It seems that Paul Farrell at MarketWatch thinks that Scott Adams' 9 point financial plan is worthy of a Nobel Price in Economics. Scott (yes, the Dilbert guy) sees this as another example of being in over his head.
Whatever.
Let's look at Scott's plan. It's actually not a bad personal finance benchmark:
- Make a will
Nope. I haven't done that yet. - Pay off your credit cards
Done. - Get term life insurance if you have a family to support
No family to support, so no life insurance. - Fund your 401k to the maximum
Done. Thank you, Vanguard! - Fund your IRA to the maximum
Done. Thank you, Schwab! - Buy a house if you want to live in a house and can afford it
Done. It's not even close to paid off, but I'm chipping away at it. - Put six months worth of expenses in a money-market account
Done. - 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
Sort of. I have more like 95% in stocks right now, but I'm also nowhere near retirement yet. - 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
I'm not confused, retiring, planning for college, or having tax issues.
Overall, I guess I benchmark pretty well. How do you do?
Posted by jzawodn at October 10, 2006 03:37 PM
You don't need a will, you need a living trust.
That way, your surviving trustee can attend to your affairs as dictated by you.
Or, "The State" will take care of your affairs for you, according to their wishes.
But not until after they give your carcass a cleaning by delivering a huge TAX emena to it/you...
A living trust is a very good idea...
Even if you have a living trust, you still need a will. But recommending a living trust to anyone with any substantial assets (limits are lower than you might think) is a very good idea.
Unconditional advice to buy a house is foolishness. It's like asking "should I lease or buy a car?" Generally, I'd advise buying, but if leasing costs $10/year and buying costs $100K, that advice would have to change. At the moment in the Bay Area, renting is half the cost of buying. Taking into account that mortgage payments don't last forever, the math for buying still doesn't work right now. Better to rent and save those pennies for a time when the price-to-sales ratio returns to value more in line with historic norms for housing.
The advice about a living trust can't be overemphasized. When you die, most everything owned by you goes into "probate", a multi-year, very public, court-overseen, lawyer-pocket-lining headache before your wishes (expressed or implied) about your property are executed.
Creating a "revocable living trust" and transfering ownership of large things (house, bank account, brokerage account) to it is a simple matter. It's just drawing up a paper, having it notarized, and "funding the trust", which means stopping by the bank to transfer ownership of your account from your name to the trust's name (my trust is "The Friedl Trust"). For a house, at least in California, it's a matter of giving the county a copy of the trust and a form transfering ownership of the house -- a painless and costless event.
It's all very simple. You don't need a lawyer or anything like that. You can copy the wording of someone else's trust word for word, just changing names. Or you can get "trust packages" at various places online and off. Y! Search is your friend.
As Craig said, you still need a will, for two things: one is to sweep ownership of all un-trusted assets into the trust upon your death. The other is to specify who should care for your children, since a trust can't cover that.
When you create the trust, you specify who has control of the trust assets. Of course, you make yourself the trustee, but you also specify who becomes a trustee when you die (or, if you like, when you become mentally incapacitated). You can specify in the trust specific actions be taken, but otherwise the trustee had discression on what to do, so someone who knows you well (and what your wishes would be) is a good alternate trustee. I suggest me. :-)
A trust like this is merely a legal song-and-dance that gets around probate and empowers those you want to control your stuff after you die to do so. It's "transparent" with respect to taxes (YOU still pay taxes on the brokerage account profits in a trust you control).
Jeffrey
Ha - I'm all over the place on this plan though I'd agree it's a solid, fairly conservative plan. My IRA was recently undiversified with some Yahoo stock.
I bought a few extra houses rather than invest more in my internet stuff, but that plan was looking smarter last year than now as prices are cooling very fast.
Now, if I was a Silicon insider like you I'd probably try to set aside a good chunk for modest angel investments (combined with expert advice) in companies that looked really good. You'll only need a single home run to make that a good idea.
A great book on value investing is the intelligent investor. One of the methodologies detailed is the index fund investment strategy with a mix of stocks and bond indicies.
How do I stand up to that list... hmmm.
Will - No.
CC's - Still paying (and using them). :(
401K - Don't have one.
Other retirement - Don't have that either.
Buy a house - Check. Did that last month... just paid first month rent. :)
Six months expenses - I can barely scrape together 6 DAYS worth.
So... there you have it. I think I bombed that one pretty good. :)
Anyone wanna spot me some angel investing for my robotics ideas?
How is one supposed to save up 6 months of payments after buying a house, paying off credit cards, and maxing out one's 401k?
Doesn't one's savings go away when buying a house? Or should I have not put that 20% down?
I maxed out my 401k, and after getting that and a yearly raise at the same time... I now take home less.. thus, savings decreases.
I need to marry rich. any cute Female millionaires out there?
Maybe I've been listening to Suze Orman too much recently, but I thought the standard advice changed from "fund your 401(k) to the MAX" to "fund your 401(k) to the MATCH". Cash in on the fact that your company might give you free money for investing in your 401(k) with a 50% or even 100% match for the first few percent, but then put the rest in something like a Roth IRA that allows you to pay the taxes NOW rather than LATER, since it is likely that taxes will never be this low again. (Unless someone more crazy than Bush comes along....)
Al,
A Roth IRA has pretty low contribution limits, so if you want to save up more than a few thousand a year it's not going to be enough.
- ask
Fund 401k to the Max? He's kidding right? that would be 50% of my salary. I also have trouble with #8 - what "Money left over" - what's that?
Well, I'm a little depressed about my finances now. Having a 401 should count for something though. Right? Heh
Jeremy,
What strategy do u take for investing, index funds or sector specific, vanguard or other ?. Any advice wud be appreciated.
Not to be a black cloud but the recommendations are ideal but not possible for all of us. I'm a tech employee but Jeremy is a bit of a celebrity tech person and likely makes a very hefty salary plus outside income.
Here's how I came out. At the end of each month, I have about $200 of disposable income. I'll never be able to retire.
Will. Done
Pay off Credit Cards: Nope ($1,200 left at 0% interest)
Life Ins. Single, no kids.
401K. Only what they match.
IRA full. Yes.
Buy a house. Yes but still owe 70%.
4 months living expenses at HSBC.
Extra investing. No cash to do this.
Airplane. No.
Donate $5,000 to non-profit each year. Yes.
Actually, I think it has more to do with two factors:
(1) being careful to match spending with income and not letting it get out of hand
(2) being single and not having gone to an expensive college
I think it's important to think about the list as a list of goals, not a statement of what you should have already done by now. Five years ago, I didn't have several items on the list done, but I decided to get serious about making sure I was planning for the future.
It's funny. People say "but you own a plane!"
Sure. But I've never bought a new car. Buying used saves a lot of money. I'm driving around every day in a 1998 model year car (~8 years old) but it's quite realiable and paid off.
I eat out very infrequently too. That adds up as well.
Heck, I could probably come up with a whole list of money saving stuff I've done to make this all work.
Seems to me that as I think Jeremy's suggesting wealth is less a function of big income than a function of living within means, some frugality, and a modest level of investment savvy.
Al-
For people who are eligible to contribute to a Roth (95-110k AGI as a single), the optimal retirement contributions are:
- 401k to the max that your company matches
- The maximum you can contribute to the Roth (4k if you're allowed the full contribution)
- The balance that you're allowed to contribute to the 401k
Now, if your company allows the Roth 401k (mine doesn't), you don't need to bother with the second step.
must be added to the list:
* do not seek self-actualization through the act of buying shit *
once you overcome the desire to express yourself via pointless consumerism, many other money issues become much simpler to deal with, and you will actually start to recognize (and pity) the vanity and insecurity of those that do try to define themselves by their products and logos
Term life insurance is a good idea if you have a family (item 3). But just as important is disability insurance, whether or not you have a family. Statistically, the average American is much more likely to be disabled than to die during his or her working career. If you work at a big company, they probably pay for some disability insurance, but it may not be as much coverage as you think. Government disability benefits are small.
The point, of course, is to HAVE A PLAN! ...and stay on it!
Re: Comment above...
[[[How is one supposed to save up 6 months of payments after buying a house, paying off credit cards, and maxing out one's 401k?]]]
Assuming you can beg/borrow/steal enough for a downpayment, you do not buy a money pit, and if it is your first home mortgage, you may be able to get a Mortgage interest credit on you income tax. I went from renting a dump for $500/ month to living in my own brick home for $700/month - but I get an EXTRA $3000 BACK in tax refunds from the intrest paid on the house. I applied every penny to credit card debt. So there is more to owning a house than just equity.
Also, if the housing inspecter tells you your prostective new dream house is a money pit and you should run like hell, DO IT!
