Wavepacket Blog

Wavepacket Blog
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Sun Dec 27 23:34:18 2009
Personal Finance Platitudes
Short sayings I wish I'd learned earlier.

Keep the green!
Image courtesy of Badseed (wiki)

I was just going through my finances again after the Holidays. Always interesting to see how the final numbers turned out!

As part of that, I happened to catch a good article about paying cash for everything to avoid accumulating debt. I think I'm pretty careful about how I spend but I learned a lot from that article.

The article made me think of all the money management platitudes out there. Many of them are bogus, I'm sure. But these are the ones I think are actually pretty helpful:

Never borrow to consume, only borrow to invest.

This is great advice. (Amazingly, after taking economics in high school and college, I only heard about it years later while reading an otherwise low-value book about the American federal deficit.)

I had usually avoided financing plans for random purchases like TVs or furniture, but hadn't thought about it much. This rule is why. And like the article above, the main point is to pay cash for most everything. Because of this I've been much better about putting less purchases on my credit card, and paying it off completely each month.

Don't put all of your eggs in one basket.

This is a basic rule, but people seem to forget it all the time. Just do a simple search for people that have lost their life savings somehow. (Interesting that many of the latest search results are victims of Bernie Madoff!)

I feel terrible for anyone that loses their life savings due to a single event, and I hope Madoff's victims are able to recover some of their savings.

But let's not forget: putting all of your savings or investments in one place is asking for disaster. Reading through some of those search results is pretty scary, with stories like this guy. The author doesn't sound like a moron. He and his wife sold their property at the peak of the market, and obviously had a fair amount of money from other investments. Yet they inexplicably put all of it into one person's hands, and then it was all lost. I feel absolutely terrible for them.

I guess this platitude ("Don't put all of your eggs in one basket") is known by everyone but is often hard to follow in practice. Even forgetting about nefarious financial advisors, people make basic mistakes like keeping all of their stock and/or pension with their employer--this means a single company is paying their salary and responsible for their retirement nest egg! You can imagine what happens to them when the employer goes under. Even more so when both husband and wife work for the same company, and have their stock and pension with the company. That's happened to people at Enron, Arthur Anderson, and Lehman Brothers. These are firms that hired smart people! But they put all of their eggs in one basket.

So I've gone through and made sure my savings are diversified. And as much as I love the company I work for, I make sure my company stock doesn't become too large a fraction of my savings.

Keep your age in bonds.

Okay, this one isn't as useful day-to-day. But I found it remarkable because it was succinct and very specific.

This was a new one to me, but a pretty good one. If you've got any sort of 401(k) or other savings, make sure a healthy percentage of it is out of the stock market. Put that money in cash or bonds instead. I knew that, but somehow it wasn't until recently that I heard to use your age as a rule of thumb for the percentage. I had been using 20% as a rough guess, but for 2010 I'll gradually bump that up to around 40% (guess my age!).

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