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Comment by AussieWog93 | Hacker News Reader

People in this thread are massively underestimating the level of financial illiteracy in the general population.

We've had multiple people try to convince us to set up bank accounts for our kids, so that they could accumulate interest over 18 years.

More that tried to convince me to gamble on random pump and dump shitcoins.

More still that talked about "investing" in random collectables like Funko Pops or Pokemon cards - they're not a bubble, Logan Paul told me so!

You could replace the AI with a piece of paper that says "set aside 10% of your income and invest it in an ETF" and it would outperform the financial "advice" that people receive on a daily basis.

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> You could replace the AI with a piece of paper […]

This is actually the 'schtick' of a book that was written ten years ago:

> Emails and comments on his blog asked for a real index card with financial advice, so Pollack jotted down nine rules in two minutes, took a picture of it, and posted it online.[1][4] The image went viral, and was covered on many internet news sites.[4][5][6] Pollack and Olen wrote The Index Card three years later, which Pollack compares with the original index card as commentary to the Ten Commandments.[1][7]

* https://en.wikipedia.org/wiki/The_Index_Card

"""

The original index card, pictured above, has:[9]

    1. Max your 401(k) or equivalent employee contribution.
    2. Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds.
    3. Never buy or sell an individual security. The person on the other side of the table knows more than you do about this stuff.
    4. Save 20% of your money.
    5. Pay your credit card balance in full every month.
    6. Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.
    7. Pay attention to fees. Avoid actively managed funds.
    8. Make financial advisors commit to the fiduciary standard.
    9. Promote social insurance programs to help people when things go wrong.

"""

All-in-all, not terribly bad advice; one could do a lot worse.

> Never buy or sell an individual security.

This is controversial but very bad advice. No index funds, by their nature, will ever match the return of high-flying company stocks.

If you have very little investment capital available, then yes, allocate it all to index funds because you can't afford to narrow it down yet. But as soon as you have some room to invest in individual stocks, do it.

After about three decades investing, I can say that more than 95% of my returns are from just a small handful of individual stocks. The index funds are in the noise. More than 60% of my net worth is just from two stocks.

>more than 95% of my returns are from just a small handful of individual stocks

Yeah, but did you know which ones from the start? The whole point of index funds or diversification in general is that you don't.

If it's in a sector you know/have intuitions about--including an employer--some individual stocks (not all in) may not be terrible bets. I've been pretty lucky especially over the past 15 years or so and I cleaned out stocks not going anywhere and farmed out at least of some of the big winners to somewhere that made sense from both an investment and tax perspective.

> Yeah, but did you know which ones from the start?

You don't, you can't.

You pick the best ones, many won't give you much return or even a loss, but sometimes you get a 100x. My best return was over 3000x, those are the ones that make up for all the losses.

You are suffering from the survivorship bias in its purest form. I really hope nobody follows your advice.

And experiences come from the bulliest of bull markets. Where most people who bet on large sector are winners. Past performance is most likely future performance if things go south...

> And experiences come from the bulliest of bull markets.

That is very true and a trap that is important to be aware of. Anyone who started investing after ~2010 has only ever experience a bull market, so expect severe pain at some point. It doesn't go up forever.

I'm old enough that my investing history inclused the dot.com implosion that wiped out nearly all of everything, and also the financial crisis of 2008. It remains true that investing in the winning companies is by far the best return by orders of magnitude.

> And experiences come from the bulliest of bull markets.

As someone who has hung out in Reddit's personal finance areas for many years now, the paniced posts of March 2020 and in 2022 were very real. Lots of climbing people down from the ledge during those time periods.

Many folks realized that they may be more risk adverse than they thought. (And those were relatively short bursts: if the things had headed down for months (or longer) there would be much more sleepless nights for many people.)

> As someone who has hung out in Reddit's personal finance areas for many years now, the paniced posts of March 2020 and in 2022 were very real.

Those were just minor blips. 2020 was a very short-lived dip of less than 30% and 2022 was a bit more sustained drop of ~35%.

The dot.com bust was an actual legit crash, at almost 85% drop.

I'd suggest at current valuations we need to be prepared for a crash at least as significant as that.

You’re correct in that people with good returns usually hit a few home runs over the decades and the rest is just beta. That isn’t the point, though.

The point is you have to be able to let the home run ride or cut when it obviously isn’t and that is hard - it’s literally the whole ‘running money’ business and unless you’re in it, you are at a disadvantage.

> More than 60% of my net worth is just from two stocks.

I would hope you realize that your good fortune (aka luck) does not generalize to an entire population.

There is some luck, for sure.

But it's not pure luck. Find good companies in an industry segment you fully understand (for me, that's Silicon Valley enterprise tech), invest early and hold on. You'll have many losers, that's totally fine. But the 50x or 100x returns will make up for it.

> This is controversial but very bad advice. No index funds, by their nature, will ever match the return of high-flying company stocks.

Sticking with index funds is very good advice:

* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

> After about three decades investing, I can say that more than 95% of my returns are from just a small handful of individual stocks.

The fact that a handful of stocks are responsible for the majority of returns has been known for years/decades:

> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

Of course you have to know not just when to pick them, but to unpick them as well when they stop performing well:

> […] Since 1926, the median ten-year return on individual U.S. stocks relative to the broad equity market is –7.9%, underperforming by 0.82% per year. For stocks that have been among the top 20% performers over the previous five years, the median ten-year market-adjusted return falls to –17.8%, underperforming by 1.94% per year. Since the end of World War II, the median ten-year market-adjusted return of recent winners has been negative for 93% of the time. The case for diversifying concentrated positions in individual stocks, particularly in recent market winners, is even stronger than most investors realize.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122

To recommend to the general public and random people that they try to pick the winners when >96% of stocks give below market index returns is the height of financial irresponsibility.

> Sticking with index funds is very good advice:

Believe what you like, I'm cool with that.

I have many Wall Street friends who are aligned with your approach, so you are in good company.

My returns over the last 30 years obliterate their returns, because turns out investing in high flying companies will have much better returns than an index fund. You do you.

> My returns over the last 30 years obliterate their returns, because turns out investing in high flying companies will have much better returns than an index fund. You do you.

Only if you gamble correctly. And the '50-100x returns' you cite elsewhere are really hampered by a bunch of duds that lose money. Generic index fund would return ~1700% in 30 years. That basically means you have to pick right 16-33% of the time. That math just doesn't work out.

> 2. Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds.

I wouldn't recommend this after seeing how SpaceX was literally shoved down lots of people's throats.

> I wouldn't recommend this after seeing how SpaceX was literally shoved down lots of people's throats.

If you're going to buy a "total market" fund, then SpaceX is part of the market. There were strange financial things with GE, Enron, etc, and they were part of index(es): you have to take the good with the bad when it comes to human (economic) behaviour.

Most stocks suck:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4541122

but you don't know ahead of time which will go from not-sucking to sucking (LSE: RR is up 10x in the last five years), or vice versa. Predicting the future is hard:

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

so it's not worth the effort for the vast majority of people.

To me, investing is NOT just getting the best outcome possible. I simply don't agree with some companies practices and therefore I don't want to invest in them. I believe I am better off if I live in a better society overall than if I have more money in a worse overall society.

> I simply don't agree with some companies practices and therefore I don't want to invest in them.

Understandable, but unless you buy the stock from them at IPO, you're not giving them money. I agree with Cullen Roche's four points on ESG investing; second one:

> 2) The secondary market is a bad place to enact change. The intelligent defense of ESG is “by reducing the demand for a stock we can increase its cost of capital and impact its operating performance.” This is true to some degree, but I think this is dramatically overstated. For instance, the firms in the S&P 500 are all large established firms that have more than enough capital to finance their operations. They aren’t using the secondary equity markets to fund their operations. In fact, most firms have so much capital that they’ve been net buyers of stock in the last 50 years. So, this puts the cart before the horse. The better way to think of public companies is to think of them like horse betting. We can bet on the horses, but secondary market purchases are just private exchanges, not cash issuance to firms. As a result, betting on the horses doesn’t change the outcome of the race. Similarly, our secondary market purchases and sales have a far smaller impact on the firm’s operations than we might think.¹

* https://www.pragcap.com/my-view-on-esg-investing/

Roche's point in 'doing good' with investing is to make as much money as you can and then fund the movements and organizations that you wish to succeed (worked for the Koch brothers and others of their ilk).

Elon told the economist in his interview last week that money won’t matter in 10 years. That is not financial advice. More people now “know” that than this list.

Musk tried to argue that:

  AI and robots will break economics by creating an era of "incredible abundance". He argued that if we can produce more necessities (goods and services) than we could consume, then the practical need for a medium of exchange simply disappears.

Not a great argument, since developed countries already have an abundance of say food and entertainment, yet the marginal price hasn't gone to $0 (except maybe iPhone games?).

We don't have a good way to value our time, or our status, or many other economic intangibles. Instead we tend to hyperfocus on money, which isn't necessarily worthwhile.

We will fight for those things and money is just one way to measure that.

10. Teach the next generation to be responsible with money and their use thereof.

This means all this akward conversations about why I don't spend money on stuff that I don't need just because some YouTubers want me to.

> This means all this akward conversations about why I don't spend money on stuff that I don't need just because some YouTubers want me to.

There's nothing awkward about the following advice in conversations:

> 1. There are two ways to use money. One is as a tool to live a better life. The other is as a yardstick of status to measure yourself against others. Many people aspire for the former but spend their life chasing the latter. […]

> 3. Spending money can buy happiness, but it’s often an indirect path. Money itself doesn’t buy happiness, but it can help you find independence and purpose – both key ingredients for a happier life if you cultivate them. A big, nice house might make you happier, but mostly because it makes it easier to have friends and family over, and the friends and family are actually what are making you happy. […]

> 6. Everyone can spend money in a way that will make them happier. But there is no universal formula on how to do it. The nice stuff that makes me happy might seem crazy to you, and vice versa. Debates over what kind of lifestyle you should live are often just people with different personalities talking over each other. Author Luke Burgis puts it another way: “After meeting our basic needs as creatures, we enter into the human universe of desire. And knowing what to want is much harder than knowing what to need.”

* https://collabfund.com/blog/my-new-book-the-art-of-spending-...

* https://www.goodreads.com/book/show/231148075-the-art-of-spe...

Teach the difference between need and want.

1-7 lay the case for why a financial advisor is not required and not beneficial.

8 is simply a contradiction of the prior at best.

Sadly, also hyper-unrealistic. Very few people can afford to save 20% of their income whilst maxing pension contributions, let alone maximising other accounts.

Points 1, 3 and 5 are probably the key ones and would still stretch most people.

I was saving 20% a year when I was making $36k a year and spending $800/mo on an apartment in the tenderloin. In 1997. It's called beans and rice. I'm still saving 20% a year, making $200k a year and owning a house. Yes, you can do it. Stop buying shoes, clothes, rims, and video games and you've probably got 20% right there.

Oh, and don't get married.

What an exciting life you got there! Enjoy your sad and lonely retirement

Not sure what that means. I own a couple classic cars and a house, work 60 hours a month, travel for fun most of the time. Lived in 12 countries in the last 20 years. Have a great girlfriend and a great ex who I get along with. But I don't waste money on rims, shoes or clothes. And tonight I made rice and lentils, because my credit card bill this month was $8k and I only made $15k.

It's actually more exciting if you limit yourself and enjoy the struggle of trying to hit a high target. For example, moving to Mexico and trying to live on $3k a month. I did that a few years ago, it was awesome and I saved a lot of money.

Sounds great!

I guess dying destitute because you saved nothing is more romantic?

The romance of Dickens gets less appealing with wisdom.

The median US household is statistically within the ballpark of being able to achieve this per the data. Americans have extremely high incomes and anomalously low taxes on the middle-class. They can easily afford it.

Whether they save or not is another matter. Something like 30% of Americans don’t save a significant fraction of their income even though the data clearly indicates it is easy to do so.

The trick is not to let it hit your checking account. Live without it and your lifestyle will adjust.

The 20% includes pension contributions.

“Pay your bills on time and fully”

“Do what you can to eliminate addictive vices or never get them”

“Max your Roth and 401k contributions before even thinking about anything else”

“Try to budget”

“Don’t live beyond your means. Monthly payment need to be considered carefully”

If you can even TRY to do these things it puts you SO far ahead of the average person.

It sucks because I get it, if you’re behind waiting years for things to stabilize sucks, if you even can. So these get rich quick by just doing X scams are enticing but only set you farther behind.

God I still remember when a friend showed up on his 18th birthday with a pack of cigarettes to show how “mature” he was. I always think about how much that one decision cost him over the years.

I never personally liked the blanket advice to "Max your 401k." For most, if achievable at all, that would be the most they can invest at all. Even though it is often recommended alongside a proper "emergency fund," that advice leaves little liquidity without major penalties.

> I never personally liked the blanket advice to "Max your 401k."

I think the general advice is max out employer contributions to your 401(k)

* https://old.reddit.com/r/personalfinance/wiki/commontopics

* https://old.reddit.com/r/PersonalFinanceCanada/wiki/money-st...

Yeah to be clear that's what I meant. Contributions beyond that depend on your situation, but if you can match your employer your should.

For enough income, maxing out 401K is the one way to reduce taxes and keep your money.

When young and lower income (lower tax rate) the best deal is to max out Roth 401k and Roth IRA if you can. Then you'll have a lifetime of tax-free appreciation.

Roth contributions are withdrawable without penalty. Also most employers offer a match of some amount, which is essentially free money.

I understand contributing at least the amount an employer will match, and almost always much more than that. But to "max" it would be $24,500/yr which for many if feasible at all would leave little go into different investment vehicles meaning all of your money is tied behind the rules of a 401k until you can access it, or take that 10% penalty.

Maybe I'm missing something here but diversification is a pretty fundamental investment rule and I'm not sure why the advice doesn't usually follow it here. Putting everything into a "you can't touch this until you're ~55+" bucket seems like quite a risk.

Most people here are probably paid too much to contribute to a Roth IRA.

That's what the https://www.investopedia.com/terms/b/backdoor-roth-ira.asp is for, assuming you don't have any existing traditional IRA balances

You can also roll your traditional IRA into an employers 401k (if the plan allows this) to zero out your traditional IRA balance.

But you can do a backdoor Roth IRA by maxing out your 401k and then rolling it over into a Roth IRA with recharachterization. You lose the tax benefits of the 401k but gain the tax benefits of the Roth IRA which can be a good trade depending on your tax situation.

No, this isn't how a backdoor Roth IRA works.

Backdoor Roth IRAs involve making a traditional IRA contribution and not taking the deduction at tax filing time (because you can't), but then rolling over (not recharacterizing, that's something else) the traditional IRA contribution into a Roth IRA. It's completely tax free, assuming you have a $0 traditional IRA balance once the rollover is complete. The usual way to accomplish this is to roll all traditional deductible IRA balances into a traditional 401k first.

What you're kind of thinking of, but also not quite right, is called a 'mega backdoor Roth', which involves contributing to a 401k via a non-deductible contribution (which is not part of 24.5k/yr limit), then immediately rolling it over into a Roth 401k. It has to be allowed by the plan, but some plans even offer to do the rollovers for you automatically.

The Mega Backdoor basically lets you get an extra ~40k/yr of Roth contributions, if you can afford it.

You can convert your 401k to an IRA when you leave an employer. Some employers also offer in service rollovers (I think these mostly have minimum age restrictions on them though)

That’s a traditional IRA, not Roth.

Right but once your traditional IRA is fully rolled over to a 401k, you can take full advantage of backdoor Roth IRA contributions regardless of income.

Traditional 401k balances transfer to traditional IRAs, and Roth 401k balances transfer to Roth IRAs.

I have considerable Roth assets because my employer's 401k allows for the Mega-backdoor, which means I can put $30k+ per year of after-tax income into 401k (beyond the normal pre-tax contributions) perform a Roth-in-plan-conversion on the after-tax assets, and then roll it out into a Roth IRA.

You can’t personally contribute to a 401k beyond the limit, even after tax. Your employer can add extra via match or profit sharing contributions. What are you talking about?

For 2026, the 401k limits are $72,000 overall, and $24,500 for pre-tax employee contributions.

Assume an employer who matches 50% up to pre-tax employee contribution max, the result is this:

$24,500 pre-tax employee contribution $12,250 employer match

This leaves $35,250 to the $72k limit.

Roth MegaBackdoor enabled plans allow the employee to put $35,250 of _after tax_ contributions in to fill that window, and to convert them to Roth assets. They can even be rolled out into a Roth IRA while the 401k is still active.

I have no clue why you think this relatively common plan option is, somehow, impossible.

Not Roth 401ks, only IRAs

Yes, although some plans let you roll contributions into an IRA.

The five-year clock is for the original contribution. It’s important not to get that mixed up.

There is no five year clock for withdrawing your own Roth contributions. Contributions (not earnings or conversions) can be withdrawn at any time with no tax or penalty.

I actually had a great session with Gemini pushing back on the "Max 401k" advice. Summarized in my own words:

  - Why would I contribute tons more to my already decent 401k? If anything, I want to pull from it. I refuse to diminish the peak years of me and my family's life together just to be wealthy when I'm old and alone.
  - that's a good point, but know you'll pay tax on top of 10%
  - well I would have paid tax anyway if I just saved it, and 401k turned out to be more lucrative anyway. So the penalty is only 10% when tax is unavoidable timewise, paltry
  - true, but you yourself just mentioned how lucrative the 401k is over time. That money will not manifest over time if you pull it now
  - why would I even want to be rich when I'm old and boring anyway, life is happening for me right now
  - well that depends on what you consider old, you could retire early, use SEPP to access penalty free, say at 50
  - I actually wasn't aware of that as an option... The difference between my age an 50 isn't that large, at least not compared to 55/60. Very good then, perhaps I'll keep things as they are.

As is typical with AI, I can't attest to whether this is accurate, whether it's good advice, or whether I myself am financially illiterate (probably), but it did raise my confidence a bit, and legitimately talked me out of a hypothetical of using some 401k money to buy a better house.

The problem of money mattering more when you are younger is something that often appears in personal finance discussions. One thing is consumption but another are opportunities to invest in yourself. There is case for not saving at all when you are young (because there are always good way the money can be spent).

Here is some good discussion that touches on it (and other FIRE related topics):

https://youtu.be/qstjUV5mh-I

That podcast was very timely and topical, thanks!

You're missing the whole point of IRAs. You said:

>> well I would have paid tax anyway if I just saved it

The point is that as long as your money is in the IRA you can earn interest or buy stocks, sell for a profit, over and over and not pay any taxes on your gains in between.

Imagine you have $100k in a normal trading account and $100k in an IRA. You make the same trades in both and both are up $20k at the end of the year. Let's say then you want to trade out and take profit. The normal account triggers taxes on $20k worth of capital gains, so maybe it now has $115k in it. The IRA doesn't, so it still has $120k in it. Go ten years like that. At the end when you withdraw from the IRA, yes you have to pay taxes on the total gains (if it's not a Roth) BUT you had the use of that extra $5k every year you didn't pay taxes on! The whole time, all that tax money you didn't pay compounds to let you make more money with it. That's the concept. You're allowed to keep using the money that you would've otherwise had to give to the government, to make more money along the way. The final 20% you pay when you cash out is less than how much you made by compounding the tax savings and plowing them back into investments.

> You're missing the whole point of IRAs.

I think you're missing the point of IRAs too. The primary point of IRAs is that you can defer taxes from a time when you have high taxes (your working years), to a period of when you can have low taxes (retirement). That's it. Being able to trade stocks within an IRA is a side benefit. Another side benefit is no taxes on things like dividends inside your IRA. Those are not the primary benefit.

I believe the general idea is to max it if you can. If you can't, put whatever you can, and forego luxuries like vacations until you can.

Right, so you max your 401k instead of diversifying a portion into something more liquid, and when something happens before 55 you have to take a major bite out of it just to access that money?

That would be what an emergency fund is for, in traditional financial literature. If you mean something more tragic, that's what insurance and other products are for. Even then, 401ks have exceptions for something like total disability that allows early withdrawals without penalty.

If you just mean "I want my money early", well... there's lots of ways to access retirement account money early without penalty with some planning.

> If you can even TRY to do these things it puts you SO far ahead of the average person.

This is basically the advice of this 2016 post (later book):

* https://en.wikipedia.org/wiki/The_Index_Card

The basics are really basic/simple.

The writer of one punch man was on to something

He knew the way

> God I still remember when a friend showed up on his 18th birthday with a pack of cigarettes to show how “mature” he was. I always think about how much that one decision cost him over the years.

The irony of taxing vices. I imagine most of it's paid by people who didn't know better at a young age, and helps encourage the downward spiral of poverty.

And if you say it discourages young people from starting on the addiction, I think we're barking up the wrong tree. Disposable vapes have the highest amount of nicotine they can put in their nicotine salts. Nicotine pouches like zyns sell the most at 6mg and above. Dispensaries and street weed have enough THC that would put a hippie in the 70's in a psychotic break.

God bless that Gen Z doesn't drink or smoke cigarettes. But they vape nicotine and marijuana. Or use pouches / edibles.

If we don't prevent first time users from getting an intense nicotine head high or accustomed to weed 5 to 10 times stronger than what their parents were used to, then I really don't see the point of excise taxes. It should be about preventing first-time use, and giving off-ramps to these potent products.

It's easy to see why it works though. I know people like this who have made bank with these stupid schemes. Far higher returns than doing things the "right" way.

The problem is you usually only hear from folks like this who are up a gajillion percent on some dumb crypto play, and not from the people who just wasted their life savings.

You only ever hear about this stuff while it's up. The NFT bros have been quite for a long time now.

While I agree with you about the level of financial illiteracy in the general population, I don't really see what AI has to add for the vast majority of the population is simple. Basic financial advice is not hard (save regularly, invest in low cost index funds, don't take on CC debt, etc.), but a lot of it goes against most human nature, especially around delayed gratification. People have known for decades that "diet and exercise" are very important for good health, yet we still have an obesity epidemic.

It reminds me of that Saturday Night Live skit from decades ago, "Don't Buy Stuff You Cannot Afford": https://youtu.be/R3ZJKN_5M44

> I don't really see what AI has to add for the vast majority of the population

What it does best: sound plausible and never tire of a personal (sounding) conversation

An early study (with one of the early versions of ChatGPT) showed that people also come away less convicted about extreme political notions whereas chatting with a human had no or a slight solidifying effect. It's apparently an amazing tool to convince people of reasonable stuff (and probably also unreasonable stuff, if you'd make it, but I guess those proposals didn't pass the ethics committee!). There's loads of Financial cooks out there that'll convince you of golden mountains for anything that gives them a cut, kickback, or straight-out all of your money, so I could even see the reasoning in encouraging people to chat with just about any chatbot about their financial decisions

My main concern is the reliability: while it may be feel-good to say that it can prevent, say, 95% of scams and 80% of bad ideas, any time it fails at its job will actively steer someone towards ruining their life. Effort might be better spent on something that reliably works. So I'm not convinced either way yet, just that I could see how this is more convincing (and thus effective, at least in aggregate) than a napkin with legit useful commandments (at least for the USA; idk if we have such a thing as 402(K) here)

We have bank accounts for our kids, currently earning 1.75% because we aren't depositing money every month. If money is deposited it's another 3.3%.

I really need to get around to setting up Vanguard for them. Thanks for the reminder!

My kids have bank accounts to learn how to manage money, banks, and training: getting used to having money in the bank before, during, and after a trip to the mall. My hope is to let them screw up their finances when they’re little instead of 20-something.

We’ve also setup tax-deferred retirement investment accounts for them. $1 at 20 can 70x or more by retirement. Mostly it’s the mental training though. Being ok “losing” money during a market correction, saving for wealth in parallel with saving to buy, seeing interest and returns over time, and having a long term plan.

This is a very good idea. I will have to copy this. :D

My oldest is 8 and can get a debit card now.

When I think back I made a lot of mistakes that I made with money was around the time I was 18. They were expensive to undo later.

My parents didn't teach me being responsive with money as they shown me how but didn't explain why.

1.75 is less than the money is losing value from inflation. If that savings is in USD it's quite a bit less than inflation over the past five years.

You need to put them in a custodial brokerage account or whatever allows you to buy ETFs for them (not sure of best tax advantaged account for non-working kids) and buy the s&p or total us market. A bank account is horrible idea when they have a long time horizon meaning they aren't affected by ups and downs of market.

Bank accounts are for 6-8 months of salary for an emergency fund.

You can read this wiki or ask an AI about the strategy.

https://www.bogleheads.org/wiki/Main_Page

VTSAX, ASAP.

Inflation is usually estimated at 3% + annually over a long enough time horizon. You're losing money.

Look into a 529 college savings plan.

I'm generally very critical of the idea that people are relying on ai, but the thing I didn't realize in the past and that I see many like me haven't is that the literacy of an average citizen is surprising low. I know people who get very useful life advice from these models. Life advice anyone over 16 should know, but that doesn't matter. This trust people incorrectly put in models means they actually listen. And SOTA models are pretty accurate when it comes to common sense. Most of the time. So it actually works out.

I still get very anxious at the idea of people relying on llms though. It just works out more often than we think.

> I still get very anxious at the idea of people relying on llms though. It just works out more often than we think.

We should all be anxious about technology which is almost guaranteed to turn into metaphorical mind control. Some day these systems will be turned into highly personalized and effective brainwashing machines and topple our supposed democracies overnight. The more people trust them and rely on them, the easier it gets.

Yes, and that's from supposed professionals too, not just crazy youtubers or tiktok channels. My neighborhood has enough old people that Edward Jones reps come over to try to manage your money. So I get to ask them questions, and see they are basically offering to rip me off. And that's in the US: You should see the investment recommendations people in Spain get when they talk to supposed advisors in real banks. Search for the Preferential shares scandal, where banks had scripts teaching how to lie to people to sell a product that would prop up the bank while having great chances of wiping out the buyer's savings.

Careful just recently two old guys in Chino Hills, California. Brothers 66 and 67 years old were involved in some sort of apartment deal for 20 million dollars which went south.

They were so extremely dissatisfied with something and went to the house of the financial advisor or grifter depending upon your point of view and took it took on him. What is going to start happening with AI data centers?

What’s wrong with bank accounts for your kids? Sorry, this one doesn’t seem to fit with your other examples.

If all you're doing with a bunch of cash over 18 years (!) is holding it in a bank account to collect interest, you're just losing money to inflation. Bank interest is almost nothing. Better to hold stocks, or at the very least bonds if you're extremely risk-averse.

Though this needs to be put in context - maybe you actually intend for the child to be permitted to spend the cash, in which case a bank account makes plenty of sense.

As the OP has "Aussie" in their name I think they'd be referring to the Commonwealth Bank of Australia Dollarmites accounts. They were shutdown recently after a watchdog investigation. It was locking kids into using the bank that would continue into adulthood and schools were getting paid to sign kids up.

https://www.morningstar.com.au/personal-finance/the-lessons-...

"They found that it provided little value for children and the largest outcome was that children were being exposed to ‘sophisticated’ marketing tactics."

Funnily enough the two people we heard that "advice" from were Brits and Saffas. It's just bad interest yields compounding over decades.

The banks might pay 3% interest, whereas even non-volatile conservative investments like cap notes or bonds would pay something like 7%.

Plugging it into a calculator:

1.03 ^ 18 = 1.70

1.07 ^ 18 = 3.37

Example numbers, but you're effectively taking half of the money that your kid would have had on their 18th birthday, and giving it to a banker.

3% is amazingly good. It’s not hard to beat that, but a savings account at a common bank can easily be below 0.05%.

I looked up BoA. 0.04%.

3% is becoming more common as of the last few years, at least in the US. I know several banks off the top of my head that offer 3.5% or higher (and more if you are a new customer) for their savings accounts. I would persuade people who use banks that haven't moved on from near-zero APY to move on themselves.

Yeah just off the top of my head I’d expect Discover and AmEx to be around 3.5%. Apple is at 3.4%.

I moved away from near 0% savings accounts more than 20 years ago, it’s amazing to me it’s still so common.

You don’t have to try very hard or go wrong to someone you’ve never heard of to get a good rate.

The rate goes up and down with inflation, high inflation, high interest - low inflation, low interest.

But even then, yes some banks still offer no or 0.5% accounts.. because they can, and many people can't be bothered to figure out a better option, or "trust" there bank and don't want to move. (or the bank has high interest account, but make it complicated to use)

When I first got a real high rate savings account it was 5%. I think my normal bank paid an incredible 0.05% at the time.

You’re right it varies and that has been obvious lately as I seem to be getting monthly email warning me my rate would be going down.

FWIW, savings rates have been coming down.

Most annoying on Reddit are people who write about "high yield savings accounts", those might have been there in 80's or 90's but I see right away those people are just LARPINg.

3% is nothing there are no "high yield savings accounts".

It’s still better than basically 0%.

Yeah they’re not going make you rich. It doesn’t take the place of investing. But its still better than a checking account for money you need to keep liquid.

3% is roughly inflation.

I’ve been thinking about moving some money over by selling some shares and opening up a savings account with enough money to make a difference.

I'm definitely at the point where, if not sticking money in my mattress, I'm keeping a lot in pretty safe investments. Did sort of an equity housecleaning a couple years back and consolidated some investments, in part to make them easier to track and manage.

3% is typical for a HYSA (Ally, for example)

Yes… I also wouldn’t park money in a savings account for 18 years.

But 7% is not the risk free rate! The S&P and these other things have risk!

But show me a bond I can buy that’s paying 7% and I’ll show you below investment grade.

LFSPA.

Not risk free, but not volatile either. Although even that underperforms compared to an index fund.

Index funds are not risk free! We have had a solid 15 years and everyone forgot that there are decades of declines or stagnation.

I would happily have a decade of declines or stagnation on the 10's of 1,000s in the kids account over the next 20 years - they can then invest in their productive earning years in companies trading at p/e's of 10 again.

LFSPA is a cap note, not an index fund. Hence the lower returns, haha.

Not saying it's necessarily the ideal vehicle but anything beats the banks.

Australian and New Zealand private small business and consumer lending?

while you’re at it maybe pick up some Indian bonds which have a high coupon close to 8%?

That's why you hedge with Bogleheads three headed fund. Bonds are strong when the indexes are weak according to them

The anti-correlation between bonds and equities hasn’t been a thing for decades. That is advice that passed its sell-by date a while ago.

The modern version is to go hard into equities and out-grow the drawdown risks. You still want a couple years of burn in treasuries but that is strictly a buffer against adverse returns. By the time you retire, the treasury fraction is a tiny fraction of the total by virtue of the equity growth rate.

I don’t have any reason to think that international economies are not correlated to the US. But also I don’t expect them to be that successful. Europe and South-east Asia have a mafia like relationship with their established businesses and regulate away new ones.

The sibling comment addresses bond funds.

ZIRP, 2008, Covid, trump, big tech, and AI all came after Boyle.

Truly conservative investments are more in the 3-4% range these days; money markets were running around 5% a few years back but they've come down. I have some bonds (including treasuries) that are higher than that but I bought them quite a while back. For long time horizons I'd be more weighted on equity indexes and maybe dividend-heavy stocks.

I am curious. When you put this money in kids names, do they (or we) get taxed on this? If we save on taxes, then for a person (or their child) with high income and high state taxes, the benefit of the 3% may be larger than it appears to be. Of course, up to a limit.

Depends on jurisdiction, I'm sure.

In the US, kids taxes can be separate, but after a small exemption, they pay the parents rate on unearned income (investments, interest, etc). You have to have a pretty big balance before 3% apy gets past the exemption though.

You’re not giving it to a banker, you’re trading risk for return and flexibility. One can access savings at any time, any amount. Not true with bonds, maybe if you fiddle with indices.

Also bond returns have averaged 5% over decades, not 7.

Not taking all this into account, and simply claiming bogey men took your money, is misleading.

While true, funds for retirement, college or to give as a gift when your kids move out do not need liquidity. Therefore, those should not be in savings.

From a return on investment perspective, it is not great.

Bank accounts are convenient and safe, but you pay the price with low interest rates. But if you don't intend to touch that money for 18 years, you don't need the ability to withdraw at any time without losing money that a bank account offers, so why pay the price for it?

However, it has symbolic and educative value, teaches the value of saving, how interest works without going into the complexities of the financial system, and making it clear to your kids that it is their money, even if they can't touch it yet. So it may be a good thing for that reason, when the sums are reasonable.

You should invest in different things depending on your age.

An old person might want to have more of their money in yielding assets. They are withdrawing from the account so the certainty of having predictable value might outweigh the inflation risk.

Savings intended for a young child should be allocated almost entirely into equities. They are not affected by drawdowns since they won't be withdrawing from the account for a decade or two, but inflation is a primary concern.

A bank account is a particularly bad place to put savings intended for a child long-term. A good high yielding account might barely keep pace with inflation, but it's unlikely to grow much in real terms. The average bank account will lose money in real terms in that 10-20 years.

Bank account interest is pretty much always less than inflation. So, money sitting in a bank account for 18 years is just losing value.

The object of the game is to live within your means, save and invest. More than half the population does not do that. When you’re 18 the treadmill starts turning if you don’t use your time wisely, you’re going to be in trouble at the end of life. When you are young, simple compounding is your friend because you have time.

https://www.thewealthminded.com/finance-basics/how-compound-...

People have won the lottery and blown it all, some people who have extremely high paying professions in their youth, have over the course of time have also blown it all.

While banks often pay crap rates, real rates (e.g. from government bonds) have largely been positive (except the short end after GFC and COVID).

https://fred.stlouisfed.org/series/REAINTRATREARAT10Y

https://fred.stlouisfed.org/series/REAINTRATREARAT1YE

Not OP, but I think they are referring to the fact that you can get tax advantaged accounts instead of a standard savings account. Not to mention the interest rate on those accounts is basically a rounding error.

A child can not get a tax advantaged account. You need earned income to contribute to those.

If you track chores you can actually set up your kids with a Roth 401k. For example, this company takes care of it for you https://www.halfmore.co/

No. You can not consider payment for chores as earned income.

Inflation over a long time horizon is about 3%. Especially if it's going to be a decade or more, just put it in an index fund.

The interest rate is very low.

My checking account isn’t the best out there at 1%. Same with my savings account at 3.4%.

Neither of those is anywhere near inflation. You are effectively losing money by parking it there.

Most checking accounts don’t pay interest at all. I looked up Bank of America's savings account: 0.04%.

You read that right. Effectively zero. And it’s a flat rate. Whether you have $10 or $10 million in there.

I was at a dealership not that long ago to buy a new car for someone.

The seller explained us how a lease was so much better financially than outright buying. He was completely wrong on the fundamentals: basically with a lease the car company makes you a huge favour because after the three years are up the car is worthless but they’ll take it back and lease you a new one anyway and you get a brand new car. Whereas if you own your car is worth 0 at year 3 (???) and you have to pay 100% of the price of a new car again to get a new one.

Never mind residual value or that you are allowed to keep a car longer than 3 years.

Must be working because most of my relatives friends have a leased car.

> The seller explained us how a lease was so much better financially than outright buying.

Of course a lease is better than buying.. for the dealer. So the seller was honest, just not entirely transparent.

Leasing is one of the dumbest financial moves ever. Forces you into a perpetual treadmill of payments for life.

Just buy a car, pay it off (cash if you can, or with a loan) and then drive it forever.

Some people want a new car all the time. Leasing is not a bad way to do that.

Wanting a new car all the time is the expensive decision, not leasing, which is merely a manifestation of that decision.

As someone who drives a ten-year-old car that probably has several good years left, I completely understand why someone would not want my boring life. This is the fallacy of people who recount stories of the “millionaire next door” who has high net worth. Many people do not really want wealth. They want to consume a lot: travel, new cars, restaurants, clothes.

> Some people want a new car all the time. Leasing is not a bad way to do that.

True.

But does that make any economic sense? If you're so rich that it doesn't matter, sure why not.

But for most people leasing is a terrible economic decision. If money matters, never lease. If your wealth is past the point where money matters, go for it.

> As someone who drives a ten-year-old car that probably has several good years left

I'd say several decades at least. My new car is 13 years old, which I consider barely broken in.

Second oldest is 22 years old, doing great. My other cars are much older, in their third and fourth decades.

Barring a crash, older cars can go on for a very long time. Newer cars built these days have a very limited lifetime ahead of them, as the electronics will be unrepairable in short order.

The other stuff sounds scammy. But what's wrong with setting up savings accounts for your kids? It's a good way to teach them to save money. I was 10 years old or so when my parents set me up a bank account with $100 in it. I saw the statements every month and started putting money I earned into it. I had that account until I left home at 17, and it had several thousand dollars in it by then. I think that was actually crucial to helping me have financial literacy. Maybe you're talking about some scammy email or whatever. But the basic idea of setting up accounts for your kids is a good one.

For a minute I thought your comment was a lead in to this south park skit: https://youtu.be/-DT7bX-B1Mg

lol. Never saw that. But it totally brought back being dragged into a bank by my Mom and sitting at a desk across from a bank rep and signing forms... I even remember exactly where the desk was in the bank. CalFed. Matt and/or Trey obviously had the same experience hahah

Inflation will erode the value of money just sitting in an account.

Even if you lock it up and get better interest the results will get dwarfed by investing in broad, passive, and low fee funds.

Yeah, but that's really not the point of opening a bank account for a kid. The point is that saving should become a habit. Seeing a balance grow is satisfying. When you're 12 years old and mowing lawns it's better to put money in your bank account than stuff it under your mattress, or spend it on dumb shit you won't remember next year. Then you talk to your kids about CDs, mutual funds, high yield savings, growth stocks, dividends, inflation, retirement funds, real estate, loans, etc.

The first thing is how to open a bank account and put money in it. You'd be amazed how many adults I've met who didn't learn that until their mid-20s.

yeah but the two are different things no? Like yes if you take more risk with even diversified, passive funds you will like get more volatility which could go either way. There is no way you can know it will drawf interest rates provided by the bank which are designed not to beat inflation but prevent your cash from getting eaten away by the inflation as opposed to sitting in your basement locker etc.

Also the idea doesn't seem to be "hey kids beat the market and get the best returns" but to gradually show the value of accumulated savings? They can also contribute their own earnings to those savings and at that age it is better to keep it in bank and accumulate interest than invest even in diversified low risk funds if your objective is to get the best savings by the time you are an adult and then you can decide what you want to invest in.

yeah but you get essentially 0 risk (especially if the bank is insured)

risk is proportional to gain

The last bit of the last bit of what you said is what Warren Buffett has been saying for decades.

> We've had multiple people try to convince us to set up bank accounts for our kids, so that they could accumulate interest over 18 years.

I don’t really see the problem here? Why wouldn’t you want to set up financial accounts for your children and invest in them?

Leaving money in the bank is not investing. Also, compare interest rate with inflation, you’re probably throwing away money every year. Meanwhile, your bank is actually investing your money and beating inflation. They pay you the interest and keep the rest.

Those accounts should be in something that pays more interest because you give up the liquidity. You pay (in reduced interest rates) for the ability to withdraw at any time. You can instead be completely risk free and make more money* by promising not to need it for another 10, 14 or 18 years.

* However many of those methods involve locking in the interest rate, so you might miss out if banks start paying 10% like they did decades ago.

> set up bank accounts for our kids

yes

> so that they could accumulate interest over 18 years

at 1% ... no ... the value of that money will so eroded by 18 years of time - a better investment would be in some good memories with them; go to europe and see the Sistine Chapel or teach them to surf / play tennis.

I've been using LLMs as a rubber duck for scenarios, and I've found they just agree with whatever the last thing you said was unless its blatantly wrong. They will happily 180 the opinion to match the last message, never ask further questions, never push back unless you've said something totally factually incorrect.

So I agree with the title. If you already know the answer, LLMs can read it back to you.

Are you referring to https://en.wikipedia.org/wiki/Rubber_duck_debugging

came here to say some version of this. for the average joe, good financial advice is simple and boring (low cost ETF tracking broad based index), and AI is definitely able to give that. the question has always been getting people to listen though, and I am not sure how effective AI will be at that. I continue to be amazed at the confidence that people place in hot stock tips from tiktok (yes, tiktok!). little has changed since the 1920s i guess.

Pokemon is a good investment IMO. My mom even bought me some as an investment in 2008.

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