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yesthattom(Snarfed from the Vanguard website)
Wouldn’t it be great if someone reduced financial planning to a few simple rules? A list that you could send to a recent college graduate, or to a friend who struggles with money?
Well someone has compiled just such a list for first-time investors called “Everything you need to know about money.” You might be surprised at how short it is—and who wrote it.
The list is the work of Scott Adams, the cartoonist famous for creating Dilbert. His deliciously cynical take on the workplace is published in more than 2,000 newspapers, in 65 countries, and 22 languages.
His pithy list on personal finance covers the basics in just 128 words: Pay off your credit cards. Save plenty of money for retirement. Write a will. Have six months’ worth of expenses saved in an emergency fund. And buy a home to live in, if you can afford it. (The complete list can be found below.)
Why did a humorist take an interest in such a serious topic as personal finance? Adams said that even as a child growing up in New York’s Catskill Mountains he had a fascination for finance. He took his bachelor’s degree in economics at Hartwick College in 1979. After college, he worked at a bank for eight years and earned an MBA from the University of California at Berkeley.
“I’m the kind of guy who wears glasses and acts like I know stuff more than I actually do,” Adams said in a telephone interview. “I can’t tell you how many of my friends would call me and say ‘I don’t know what to do with my money. What should I do? How should I invest?’
“I realized there was a pretty big need for people to know how to do this stuff,” Adams added. “And so I thought maybe I’ll write a book. It will be kind of a Dilbert funny book on how to invest.
“I bought all the investment books I could. The more I read, the more I realized you couldn’t make a book out of it if you were honest. Because the only way to do it would be on one page,” Adams said. “If you’re actually trying to educate people, it turns out the formula is very simple.”
So simple, in fact, that his entire list fits on one page.
Everything you need to know about financial planning*
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
*From Dilbert and the Way of the Weasel, 2002
What do financial professionals think?
Can Adams’ short-list of rules win the respect of financial professionals? In fact it does. “He’s basically laid out a good, generic financial plan in less than 150 words,” said Roy Weitz, a CPA in financial planning practice in Los Angeles. “I would have bet a beer that it couldn’t be done.”
Another fan is Vanguard Chairman and CEO John J. Brennan. He said he found Adams’ list the kind of clear and direct advice that might help a grown child get off on the right foot financially.
“When I look at ‘no credit card debt,’ hallelujah,” Brennan said. “A will and life insurance—absolutely. And then when you get down to his more specific investment information, it’s right on the money for me. He gets it.”
Dee Lee, a Certified Financial Planner™ from the town of Harvard, Massachusetts, also said she found Adams’ rules to be “good solid advice.” Dee noted, however, that some of Adams’ rules might be costly to follow.
Adams advises saving the maximum to a 401(k) and IRA each year. Dee noted that would require $19,000 to fully fund both accounts this year. “That’s a lot of disposable income,” Lee said. “If they don’t make the megabucks, they should not get discouraged but try to work on each of the issues.”
Lee also suggested one additional rule for Adams’ list—obtain health insurance.
Reached by e-mail, Adams said he agreed with Lee’s suggestion that obtaining health insurance would be a worthy addition to his list.
He follows his own rules
Does Adams live by his financial rules? For the most part he does. Adams said he’s allergic to debt and makes a habit of saving half of his income.
“I found that people who had massive credit card debt were asking me how they could invest in stocks, or how they could borrow money from their credit card to invest in stocks,” the cartoonist recalled.
However, Adams said he no longer follows his rule to invest 70% in a stock index fund and 30% in a bond fund. The best-selling author says he invests primarily in municipal bonds today, which are tax-exempt, and also owns land in his adopted home state of California.
“I’m kind of a special case,” Adams added. “The best way to use this advice is to understand the framework. If you have no special situation, this framework works great.”
Notes:
Wouldn’t it be great if someone reduced financial planning to a few simple rules? A list that you could send to a recent college graduate, or to a friend who struggles with money?
Well someone has compiled just such a list for first-time investors called “Everything you need to know about money.” You might be surprised at how short it is—and who wrote it.
The list is the work of Scott Adams, the cartoonist famous for creating Dilbert. His deliciously cynical take on the workplace is published in more than 2,000 newspapers, in 65 countries, and 22 languages.
His pithy list on personal finance covers the basics in just 128 words: Pay off your credit cards. Save plenty of money for retirement. Write a will. Have six months’ worth of expenses saved in an emergency fund. And buy a home to live in, if you can afford it. (The complete list can be found below.)
Why did a humorist take an interest in such a serious topic as personal finance? Adams said that even as a child growing up in New York’s Catskill Mountains he had a fascination for finance. He took his bachelor’s degree in economics at Hartwick College in 1979. After college, he worked at a bank for eight years and earned an MBA from the University of California at Berkeley.
“I’m the kind of guy who wears glasses and acts like I know stuff more than I actually do,” Adams said in a telephone interview. “I can’t tell you how many of my friends would call me and say ‘I don’t know what to do with my money. What should I do? How should I invest?’
“I realized there was a pretty big need for people to know how to do this stuff,” Adams added. “And so I thought maybe I’ll write a book. It will be kind of a Dilbert funny book on how to invest.
“I bought all the investment books I could. The more I read, the more I realized you couldn’t make a book out of it if you were honest. Because the only way to do it would be on one page,” Adams said. “If you’re actually trying to educate people, it turns out the formula is very simple.”
So simple, in fact, that his entire list fits on one page.
Everything you need to know about financial planning*
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401(k) to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and you can afford it.
- Put six months’ expenses in a money market fund.
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
*From Dilbert and the Way of the Weasel, 2002
What do financial professionals think?
Can Adams’ short-list of rules win the respect of financial professionals? In fact it does. “He’s basically laid out a good, generic financial plan in less than 150 words,” said Roy Weitz, a CPA in financial planning practice in Los Angeles. “I would have bet a beer that it couldn’t be done.”
Another fan is Vanguard Chairman and CEO John J. Brennan. He said he found Adams’ list the kind of clear and direct advice that might help a grown child get off on the right foot financially.
“When I look at ‘no credit card debt,’ hallelujah,” Brennan said. “A will and life insurance—absolutely. And then when you get down to his more specific investment information, it’s right on the money for me. He gets it.”
Dee Lee, a Certified Financial Planner™ from the town of Harvard, Massachusetts, also said she found Adams’ rules to be “good solid advice.” Dee noted, however, that some of Adams’ rules might be costly to follow.
Adams advises saving the maximum to a 401(k) and IRA each year. Dee noted that would require $19,000 to fully fund both accounts this year. “That’s a lot of disposable income,” Lee said. “If they don’t make the megabucks, they should not get discouraged but try to work on each of the issues.”
Lee also suggested one additional rule for Adams’ list—obtain health insurance.
Reached by e-mail, Adams said he agreed with Lee’s suggestion that obtaining health insurance would be a worthy addition to his list.
He follows his own rules
Does Adams live by his financial rules? For the most part he does. Adams said he’s allergic to debt and makes a habit of saving half of his income.
“I found that people who had massive credit card debt were asking me how they could invest in stocks, or how they could borrow money from their credit card to invest in stocks,” the cartoonist recalled.
However, Adams said he no longer follows his rule to invest 70% in a stock index fund and 30% in a bond fund. The best-selling author says he invests primarily in municipal bonds today, which are tax-exempt, and also owns land in his adopted home state of California.
“I’m kind of a special case,” Adams added. “The best way to use this advice is to understand the framework. If you have no special situation, this framework works great.”
Notes:
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- Mutual funds are subject to risks, including possible loss of principal.
- Investments in bond funds are subject to interest rate, credit, and inflation risk.
- If you take withdrawals from an IRA or 401(k) before age 59 ½, you may have to pay ordinary income tax plus a 10% federal penalty tax on withdrawals.
- Although the income from a municipal bond fund is exempt from federal tax, capital gains realized either through a fund’s trading or from your redemption of shares are taxable. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as the alternative minimum tax.
- Statements appearing in this article are not necessarily endorsed by Vanguard.
- We recommend that you consult a tax or financial advisor about your individual situation.
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this advice is great if you already have money.
Date: 2006-06-20 03:55 pm (UTC)That would be nice, but that'll take a while.
Fund your 401(k) to the maximum.
Fund your IRA to the maximum.
Put six months’ expenses in a money market fund.
Sure, I could do all this, if I didn't have to pay rent, eat, insure my car, or pay for anything else.
Take whatever money is left over...
Left over?
What I'd like to see is financial planning advice for people making less than $35K and living in the more expensive regions of the country. Ideally, that advice would not be "move to another part of the country."
Re: this advice is great if you already have money.
Date: 2006-06-20 08:41 pm (UTC)There is a book called "The last investment book you'll ever need" by Andrew Tobias. I highly recommend it.
Re: this advice is great if you already have money.
Date: 2006-06-20 09:09 pm (UTC)Living within your means also means being able to save 10% of your income, and not having any additional credit card debt (if you decide today that you will live within your means, you'll have some credit card debt).
I don't fund my 401(k) to the max, nor my IRA, but I save 5% in my 401(k) and 5% in savings towards Big Things (wedding, house, etc) and don't touch it. I have some credit card debt and a LOT of student loan debt. And I'm supporting Tony, who also has a lot of student loan debt. I don't spend more than 1/4 on rent, which is the suggested maximum, but I spend another 1/4 of my take-home pay on student loans, which leaves me with a paltry half, and that's before car insurance, utility payments, food, etc.
It's not for me to say whether anyone other than myself is living within their means. But it sounds like your heart wants you to stay in a place that's hard for you to afford -- which of course financial planners don't take into account. "Fiscally sound" may mean you're miserable, which isn't a way to live.
Re: this advice is great if you already have money.
Date: 2006-06-21 05:19 pm (UTC)It seems to me that establishing a budget is probably the most critical step in financial planning -- and the one a lot of people don't do very effectively.
Figure out how much money you need for your fixed expenses, such as rent, electricity, heat, car insurance, etc.
Whatever's left over is the money you could potentially be saving or using to pay down your debt. Of course, you do also need to eat, buy clothes, buy gas, pay for medical expenses, deal with car repairs/maintenance, travel, etc. -- which is why I say it's only money you could potentially be saving. Every dollar you spend on something else is obviously money that can't be saved.
Anyway, then you figure out how much money you need for those other things. I like to start with the expenses that tend to be larger and come up more irregularly, so I can save for them in advance. I figure out things like how much I think I'm likely to spend in a year on car repairs/maintenance, how much I'll need for travel, etc. Then I divide that amount by the number of paychecks coming in, and save it right off the top, so it's there when I need it.
As for the other expenses, some people find it helpful to establish a weekly budget for misc. expenses like food, clothes, and gas. Then they just stick that amount of money in their wallet at the beginning of the week, and when it's gone, they stop spending money. Other people set budgets for each category, and then monitor how it's going over the course of the month. Buying and using Quicken on a regular basis is the best thing I ever did for my own financial well-being.
After that, unless there's something seriously wrong with your financial situation (that is, your lifestyle is just too expensive compared to your income), you'll be able to calculate how much money you ought to have left each month to save or use to pay off debt. I strongly recommend saving that money "off the top" too -- putting part of it into a 401(k), having it automatically transferred into a savings account shortly after payday, whatever -- so that you never see it.
So anyway, that's my take on financial advice for the less affluent. :-)
no subject
Date: 2006-06-20 04:02 pm (UTC)no subject
Date: 2006-06-20 04:11 pm (UTC)no subject
Date: 2006-06-20 05:38 pm (UTC)Unless, of course, your goal is to be a philanthropist in your old age.
no subject
Date: 2006-06-21 01:07 pm (UTC)the profligate retiree!
no subject
Date: 2006-06-21 01:06 pm (UTC)i keep thinking maybe i should do up a will. on the other hand, i'm single and childless, so it's not like i have to worry about providing for anyone after i'm gone.
no subject
Date: 2006-06-21 04:16 pm (UTC)no subject
Date: 2006-06-21 06:49 pm (UTC)Nolo Press has an excellent "Simple Will Book," which, for $25, will allow you to prepare a legally valid will in a couple of hours. I highly recommend it. :-)