Freakonomics Radio

Freakonomics Radio recently released two new podcast episodes that I think are worth highlighting on my blog. Managing your money and knowing how to invest can be complicated. I try to alleviate some of that through this blog, and I think these two episodes also help explain some of these concepts in a digestible way. Each episode is about 45 minutes long. They’re worth the listen.

  1. The Stupidest Thing You Can Do With Your Money
  2. Everything You Always Wanted To Know About Money (But Were Too Afraid To Ask)

The Stupidest Thing You Can Do With Your Money

The first episode was released on July 27, 2017 and describes the differences between passive investing (think low-cost index funds) and active investing (think trying to pick the next Microsoft stock). It’s called The Stupidest Thing You Can Do With Your Money. (Hint: Active investing is stupid. Passive investing is smart.) If you want to learn more about investing, or get a refresher, I would spend 48 minutes listening to this episode. It features John Bogle (who founded Vanguard) and Kenneth French and Eugene Fama (whose research helped shape Dimensional Fund Advisors, or DFA). (Note: I use Vanguard and DFA funds in my own portfolio.)

Everything You Always Wanted To Know About Money (But Were Too Afraid To Ask)

The follow-up episode was released on August 3, 2017 and shares Everything You Always Wanted To Know About Money (But Were Too Afraid To Ask). Harold Pollack created an “index card” approach to personal finance – ten rules that fit on one index card in an effort to make personal finance less complicated. Again, take the 44 minutes to go listen to this episode. I’ve captured the ten rules, and some important points made in the episode, below so you can easily refer back to them.

 

10 Rules

  1. Strive to save 10 to 20 percent of your income.
    • The specific amount you can save (it may be more or less) will depend on your life circumstances at any given time.
  2. Pay your credit card balance in full every month.
    • This may be the most important rule on the index card.
    • Important note: In full means the entire balance, not the monthly minimum.
    • His advice: “Ignore your credit card reward program. All the research suggests that that these reward programs just make you spend more money.” Food for thought anyway.
  3. Max out your 401(k) and other tax-advantaged savings accounts.
    • Lucy’s tip: Maxing out your 401(k) means contributing the maximum amount you are legally allowed to contribute ($18,000 per year currently – or $24k if you’re 50 or older). This is different – and often much more – than the amount you need to contribute to get your full employer match. Contributing enough to get your full employer match is a great start. Just know it’s not the maximum amount you can contribute.
  4. Never buy or sell individual stocks.
  5. Buy inexpensive, well-diversified index mutual funds and exchange-traded funds.
  6. Make your financial advisor commit to the fiduciary standard.
    • A fiduciary is legally required to put the best interests of their clients above their own. To learn more, watch this.
    • Lucy’s tip: Also seek out a fee-only financial planner. Fee-only planners are obligated to receive compensation from their clients ONLY. They do not sell products, receive commissions, or have financial incentives to push certain advice or products onto their clients.
  7. Buy a home when you are financially ready.
    • “We should think of our home as something that we use and consume and something that helps us with our life, not as the major pillar of our wealth.”
    • “Your home is the most leveraged and undiversified investment you’re ever going make in your life.”
    • Buy a home when you can put 20% down, get a fixed 15-year or 30-year mortgage, and make sure you still have a cash cushion for repairs, furniture, maintenance, etc. I think you all know how I feel about this.
  8. Insurance. Make sure you’re protected.
    • Insurance is about protection. It’s not an investment.
  9. Do what you can to support the social safety net.
  10. Remember the index card.
    • Write these rules down (on your own index card, obviously). Put them where you can see them. Remember the rules.

Bonus: Rule #11

Personally, I would add one more rule – always maintain an emergency fund.

Conclusion

While investing and managing your personal finances can be confusing and complicated, I think it is better to focus on the basics and what you CAN control. Don’t let the confusing aspects keep you from taking ANY action. As a bonus, less is more when it comes to investing (less trading, less speculating, etc.), and a Vanguard target date fund can go a long way (scroll down to the Balanced Funds section). If you follow these ten – with my addition, eleven – rules, you will be well on your way.

What do you think? Does this list help simplify things for you?


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