I’ll never forget my first finance class.  As a bright-eyed and bushy-tailed twenty-year-old, I’d finally gotten through all the English and History classes required for my degree.  I looked forward to finally getting to learn what I’d paid all that money and waited so long for.  So, I got to class early and sat in the second row because I hadn’t yet embraced my inner nerd enough to sit in the front.

Soon, a frazzled-gray-haired professor rushed in, holding a battered leather briefcase in one hand, clutching a big stack of disheveled papers in the other.  He threw both onto the desk in the front of the room and squared his shoulders to face the class.

“Welcome to Introductory Finance.  I want to warn you that if you can’t boil it down to dollars and cents, it doesn’t belong in this class.  Finance is concerned about money and how to make more of it.  No one cares about your feelings.  If you can’t accept that, then there’s the door,” he proclaimed.

I scratched my head and wondered about the veracity of my vocation’s creed as the professor began to scribble equations on the board.  Little did I know he was taking it easy on us newbies.  The Greed and Fear axiom came in later classes.  I later learned some economists make a case for the righteousness of this argument … more here.

Finance, or Applied Micro-Economics, gets complicated fast, and it’s easy to lose your way if you’re not good with numbers and don’t spend inexorable amounts of time studying it.  In essence, everyone’s working hard trying to figure out how to outsmart everyone else by getting something for less than it’s really worth, then hoping to sell it to someone else later for more.  You know, buy low – sell high.  Easier said than done.

The Real Estate Crisis of 2007 is a great example.  People bid up the price of homes to a point higher than what they were worth.  I don’t want to get into the weeds, but you need to understand that financial bubbles are a game of musical chairs.  Say Joe bought a house that was worth $80,000 for $100,000.  Now, Joe got a bad deal because he paid more than it was worth.  But, luck was on his side because Susan got bitten even harder by the greed bug, and Joe got scared after seeing all problems and sold that house to her for $120,000.  Then Susan got scared and sold it to Bob for $130,000.  Everything’s golden while the music’s playing and everyone’s buying.  But, you lose when you’re the last one standing, holding the bum investment, with no place to sit, as the bubble comes crashing down.

Avoid Getting Stuck with Bad Investments

Poor Bob got shafted because he bought later in the cycle even though Susan and Joe also paid more than the house was worth. He had terrible luck because the bubble happened to burst and he couldn’t find someone to buy it for more than he paid.  Even the best financial minds agree that you can’t predict bubbles, and most aren’t 100% sure they’re real before they implode.  Anyone who tells you otherwise is trying to sell you something.  Do everyone a favor and buy a lottery ticket if you want to get your rocks off playing good luck / bad luck.  If you don’t understand it, it’s a gamble, not an investment.

So how can you win this game with enough money and security for you to lead a happy, worry-free life?  One way is to spend a lot of time and intellect reading lots of books and doing a lot of research before investing.  If you don’t out-think and out-research everyone else, you’re going to be the one holding the lousy investment when the music stops.  One of the best ways to win is never to play musical chairs.

Ben Graham, a world-class investor Warren Buffet’s mentor, wrote an excellent book for the layperson to get up to speed on finance and business basics, The Intelligent Investor.  I’d recommend everyone read it …  more here.  In the spirit of full disclosure, I’ll get a small commission if you buy that book using this link.  But, I’ll summarize one of the best strategies outlined there in this article.  I’ve successfully used this strategy for years.

For the everyday Joe’s and Jane’s, you need some tried and true, easy rules of thumb.

I know that’s a cliche, but IT WORKS ALL THE TIME.   It’s easier than you think.  The passing of time is inevitable and is actually one of the most important concepts in finance.  Once you understand the Inevitability of Time, you need to tweak a few things to retire securely.   For example,  a small decision like a college student who decides to make his own coffee and save $4 a day instead of buying a Starbucks would result in over a quarter of a million dollars ready for early retirement.  If he goes crazy and packs his lunch too, saving another $12/day, he’d be a multi-millionaire when he retires.

The Inevitability of Time

The miracle of compounding (… more here) transforms small amounts into millions over time, as shown below.  After many years, our prudent college student’s early retirement strategy will result in a $2,879,767 nest egg.  And he doesn’t have to worry about the ups and downs of the market because it will all average out in the long run.  His $16 will buy fewer shares when the markets are up, and the same $16 will buy more when it’s cheap.  Early retirement takes a little more work.  A twenty-year-old would need to save $25 a day, which is totally doable but would require more discipline.