I like the Little Book Series. The first one I picked up was the Little Book That Beats the Market by Joel Greenblatt, which was a good read. I think most books nowadays are filled with too much filler words, and the actual real content can probably be shrunk to less than 100 pages. That’s why I like the Little Book series where its small book size plus fewer pages forces authors to get to the point, which of course benefits readers. Though nowadays I’m beginning to see more books from the series that is getting lengthy.
Today’s book is The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money, by Jonathan Clements. He spent 18 years at the Wall Street Journal as a personal finance columnist and is now the Director of Financial Guidance for http://www.myFi.com from Citicorp.
Overall this book is pretty good and covers a broad range of important topics. It succinctly writes down the key points to note for each topic. I like the last portion where he gave a couple of examples which allows people to fit their scenario and see his advice for their particular scenario. I particularly like his point about budgeting, which I also had trouble doing. His method of pay yourself first is definitely cleaner and easier to do.
- Money is a means to an end, you need to know what your goals are.
- Don’t neglect today while saving for tomorrow.
- Think harder about how we spend our money and time.
- Money is emotional, settle for a strategy that you can stick with along the way.
- Financial management includes our debts, homes, children, and income-earning abilities.
- Focus on the things we can control (e.g. savings, investment cost, risk taking).
- Simple is better.
How to Squeeze More Happiness from Dollars
- Buy experiences, rather than things.
- Count your blessings. Go out and celebrate, put up photos, admire what you have. This gives more happiness for your buck.
- Strive for a sense of control, avoid uncertainty (e.g. large debt, long commute).
- Find a purpose. You want to feel you’re making progress each day. You will likely be far happier than lazing around the rest of your life.
- Give a little, it makes us feel good.
- Make time for friends and family.
- If you have a steady, bond-like, income, consider diversifying by buying stocks.
- Set target portfolio percentages for each asset class (e.g. U.S. small caps, U.S. large caps, commodities, etc.) and regularly adjust your portfolio to bring it in line with those targets. The exact portfolio percentages are far less important than your willingness to stick with them (i.e. do not lower the % in a crisis).
- Budgeting doesn’t work for most people. It is better off forgetting the budget and instead simply sock away money as soon as we get our paycheck. Sock away 10-15% of your salary and force yourself to live on whatever remains, “pay yourself first”.
- Keep core living expenses to 50% or less of pretax income. Core living expenses include mortgage/rent, utilities, food, and insurance. The other 50% is for entertainment, savings, and taxes.
- Buy a home that is the right size for you and your family, and no larger. That way, you won’t be wasting rent which you could have earned if the money is spent on another property.
- Historically, average home price appreciation over 30 years is 4.7%. Subtract the property tax, maintenance cost, insurance (adds up to ~3% or more of the home value), your home investment is not even keeping pace with inflation (~3.8% a year). There is also the cost of 5-6% commission for buying and selling a house.
- Early gains on the home price when your leverage high is set against high interest costs at the start. Later gains on the home price when you have paid down most of the mortgage means the debt leverage is lost.
- Real estate market is less volatile because owners don’t get daily price information, they have to live somewhere so they don’t easily sell their homes, and during real estate downturns they hang on to their homes and make the monthly mortgage payments.
- You don’t have to own a big house, and you don’t have to pay for the kids’ college, but one day you will have to retire. Deal with retirement early. Don’t deal with house, kids, and retirement sequentially (in your 30s, 40s, 50s).
- In retirement, hold a cash reserve equal to 5 years of spending money (can be placed in short-term bond funds, money market funds, and CODs) so you reduce the risk you’ll need to sell stocks during a bear market.
- Living off bond income does not counteract inflation, you need to hold stocks or buy perpetuities. Delay getting your Social Security benefits.
- While mortgage interest helps to reduce taxes, the money to pay the mortgage needs to come from somewhere. If it comes from selling investments, it can create additional taxable income.
- Tax deduction for retirement account contributions is enormously valuable. The initial tax deduction often pays for the eventual tax bill when you withdraw the money.
- To defer taxes for as long as possible, hold stocks (diversified, tax-efficient, low-cost funds) in your taxable account and bonds in your retirement account. This will defer the tax bill on the bond interest, and tax-efficient stock funds will keep the tax bill modest. People may think that bonds should be in a taxable account because it is less volatile and it can be sold if money is needed in an emergency, however what you can do is to sell the stocks in taxable account, and in the retirement account, move the same amount from bonds to stocks which will not incur taxes.
- If you lost your job, just retired, or have very little taxable income, consider deliberately realizing gains to take advantage of being in a lower tax bracket.
- Forget about extended warranty, trip cancellation insurance, it is not a financial disaster.
- Policies with low deductibles is more costlier, and may cause people to mistakenly shorten the protection period. You can likely afford the initial payment if you are working, if not you can create a separate emergency reserve with 3-6 months of living expenses.
- Life insurance with cash-value comes with high premiums, and may cause people to mistakenly shorten the protection period, term insurance is better. The money that goes into cash-value insurance also does not get tax-deferred growth, better to put the money in a retirement account.
- The best way to cut insurance costs is to amass a decent amount of savings so you need less insurance. When your children grow up, you may not need insurance since you no longer have financial dependents.
- It costs more then $200,000 for a middle-income family to raise a child through to his 18th birthday (U.S. Department of Agriculture). College costs are on top of that.
- Raise money-smart kids who know how to live within their means. Give them an allowance and force them to live within that budget.
- A Will may not apply for most of your assets. Check the rights of survivorship for your home, the beneficiaries of your retirement account and life insurance.
- Check whether a living trust (your assets placed in the trust) will have a lower legal bill than going through a Will / court.
- A bypass trust will allow your estate to flow into a trust and avoid estate taxes up to $3.5M a spouse.
- Draft a letter of instructions on the sort of funeral you want, where key documents are located, who should get your personal effects.
- Draw a living will that specifies your wishes concerning life-prolonging medical procedures, health care power of attorney, durable power of attorney for financial decisions, should you become incapacitated.
- If you are distributing your assets unevenly, set expectations with your family so that they do not contest and fight over your will.
- Focus on the things we can control: looking after our health, keeping spending habits modest, raising money-smart kids, etc.
- Don’t feel badly about things we can’t control: employer in financial trouble, parents are poor, etc.
- You don’t need large income or portfolio to squeeze a heap of happiness out of what you have.
- Strive to ensure money is enhancing your life, rather than getting in the way.
- If your goal is to have more time with family, ditch the high-spending lifestyle so you don’t have to worry about getting the next pay raise, and go for the smaller house closer to work so you save commuting time.
- If you really want to quit your job and do something more fulfilling, stop shopping as much and start saving like crazy.
- If you are fearful that your family cannot cope without you, get a will, buy life insurance, and check the beneficiaries on your retirement accounts.
- If you are saving diligently for a 30-year retirement, spend time looking after your health so your body can last as long.