Current Events > Great Freakonomics episodes on the basics of personal finance and investing

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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.
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I feel like this is stuff I should learn, but I probably won't.
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GeneralKenobi85 posted...

I feel like this is stuff I should learn, but I probably won't.

This is why I think it's useful to learn via a podcast like this. This stuff can be very intimidating. With this, you can just put it on in the background while you're doing something else and absorb some of the basics.
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Tag. This interests me.
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Number 1 never made much sense to me. Don't waste your money is much better advice. I usually save 40%+. Should I just blow 20% of my income every month because of a budget?
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Squall28 posted...

Number 1 never made much sense to me. Don't waste your money is much better advice. I usually save 40%+. Should I just blow 20% of my income every month because of a budget?

If you can comfortably save 40%, save 40%. Most people don't have that luxury. This is just a guideline for helping people meet their financial goals.
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whats the point of a financial goal if i live on gamefaqs
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lol no you shouldn't be investing any money in the stock market everything is overpriced and due for a correction just look what happened today lol

@Darkman124
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ChrisHanson24 posted...

lol no you shouldn't be investing any money in the stock market everything is overpriced

Everything?
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Food budget is #1 most important thing.
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Out of curiosity, whenever I read articles that talk about saving x% of your income, it doesn't specify what to save for. Does that all go to retirement? Rainy day fund?

I save about 17% of our gross income, but that's spread between retirement, pensions, vacation fund, rainy day fund, and saving for my sons education.
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NES4EVER posted...

Out of curiosity, whenever I read articles that talk about saving x% of your income, it doesn't specify what to save for. Does that all go to retirement? Rainy day fund?

I save about 17% of our gross income, but that's spread between retirement, pensions, vacation fund, rainy day fund, and saving for my sons education.

This only covers the basics, but the hierarchy for saving is generally as follows:

1. If you have any credit card debt that's accruing interest, pay that off first.
2. Set aside a rainy day/emergency fund equal to 6 months or so of your living expenses. Put this in a liquid account.
3. Contribute until you max out your retirement account, as this is tax deductible. Any income earned in that account is tax deferred
4. Last, invest in your personal investment accounts (i.e. non-retirement).
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NES4EVER posted...

Out of curiosity, whenever I read articles that talk about saving x% of your income, it doesn't specify what to save for. Does that all go to retirement?

duh you dont want to have to work til your 70 do you

Tag

we're paying so much into social security already, it's pointless to save in more retirement accounts. might as well spend and enjoy life now rather than wait until you're crusty and old. saving money in retirement accounts is utterly pointless since we can just increase taxes on the rich and on corporations to better fund social security.

ChrisHanson24 posted...

NES4EVER posted...

Out of curiosity, whenever I read articles that talk about saving x% of your income, it doesn't specify what to save for. Does that all go to retirement?

duh you dont want to have to work til your 70 do you

Lol both my fiance and I have decent pensions. I am able to retire at 55, and I'll max out my pension at age 58.

I also save money outside of that. It's just that there are other priorities as well. Canada has an education savings plan that matches up to 20% of your annual contribution up to $2500. I'd be silly not to contribute seeing as there is a 20% return BEFORE the tax free interest on the total investment.
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The Admiral posted...

6. If you ever hire a financial advisor, make sure they commit to the fiduciary standard.

imo there is only one good kind of financial advisor and that is the kind that you pay a flat fee to for him to give you a set of ETFs and/or stocks to purchase yourself that reflect your own risk tolerance and timeline, and then you both walk away

with the fiduciary rule gone there really is no 'committing to the standard' only various degrees of not

and anyway the whole concept of paying someone to invest for you goes against the concept of indexing
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Tag for later
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Why no stocks assuming it's with money after 401k & IRA are maxed and it's invested companies that you believe will be good long term and you're not attempting to day trade?
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The Admiral posted...

9. Do what you can to support the social safety net.

What were they talking about here?
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it's sad that this stuff doesnt apply to 99.99% of the world's population

DifferentialEquation posted...

Why no stocks assuming it's with money after 401k & IRA are maxed and it's invested companies that you believe will be good long term and you're not attempting to day trade?

because "what you believe" is probably not correlated with long term market performance at all
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AlternativeFAQS posted...

it's sad that this stuff doesnt apply to 99.99% of the world's population

can't believe I'm a 0.01 percenter
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AlternativeFAQS posted...

it's sad that this stuff doesnt apply to 99.99% of the world's population

This applies to everyone who is basically lower-middle class or above, which is the vast majority of CE. Not really sure what you're talking about.
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They should make a podcast like this but for people without any ambitions who just are living to die eventually. People who don't have 401ks, don't care about saving or homebuying. It could discuss stuff like what the most amount of food for the lowest amount of money you can get is at fast food places or how to find old arcade games in your town.
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It's reassuring to know that I'm doing the right thing when it comes to handling my income. Although I still don't feel particularly comfortable with the idea of getting into the stock market.
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tag
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Yaridovich posted...

fast food places

the first part of any such podcast would be 'stop eating at fast food places entirely, it is a very bad financial deal for you not only in the moment but when you have health issues down the line'
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Darkman124 posted...

DifferentialEquation posted...

Why no stocks assuming it's with money after 401k & IRA are maxed and it's invested companies that you believe will be good long term and you're not attempting to day trade?

because "what you believe" is probably not correlated with long term market performance at all

What would you recommend doing with extra money after retirement accounts are maxed?
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Thanks for sharing
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DifferentialEquation posted...

Darkman124 posted...

DifferentialEquation posted...

Why no stocks assuming it's with money after 401k & IRA are maxed and it's invested companies that you believe will be good long term and you're not attempting to day trade?

because "what you believe" is probably not correlated with long term market performance at all

What would you recommend doing with extra money after retirement accounts are maxed?

The advice above, and which I agree with, would be to put that into a low-cost index fund. If you're relatively young (under 25), you should have about 80% of your money in equity-related investments (which includes those index funds) and the other 20% in bond funds. Both Vanguard and Fidelity have great selections of low-cost funds in both of those categories.
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#9 sounds political (just based off of what I read in the OP), but the others are things I agree with for the general population for sure.

The amount of time, research, learning of skills, etc. that goes into being informed enough to pick individual stocks is incredibly great, so great that the vast majority of people are probably best off never doing it. If it's something you really have taken a great interest in, then okay maybe, but I know too many people who aren't that into it who I could see being susceptible to getting sucked into the buying and selling of stocks without really knowing what they are doing, but as a "get rich quick" type thing. That will never work.
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The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?
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That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

You still build credit if you pay it in full.
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Anteaterking posted...

That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

You still build credit if you pay it in full.

Do you build it any faster if you leave a balance?
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Anteaterking posted...

That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

You still build credit if you pay it in full.

ive had my balance at 15-20 percent of my limit for years and my credit has only gone up. 757 as of monday

That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

I can tell you from personal experience that paying it off in full will still increase your credit score. I've paid mine off in full every month ever since I've had a credit card (basically my entire adult life) and my credit score has been above 800 for a long time
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That_Happened posted...

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

the key is to keep some balance on your monthly statements, so you have a history of paying your bills IIRC

and it shouldn't matter if its a long-standing balance or a new one every month as long as you have a meaningful monthly balance that has to be paid(and you do indeed pay some portion of that balance)

I might be wrong tho, this is just what I recall someone telling me when I was younger
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Good topic

This should be required in school but they want to keep us poor
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For credit cards (and credit score) what matters is:
- Number of cards (Factor in below)
- Total accessible balance (Amount available)
- Utilization (how much of that accessible are you using)
- Length of history (how old are the cards)
- Payment history (on time? 30 days late? 60 days late? Etc)

So a good rule of thumb is to have a few cards with the maximum line amount they will allow you (call and request an increase after a year). Use them. Pay on time. Don't carry a balance more than 30% of what is available.

*Disclosure: Not a credit advisor, but I do work in the financial industry.
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Naw, I would rather vote for Bernie and have the millionaires and the billionaires pay me
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Tag for when i get home. Good topic
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halomonkey1_3_5 posted...

That_Happened posted...

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

the key is to keep some balance on your monthly statements, so you have a history of paying your bills IIRC

and it shouldn't matter if its a long-standing balance or a new one every month as long as you have a meaningful monthly balance that has to be paid(and you do indeed pay some portion of that balance)

That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

Why have a credit card at all? Can't you just use a debit card?
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That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

You should pay your monthly statement balance in full, which prevents you from paying interest. The statement balance is not the same thing as your total balance; it's just the part you owe by the payment date.

Having a past due balance and paying interest and penalties is never something you should do. The "carrying a balance" simply means you regularly use the card and still have a balance between pay periods.
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Bolle_Henk_ posted...

Why have a credit card at all? Can't you just use a debit card?

Credit cards are (one of the many things) used to establish good credit, so you can buy larger items that you would pay in monthly payments, like a house, a car, etc. If you can prove you're responsible and can keep up with payments, businesses will give you better deals and better rates when you buy those things.
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The Admiral posted...

That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

You should pay your monthly statement balance in full, which prevents you from paying interest. The statement balance is not the same thing as your total balance; it's just the part you owe by the payment date.

Having a past due balance and paying interest and penalties is never something you should do. The "carrying a balance" simply means you regularly use the card and still have a balance between pay periods.

Got it. Thank you.
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Bolle_Henk_ posted...

halomonkey1_3_5 posted...

That_Happened posted...

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

the key is to keep some balance on your monthly statements, so you have a history of paying your bills IIRC

and it shouldn't matter if its a long-standing balance or a new one every month as long as you have a meaningful monthly balance that has to be paid(and you do indeed pay some portion of that balance)

That_Happened posted...

The Admiral posted...

2. Pay your credit card balance in full every month.

I was told that if you want to raise your credit score you shouldn't pay it in full, but rather keep a balance on the card and pay it regularly. Is this true?

Why have a credit card at all? Can't you just use a debit card?

Plus you are throwing away free money by not collecting credit card points
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This reminds me that I need to switch banks, Wells Fargo sucks
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