DADDY'S GUIDE

DADDY’S GUIDE TO FINANCIAL SECURITY

By

Preface

This is a simple yet comprehensive guide to achieving financial security, such that you will not need to worry about money above baseline levels throughout your life, and will be prepared for retirement, when and if that unfortunate time arrives.

But you say, what do you mean “baseline level”? Well my life as an adult, which is to say, since I have been married to your mother, has shown me that everyone has a baseline level of worry about money. The typical baseline level for The Greatest Generation, which is the generation of our parents, is pretty high. This is usually attributed to those people having lived through The Great Depression, in which everybody except the Kennedys, the Rothschilds (or should I say the Rothschildren), and Al Capone lost all their money and had to stand in lines at soup kitchens or sell pencils for a penny (what did people need all those pencils for, anyway?).

Now, those folks were followed by The Second Greatest Generation, also known as the Baby Boomers, who were freed of the existential burden of the Depression and supposedly not scarred by living through the threat of imminent nuclear annihilation, nor the misery of living with their parents, who were constantly squirreling away nickels and making their children wear faded hand-me-down clothes in anticipation of the next depression. (It turns out that particular economic catastrophe, which we call The Great Recession, in order to distinguish it from the Depression, and also to give the impression that it wasn’t really all that bad, certainly not compared to “what we went through”, didn’t roll around until The Greatest were well into their cozy, pension-insulated, senior discount-priced, Baby Boomer-funded dotage. We will get back to that later. If I remember.)

So. My experience is that Baby Boomers have varying baseline levels of financial worry. At the low end, you have me. When I got out of law school, I thought, “Wow, with my shiny new law degree in hand, I can reasonably expect to enjoy a good standard of living for life.” We now know that was not necessarily the case (see The Great Recession, above), but it turned out to be true for me, especially after I had the good sense to marry your mother, who is, to use a metaphor that she might not particularly appreciate, a cash cow. And sure enough, every time Susan asks if we ought to be worrying about money, I say “nope.”

Now on the other hand, you have Susan, who slipped into the Baby Boomer generation just under the wire in 1961 and has a pretty high baseline level of money worry. (This is probably part of the cause of the cow situation I referred to above.) And it is hard to know where this comes from. Susan’s parents were actually better off financially than mine, and while you could fairly call them thrifty, they could never hold a candle to my parents, who can basically live on air. But for whatever reason, Susan worries about money. Mind you, that doesn’t necessarily prevent her from incurring some pretty eye-watering expenses (see Spending, below), but day in and day out, she has her concerns.

So you will have to ascertain your baseline level of money worry, and either learn to live with it, or go to somebody with a completely different skill set than mine, possibly a shrink. But if your goal is to both be and feel as secure as you reasonably can, read this monograph.

One More Thing

Oh, yes, there is one more thing. At the start I implicitly stated that financial security means feeling comfort about your financial well-being throughout your life, including after retirement. But on a day-to-day basis, that means more than just knowing you can pay your bills and afford your daily latte at Starbucks. It also means NOT being financially committed to an income level or trajectory that you is not sustainable for you. Once you are making money, especially if it seems like a lot of money compared to whatever came before, such as being a student, it is insanely easy to get used to that level of income and spend what you make. And if your income seems to keep growing, it is just as easy to set your spending on the same trajectory—up, up, up. You go out more. You buy a house, then a more expensive one. You renovate that one for more than you even paid for your first house. Then maybe you buy a second house. You get it.

Then, maybe your income drops and suddenly you can’t afford those golf weekends in Palm Springs or dinners at The French Laundry. You are in trouble; you can’t pay your bills. Maybe you file for bankruptcy protection. This scenario has played out thousands of times with child stars, sports stars, and even ordinary working people. George Best, one of the most successful British footballers ever, died penniless. As he put it, “I spent a lot of money on women and fast cars. The rest I squandered.”

But even if the gravy train never stops, you may at some point want to get off the train, but feel locked into a lifestyle and a debt load that keeps you in your seat. That is not financial security. So, to achieve your optimum level of financial well-being requires a sense of proportionality among your working, spending, and saving habits. I will return to this theme later.

Introduction

Daddy’s advice for achieving financial security boils down to eight words:

Work steadily

Spend reasonably

Save consistently

Invest wisely

Yep, that’s it. Right now, you are probably thinking two things. First, how can you write a page-long preface for a “guide” that is only eight words long? And second, why are there all those pages I haven’t read still out in front of me, if you only have eight words of advice? Possibly you are also thinking, boy am I glad I didn’t have to pay for this nonsense.

The answer is, this is sort of a business book, and the essence of any business book is to take something that could be a pithy, useful article that anybody can get for free, and turn it into a bloated, boring book that you can sell for $37.95 a copy and make real money on. Except I’m not expecting to make money, anyway. Also, unlike a business book, this is supposed to be entertaining.

So from here on out, I will be explicating those eight words.

Chapter One: Working

Let me start by saying, up front, with apologies to all those stay-at-home dads out there, when I say “working” in this context, I am using the term in the sense of getting paychecks, paying taxes, and saving money (see Saving, below). This is actually an important qualification, because a key trap to avoid is the one of “I really won’t be making much of anything anyway, once you deduct the cost of dog care, commuting, overpriced organic lunch salads, pitching in for the monthly birthday lunch even though I always seem to miss that day when it’s my birthday month, and taxes. I should probably just stay home and save all that money.”

Little known fact about taxes, which will come up again: in the U.S., so far at least, we don’t have a tax rate over 100% (not even when you take into account state taxes, etc.) This means that YOU ARE ALWAYS BETTER OFF MAKING THE MONEY even after taxes. So go make money, even if it is not a lot.

The other consideration is, and this is important, every month you are not working, in addition to not bringing home that paltry paycheck with retirement savings already taken out, you are losing skills, you are remaining at your same “most recent salary”, and you are losing the habit of going to work. Not only that, there is a real danger that you will be seduced into the kind of pointless, time-sucking, money-draining activities that I have already seen my retired colleagues pick up, such as golf, fly fishing, and Buddhism.

Now there is going to be an exception to every rule in this book, and there is one that applies here. Some lucky people have perfected the art of getting paid NOT TO work. We have a friend whose career, at least from the outside, appears to consist entirely of finding large, cash-rich companies that are ripe for takeovers, reorganization, or downsizing. He finagles a high-paying job, and keeps out of trouble as long as it takes for the reorg to occur, at which time he steps down, collects an unseemly severance package, and starts the cycle again. For him, it is a highly successful strategy, but you need to understand first, that this is the rare exception, in addition to which, even this person found it necessary to amass a lot of expensive education, and worse yet, work pretty hard (or at least travel a lot, often to places like Toledo, Ohio) to build the resume that launched his life of intermittent leisure. For the rest of us, the best strategy is to keep bringing those paychecks home.

A corollary to this is, if you are part of a couple, having both halves in the workforce to the extent possible is a great hedge against the vicissitudes of the workplace. You may think that your dog-walking business is entirely recession-proof, because after all, people love dogs and have to find somebody to walk those dogs. Also society, or at least American society, has belatedly determined that it is necessary for a dog owner to “pick up” after a dog when you take it “for a walk”, which is dog owner shorthand for “going out for a poop”. And let’s face it, the only thing that is more disgusting that scooping up poop with only a thin, possibly torn plastic bag between you and the poop is doing the same thing when it is raining. So most people have limited tolerance for taking their dogs “for a walk”, and therefore need dog walkers. (In fact, I have several times over the last few years talked to people who would kind of, sort of, really like to have a dog, but they say, “Then I have to get a dog walker.” Which is not something I could imagine my parents saying, or for that matter anybody else I knew when I was growing up in the suburbs of Richmond, Virginia. Whatever.)

But back to the subject at hand. What if paying somebody to walk your dog suddenly becomes insufferably “bougie” as I think you young people say, or worse yet, people just decide to have cats instead of dogs, and the market dries up? Well, then you are going to be pretty happy that your spouse has a stultifying government office job that is essentially guaranteed for life. So make sure you are both working, to the extent possible.

Also, remember the goal is to work steadily. A key aspect of that is pursuing work that is satisfying, remunerative, and compatible with the rest of your life, or at least provides enough of those things that it feels sustainable. If not, you are likely to reach the point at some time in your otherwise-working life when you have to stop working and recuperate. If this pattern of working feels right for you, and you have carefully calibrated your spending (see Spending, below) to match what it means for your income, this may be fine. I have met more than a few people who live this way—fishing guides who work every day of the summer in Alaska and sit on the beach in the Caribbean for the rest of the year, finance types who bank a lot of money and take a sailboat cruise around the world, etc.

But if you are like most people, you will have acquired a lot of accessories that are expensive and hard to ignore, like mortgages and children. You probably also have developed habits that are pretty ingrained and inexplicably hard to give up, like cable TV, yoga, and golf. If that is true of you, you are not going to feel financially secure while not working. On top of which, some people don’t feel comfortable, when asked what they are up to, saying “sleeping late, not showering, and watching a lot of daytime TV”. On the other hand, if you can swing working from home like more and more of us these days, you can combine all those things with an actual paying job, but that is a bit off-topic for this monograph.

So my recommendation, which works for most people, is to find work that is sustainable and keep at it.

Chapter Two: Spending

Before we talk about how to spend money, is helpful to think about the various categories of expenses we need to live. For most people, the biggest category is housing, which for these purposes includes rent, or if you are unfortunate enough to own a house, mortgage payment and upkeep, plus utilities.

Next is cars, sometimes referred to as “the second biggest investment you will make.” This is clearly an erroneous statement, as an “investment” is an outlay of money intended to create income or capital gains. Assuming you are not driving the car for a living, purchase of a car should not ever be intended to create income or capital gains. There is an exception to this, which is buying Ferraris. But if buying a Ferrari is in your plans, you either have way too much money or way too little perspective for this guide to be of use to you, so please stop reading now.

The next category is all the other stuff you need to live, which we will call “the other stuff.” This includes clothes, furniture, spatulas, stamps, and hair gel.

The final core category is entertainment, which generally covers everything else, including anything you do for fun (movies, vacations, clubbing, hang gliding), to impress people you meet (weight lifting, eyebrow waxing), or to make your family and friends happy (gifts, parties). Food has a special rule: if you are buying food to eat at home or the office, it falls into “the other stuff”; if it is being consumed in a restaurant or any other place, it falls into entertainment.

We also have a few special categories that may not apply to everyone: children, divorce, and timeshares.

We will take these in the order in which I feel like writing about them.

The Other Stuff

It is not easy to lay out guidelines on spending for the other stuff. In our current economy, my experience is that for most things people buy (other than houses, which are more complicated) you can basically: 1) spend practically nothing and get a product that my parents would happily buy, 2) spend a reasonable amount and get something more than serviceable, or 3) spend an almost unlimited amount of money and get something that very well may not be as serviceable as those in category 2 (Jimmy Choos would be a good example here), but has ancillary impacts that are deemed, by some consumers, to justify the added cost. Often, those effects fall into the category of fashion, and they tend to create an identity for the purchaser.

Now, I have nothing against fashion, as long as it is not painful to look at. And I am comfortable with goods that contribute to identity. For example, one reason I never got a tattoo, back when I was in the tattoo-acquiring phase of life, was to distinguish myself from biker gang members, although this strategy is not recommended today (yes, there were other reasons I didn’t get a tattoo such as, it hurts). But my recommendation to you is to focus your spending on categories 1 and 2. For shorthand, we will call category 1 your Target purchases, category 2 Nordstrom, and category 3 Neiman Marcus. If we were buying furniture, it might be IKEA, Pottery Barn, and Roche Bobois.

So, Target vs. Nordstrom? Both are good options; both will serve you well and, applied in moderation, will not break the bank. Nordstrom may, in some cases, last longer or work better, and so may the best choice if you can afford the upfront cost. Shifting to furniture for a moment, IKEA products look just fine once you manage to assemble them using the cartoon instructions designed to be equally incomprehensible no matter what language you speak, and perform fine too, but have a definite lifespan, whereas furniture in the upper expense categories will last forever provided you don’t have children or are willing to reupholster once in a while.

The key question is: when do you go Neiman Marcus? Well, first of course, you have to figure out whether you can afford the expense. Life being what it is, most of the time it will be difficult to tell whether a particular extravagance will have a detectable impact on your financial security. But at the same time, you might find yourself getting into a habit of thinking: “Is this $800 scarf, handmade in Manhattan by a graduate of Rhode Island School of Design, really going to put me in the poorhouse?” And the answer, inevitably, is “no”. If that sort of thing happens every month, you may not end up in the poorhouse (after all, I am pretty sure we in the U.S. got rid of poorhouses except in the metaphorical sense a long time ago), but YOU WILL NOT ACHIEVE FINANCIAL SECURITY.

You have to self-monitor.  Like when I was in college and got a credit card for emergencies only, but later noticed that my definition of an emergency was being in a record store without $5 in cash (this was back when buying a vinyl record was not in itself a ludicrous bougie indulgence). Cleary, a redefinition was in order, so I redefined my purpose for having a credit card (note, this is NOT the recommended response). Now, a spouse can be a substitute for self-monitoring, but that has dangers of its own. Anyway, making a habit of Neiman Marcus, literally or figuratively, is not a good way to achieve financial security.

Ok, so you have not punched the Neiman Marcus ticket in a while, and you don’t think the purchase at hand is going to break you. Do you take the plunge? The big issue now is, how much satisfaction is the purchase going to give you?

Susan’s experience with a particular clothing store is telling. For the purposes of this monograph, we will refer to that store as “Neiman Marcus”, but it is only right to interject here that Susan would never actually shop at Neiman Marcus. But that’s another story. Anyway, the proprietor at this store is a fantastic salesman, which is to say, it’s worth your life to get out of the store with only a handful of eye-wateringly expensive garments, not to mention the jewelry to go with them. While I am not at liberty to tell you the actual amount Susan spent there in one year, I can say it was more than the cost of our first car. But what transpired, in the cold grey light of day, was the realization that while all those clothes had their wonderful attributes, they didn’t make Susan happy enough to justify the cost. So back to Nordstrom (figuratively speaking) for her.

As a result, Susan’s position on Neiman Marcus is she would happily buy a very special item or two there, once in a while, so long as she can be sure things won’t get out of hand. In other words, she doesn’t shop there anymore.

Cars

Cars are fun. First rule: never go into a car dealership unless you are actually ready to buy a car. Shiny new cars are ridiculously seductive, and there is just way too much chance you will walk out with a car. It turns out this applies at all ages. You may not remember, but when Rachel was about 5 years old, we wandered into a showroom while our aging Corolla was being serviced by the dealer. When it was time to leave, Rachel cried inconsolably because we were not willing to buy one of the cars. Mind you, this was a TOYOTA dealership; we are not talking about McLarens or anything really sexy like that.

Cars fit well into the Target, Nordstrom, Neiman Marcus paradigm, and another object lesson from real life will be valuable here. Susan and I always bought Target cars (Toyotas) because we found the Nordstrom cars (BMWs, Audis) to be expensive and boring. But one year I made the mistake of buying Susan a car for her birthday—Rachel was about to start driving, and it seemed like a good time to get a third car, a non-Toyota car. I wanted something fun and different, and we got a manual transmission, cute, sporty little Mini Cooper. After an initial “what the ???” moment, Susan grew to love the car; I did too; and we formulated the idea that we were “car people”, like my friend Glenn, who has bought at least one of every car you can possibly name, from Fiats to Subarus to Porsches (ok, he hasn’t bought any Toyotas).

With that background, we inexplicably got the idea, after moving into a condo in the City with one parking place, that we needed a second car. Not just any car, not a Target car, not even a Nordstrom car. We wanted Something Special. We looked around, and quickly fell in love with a VERY EXPENSIVE CAR. We bought it from the dealer, 7 years old, with 500 miles on it—a show car. We paid HALF the sticker price; how much more could it depreciate? Well, a lot, it turns out. About three years later, we realized that the car was totally impracticable, expensive to maintain in every way (when it needed an annual checkup, we contacted the nearest dealer who was 50 miles away and said “no problem, we will just send a truck to pick it up”; you can guess what that cost), and most important: not compatible with our lifestyle and self-image. We realized, slowly but inexorably, that we are Mini people. So we sold it for half what we paid.

For the record, while the auto debacle was, like all our enterprises, a joint effort/folly, this one goes on my account. The Mini continued to serve us faithfully until it had an unfortunate encounter with a Ford Focus, at which time it was replaced—with a shiny new Mini.

That’s probably more information than you wanted about what kind of a car you should buy, especially if you already have fixed ideas on the topic, which it turns out many people do. Personally, since exchanging my Mustang for an Alfa Romeo (1981), I have had the rule “never buy an American car”, which over time likely became misguided. As of a few months ago the rule became easier to follow since Ford decided to stop making cars entirely in favor of concentrating on higher-margin pickup trucks and SUVs. Since we don’t buy such critters, Ford is off the list. Which merits a side note on what SIZE of car to buy. We never owned a car bigger than a 4-door Camry, which worked out fine because we lacked the following appurtenances, none of which are recommended by Daddy’s Guide:

  • More than two children (you are aware that overpopulation has become a concern again, especially in light of climate change, aren’t you?)
  • A dog (don’t get me started)
  • Lots of recreational gear (unnecessarily bumps up your Other Stuff expense, in both the buying phase and the using phase)

We also never bought a 4wd. To me, unless you live in a ski resort, or possibly New England before the climate changed, or are a serious skier, off-roader, or something else like that, this is only needed a few days per year. You can rent a vehicle for those days. We have often rented vehicles that are larger or more skid-resistant than our own car for vacations—it is cheap and fun! So for many people, buying a 4wd is like having a formal dining room that you only enter four times a year (we did that, but not because we wanted to).

Enough on that. One other note on cars: keep ‘em till they drop. Cars these days last forever, especially if you buy something like a Toyota (ideally, an actual Toyota). Did you know that the average car on the U.S. roads today is 11 years old? So buying a new car every year or two is not recommended, no matter how fun it might seem.

Having said that, some of my friends, who are not profligate, lease cars and therefore switch to new ones every few years. It is quite possible that leasing a car instead of buying can be a perfectly reasonable approach, like renting a home instead of buying (see Buying a House, below). But I never wanted to lease a car, so I never really “ran the numbers”, and I am getting a little tired of the mathematical aspects of Financial Security, so I am not going to rule out leasing. You will just have to figure that one out for yourself.

Buying a House

This is a very complex subject. There are many reasons to buy a house. Owning your own home is widely considered a mandatory component of The American Dream. In our society, it is often thought to be an essential marker of middle-class adulthood, and in the United States nearly two-thirds of adults do own. (However, in some parts of the world the rate is much lower—in Switzerland, it is well under half.) There is an undeniable satisfaction in having your own place. Without seeking permission of a landlord, you can replace the janky stove or improve the garden and not only enjoy the results, but hold out hope that you will recoup some of your investment of time and money when you sell. You can even paint your living room walls black or install orange shag carpet, so long as you don’t plan to sell.

On the other hand, owning your residence entails a lot of expenses that renters don’t have: insuring the house against fire and other casualties, repairing appliances and plumbing (no more calls to the landlord!), property tax, etc. Rules of thumb for upkeep (not including insurance and taxes) range from 1% to 4% per year. So if you are buying a $500,000 home, at 2% (the middle of the range) upkeep will average $10,000 per year—the equivalent of $830 a month in rent, just for upkeep. Remember, this rule of thumb includes things like replacing an oven or roof, which don’t come along very often but are pretty expensive. So you can spend a lot less than 2% for year after year, but the odds say the costs will eventually catch up with you.

Note: We will contrast ownership to renting. Now, some of you may have the mixed blessing of living with your parents rent-free, or may have contrived some other way to live for free. In that case, you may feel the quest for financial security dictates that you should continue to sponge as long as the spongee is willing to put up with you. (There are lots of non-financial reasons to move on, and if you are actually cohabiting with your parents, they are probably happy to outline a few for you.) However, that is only true if you are taking advantage of the free rent by saving money. If you are consistently spending all your income anyway, sponging may not be the best option for you, even from a purely financial standpoint.

Which brings us to the most important benefit of buying a house. Buying a house is an investment and over time, your residence will generally increase in value. So buying is a way to enforce saving. If you are renting, or even living rent-free, and consistently spending all your disposable income, you are better off buying because some of your housing expense can eventually be recovered. Indeed, the creation of wealth by owning a home has been a bedrock of the American middle class. Conversely, those who have been excluded from purchasing homes, in particular African Americans (as a result of redlining and other government-sponsored forms of discrimination), have found it extremely hard to create intergenerational wealth, which is a core reason for the tragic wealth gap between White and Black Americans.

Another advantage of owning your home is that, assuming you take out a fixed-rate mortgage, your monthly payment does not increase. This is obviously a great bonus in times of high inflation when rents tend to increase precipitously, but also creates stability and therefore Financial Security, which is what we are all about here. So, Daddy’s Guide is squarely supportive of home buying as a concept. At some point in your life, your residence should probably be a part of your investment portfolio—though not the only thing. But the question then becomes, when? Three considerations often come up.

First, it is commonplace to hear people say, “I just can’t see paying rent month after month; you are just throwing all that money away. I need to buy.” The idea is that mortgage payments build equity in the house by paying down the mortgage, which is true. But remember, most of your mortgage payment goes for interest, especially in the early years. For example, if you took out a $500,000 mortgage at 5% interest, in the first year your monthly payments will be over $32,000 but will only reduce your debt by about $7,000. And if you refinance your loan often, or buy new houses every few years, you may spend most of your life in the early years. So most of your money is just servicing the debt, not reducing it. Now if housing prices are going up, which they generally do (but not always, and not consistently—see the notes about our own experience below), you do have an actual investment that may be appreciating. But it may not, so it is possible when you go to sell, you will see that you really were “throwing the money away”—like rent.

People also often say, “I am in such a high tax bracket now, I need the mortgage deduction.” It is certainly true that mortgages are tax-advantaged because the interest is deductible, so a person in a high tax bracket gets a bigger tax benefit for each dollar deducted compared to someone in a lower bracket. However, this does not mean that being in a high tax bracket, in itself, is a reason to take on a mortgage. First, as noted above, since tax rates are less than 100%, while your deduction reduces your taxes, it also reduces the money in your pocket. Maybe you get enough glee from depriving Uncle Sam of the income that you don’t mind taking the hit yourself? If that is not the case, you have to actually want the house, not just the deduction.

Finally, lots of people seem to think real estate is a no-lose investment, so the sooner they get into the market the better. Is this really true? Well, the long-term increase in housing prices is around 5% per year, compared to nearly 8% on stocks. So, other things being equal, you are better off putting your hard-earned savings into stocks than real estate. But if we are talking about investing in your residence, things are not equal at all. Your residence provides the benefit of housing—it obviates the need to pay rent. On average then, your house will give you a 5% return PLUS income equal to the rent you are avoiding, which may amount to better than the 8% return on stocks, which includes both appreciation and income (dividends). Also, as an investment, buying a house provides leverage. Your initial investment is your downpayment, but your return is on the full value of the home. Your stock investments provide no leverage (unless you buy on margin, which we don’t recommend; see Investing, below).

On the other hand, the real estate market goes down as well as up; there is no guarantee you will actually make 5%. That sad truth was one of the causes of the 2007-08 meltdown (in addition to predatory lending, faulty risk assessments and an array of other financial shenanigans). For example, Susan and I bought our first house in 1987 for about $200,000 and sold it two years later for $300,000—it’s hard to argue with that. We bought our second house in 1989 for $428,000 and sold it nine years later for $459,000. Taking into account the cost of improvements, we lost money. Our third house yielded a return of about 3% over 14 years. Over that time, its nominal value more than doubled, then dropped by about a third, and finally recovered enough to chalk up that small gain.

So, no need to rush to buy. The bottom line is: you should buy when you can own a place that will make you happier than available rentals at a monthly outlay that you can afford. In the meantime, just make sure you invest the money you save by not taking on an expensive mortgage. And be happy knowing if the oven fails, you can just call the landlord.

My position on house buying, from the standpoint of ensuring financial security, is summed up in a few easy rules:

  1. Your house is not the only asset you bring into your retirement. For many people, their house is their biggest investment; in fact it may be their only investment (for context, only about half of Americans own stocks). This can work out just fine—you might be able to sell your house, move into a condo, presumably in Florida or Arizona, which may well be lower-cost areas compared to where your house lies—but is not a good strategy. Many homeowners found out in the Great Recession that their only investment had a net worth less than zero. They could not even sell for enough to repay their mortgage. Not you. In your retirement, you will stay in your house/condo/apartment and live off your investments—plus whatever Social Security income Uncle Sam is willing to provide.
  2. Don’t get sucked into the trading up mentality. A few short paragraphs ago you noted, if you were paying attention, that one of the great benefits of buying a house is that your mortgage payments won’t go up over time (assuming a fixed rate mortgage). It turns out many people discard this advantage by “trading up” to a more expensive house every time their increased income makes the mortgage payment seem bearable. As noted above, constantly adjusting your spending to match your income is NOT a path to financial security. On top of which, the transaction costs involved in buying and selling are substantial. These include paying brokers, spending money to get your house ready to sell (not to mention the pain of wondering why you didn’t make those improvements years ago so you could enjoy them instead of your buyer, who is probably going to renovate the place anyway). Plus, once you buy your “move in ready” house you will likely notice the bathroom tiles are ugly and want to upgrade, and it is quite possible that the water heater, which worked fine during the inspection, conks out only months later (or even sooner). So stay in your house as long as it is working for you and enjoy the constantly diminishing (inflation-adjusted) payments.
  3. Don’t overinvest in paying off your mortgage. Most people love the idea of owning a home free and clear—no rent, no mortgage, low cost of living. If you can afford to pay down your mortgage and you will otherwise spend that cash, go right ahead. Every dollar you put into reducing your mortgage debt saves you the interest—paying $100 into a 4% mortgage saves you $4 a year. But if you instead invest that $100 in stocks and make 7 or 8% a year, you are ahead of the game. Keeping a high level of low-cost debt is a very sound financial strategy—the American government, which pays ridiculously low interest, is $30 TRILLION in debt, and believe me, never intends to pay it off, no matter what any Republican politician may say. [IMPORTANT NOTE: In contrast to low-interest debt like a mortgage (at least relatively low interest), you should NEVER take on credit card debt, which always comes at an eye-wateringly high interest rate. In fact, to continue reading, you must now pledge to pay off your credit card bills every month. Believe me, credit card debt is practically the quickest path to financial insecurity.]

So, as a savvy reader of Daddy’s Guide, you will buy a house if you want to put your own mark on your residence, if you can afford the payments for a place that you will be happy and live in for a good while, and/or if you prefer the comfort of a fixed mortgage and the cost and time involved in keeping up a house to the ease of paying rent that is going to rise over time.

Entertainment

Although The Other Stuff seems like a residual category, it really means “the other stuff you need to live”, whereas Entertainment is more or less how you spend the money that is left after you cover housing, car (if necessary), The Other Stuff, and saving for retirement. If there is no money left at that point, I do not favor eliminating entertainment. First, that would make you very unhappy. Second, it probably won’t really happen, which means you will probably cut down on saving or start taking on high-interest rate debt (for example, on credit cards), neither of which is recommended. You can choose between two approaches:

The ideal approach is to make a budget containing all the weekly, monthly, and yearly expenses you have (including savings) and assign an amount for entertainment. Obviously, this only works if you actually keep your entertainment expenses within the budgeted amount, which is actually pretty hard to do, since some of these expenses are pretty lumpy. So you can go along through most of a year staying well within your budget, then suddenly a can’t-miss wedding, or maybe a special, last-chance-to-see-the-original-cast Hamilton performance on Broadway crops up, and you blow the budget. But you do the best you can, and the semi-ideal approach outlined below can be your backup plan.

The semi-ideal approach is to estimate your ongoing expenses and determine an amount you can afford to set aside for retirement, leaving some money for entertainment, then determine how much you can save each month, and then make arrangements, probably through your employer, to put that amount somewhere you can’t reach it (probably a retirement account like a 401k, which penalizes you severely if you take money out early). Then, you go ahead and live your life, applying the rationale under The Other Stuff to Entertainment, too, and at the end of the month hope you have money left for the mortgage or rent. If not, you tighten up your expenses next month. This approach worked pretty well for Susan and me and ought to work for you, too, as long as you don’t cheat and stop paying off your credit card every month, or something else shifty like that.

Having covered the key categories of spending, I should sum up Daddy’s rules on Spending:

  • Be conscious whether you are spending at the Target, Nordstrom, or Neiman Marcus level
  • Buy a car that serves 90% of your needs and hold onto it as long as it still does that
  • Before you buy a house, make sure you can afford it (with all its costs), that you will be happier there than in your rental, and (as with cars) hold onto it as long as you stay happy with it (and try to stay happy)
  • Don’t let your entertainment expense cut into savings or put you in debt.

Notes on a few special topics–

Children

I recommend no more than two. If you are reading this and already have more than two children, I realize you lacked the benefit of this monograph, so I forgive you. But don’t have any more. Having excess children has all kinds of negative impacts. Let’s start with the global view. Having more than two children leads to increasing population, which burdens the earth and accelerates climate change, even if your kids are vegan, bicycle-riding, vegetable growing, composting nut jobs. But you say, “well there are a lot of people who don’t have any children at all, so I am just offsetting their underperformance, and by the way, my kids are going to be brilliant (as well as vegan) and will probably find the cure to climate change, so go pound sand.” Which leads to the second negative aspect of having excess children—it is fundamentally arrogant.

Well, that was pretty judgy. Forgive me, I just really don’t get it…maybe it’s because the family I grew up in was so small and still didn’t get along very well. More family, more drama?

Anyway, there are a lot of other negative externalities, most of which are financial. OBVIOUSLY, having children is stupendously expensive (so be glad I didn’t tell you childlessness is the best route to Financial Security in the first place), from diapers to piano lessons all the way through college. But it doesn’t stop there; there’s the cost of holiday gifts, family dinners, and so on and so on. Plus, you probably have to buy an SUV or even a minivan to accommodate all those brats; you need a bigger house; you have to rent multiple hotel rooms when you go on vacation. The list never ends. Trust me.

Divorce

For many years, Susan had just one four-word piece of advice on achieving financial security: one spouse, one house. It worked out well for us.

In any case, we know that divorce is a very bad thing, for many reasons. It means paying unseemly sums to lawyers, which is never a good thing; it is bad for kids if you have them; it can be extremely hard on pets, especially if there is joint custody and they have to spend equal time in the company of the former owner who buys the lousier treats. But here we are only concerned with Financial Security, and I can tell you in no uncertain terms that divorce is a bad choice.

Timeshares

You are probably thinking: “Why does Daddy even include this? I am obviously way too smart to buy a timeshare, especially given our own family’s experience with the phenomenon, which let’s face it, was chronicled in excruciating detail in The Colby Report.” That’s what I thought (except for the personal experience part), right up until about two hours after we bought one. So let’s reprise the situation as I remember it.

Here we are at the rental car place in Los Cabos, trying for the umpteenth time to avoid the $50 a day charge for insurance, which never shows up when you make the reservation (ok, when the quote is $4 for a weekly rental, maybe one should know something is up). Trapped and sweltering, we are approached by the ubiquitous timeshare sellers offering free tequila! Discounted car rentals! Free lunch! Like everybody else who ignores their better instincts, we think “ok, sure, we will go for your free lunch, but we are not buying any timeshare, no sir, not us!” So we go to lunch with the very perky salesperson, who gives us her spiel, and a funny thing happens. Susan and Marilyn start to say, “maybe this is a good idea!” (Editorial note: it is more than possible Susan and Marilyn remember this differently, but if that is the case, they can write their own Guide. This is mine, and I am telling the story my way.) So I think, those two are pretty hardnosed, so if they think it is ok, it probably is. Well, you know the rest of that story.

But just to underline how dangerous this is, remember that we (and here I think it was only Susan and I) did it again! This time around they upped the ante with a helicopter ride, and we bit. I am proud to say we managed to emerge without buying ANOTHER time share, but we did have to buy our way out by accepting some really stupid “introductory deal” that was way less expensive than an actual timeshare but correspondingly less useful as well.

You would probably think Daddy’s recommendation is never buy a timeshare, but you would be wrong. Based on not only our personal experience but my encounters with timeshare owners through my life, I feel they can be a good thing if they fit your vacation needs (they did not fit ours, but that is a topic for Daddy’s Guide to Vacation Travel [don’t hold your breath]). It is actually possible to buy a timeshare on the secondary market, and they can be got VERY cheaply. So think through this carefully, make sure you will really want to use (or trade) the timeshare regularly, and buy cheap. A few months ago I would have added “we’ve got one for you”, but you are too slow.

Chapter Three: Saving

The standard advice on saving for financial security (which mostly means saving for retirement) is the same as for voting—do it early and often. This is actually good advice, at least when it comes to saving. Start early and make it a lifelong habit. All completely true. But of course the follow-on question has to be: “how much should I save” and that is a little more challenging to answer. There are so many variables, such as how much you earn, how much you spend, whether you intend to have children (or already have them), how long you expect to be working, what you expect your life to look like in retirement, etc., that is hard to suggest a number or even a percentage of your income. But we will try to find some bright lines.

First, look at what your employer has on offer. If you are the beneficiary of a “defined benefit plan” which is what we used to just call a “pension”, lucky you! If you spend much or all of your career in that plan, your retirement is probably relatively well taken care of without any action on your part, aside from showing up for work (and let’s face it, you probably work for the government, or are in a union, or ideally both, so you probably aren’t going to get fired anyway; so go ahead, take a bogus sick day). You probably should still save for retirement, but your savings will mostly go to improve your standard of living in retirement rather than ensuring your survival. It is not that likely your employer has a 401k plan, but if they do, you should contribute what you can—I can’t tell you how much is enough.

For most employees, the employer has a 401k plan and maybe a Roth 401k plan as well (the differences are discussed in Investing, below). If you work for a nonprofit, your plan may be a 403b, which is basically the same as a 401k. If your employer has a matching plan, you MUST contribute whatever you need to do to maximize their match. Not doing that is just leaving money on the table, wherever that metaphor came from. Beyond that, it is best if you can actually contribute up to the federal limit into either a 401k or a Roth 401k. Either way, you are maximizing the government’s tax largesse, which you should always do. If you do that, you will end up with a bunch of money in your retirement account, which along with Social Security (assuming it still exists) may be enough to make you comfortable in your dotage.

If you have maxed out your employer’s contribution and also reached your federal limit, you are well on the way to Financial Security. If you can do more without compromising too severely on Entertainment, do it. As I note somewhere below under Investing below, if this is not your situation, don’t stress too much.

Having said all that, I have to acknowledge that you may have student debt, which alters the landscape. It is not unusual these days for people to be carrying student debt well into middle age, which is undoubtedly a major indictment of our education system in general and our financial system specifically. But if that is the case for you, it may be significantly harder for you to meet the guidelines outlined above. Do the best you can, and reassess your financial situation in a few years.

Chapter Four: Investing

Ok, now you have some savings, what should you do with it? Zillions of words have been written on investing for retirement; there are untold numbers of columnists and magazines and websites on the topic. Many are very good; with numbers and charts, they quickly and clearly communicate the importance of starting early, the virtue of a diversified portfolio, etc. But in this guide I want to lay out several completely different principles that underly my recommended approach to investing.

But before I delve into those principles, I need to lay out my overall approach to investing, which I call the “Don’t Eat Much” approach. When I was a child, my dad would ask my mom something like, “should we hold onto this old set of water glasses, which we never use anymore?” And she would reply, “well, they don’t eat much”—as much as to say, they aren’t causing us any trouble, so leave well enough alone. In short, my desire is to spend as little time on my investments as possible while still making a good return. My approach demands investments that don’t eat much, so I don’t have to feed them often, metaphorically speaking. This philosophy will underpin much of the discussion below.

A few additional notes. First, besides appealing to my fundamental laziness, my approach has the virtue of keeping me out of trouble. In general, when amateur investors pay too much attention to their portfolio, they do bad things. Like buying stocks when things are rosy and everybody is buying—this is usually the top of the market, meaning they are probably in for a quick loss. Or not doing things, like holding onto stocks that have dropped in value because they are hoping they will come back and avoid the loss, while the stocks just continue to plummet. I have done these things.

Second, the hands-off approach can go too far. Like when I continued increasing my investment in something called the “extended market fund”, thinking it meant I was buying a pretty wide swath of the market (it was “extended”, after all), when it was actually composed solely of stocks from small and medium-sized companies. It was when I realized this oversight that I knew I needed professional help, at least in the realm of investments.

Finally, this is just my personal approach. You may feel differently. You may want to spend more time on your investments. After all, people do weirder things than that, like collecting stamps. If that is the case, I think it is still worthwhile for you to read this section; there is more here than just laziness.

Now let’s talk about the types of investments you might be considering. There are a more or less infinite number of types of investments, but for these purposes we will break them down into a few categories:

  • CDs, money market accounts, and money market funds
  • Bonds
  • Stocks
  • Other stuff

First, let’s talk about what these are.

INVESTMENT TYPES

CD’s, Money Market Accounts, and Money Market Funds

We start with CDs, money market accounts, and money market funds, because they are easy. In each case, you are giving your money to an institution that will invest in very safe, short-term vehicles like Treasury bonds and commercial paper (short-term corporate debt). As a result, all are very conservative—they offer little risk of losing money—but they also pay back at a low rate. They are useful as a way to get a little return on money you want to have easy access to, but they should not be considered long-term investments.

The differences in these three vehicles relate to how long your money is tied up, how much you will earn, and whether they are insured. CDs have a set term; you can’t get your money back until the term is over (technically, you can, but you will have to pay a hefty penalty for the privilege, which you don’t want to do). So you need to assess how long you can wait to get the money back. With either a money market account or money market fund, you can withdraw money at any time (though you may have a minimum required balance and may be limited in how often you can withdraw). You can even write a check, almost like a regular bank account (again, there may be restrictions, like the check may have to be more than $500). In return for agreeing not to ask for your money back until the end of the term, you get a little more interest from a CD than with the other two options.

CDs and money market accounts are issued by banks and savings and loan associations, so they are federally insured; money market funds are issued by investment firms (like Fidelity or Vanguard) and are not insured by the federal government. Money market funds tend to pay just a bit more than money market accounts, to make up for some added risk. I don’t think the insurance should make a difference, because the chance of an institution like Vanguard going bust is vanishingly small, and also because in the greater scheme of things you aren’t going to have that much money here.

The biggest virtue of a money market account or money market fund, which I think can’t be overstated, is you don’t have to keep thinking about when your CD matures and what to do with your money next; you just leave it there until you need it, and it waits patiently for the day. Hence the joy of money markets (either kind) vs. CDs.

Bonds

Bonds are debt instruments, which is finance-speak for loans. You have your government loans, which include federal debt—Treasury bonds and Treasury bills—and loans to states and local government agencies, which are referred to collectively as “municipal bonds” or “munis”. Treasury and municipal bonds are considered extremely safe, as they are backed by the issuing government; they also get favorable tax treatment (muni bonds are exempt from federal tax and may be exempt from state tax, while federal obligations are exempt from state tax but subject to federal tax). For both reasons, they pay less interest than corporate bonds.

And you have your corporate bonds, which for our purposes can be characterized as investment grade bonds (issued by highly stable, creditworthy enterprises) which are seen as very low risk and pay low interest, and junk bonds, which are considered more risky and as a result pay higher rates of interest. Because of their higher interest rate, and because issuers probably did not appreciate having their product referred to as garbage, these bonds are also known as “high-yield bonds”.

All bonds have lifetimes. Bonds that are repaid in one or two years are considered short term; between two and ten are medium term; and those with a longer life are long term. In general, the longer you are tying up your money, the higher the interest you will receive. In some circumstances, this is not the case; this is called an “inverted yield curve”, which we will not try to explain here. You know, we are not trying to run the Federal Reserve or anything like that.

As an investor, you can buy bonds and hold them for their lifetimes. But most individual investors invest in bond funds, which are baskets of bonds assembled by an institution like Vanguard. This has two benefits for you: first, you don’t have to pick the bonds, and second, you can easily move money in or out of the fund, because Vanguard is constantly buying and selling actual bonds. They do the work for you.

But the inflexibility of long-term bonds still has an effect on the investor, even if she has invested in a fund. The price anybody pays for a bond is based on two things: the face amount (the amount originally borrowed) and the interest rate. If you lend a company money for ten years at a 5% return and then, halfway through the ten-year period, interest rates go to 8%, and then you want to sell your bond, you are going to have to give the buyer a discount reflecting the crummy interest rate she will get. So the value of long term bonds in a fund fluctuates with the current interest rate. As interest rates rise, the value of outstanding bonds falls, which makes perfect sense when you think about it, but is also kind of counter intuitive, because it is also true that when interest rates rise, you can make more money by lending. So it seems like rising interest rates should be good for bond investors. Very confusing.

The good news is that the shorter term your bonds are, the less they fluctuate with interest rates because buyers are not locked into the low old rate (or don’t benefit from the high old rate) for that long. So to keep our heads from exploding, we just don’t invest in long term bonds and we leave the pricing stuff to bond traders, who actually like to think about things like that. (A friend of mine is a bond trader, and I have been exposed to his unnatural fascination with bond prices more times than I wish to think about.)

Stocks

Stocks are also called equities, although there is nothing equitable about an investment where the wealthiest ten percent of the country own almost 90% of the market. From a company’s standpoint, stocks are one of two main ways to raise money: debt (bonds) or equity (stocks). With debt, the company borrows money and pays back later; with equity the company sells a bit of its business to investors, who get to keep it or sell it to somebody else. From the investor’s standpoint, stocks are a way of sharing the profits of a business by owning a little piece of it. You may remember when you were a little kid and your grandparents bought Dominion Energy stock for you, we said you were the proud owner of a brick in a powerplant; that’s the general idea.

Of course, when you buy stocks, you generally are not buying from the company. Businesses periodically decide to sell stock to the public, which is a public offering, and when this happens for the first time it is an initial public offering or “IPO”. The rest of the time you are buying from another investor. To find your seller you can use a broker who will charge a fee for that service. Historically, brokers charged hefty fees for buying and selling on your behalf, because they claimed to have insight into which stocks to buy. Some years ago discount brokers, arose who did the job for less and did not pretend to know what you should and shouldn’t buy. Today, online brokers like Robin Hood don’t charge a fee at all. You may wonder how Robin Hood makes money, but that is beyond the scope of this monograph; you have to read Matt Levine to understand it. Good luck.

There is another way to buy stocks, which is to invest in stock funds—baskets of stocks assembled by institutions in which retail investors (that’s individuals like you or me) can buy shares. These are generally referred to as mutual funds or exchange traded funds (ETFs), the difference being that ETFs are themselves bought and sold on, for example, the New York Stock Exchange as if they were stocks. When you invest in a fund, instead of paying for trades as they occur, the institution charges you a set percentage of the amount you have invested for their costs of operation. This is called the expense ratio, and varies from a few hundredths of a percent to around one percent per year.

Stock funds are divided into active funds, which attempt to maximize returns by buying and selling stocks—trying to buy low and sell high, as it were, and passive funds, which generally buy and hold stocks, anticipating returns from stock dividends (earnings paid out to stockholders) and from increases in the market overall. Most passive funds are index funds, meaning that they are intended to mirror a specific mix of stocks. For example, there are S&P 500 index funds, which mimic the S&P 500 by holding all the stocks in that index. Because index funds trade less than active funds (mainly buying and selling as stocks are added to or removed from the index), and because they don’t need to carry on a bunch of expensive research to decide when and what to buy and sell, index funds have lower expenses than active funds.

Other Stuff

There is an endless array of other things that people consider to be “investments.” I don’t recommend any of them as cobblestones on the yellow brick road to Financial Security, and I will pretty much limit my discussion here to explaining my reasoning.

Hedge Funds. Number 1, these funds generally require such a large investment that if you have that kind of dough, you shouldn’t be reading this. Number 2, although the “hedge” part suggests a risk-limitation strategy, these funds tend to use a lot of leverage, which means when things turn bad (and they always do, eventually) you can lose a lot of money fast. If my explanation Number 2 contains concepts that require more explanation, just stick with Number 1.

Private Equity. These are investments in private equity funds, which invest in a portfolio of privately held companies (ones whose stocks are not listed on an exchange and not available to the general public). Like hedge funds, these usually require big bucks to begin with, so they are a little beyond the scope here. They can also be pretty risky. For these purposes, I am going to assume you don’t have enough money to invest in private equity, so that’s all I have to offer. Except to add for your edification that private equity firms are evil because they generally buy up profitable companies, often using a lot of debt, and then fire a bunch of employees to reduce costs and pay their debt service (editorial note).

Real estate. For this purpose, I am talking about owning actual dirt or buildings (other than your own residence, discussed above), not REITS (real estate investment trusts), which are more or less the same as stocks. People like real estate. They can touch it; it has an aura of stability and permanence. People like to say “they aren’t making any more of it”, which of course is only true if you are talking about dirt (as opposed to buildings), and it isn’t even true about dirt if you are talking about places like Dubai, where they build artificial islands on which to construct houses and apartments. It is also undeniably true that a lot of really rich people made their money in real estate, and that a bunch of somewhat rich people got that way by slowly buying up houses and apartments and building an empire over many years. So that is a tempting factor.

My main problem with real estate is that it takes a lot of work. You have to tool around endlessly looking for stuff to buy (worse yet, possibly in a car with a realtor), then you have to “run the numbers” to see if it is a good deal, and when you are done you have an asset that can, and certainly will, develop a leaky roof during a massive thunderstorm or conjure up a stopped up toilet on the eve of the first vacation you have taken in two years. The other problem is that the real estate market periodically goes through some pretty wrenching downturns, as noted above. Real estate investing is best left to professionals, which is not you; you have a real job.

Other tangible goods (gold, art, baseball cards, Beanie Babies, etc.). Unlike stocks, bonds, and even real estate, none of these things produce income; they are valued only because people like to own them. Since their value fluctuates with the whims of the collective public, these are highly risky investments. In addition, their owners tend to get attached to them (note that most of the famous baseball card collection sales come about when somebody finds a cache of cards in the attic, not when a collector decides to cash in). An asset that you will never sell is not an investment, no matter how much it appreciates (or how much you appreciate it). Since I failed to get this tome out faster, I am now compelled to add to this category NFTs (non-fungible tokens, which I will not try to explain) and crypto currencies (ditto).

So now we know that in the world of Daddy’s Guide, there are basically only two investment types to worry about, stocks and bonds, and you are way too young to buy bonds. So, what should your investment strategy be?

INVESTMENT STRATEGY

Well, you’re young, so most of your savings should be going into tax-advantaged funds for retirement. That money should be 100% invested in stocks representing essentially the entire stock market, ideally through low-cost index funds or EFTs. Simple, no?

You may ask, is that just the U.S. stock market, or should I buy international stocks as well? It turns out this has been a bit of a bugaboo for us, in that our investment advisor (retained after the “extended market” imbroglio mentioned above) is contractually obligated to make us buy international stocks. I am not making this up. If we insist on only “buying American” she will fire us. Which is awkward in that one of us, and by this I mean Susan, does not want to buy international stocks. She has three pretty good reasons for this position. One, today we live in a pretty integrated world economy, so there is fairly high correlation between movements in U.S. stocks and others. Two, when there is divergence between the economic performance of the U.S. economy and others, the U.S. economy generally does better. The third reason, which is really just another form of the second, is that stocks outside the U.S. have lagged behind U.S. stocks for many years. These are all facts. Nonetheless, experts continue to believe a time will come when the U.S. stock market will become the laggard, and if you are still alive when that day occurs, you will be glad to have international stocks to balance out the lousy performance of the American ones. Whatever. Go ahead and buy international if you want to, or if somebody makes you. Just don’t buy too much. We are required to hold 10%, but that is not necessarily a recommendation.

Now, at some point in your life you are going to need to start moving your retirement portfolio into less volatile investments, which you now know means bonds. When will that happen? Well, not for a while. So you can wait until I write the next installment of the Daddy’s Guide series, Preparing for Retirement. But hopefully I will die first. At least now you know that as you approach your dotage, bonds ought to figure into your investment life.

Unfortunately, my desultory pace of writing saddles me with the need to address 401k vs. Roth 401k since the question has already come up in a non-hypothetical context. A traditional 401k takes pre-tax contributions from your salary (your employer has to have set up a plan) and the gains in the account accrue tax-free. You can take money out any time, but to avoid a heavy penalty you need to wait until you are 59 ½ (I never met anyone who said they were 59 ½, but for some reason the federal government likes half years). Then, starting at age 72, you must start taking money out. Assuming you are at least 59 ½ when you take distributions, you are taxed on all the money at your then-applicable tax rate.

A Roth 401k takes after-tax money but the gains in the account are not taxed and when you take money out (with the same age limitations as for a 401k) you don’t pay tax at all.

Although it is not intuitively obvious (at least to me), your results for will be exactly the same in the end for either plan PROVIDED that your tax rate on withdrawals is the same as it was when you deposited the money in the account. That is, if you take say, $10,000 of salary and put it in a 401k, and take the after-tax equivalent and put it in a Roth 401k, in 20 or 30 or 40 years you will be able to take out the same amounts. The extra amount invested in pre-tax money is exactly offset by the tax you pay on withdrawal. However, if your effective tax rate is higher when you withdraw, you would be better off with the Roth (i.e., paying the tax up front at the lower rate); if the later tax rate is lower, the opposite is true and you would be better off with the traditional 401k.

You might say, heck, I’m making a lot of money now and when I retire it will be zilch, so surely I should stick with the good ole’ 401k—pay later. Maybe, but if you squirrel away a lot of money, get Social Security (taxable to fat cats like you), and maybe keep making money later in life, you might be surprised. Also, it is hard to guess what Congress will do to tax rates, although in the current climate, nobody is losing money betting that the answer to a question that starts with “What will Congress do…” is “nothing.” Splitting your retirement funds 50/50 Roth vs. non-Roth seems like a good hedge.

But. The IRS limits the amount you can put into these accounts, and the limit is the same for both types. Remember that the comparison above assumes you are taking the same hit to salary for either plan. If you can afford the extra tax cost of the Roth contribution and still maximize the allowable contribution, you are actually putting away more money. In that case, the Roth is the better choice.

[If this Roth/IRA stuff seems confusing, join the club. I just hope I am not too far off base. If you figure out I am wrong, please let me and my readers know.]

I should also touch on non-retirement money. There are two kinds. One is the kind you put aside so you can cover unexpected expenses, like major house repairs, car repairs, or your last chance to see the Rolling Stones (assuming they don’t just fool you with yet another farewell tour), or expected large expenses like a downpayment on a house. Everybody needs this; the only question is how much you need and how much you can afford to set aside. The other kind is what you get when you have maxed out your 401k or Roth 401k contributions and you still have money left. Not everybody has this, in fact, Susan and I did not have to address this problem for quite a few years.

As to the first, you don’t want that money tied up where you can’t get it quickly, and you probably don’t want it to be stashed in some highly volatile asset like stocks, because you may be forced to take capital gains when you don’t want to, or sell an undervalued asset at the wrong time, or you just might not have as much money available as you thought. So you could just put it in a checking account, where its value will slowly be eaten away by inflation (or quickly, depending on the economic cycle). Or you could put it in a money market fund or CD, where it will wither slightly more slowly. As noted above, for the difference it makes (at least in the current environment) and the relatively small amount you will be dealing with, I would go with the money market just for simplicity. But if the amount is larger and the time frame somewhat known, maybe it makes sense to spring for a CD. Check the rates, and don’t forget to do the math and see whether the difference is really worth the trouble.

For non-retirement funds that you don’t expect to touch for a long time, like at least several years, I would treat them like your retirement savings—put them in stocks and forget about them—as long as someone, preferably someone who is not you but does not charge much, IS watching the funds (by the way, that person is not me, either, even if I am your actual daddy).

AND A FEW MORE THOUGHTS

As I mentioned at the outset, most of this is pretty garden variety stuff, which you can find in any financial self-help book, like Investing for Dummies (an actual book, which I have not read). But I want to go beyond that kind of book learning and share some hard-earned lessons from personal experience.

  1. Don’t buy specific stocks, and buy index funds instead of managed funds. I could go into the “efficient market hypothesis”, which proposes that the stock market is so big and well-informed that any factor that would influence the price of a stock has already been taken into account, so there is no way to make a profit by trading. I won’t do that because: 1) I don’t really understand the hypothesis, I just cribbed the above from Investopedia (a pretty good source, by the way), 2) the hypothesis clearly is not really valid as people demonstrably do make (and lose) money on the market all the time, and 3) I have my own independent grounds for my conclusion. Viz:

First, I figure there are millions of people out there who are highly educated, highly interested in picking stocks, and highly motivated to make money on the market as their career or their favorite hobby. I, on the other hand, am not very interested in researching companies to figure out who to buy, plus I have an actual job and a pretty long list of things I would rather do in my spare time, including bowling, just to give you an idea where picking stocks falls. Remembering that trading stocks is a zero-sum game, why should I think I will outdo the person on the other end of my trade?

Naturally, you might say: “of course I don’t have the time or inclination or background to pick stocks, so I will hire an expensive Harvard-educated advisor to pick for me.” Unfortunately, research shows that only a small percentage of such advisors consistently beat the market. Even when a particular money manager chalks up high returns year after year, there usually comes a time when her returns sink like a Timmy Lincecum pitch and you realize: they were just lucky long enough to look like they knew something. And, of course, you have to pay those people for their advice, generally around 1% of your investments’ value per year. Given the long-term rate of return on stocks is around 8% (after inflation), that is significant, especially when you can invest in index funds practically for free.

  • Don’t try to time the market.

This one is not original, but it does have special significance for me. Back in about 2002, after the crash of the first dotcom boom, we were realizing just how clueless our then-current advisory firm was (“we will buy FedEx because they are the best company in that market”), we decided to move on. We cashed out. Then came the mistake: I felt (it should have been such a warning sign that I was acting on “how I felt”) that the stock market was going to continue dropping, so we kept our money in cash for quite some time. Quite some time after the market rebounded, until we realized we had made a mistake and bought back in at a higher price.

Sad to say, it happened again. On Election Day 2016, I had coffee with a sophisticated, wealthy real estate professional, who expressed deep concern about the market tanking after a Trump win, due to the uncertainty such an earth-shattering result would inevitably bring. I needed to take some money out of the market due to the extended market imbroglio mentioned above, so I went ahead and did that and then held the cash waiting for the crash. You know the rest.

  • Don’t invest through a friend.

This is not really investment advice; it is social advice. You might have a friend who is a money manager. They might work for a big, reputable firm. Or they may have their own private, extra-special firm, and because you are their friend you have an opportunity to invest through them. They are almost certainly well-off (aren’t most people in the finance world doing pretty well?), and sophisticated, and they know way more than you about investing. So you invest with them. Well, in all likelihood they are going to disappoint you (see the discussion above). And then you are going to have to decide either to stick with them, because after all, they are your friend and will work extra hard for you, and anybody can have a bad year or so. Or you pull your money, which is going to require some explanation, and that may be a conversation that neither of you enjoys; it leaves a bad taste in everyone’s mouth; and now you have doubts about how smart your friend really is, which becomes annoying when they continue making lots of money off their other clients. Yes, this actually happened to us, and while we remained friends with our erstwhile advisor, the incident did not exactly burnish our relationship.

Also—

Below are a couple of principles that are only important if you go off the rails and invest in something besides stocks, bonds, and money market funds. I am sorry to say it, but I am just not confident that you are going to keep to the straight and narrow, so I am including them. Plus, they give me a chance to share more of my own tales of woe.

  • If it looks too good to be true, it isn’t. This may seem obvious, but apparently it isn’t. Here is one example. Bernie Madoff is generally “credited” with running the biggest Ponzi scheme in history, raking in tens of billions of dollars of investors’ money. (By the way, if you don’t remember, the name is pronounced “Made-off”, as in “Bernie made off with a lot ill-gotten gains.) Anyway, his firm reported steady gains, year in and year out, of 15 to 18%. The gains were not crazily high given what the stock market was doing during much of that time, but they were oddly steady. Though Madoff claimed he was investing in the stock market, his returns did not decline at all when the market tanked—they just kept rolling in. On top of which, Madoff refused to allow his investors access to their own accounts—he just mailed them statements at the end of the month. His investors, most of whom were wealthy, sophisticated, and experienced investors in their own right, should have known something was afoot, but to a man, woman, and institution, they played along unquestioningly, pretty much up to the day federal prosecutors arrested Madoff for securities fraud.

Susan and I (well really just I), made a similar mistake at an embarrassingly late stage in my investing life. A friend came to me with the offer to invest in a biotech company that was raising its second round of financing. He acknowledged that all startups are risky, and this one was obviously risky too, but it looked like “the closest thing to a sure bet.” What’s more, the corporate lawyer for the startup, an experienced hand with a major law firm, said it was possibly the most promising biotech company he had ever seen. Theoretically, it was a risky investment, but in reality, it was practically money in the bank. I was interested in getting involved, seeing the company grow, and making money; Susan just gave in. You know the rest. The company went nowhere, the founder was likely a crook, and we lost all our money (BTW, it wasn’t Theranos).

Fortunately, the amount we invested was small enough that losing all of it did not put us in the “poorhouse”, whatever that might be, nor did it really damage our financial plan. Which, I suppose, is another lesson of investing: It is totally reasonable to invest in practically any asset class, no matter how wacko it may seem (let’s say crypto currencies, and by saying that I know I am revealing myself as a beyond-redemption Boomer), is ok, as long as you don’t mind losing your money. It’s like going to the casino, if you like that sort of thing. So long as you limit your losses, it’s just entertainment. In fact, during the pandemic some commentators theorized that some investors piled into the market simply because they were bored.

But, I digress. The lesson is: If it looks too good to be true, it ain’t.

  • Investing where your friends do is not due diligence. You are smart, educated, and successful; you have read Daddy’s Guide to Financial Security (ok, you skimmed the boring parts). You probably hang out with some people who are a lot like you. Maybe they even have more money, more experience in finance and investing. Sooner or later one of them is going to come to you with an idea. Maybe they are thinking of buying an apartment house, buying a youth hostel in Colombia, or investing in a marijuana genomics company. (I am not making these up, and the youth hostel might have been the best prospect.) You may be tempted to think, geez, Wilbur is investing in this apparently hare-brained scheme; maybe it is not as nutty as it seems and I should join him.

That is not good enough; you need to do your own research. Exhibit One: Madoff again. Like most financial advisors, he got most of his new clients through referrals from existing clients, who were pleased as punch with all the money they were making. No doubt their friends figured if Wilbur was investing with Madoff and doing so well, it must be a good idea. Exhibit Two: our biotech startup. A whole bunch of my very savvy, successful friends had already bought into the concept, so how could I go wrong? I should have been delving into the back story of the founder (and of how his last venture went wrong), the clinical trials (which for some reason, could never be replicated), and the market research (which never really showed a market existed).

IN SUMMARY

Well that topic got a lot longer than I expected, so I guess I better summarize Daddy’s rules on investing. They are pretty simple:

  • Make investments that don’t take up a lot of time so you can spend your time on things you actually like to do, which also will not cause you to lose money (unless gambling is one of the things you like to do, in which case the entire section on investing is probably lost on you anyway).
  • Then don’t pay too much attention to your investments—this saves time and avoids silly mistakes (most of the time).
  • Invest your retirement money in the entire U.S. stock market (I leave the international stuff up to you) through low-cost vehicles such as index funds. When you get old, buy bonds. Somebody else will have to tell you when that is.
  • Don’t do stupid things like the things I did. Find your own.

Epilogue

Well, that’s the sum total of what I have learned about attaining Financial Security in my first 66 years of life. Despite some pretty spectacular mistakes, it has worked out pretty well for Susan and me. I hope it is the same for you, and maybe even a little easier as a result of reading this.