12 Truths of Personal Finance
Primary Points
- The Lottery Mentality is poison to your financial health–it prevents you from taking action today and kicks the can of responsibility into the unknown future.
- A little work today goes a long way.
- 12 Truths about personal finance—a love letter to family.
Family. They’re your flesh and blood. The ones who, whether we like it or not, and for better or for worse, will be a part of our lives until we lose consciousness and depart from this world.
For a segment of the population that is supposed to be as close to us as anyone regarding familial bonds, it is staggering how little influence we can feel that we have over our loved ones. Or perhaps this is only a problem I have–but I have a hunch I’m not the only one who struggles with this.
In an attempt to assuage my conscience, I’m writing this for all family members out there who haven’t–or will not–listen to their own flesh-and-blood when it comes to financial CENTSability. So, in truth, and in love, here it goes…Twelve truths as I’ve come to know them.
FIRST
One day you will not be able to work for money. In that moment you won’t be able to live paycheck to paycheck any longer and you will need to financially support yourself so you don’t end up out on the street eating cat food like crazy uncle Dan. Personally I’ve seen many older people who wish they could spend time with their grandchildren but because they’re not financially independent are forced to work less than desirable jobs during their golden years. This is a shame. It is a tragedy. And most of the time, it all could have been avoided.
Most recently I was speaking with a couple who said, “I just want to live a little now.” But I asked them, “When your children have their own children, would you want the opportunity to spend time with them without the need to work for money?” Furthermore, I said, “If you ‘live a little now’ you’re taking that choice away from your future self.” Don’t take away your future choices and options; provide yourself with maximum choices and options for your future self by making the right financial decisions today!
SECOND
You have the power and ability to stave off the financial apocalypse. Your ability to say “no” to “excess” and “the extra” and “yes” to free and fulfilling experiences will dramatically alter your financial future. Said another way, the less you need to spend the less you’ll need in retirement, and the faster you can get there. The person who needs to spend $80,000 per year would need $2,000,000, but the person who only needs to spend $35,000 per year would need $875,000 (the numbers don’t include Social Security, which would also help–I just don’t like planning on it unless you’re 10 years out from full SS benefits).
THIRD
It requires work on your part–you need a spending plan to carve out some money to invest. Your future self will thank you for it. This does require that you reconsider your priorities, values, and desires. But if you can reorder your loves, you will find freedom, peace, and the ability to love the virtuous things in life. ”Love people. Use things. The opposite never works.”
FOURTH
The lottery-mentality has stolen years of freedom and wealth from you already. And, it will continue to steal many more years unless you do something about it today–this hour, this minute! What is this “lottery mentality?” It is the belief that “one day, when I have money, I will invest and be wealthy.” This is the king of wishful thinking. It’s a child’s fantasy without any actionable steps towards real world incremental solutions. It’s a wish-dream. There are several problems with the lottery-mentality, so let’s name them here.
(a) You’re more likely to be hit by lightning multiple times over than winning the lottery. So if you’re waiting for that windfall, I’d put money down that you’ll still be waiting when you’re too old to work and living off cat food. Capitalize on your human capital today by making small incremental steps to better your financial future.
(b) “Someday” never comes because “someday” is an excuse. You’ll even have an excuse for that day when it comes. You need to name it. Call it for what it is. And then, do something about it.
(c) “Once _____ happens, then I’ll invest.” This is a variant of (b) above. I cannot tell you how many times I’ve heard this line from family members and friends alike. “Once my spouse gets a job, then I’ll invest.” “Once I get a raise, then I’ll invest.” “Once we get a new home, then I’ll invest.” And it goes on and on and on. This excuse comes from people who make $35,000 a year to those who make $150,000 per year–I’ve heard it from both camps. When we were paying off our nearly $100,000 in school and consumer debt we still auto invested a little bit (i.e. $200) each month into our IRAs–it was good practice and once we paid off the loan it was much easier to continue that practice, taking the money that was going towards loans and putting it towards our 401(k)’s/IRAs/HSA/and taxable brokerage account.
FIFTH
If you can open a checking account, you can open a brokerage account (and an IRA account). If you don’t know how to use the portal, that’s okay, you can literally call a helpline for that. Or just watch a youtube video on how to use it. So go open the account–I’ll wait… seriously, right now, go open your vanguard account and come back to finish this article.
SIXTH
You only need 3 funds to have a fully diversified portfolio.
IRA’s, 401(k)’s, and Brokerage accounts are like taco shells–you get to decide what you put inside them. And, lucky for us, there are three funds that can give us the maximum diversity that someone from days past could only dream of.
(Image from Vanguard)
The three funds you’ll need:
(1) Vanguard Total Stock Market Index Fund (Holds virtually all the US stocks in one wrapper)
(2) Vanguard Total International Stock Market Index Fund (Holds virtually all the world’s stocks, except US stocks, in one wrapper)
(3) Vanguard Total Bond Market Index Fund (Holds virtually all of the types of US bonds in one wrapper).
Please note: If a total bond fund isn’t desirable to you due to current low long-term yield rates, and you don’t mind a little more complexity, you’re welcome to use BIV/VBILX, VGIT/VSIGX, and a CD ladder to achieve your bond portion of your asset allocation. Remember, bonds are there to act as your shock-absorbing element in your portfolio — when markets go crazy it’s nice to have this to ride out the waves!
One last thing: Stay away from expensive actively managed funds–they often carry all kinds of fees which wreck your chances for financial success.
SEVENTH
If you don’t fund your retirement by putting systems in place to do so automatically, you will end up working until you literally cannot work any more, or until you fall over dead. Thus, you need to pay yourself first by having all of your investment purchases automated to come out of your checking account the day you get paid every month. This will force you to develop a spending plan while at the same time you’ll automatically invest by default.
EIGHTH
You need to fund your retirement plan in the right order. The order of operations are as follows:
(1) After saving $1,000 in your savings account, and after paying off all debts (except your 15 year fixed mortgage) by using the snowball method, you will need to save up 3-6 months worth of expenses for an emergency fund.
(2) Invest in your tax advantage accounts first. If there’s a company match for your 401(k) invest up to the match first.
(3) Then max out your IRA / ROTH IRA account for you and your spouse.
(4) Next, if your 401(k) plan offers low-cost options then consider maxing out your 401(k) plans.
(5) Then max out your HSA and invest the money you put in there.
(6) Whatever is left, invest in your taxable Brokerage Account. Only use funds with a high percentage of qualified dividends like the Vanguard Total Stock Market Index Fund or the Vanguard S&P 500 fund. It’s generally not a good idea to hold bond funds in your taxable account–bond funds spit out dividends that are taxable at your normal income tax bracket level. For this reason, it’s a good idea to hold all your bonds in tax-sheltered accounts. You might be tempted to put money in a Municipal Bond Fund like MUB or VTEB, but Alan Roth makes some solid points on why it’s probably not a good idea.
NINETH
You need to set up the right asset allocation for where you’re at in life. So, in other words, you need to answer the question “How much should go into each of the three funds (number Five above)?” I’ve already discussed why I don’t think a reverse glide-path model is the way to go. You can also listen to Michael Finke discuss in brief why he doesn’t like the reverse glide-path either. So what to do? Here’s my rule of thumb for a normal 30 year retirement–it’s different if you’re attempting to live off your assets before normal retirement age (FIRE):
Starting Retirement: 40-50% Stocks (of that, 70% US, 30% International), 60-50% Bonds.
10 Working Years or less: 50-60% stocks (of that, 70% US, 30% International), 50-40% Bonds
15 Working Years: 70% Stocks (of that, 70% US, 30% International), 30% Bonds.
20 Working Years: 80% Stocks (of that, 70% US, 30% International), 20% Bonds.
25 Working Years: 85% Stocks (of that, 70% US, 30% International), 15% Bonds.
30 Working Years: 90% Stocks (of that, 70% US, 30% International), 10% Bonds.
Check out the Trinity Report here for asset allocations and success rates–pay close attention to Table 4 since it contains the inflation adjusted and median value of the portfolios.
TENTH
Delay Social Security until you absolutely have to take it & stay away from annuities as a general rule of thumb. When you purchase an annuity you’re really just paying a lot of money for a roundabout bond fund. In other words, with an annuity it really is a roundabout way to provide fixed income like bonds or CD’s, but Annuities (1) have high fees, (2) require you surrender your money to the company, (3) and it exposes people to the maximum amount of inflation risk–The purchasing power of $10 in 1980 when inflation rates were ~14% is not the same as $10 in 2000. Check out this video for a fun little video from Alan Roth on how you can make your own Annuity without the costs and downsides of an Annuity company.
ELEVENTH
(because when you need that little extra, we can turn it up to 11)
In a normal 30 year retirement timeline, you can withdraw 4% of your investments pretty safely each year. That does mean that each year you’ll have a different annual income because the markets will fluctuate. Because of this, if you can invest enough to live off of 3% (33.33 x your annual expenses) of your investments that will give you a bigger cushion than 4% (25 x your annual expenses).
TWELFTH
If you’re not willing to learn about this stuff yourself, or if you cannot be trusted with your own investments, get yourself a fee-only Financial Advisor who will commit to a fiduciary standard. Most likely, you won’t need one until you get closer to retirement. Why? Because the accumulation phase is pretty straightforward, but the withdrawal phase, estate planning, etc. can be a bit more tricky. My go-to is XY Planning or Advice Only Financial.
I hope this is helpful. I hope you find financial peace and freedom to live your life to the fullest in a meaningful way that helps your neighbor and your local community.
What do you think I missed? What would you like to tell your loved ones regarding finances? What do you wish you would have known when you were just starting out?
