What Are Your Top Five Financial Principles?
I don’t typically write reviews of other people’s articles, but I came across this New York Times piece by Ron Lieber today, and I feel that some of his points should be discussed. Mr. Lieber offers the five following basic financial principles:
1. Investing is Simple
The best way to score big points with me is to quote Michael Pollen. Lieber riffs on the tagline to Pollan’s most recent book, “In Defense of Food.” The slogan: “Eat food. Not too much. Mostly plants.” Becomes, “Index (mostly). Save a ton. Reallocate frequently.” The key is to keep it simple when it comes investing (and your diet).
2. It Still May be Worth Paying for Help
Here Lieber makes a case for forfeiting 1% of your portfolio’s value and hiring a pro to keep your financial house in order. I agree with this premise if you can find an advisor, accountant, or attorney who is willing to give you advice across all three disciplines (investment allocation, accounting, and tax law). Instead, if you have more than $200 grand in retirement assets, you probably need all of the above, and that’s going get expensive. Personally, I feel that unless you have a really outstanding advisor, you’re better off seeing point number one and being patient.
3. Peers May Know More Than Pros
Here Lieber contradicts his previous point - he says a professional may not be as knowledgable about certain details as personal finance bloggers. This is pretty good advice (as a blogger, I’m obligated to point that out), but the caveat is that personal finance writers who publish online don’t have the same fiduciary obligations as registered, licensed agents - so proceed with caution when it comes following advice found online.
4. Everything Can (and Should) Be Automated
I agree with Lieber here - direct deposits, automatic funds transfers, and online bill pay can make saving and managing expenses so much simpler.
5. Have the Talk
The article encourages readers to visit with their parents about their retirement income needs and be prepared to help out if the need arises. While this is good advice, it’s clearly targeted towards the baby boomer generation (my parents). I think that “The Talk” that Gen X and Gen Y needs to be having is open, honest financial communication between partners in a relationship. I wasn’t very far into my banking career before I figured out that financial infidelity is entirely too common.
This inspired me to think about what five financial principles I hold most dear. Here’s my top five:
1. Pay Yourself First (aka Spend Less Than You Make)
Have a set amount automatically transferred to a high-yield savings account every payday. Then forget it’s there.
2. Take Full Advantage of Your Employer’s 401(k) Match
Naturally, not everyone is lucky enough to get a matching contribution from their employer, but if it’s available to you, don’t leave any free money on the table - contribute enough to get every matching dollar you can.
3. Retirement Savings ≠ Emergency Savings
One of the product ideas I was researching when I left my product development gig was debit access to 401(k). I’m sure I don’t have to explain why this is a bad, bad idea. Once you put money away for retirement, do everything in your power to keep your mitts off of it until you reach age 59 1/2.
4. If It Sounds Too Good to be True, It Probably Is
Don’t fall for phishing scams (trust me, no African prince needs use of your account for a gazillion dollar international wire transfer), read the fine print, and don’t give anyone your social security number or bank account number unless you are initiating the transaction.
5. Borrow Mindfully
Avoid high-interest debt and don’t finance toys like boats or RV’s. Be careful about overextending yourself for your “dream” home or car - bankruptcy, foreclosure, and repossession are not fun, and they can destroy your credit for 7-10 years.
There you have it: two very different “five financial basics” lists, likely reflective of two very different lifestages and generational views. What’s in your top five?
Stumble it!
May 22nd, 2008 at 3:56 pm
I’m sometimes amazed that my finances (save for my retirement fund, which is tiny) are in as good a shape as they are. I have a tendency for self-indulgence and rarely (if ever) lay out a strict budget, and have an income history that tends to be extremely feast-or-famine. Yet I seem to be doing okay; good credit score, no long-term debts save for my mortgage(s).
Here’s my five.
1. Your credit card is useful, but evil. Don’t trust it, and take any shit from it.
It’s convenient – much too convenient. It doesn’t feel like spending money when you use it, but you are. Be conscious of how much you’re spending on what. Set limits, and abide by them. If you cannot pay more this month than what you spent with it last month, you are doing something very wrong.
And if it eff’s with you, if it suddenly jacks your interest rate into the clouds because you were a week late on a payment, if it starts charging you for services you never asked for, put a bullet in its head. Immediately. No negotiation, no mercy, no remorse.
2. Minimum payments are for suckers.
Always pay more than your minimum loan payment.
Always pay more than your minimum loan payment.
Always, always, always pay more than your minimum loan payment.
And if you can pay the sucker off outright, do it.
3. Automate nothing.
Ignorance is too high a price to pay for convenience. Always be aware of where your money is going. And your creditors should get your money only when you say they get your money.
4. It’s Only Money
Money is not an end unto itself; it is a means to an end. And that end is the happiness and well-being of yourself and your dependents. Be mindful of it, be intelligent with it, but don’t worry about it unless you absolutely have to.
And get off the consumerist treadmill. America teaches you to endlessly want what you do not need; you will never be content until you teach yourself to enjoy what you already have.
5. Time, not money, is the coin by which you spend your life.
Do not sell your time cheaply. You have too little of it to waste on a soul-deadening job you despise. Trading job satisfaction for money is almost always a deal you will come to regret.
Know what you enjoy. Know what brings you happiness. Do it.
May 22nd, 2008 at 4:00 pm
I’m not sure what my top five are, but here are five of mine:
1. Don’t buy stuff I don’t/won’t want. (Not because other people do or people expect me to or it never occurred to me not to, etc.)
2. Save money on what I do get, so I have more for other things. (Basic frugality.)
3. “Safe” investments aren’t safe against inflation. (Diversify.)
4. Save money from each paycheck for large future purchases (such as car repairs, vacations, and retirement).
5. Experts know their fields better than you do, but you know yourself better than experts know you, so you have to work together. (I’m talking about doctors, HR benefits specialists, even repair people. Find ones who have or at least understand your philosophy on these things or who at least realize that there might not be just one right answer.)
May 22nd, 2008 at 6:42 pm
I think I can boil mine down to just one: Moderation in all things. Moderation in saving, in spending, in working, and in playing.
May 23rd, 2008 at 5:42 pm
It’s spelled “principle” - the other spelling is your PAL who runs the high school. This is a great article otherwise!
May 24th, 2008 at 8:12 am
Thanks for pointing that out, Beth. The fact that I got it wrong, repeatedly, should be considered a hint.
I made the changes throughout. Thanks for reading,
Heidi