This 4×6 index card has all the financial advice you’ll ever need

http://m.washingtonpost.com/blogs/wonkblog/wp/2013/09/16/this-4x6-index-card-has-all-the-financial-advice-youll-ever-need/

by bcn • 13 years ago

155 249 13 years ago

m.washingtonpost.com

peter_l_downs• 13 years ago

Seems about right to me.

johnnyjustice2• 13 years ago

What does HN think about the last statement? -Promote social programs for when things go wrong

lisper3• 13 years ago

Seems like a no-brainer to me. The alternative is to have people panhandling on the streets. That's not pleasant -- on either side of the transaction. I'd rather live in a country where it wasn't necessary.

baddox4• 13 years ago

It's not a no-brainer to me. My brain desires more data on the economic efficacy of specific social programs, because even the broad implication that social programs reduce the number of people panhandling on the streets is not obvious to me.

humanrebar7• 13 years ago

Sounds like political advice more than financial advice.

In a similar vein, I would advise people to support charities that help the less fortunate like food banks, but I wouldn't consider that financial advice.

jmduke• 13 years ago

Cynically, you can consider it hedging one's bets (no pun intended.)

muzz3• 13 years ago

he clearly qualifies it for "when things go wrong", so the suggestion is more like some kind of insurance in case that happens

johnnyjustice2• 13 years ago

You are right it does seem more political then financial. Advising people to support charities would be financial advice, wouldn't it? I think its pretty good advice something like "Attempt to give 1% of your income to a good cause for when things go wrong"

ChuckMcM• 13 years ago

So in the ideal world everyone around you is doing the same thing as the card. If that is true, then when something goes wrong there will be plenty of safeguards already in place.

It takes a special kind of hubris to social welfare benefits believing you will never need them.

baddox4• 13 years ago

So in the ideal world everyone around you is doing the same thing as the card.

That still doesn't constitute financial advice, unless your choice to follow the card somehow influences others to follow the same card, which is unlikely at any measurable level.

baddox4• 13 years ago

I think it's too broad, because the economic efficacy of social programs probably varies wildly, especially when we're talking about government social programs.

acdha3• 13 years ago

economic efficacy of social programs probably varies wildly, especially when we're talking about government social programs.

As opposed to literally everyone having to figure this out on their own? Say what you will about government programs, they're going to be more consistent than what you get pushing the problem out to millions of individual actors.

joseph_cooney• 13 years ago

...If you happen to live in the United States, and the tax laws there don't change.

muzz3• 13 years ago

well yes, but it should be too hard to replace "401k" with whatever tax-advantaged retirement program is available

kintamanimatt2• 13 years ago

Edit: Misinterpreted what a 401(k) is. I thought it was a tax-free savings account that you can borrow against, rather than a form of pension plan. The UK does have something somewhat similar: a personal pension scheme. The rest of this comment is wrong, but I'll leave it here for giggles.

They don't really always exist. As far as I'm aware there isn't really the British equivalent of a 401k, for example. Brits have ISAs but they're just tax free savings accounts with an interest rate generally well below inflation. Cash ISAs also come with the restriction that you can only deposit a very low amount into them per year -- this year it's £5,760. You also can't re-deposit withdrawn money without that further deposit subtracting from your annual deposit limit.

The trouble with putting large amounts of money in a savings account is that it generally comes with interest rates that (even before tax) are less than inflation. Savings accounts are great for socking away money to cover temporary shortfalls in income, but not much else.

kondro2• 13 years ago

I would have an opinion but Australian law prevents me from having one without providing a statement of advice.

kintamanimatt2• 13 years ago

I doubt anybody could construe a general opinion that's not tailored for a specific individual's situation as financial advice, if that's what you're getting at. Maybe it's different in Oz.

kondro2• 13 years ago

You'd be surprised. Our law assumes quite a large amount of potential uneducation and general stupidity when it comes to an unsophisticated investor interpreting financial advice.

JoshTriplett7• 13 years ago

Almost all of this is excellent advice, except for one point: "save 20% of your money". That's a bare minimum, which will let you retire after about 37 years of working. Bump it to 35% and you'll retire after 25 years. Bump it to 50% and retire in 17. Bump it to two-thirds and retire in 10 years.

That's one of the most important factors in your personal finances: not how much you make off your investments, not whether you max your 401k, but how much of your income you save and how much you spend. The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".

muzz3• 13 years ago

The savings part sounds like advice from Mr. Money Mustache, there was discussion about his advice here before.

"Never borrow money" would include never having a mortgage, which would be a huge lost opportunity for many. Not to mention borrowing money to invest in oneself, start a business, etc.

JoshTriplett7• 13 years ago

A mortgage is one of the few exceptions, and even then you should carefully consider whether renting or buying makes more sense. A car, notably, is not a good exception.

Education depends heavily on return on investment; you'd want to carefully analyze how much more you'll make with that education, how long it'll take you to pay off the debt, etc. It can certainly make sense when attempting to bootstrap yourself if your alternative is no higher education at all, but if you're in a financial position where you have to borrow for tuition, you may well qualify for better options such as scholarships. If you're reasonably well off and borrowing to go to a higher-end school, that makes much less sense.

And yes, the savings -> years to retirement table came from a Mr. Money Mustache article: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-sim... .

pmorici• 13 years ago

Mr. Money Mustache's advice wasn't to never borrow money. He said the only reason to borrow money was to buy a house.

coldtea5• 13 years ago

would include never having a mortgage, which would be a huge lost opportunity for many

A lost opportunity? If you can afford a house easily buy one, if you cannot afford it a mortage is anything but a huge opportunity.

http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to...

http://www.jamesaltucher.com/2011/05/why-i-would-rather-shoo...

jmharvey• 13 years ago

People frequently get themselves into serious financial trouble by borrowing money to "invest in themselves" or "start a business." On a case-by-case basis, these may actually be sound financial moves, but there are whole industries built on suckering people into making "investments" that aren't financially prudent.

throwaway1979• 13 years ago

"Save 20%" ... gross or net?

JoshTriplett7• 13 years ago

Net. Gross is uninteresting for almost all purposes other than pre-tax investments you can make; just write off taxes as a drag force and pay attention to what fraction of your net income you're saving.

The important detail about increasing your savings rate: it also means decreasing your spending rate, and you can retire as soon as your savings generates income greater than your spending rate, not greater than your overall income.

sliverstorm7• 13 years ago

It would have to be net. Your tax situation determines the conversion from gross to net, and can vary wildly from person to person making percentage rates based on gross too variable.

While you should of course do what you can to reduce taxes, that's so complicated it warrants completely independent dialogue.

BrandonMarc6• 13 years ago

Fair question, but OTOH it kinda doesn't matter since nobody does either.

Seriously, everybody talks about saving money, and everybody intellectually agrees it's a good thing, but next to nobody actually does it.

Which means, even if you're aiming for 20% of the little number, you're behaving smarter than the vast majority of your peers.

ultimoo• 13 years ago

This is really interesting and inspiring for someone like me who is in his mid twenties.

Burning question: what to do when you have (education) debt? Do you put every spare dollar in repaying it or still inculcate a habit of saving 20%?

JoshTriplett7• 13 years ago

What's the interest rate on the debt, and how much are you making on your investments? To a first approximation, you can treat the debt as an investment with a guaranteed rate of return. If you have debt that's not at such a ludicrously low interest rate that it makes sense to hang onto the money and invest it (rare), then your savings should be going straight into paying off that debt.

The savings rate still applies; it determines how fast you can pay off the debt. If you can reduce your spending and increase your savings rate, you'll pay off the debt that much faster, and the same principle applies once you've paid it off and started investing.

gerickson2• 13 years ago

Recent college grad and young working professional here. I graduated with ~$25k in student loan debt 2 years ago and am due to pay it all off by April 2014. I struggled with burning question, as well.

The general advice I got was that if the loan interest rate is less than 6%, you're better off investing the majority of your excess cash into something like an index fund since it theoretically will give you >6% gains.

However, I hate the stress, mental overhead, and risk involved in owing somebody money, so I decided to automatically save 10% of each paycheck (set up direct deposit to funnel 10% to a separate savings/investment account) and essentially contribute as much as possible after that to student loans.

I'm happy where I currently am - almost out of debt and with a non-trivial amount saved up. The key for me was automatically moving the first 10% to savings then setting an ambitious goal each month to put toward debt. Good luck!

coldtea5• 13 years ago

Bump it to two-thirds and retire in 10 years.

Expand it by 100 and you would be already retired before you would were even born!

I guess the point of the advice is to be realistic.

The only more important factor is "never borrow money", and in particular "never carry a balance on a credit card".

Well, lots of people have started companies or saved themselves from starvation by maxing a credit card.

JoshTriplett7• 13 years ago

The idea that >20% savings rates are not "realistic" is a serious mindset problem. Almost anyone on Hacker News with a paying job (i.e. not an early-stage no-funding startup) should easily be able to save much more than that. Sure, saving two-thirds of your income might be out of reach, and even the 20% advice is better than most sites that often say 5-10%, but consider carefully whether you can increase it and retire years earlier (or become effectively retired, in the sense that you no longer depend on having an income).

EDIT: "Almost anyone on Hacker News". Yes, 20% would be significantly harder on minimum wage.

enraged_camel2• 13 years ago

One of the recommendations is actually wrong, and in fact outright harmful.

"Buy inexpensive, well-diversified mutual funds such as Vanguard Target 20xx funds."

Yeah, no. Mutual funds, even those by Vanguard, have high expense ratios, and there is absolutely no evidence that they outperform their equivalent index funds. Jack Bogle, founder and retired CEO of Vanguard, himself recommends index funds over mutual funds for this reason.

Shengster• 13 years ago

Good point, although I think he implicitly implies "index funds" in this case because later there's a bullet that says:

* Pay attention to fees. Avoid actively managed funds.

ankzap• 13 years ago

Vanguard Target funds are nothing but a collection of passively managed index funds. The ER is slightly higher than doing it a la carte, but it re-balances without having to worry about it.

scott_karana2• 13 years ago

The MER for the Vanguard Target 2030 is 0.17%. Stated differently: 0.0017.

Yes, it's slightly lower if you buy all the composing Vanguard index funds individually, but for an index card comment, I'd say it's good enough.

(Minor quibble: index funds can be mutual funds or ETFs)

dmethvin• 13 years ago

Their expense ratios are pretty decent: https://personal.vanguard.com/us/funds/vanguard/all?sort=nam...

And, the idea of the target funds is that they become more conservative as you reach the target. The pure index funds do not. So they are basically index funds with portfolio rebalancing.

https://institutional.vanguard.com/VGApp/iip/site/institutio...

dubfan• 13 years ago

An article that elaborates on your point:

http://www.forbes.com/sites/baldwin/2013/06/05/the-trouble-w...

cmbaus4• 13 years ago

Vanguard mutual index funds are very cheap. I'd recommend them.

sologoub• 13 years ago

It's not quite that simple. What you need is a savings rate that is far above society's average in order to be ahead by that much. For US, that's relatively easy, but for many cash-heavy economies it is not. If your country propensity to save is 90%, getting to 99% isn't all that groundbreaking.

The other thing missing is to take calculated risks for higher returns. For example, if you see housing starting to recover, picking up a distressed rental is smart. Provided you know what you are doing.

I recall a while back someone posted here about picking up semi-abandoned apps that were generating some cash flow, sprucing them up and letting the revenue drip in. Again, this works if you know what you are doing, but won't work for average Joe.

raintrees• 13 years ago

"Never borrow money" excludes Smart Debt: Debt someone else pays for you, such as Investment Property, or Big Business (not small business. This definition of Big Business is where you have a controlling interest and you can leave for 6 months and business is even better).

It depends on how quickly you wish to generate wealth. Leverage (OPM, OPT) must be used wisely, but significantly speeds up the process.

DustinCalim• 13 years ago

Ironic "Never borrow money" shows up here considering the start-up orientation of this site... Small business owners are a cornerstone of capitalism and our economy so we should incentivize people to take risks when they can.

WildUtah3• 13 years ago

Borrowing money for current consumption and for investment are very different things.

Furthermore, borrowing money for investment and selling equity in a business to investors are two very different things.

superuser25• 13 years ago

Never borrow money? You've just completely eliminated car ownership for a good chunk of the middle class, and homeownership for pretty much everyone but the very rich. That's probably a defensible position, but it's definitely not normal financial advice.

If putting $7,000 away for retirement right now nets you more by retirement age than the lifetime cost of a car loan, you should take the loan.

derekp75• 13 years ago

I've owned cars since I was 17 year old, and never had to borrow money for a car till I decided to buy a brand new car years later Since then, I've decided to do the following: So you make "car payments" into your savings account every month, and after 1 - 3 years you can get a usable or very nice used car. Then continue to make car payments into your savings, and 5 years afterwards you can get a brand new car -- one that will last you for 15 years (at least). Then, in the last 5 years, do the same thing if you want to continue to drive new vehicles.

alok-g3• 13 years ago

> ... Bump it to 35% and you'll retire after 25 years. Bump it to 50% and retire in 17. Bump it to two-thirds and retire in 10 years.

Can you/someone please point to the maths behind this? It sounds to me there are some assumptions about returns on investments and inflation rates.

stephenbez2• 13 years ago

The math is covered here: http://earlyretirementextreme.com/

Basically the thought is that 20-25 years of living expenses will generate enough income for you to early retire on.

If you make 100k (post tax) with a 20% savings rate, you save 20k, and have living expenses of 80k. Ignoring future compound growth, for each year you work, you save 1/4 a year of living expenses.

If you go the other extreme, and have 66% savings rate, you save 66k, and have living expenses of 33k. With 33k living expenses you need 660k to retire. Each year of working you end up with 2 years of living expenses. Even ignoring the effect of investment growth before you retire, that is only 10 years of working.

Of course 20 years of savings maybe be too optimistic. The book is good and has more details.

pwthornton• 13 years ago

Why would you want to retire in 10 years? Isn't that like saying you hate your work? I enjoy my work, and am working to make it more enjoyable. The idea that I would try to live like a pauper so I could retire in 10 years and not do anything seems kind of strange.

If I retired, I would just find another job or career to make stuff.

JoshTriplett7• 13 years ago

Just because you have enough savings to retire doesn't mean you have to retire; it just means you have the option to. And "retire" doesn't mean you have to stop doing interesting work, either. You could keep working an existing job that you enjoy knowing that it's completely optional for you, or you could spend 100% of your time doing work that doesn't necessarily pay (e.g. a startup, or working on random Open Source projects that tickle your fancy).

humanrebar7• 13 years ago

I consider it to be a huge oversight that they left off building an emergency fund.

Before buying a house, buying individual securities, or maxing any retirement contributions, you need enough liquidity in your investments to get you through an illness or layoff that leaves you without income for a year.

It amazes me how otherwise intelligent peers of mine will be paying extra on mortgages, student loans, and retirement funds with less than $5k in the bank.

solarmist2• 13 years ago

Wouldn't save 20% of your income cover that? It's just a management detail after that (i.e. leave some of that 20% liquid for emergencies).

humanrebar7• 13 years ago

I said you should have enough liquidity to get you through a year-long crisis. If you're saving 20% of your income, you're probably.

However, unless you have especially nasty rates on student loans, paying them off shouldn't come before accumulating some fairly liquid savings. The same probably goes for paying extra on the principal on your mortgage and maxing out retirement plans.

ajross4• 13 years ago

That sounds wrong. An unexpected year-long unemployment isn't unheard of, but for an already-employed investing professional (i.e. not a recent entrant/re-entrant to the employment market who wouldn't be able to take this advice anyway) it's really quite rare. Certainly it's not true that most people "need" to do that, as it won't happen to them.

This sounds like the kind of failure mode better addressed by solutions like insurance instead of upfront savings.

superuser25• 13 years ago

2008? Lots of well-established, middle-aged homeowner professionals became unemployed for long stretches. The unemployed college graduate narrative gets a lot of play in the media because it challenges assumptions (i.e. that a college degree means you're set for life) but professional middle managers got hit pretty hard also.

humanrebar7• 13 years ago

In broad strokes, the more specialized your skill, the harder it will be to find a job that meets your salary expectations. Sometimes this will mean moving to a new city or being unemployed for over a year. Sometimes this will mean taking a pay cut, which means you'll need some cash to break a lease or otherwise see you through downsizing your lifestyle.

Also keep in mind that it's huge to have 6 months of expenses easily available while evaluating job offers. You're much more likely to settle when you have to worry about paying your mortgage next month.

kilroy123• 13 years ago

I think the "save 20% of your money" would include a emergency fund. At least that's my assumption.

pfranz• 13 years ago

Do you need a full year of income liquid? I would think 3-6 months liquid and the rest could be liquidated when needed (for the remaining 6-9 months).

sliverstorm7• 13 years ago

Think of maintaining a smaller emergency fund as a form of risk-taking. Every form of investment is a risk, so we are hardly new to risk-taking here.

For example, I keep a very low cash balance and divert most of my surplus to investments. This is partly a gamble, in that I may be forced to sell at a less than ideal time, and partly a credit-backed risk in that my credit cards provide me a buffer large enough to liquidate most of my investments.

toomuchtodo• 13 years ago

You can get your contributions out of a Roth IRA at anytime. That gives me tens of thousands of dollars I can get to in 24-48 hours. It also helps that retirement accounts are shielded from creditors, and hence make better vehicles as emergency funds when you've done sometime like walk away from your underwater home.

nostromo• 13 years ago

Am I alone in wondering if the advice about broad index funds is no longer good?

We're still below the s&p inflation adjusted high from ~2000 -- almost 14 years later. When will the gains finally arrive?

I worry that there is some systemic problem in our economy that has leaders playing whack-a-crisis every five or ten years that erases years of gains.

I've read John Bogle and I want to believe. But a few years ago I took some money out of index funds and placed it in a rental property and so far I've seen very predicable returns with no loss in principle, and it makes me wonder if I should keep bothering with index funds at all.

JoshTriplett7• 13 years ago

Rentals are much more risky, as the housing crash demonstrated. If you really want to benefit from that market, buy a REIT unless you actually enjoy the work of being a landlord.

The gains are here now, and I'm more concerned about a bubble personally. Vanguard's total stock market fund has year-to-date growth of ~17%, and their more-stable lower-growth "balanced" fund with bonds included has year-to-date growth of ~8.75%. Both of those are better than the usual estimate of 7% annual growth for retirement funds (a conservative 3% for inflation and 4% for income).

cperciva2• 13 years ago

We're still below the s&p inflation adjusted high from ~2000 -- almost 14 years later.

Only if you're looking at the price index. The total return index -- including dividend payouts -- peaked at 2108 in September 2000, and is now at 3027. After inflation that's a gain of 6%, for a real return of slightly under 0.5% per year... but hey, at least it's positive.

jayp• 13 years ago

It's barely positive if you compare the two points. However, if you have investing regularly via your 401k (etc), you also bought in during the low periods. So, your gain would be much more than just minimal positive.

a8da6b0c91d• 13 years ago

I also question the advice to max out 401K and IRA contributions. Recent events in Cyprus, Argentina, and some other places have made it quite clear that such money is far from safe. If there's a fiscal crisis and the political class is backed into a corner, they will seize your money. They'll do some sleight of hand to claim you're getting an equal value retirement annuity, but that will be a lie.

More generally it seems like all pop financial advice is based on the premise that the next 40 years will look much like the last 40 years. Historically that's been a bad bet. For example, you never hear about hedging for a deflationary crash, because that's unthinkable given recent history.

eatmyshorts6• 13 years ago

Did either Cyprus or Argentina seize any defined contribution pension funds? I was under the understanding that only defined benefit pension funds have been raided. I can't think of a single exception.

401K and IRA are defined contribution pensions. Repricing financial instruments can affect those greatly, but I would argue that those are accurate reflections of the value of the investments.

sliverstorm7• 13 years ago

You should always compare your rates of return on different types of investments. The advice about index funds is (to my knowledge) primarily rooted in the fact that index funds typically outperform mutual funds, with lower management fees to boot. Not a claim that index funds are the strongest investment.

Also worth noting- can rental properties ever be included in blanket investing advice? Investing directly in property requires either a group of investors or considerable capitol- both, really. Stocks and such are popular in sweeping advice because anybody with two nickels to rub together can acquire stocks.

chris_mahan6• 13 years ago

I trade in individual securities, but I put in the time to learn about the companies, the industry, and so on. Also, having taking econ, accounting, finance, and statistics in college helps.

ajross4• 13 years ago

Professional traders have been known to put in the time to learn about this stuff too. Don't fool yourself. You might make some good bets. You might make some bad ones. You're not going to systematically outperform a market as an individual investor by anything but luck (or plausibly by chasing a "hunch" based on good intuition and evidence that the professionals missed -- but don't fool yourself, that's luck too).

chris_mahan6• 13 years ago

I have consistently outperformed the market since 2007, when I started investing (I refer to the market as the DOW).

Just because the average salary in the United States is $57,000 (random-ish number) does not mean that's what I have to settle for because it's the average. If I put in the time, work smart, work hard, and keep learning, then the expectation is that I can beat the average income. Likewise, I can beat the average market by putting in more time, more effort, more learning, than the average investor.

I tried forex for 2 years, and did poorly, so I stopped, and learned my lesson.

I bet on Ford at 1.60. I bet on Tesla at 16, and 24. (not heavily mind you, just 2.5% of my portfolio). I research the companies, the management. I not only go to the annual report, but I also read books by the founders, read about their manufacturing (are they using lean like Toyota or lean like GE?). I went after Ford based on Mullally's performance at Boeing. I went after Boeing based on the 787's promises. (It's doing very well.) I read Deming.

I lost $900 in American Airlines, and $300 in Washington Mutual. I did lose $6K on a $10K mutual fund that went south in 2007-2008. It looked like it would recover, but then wasn't following the market up. I've made a lot less money with mutual funds that with stocks.

Granted, I've been riding a pretty nice wave since the drops of fall 2007 and mid 2008, but I don't blindly pick a stock and buy in. I'm very careful where I put the money, and will do 2-4 weeks of research on a single company.

I also research their competition, and business trends in general. This means I don't watch TV, don't watch sports, and will do one movie per month with my son. Instead, I read. A lot.

I do max my 401k because of company matching, but I'm not holding my breath on returns. There's an event horizon where it's better not to match and buy securities directly, because of the 1% or so fees. (You start out with twice as much, but you get less annual yield.) You don't pay taxes till you sell, and you can sell at a time of your choosing.

I don't day-trade, I don't even month-trade. I generally invest for 7-15 years.

Finally, I invest only my own money, and that is a very strong motivator for spending the time to do it right. (Small caps do slightly better than large caps--more risk, more return. Diversify.)

sliverstorm7• 13 years ago

Professionals isn't all you are betting against. There's plenty of ordinary Joe's day trading as well.

chris_mahan6• 13 years ago

I should add that these college courses weren't just some courses I took, but were part of a BA.

bunkat• 13 years ago

It literally doesn't matter. I know you've convinced yourself that you are in some way better or smarter than everyone else, but you will not beat the averages unless you happen to get lucky. Your biggest mistake is assuming the market is a numbers game that you can win if you calculate things carefully enough. If that were true, all of the quants and hedge fund managers would be making there fortunes off of stocks instead of salaries and fees.

sliverstorm7• 13 years ago

I also trade individual securities. I'm not quite as thorough as you, so I typically pick companies I am familiar with on a more personal level.

I don't expect to beat the market, and I don't put much into individual securities. However, I have fun and have been making modest returns. Besides, you'll never beat the market if you never even try shrug. Of course, with the portion of my capitol that I put in, "beating the market" makes me feel good, more than it makes me money.

notdrunkatall2• 13 years ago

Except for the 'never buy a security' bit, I fully agree.

cperciva2• 13 years ago

Do you think you can beat the market?

Are you a professional stock market trader?

If you answered yes to the first question but no to the second, why?

staccatomeasure5• 13 years ago

I think with good domain knowledge and basic knowledge of economics and finance your average Joe can do better than the market. There's a lot of low hanging fruit in the stock market that a small investor in particular can grab because their size allows a certain level of under-the-radar activity.

eatmyshorts6• 13 years ago

Buy and hold, not day trade, and I think you can beat the market. You don't have management costs. And buy and hold avoids capital gains that professional stock market traders will incur. You also have to do your homework--don't buy the latest fad, and don't chase performance (that's a guaranteed train wreck waiting to happen).

And, yes, I can beat the market. My 20-year investment history shows that I consistently beat the market. And, no, I'm not a professional stock market trader. I've worked as support staff at investment banks, and I can tell you first-hand that there are many reasons not to be a "professional stock market trader". The industry is a horrible place to work, and I'm glad to be out of it.

notdrunkatall2• 13 years ago

I don't think I can beat the market, I do beat the market. I've beat it every year since I started investing in 2006.

No, I'm not a professional.

Because that's not what I want to do with my life.

zedpm• 13 years ago

Seems like good advice, though a great many Americans are at a disadvantage because their employer doesn't offer a 401k. Even with no employer match, a 401k allows an individual to save much more money in a tax-advantaged account ($17,500 for a 401k vs. $5500 for an IRA). If you're a W-2 employee but your employer doesn't offer a 401k then you're pretty much stuck paying higher tax rates on any savings beyond $5500/year.

mrb2• 13 years ago

With no employer match, a 401k has ZERO tax advantages. Because it merely delays when your income is taxed: after withdrawing it from the 401k. Mathematically you end up with the same capital whether your pay income taxes today and invest post-tax money, or whether you invest in a pre-tax 401k and pay taxes later.

akjj• 13 years ago

Even without an employer match, the 401k has the advantage that interest is not taxed. This makes a big difference over the course of a career.

dnautics4• 13 years ago

you could be even worse off, if the income is taxed later at a higher rate.

harterrt• 13 years ago

That's not true if your tax rate changes over time, which it probably will. Specifically, when you withdraw during retirement it is likely you will not be earning much and your tax rate will be much lower than when you were working full time.

jacalata• 13 years ago

That's only true if you expect to earn the same amount (or more specifically, to be at the same tax rate) while putting money in as you will while taking money out.

icodestuff• 13 years ago

That's not how it works. You pay last-dollar taxes on the money that would otherwise go into the 401k. You pay first-dollar taxes it when you withdraw at retirement. The first-dollar taxes are lower up to the tax bracket you'd otherwise be in if you didn't contribute to the 401k, unless you have additional sources of retirement income.

derekp75• 13 years ago

Let's try with some numbers. First, let's invest $1000 post-tax, for a number of years, where we end up doubling (getting 200%) return on investment after a number of years.. Assume tax is 25%. So you are investing $750. Your return on investment is $1500, but that get's taxed at 25%, so you actually are getting $1125. Add that to your original $750 investment, and you have a total of $1875.

Now let's do this pre-tax money (401k). $1000 invested, with 200% return, gives you $2000 profit, or $3000 with the initial investment. Now take 25% tax out of that 3000, you end up with $2250 at the end. So you get a total of $375 advantage with the 401k route.

Oh, and during retirement, you will most likely live on a reduced gross income (you aren't paying FICA, your house is paid for already, and you also [might] get social security income). Which means, with our graduated tax system, your overall tax rate is less then, for an even better tax savings (you only pay taxes on the amount of 401k that you withdraw each year).

carsongross3• 13 years ago

That's not true: the capital gains you accumulate are pre-tax, so your entire investment is taxed once, upon withdrawal, as income. With up-front taxation you still end up paying additional capital gains taxes at the end of the day on your total capital gain.

There are conceivable situations where you end up paying more in taxes, if your retirement income tax rate is higher than your current income tax rate plus your capital gains rate multiplied by the ratio of capital gains to the total capital.

I've spreadsheeted it out and using a 30 year timeline and what I most would consider an extremely conservative rate of return, you end up with about 15% total advantage. This can go up to 20 to 25% if you assume more aggressive returns.

Despite that, I hate the fact that your money is locked up and there is a severe penalty if you pull it out (except in a few situations, and even then the amount you can pull is limited.)

Is it worth 15% of your money for it to be truly your money? It is to me, but that's a subjective call.

dragonwriter7• 13 years ago

With no employer match, a 401k has ZERO tax advantages. Because it merely delays when your income is taxed: after withdrawing it from the 401k. Mathematically you end up with the same capital whether your pay income taxes today and invest post-tax money, or whether you invest in a pre-tax 401k and pay taxes later.

If you are paying a higher marginal income tax rate now than you will be when you retire (before considering the income from withdrawing retirement investments), you are better off with a tax deferred retirement account.

If you are paying a lower marginal income tax rate now than you will be when you retire (before considering the income from withdrawing retirement investments), you are better off without a tax-deferred retirement account.

For most people, the former is more likely than the latter.

sopooneo3• 13 years ago

If it is the case that you are going to move money around between funds then would the 401K would provide a benefit?Because you wouldn't have to pay capital gains tax every time you switch and have made money?

WildUtah3• 13 years ago

Mathematically you end up with the same capital whether your pay income taxes today and invest post-tax money

No.

___

Put $100 in an IRA.

    [$100]

Quadruple your money by keeping it in an index fund for a couple decades.

    [$400]

Pay 25% income tax on the money.

    [$300]

Spend $300 in retirement.

---

Or,

___

Earn $100.

    [$100]

Pay 25% income tax on the money today.

    [$75]

Quadruple your money by keeping it in an index fund for a couple decades.

    [$300]

Pay 15% capital gains tax on the $225 gain.

    [$266.25]

Spend $266.25 in retirement.

---

But you could also tell this story:

___

Put $100 in an IRA.

    [$100]

Double your money in some garbage high-fee actively managed fund your boss's boss picked out based on the quality of strippers the investment advisor hired when he sold your company the plan. Your awful 401k offered limited investment options and the rest were even worse.

    [$200]

Pay 25% income tax on the money.

    [$150]

Spend $150 in retirement.

---

But lobbying your boss to get low-fee index funds into the 401k plan doesn't fit on a card. It's still the kind of thing a wise planner needs to do sometimes.

0003• 13 years ago

Never buy or sell an individual security. The person on the othr side of the table knows more than you do about this stuff.

The person on the other side is c++.

cmbaus4• 13 years ago

If you follow that advice, you don't need a financial advisor.

cmbaus4• 13 years ago

Even if a financial advisor meets the fiduciary standard, he or she may still not be looking out for your best interest. I'd say become educated, and bypass the advisor altogether.

dnautics4• 13 years ago

self-contradictory: "Make financial advisor commit to a fiduciary standard"

eatmyshorts6• 13 years ago

A Registered Investment Advisor (RIA) is required by FINRA to commit to a higher fiduciary standard than a broker (the more commonly used investment advisor). I think that's what he's referring to. Of course, most RIAs don't cater to anything but high-wealth individuals. Things are changing, though, as the Internet is enabling a number of RIAs to cater to those with lower levels of investment funds.

dnautics4• 13 years ago

I meant that the card was giving advice and the card hadn't committed to a fiduciary standard.

jellicle2• 13 years ago

There are a couple of good parts about this post. The first is the HN comments, which are an unintentional fountain of hilarity. But the second is the assumptions.

50% of the US population can't afford to put even a dollar into any sort of investment security. Of the 50% of the public that does own some sort of security, most of them are in the three-figures range. This index card, without realizing it at all, has targeted itself towards the top 10% of the population: people who have jobs with 401Ks, people for whom Roth IRAs will be useful.

In other words, if you are well into being one of the richest people in the richest country in the world, here you go - save 20% of your income, and so on. And you'll be fine!

So I'm just curious: suppose you aren't?

leokun• 13 years ago

The promote social insurance programs line comes in maybe.

VikingCoder• 13 years ago

I agree, but it is potentially useful to that demographic.

If we made this two or three standard deviations more exclusive, the financial advice could be: Be born wealthy. Don't borrow against your trust fund.

tptacek• 13 years ago

The top 10th percentile of earners in US are barely even eligible to use Roth IRAs, which have gross income participation limits.

jcdavis• 13 years ago

One can do a backdoor Roth conversion to get around that limit. (but you need to have no money in regular pretax IRAs to do so)

wdr1• 13 years ago

Honestly, when it did become so evil to give honest, practical advice to the middle class?

The wealthy have been sufficiently vilified that we now have to crucify those not born into money, bu starting to do okay?

This was a very reasonable & practical post with good advice for those starting to come into money. Why is that so bad? That type of advice can't be dispensed without a holistic social program? That's total bullshit.

kjs3• 13 years ago

Get over yourself. What is total bullshit is entitled twats like you mentally rewriting the article so it's not "all the financial advice you’ll ever need" as claimed but "all the financial advice you’ll ever need if you're in the minority and an up and coming middle class wage earner who has sufficient disposable income to act on the advice".

derefr• 13 years ago

If you fall below those limits, do you really need "financial advice?" If you're making below, say, $60k/yr -- and you're still young enough that what you do with your long-term investments can serve to multiply your returns -- then what you probably need is not financial advice, but bootstrapping advice. Starting with "go to school for STEM--or finance, if you can."

staccatomeasure5• 13 years ago

It says it has all the financial advice you could ever need, not all the advice you need right now.

Poor people: save money and pay off credit card debts. Middle Income And Above: do that + other rules.

And saying poor people couldn't save even a dollar is nonsense. Poor people are not 100% optimal in their spending and financial matters - often quite the opposite. Furthermore, poverty is often something people grow out of (the poor skew young), and this has some good advice for doing that faster.

Stop making a useful article out to be some elitist hogwash.

dragonwriter7• 13 years ago

Poor people: save money and pay off credit card debts.

So, "poor people, get surplus income".

Or, equivalently, "poor people, stop being poor".

And saying poor people couldn't save even a dollar is nonsense.

If you can reliably meet the requirements of life without charity or depletion of reserves, you arguably aren't meaningfully poor. Poor people can save sometimes, but that's mostly saving a reserve for the bad times that will come (usually fairly soon and frequently), not net savings over the long term.

jamesaguilar2• 13 years ago

The last line of the card is for those who aren't. Otherwise, they need to grow their income, because nothing you do is going to fix the problem if you are making 15k per year.

mechanical_fish• 13 years ago

The percentage of US workers with access to a retirement-benefits plan is 71%. 57% of all US workers participate in such a plan.

(Source: U.S. Bureau of Labor Statistics, 2009 National Compensation Survey, http://www.bls.gov/ncs/ebs/benefits/2009/ebbl0044.pdf)

In Table 2, it says that even 15% of the lowest income decile - people making less than 90% of workers - find a way to participate in a retirement plan.

Here's a more detailed writeup from the Bureau: http://www.bls.gov/opub/cwc/cm20100520ar01p1.htm

Meanwhile, the "top 10%" of households earn $135k per year or more, while the median income is around $50k.

(Source: http://www.economist.com/blogs/dailychart/2011/09/us-househo...)

Anyone making over $60k per year could (in theory; this is a highly abstract argument at this level, of course!) save 20% of their income without dropping below the median household income of $50k; households making over $60k per year appear to constitute 32% to 40% of the population, if I read this Census Bureau chart correctly: https://www.census.gov/compendia/statab/2012/tables/12s0690....

None of which says anything about the effectiveness of 401k plans, or anything else. But if you're going to handwave about numbers it's nice to hit the right order of magnitude.

thesz• 13 years ago

20% of $60K is 12K. Or, put another way, 80% of $60K is $48K.

$48K is below $50K.

Your math is wrong.

lutusp2• 13 years ago

Anyone making over $60k per year could [...] save 20% of their income without dropping below the median household income of $50k.

20% of 60k is 12k, 60k - 12k = 48k. So no, the claim isn't true for the most trivial of reasons.

jrkotrla• 13 years ago

you are wrong. I was saving money in an IRA when I had a salary of 25k. 2011 Median income was $50k. That may not be much in the SFO and ATX and LGA's that HN populates, but for the majority of the country where the majority of the population lives, that is a good salary.

I know that HN is full of tech people who think that six figures is slumming in SFO, but you are desperately out of touch with reality. If a family of five (my dad, mom, and us kids in the 80's) can set aside money money on $22k a year, then the median family at $50k can set aside money in 2013.

ajuc• 13 years ago

You have food stamps, cheap oil and electricity, unemployement smaller than 10%, and if you are homeless you can move to a state that doesn't have winters capable of killing you.

People in Eastern Europe save money and 50% of Americans can't?

MacsHeadroom• 13 years ago

41% of working age Americans are jobless. The official unemployment calculation is a joke.

prawn2• 13 years ago

Budget to save before you outlay your discretionary income. You might have to redefine discretionary to include car (if public transport suffices for your job), cable, etc.

Don't lay out your budget and set aside $x for entertainment (eating out, etc). Savings will always suffer. Set aside desired savings first and then work with what's left.

BrandonMarc6• 13 years ago

Hear hear. I can't repeat this point enough. You have to force yourself to save, first. If you spend on everything else first and figure you'll save "the rest", something will always come up. If you set it aside before other categories, it will ... be set aside!

As a corollary, just writing (and following) a basic budget does wonders. I've talked to a lot of people who said it was like getting a raise. You have regular expenses, so just plan out a basic month and then follow it. Something magic happens next: by being more conscious and deliberate about your spending, you spend less on un-necessary "wants" (if it's truly a need you'll spend it no matter what).

Plus, a written budget is like looking in the mirror: it's a reflection of your priorities, good bad or indifferent. If you see you're spending $300 / month on restaurants and $0 / month saving for retirement ... well, that shows what appears to be important to you. And, if you've got two brain cells to rub together, it shows an easy place to make some adjustments. Not that I have anything against restaurants ... even $200 and $100 would be far more reasonable.

lpolovets• 13 years ago

Scott Adams, the creator of Dilbert, has a similarly good set of advice:

- Make a will.

- Pay off your credit cards.

- Get term life insurance if you have a family to support.

- Fund your 401(k) to the maximum.

- Fund your IRA to the maximum.

- Buy a house if you want to live in a house and you can afford it.

- Put six months’ expenses in a money market fund.

- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

- If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) ( hire a fee-based financial planner, not one who charges a percentage of your portfolio.

(source: https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?Art...)

cmbaus4• 13 years ago

Typically fee based advisors charge a percentage of assets under management. The is opposed to traditional brokers who charge trade commissions. There are few who aren't paid based on AUM.

peterjancelis• 13 years ago

Doing a startup is inconsistent with the advice give here.

superuser25• 13 years ago

Because doing a startup is not financially advisable to most people without a financial cushion. It may be fun, it may be thrilling, and it may work out better than your wildest dreams, but good financial advice for the general public it is not.

BrandonMarc6• 13 years ago

Debt for consumer needs != debt (investment) to build a business

eatmyshorts6• 13 years ago

Replace 401K with SEP or Simple 401K, and I think the rest of the advice is valid. Also, consider the true cost of working for that startup. Stock with a startup effectively is valueless, and should be considered as such. If you can't save while working with a startup, or you have no savings as a backup if (and usually when) the startup fails, then you should consider a more traditional, established company instead.

ww520• 13 years ago

I don't know how good the advise is to max out 401K and other retirement account. Some of the 401K accounts have very limited choice of investment. For example, you can't do real estate investment.

If you know what you are doing, you might want to retain the money outside and do the investment yourself on investment that are not available in a typical 401K account.

eatmyshorts6• 13 years ago

Look at the costs associated with each of your 401K investment options. Usually, most plans include at least one that is not actively managed, and their management costs tend to be significantly lower. Additionally, but avoiding actively managed funds, you also avoid the "chasing the tail" syndrome that leads to almost all active managers under-performing index funds over time. Layer in the tax benefits of 401K accounts, and I think the advice to max out 401K and other tax-shielded investments, and to look for "inexpensive, well-diversified funds" is very good advice. If followed correctly (few do, from the sounds of the replies to this article), I think you'll find that the advice is sound.

oceanstone• 13 years ago

This might be blunt, but I found this advice to be misleading. Many lost large percentages of their 401ks in the ~2000 and ~2008 crashes.

Crashes historically happen at least once every decade.

gremlinsinc2• 13 years ago

this is nothing new... this is stuff straight out of the automatic millionaire by David Bach..wanna get rich? First step is pay yourself and get out of debt... then build up some solid investments.. real estate is a good way to build assets and wealth flipping or rentals..rentals for long term obviously.

Or do what 80% of us reading hn plan on doing ...build something awesome and get bought out for 10 mill.

sopooneo3• 13 years ago

I never understood why real estate would be such a good investment. If one house is good, why not 100 as part of an REIT?

twelve40• 13 years ago

It's different than REIT, not necessarily universally "good". One obvious difference is with a house you get a collateral for a huge low-cost leverage, that in some cases might be easier to settle if things go South (e.g. shortsale). Another one is rent you save/collect from someone else.

kamaal3• 13 years ago

As some one who takes great meticulous care in planning and investing regularly, both for the long term and super long term(retirement savings), I can pitch in and offer some advice here.

First advice I would give is, totally avoid using credit cards. It might sound impractical, but I've found some workarounds for it. Which is to use my debit card as a credit card. Go frugal for a few days and save some money in the savings account, then use that money as credit to yourself. The worst thing about any kind of debt/loan is the interest part. Lesser interest you pay the better, except in situation where you are making an investment with the loan(like buying a property of a home) and the value of the investment is growing faster, when the at the same time inflation is decreasing your loan's net value.

Second advice I can give you is to buy your own home and avoid paying rent. If you look at the whole thing having your own home is vastly more profitable than renting some one else's home on a long term.

Then there are a few assorted advices I would like to give, especially to people in India(My country), But I believe it applies equally to else where to. Buy gold in small quantities regularly. Gold is protected from inflation, and is the near standard of economic growth around the world. And value of growth(over long term) always grows. Once you have sufficient gold- sell it and, learn to buy real estate in city outskirts. You will see in any growing city, sooner or later outskirts merge into main city areas and then real estate prices shoot up. Take loans to do this, if and only if the loan is small and as I said before, inflation affects your loan faster than, the rate at which its value grows.

Make the mandatory 1 lac per year(if you can't make as much as you can), tax savings investments on things like endowment insurances which serve as both life insurance and long term investments.

Its good if you could rotate money by building a home which you could rent out. It will serve as a steady source of income later and after retirement.

Lastly at the risk of attracting downvotes, please don't invest in stocks and show pointless heroics if you don't understand that business. Far more people have burnt their hard savings hoping for magical miracles to happen and make them millionaire while dealing in stocks. In short if you know how to do it, do it. Else keep out for your own good.

ChrisNorstrom• 13 years ago

My friend... That sounds like some really BAD advice. Gold (even Warren Buffet warns against), Real-Estate (which is extremely risky, limits your job and movement flexibility), No Credit Cards (so you plan on having no credit history?), I don't even know where to begin. That's some terrible advice.

kamaal3• 13 years ago

I am NOT suggesting you buy tons of gold or hundreds of properties. That's what Warren Buffet advices against, because in problems like sub prime crisis, the more you own the more you lose. That is a totally different scenario.

But I've seen millionaires being made and money being transferred through three generations in a family, only because some one invested in properties and bought enough gold when it was cheap and easy to buy, and later find it multiply. And people there hardly do enough work except for building more wealth through rents they get.

May be controlling a lot real estate is dangerous from a super super long term perspective. But by then, your great great grand daughters bones would have turned to dust and it wouldn't bother you least bit.

Gold, real estate, and kids. Nothing really beats these investments in a true sense.

anovikov2• 13 years ago

Why having a credit history if one plans to have a frugal life with no purchases he can afford out of the pocket?

727374• 13 years ago

"buy your own home and avoid paying rent"

Obligatory counter-comment - this is not true in a lot of markets, notably ones where a lot of HN people probably live like SF, NY. One must take into account many variables such as rent prices, house prices, property tax, your personal tax situation (in the US), expected duration of ownership (biggest factor IMO), etc.

jjoe• 13 years ago

First advice: max your 401k. That's selfish.

That's what Wall Street wants you to do. Reality is whomever manages the funds has only one short-term goal in mind: year end bonus. It's very common for traders to move on shortly after bonuses are given out leaving "cooked" books for the next trader to deal with. The plan is always to never get caught holding the short term strategy book.

I find the typical trader archetype to be repugnant. There's so much of it that goes against technical-minded people with even the tiniest sense of ethics. If you're financially disciplined you're better off investing elsewhere.

Jugurtha• 13 years ago

Seeing the comments here about people is interesting. Whether it's in the comments or in reality, most people aren't conscious they are poor.

Poverty isn't a privilege reserved to those who live under bridges, or take showers once in a while.

Driving to work and back every day, stuck in traffic, getting home exhausted and not wanting to do anything is poverty.

It's amazing how many guys I know who start working and consider it a success and start spending cash, get a car on credit, get a mortgage and what not. They actually think that having an expensive car makes them rich, yet can't even afford a part of that car breaking. It's a disaster for them.

So, if you have to slave for a pittance (or not, you're slaving anyway). If you can't afford to be ill with some weird disease and getting properly treated for it without waiting social security. If you can't afford a good life for your children. If you can't buy something (a car, a house) without a loan and it still doesn't represent a good portion of your assets..

If you can't do that, you're poor. Poor in money, and most probably poor in time, too.

anovikov2• 13 years ago

What about non-US people? U.S. index funds are off limits to us, and European ones are hard to trust, and normally require a lot of difficult paperwork to get in unless you are a citizen of a particular country, and operate off a very localized, and very small equities market (say Austrian, however healthy Austrian economy is i find it hard to bet my retirement savings on it, especially given neither my income nor my expenses have anything to do with it). And yes, fees of those funds are way higher than Vanguard's, due to their small size.

With income in 7-figure range, one can buy commercial real estate, which gives decent returns and is a good replacement for exchange-traded equities. But what about others?

ckeck• 13 years ago

Correction: Don't have a credit card bill to begin with.

Let the excuses and reasons for them fly, think whatever...fact is they are not necessary. While some smaller percentage of people can be responsible, for many it just invites problems. Don't get one in the first place.

This 4×6 index card has all the financial advice you’ll ever need

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