Jay Huebner will have to take some of the blame for these papers, he suggested that I provide his children some written guidance on “how to invest money.” After thinking about it for a while, I have decided that I would provide some written guidance, but the audience I aim for and the subject would be a little broader. The audience a little broader because it is easy to do with our computer and perhaps there are more that are interested. The subject a little broader because I believe in so doing, it would be more useful and there would be less chance that it would be misleading.
This first chapter is devoted to basic guidance. Chapter 2 provides the real investment advice, and 3 pursues additional details.
What this is not. This is not all of the information you will ever need on personal finance. There are lots of good books on the subject, try the local library or book store. Most community colleges, etc. have reasonable courses on the subject. If you think education is expensive, try ignorance. To effectively manage your personal finances and invest wisely, you must devote a continuing effort, forever.
Get some financial flexibility. Your hot water heater could explode, your car could be wreaked or stolen, you could get sick or be laid off or need an operation. If you are stretched to the limit financially, any of these could make the disaster worse. Have some cash in your checking account, some standby credit from your credit union or whatever. How much? You think about what could happen to you and what the effects would be and decide. Glee and I, being in Saudi Arabia, keep two checking accounts (different institutions) each with a month’s pay and have several lines of credit (that do not cost unless we use them) in standby. To prove the point, in July 1992, the AC in our Dallas house died, the renter screamed that it was hot and we used most of a month’s pay to fix the problem.
Budget and review your financial situation. One of the witty sayings in a financial computer program I have says “Rich people plan two generations ahead, poor people plan for the weekend.” You need a plan, even if it is only for the month. Preferably it will be for a year, better yet for a few years. If you have kids, or will have them and want them to succeed, you need to start planning for their college. Ross Perot said “Texas has enough hands (field hands), what it needs is more heads (educated people).” The same with the rest of America. Costs for four years at a state university are about the same as a house; community colleges are less, and private colleges more. Do not be frightened, just start planning. To some extent you plan when you check the balance before writing a check, and when you get your monthly statement and balance the checkbook, but that is not enough. Where should the money go? I say you should save something every month, even a little, because then it becomes a habit – a self imposed requirement. Many people say “take the savings out first,” in effect pay yourself first. Do what ever works for you. If you do not have a written budget, you probably do not have a budget. Every six months, or year you need to review how you have done and what changes should be made. This includes evaluating how well your investments have done. Every time I get a pay raise, I review our budget and financial planning and decide how to “spend” the new income. I have been doing this for 30 years. I also do an annual review of our financial planning in conjunction with doing our income taxes, which I start right after the first of the year. I will discuss investments and taxes more later. The point is you are responsible for your financial future, take charge of it.
Do your own calculations. Not that you will very often find banks, S&Ls or salesmen making mistakes or lying to you, but you need to calculate the costs to you. For example when buying a car “on time,” look at various lengths of payments and various sources of finances. Figure the total cost to you, including insurance, setup charges, fees and etc. Employee owned credit unions usually are less costly than commercial sources for borrowing money to finance a purchase. When you find a good credit union, maintain your membership. They may not, however, be the best place to keep a large amount of savings. Often doing the calculations are difficult because you do not have sufficient information. That is your problem. Get the information. Believe me, it matters. On the other hand, I once had an office mate who said that he spent 4 hours finding a 3 cent error in his checkbook. The payoff was not worth his effort. There is an old saying about being penny wise and pound (Sterling) foolish. Judgment is required.
Insurance is to spread the risks. After you have thought about #1 (above) for awhile, you will probably come to the conclusion that there is a limit to the extent of disasters that you can be financially prepared to accommodate. How right you are, and most of the rest you have to handle with insurance, which is an outgrowth of people getting together to share specific risks. Of course most of these institutions have evolved to where it is no longer obvious that that was their purpose and intent, but that is what it was and is. So what you should insure are those things of financial value that you cannot afford to lose, and those risks that you cannot afford to take. If you buy a house or car “on time,” the “holder of the note” will insist on insurance, to protect their financial interest. Not yours, theirs. Notice that you pay for their protection. I was the primary breadwinner in our family for many years, so I had lots of insurance on my life. I wanted our kids to be able to afford college, even if I died. Now that our kids are out of college and our investments, etc. are sufficient for Glee to live a fairly comfortable life, I have eliminated most of my life insurance. Life insurance is not a good financial investment, do not use it as such. Term insurance is much cheaper than other alternatives. Invest the difference. Think carefully about what you insure. For example, if you have a pleasure boat, maybe you only want liability insurance.
Health is better than wealth. What is a rule like this doing in a personal finance paper? Well, number one, I am writing it, I feel strongly about it and I wanted to include it. Number two, your state of health, your expected future state of health and your life expectancy have a significant impact on finances, so they should have an impact on your planning. Also your life style choices related to health have an effect on the cost of a number of items, such as life and health insurance. So exercise, all things in moderation, and do not smoke.
Consider Discretionary Money. Beyond adequate food, minimal shelter and clothing, and transportation; all of your spending could be considered discretionary. If you get right down to it, you do not have to have vacations, many new clothes, stereo, TV, labor saving appliances, Christmas presents and etc. I am not suggesting you give any of these things up, but I am suggesting that you consider all of them as discretionary items. Items that, for the purpose of budgeting, you could live without. Do not be “trapped” by things, just because you are used to living with them. You are trading hours of your life for things, choose carefully.
Basics first. It is a pleasant reverie to think that as soon as you start making money, you can start investing in a hot growth stock and retire before you are 30 years old, maybe even before you pay off your new house or before it is time to trade in your leased car. To barrow money for investment purposes is called leveraging. Unless you really know what you are doing, leveraging is about as smart of a scheme as buying lottery tickets, and your odds for a substantial success are about as good. Lottery tickets are called Idiot Taxes by Jay’s kids. Stick to the basics, which I define as:
- Pay off (or do not get into) credit card debt;
- Arrange your life style so that all future vehicles, vacations, and other discretionary items are financed out of your savings (earn interest, do not pay it);
- As soon as your life style and employment are stable enough, purchase a house. (a house will get more attention later);
- Establish a nest egg for that rainy day (that earns interest, or at least gets you free checking) and start saving;
- Get the basic insurance that you need; health, life, etc.; and
- Start an IRA (more on IRA’s in Chapter 2).
