We’re Talking Real Money Here!

Personal finance has always been an interest of mine, but I haven’t always done a good job of it. Turns out, I’m not alone. The Atlantic recently published an article that leads out with the following simple quiz:

Do you understand money? Let’s see how well you do with the following questions. 1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.

2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

The correct answers are 1-A; 2-C; and 3-B. How did you do? Did you respond correctly to all three questions? If you did, then you belong to a surprisingly small global minority.

The article proceeds to document that only 30% of Americans got all three right and in Europe, about half of the Germans and the Swiss got them all. They did the best of all nations, but half is hardly much to brag about. There’s more analysis, but the basic message is that people’s ability to handle their own finances is, well, dismal. I’ve been pondering the in’s and out’s of money for a half century now and I think I’ve got a lot of it figured out. (Turns out, studies find that most other people feel that way too as they age, even if they’re wrong about it. Glad I’m not one of them!)

I would like to impart some of my knowledge to my children and grandchildren, but that’s hard to do. Kids aren’t interested and when they do get old enough, they too come to think they know more than they do about it. But just on the off chance they might someday read this post, I’m taking a chance and offering some observations and advice here. You can eavesdrop if you like.

1. The basic secret of financial security is actually easy and simple. Avoid unnecessary debt and spend less than you make. Do this routinely and resist temptation to make big purchases. I think it was Ben Franklin who said not to be “penny-wise and pound-foolish”.

2. Compound interest is powerful, both positively and negatively. Currently, interest on savings and money-market accounts is effectively zero, and that means that inflation, while historically low, is still eating away at your savings’ value. But, someday, compound interest will again be offered on savings.  Think money-market funds, government treasuries, and top-rated commercial paper.

3. Stock investing is a lot like gambling for the majority of people, and as in gambling, the average bettor is destined to eventually be on the short end of the deal. One reason for this is that it’s counter-intuitive. Stocks look their best when they’re near the end of an impressive run-up in price, and that’s usually the worst time to invest in them. Growth can not be maintained indefinitely and even Walmart stock eventually plateaued. (Man, I wish . . . ) I tried buying individual stocks for a few years – it was discouraging.  I found that although the broker’s fees seemed like a small percentage, they worked just like compound interest, nibbling away what few gains I had. My final conclusion: buy mutual funds, and of those, index funds are best because all funds charge fees and index’s have the lowest. Fees work like compound interest too, you see.  Think of it this way:  stocks historically appreciate about 8% per year and if your fund is charging you 2%, it’s taken a quarter of your gain already.  Fees vary wildly among mutual fund companies, so pick carefully. Some charge 5 to 10 times less than others!

4.  When investing, use dollar-cost-averaging.  This means, set aside some of your income every month for savings, treat it like a bill, and send it in.  If you think can’t manage that, get some finance software and track every penny for a while.  You’ll probably be amazed where your money’s going.

5. Planning for retirement is especially hard because it always seems so far away. Deferred gratification is not natural. Also, pensions are going the way of the dodo bird, although there is still one good source: the military. Don’t try that just for the pension, however. It’s very competitive and making a grade eligible for a pension is far from guaranteed. Thanks to Uncle Sam, FDR, and some good-old American socialism, most people can count on enough Social Security to keep them from becoming homeless or starving, but not much more. But it is indexed to inflation and immune from market dips. (That’s a precious gift from Democrats.) But if you want to actually enjoy retirement while fending off health problems, and everybody has them as they age, you need to save and invest for that goal. The rule of thumb for drawing out savings over your retirement, so that you don’t out-live your reserve, is only between 3.5% and 4% per year, so the earlier you start saving, the better.

6.Managing your money is something you have to do yourself.  If advisors were all that smart, they’d just manage their own money.  Anything that sounds too good to be true, is. But also, sometimes you get what you pay for. Do your homework and don’t mix money with emotions.

7. If you get some kind of windfall, such as an inheritance, do not treat it as a different kind of money. It isn’t, it’s all the same. Money is fungible. Look that word up, memorize it, and make it part of your thinking.

8.  Life insurance is important if you have dependents who would otherwise suffer if you get disabled or die, but it is a poor savings vehicle.  Buy only as much as you need, and buy the cheapest (from a reliable company – they have ratings).  It’s called term insurance.

Good luck, kids,


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About Jim Wheeler

U. S. Naval Academy, BS, Engineering, 1959; Naval line officer and submariner, 1959 -1981, Commander, USN; The George Washington U., MSA, Management Eng.; Aerospace Engineer, 1981-1999; Resident Gadfly, 1999 - present. Political affiliation: Independent, tending progressive as the GOP recedes from its Eisenhower roots.
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28 Responses to We’re Talking Real Money Here!

  1. Sheryl says:

    This post made me think of the old saying, “Watch your penneys and the dimes will take care of themselves.” :)

    • Jim Wheeler says:

      Watch your penneys and the dimes will take care of themselves.

      That’s a good one, Sheryl. Makes all kinds of sense, in context of course. It’s opposite is the one about penny wise and pound foolish. I had an aunt who was like the latter and was a victim of elder abuse. Scrimped and saved all her life. Worked on the family farm with her siblings and also in a unionized grocery store. The last one of the family group alive, she gave $60,000 to a traveling minister and left the family farm to a couple who promised her things they didn’t mean. True story.

  2. Great read. My children are young but I already have begun training them. JB

  3. Jim in IA says:

    I’m sending this to my wife. She is the trained finance person in the family and will find this interesting.

    I think we do a poor job educating our school children about money smarts. The basics aren’t that hard to grasp.

    • Jim Wheeler says:

      I agree, Jim, about money smarts and education. See my comments to Frank on the subject. (So, you married an economist! Wow. :grin: )

      • Jim in IA says:

        Well, she would say no to that. They are different from her. She calls herself a portfolio manager/financial analyst. :-)

        I did marry the right person. The finance stuff came later.

  4. Jeff Little says:

    The low performance on this quiz does a lot to explain why so many Americans vote so vociferously against the New Deal every chance they get. Nature abhors a vacuum and the “I worked hard unlike those lazy guys over there” arguments get a lot more traction if you don’t like numbers.

    • Jim Wheeler says:

      Right, Jeff. And what amazes me the most about Social Security is how few people understand the “security” part. I suppose the Great Recession might have helped that a little, I’m not sure. The GOP hasn’t renewed W’s attempts to privatize it lately, but it will probably happen again.

  5. I’ll second what you’ve said (though I would say some of it differently.) My education, industry experience, teaching experience, and professional certifications are in finance and economics. Fortunately our son has learned from example and from dinner table talk. He is in the military (Air Force) and invests a large portion of his pay, primarily in index mutual funds. Now and then I get questions about how to deal with some issues. He’s setting himself (and his fiancee) up for a relatively secure financial life.

    • Jim Wheeler says:

      Sounds to me, Melanie, like you and Jim have a smart son and given that you’ve got a relationship so good that you’re having money conversations, you are ahead of 99% of the pack! Good for him, and good for you.

  6. aFrankAngle says:

    Great advice. As a whole, the educational system doesn’t see this as important because “it’s not on the test.” Then again, given an educational system entrenches in an early 20th century industrial model … that’s understandable. Hard to believe that I disagree so much with my accountant regarding retirement accounts …. on the plus side, he only does my taxes.

    • Jim Wheeler says:

      Taxes. Good point, Frank. That’s something I didn’t touch on in the post, and probably should have, but it was getting too long already. The two main kinds of IRA are, in my opinion, excellent vehicles for “paying yourself” and each has its own advantages and disadvantages. One of the main strengths of the Roth is its exclusion from mandatory withdrawals after age 70 ½, and it is also a better one to pass on to one’s descendants. If America is going to become dynastic, one might as well jump on the bandwagon.

      You’re right about the educational system being mired in the past regarding personal finance. Every high school ought to have such a course, and if I had my way it would also include a primer on babies – where they come from, what they cost (in both dollars and emotions), and all the things that sometimes go wrong.

  7. My final conclusion: buy mutual funds, and of those, index funds are best because all funds charge fees and index’s have the lowest.
    Would you give that advice to any age group, or just the young and relatively young?

    • Jim Wheeler says:

      Would you give that advice to any age group, or just the young and relatively young?

      Dear Helen,

      I am 77 years old and I am still invested in 50% stocks. That said, it is because I can afford to be. I don’t need to draw on my savings, thank goodness. If I were nearing the end of my savings I would never risk those remnants on the vagaries of the stock market. Every situation is different, and that is what makes horse races. Ha ha. But I will say this: in the competitive world of investing, there is no substitute for risk. It goes hand in hand with your prospects. One more point: dollar-cost-averaging into a sea of risk can spice up one’s life, especially if, as in the last 5 years, the gradual trend of the market is upwards. :smile:

  8. Should have said, I ask because I usually hear that for young people, invest in stocks, but for older people, invest in bonds
    . I also find interesting
    6.Managing your money is something you have to do yourself.
    because I’ve been thinking about that lately. We have a financial advisor, same one for years, and I’m not sure what he does other than send several monthly (or is it quarterly?) statemenst that we sometimes open before we file. I’ve been wondering if we really need him or if we should just move everything to an index fund. (Well, not everything, but stocks.) Of course, having a money manager is convenient at tax time, becasue he already has our interests/dividends/profits/losses and all we have to dig up is medical expenses. (Well that’s oversimplifying, but not a whole lot.)

    • Jim Wheeler says:

      I am a fan of the world’s largest mutual fund, Vanguard. They invented the index fund and they are owned by their investors, which is why they charge less. For example, they have several funds made up of several broad index funds designed for retirement. Their expense ratio is 0.17% compared to the industry average of 1.05%.

      My advice is to figure out just how much you are paying your financial advisor and what his expense ratio would be. This can be challenging because the industry likes to hide that information.

      If you are interested, here is a link to a page at Vanguard’s site that may interest you:

    • Just a comment… if you move everything from one thing (some type of investments with the financial advisor) to another (index funds, or really anything else), you must be aware of the tax consequences of doing so. The tax cost, frankly, can make that prohibitive. OR it could well be worth it. It’s a tough calculation of all the costs, including management fees or brokerage fees, as well as taxes. Good luck.

      • Jim Wheeler says:

        That’s a good point, Melanie, if we’re talking non-IRA investments. If there are significant “unrealized gains” and you sell them, those would be taxed in the year sold. However, I would think that stock holdings should be transferrable from one broker to another without being sold. Once that is done, stocks could be sold incrementally over time so as not to raise one’s tax bracket. In the case of IRA’s, there wouldn’t be a tax problem with a direct transfer between companies, as Frank knows by his previous comment. Also, I would not think there would be a management fee just for transferring assets to another company – that sounds unethical.

        • That’s right — no issue with direct transfer of retirement (IRA) funds. And if there are individual asset holdings, yes, *generally* they can be transferred, and then sold over time. As to fees for transferring, I have seen them. And it is unethical, but does happen at some financial institutions.

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