Tuesday, October 11, 2011

When people come advising

I went to a financial fireside the other night at a local LDS meetinghouse. There was a speaker who had lectured around the country on financial topics and is well-respected in the community. As with most of these types of things there was a certain amount of psychological pump-priming, as it were, at the beginning. You know, facts on the amount of people financially independent (said ~5%), the average credit card balance in America (a few grand), and the national savings rate (he said it was still zero even though it has bumped up a bit). He eventually got to the nuts and bolts of the presentation (although the projector was having issues so it was a bit constrained), which was based around the fact that one should spend less than their earn. It’s great advice, of course, and we could all probably work on it. He used some math to show us how much extra pre-tax (and pre-tithing) income one has to earn to spend a dollar after taxes. While basic for some folks, it’s a worthwhile exercise if you’ve never done it. Take a minute and divide 1 by (1 – all your tax rates combined). So, if after federal, state, and payroll taxes 50% of your money is taken by the government, then for every dollar you spend you need to actually earn two dollars. This is a good reason to trim expenses rather than enslessly worrying about increasing income, as the post-tax dollars (which you’re spending) have a bigger effect.

Later on he mentioned a few authors and stated the fact that he made his money in real estate, but acknowledged that that’s not the best way for everyone. Indeed. As a real estate junkie, you probably imagined that he mentioned his love of the book Rich Dad Poor Dad, by Robert Kyosaki (he did). For the uninitiated, this is a shame, because the book is filled with vague advice. Kiyosaki repeatedly states that people should learn to own assets (like real estate) and have their money work for them, but doesn’t exactly say how. Investing in real estate is much like opening a small business, which isn’t the best thing for most of America to be doing, as it’s much too risky. Fortunately, after touting Dave Ramsey (who has good advice only if one is in debt) the speaker later mentioned more worthwhile books, such as the Richest Man in Babylon, which has great parables about simple financial topics.

I think that besides citing the best books, one of the main keys to these types of presentations is specific advice. If one is at the talk then they probably already know they should spend less than they earn. What I think people aren’t so clear on is how to invest their money. What follows, then, is how I would have structured the talk.

First, touch on the simple fact that you must spend less than you earn. Endorse The Richest Man in Babylon

Second, address what investment options people have after they’ve saved a decent sum. Talk about the relationship between risk and reward. Give a brief overview of stocks, bonds, gold, and real estate. Show how a combination of stocks and bonds have the best risk/return profile and you don’t have to run a side business (as you often are when investing in real estate). Recommend a book: The Investor’s Manifesto or The Boglehead’s Guide to Investing.

Third, show that stock picking and market timing are fool’s errands and that picking mutual funds that index the market is the only wise course. Briefly address asset allocation and typical returns of bonds and stocks. Talk about the simplicity and advantages of target retirement funds. Recommend Vanguard and recommend that they set up automatic contributions (wherever they end up).

Fourth, show the impact of expenses on mutual fund performance over time. Talk about expense ratios. Discuss why, in investing, you get what you don’t pay for, as Jack Bogle said.

Fifth, discuss the impact of taxes on one’s investments and why investing should largely be done in tax-advantaged accounts such as an IRA and 401(k). Discuss the tax advantages of these accounts (and the difference between pre- and post-tax contributions). Talk about filling the accounts in the proper sequence of a) contributing to the 401(k) to the match, b) filling the IRA to the max, and c) then filling the 401(k) to the $16500 max as best one can.

I think that this would allow one to hit the ground running the Monday following the seminar. They’d know what to do with their 401(k) (first fill to the match with low-expense-ratio target retirement funds); they’d know about IRAs (that the should use them, with funds having low expense ratios, at Vanguard, and preferably using a target retirement fund); and they’d have some simple, yet important books that will take them well on their way to financial well being.

But that probably would take two hours. What did I leave out?


  1. what do you have against rich dad/poor dad? There's some great principles in there.

  2. Like I said, it's just a bit vague about how to become financially independent. It's not that it's totally devoid of value, but just that there are better books to read if one wants to learn about this type of thing.