LogFAQs > #886088122

http://freakonomics.com/podcast/everything-always-wanted-know-money-afraid-ask/
http://freakonomics.com/podcast/stupidest-money/

We get personal finance and investing topics here every so often, and I figured this would be a great resource for anyone who is curious about the basics and don't know where to start. Questions like how much do I save? What should I be investing in? Should I be buying stocks?

The first episode has the nine golden rules for basic finance and financial stability. They explain each in the episode, but they are:

1. Strive to save 10 to 20 percent of your gross income.
2. Pay your credit card balance in full every month.
3. Max out your 401(k) and other tax-advantaged savings accounts.
4. Never buy or sell individual stocks.
5. Buy inexpensive, well-diversified index mutual funds and exchange-traded funds.
6. If you ever hire a financial advisor, make sure they commit to the fiduciary standard.
7. Buy a home when you are financially ready.
8. Have sufficient insurance to make sure you're protected from significant life changes.
9. Do what you can to support the social safety net. [Eh]

The second episode, on investing, is an expansion of rules 4 and 5 above. The easiest, best-return device you can invest your money into is a low-cost index fund. The fees on these are basically 0.04%, versus 1-2% on mutual funds and twice that if you have an advisor. An index fund basically just gives you whatever the return on the overall market is (so if the fund is on the S&P 500, your return will be the S&P return). Since almost no funds consistently beat the market, this is the closest proxy to the best long-term return you can expect. The key, once accepting this, is to minimize the fees you need to pay.

To give an example of how crippling fees are to your investment return, let's say you invest $10,000 for 30 years into low-cost index funds, 1% fee mutual funds, and 2% fee mutual funds. Here is the difference in returns:

• Low-cost index fund (0.04% fee): $10,000 becomes $75,275
• 1% fee mutual fund: $10,000 becomes $57,435
• 2% fee mutual fund: $10,000 becomes $43, 220

Thanks to the magic of compounding, the difference in annual fees gives you almost a 75% higher return with the index fund over the 2% fund. The key takeaway here is that mutual fund and other investment fees kill equity returns. These examples ignore tax.

Anyway, hope this is useful for some CEmen interested in the basics. The podcasts are pretty easy background listens when you're gaming or doing something else.
---

- The Admiral