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Personal Finance Advice Irritations
Mar. 21st, 2007 05:11 pmDue to the explosion in personal finance blogs and my enthusiasm for early retirement, I've been reading a lot of personal finance advice lately. I probably should think about taking a break because certain oft-repeated themes are starting to really get on my nerves.
The Magic of Compound Interest
The magic of compound interest is not nearly so fabulous seeming once you factor in the anti-magic of inflation, the black magic of annual fees, and the roller coaster ride of the investments that are most likely to give you really exciting returns.
Pay Yourself First
The idea is to withdraw your savings and investment money right after you are paid and then you can watch your savings grow via the magic of compound interest. The alternative is to wait until right before you are paid to see how much you can afford to save, but if you do that you will never save anything because you will have spent it all.
Yet somehow, if you pay yourself first you never notice the difference. It's like magically having more money.
Only I don't believe in magic. Something changes. What is it? Why can't someone tell me what some of the actual changes are and then I can decide if I want to integrate any of them? I'm guessing that people feel they are running low on money so they reduce or put off their discretionary spending until the next pay day. Why don't they instead reduce this spending throughout the entire pay period for even greater savings? You could have a rule that you may buy stuff only on payday and then you have to put all remaining money into savings!
Or worse, what if they just charge more on their credit cards? Their debt then increases even more magically than their savings!
Techniques! I want techniques!
Tax Deductions of 28%
I am now making about the same as the latest figure I've seen for the average salary in my country (~$39,000 per year). Although just barely, I am still in the 15% tax bracket, and there is another whole bracket between mine and 28%. But why are all examples about 28%? What about all those people at 33%, 25%, 15%, 10% or, God forbid, 0%? Don't they have financial interests? No, they don't.
Buying a Home is a Good Investment
Renting is just throwing away money.
So is buying! When I first bought this house, my principle and interest payment was about $500 per month of which only $30 was going toward paying off the principle. I was throwing away the other $470. Also, I started having to make repairs and to pay more tax and insurance than I ever did when I was renting. It's also well known that people are extremely tempted to spend more money on decorating and even renovating when they have a house than when they are renting (unless they are in one of those places where people renovate rentals, like New York City).
Also, there are huge fees for both buying and selling, not to mention refinancing. My closing costs came to $5,000 and the entire house was worth only $61,500. (Admittedly, much of it was for the escrow account, but 3% was for the real estate agent, and more was for title fees, etc.)
Your interest is tax deductible.
Only the part of it that exceeds the standard deduction. It drives me nuts that everyone pretends that every cent is deductible.
The value of your house will skyrocket.
Except when it doesn't. And even if it does, so what? That just means you have to pay more for taxes and insurance. Oh, but you can take a loan on your equity. If you don't mind paying very high fees!
Buy Low, Sell High
Great advice. But how do you know when the price is low because it's a pile of crap compared to when it's low because everyone's an idiot?
And how do you know when it's high? If I had been in the market during the technology bubble, I might have sold stocks and sat in bonds once it became obvious that the market was way, way overpriced. But that would have been a mistake because I could instead have watched my money double a couple more times before it crashed four years later at which point I would have lost maybe 40% and still been far, far ahead.
Pay Off Your Credit Cards
I'm sure it's true that the best investment some people can make is to pay off their credit cards. But this is too much like the advice that one of the most important things you can do for your health is to quit smoking. In order to quit smoking, I have to start. I don't think that's such a great idea.
Hey, I didn't claim I only get irritated with good reason. Sometimes I'm irritable.
Be Frugal
Mediocre frugality advice annoys me. I remember one time I was feeling poor and I heard someone getting financial advice on a radio talk show. They wanted her to move out of her gigantic apartment into a large apartment, to eat out only one meal a day and to trade her luxury car for a Toyota Camry. I had a small apartment with a roommate, rarely ate out, and didn't have a car. Scum!
(That same day a kid came to my door trying to get me to buy something crazy like $2 candy bars. I said no. "But it's only $2!" I can buy a whole bag of chocolate chips for $2, if I had $2 extra to blow on stuff I don't need, which I didn't! "We take credit cards!" Arrg!)
Retirement Is a Four-Legged Stool
I once thought that retirement could be financed using retirement savings and Social Security. But no. It turns out that with pensions getting trashed, you have to save extra for your own retirement. And thus the three-legged stool of retirement planning was born. You need Social Security and a pension and personal savings.
Okay, fine, I'm trying to save extra money, which I have to tell you does not seem to be adding up in a magically compounding interest kind of way, but now there's another leg. The fourth leg is--are you ready for this?--employment. One of the ways to finance retirement is to, uh, not retire.
Actually, lots of people are either working just part time or are retiring from their day jobs to go into fun jobs that don't pay enough. So it makes some sense, but I don't want to hear it.
And I'm wondering how many more legs this little stool is going to sprout in the next ten to forty years.
Journal entry of the day: Empirical Question's A Hairy Issue - "It strikes me as very strange that the standard approach to haircuts is to get one's hair cut to the ideal length. To minimize the variance in one's hair length from the ideal over the period of time between cuts, you should get it cut too short instead." Read this for an excellent discussion of an interesting topic nobody ever talks about.
The Magic of Compound Interest
The magic of compound interest is not nearly so fabulous seeming once you factor in the anti-magic of inflation, the black magic of annual fees, and the roller coaster ride of the investments that are most likely to give you really exciting returns.
Pay Yourself First
The idea is to withdraw your savings and investment money right after you are paid and then you can watch your savings grow via the magic of compound interest. The alternative is to wait until right before you are paid to see how much you can afford to save, but if you do that you will never save anything because you will have spent it all.
Yet somehow, if you pay yourself first you never notice the difference. It's like magically having more money.
Only I don't believe in magic. Something changes. What is it? Why can't someone tell me what some of the actual changes are and then I can decide if I want to integrate any of them? I'm guessing that people feel they are running low on money so they reduce or put off their discretionary spending until the next pay day. Why don't they instead reduce this spending throughout the entire pay period for even greater savings? You could have a rule that you may buy stuff only on payday and then you have to put all remaining money into savings!
Or worse, what if they just charge more on their credit cards? Their debt then increases even more magically than their savings!
Techniques! I want techniques!
Tax Deductions of 28%
I am now making about the same as the latest figure I've seen for the average salary in my country (~$39,000 per year). Although just barely, I am still in the 15% tax bracket, and there is another whole bracket between mine and 28%. But why are all examples about 28%? What about all those people at 33%, 25%, 15%, 10% or, God forbid, 0%? Don't they have financial interests? No, they don't.
Buying a Home is a Good Investment
Renting is just throwing away money.
So is buying! When I first bought this house, my principle and interest payment was about $500 per month of which only $30 was going toward paying off the principle. I was throwing away the other $470. Also, I started having to make repairs and to pay more tax and insurance than I ever did when I was renting. It's also well known that people are extremely tempted to spend more money on decorating and even renovating when they have a house than when they are renting (unless they are in one of those places where people renovate rentals, like New York City).
Also, there are huge fees for both buying and selling, not to mention refinancing. My closing costs came to $5,000 and the entire house was worth only $61,500. (Admittedly, much of it was for the escrow account, but 3% was for the real estate agent, and more was for title fees, etc.)
Your interest is tax deductible.
Only the part of it that exceeds the standard deduction. It drives me nuts that everyone pretends that every cent is deductible.
The value of your house will skyrocket.
Except when it doesn't. And even if it does, so what? That just means you have to pay more for taxes and insurance. Oh, but you can take a loan on your equity. If you don't mind paying very high fees!
Buy Low, Sell High
Great advice. But how do you know when the price is low because it's a pile of crap compared to when it's low because everyone's an idiot?
And how do you know when it's high? If I had been in the market during the technology bubble, I might have sold stocks and sat in bonds once it became obvious that the market was way, way overpriced. But that would have been a mistake because I could instead have watched my money double a couple more times before it crashed four years later at which point I would have lost maybe 40% and still been far, far ahead.
Pay Off Your Credit Cards
I'm sure it's true that the best investment some people can make is to pay off their credit cards. But this is too much like the advice that one of the most important things you can do for your health is to quit smoking. In order to quit smoking, I have to start. I don't think that's such a great idea.
Hey, I didn't claim I only get irritated with good reason. Sometimes I'm irritable.
Be Frugal
Mediocre frugality advice annoys me. I remember one time I was feeling poor and I heard someone getting financial advice on a radio talk show. They wanted her to move out of her gigantic apartment into a large apartment, to eat out only one meal a day and to trade her luxury car for a Toyota Camry. I had a small apartment with a roommate, rarely ate out, and didn't have a car. Scum!
(That same day a kid came to my door trying to get me to buy something crazy like $2 candy bars. I said no. "But it's only $2!" I can buy a whole bag of chocolate chips for $2, if I had $2 extra to blow on stuff I don't need, which I didn't! "We take credit cards!" Arrg!)
Retirement Is a Four-Legged Stool
I once thought that retirement could be financed using retirement savings and Social Security. But no. It turns out that with pensions getting trashed, you have to save extra for your own retirement. And thus the three-legged stool of retirement planning was born. You need Social Security and a pension and personal savings.
Okay, fine, I'm trying to save extra money, which I have to tell you does not seem to be adding up in a magically compounding interest kind of way, but now there's another leg. The fourth leg is--are you ready for this?--employment. One of the ways to finance retirement is to, uh, not retire.
Actually, lots of people are either working just part time or are retiring from their day jobs to go into fun jobs that don't pay enough. So it makes some sense, but I don't want to hear it.
And I'm wondering how many more legs this little stool is going to sprout in the next ten to forty years.
Journal entry of the day: Empirical Question's A Hairy Issue - "It strikes me as very strange that the standard approach to haircuts is to get one's hair cut to the ideal length. To minimize the variance in one's hair length from the ideal over the period of time between cuts, you should get it cut too short instead." Read this for an excellent discussion of an interesting topic nobody ever talks about.