3 Sep 2012

In honor of Labor Day

Many people regret that schools do not teach important life skills -- such as how to manage money* -- that would make life easier (less labor!!). After several decades of managing my personal finances -- mostly with success but learning from failure -- I offer the following advice.**

  • It's better to be paid "less than you're worth" than be proudly unemployed.
  • If you think you can do the job, but they don't, then offer to work FREE a few days per week for a month. You will be busy (good) even as you look for other jobs; they can decide if they want to hire you. You may even be able to network inside the company.
  • Think long and hard before taking more money in exchange for a longer commute. Time is money.
  • Have savings so you can dump a shitty job. Happiness may be priceless, but you need to pay the rent.
  • Spend less than you make. That means reward yourself AFTER you get paid.
  • Remember that it's often easier to spend less than make more.
  • A tax rebate is YOUR money. It's not a gift. Put it in savings or pay off debt.
  • Try to avoid cars. They are expensive and separate you from humans. 
  • It's cheaper to pay for a health club membership than heart bypass surgery.
  • Invite friends to your house for drinks, not a bar. Cleaner floors, better serving sizes.
Savings and investment
  • Always keep $10,000 (or 6 months living expenses) in your savings, as security.
  • After that $10,000, allocate your money to cash/bonds and equities in proportion to your age, i.e., YEARS % in cash/bonds and  (100-YEARS) % in equities. If you're 30, then its 30% cash/bonds and 70% equities. As you age, you will have more cash/equities and lower variation in your portfolio.
  • Following Nassib Taleb's advice, invest in high risk (high return) equities, not a broad market index.
  • Don't buy individual shares. Buy low-fee indexed mutual funds. (I use vanguard.)
Housing and debt
  • Don't get into debt for anything except a house. School loans may be a necessary evil -- or just plain evil.
  • Remember that buying and renting often cost the same, since the value of tax deductions and/or equity appreciation are reflected in the house's price. 
  • That said, you get flexibility with a rental, stability with a house.
  • If you buy a house, then do so because you want a place to live, not as an investment.
  • Do not lend/borrow money from friends unless you're prepared to make it a gift.
Got other suggestions/ideas?

* as well as eating well and avoiding pregnancy!
** I'm not a financial adviser, etc. If you make money, buy me a beer. If you lose money, write it off as "education" :)


Jay said...

All in all pretty good advice.

I suggest individuals should set a savings goal of a minimum of 10% of gross pay.

It's easiest to increase savings when you get a raise.

Tilt your savings and investments more toward equities than the age formula suggests. If you retire at age 60 your nest egg may have to last 30 or more years, and bonds cannot keep up with inflation.

Understand the difference between risk - as in volatility of returns - and uncertainty.

Be wary of inflation risk when making bond investments.

Given the historically low bond yields, underweight the bond portion of your portfolio. It seems better to lose 2% per year to inflation in a money market account, than to risk a 50% loss in your bond when interest rates revert to a more historically normal level (about 3% above the long term inflation rate for risk free investments such as U.S. Treasury bonds).

Buy some individual stocks, but don't trade frequently. Having some skin in the game will help you understand macro economic policies' effects on businesses and will give you a different view point from the pundits in media. (Do this only after you have established a diversified base, and don't put more than about 5% of your savings into an individual stock unless you have the temperament to avoid panic caused by short term fluctuations.

Simit Patel said...

Take the time to educate yourself about financial markets before jumping in. Educate yourself to the point where you have a plan you are confident in -- a plan that provides clear buy and sell criteria. Write this plan down. That is very important: write it down.

Tim in Albion said...

What Jay said about the bond allocation. Bonds have had a nice 30-year bull market, since the big inflation spike of the early 80s; as the interest rates have declined, the bond values have increased. But rates are now at historic lows, nearly zero, and have nowhere to go but up in the medium- to long-term; meaning, the value of bonds sold today will inevitably decrease.

If you buy a bond, you can hold it to maturity and get your money back; but if you buy a bond fund, you are virtually certain to lose money. Bond funds might be one of the worst investments a long-term saver could make right now.

I also agree that it's good to buy some individual stocks, as a small proportion of one's savings. Makes you look at things a little differently. Wish I'd started that a long time ago, instead of sticking with the mutual funds.

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