When I started this site, I had no intention of addressing personal finance.
It is a fairly worn out topic on the blog circuit. However I’ve had a request to give my take on it and will happily oblige.
- Resources in the space:
One of the best known personal finance radio Titans is Dave Ramsey.
I’m not a big fan of his but for most people, that will never touch an individual stock or derivative, he does a serviceable, if inefficient, job on most of the high points.
Credit is not all bad. Regardless of what Dave says. Credit is how your favorite growth company and stalwart blue chip executes acquisitive growth. Credit is how the wealthy get wealthier. Access to credit is one of the leading causes of economic inequality and one of the biggest drivers of compounding wealth.
Very few people have ever become wealthy by simply working for someone else and saving a portion of their salary.
On the other side of that: don’t take out debt on non-appreciating assets.
Carrying a balance on your credit card is financially foolish. If you can’t pay it off in full every month then you are spending too much and need to address your spending habits. No amount of credit card rewards can justify carrying a balance and paying the ridiculously high interest rates associated with it.
Cars are not appreciating assets. If you buy a new car you will never get as much out of it when it comes time to sell it. Unless you buy a very low production exotic. If you are in that income bracket then you aren’t likely reading a personal finance post.
Bottom line. Credit is not the boogeyman Ramsey makes it out to be. Self-control and the misapplication of it, on the other hand can really bury you financially.
For instance, I have the goal of holding long-term cash flowing real estate at an institutional level as but one of many strategies with my own fund someday. That strategy also requires access to credit.
Starting a business almost always requires access to credit. Leverage applied correctly magnifies wealth. Applied incorrectly it blows your financial world to smithereens.
Starting a business provides the opportunity for wealth at a level not accessible to most simply trying to save a salary, but now I am getting off track.
Ramsey has helped a significant number of people save more than they otherwise would and has provided an emotion based approached to getting many people out of debt. Even if it’s not the most efficient or mathematically correct way.
Following his advice on debt and savings will get you further than you probably are now if you are struggling to get your financial world to stabilize. That’s value added so I won’t bag on him too much.
With that my cliff notes version of personal finance is:
- Pay down debt by interest rate.
Mathematically speaking it makes the most sense to close debt by order of how much it is costing you. Ramsey says to order the debt buy-down from smallest to largest so you get motivation to follow through on the rest of the plan. It’s an emotion based approach. Either way, choose to be disciplined and get out from under your debt load, don’t spend more than you make, and only take on debt where the asset stands to appreciate. I say order by interest rate, Ramsey says order by size. I say just get it done and follow through.
- Make a budget
I recommend using the Mint or Personal Capital Apps/Computer Programs. There is an initial set up effort but once it’s done then it is largely automated with monthly adjustments. Again, if you are spending more than you make then you are doing it wrong.
Investing is where Ramsey is dreaming. A 12% inflation adjusted CAGR via passive indexing is simply not reality. This is pretty well beaten on personal finance blogs so I won’t rehash it. A quick Google search will return many results of professionals calling him out.
However, regardless of Ramsey’s fantasy land investing, his emotion based approach has clearly motivated people to contribute more to employer retirement accounts and thus make their access to funds more stable in the future. So good on him. Just recognize that the return rates that he spouts are not based in reality.
I can get 12% by taking profits on my investments. I made 14% in April 16 alone by sitting on cash and selling volatility via probabilities. One month. But most people will not sit and figure out how to trade volatility, dig through SEC filings for clues as to valuation, build valuation models, run a given companies financials, and try to sort through the overvalued and overhyped stocks for the nugget of undervalued indicators. That’s not even mentioning the need to manage risk like your life depends on it. I do that and will hopefully have my own firm someday to do that as well, but passive indexing will not get you that level of return.
Automate, automate, and automate. Create a savings account with your bank and then don’t link it to mint or personal cap. If you can’t find the discipline not to spend wisely, if you know the money is there, then hide this automated account from yourself.
Personal finance comes down to:
Killing high interest debt.
Eliminating debt on non-investable/appreciating assets.
Disciplining your spending habits.
Max your retirement contribution (unless you have the motivation to learn how to manage risk and make money in the markets…then by all means do you boo boo.)
It’s not complicated, but it’s certainly not easy and it’s rooted in our ability to regulate the self.