My (mis?)understanding of the economy

Or: “What should I do with my money?”

Note: This post is 100% honest. It may sound sarcastic, but this is actually how my thirty-something year old brain understands the financial aspects of living on our planet. Unfortunately for me, economic subjects seem to be extremely pervasive in our lives, where normal people are expected to understand things about the economy that are not intuitive, and have not been taught to them at school.

I’m not a stupid guy. I’ve got a Master’s degree in Law, became a developer at IBM right after graduating, and so far I’ve been pretty successful at that.

My wife is not stupid either. She graduated cum laude for her Bachelor’s degree, summa cum laude for her Master’s degree, and is currently doing a PhD.

So here’s the deal. We’re not stupid, but we don’t understand jack sh*t about money. If I try my hardest to focus, and my friend (who is incredibly entertaining and very good at explaining things) explains anything related to taxes, economy, pensions, etc to me, my brain just shuts off after a couple of seconds. It feels like my brain is actively trying to block the information, making sure it is never interpreted or stored.

As far as I think is important for this post, here’s my understanding of the economy:

Economy 101

• There always seems to be something like a sine wave pattern going on, where we’re all saying: “Jay! The economy is doing great!” Either that, or: “Oh no! It’s going down again!”
  • Somehow everyone seems to think that this pattern should not be occurring: the chart should only go up.
• Countries seem to care a lot about having a “stronger” economy than other countries. I always interpret “stronger” as “better” in this context, making it sound like some sort of race for people who are actually interested in finance.
• Lots of smart people with degrees about economic stuff always seem to be making predictions that contradict each other, giving me the impression that nobody really has a clue of what’s going to happen. Which makes sense, because that’s kinda how life works. But then why pretend?

Investing

• For a long time, I regarded the bank as a place that stores your money and keeps it save. That’s it. I knew it wasn’t a Scrooge McDuck vault, but I didn’t know anything about banks “investing” money to… get more money? Why? Well, that leads to the next point.
• If you put enough money in the bank now to buy an apple, you won’t be able to buy an apple when you withdraw the same amount after 20 years. (The same is true if you hide it under a mattress, it’s not specific to the bank.) So if you want to still be able to buy an apple 20 years from now, you have to do something with your money. This is called “investing”.
• Investing is the most weird thing about the whole economy thing, if I’m even remotely close to understanding it. You can invest in anything, I guess, but most people and companies seem to invest in companies that sell “shares”. If you hold a share in a company, you may get a piece of that company its profits. And you get to say stuff about what you want the company to do. Since you own shares in the company, your opinion is going to be geared towards how the company can make more money. That way, the profits that you’ll get through the company will be higher, which means you get more money. And other people will suddenly want to buy shares in that company as well, so if you decide to sell your shares, you’ll make money. Since you won’t live forever, your main concerns are going to be about the company its profits in the fairly short term. If the company is doing “just fine”, making exactly the amount of profits this year as it did last year, then that means your money won’t be worth as much as if you would have invested it in a company that has “grown” an incredible amount. Of course, the “just fine” companies are much more stable. And thus, the incentive is born to invest in less stable companies, that may show a sudden spike in profits. Instead of putting your money into a company that has proven to do a solid job for years, you’ll invest it in something more “interesting”. You’ll buy shares that are less stable, but that could become 3x more valuable in a short period of time.
  • My mind labels “investing” as gambling. People say it isn’t, but nobody has been able to convince me so far. If you think you can, please try. You’re removing money from your wallet, and whether or not you get the same amount back depends on an outcome you aren’t 100% sure about.
    • I would consider you to be a much more responsible person if you invested while actually knowing the outcome beforehand, but that’s considered to be unfair, and you may end up in jail if you take that approach.
• I absolutely hate gambling. One of my biggest fears in life is that I would go to a casino for a fun night with friends, and that I would make a ton of money. I’m afraid of the part of my brain that might get unlocked if that would happen. “It happened before, you may get lucky again! Let’s go to the casino every night!”
• Everyone seems to think it’s normal to gamble invest money this way.
• Not only that, you’re being forced to do it as well. It’s regarded as a responsible thing to do to put your money in a pension fund. But if a pension fund would just be a Scrooge McDuck vault, your money would lose its value. So what do these funds do? They go to the casino we call the “stock exchange” and gamble with your money. That’s right, the responsible thing to do is to let others gamble with your money.
  • Since this is considered to be the responsible thing, most people above your age are doing it, or have done it. If your age is 40 or lower, that means the majority of people will want you to do it for their own sake, since pension funds need to keep existing to pay their pensions. So if the next generation doesn’t invest in a pension fund, previous generations might be screwed.
    • I don’t like to thing this way, but it kinda means you cannot trust the majority of people’s opinions about this subject, because they would be crazy to tell you not to invest in a pension fund, since they need you to do it for their own sake.
• In the meantime, companies exist that do not sell shares. They don’t have to deal with shareholders, they don’t have to be afraid of what value their shares will have one year from now if they decide to do X, Y or Z. They are free. This sounds like the most responsible way to do business, and ironically, the only companies that I would think are worth investing in are the companies that don’t allow it.
• I still don’t get why you won’t be able to buy an apple in 20 years, for the exact same price it costs today. This seems to be the root cause of all this crazyness. I know the term is called inflation, and that an inflation of amount X is regarded as a characteristic of a “healthy economy” by the people who make the bad, contradicting chrystal ball predictions. Why?

Houses

• Everyone seems to work toward having a house.
• Nobody seems to own a house.
• People who finally own a house want to get rid of it so they can buy a bigger house they cannot afford.
• If you “buy” a house, you probably really just drowned yourself in debt with a bank. You’ll be working for 30 years to pay of this mortgage. They named it a mortgage because “mort” means “death” in French, and by the time you’ve paid off your debt, you’ll almost be dead.
• “Buying” a house by getting a mortgage is considered to be a good, responsible thing to do.
  • This is because it is compared to renting, which really just means donating money to rich people for being rich enough to have multiple houses. So far I’ve donated about 50K to rich people this way. That’s money I’d rather have kept, but I think it’s been better for my mental health and overall wellbeing than sleeping on the street would have been.
• If you get a mortgage, you will pay way more money for your house than if you would be able to buy it yourself today. I think it’s something like 1.5 times more money, I’m not 100% sure. So if you pay 300K for a house, you’re giving away 150K to the bank. You would never give 150K away to the bank for fun. The only reason you’re giving away 150K is because the bank has 300K, which you don’t have yet. Yes, you’re donating 150K, because you don’t have 300K.
  • The bank won’t be doing nothing with the 150K you donate to them. They will do the responsible thing with that money: invest. So getting a mortgage is the responsible thing to do, and once again, the responsible thing results in others gambling with your money.
• To me, it sounds like an extremely responsible thing to save up as much money as I can now, to buy the cheapest possible house as soon as possible without getting a mortgage.
  • If I would ever lose my job, the bank won’t be able to take my house away.
  • Money not spent on paying off the mortgage (/ renting a house) can be saved up to buy another house, to free another human being from being a slave to the bank.
    • Together with that person, I’ll (relatively) quickly be able to buy another house.
      • Now we’re 3 people saving for a house for a fourth.
        • Now we’re with 4. And I didn’t even include my wife or the other’s partners yet.
          • Are you scared yet, banks? :)
• The Dutch government doesn’t want you to be a responsible person and save for a house without getting a mortgage. If you save more than 50.000 euros, you’ll have to pay taxes over your savings. If you finally buy a house, that house is considered to be capital for which you’ll be paying taxes.
  • Luckily I moved to the UK. I may have even less privacy here, but at least I can give Mark Rutte a slap on the hand if he tries to touch my money while I’m trying not to get a crippling debt for life.

Anything else?

I don’t know. I think I kinda solved the “What should I do with my money?” question.

Advice to myself:

• Don’t invest your money in shares, because that’s gambling.
• Don’t invest in a pension fund, because that’s indirect gambling.
• Don’t get a mortgage, because that’s indirect gambling. And you’ll be royally screwed if you ever lose your job.
• Buy the cheapest possible house as soon as possible. After that, buy another house for someone else. Together, buy another house. Repeat.
• Never move back to The Netherlands.
• Oh and maybe buy some gold.

Comments

I made an “Ask HN” post about the pension aspect of this post here. Really appreciate the comments so far. Maybe I’ll take a less binary approach to retirement and invest in a scheme as well as in houses. Not sure yet, as it still sounds like economic gambling voodoo to me. We’ll see!

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