Sunday, October 15, 2006

The 10 Financial Commandments...

I'm lifting the framework for this comment from a pretty good cartoonist and his comments on the 9 keys to everything you need to know about financial management. Scott Adams is the creator of the Dilbert line of comics and for a cartoonists the simplicity of his ideas is pretty appealing to most investors....My comments are in italics
  1. Make a will - With access to will creation software like Willmaker there is no reason not to have done this. It's a 2 hour process for most people.
  2. Pay off your credit cards - I add to this ALL DEBT. Before you start thinking about investing you have to pay off all non-mortgage debt. Cars, consolidation loans (yikes!), student loans (unless the interest rate is below 5%), etc, should all be gone before you can do anything else.
  3. Get term life insurance if you have a family to support - Term is the best value if you have a family to support. If not, don't bother.
  4. Fund your 401k to the maximum - This assumes that you have good investment options. Assuming you invest in a low-fee index fund, I'd agree with this statement.
  5. Fund your IRA to the maximum - Obviously.
  6. Buy a house if you want to live in a house and can afford it - I like where this is ranked in terms of importance. A home is a way to own the property where you live, but it should NOT be considered a major piece of your investment portfolio. Too many people are risking their financial future by being overweight expensive real estate. The other key point is "If you can afford it". I'd say if you can afford it with a traditional 20-30% down and a traditional 30 yr mortgage. If the answer is no to traditional financing than you can not afford the house.
  7. Put six months worth of expenses in a money-market account - One day it is going to rain and it's nice to have access to cash until you get back on your feet.
  8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement - Ah, we finally get to investing and......... an index fund?? Well, the truth of the matter is that index funds are consistent, low cost ways to invest. Every broker will tell you something different, but that is because their livelihood is dependent on you believing them. The only people with any edge in the market are blackbox technicians and super smart money managers that have information flowing to them 24/7. If you can't follow the market 24/7, then you should invest in index funds.
  9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio - I agree that you should hire a fee based planner if you need a check-up but their value-add is limited.
  10. Track your expenses for a month - Put it all on paper and the $4 coffee or the $2 bagel will start to add up. You have to track and categorize every expense to make this worthwhile, but I think it's well worth the effort.

I wish it was more complicated, but it's really not. Unfortunately, because soooo many people have vested interests in trying to separate you from your money the appeal of such a simple plan would be lost on stockbrokers, insurance agents, real estate agents, financial planners, and banks.


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