I love the idea of building a cob house. Ever since I’ve learned about it, I’ve had a desire to build one myself. It’s a very versatile building material, has excellent thermal mass properties, and is the epitome of frugality when it comes to building a home. I don’t know if I’ll ever get to build my own cob house, but I can watch the process on a blog called The Year of Mud: Building a Cob House. Brian is documenting his own experience building a cob house with pictures and posts describing the process. I really like reading up on what he’s doing, and I thought I would share the blog with you.


       If you’d like to learn more about building with cob, I’ve included a few of the links I’ve collected below:

       If you’re new to investing, you’ll soon hear about the two main styles of investing – Active Investing and Index Fund Investing. Before we can really discuss either of them at length, we need to have a definition for each approach. I’m going to set out here my definition for Active Investing, and next Friday I’ll discuss my definition of Index Fund Investing and what it means.


Characteristics of Active Investing

       Rather than start out by giving a simplified definition of Active Investing, I’m going to start out by describing some of the characteristics of Active Investing and the behaviors of Active Investors.

1.  Active Investors believe they can pick specific stocks that are going to “outperform”. They also often believe that there are other people, usually Active Mutual Fund Managers, who can pick the “right” stocks as well. The idea is that with enough research and the right insights or methods, you’ll be able to find values that other people have missed and make a fortune in the process.

2.  Active Investors think they can figure out when to get in and out of the market or a specific type of investment. They believe it is possible to tell when they should sell all their stocks and put everything in cash. Or they think commodities (or any other specific asset class) are overvalued and it’s time to start buying foreign stocks (or some other specific asset class). This is often called “Tactical Asset Allocation”, but it’s essentially Market Timing any way you look at it. Active Investors often apply the same line of thinking to individual stocks or bonds.

3.  Active Investors often think a mix of U.S. Large Company stocks provides adequate diversification. The truth is there are many other types of assets in the investment world, and you need a mix of several to be truly diversified.

4.  Active Investors often invest without thinking about risk. If an investment is a good value, you should just put your money in it, right? Wrong! You first have to consider the risk of the investment and your own risk tolerance before investing. You also have to consider the risk of not meeting your goals.

5.  Active Investors often invest without first reading the academic research about free markets and investing. Academia offers us a much less biased view of investing than the materials we see in the financial media and the advertisements of financial services companies. If you really want to understand investing, you need to learn a bit about what academic research tells us.

My Definition of Active Investing

       Active Investing is basically any investment strategy aimed at “beating the market”. This means Active Investors are attempting to get a higher net return than a relevant benchmark or index. The net return should be adjusted for all additional commissions, loads, fees, expenses, and taxes. You should compare the results over at least 10 years, but preferably over 20 or 30 years, to get a meaningful comparison. Most Active Investors fail to take all of these factors into account when comparing their performance with an appropriate benchmark. They usually don’t even pick an appropriate benchmark!


A Better Way

       Next Friday, we’ll talk about the alternative to Active Investing – Index Fund Investing.

       Continuing our series on Benjamin Franklin’s The Way to Wealth, here is today’s quote:

       ”It would be thought a hard government that should tax its people one tenth part of their time, to be employed in its service. But idleness taxes many of us much more, if we reckon all that is spent in absolute sloth, or doing of nothing, with that which is spent in idle employments or amusements, that amount to nothing.”

The Way to Wealth – Benjamin Franklin

Diamond-Tipped Government?

       When I read the first part of this quote, I wanted to laugh. I personally pay 25% of my income for federal, state, and local taxes including Medicare and Social Security taxes. Franklin says a hard government would tax its people 10%. What would he think of 25%?! I often wonder what our Founding Fathers would have to say about the current state of America.


Wasted Time

       On the other hand, how much time do I waste and how much is that time worth? I’m not talking about the necessary leisure to rest from work and spend time with family and friends – but just the shear amount of wasted time where I’m neither working nor involved in some leisure I truly enjoy. How many hours are wasted in front of the television just watching whatever happens to be on (so many better options here)? Or sitting around waiting for a doctor’s appointment (we could be reading instead)? Or time we spend just surfing around on the Internet letting time slip by while we’re so easily distracted with the millions of things you can find online?

       What if we put a dollar value to all that wasted time? How much would it be worth? Would we be able to pay our taxes easier if that money were in our pocket? Would our taxes even need to be so high since there would be more income to tax? Franklin’s point about taxes was that we probably wouldn’t need to complain about them if we actually used our time wisely. What do you think?

       This week’s Personal Finance Bible Scripture comes from Ecclesiastes 5:10-11. Solomon has a lot of great advice for us in Ecclesiastes. His simple observations go right to the heart of the matter and still ring very true today.

       ¹⁰ Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income. This too is meaningless. ¹¹ As goods increase, so do those who consume them. And what benefit are they to the owner except to feast his eyes on them?

Ecclesiastes 5:10-11 (NIV)

       Solomon wisely observes that the greedy can never have enough. But what is the point of greed? What good does it do us to have more and more? The second verse gives us Solomon’s insight into the folly of greed. Having and eating lots of food only makes you fat. And what good does it do to have all kinds of possessions? Do you want to be wealthy just so you can sit around and look at your stuff all the time?

       How often do we think to ourselves “If I only had some more money in the bank…” or “If I could just get a raise and make more money…”? Solomon is cautioning us against the love of money. More money and more possessions aren’t really going to give us meaning in life. Only when we accept Jesus and give up our lives to Him can we experience any true and lasting meaning in this life. All the things The World can offer us are truly meaningless – they won’t matter at all once we’re dead!

       In 1785, French mathematician Charles-Joseph Mathon de la Cour wrote a parody of Benjamin Franklin’s Poor Richard’s Almanack. The Frenchman called his parody Fortunate Richard and, attempting to mock the American optimism so well-represented by Franklin, wrote that Fortunate Richard left a small sum of money in his will to be used only after it had collected interest for 500 years.

       Mr. Franklin thought the idea was fantastic and wrote back to Monsieur de la Cour thanking him. Franklin decided to leave a bequest of £1,000 (about $4,550 at the time of his death) each to his native hometown of Boston and adopted hometown of Philadelphia on the condition that it gather interest for 200 years. Franklin believed 200 years was the maximum length of time any person should be able to control assets from beyond the grave.


The Strings

       In 1789, Benjamin Franklin added a codicil, or supplemental provision, to his will providing about $4,550 each (about $108,000 in 2008 dollars) to Boston and Philadelphia. Mr. Franklin stipulated that the funds should be used to make loans at 5% interest to young craftsmen under the age of 25 to help them set up their businesses. The loans were to be given only to those craftsmen who were married, had completed their apprenticeships, and could obtain two co-signers to vouch for them.

       After 100 years, each city was to take 75% of the fund to use for public works (like bridges, pavement, public buildings, and the like). They were to then continue loaning the money for another 100 years. At the end of that 100 years, each city would get about 25% of the money and their respective states would get the rest. Had Boston and Philly followed through with Franklin’s wishes successfully, they would each have had nearly $20,000,000 in their funds at the end of the 200 years.


What Really Happened?

       In truth, Boston only had about $5,000,000 in its fund at the end of the 200 years, and Philadelphia only had about $2,000,000. That’s still a strong testament to the power of compound interest. Turning $9,100 into $7,000,000 is sure to catch most people’s attention. (And that’s after spending 75% of it halfway through the 200 year period. It could have theoretically reached well over $78,000,000 if they had never spent any and had managed it well.)

       Boston and Philadelphia both started out following Franklin’s wishes, but other factors came into play and thwarted his original plans. The Boston fund started investing in savings accounts and a life insurance company after the Industrial Revolution, when more people started working for big companies instead of setting up their own small businesses. Philadelphia used its fund mostly for mortgages during the last 50 years, which was probably more in line with Franklin’s intentions.


Franklin’s Message

       The point of Franklin’s experiment was partially to benefit two cities dear to his heart, but I believe he was also trying to illustrate the tremendous power of compound interest for future generations. The longer you keep your money invested, the more amazing the power of compound interest. So start saving today, and put your money to work for you!

Click the graph to see the power of compound interest.

       Bob at Christian Personal Finance has a great post about how cars affect your financial freedom. Definitely check out his post. He estimates that eliminating a $400/month car payment could mean $1,000,000 more by the time you retire. Even a $200/month payment could mean an additional $600,000 over 40 years. Granted that’s not adjusted for inflation, but it could easily mean the difference between retiring and having to work a few more years for many people. It’s just another great reason you shouldn’t buy into consumerism. There’s nothing wrong with buying a used car, and it could save you a lot of money in the long run.

OR

?

Your Choice!

       Be sure to check out this week’s Carnival of Personal Finance hosted at The Digerati Life! It’s a very interesting theme this week!

       Do you buy into the hype of shopping and consumerism? Do you think more money will make you happier? Do you think more stuff will make your life easier? Do you always have to have the latest model, the newest car, the hottest fashions, or the biggest house you can afford? Advertisements tell us every day that we are missing out if we don’t have the things they’re selling. Just watch this video from YouTube titled “Please Buy More Stuff” to see what I’m talking about:

       This is just one of the many messages from The World that flies smack in the face of The Message that God has been trying to tell us for thousands of years. Do you believe The World’s message? Jesus speaks directly to those who believe the world’s message in Revelation 3:17-18.

       ¹⁷ You say, ‘I am rich; I have acquired wealth and do not need a thing.’ But you do not realize that you are wretched, pitiful, poor, blind and naked. ¹⁸ I counsel you to buy from me gold refined in the fire, so you can become rich; and white clothes to wear, so you can cover your shameful nakedness; and salve to put on your eyes, so you can see.

Revelation 3:17-18 (NIV)

       The World tries to tell us that if we just acquire more wealth & things, then we won’t need anything else – we’ll be satisfied and secure. But the truth is that the more we get the more we’ll want. The World can not offer us any true satisfaction or security. It’s a false hope to think that a bigger bank account will make you happier or more fulfilled. Jesus already knows The World can’t satisfy us, and that we’ll actually be pitiful, poor, blind, and naked if we listen to The World’s message. Only God can provide us with true wealth and open our eyes so we can see the truth.


Something Better

       God has a higher purpose for us than million dollar investment portfolios and 3,000 square foot homes. God wants more meaning in our lives than a brand new car and shiny boat in the driveway. God has a higher calling for our retirement years than day after day spent on the golf course, beach, or back porch.

       There’s a major problem with The World’s message – specifically in that it contradicts God’s Message. We’ll talk more about why The World’s message is a problem next Sunday.


Want to read the entire Bible study series on Contentment? Download your free copy of Contentment Is Wealth: A Bible Study on Contentment now!

       Today’s post has absolutely nothing to do with personal finance. I ran across this video a couple weeks ago and found it very amusing. If you don’t know who John Hodgman is, I’m sure you’ll recognize him as the “I’m a PC” guy in the Mac commercials. I liked him in the commercials, in his recent guest spot on NPR’s Wait Wait…Don’t Tell Me!, and in this talk below from TED. Hope you enjoy!