The ABCs of Personal Finance (2014)
outlookzen.com
outlookzen.com
Another thing I hate, the 10% return on average of the stock market. Since the inception of S&P 500 in the 50's, it's almost 8%. In fact, the average rate of return over any 40 years (the typical investing age) is something around 6.5% [0].
The single greatest thing you can do to save for retirement - negotiate for a 2% salary raise when you start your career. This will literally beat every piece of advice in this entire document combined.
I ran an XIRR analysis on my complete lifetime retirement contribution history, pretending that on the dates I had those sums of money, I put the money in the S&P and held. The results were not pretty, and were way below these "average rate of return" stats the articles like bandying about. (This takes dividend history into account.)
On top of that, the above link also shows how performance goes down if you want some degree of confidence. Over a 40-year period, a 90% confidence gives you 4.9%.
Finally, people are usually advised not to put all their money in the S&P anyway. Some kind of allocation model is preferred instead, which further mutes performance.
Our lack of personal-information education in this country is due in large part to misinformation, not just ignorance. I agree with the above conclusion; your chief weapons are raising income and cutting expenses, not chasing returns.
Yes, but even so, it's worth doing:
http://awealthofcommonsense.com/2014/02/worlds-worst-market-...
To expand, the reason one shouldn't rely on those is because people will bust out the spreadsheet, and put their 7-10% expected returns in there, and then figure out an amount of monthly savings that is "enough" for their goals. And then years will pass and they'll fall short.
Yes, invest - it'll most likely beat inflation. But don't get the false sense of security. (And you'll like need more than a million anyway.)
https://investornews.vanguard/lower-expense-ratios-on-21-van...
For non-Vanguard funds, ETFs are generally more tax efficient than mutual funds because they can avoid capital gains distributions in ETFs, but not in mutual funds. Vanguard has a patent on the mutual fund method.
2. Intra-day trading has some value to some people, and
3. As others have pointed out, fees can be lower for the same dollar investment.
ETFs are available from any place that has access to the stock market.
All too often, for many people, these two assumptions are false. What good is advice like "pay your credit card in full every month" when you have no money left after paying rent? Or if you have just enough money to pay it off, but you're not sure how much you will have next month? How do you choose whether to save cash or pay debt?
The article strikes a tone that seems naive and slightly patronizing, by failing to consider a situation that many people face on a monthly basis.
Should we also avoid writing new car reviews? What if I can't afford it? Can I talk about my new phone? It may make some people feel bad, right?
This is my personal opinion coming from a background where my personal finance knowledge started out as "I have a bank account" and is now more advanced than most people. I also came from a poor family.
IMO the very basic first steps anyone needs to take when getting the foundation of personal finance down are:
1) Either increase income or reduce spending so the money coming in is greater than the money going out. This can come with serious lifestyle changes, maybe you have to sell or downgrade a car, for example.
2) Aggressively pay off any high interest debt (credit card, subprime auto loans, etc.).
3) Build emergency fund. Use only for emergencies, not planned expenses.
4) From here, do everything in your power to not end up with high interest debt.
After you get the foundation then there's a lot of flexibility based on your goals and life situations and this is where the "personal" comes in.
Many people haven't mastered foundational steps, and mastering those steps are more important than meandering around about CDs, charitable giving being tax exempt, micromanaging credit scores, and tax loss harvesting. Not to mention it doesn't have the important caveat that you have to itemize to take advantage of the specific tax deductions mentioned.
I actually know a guy who is trading individual stocks while also paying 20%+ interest on thousands of dollars in credit cards.
How do you suppose would dates help this series of essays?
The median income for a man with a Bachelor's degree in the US is ~$51k [0] - which means a full half of reasonably well educated men make less than that (the numbers for college educated women are much more grim). I'm assuming there is substantial overlap between less expensive places to live and people making below median income.
[0] https://en.wikipedia.org/wiki/Household_income_in_the_United...
Even bonds are too risky and low yield over this kind of timeframe.
If you had 5-10 years, longer duration bonds (cash is essentially a zero-duration bond). If you had >10 years, maybe stocks. Stocks can lose value over periods of 20 years, though, so you probably wouldn't go 90:10 even for a 10 year period.
As you get closer to buying a house you can allocate more and more to HYSA.
I did make that money work for me in a low interest environment by using it to churn bank account bonuses.
https://www.doctorofcredit.com/a-beginners-guide-to-bank-acc...
https://www.treasurydirect.gov/indiv/research/indepth/ibonds...
Some people will suggest that paying off debt with two thirds is more advantageous due to the interest rate difference. However psychological effects of watching a savings balance grow are more powerful than the tiny monetary amount you recoup by paying off 20% interest debt twice as fast.
You want your finances to be as much 'set and forget' as you can possibly get. I've switched to fixed payment amounts over paying off the balance every month on my regular card. So the spendy months are offset by the lean months. And my head can wrap itself better around the fixed $1400 I have going out rather than having to constantly check balances, not that that really stops me, lol.
Occasionally you need cash, such as if you're saving for a down payment or want to quit your job. In this case you can drop all your monthly payments down to the minimum, let your credit and cash balances pile up. If your credit is good, then once the dust settles and you're back to normal you can get a fixed interest loan to cut down on the interest-rate pain. $6k in credit card debt costs about $200/month. Cutting that interest rate in half saves you a hundred bucks.
You can't plan everything, and you can't always tame the little inner demon wanting you to spend more money. Some years are just spendy. Distinguish between capital spending, recurring spending, and incidental spending. It's the incidental stuff that will kill you if you don't rein it in.
Don't worry too hard about capital purchases like buying furniture, buy good stuff so you don't have to replace it every few years and just pay it off.
Don't worry about running up a few hundred bucks coming out of your account every month for Patreon donations or cloud services. Just run through your bank statements every six months or so and cancel stuff you don't use anymore.
It's those incidentals that will kill you. I probably have $3k in debt for frivolous purchases over the last few years that I really should have been better about. Key here is to recognize the psychological need they're filling. I used to go to the bar a lot because I'd get bored. Nowadays I spend a lot less money comparatively on cheap tech toys and hobbies. Retail therapy can be cheap or it can wreck your long term goals. Start paying attention before it goes so far you're paying $500+/mo just to finance your previous life.
The house makes sense because it's an accessible form of leverage and the retirement portfolio makes sense because of the time scale involved makes the return on investment vs just putting it under the mattress meaningful.
Otherwise it's just not worth your time. Obviously you can do active trading on the market and make more money with less capital but that's not investment.
Similarly, you can use the same logic to determine that paying 20% interest on small amounts of money, i.e. under $10k, just isn't worth worrying about in the grand scheme of things. It's like $300/month. I'm not going to waste sleep over that. I mean, I'll happily take it if someone's giving it for free, otherwise it's just another bill.
And I've already got lots of other bills in the range of $1-300 a month. I'd rather have the things I bought with the $10k right now than to save up for them, just to save a few hundred per month.
The problem comes in when you're spending that money on stuff that's not providing meaningful quality of life benefits. That's a leak in your bucket. Whereas $10k in debt in a life that's working is more like poking holes in an airship. You'd need a whole lot of them to bring it down.
This should be universally taught in about sixth grade. People would be much, much better off (in general).
Glad to see an article like this.
Just pay them. If you are wealthy enough to worry about and have to time to game the tax system, you should just pay them. Don't over-itemize to save yourself a few hundred dollars.
The attitude of avoiding taxes baffles me. We are the government. We all use roads and rely on the infrastructure, the idea that is it normal to not pay your fair share angers me to no end.
I understand using a 401K, getting exemptions for some things are built into the system. I am not talking about those. If you are truly struggling, I understand why you would need to game the system a bit.
I am talking about wealthy and middle class people who deliberately abuse the tax code. Be a good citizen, pay your goddamn taxes.
And, “Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
No one is saying otherwise, including the article.
> I understand using a 401K, getting exemptions for some things are built into the system. I am not talking about those.
What are you talking about, exactly?
> I am talking about wealthy and middle class people who deliberately abuse the tax code.
Can you elaborate here? Do you mean violate, or just take some deductions that they are entitled to, but that you don't like?
Ok, so like why should I be a good citizen and pay my share of taxes when loads of giant companies, corporations, and wealthy individuals get out of paying millions in taxes every year by abusing the tax code?
What is the definition of “deliberately abusing” the tax code? If it’s legal, it’s legal.
"Minimize your Taxes".