Review
This book should be mandatory reading for college graduates. It concisely explains personal finance fundamentals and offers opinionated, pragmatic advice. Usually with these types of books the author is trying to sell you on a silver-bullet product or service, but this book objectively recommends a wide variety of companies and tools. The only knock on this book is that some of the investing advice is targeted to younger people. (Disclaimer: I skipped the sections on debt–about 20% of the book.)
Summary
Highlights for each area:
Credit
- Credit is one of the more overlooked factors in getting rich. Large purchases like homes and cars are almost always made on credit, so having good credit can save you tens of thousands of dollars.
- Two or three credit cards is a good rule of thumb.
- To improve your credit utilization rate, increase your total available credit.
- If you’re applying for a major loan, don’t close any accounts within six months of filing the loan application. You want as much credit as possible when you apply.
Checkings and Savings Accounts
- Online banks have no branches and no tellers and spend very little on marketing, which allows them to accept lower profit margins than conventional banks. That savings is passed on to you as lower fees and higher interest rates. Specific online banks recommended: ING Direct, Emigrant Direct
- The key difference between checking accounts and savings account usually has been that savings accounts pay interest. However, most online banks now offer checking accounts with interest, blurring the line between checking and savings accounts.
- The most important practical difference between checking accounts and savings accounts is that you withdraw money regularly from your checking account — but you rarely withdraw from your savings account.
- Think of your checking account like an e-mail inbox: All your money goes in my checking account, and then is regularly filtered out to appropriate accounts, like savings and investing, using automatic transfers. Think of savings accounts as places for short-term (one month) to midterm savings (five years).
- Some banks offer higher-end accounts with higher minimums — often $5,000 or $10,000 — and more services like commission-free brokerage trades (which you should avoid, since banks charge exorbitant fees for investments), “bonus” interest rates, and discounts on home loans. These accounts are worthless. Avoid them.
- If you’ve decided an online checking account is right for you, Schwab offers a stunningly good account with 3 to 5 percent interest on money in your checking account, no fees, no minimums, no-fee overdraft protection, free bill pay, free checks, an ATM card, automatic transfers, and unlimited reimbursement of any ATM usage.
- Don’t use a standard Big Bank savings account. Online savings accounts let you earn dramatically more interest with lower hassle. If your Big Bank charges you a $5 monthly fee, that basically wipes out any interest you earn. And because you’ll primarily be sending money there, not withdrawing it, what does it matter if it takes three days to get your money?
Retirement
- Every person in their twenties should have a Roth IRA, even if they’re also contributing to a 401(k).
Budgeting
- The recommended budget divides your income into four areas: (1) fixed costs, (2) investments, (3) savings, and (4) guilt-free spending money.
- (1) 50–60% of your take-home pay should go to fixed costs like your rent/mortgage, utilities, cell phone, and student loans.
- (2) 10% of your take-home pay should be invested for the long-term. This includes 401(k) contributions.
- (3) 5–10% of your take-home pay should be saved in a savings account.
- (4) 20–35% of your take-home pay can be guilt-free spending money.
Investing
- Rule of 72 to calculate how long it will take to double your money. Divide the number 72 by the return rate you’re getting, and you’ll have the number of years you must invest in order to double your money.
- In investing terms, cash is money that’s sitting on the sidelines, uninvested and earning only a little money in interest from money-market accounts, which are basically high-interest savings accounts. Cash is the safest part of your portfolio, but it offers the lowest reward. If you factor inflation, you actually lose money by holding cash in most accounts.
- As long as you’re contributing toward your savings goals, don’t worry about having a separate cash account as part of your investments.
- The little-known but true fact is that the major predictor of your portfolio’s volatility is not due, as most people think, to the individual stocks you pick, but instead your mix of stocks and bonds. In other words, your investment plan is more important than your actual investments.
- It is important to diversify within stocks, but it’s even more important to allocate across the different asset classes — like stocks and bonds. Investing in only one category is dangerous over the long term.
- Bonds act as a counterweight to stocks, rising when stocks fall and reducing the overall risk of your portfolio.
- If you’re younger (20s or early 30s), you don’t necessarily need to reduce your risk, so you can invest in all-stock funds and let time mitigate any risk. If you’re older (30s or older), you want to balance your investments with bonds to reduce risk in the shorter term.
- Index funds are far superior to buying either individual stocks and bonds or mutual funds.
- Main disadvantage of index funds: When you’re investing in index funds, you typically have to invest in multiple funds to create a comprehensive asset allocation (although owning just one is better than doing nothing). If you do purchase multiple index funds, you’ll have to rebalance (or adjust your investments to maintain your target asset allocation) regularly, usually every twelve to eighteen months.
- Lifecycle funds are different from index funds, which are also low cost but require you to own multiple funds if you want a comprehensive asset allocation. Multiple funds mean you have to rebalance your funds regularly, usually every year, which is a laborious process of redistributing your money to different investments so you get back to your target asset allocation.
- Lifecycle funds aren’t perfect for everyone because they work on one variable alone: age. Everyone has different investment needs, and these funds aren’t particularly tailored to your individual situation. As a result, you might not get the maximum possible return you could get if you picked your own portfolio. However, lifecycle funds are designed to appeal to people who are lazy.
- If you’re looking for one investment that gets you 85 percent of the way there — which you won’t have to monitor, rebalance, or even pay attention to — then just use a lifecycle fund. But if you want more control over your investments and you just know you’re disciplined enough to withstand market dips and to take the time to rebalance your asset allocation at least once a year, then choosing your own portfolio of index funds is the right choice for you.
- In your twenties and thirties, there are only three reasons to sell your investments: You need the money for an emergency, you made a terrible investment and it’s consistently underperforming the market, or you’ve achieved your specific goal for investing.
Real Estate
- Buying a house is the most complicated and significant purchase you’ll make, so it pays to understand everything about it beforehand.
- Mortgage payments are very different from rent. You might be tempted to think, “Oh, I’m paying $1,000/month for my apartment, so I can definitely afford $1,000 for a house and build equity!” Wrong. First off, chances are you’ll want to buy a nicer house than you’re currently renting, which means the monthly payment will likely be higher. Second, when you buy a house, you’ll owe property taxes, insurance, and maintenance fees that will add hundreds per month. If the garage door breaks or the toilet needs repairing, that’s coming out of your pocket, not a landlord’s.
- Buying a house changes your lifestyle forever. No matter what, you have to make your monthly payment every month — or you’ll lose your house and watch your credit tank. This affects the kind of job you can take and your level of risk tolerance. It means you’ll need to save for a six-month emergency plan in case you lose your job and can’t pay your mortgage.
- The total price of buying and owning a house is far greater than the house’s sticker price. When you rent, you’re not paying all those other assorted fees, which effectively frees up tons of cash that you would have been spending on a mortgage. The key is investing that extra money. If you do nothing with it (or, worse, spend it all), you might as well buy a house and use it as a forced savings account. But, hopefully chances are good that you’ll take whatever extra money you have each month and invest it.
- The easiest way to see if you should rent or buy is to use The New York Times’s excellent online calculator “Is It Better to Rent or Buy?”
- Stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross pay.

