MYTH NO. 1: YOU CAN HAVE IT ALL
So many desires, so little cash.
A big house. A snazzy car. An Ivy League education for the kids. A comfortable retirement. A financial safety net that includes heaps of insurance and a big cushion of cash. It's the shopping list of the American dream and you want it all. Guess what? You can't have it.
Of course, our parents didn't have it all, either. In fact, they lived rather modestly. But they brought us up to believe that the bounty of the world -- plus the matching his and hers towel set -- could all be ours, just as long as we worked hard, brushed our teeth and made our beds every morning.
What's the reality? The reality is, you aren't likely to ever have it all, no matter how hard you work (and forget the stuff about brushing your teeth and making your bed). Which means you have to learn to be choosy. You have to learn to be skeptical. You have to weigh the advice you hear very, very carefully. It's your money. Treat it well.
Where We Go Wrong
You shouldn't follow any financial strategy just because it says so in this book, or you read about it in The Wall Street Journal, or you heard some "guru" spouting on TV. Ditto for the advice you get from your financial advisers. After all, these folks have an agenda. They may want to help you, but meanwhile they are also helping themselves -- to your money. The fact is, if you hang around too much with insurance agents, you will probably end up with too much life insurance. If you spend your days with real-estate agents, you will wind up owning an absurdly big house. If you talk too often to your broker, you will end up with too much money in broker-sold mutual funds. (The truth is, any money in broker-sold mutual funds is too much money. But we'll get to that later.)
And whatever you do, don't do what your brother-in-law says. Surveys show that most folks get their financial advice from friends and family. It's okay to listen to your uncle rattle on about his favorite investments. But you shouldn't do anything without first thinking carefully about the advice and whether it really makes sense.
You -- and nobody else -- have to make your life's critical financial decisions, knowing that you can't afford to do it all. So what should you do with your money? We all tend to share four major investment goals. We want to buy a decent house, put our kids through college, retire in comfort and be prepared for financial emergencies. But it's tough to meet all of these goals. Think of the dollars involved:
* If you earn $60,000 a year and you want an emergency fund big enough to cover six months of living expenses, you need to sock away around $18,000. Just got a new job paying $70,000 a year? You will no doubt crank up your standard of living -- which means your emergency reserve also has to be bigger.
* Homes cost an average of $125,000, so making a 20 percent down payment is going to set you back some $25,000, and that's not counting all the closing costs. If you put down less than 20 percent, you have to pony up for mortgage insurance, which is obscenely expensive.
* If you want to send your kid to a top private college, you are staring at a $100,000 bill for a four-year degree. Planning to have a second kid? The total tab just became $200,000.
* If you want a portfolio big enough to provide you with $60,000 a year in retirement income, you need to amass around $1 million. That's a million in today's dollars. Every upward tick in consumer prices means your retirement portfolio has to be that much bigger.
The New Rules
Feeling overwhelmed? Start by deciding what's important to you. Maybe you want to buy a smaller house, knowing it will make it easier to send your kids to a great college. Maybe you want to skimp on housing and encourage your children to go to the local state university, so you can retire early. Or maybe you are willing to delay retirement, so you can live more lavishly and send your kids to a ritzy private school. None of these choices are bad. What's bad is not making a choice. Instead of staggering from one enormous credit-card bill to the next monthly car payment, you ought to decide what you want to achieve with your money and have a plan for how you are going to get there.
All the planning in the world, however, isn't worth squat if you don't save. You may not be able to have it all. But if you don't save, you won't have anything. Folks always have ample -- and seemingly rational -- excuses for not saving. I'll start next year, they promise. The market is too high, they cry. First, I have to buy a new car, they say. I've still got plenty of time, they argue. But the grim reality is, many folks never become serious savers. They squander money and time on purchases they don't even remember. So make a commitment. Start saving and start now.
If it helps, draw up a list of goals and stick it on your refrigerator. Announce to your friends and family that you plan to pay off your mortgage in 10 years, or retire at 55, or save $5,000 before the end of the year. Maybe their expectations will be the incentive that makes you stick with your plan. Consider tracking your investment progress using a spiral notebook or a computer program, so you see and appreciate what you achieve. For the financially ill-disciplined, personal-finance software programs such as Microsoft Money, Managing Your Money and Quicken can be surprisingly helpful. If you find it difficult to save, look into setting up an automatic investment plan, in which money is deducted from your paycheck or bank account every month and plopped straight into a mutual fund.
Don't overlook the virtues of being cheap. No, you don't have to recreate the life of Ebenezer Scrooge. But any dollar you choose to spend is a dollar you can't save, so think long and hard before you crack open your wallet. Remember, those dollars were awfully hard to come by and they are awfully hard to replace, if you are losing a third of your paycheck to federal, state, Social Security and Medicare taxes, it means you have to earn $1.50 to replace every dollar you spend. And when you do spend money, spend it only on things you really want. Venture to the stores with a shopping list and buy only the items that are on that list. So what if shopping is the national pastime? Refuse to join the game. Don't buy anything just because that's what your parents bought, or that's what your friends are buying, or that's what the television advertisements say you ought to buy.
Finally, pursue strategies that will make one dollar do the job of two. One of the key personal-finance challenges of the 1990s is learning to balance the conflicting pressures of job insecurity and the need to save for retirement. Because of job insecurity, there's an inclination to stick every available penny in easily accessible, conservative investments. But at the same time, because of the need to save for retirement, you really ought to shoot for top-flight investment returns by shoveling every spare dollar into stocks, especially stocks in tax-sheltered retirement accounts. An unresolvable conflict? Fortunately not.
There are strategies that will let you behave like a long-term investor, while still leaving you with easy access to your cash. As I suggest later in this book, you might want to put some of your emergency money in stocks, so the money grows more quickly and can eventually become a cornerstone of your retirement portfolio. Consider paying off your mortgage so that not only will you own your house outright, but also you will free up money every month that can be put toward college tuition. Keep your debts low and your financial obligations small, so you need less of an emergency reserve. Put your stocks in a margin account and set up a home-equity line of credit, so you can borrow money quickly and cheaply if you get hit with a financial cash crunch.
You Never Call, You Never Write
If you want to cut down on the amount you spend, try reducing temptation by putting an end to junk mail, mail-order catalogs and phone solicitations. You can slash the number of calls you receive from telephone salesmen by writing to the Telephone Preference Service, Direct Marketing Association, P.O. Box 9014, Farmingdale, NY 11735-9014. Make sure you include your name, address and telephone number, including area code.
Meanwhile, stop much of your junk mail and mail-order catalogs by writing to the Mail Preference Service, Direct Marketing Association, P.O. Box 9008, Farmingdale, NY 11735-9008. When writing, include the different spellings of your name that are used in direct-mail solicitations.
Magic solutions? Far from it. Even if you employ these strategies, you won't have it all. But with them, you should have a lot more than you otherwise would.
Copyright © 1998 by Jonathan Clements
HOW YESTERDAY'S RULES BECAME TODAY'S MYTHS
Everybody needs somebody to blame. I'm blaming my parents. It's unfair, of course. They brought me up, they educated me, they taught me to put the fork on the left. But it's the late 1990s, the world isn't working the way they said it would and I need somebody to blame. Sorry, Ma.
It's not entirely her fault. After all, Dad also deserves some blame. But the real problem is, everything changed. Fixed pensions became unhinged. Cherished employees became temporary labor. Home prices plummeted. Inflation disappeared. Folks kept living longer. Wages stopped rising. And Harvard started charging $100,000 for four years.
All of which means the old financial rules don't work any-more. Remember what our parents told us? Buy the biggest house you can. Nothing's safer than money in the bank. Take out the largest mortgage possible. You can't go wrong with IBM. Everybody should own gold. Stocks are risky. You ought to buy antiques. Remember Uncle Joey? He made a killing in antiques.
This sort of foolishness hasn't gone away. But the messengers have changed. You hear this nonsense at parties, on the commuter trains, in the company bathroom, around the water cooler and at the community pool. Your friends and colleagues, who vowed they would never be like their parents, now parrot them endlessly.
Listen at your peril, because this free advice is usually worth what you are paying for it. (That's the reason we're charging serious money for this book. Honest.) With jobs so tenuous and saving for retirement so critical, you can't afford to make big mistakes with your money. You can't afford to buy lackluster investments and pursue wrong-headed financial strategies. You can't afford to get sucked in by the old wacky rules of thumb. These myths may be comforting mantras from the childhood dinner table. But they are still myths.
How did these myths develop? Some of them feed our egos, like the idea that we can beat the market or find the next superstar mutual fund. Some of them grow out of wishful thinking, like the belief that we can get rich buying expensive antiques and fixing up our homes. Some of the myths reflect our fears, like the need for lots of insurance and lots of emergency money. And some myths are old truths that worked once but have since been rendered obsolete by changing circumstances.
The fact is, a lot of the stuff our parents told us is now dead wrong. They didn't just mess us up. They messed everything up. But they also got very, very lucky. That's why we should despise them. They came of age when it really was morning in America. Stocks went up. Gold went up. Real estate went up. Jobs were plentiful. Things were just sickeningly good. (Unless, of course, you were African-American. Or a woman. Or gay. But that's another story.)
Now things are just okay. The gilded age has become the bronze age. Our job is to make the best of it. That's where this book comes in. It won't make you rich overnight. In fact, it may not make you rich at all. But it should help you avoid today's big pitfalls -- and make the right financial moves -- so that you can cope with financial emergencies, buy the right house, put your kids through college and retire in comfort.
With this book, I want to make you rethink all of your financial strategies. No, I don't expect you to agree with every one of my contentions, But I hope you will at least come to understand some of the flaws that imperil today's most popular money strategies.
Best of all, this book should confirm all of your worst suspicions about your parents and your colleagues and your friends. Yup, you were right all along. They really have been talking a lot of nonsense.
Copyright © 1998 by Jonathan Clements