I think I can change your financial life, from muddle-along to easy, permanent success. Thatâs why I wrote this book.
âEasyâ sounds phony but trust me, itâs not. Of all the ways of managing money, nothing beats the simple ways. Iâll go even furtherâthe simple ways are not only smart, theyâre also the most sophisticated. It takes a clear head and a wise eye to distinguish the good from the bad in the confusing world of personal finance. Only the good can make you financially secure.
From experience, I know how much time it takes to find the financial products that work the best, and time is what nobody has today. The path of least resistance carries you toward the usual stuff that the money industry sellsâinvestment, insurance, and banking products with high (and often hidden) fees. Theyâre what most people buy, so you figure they must be okay.
I wish that were so. When you really study this subject, as I have, you learn that whatâs on offer is mostly mediocre and sometimes downright bad. The products are expensive, which wastes your money. Theyâre often complicated, with risky angles that you didnât know about. If you pick your own investments, you may choose things that donât go together well, leaving big gaps in your security fence. If you buy from brokers and planners who earn commissions, you may find yourself trapped in a poorly performing product that you donât understand. Even your companyâs 401(k) may be stuffed with losers. Maybe everything will still work out, but maybe not. No wonder so many people feel a little bit anxious about their money, and out of control.
It doesnât have to be this way! Managing money isnât hard as long as you keep it simple. Not only are simple products, er, simple to understand, they cost less, gain more in value, and leave you more secure. In this book, youâll find the most straightforward, sensible products and strategies I knowâand in case youâre wondering, I use them all. In fact, theyâre all I use.
Why am I so sure theyâll lead you to success? Because simple systems fit into our busy daily lives. Thatâs where lots of personal-finance advice falls short. Youâre expected to morph into some kind of expertâa lover of picture-perfect budgets, a student of stock price/earnings ratios, a sponge for new financial terms. If you could do thatâor wanted toâyouâd have done it already. Maybe youâve even tried, by reading other money-management books. If so, I know what happened. You underlined sentences, made some notes to yourself, and then went to the movies. Maybe you tracked your spending for a couple of weeks before giving up. You thought about fixing your 401(k) but your mind (or gut) still clenched. Given this history, you assume youâre a failureâa klutz whoâll never be any good at personal finance.
Not true. To start with, youâre smart (this isnât a âdummiesâ book). Youâre good at your job, wise about your children and friends, and know about stuff that mystifies meâairplanes, synthesized music, quarks, patent law, ultimate Frisbee, cooking (yes, cooking). Youâre perfectly capable of managing money, if only it interested you. But it doesnât, so you defer, denounce, deny (and worry in the night).
This book understands that. Good financial planning builds from your personality up. To gain control of your money, your strategies have to fit you like a glove, so you knowâwithout frettingâthat youâre doing the right thing. You need a program you can practically write on the palm of your hand. One that takes into account the distractions and inertia that embody normal life.
Including my normal life. Money is my business but itâs not my hobby. I think, talk, and write about personal finance all day. After hours, I want family and friends. Iâd rather read a John Grisham thriller than settle in with Sidney Homerâs History of Interest Rates. All my bills get paid on time and I glance at the monthly totals on my investment statements. I may make a change in my mutual funds (usually later than I should have). Generally, however, money management lies near the bottom of my list. I donât have the time to spend. Well, maybe I have potential time, but Iâd rather spend it on things I find more fun. And the same with you.
Happily, you can get away with it. You can give just a nod to your finances and still do better than your friends who play with their money all the time. Playing around leads to mistakes. âHands offâ is one of the easy-money rules that works. The key is to start off right: Buy good insurance and set up an automatic system for saving, investing, and clearing your debts. After that, your finances can run themselves while you get on with the rest of your life.
A Hymn to the Simple Financial Life
Most of us can manage wonderfully, using just a few strategies and tools. That sounds crazy at first. All financial advertising tells us weâre incredibly special, needing products that have to be tailored to us personally. A smiling âfinancial adviserââa wizard, by implicationâstands ready to steer you through the mysteries for a fat, though often hidden, fee.
Pooh. The only wizard that Wall Street resembles is the Wizard of Oz. Out front, a mighty voice and megaphone; behind the screen, an ordinary person trying to impress. Financial firms love to make investing look complicated, so youâll need their help. But all good financial advice springs from the same short list of principles that you already know: Save more, borrow less, pay attention to taxes, invest regularly, diversify, limit risk, and hold down fees. You can do that yourself, without a wizard in sight.
Once you start looking into easy ways of managing money, youâll get two big surprises.
First, you donât need discipline. Save your discipline for your diet, where youâll need it more. You can set up your finances so youâll get rich (or at least rich enough) without thinking about it. You can reach this comfortable goal on an ordinary salary, without hitting the jackpot in business or investing in a lucky stock. You donât even need a financial adviser to help. All the tools exist to do the job properly, while you sleep. You just have to trigger them and then yawn off.
The second surprise is how few things you really need. Sure, there are thousands of financial choices out there in Money World, but when you look at them closely you find that theyâre mostly fluff. Itâs a world of copycat mutual funds, funds whose high fees will demolish your returns, seemingly safe (but actually risky) investment annuities, costly insurance policies, mortgages that never endâall salable products, but often stupid and sometimes even deceptive. You even have to be careful with useful investments, such as low-fee mutual funds. There are too many to choose from, especially in your 401(k) or Individual Retirement Account, and itâs easy to make mistakes. When you canât investigate every investment, or donât have a basis for choosing, you often put off making any choice at all. Or you donât revisit choices you made ten years ago becauseâas usualâyou have no time.
To cut through the clutter and help you make good, new decisions fast, Iâve made a short list of things that work. Theyâre not money âbasicsââthis isnât a kindergarten class. Just because something is simple doesnât make it naĂŻve. In fact, this bookâs investment strategy is pursued by hundreds of major institutions that invest billions of dollars of workersâ pension money and college endowment funds. The strategies for insurance and savings are endorsed by top academics and financial planners.
Iâm not proposing a cookie-cutter system, with just one plan for everyone. Life is personal. We all make choices with our money. What Iâm saying is that the list to choose fromâthe good listâis surprisingly small.
There are just two little secrets to personal finance. First, managing money isnât hard. Sure, you can complicate it, but why would you want to? Lots of evidence proves that the simpler things work better than the alternatives touted by the Great American Financial Sales Machine. Once youâve cleared your mind of what Wall Street says, youâll hit on the other little secret: You donât need what theyâre selling! Difficult to believe, I know, but true. You can ignore almost every financial ad you see and everything your friends boast about when they talk money (remember, some of them lie!). This program works better, and with less risk.
Your New Life: Getting Started
You donât have to start by getting organized. If you ever catch me in organization mode (filing bills, cleaning closets, sorting the piles of paper on my office floor), youâll know I have something hard to do that Iâm putting off. Youâll eventually want to track your net worth and create good financial files, but that can come later. Itâs best to begin with something that moves the ball down the field right away.
So surprise yourself by discovering what financial products you already have. This might require some excavating. Youâve probably forgotten some of the choices you made in earlier years. Many spouses and partners donât know what decisions the other has madeânot because anythingâs hidden but because you havenât thought about it much. On the retirement front, you might be ignoring your 401(k) or other investments, crossing your fingers and hoping for the best. But by letting things ride, you give up on the chance of making them better. You might even find that your situation isnât as wiggy as you feared, just not well enough on track. If you truly havenât been doing enough, itâs never too late. Or almost never. All you have to do is start.
SoâŚmake a pile of your latest financial statementsâbank accounts (checking and savings), debts (mortgage, home equity line, credit cards, and any other), insurance (life, homeownerâs, auto, disability, umbrellaâthe amount and type), retirement accounts (what the plans are worth and how much youâre contributing), any college savings, brokerage house and mutual-fund statements, real estate holdings, and other investments.
List all your debtsâthe balance, the interest rate, and how much youâre paying every monthâthen set that part of the pile aside (donât even add it up, if that will scare you off).
Now for the interesting part. List all your investments and insurance policies, along with their current value. If you donât know their value, an approximation will do. Next to each item, write down why you own it. Something simple is enough. âI own life insurance to protect my family if I die.â Or, âI chose this mutual fund because itâs a growth fund and I want my money to grow.â Or (be honest, here), âI bought 5,000 shares of Weirdo General because a guy told me it would triple.â If you know more, put that down, too. For example, âI chose this mutual fund because I looked it up and it did well over the past five years.â If you have no particular reason for owning something on your list, thatâs fine, too. Just leave it blank.
Or rather, leave it blank for now. This is your starting place. The idea is to fill in the blanks as you proceed, chapter by chapter, through this book. Youâll be amazed at how helpful the âwhy do I own itâ question is going to be. Asking it (and working out better answers than you had before) will do three wonderful things. (1) Youâll reflect on whether you need that particular item at all (maybe Weirdo General ought to be dumped). (2) Youâll nail down, in your mind, what that product is supposed to contribute to your life. (3) Youâll start thinking about whether it really meets your goals and, if not, what to substitute. Some of the financial products or services on your current list youâll find you definitely want to keep because they exactly fit your needs. Other things you will probably change because youâve found something better.
As you make your decisions, you should record more detailed answers to the question âWhy?â For example, instead of saying you own life insurance âto protect my family,â youâll write something like the following:
Does that sound too complicated? Donât worry, youâll easily figure it out when you read Chapter 4. By recording these details, youâll have more than a mere life insurance policyâyou have an insurance plan. Hereâs another example: Next to â401(k),â you might write:
Bingo, thatâs another plan. You can tell your computerâs calendar to remind you about your decision next March, or write it on the wall or desk calendar you use.
These notes have a very practical purpose. They help you keep track of your thinking process, which will be important when you forget (again!) why you made a particular choice. And donât worry, everyone forgets, me included. Thatâs what happens when you have a busy life. At some point in the future, youâll have a new question about your personal finances. When you check back, this list will put you into the picture right away. It keeps you in control of your money and your plan. If something needs changing, you can pick up from where you left off without starting the âwhyâ process all over again, from scratch. These notes can also be terrifically reassuring ifâin the dark of nightâyou start wondering whether youâve done the right thing. Let me say right here, that answer is going to be yes. When youâve thought about why, youâll almost certainly be on track.
On which track? Toward your goals, of courseâso after youâve finished this list, start another one headed âGoals.â We all have goals, but they generally live only in the backs of our minds. That makes it all too easy to get sidetracked into stuff we hadnât intended. To make things happen, you need to put your goals front and center. Frame the question this way: What are you working for? If all your money goes out the door for groceries, credit cards, entertainment, and the electric bill, youâre always working for someone else. To work for yourself as well, you should deliberately set some of your income aside for the specific things you want.
So list your personal goals, along with a time frame for achieving each one (donât break your head on the time frames; terms like âsoon,â âin a few years,â and âway out thereâ will do). The goals labeled âsoonâ might include a new car, a vacation, a first house, clean credit cards (no consumer debtâwhat a concept!). âIn a few yearsâ might be college tuition or starting your own business. Retirement might be âway out there.â It depends on your age and life events. Youâre going to find this list a huge help when you reach Chapter 7 and think about how to arrange your savings and investments. For each time frame, thereâs a perfect place for your money to be.
Pulling together your key financial records and making these two lists shouldnât take more than three or four hours (two, when you know where your records are). Then you can go to the movies. If you already have a good filing system, add a file labeled âGoals ...