The most gratifying comment I can receive from readers of my Smartest series of books is, “I wish I had this information 20 years ago. I bought your book and gave it to each of my children.”
The advice in my books is timeless: Intelligent investing and sound financial planning is not altered by current events. Unfortunately, this is directly contrary to the misinformation in much of the financial media. When you think about all the gifts you want to bestow upon your children, consider providing them with financial advice that will benefit them throughout their lives. You can’t put a value on it. Here’s a good place to begin:
Track Your Income and Expenses
I’m dating myself here, but manually tracking how much you made, how much you spent and what you spent it on used to be so burdensome that very few people had the discipline to do it. Now you have no excuses. Mint.com links your credit or debit card and automatically categorizes your expenses and checks them against your budget. Mint also provides data from which you can compare your expenses in a particular category to other subscribers. The first step towards planning for financial success begins with using Mint (which is free!).
Avoid or Eliminate Debt
Debt is the mortal enemy of those seeking financial success. Use credit cards for emergencies only, pay regular expenses in cash or use a debit card and never co-sign for a loan unless you are prepared to assume liability for it upon default. Your goal is zero debt, except for a mortgage. If you already have credit card debt, pay it off as quickly as possible.
Set Financial Goals
A map won’t help unless you have a destination. Divide your goals between short -term (a car, buying a house) and long-term (having enough money for retirement). A very worthy short-term goal is paying off your credit card debt. Mint has a “Goals” feature that lets you set different goals and ties them to your budget. Use it.
Buy a Home and Pay It Off As Quickly As Possible
In these troublesome economic times, it’s not surprising that many people have a pronounced fear of being homeless. This fear is hardly unfounded, as the U.S. Department of Housing and Urban Development estimated that, in January, 2011, 636,017 people were homeless in the United States.
Historically low housing prices present a unique opportunity for those looking to purchase their first home. Here’s my advice: Buy a house you can afford, put down as much as you can, get the best terms available on a mortgage, and pay the mortgage off as quickly as possible.
If you follow this advice, you won’t have to worry about being homeless.
Sorry to tell you this, but you are eventually going to die. The only question is when. Almost everyone who has dependents needs insurance. I know the traditional wisdom is “buy term and invest the difference.” This may make sense for those who need a significant amount of insurance and can’t afford the premiums for whole life (also called “cash value”) insurance. Others should consider cash value insurance, but follow these guidelines:
-Ask your agent about “blended” policies. They combine whole life and term into a single policy. They build up cash value quicker and have higher death benefits than whole life alone because of the lower sales costs. Unfortunately, the lower commissions mean that some agents won’t recommend these policies.
-Limit the insurance to those with very high ratings, like Northwestern Mutual, Guardian, TIAA-CREF (which sells by phone and does not use commissioned sales people), New York Life and Mass Mutual.
I have never met anyone who had built up a significant cash value in a whole life policy and regretted the decision to forego term.
This is the big kahuna and where the biggest danger to your financial success lies. It’s sad because Smart Investing is so simple. I provide chapter and verse in The Smartest Money Book You’ll Ever Read, which is co-branded with Mint. This blog also tells you the exact steps you need to take, and includes the funds, with ticker symbols, that you should consider.
The Bottom Line
-Focus on your asset allocation (the division of your portfolio between stocks and bonds).
-Never use the services of any broker or adviser who tells you he or she can “beat the markets.”
-Your portfolio should be globally diversified and should consist only of low management fee stock and bond index funds, exchange traded funds or passively managed funds. You can purchase these funds directly from large fund families, like Vanguard, which is the leader in low-cost index funds.
-Be sure the custodian of your funds is a large, reputable organization, like Vanguard, Charles, Schwab, Fidelity Investment, or TD Ameritrade.
Educate yourself on sound principles of Smart Investing. You will find they are vastly different from the musings of financial pundits on TV. I distill these principles in The Smartest Investment Book You’ll Ever Read, and John Bogle’s book, The Little Book of Common Sense Investing, is another excellent resource.
Following this advice is no guarantee of financial success but it will go a long way towards getting you there. I wish my own parents had imparted this information to me. Now is the time to reverse the cycle of ignorance and empower your children to avoid our mistakes.
Do you have a question you’d like to have answered by Dan Solin? Join us on the Mint.com Facebok page on January 11th for a LIVE reader Q&A session with Dan. In the meantime, you can submit your questions to firstname.lastname@example.org
Dan Solin is a Senior Vice-President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read and The Smartest Portfolio You’ll Ever Own. His new book, The Smartest Money Book You’ll Ever Read, will be released January 3, 2012. You can buy the book at several retailers and in various formats, including: Amazon, Barnes & Noble, Nook and iBooks.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.