Their investments, to behave like
their short-term money, i.e.,
a savings account.
And when you confuse those things,
those different types of jobs you want
money to do, you run the risk of using
too much of your money for one type
of job and not enough for the others.
Let's dive a little deeper.
Money can be used for immediate needs
like paying your rent or mortgage,
buying your groceries, and other
things that need to happen every month.
But money is also used for all of
the stuff that we don't plan on, like
replacing a broken water heater or fixing
something that's wrong with your car.
We don't know when those things
will happen, but when they do,
we need the money right away.
But money also needs to pay for those
nice-to-have, intermediate term things
like vacations or buying a car or
saving for a down payment on a home.
Those are not the same things as
paying your bills, but obviously,
they come with a price tag.
And finally, money also needs to be set
aside for long-term goals like retirement
or sending your kids to college.
Those are all different types
of jobs that money can solve.
But the thing is, all of those
different time periods require
different strategies to make sure
you have the kind of stability and
security you need when you need it.
And it's really easy to conflate
what works well with one timeline
with what works for another.
That's what I wanna talk about today.
Saving money is the process of
taking some of today's income
and setting it aside for later.
The golden rule is to aim for saving
twenty percent of your gross income.
But for now, let's just say that
saving as much as you can manage
is a great start, even if you can't
hit that twenty percent target.
And I want everyone everywhere to have
an automated, "don't even need to think
about it" strategy for saving money.
Now, let's compare the practice
of saving a portion of your income
with the idea of building wealth.
This can be a slightly fuzzy concept.
Does wealth mean having enough
money to retire or to travel the
world and stay in fancy hotels?
What about owning a luxury car?
Those are all things that people
associate with wealth, but they're
not necessarily the same thing.
Merriam-Webster says that wealth is,
quote, "An abundance of valuable material
possessions or resources," end quote.
That's a pretty good definition,
but it's also kind of vague.
What's an abundance?
Is one year's worth of income
in a bank account abundant?
and how does that relate to how much
you have in your retirement accounts?
I like author Morgan Housel's definition
of wealth: The ability to do what
you want, when you want, with whom
you want, for as long as you want.
And the reason I like that definition
is that it says nothing at all about
your net worth or your income or the
size of your investment accounts.
Instead, it centers around doing what
you like with the people you care about.
So someone who earns five hundred thousand
dollars a year but feels chained to their
job in order to maintain an expensive
lifestyle is not necessarily "wealthier"
than someone who earns a hundred fifty
thousand dollars a year and only needs
to spend half of that to feel satisfied.
The condition of wealth is all
relative to what your resources are
and how much you need to spend in
order to feel like you have enough.
So back to our question.
How do we square the idea
of saving a portion of your
income with building wealth?
Here's how I think about it:
The cash that you keep in your
savings account is excellent
at solving short-term problems.
You need that money right away, and
as long as you're keeping it in an
FDIC-insured account, it is ultra secure.
In the short term, having enough cash in
the bank totally meets that definition
of wealth: you're able to do what you
want/need because you previously set
money aside for just that purpose.
But as I've talked about in previous
episodes, money in the bank loses
value over time due to inflation.
So while cash is awesome for
solving short-term problems, it's
not that great for the long term.
For intermediate term goals that are
six months to maybe two or three years
away, putting money in a high yield
savings account is still a great idea.
But even three years might be enough
to notice the sting of inflation,
so you might consider looking for
places to park your money where it
can earn a little more interest.
This is especially relevant if you're
approaching retirement and you need to
switch from living off your income to
living off your savings and investments.
One idea is to look at the current
rates for certificates of deposit,
which are called CDs, at your bank.
If you want to buy a house in two to
three years and you can get a two-year
CD that pays enough interest to outpace
inflation, that's a super secure way to
earn a little extra money in the meantime.
A money market account is also a way
to earn a little bit more interest
with a high degree of stability.
Or you could consider something like US
Treasury bills, which mature anywhere from
a few days or weeks up to a year, or even
Treasury notes, which have maturities of
anywhere from two years up to ten years.
All of those are ways to save your money
over a few months or a few years, that can
usually do a better job of keeping up with
inflation than money in a savings account.
The way I think about it is this.
If you know you need to pay for something
in less than a year or two, then
cash is still probably the best bet.
If you know that you want to pay for
something between two and five years
from now, then one of those other options
I just mentioned would be extremely
stable and can probably offer better
interest rates than a savings account.
This way of thinking about intermediate
term expenses also fits into that "what
you want, when you want" idea of wealth.
But while CDs, money market accounts,
and short duration US Treasuries are
a great way to keep up with inflation
while keeping your money reasonably
secure, they're not awesome at actually
beating inflation For example, if
you get a one-year CD paying 4%
annually and inflation is around 3.4%,
like it is right now, then you're
only growing your money at around 0.6%
per year in relative spending power.
So you might not lose spending power, but
these types of accounts or investments
are not really well-suited for anything
more than five-ish years from now.
That brings us to longer term
things like retirement or saving
for a child's higher education.
For those goals, we need something
that is likely to outpace inflation
by a significant margin over that time
period, and that's where investing
in the stock market comes in.
The US stock market has historically
returned around 10% per year on
average, or around 7% per year
once inflation is factored in.
And that means that money that you
invest now has the potential to
almost double over the next 10 years,
even once inflation is factored in.
That's totally great.
The downside of investing in the
stock market is that it is super-duper
unpredictable over the short term.
No one on earth has any idea what the
stock market will do next week or next
year, so it's a lousy place to keep money
that you might need in the next few months
or even the next two to three years.
It's just way too volatile
for that timeline.
But again, while stocks are lousy
at providing the kind of stability
you need in the short term, they're
actually very well-suited for goals
that are 10 or 15-plus years away.
I've said it before, I'll say it again,
the single biggest superpower that every
investor has is the ability to stick
with their investment mix over many years
and decades so that compounding growth
can do all of the hard work for you.
While money in the bank represents
wealth in the short term and things
like CDs or US T-bills represent
wealth in the medium term, investing
in the stock market is the best way I
know of to build wealth for the long
term, including the rest of your life.
Remember that definition of Morgan
Housel's: it's doing what you
want, when you want, for as long
as you want, and that's where
the rest of your life comes in.
So back to our original puzzle: how can
we save our money wisely now to build
wealth according to the definition we've
been using when it can mean different
things based on when you need it?
My first suggestion is always to
build up a savings account cushion to
cover those ultra-short-term needs.
A good rule of thumb is between three
to six months worth of expenses,
but I honestly don't see anything
wrong with aiming for one or even
two years of expenses if that
helps you sleep better at night.
And, while this isn't really the focus
of today's episode, I also think it's
important to pair saving a bunch of
cash with paying down any high-interest
consumer debt like credit cards.
Credit card interest is a huge drag
on your short-term spending power and
your general financial security, so
the first two ways you can save money
are building up a savings cushion
and eliminating high-interest debt.
My second suggestion is to save for
specific medium-term goals based
on the timeline that makes sense.
If you have a vacation coming
up in less than a year, then
just keep that money in cash.
If you know you want to buy a new car
in two years, on the other hand, then
you might find a better interest rate
with something like a CD, a money
market account, or US Treasuries.
And my final suggestion for building
wealth through saving is to invest
money that you'll need in ten to
fifteen-plus years in the stock market,
because that's the timeline that makes
sense with that kind of investment.
The stock market is way too unpredictable
in the short term to make sense for your
emergency money or a down payment on a
home, but it's totally appropriate for
goals that have that much longer timeline.
And by the way, that's true even if you're
already in or approaching retirement.
Some of your money needs to be available
right away, but some of it also needs
to continue to grow so that you can
maintain spending power over time.
So what do you think?
Does that framing of wealth, saving,
and different timelines make sense?
Money can do lots of different
jobs depending on when you need
it, and it's easy to confuse what
works well for one type of problem
with what makes sense for another.
I hope that by separating those different
jobs into different buckets based on
what you need the money to do and when,
you'll be able to save in the right ways
to build up wealth both now and later.
If you have a question about
what to do with your own money,
please feel free to reach out.
You can send me an email at
podcast@iselerfinancial.com.
That's it for today.
Next week I'll be talking with tour
manager and tour accountant, Paul Dalen.
Paul has been in the music industry
for a long time, including a stint
as an artist manager, and he's in
the position of being able to make
retirement a real thing despite literally
decades spent touring with bands.
And it's not because he started saving
and investing in his early 20s or because
he's done everything right along the way.
Paul shares how he actually had to start
over from scratch around 15 years ago,
and the choices he made then really
set him up for the life he has now.
As a former touring professional, I know
how the concept of retirement can feel so
impossible when you don't even know who
you'll be working for next year, so I'm
really excited to share that conversation
with tour manager Paul Dalen next week.
The Thing We Never Talk
About is for educational and
entertainment purposes only.
It's not legal, investment, or tax advice.
People on the show, including myself,
may have interests for or against
any investments discussed, so do
yourself a favor and don't ever make
any investment decisions based on
what you hear on this or any podcast.
If you like what you hear, please
like and subscribe to this show
wherever you get your podcasts.
If you have a money or finance
question you would like answered
in a future episode, please visit
iselerfinancial.com/podcast.
Thanks so much for listening.
I appreciate you.