Book Review: Money Mindset by Jacob Gold

In The Money Mindset – Formulating a Wealth Strategy in the 21st Century, Jacob Gold traces the key components for building financial fitness, such as finding the right mindset, understanding risk, asset allocation, and diversification. He introduces the importance of understanding taxes and insurance.

He gets the big picture on taxes, which is that you should pay the minimum allowable, but if you pay a lot in taxes you should feel fortunate because that means you earn a lot. Similarly, he gets the point of insurance, which is solely to transfer risk to another entity.[1]

You could possibly start with this book for a newbie, but it wouldn’t be my first choice by a long shot.

I’m not a fan of a couple of Gold’s approaches.

First, although he says stocks and bonds both make up a portion of many portfolios, he does not guide the reader to know exactly how to come up with an optimal asset allocation. I think there is a correct answer, or at least a fruitful discussion to be had about the right mix between major asset classes.

At one point, presumably through laziness, he introduces an absurd situation, in the course of explaining the advantages of diversification and rebalancing:

“Rebalancing is really a forced way to incorporate the “buy low, sell high” mantra. For example, if you had $100,000 and 70 percent of that money was allocated to stocks, 20 percent to bonds; and 10 percent in cash, it might be that the next year that $100,000 grows to $150,000 but the growth was from the bonds. [Emphasis mine.] Since the bonds appreciated in value, that takes the asset allocation that you had determined based on the risk tolerance questionnaire, and throws the balance of investments out of whack…”

Um, no. Rebalancing is the right idea, but there is no conceivable universe in which your 20 percent allocation to bonds makes your portfolio grow from $100,000 to $150,000 in a year and “the growth was from the bonds.” So that part of the book didn’t appeal to me.

My second problem with the book – and I have found this with the vast majority of personal finance/investing books – is that Gold abdicates responsibility to really teach compound interest. Instead, he returns to the ‘Rule of 72’ (gag, barf) to show how money doubles according to the rule of 72 divided by the annual % return.

Sure, that works, but is entirely too inflexible to use for anything but that simple function. How large will my money grow at 3.5% return per year for 27 years? How large will my money grow at 1.4% per year for 8 years? How large will my money grow at 17.3% per year for 14 years? We need to teach compound interest in a real way, and not depend on the ‘Rule of 72.’ We can do better, people.



Please see related posts:

Book Review: The Only Investment Guide You’ll Ever Need by Andrew Tobias

Book Review: Simple Wealth Inevitable Wealth by Nick Murray

Book Review: Stocks For The Long Run by Jeremy Siegel

Compound Interest and Wealth

Compound Interest and Kittens

The Princess and Compound Interest


[1] Although I don’t think he properly distinguishes between term and whole life insurance.

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Ask An Ex-Banker: FICOs Score and Monthly Balances

credit_cardsNote: See Part I on FICO Scores, which inspired this question from a reader.

Dear Banker,

I’ve been getting copies of my 3 credit reports annually since 2005.

I’m concerned about a change in the reported information from Capital One and Chase. My reports used to reflect
1) amount billed
2) scheduled (minimum) payment
3) actual payment

The latest reports from Transunion and Experian no longer reflect the “actual payment” amount, so although my reports show all payments made on time, it doesn’t reflect the full balance being paid monthly as opposed to the minimum payment.

I feel like I have to alternate credit cards in order to have a zero balance every other month so it doesn’t appear that I’m making minimum payments and carrying an unpaid balance.

I’ve contacted Capital One and Chase to ask them to report the actual payment amount as they used to, but all I get is a standard response “we’re correctly reporting your account” to the credit bureaus.

Am I wrong in thinking that if they report amounts in addition to whether or not the account is “paid on time”, they should include actual amount paid as well as amount billed?

Thank you
Bette in SA


Dear Bette,

Thanks for reading, and for your good question.

The most important element for FICO scoring (35%) is whether bills are paid ‘on time,’ so if you’re consistently doing that, your score will reflect that, and the fact that there’s a balance on your report is (mostly) irrelevant.

The FICO algorithm doesn’t care whether you make minimum monthly payments or full-balance payments. As long as payments are being made ‘as agreed’ according to the fine print you signed with your credit card company, your FICO score can’t distinguish between people who carry a balance and people who pay off their balance every month. What I mean is your score won’t be hurt by minimum monthly payments, nor can you really boost your score by making maximum/full balance payments. There is (almost) no distinction between them, for scoring purposes.

Small caveat: One small part of your score reflects your ‘usage amount,’ meaning what proportion of your available credit balances are used at the time of the score. Meaning, if you had a total of $10,000 in available credit among all your cards, and you were using $9,750 of that with a credit card balance, that could slightly lower your score. Not much, but a little.
Conversely, If you had a total of $10,000 available credit, but only showed up with a monthly balance of say $300 (leaving you with $9,700 available unused credit), that would slightly raise your score. Not much, but a little.

A useful graphic linking credit scores and auto-loan rates

That would be the only sense you could be concerned about the monthly reported balance as you described. However, if you have many thousands in available credit and only hundreds in reported balances, those reported balances are basically irrelevant for your score.

As for you question to Chase and Capital One – I’m sure they won’t change their reporting methods. They just do an automated snapshot on a monthly basis to send to the credit bureaus. On any given day of that snapshot, we (the consumer) may have an outstanding balance on our card, even if we don’t carry any balance month-to-month.

My strong advice – don’t try to alternate card usage, and don’t worry about it, it’s not hurting your credit.



Please see related Posts

FICO Part I – What’s in the Score?

FICO Part II – Ignoring FICO and also why FICO is awesome


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FICO Scores – Part I

confessionI’m 43 years old and I have a terrible confession to make: I still know my SAT scores by heart. Wait, it gets worse. I still know my PSAT scores by heart. I know, I know, I’m that guy. I’m not proud of this so let’s move on quickly to another semi-related topic: FICO scores.

Unlike the SAT, everybody should track his or her FICO score throughout adulthood.

I bring up the SAT analogy because you should no more apply for a loan without knowing your FICO score than you would think of applying to college without knowing your SAT score. Like the SAT, FICO serves as a sorting mechanism determining your eligibility, in this case, for lending products.

Any credit card, auto-loan, mortgage, or business loan application you submit will prompt your lender to pull your credit score as a major determinant of your access to their best, or worst, products.

Unlike the SAT, however, you only need to remember one single number to achieve total success: a 720 FICO.

An online universe of FICO-score nerds exists and I’m not writing with that audience in mind, any more than I would encourage SAT nerds to remember their scores 25 years too many. (Yes, I’m looking right at you, mirror.)

FICO determines loan quality
If you’ve got a 720 FICO, considered by most banks the cutoff for “Prime” loans – the ones with the lowest interest rate and best terms – then you can stop nerding out about your FICO score. A higher score than 720 gives you nothing but bragging rights.

If you’ve got lower than a 720 FICO, expect to pay more in fees and interest, with fewer options. Borrowers in the high 600s may still qualify for what’s known in the banking world as “Alt-A” loans. Borrowers with a FICO score in the mid 600s or below either qualify for Subprime loans – a high interest rate, high fees, and somewhat punitive terms – or no loan at all.

What to do

So how do you access your score? The FICO company, as well as the three credit bureaus Equifax, Experian, and TransUnion each offer personal credit reports and scores for less than $20 each. You can spend a couple of minutes online to access your report and score, and I highly recommend doing this before applying for a loan anywhere.
You really don’t need to buy more than one score with one report from one bureau, so you should be able to accomplish your goal for under $20.

Free credit report?
Consumer advocates trumpet the idea that you can get a free credit report each year, which is true.
But that report does not come with a FICO score. I don’t think that a credit report without a credit score fully equips you with all the knowledge that you need.

To return to my college analogy, a free credit report with no FICO score is like a college application full of essays but no SAT score. You are not getting the full benefit of seeing your application the way a bank sees it, which is ultimately one of the main points of reviewing your credit profile. I advocate spending the money to get the score along with your credit report.

Inputs to FICO
So what does FICO measure? The Fair Isaac Corporation, the company behind FICO, reports that five factors go into their mathematical formula, all of them measurements of past borrower behavior.

I’ll list the factors in order of importance, according to their formula.

fico_scoringFirst: – Have you ever missed debt payments, and if so, how often and how recently? (35 percent)
Second – How much do you owe now? High debt lowers your score, while low debt compared to your available credit actually raises you score. (30 percent)
Third – How long have you been borrowing money? A longer time raises your score, while a shorter time lowers your score. (15 percent)
Fourth – FICO considers some types of credit like installment loans riskier than other types of credit like mortgage loans, and adjusts your score as a result. (10 percent)
Fifth – Have you applied recently for credit? This lowers your score a bit, as it shows you need to borrow money. (10 percent)

Lesson One: Time
Reviewing these five factors, we can see that the biggest determinant of your score is time: Specifically, are you timely with your bills, and how long have you responsibly handled debt?
Because of the impact of time, even younger borrowers with perfect credit history cannot achieve very high FICO scores (in the 800s), whereas older borrowers have a natural advantage because they may have very ‘old’ credit lines boosting their scores.

Lesson Two: No tricks
You should never make a financial or borrowing decision based on how it will affect your FICO score. Instead, just do the ‘right thing’ in your situation, and the FICO will work itself out. Paying your bills on time, lowering your balances when you can, building up a long-term track record of ‘safe’ borrowing behavior is the only reliable method for boosting your FICO.

Plenty of ‘services’ claim to be able to boost your credit score, but I would never recommend attempting any of these. Like many other areas of finance, the best practice is to ignore short cuts and tricks. Just stay focused on the long-term unsexy practice of paying back your debts. The FICO score will work itself out in the long run.

a_lanniseter_always_pays_his_debtsWhen I say you should avoid tricks and mostly ignore your FICO score, I don’t mean to ignore the underlying issue of settling past debts. The best practice is to make like a Lannister, and always pay your debts.

Next week I’ll write about when to totally ignore your FICO score, but also the financial advantages of not ignoring your FICO.

A version of this post ran in the San Antonio Express News.


Please see related posts:

Ask an ex-banker: FICO scores and monthly balances

FICO Part 2 – When to ignore FICO, and why FICO is awesome


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Audio Interview Wendy Kowalik Part II – On Insurance And Getting Rich Slowly

Please see related discussion with Wendy Kowalik in Part One on investment advisory fees.

Michael:          Hi, my name is Michael and I used to be a banker.

Wendy:            Hi, Michael. Wendy Kowalik, I founded Predico Partners. We’re a financial consulting firm. I started my career with an insurance company and sold insurance for the same 17 years that  we managed money.

Try to save your money from all these nice folks
Try to save your money from all these nice folks

On Insurance

Michael:          That is my pet peeve, insurance. I think too many people who are engaging with insurance as if insurance was a form of investing make a deep error. I find when people buy insurance they’re being told that it’s some kind of good investment. You and I previously spoke about this guy Dave Ramsey, who for all his flaws, has told me the number one thing I need to know about insurance, which is: figure out what the risk transfer is. And that’s what insurance is for. It’s not for mixing with investments. I deeply believe that.

You came from a firm that did quite a bit of insurance. As we’ve spoken in the past, that’s not always how insurance is sold. Probably the majority of the time it is some kind of weird blend between a supposed investment in addition to a risk transfer. You’ve done it. I haven’t sold insurance or been involved in that, but what do you think about my ideas?

Wendy:            “It depends,” is the worst answer, but globally you’re on the right track. You’re exactly right. And what I’ll tell you is if someone is walking through the door saying you should use it as an investment vehicle, you’re probably on the wrong track.

Interview with Wendy Kowalik of Predico Partners

Very seldom will you find that working well. The insurance industry’s argument on that side of it is it’s disciplined savings. It grows tax deferred. Well, so does your 401(k). Make sure you’re making that out first. That’s the first place you need to be saving, on that side.

The other argument is you can go in and take a loan out tax-free. Very true statement except for the fact that if the policy doesn’t last for the long term, then you pay taxes on every dollar you took out. That’s where it’s all the details within the insurance that many times make them not work as they were originally sold.

Yes, for globally, I would tell everybody that there’s only two reasons to purchase insurance.

  1. To protect an income source if you’ve got a spouse that’s working and you need their income to make your monthly budget. You need to protect that.


  1. The second side of the table is if you have estate taxes. You can use insurance to basically pay a lower dollar amount for you estate taxes. Outside of those two pieces of the puzzle, I don’t really see a huge need for life insurance.

Michael:          The second part, the estate taxes, is going to be much more of a high net-worth problem than an ordinary investor problem. We’re talking up at the top 5%, 1% or .01%. It gets more plausible that they’re going to be able to have a tax savings and estate planning through insurance, right?

Wendy:            Right, sitting here today, an estate over 10-million dollars for a married couple and an estate over 5-million dollars for a single individual.


Michael:          What I tell people, and most of my ordinary acquaintances are not in that category, I just say “You need to focus on self-insuring” through trying to invest your money so that when it comes time where you can no longer work, or you choose to not work, you’re not worried about an income stream, and you’ve self-insured though actual investments, rather than this expensive version, which is paying an insurance company to be this mix of asset protection, asset building, and income replacement.

Wendy:            That’s exactly right. You should have two different pieces of the puzzle. You should have term insurance if you’re protecting an income stream for a period of time. And use your savings separate from that.

Michael:          Right. I just don’t trust that most insurance sales people in the industry is parsing that out for people to say “If you’re got a risk of loss of income, you need term for the period of time in which you’re worried about that, and then use the savings to put that in the market.”

This is what I always tell people — without knowing — having not worked in the insurance industry that just seems to be the right thing.

Wendy:            Right.

Michael:          For most people, with obvious exceptions. If you’ve got a ten-million-dollar estate it’s a whole different situation and you probably need different set of advice, which I’m not qualified to give. We’ve got term insurance in my family related to how old my kids are, when they are going to be no longer under my protection, and can fend for themselves in a sense. But it’s super-duper cheap to get that, for a certain number of years, and a certain amount of money, not a huge amount, but sufficient to not leave them in a lurch.

Wendy:            That’s the biggest struggle on the insurance side, is figuring out what that number is.

Michael:          Tight.Certainly back to your two reasons to have insurance. One is replacing income stream, and the second is estate planning and possible tax reduction. The folks for whom that second part is relevant, estate planning — the first part seems to me to be totally irrelevant. You’re either in one or the other. You’re probably not in both because if you have ten million somewhere in assets, you don’t really need to ensure further a loss of income stream. You’re probably going to be able to feed and clothe yourself now. Or am I not thinking about that right?

Wendy:            Yes, no you’re right. Could they self-insure? Absolutely. What you’ll find a lot of times, though, is you’ve got people in that situation that have purchased property or they’ve got a family-owned business that makes that up. Then it becomes a liquidity event. Do I really want to unload Pepsi to pay the estate taxes? Or do I want to have to sell at that point or do I want to buy some time? It still may not be this massive convoluted structure, but I may be that I want to purchase an amount to give me time to figure out what I want to do with the asset.


On Budgeting, and Getting Rich Slow

Michael:          So, any other topics you think we should get onto the podcast?

Wendy:            The other thing you put on there was budgeting. How do people come up with a budget.

Michael:          Oh yeah, let’s talk about that.

Wendy:            I do think that is a big piece of the puzzle. The number-one side we run through is no matter how much money you have, you’ve got to understand how much you spend that’s fixed expenses and will not change, no matter what you do right now, unless you actually make radical lifestyle changes, such as selling your home, changing your cars, that type of thing.  Or is it just discretionary, and to me that is such a big piece of the puzzle, is understanding exactly what you’ve got that’s fixed, what you’ve got that’s discretionary, because that’s the only way you can determine can I really cut back and make some changes, and start saving more, because we don’t need to eat out as much or go do this as much. Or is it that we’ve extended beyond what we can truly afford either in a home, or cars, or things such as that, and we need to change lifestyles more dramatically than just not going out to eat on Friday nights.


Michael:          I’ve taken to saying to people, my friends, or peers, or people that ask my advice that nobody has any extra money at the end of the month. Whether you make 350,000 bucks a year or you make  35,000 bucks a year. There’s no extra money. Your lifestyle builds to whatever you’ve gotten comfortable with, and I tell people you basically have to trick yourself into creating little streams of savings and investments. This isn’t true for everybody and to bring up my nine-year-old daughter, she’s basically a hoarder. Her babysitter basically said early on she’s going to be on the hoarder TV show. She never throws anything away, so if you give her some money — there’s a few people like that, who save all their pennies, nuts, and squirrel them away.

But for most people there is no money. There’s no salary that’s enough to make sure you have extra money. If you move up from the Honda to the Audi, then you have to get the Jaguar. You’re still just buying a car, but somehow if you make 350,000 dollars. It’s not hard to go bankrupt on 400,000 dollars a year. Mike Tyson went bankrupt after earning 300-million dollars in his life. There isn’t any real money…[that’s sufficient.] You have to figure out tricks and ways to get the excesses.

Then you have these weird stories of the person who never made more than 40,000 dollars in their life, and they have huge investment accounts, relatively speaking, at the end of their life. They were able to do it.

Wendy:            My favorite was we had a client referred to us in my former firm. That was exactly it. He had been a civil service employee, never made over 40,000 dollars for many years, and finally topped out at 65,000 dollars. She was in her early 80s, late 70s, and her investment account was worth 15 million dollars. She purchased with every extra few dollars, at the end of the month, she’d say this is what we’re going to set aside for savings. He would purchase bank stocks because he decided that it paid a little bit in dividends, and that was what he followed. He did financial stocks and he purchased six stocks, followed them. He never once sold a dollar of them. He never cashed them in for anything, and just added to those same six. That’s what it grew to. It was absolutely incredible.

Stocks for the long run

Michael:          That is incredible. If you have 60 years of doing that, there’s the compound returns of equity exposure to a couple of good stocks or six different bank stocks over a certain period of time. That’s incredible, yet mathematically very plausible when you look at it, how much you could put away, and if you let it ride for 40 to 60 years. It’s totally doable. It doesn’t feel like that until holy cow, 30 years later suddenly it’s grown.

Wendy:            Right.

Michael:          I feel like that message doesn’t get out to enough people or it gets out when you turn 62 and you’re like huh, so I should have been starting 40 years ago? Now you tell me?

Wendy:            That’s right. And I think it’s hard to withstand, and I think what many people strive for is they keep trying to find a better way to get to the investment returns. They’re looking for that — there’s some trick to get there. A lot of it is just hard work and discipline.

Michael:          I think automatic deductions from paychecks or your checking account, so you never see it — just like investment advisors are going to secretly, stealthily take out 1% or 1.5% per year. If you can get your 401(k) and then your brokerage account to sneakily take out a few hundred and then a few thousand dollars per pay period, it works out in the long run.

Wendy:            Exactly. You’re right.

Michael:          It’s hard to make the affirmative choice to do it, but if just sneakily happens by default you can build up wealth, I think.

Wendy:            I completely agree. We tell everybody if you take it and send it to a brokerage account that’s not in your bank, leave it in cash for 90 days, that way you know can you really make it without that money, without having to go back and take it back. You normally won’t call the brokerage account and ask them to send you a check. You really do need it if you’re doing that. So then at the end of 90 days put it to work. See if you can increase it and put away more in the next pay period.

Michael:          I think that method works. GET RICH SLOW. It’s hard to get rich quick.

Wendy:            Very true.

Michael:          Thank you for discussing all these things. I think there’s lots of interesting ideas here that people should be paying attention to.

wendy kowalik pic 2
Wendy Kowalik, President of Predico Partners


Please see related posts:

Interview with – I give ALL the answers

On Insurance – Use for Risk Transfer Only

On Insurance as an Investment

401Ks are awesome but should be simpler

Guest Post from Lars Kroijer: Don’t buy too much insurance

On Longevity Insurance: Do You Feel Lucky?

Audio Interview Part I with Wendy Kowalik – On Fees




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Interview with – I Give ALL The Answers

Finance website asked me some good questions for their blog. You can visit them there or enjoy the repost below.
As a former Wall Street insider, what do you think is the average person’s largest misconception about investing?

The average person thinks that what Wall Street does is so complex that it requires extremely bright specialists to handle the complex needs of individuals. And the average person thinks implicitly that complexity and special skills naturally justify high fees.

And while it is true that many to most people on Wall Street are bright and there are complex things happening there, all that intellect and complexity is irrelevant for the vast majority of individuals. For most Americans, including high net worth individuals, a very simple and inexpensive approach will serve them best.

If you had the ability to get every person in the United States to adhere to three financial principles, what would those be? Why?

Great question. More than principles, I would go with three financial attitudes. Those would be:

a) Optimism – You kind of have to trust that markets are going to work out fine in the long run, even when the short run and medium run look extremely frightening.

b) Skepticism – Most financial solutions you get pitched with constantly are irrelevant or overly costly.

c) Modesty – Be realistic and modest about your own ability to ‘beat the pros,’ and realistic and modest about the ability of professionals you hire to ‘beat the pros.’ Also, modesty about attributing one’s investment success can avoid mistakes due to excessive confidence.

How does life change when one has more financial literacy? What does it take to be financially literate? How illiterate are most people?

Financial literacy is a process that most people need to engage in, but a process for which there are too few guides. Most of our parents don’t know how to help. Certainly our teachers and professors are mostly unhelpful guides. Most of the ‘experts’ in the media are in fact salespeople in one form or another, so while they can tell you the positive features of what they sell, most are unhelpful in helping us sort out our different options in a suitably skeptical way.

Most well-educated people that I know are very uncertain what to do when it comes to financial decisions. Or worse, they have high certainty, but wrong ideas. Both versions of financial illiteracy can be very costly.

Financial literacy obtained in one’s early twenties, I think, would make the average, middle-class person $1 million richer at the end of their life. That’s the premise of my book. (More on that later, see below, the end of this post.)1

For higher earners, the benefits of financial literacy will be many multiples of that.

Investment is something that many people want to do, but don’t seem to fully take advantage of. What are some of the best practices one can employ to become better at investing?

The four biggest determinant of investment results are:

  • Time (longer is better)
  • Asset allocation (risky is better, and for non-experts/non-insiders, diversified is better)
  • Costs (lower is better)
  • Tax advantages (zero, low, or deferred taxes are better)

A powerful way to combine those four advantages – one that anyone can do but not enough of us do – would be to fund your (tax advantaged) retirement accounts (like an IRA or 401(k)), and purchase risky (100% equity) low-cost (probably index) mutual funds while still in your twenties.

A 22 year-old who does that for the next ten years is guaranteed wealth in his or her old age. In fact, it is impossible not to end up wealthy if a 22 year-old does that for ten years in a row.

If you’re not 22 right now, you won’t have as much time – which is a shame – but it’s probably still worth doing all the steps that I described above at any age.

The absence of 50 years of investment growth makes a wealthy old age still likely, but just less guaranteed.

Another important best practice is to employ automatic deduction as your main weapon to fund retirement and investment accounts. By that I mean you have to set up a system with your brokerage firm that automatically transfers money from your paycheck or your checking account every month (or every two weeks, or whatever) into your retirement and investment accounts.

The weird secret is that basically nobody has enough money left over at the end of the month or year for investing. But if we take that money out in small increments through automatic deductions, somehow we find we do have the money. This is one of those weird psychological tricks that make the difference between being wealthy or not being wealthy in our old age.

There seems to be a battle among many individuals who struggle with paying down debt and trying to save. What kind of advice can you give them?

If we have trouble paying down debt and saving, then we have to employ a series of Jedi mind tricks to get it done. Those Jedi mind tricks could involve three methods: a) automatic deduction b) budgeting, and c) radical transparency.

a) Automatic deduction, which I mentioned above, is probably the most powerful of these. You have to figure out a way to get your money out-of-sight, out-of-mind before you spend it. If you’re in debt, that means setting up automatic payments toward your high interest debt. If you’re trying to save or invest, that means setting up automatic payments out of your checking account and into a hard-to-reach savings vehicle or brokerage account.

b) Budgeting, which I hate to do – along with 99% of the rest of the planet – is not for me a long-term sustainable solution in itself. But over the short-term, it can actually help you alter your behavior when you start to write down every single freaking, nitpicky little transaction. The act of recording all transactions – even just for a couple of weeks or a month – I believe could change your behavior. That’s because you realize just how many non-essentials you purchase. It gets annoying writing down that packet of tic-tacs, and the latte, and the iTunes download, but then you realize you made $173.52 in non-essential purchases last month. And if you could dedicate the $173 extra to debt payments per month, you might actually be able to get rid your debt in this lifetime.

c) Radical transparency means announcing to your group of friends, or a single friend, or a debt-counseling group, your intention to get debt free in a set amount of time. Then you commit to regular (daily?) updates to your support person. The publically-stated intention, along with the support you will get from the group, may be the Jedi mind trick you need to actually kill your debt. There’s something powerful that AA members have figured out, which is that if you admit your powerlessness, and then you ask for help from an understanding group, you may be able to achieve the previously impossible-seeming task.

What do you think are some of the biggest challenges regarding debt (getting out of it, staying out of it, paying it off, etc)?

Debt exists in that psychological area of shame in which, like a cat with a broken leg, we want to hide our injury from others. We don’t want to admit our debts to others, and we don’t want to ask for help. We may even engage in self-destructive behavior – “Hey, let me buy this lunch for everyone!” – in order to hide our shame.

People stuck with excessive debt probably also have a fatalistic approach; they may believe that it’s not possible to reduce or manage their debt, so why even try? For people for whom this sounds familiar, I’d recommend a classic from the 1930s called The Richest Man in Babylon.

It may seem cheesy at first to the modern reader, but I think it effectively captures the psychology of a debtor’s resistance to getting out of debt. The book also has extremely practical steps toward becoming debt-free and then building wealth.

You say on your site that politicians are able to take advantage of citizens because those citizens are not as aware of financial matters as they should be. Please provide an example of this and how financial literacy can help fix this problem.

‘Taking advantage of’ is too strong a phrase. But I think citizens cannot properly police their officials if they don’t understand concepts like compound interest, which affects the future growth of government debt, public pension obligations, and Medicare and Social Security obligations.

Young people entering the professional world oftentimes come into adulthood with debt from student loans. What advice would you offer to these individuals?

The best situation would be to minimize student loan debt up front, but I suppose that line of thinking would get us talking about unlocked barn doors and horses that have already left the premises. It’s at least worth mentioning, however, that borrowing big sums of money to get a name-brand educational degree may not make as much financial sense as loading up on credits on the cheaper side (e.g. two years of community college, then transfer) before purchasing an expensive educational certificate.

Once you have a pile of student loan debt, I think the situation has to be tackled with optimism (student debt can be paid off) but realism (you may not be able to pursue your artist’s dream right now).

Stealing a page from the aforementioned The Richest Man in Babylon, I would suggest students do NOT forget to start an investment account. The author of that book has an interesting formula that, while it may not work for everyone, at least has the virtue of simplicity.

It goes like this:

1. Arrange your lifestyle such that you can live off of 70% of your take-home pay on a monthly basis. (I know, I know, this seems impossible. But still, it’s probably your only chance ever of making it all work out in the long run. Basically, yes, we’re talking about rice & beans, a subpar vehicle, and an apartment in a rougher neighborhood than you would prefer.)

2. Dedicate the next 20% of your take-home pay to paying off your debts.

3. Dedicate the final 10% of your take home pay to investments. In the beginning, this should to be channeled to an Individual IRA or 401(k).

When indebted, it seems like step #3 is an impossible kick-in-the-pants suggestion, because there’s no extra money to make this happen. The problem with skipping step #3, however, is that a student-loan-burdened individual will never get around to starting investing, until age 40. By then, it’s almost twenty years too late to get started.

So as impossible as it may seem, my advice for the student-loan-indebted recent graduate is to follow all three of the steps above. 70% for living expenses, 20% for debts, 10% for investments. Wash, rinse, repeat, every month. Rice and beans will suck for a while. But wealth will follow.

What are your thoughts on retirement and preparing for retirement? What about those who have already retired and are scared of outliving their money?

For people who are already putting away money in their tax-advantaged retirement accounts (IRAs and 401(k)s), the most important decision is probably their allocation to risky assets (like stocks) vs. non-risky assets (like bonds). The mistake most people make, in my opinion, is to dedicate too much money to the non-risky category.

This mistake is exacerbated by 98.75% of all investment advisors who tell their clients to invest in a mix of 60% stocks and 40% bonds. This piece of advice – which I strongly disagree with – serves the investment advisor well because you will not panic when the market crashes, and therefore you are less likely to fire your investment advisor for losing you money.

I think this advice serves the individual less well, since most people would end up far wealthier in the long run if they invested a higher percentage of their assets in the risky category.

My further thought process, which owes a heavy debt to the amazing book Simple Wealth, Inevitable Wealth by Nick Murray, goes like this:
a) Retirement accounts, by definition, are long-term investments. Even if you’re already retired, you need retirement money to last many years – often a few decades.

b) The longer your time horizon, the higher the probability that risky (like stocks) beats non-risky (like bonds).

c) Using the historical experience of the last 100 years, we can say the following: with a five-year horizon, stocks beat bonds 70% of the time. With a 10-year horizon, stocks beat bonds 80% of the time. With a 15-year horizon, stocks beat bonds 90% of the time. With a 20-year horizon, stocks beat bonds 99+% of the time.

d) Because most retirement money is invested for the longest time period, by allocating your retirement money to bonds you are basically saying that you believe that history is no guide at all, “it’s different this time,” and that odds-be-damned, you want to make a very low probability bet. That’s fine, and that’s what 98.75% of investment advisors tell you to do, but personally I think that’s a crying shame and a terrible choice, as well as a way to reduce your wealth in your retirement.

e) Although risky assets (like stocks) are extremely volatile in the short and medium run, a longer investment time horizon (plus automatic deduction dollar-cost averaging!) makes equity volatility less of a risk and more of an opportunity.

f) The real risk of investing your retirement money is actually with bonds, an allocation to which – for many people – will cause them to outlive their retirement funds. After taxes and inflation, bonds lose purchasing power. I understand this is contrary to conventional wisdom and contrary to what 98.75% of all investment advisors say, but that doesn’t make it any less true. Again, for a more articulate presentation of these ideas a) through f), I highly recommend Nick Murray’s Simple Wealth, Inevitable Wealth.

By the way, I’m not an investment advisor, so I suffer exactly zero consequences for people taking my advice on this topic or not. And that’s precisely why I have credibility on the issue. I’m not worried about being fired as somebody’s investment advisor when the market crashes.

And by the way, the market will definitely crash. I don’t know when, or by how much, but it will crash multiple times over the course of your investing lifetime. The key, however, is to not panic, and instead keep on doing what you were doing. Ideally, this means automatic deduction investing, so that you can dollar-cost average your stock investments at more advantageous prices when the market crashes.

Please share anything additional that you would like individuals to know about Bankers Anonymous.

I’m passionate about teaching finance. I’m on a mission!

My book The Financial Rules For New College Graduates: Invest Before Paying Off Debt And Other Tips Your Professors Didn’t Teach You is for the smart  college graduate just starting out trying to navigate the highly consequential financial choices regarding car loans, debt, savings, home-ownership v. renting, insurance, entrepreneurship … even philanthropy and retirement planning.




Please see related posts:

Book Review: The Richest Man In Babylon, by George Clason

Book Review: Simple Wealth, Inevitable Wealth by Nick Murray

Book Review: The Automatic Millionaire by David Bach

How To Be A Money Saving Jedi

Stocks vs. Bonds: The Probabilistic Answer




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  1. When this post first came out in 2015 I hadn’t written my book, but I very much wanted to. The book came out in 2018, and if you liked this post you should, well, buy it!

Do You Need An Investment Advisor? And Why?


A version of this post previously appeared in the San Antonio Express News.

Some friends of mine recently opened up investment accounts with a guy who is a salesman at a national insurance company. My friends also hired a “fiduciary” to review their investment plans. Finally, they consulted me, for free, on what to do with their investments because I’m a friend.

They seek answers to something nobody ever bothers to teach. They need financial advice. Who doesn’t?
Among the three sources they recently contacted, they will certainly hear quite a bit of possibly contradictory advice. In the long run, I got to thinking, do they also need to hire an investment advisor?
“Do you need an investment advisor?” is one of those evergreen questions for people who have managed to accumulate some investments.

The short, albeit possibly contradictory answer — given that I do not have an investment advisor myself — is: “Yes, probably.”
Following on the heels of that question, if the answer to the first question is yes, is: “What do I need an investment advisor for?”

I’m so glad you asked. And you’re not going to believe this, but I have very strong opinions on this question.
A good investment advisor should do two — and only two — things, and then stop.

Number one thing: Set up an investment plan for the client that has a reasonable chance for success at meeting the client’s goals, taking into account the client’s ability to save and invest. The plan should be so simple that all parts can be understood clearly by the client. The plan should run on auto-pilot (probably involving automatic paycheck or bank account deductions), and should rebalance on a low-frequency cycle (probably through new purchases, rather than sales).
All of this should be accomplished within two visits with the investment advisor.

Number two thing: When the market crashes — by the way, the only 100-percent guaranty in an investing life is that the market will crash, probably more than once, in a client’s 30-year investment cycle — the investment advisor is there to prevent the client from selling after the crash. Because when things get cheap you’re supposed to buy more, not sell.
Psychologically speaking, few of us can stomach the nausea of actually buying after the crash.

Ahem. Now, would all those reading this who made stock purchases in March 2009 please raise your hand?
Oh, really? All of you with your hands up are liars.
While we rarely have the sense to buy at the lowest point in the market, realistically a good investment advisor reminds us at least not to sell after the crash happens. The good advisor reminds us that we knew a crash would happen a couple of times in our 30-year investment cycle.
After the crash comes you don’t sell — you just keep on doing what you’re doing. If the advisor can prevent the panicked sale after the crash, the advisor is worth all the money paid to her over the years.

And that’s it. Anything else that an investment advisor does is probably too much, and the client may suffer as a result.

“But, but, but…..” I can already hear all of the investment advisors out there protesting.

But what about tax planning? And estate planning?
What about insurance products? Have you considered whole life versus term life insurance. Or can I interest you in a variable annuity?
But shouldn’t an advisor pre-screen some hedge funds and venture capital funds?
Want to hear about oil & gas leases? Master limited partnerships?
I’m pretty sure there’s real estate and mortgage refinancing to be done, no?
What about picking great stocks for a client?

If your financial advisor was a stock-photo robot, he should look like this

But what should I know about precious metals, agricultural commodity futures, and that new project finance deal in Ghana?
I also once read something about sector rotation? And then there’s value vs. growth? And biotech, and countercyclical consumer products!
What about anticipating the Fed, trading ahead of new data releases, getting in early on the next hot trend, or black-box trading and currency hedging?
Look, I agree — finance can be endlessly fun and interesting, and these are all great areas for a broker or investment advisor to get into because they produce wonderful opportunities for additional fees, commissions, portfolio churn and opacity. In most cases, however, they just don’t happen to produce wonderful results for clients.
If you need insurance or tax planning, by all means hire an expert. But a good investment advisor does not necessarily serve her client by brokering all these products.

To sum up:
Do you know how to set up what I describe above as “the number one thing” all on your own? If not, you probably need an investment advisor.
Second, do you know — beyond a shadow of a doubt — what you will do when the market crashes? Are you sure? If not, you probably need an investment advisor to hold your hand — that itchy-to-sell trigger-finger hand — to prevent you from selling.




Please see related posts: Book Review of Simple Wealth Inevitable Wealth by Nick Murray

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