Ask HN: Good assets to grow to be financially literate

Phil Tadros · January 26, 2023

2023-01-26 08:20:09

Matt Levine’s most important lesson of “financial literacy,” that is never taught in any “financial literacy” classes:

> If I offer you a 20% annual risk-free return, am I lying? The answer is yes, of course.

The subreddit personal finance has straightforward advice, and a very nice algorithm for determining where to put your money (and an exit criteria after which you can do whatever you want).

That basic flowchart has helped me set my goals for years, and to maximize my progress towards those goals.

It’s very simple, a 10 minute read, and backed by most the books and advice you’re likely to receive anyway, including basic stats about emergency funds, etc.

Unfortunately, it can seem mundane, as financial responsibility is about time in investment and good lifelong habits, not easy tricks.

The stuff on personal finance does not apply to anyone with weird life circumstances or too much money – past a certain point, you need to do weird forms of diversification. Also, if you are saving part of your money for a short-term goal like a house, rather than retirement, you have to adjust the mix accordingly.

Advice here seems generally good. I did start learning about finance and investing very young, and my views have changed a lot as I’ve gotten older. So take this advice as stuff after you learn investing basics.

1) financial independence is great, but you could also die tomorrow. Make sure you understand what your most important values and priorities are, and don’t put them off in favor of more future wealth.

2) health is wealth, don’t ever sacrifice health for more savings. I promise it won’t be worth it.

3) relationships are wealth. Don’t sacrifice the people that matter to you for a little bit more savings. In my own life this meant going from spending very little on traveling to see old friends to quite a bit traveling to see old friends.

4) it’s often much easier and more enjoyable to increase your pay 25% than it is to decrease your spending 25%. Most people are actually not good at navigating “how do I get paid more per hour worked” and a little bit of brainstorming and long term planning in this department can take you leaps and bounds further financially than penny-pinching.

Paycheck to paycheck is vague though. If that includes having a secure job putting money into a 401k and paying down a mortgage maybe its a perfectly good strategy. If you aren’t doing those things then you need to change.

Understanding the Bogleheads philosophy is a great place to start. Along those lines, the book “The Simple Path to Wealth”, by J. L. Collins is great for developing an initial mindset on how your money can work for you.

Bogleheads subreddit and forums are generally great. A lot of great knowledge there, as most investors there are familiar with riskier investment as that is how many started.

I have read some insane upvoted comments in r/personalfinance and r/investing but bogleheads are generally on point.

The nice thing about bogleheads is it starts pretty simple but scales into the minutia of various tax efficiency techniques, fund selection, real estate, and so on when you need it.

The other thing I like about it is that the forums have lots of detailed personal scenario discussions that are helpful for getting real life examples of the application of the dogma.

/r/personalfinance has some solid stuff in their sidebar/wiki.

I’m big into Financial Independence as a concept and community, so I’m partial towards that. Some recommended reading (some which you may like and some you may not):

– /r/financialindependence sidebar/wiki

– https://www.mrmoneymustache.com/ – Bit extra radical on the frugality facet however a private favourite

– https://www.madfientist.com/ – Podcast and weblog. Bunch of stuff on tax advantaged automobiles

– Your Cash Or Your Life – Unbelievable e-book (foreward by MMM referenced above)

– YouTube/common trying to find funding automobiles. Huge ones within the US are: 401k, IRA vs Roth IRA, 403b, 529 (you probably have youngsters). Tax advantaged accounts have large advantages, so undoubtedly perceive them. Solely takes a bit of bit to learn in regards to the ones I listed.

– Dave Ramsey – Love him or hate him, for those who actually wrestle with cash and debt on a elementary degree, he has good recommendation. His recommendation is not optimum for everybody if you do not have points with debt, however one thing to contemplate.

– Is dependent upon the way you need to make investments. Lots of people (myself included) are fairly straight ahead with index funds and diversify in several varieties, reminiscent of US vs worldwide or possibly a wide range of concentrate on business. Do you analysis and determine what’s finest for you, however index fund investing is fairly protected and simple.

Some private recommendation:

– Spend lower than you make. Appears apparent however it actually is the golden rule of non-public finance. Simpler to say than do, particularly with out figuring out your monetary/life scenario.

– Cut back any debt you could have. Excessive curiosity is clearly an enormous one and a few folks have various ranges of consolation with low curiosity debt (like mortgages from the previous few years). Discover what you are comfy with, however simply eliminate any bank card debt instantly. The possibilities you beat that rate of interest with an funding is mainly zero, and the restrict because it approaches zero over a number of years.

– Take into consideration the depreciation in your belongings. Shopping for a brand new automobile means you eat the majority of depreciation. There’s an optimum level to purchase a automobile the place you get probably the most life for one of the best greenback after the depreciation is misplaced.

– When you’re in software program like loads of HN, we’re very fortunate to have careers that pay properly generally. Make the most of that. Reside on much less, make investments extra, and be beneficiant with others.

Another new resource I’ve discovered is qubemoney.com. Great way to set a budget and stick to it. They issue a debit card that declines unless you “open” a budget first on the app. That way you always have to think about what you’re spending before you spend it and you always know how much you have in your budgets.

The richest man in babylon – a book of parables about an ancient babylonian who accumulated wealth – is a fun read and a nice way to pick up some essential concepts in an entertaining way.

William Bernstein has written many finance/investing books, though most of them can get quite advanced. But he also wrote a much more approachable, 27 page booklet available for $1 called “If You Can: How Millennials Can Get Rich Slowly” that is a good intro to the space. I greatly appreciate the wit and no BS style of his writing.

1. An app called YNAB (You Need A Budget). They use the envelope system of budgeting and they have group classes you can join. Absolutely transformative.

2. Rich Dad Poor Dad

Rich Dad Poor Dad should always be mentioned with the caviet that:

A) 99% of the book is fabricated

B) It’s based on methods which are significantly harder to do in this day and age

The biggest takeaway from the book is the mental shift to assets and liabilities. But the anecdotal stories are pretty poor and, as I said, fabricated.

I didn’t read that book but watched a seminar via YT from the author. It talked about real estate investment and I found it eye opening from how/where profits came about. The example I remember (I have no idea if these are feasible numbers, just pulling numbers out of thin air for an example) goes something like this:

1. Buy 50 unit apartment complex for $10mln. Get investors to pay $4mln, loans for $6mln. Cash flow is $600k/year from avg of $1000/mo.

2. Slowly invest in the property, refurbish units by maybe adding in-unit laundry for example. Keep property well maintained.

3. After some time (3 years?), get property re-assessed and now its worth $15mln. Refinance the property to $15mln, pay off $4mln to investors, take $1mln from loan for renovation recovery/profit, tax free, pay off previous loan.

The eye opening part for me was that the goal is to not build and sit on the equity like a residential house but use the equity and increased property value to refinance and the extra money from the loan becomes essentially tax free profit. There is risk that something like a large employer leaves town/lays off people and now you have less renters and property value might decline and things like that. He had a real estate developer discuss how they would do this and do it well by researching areas, property values, etc. This also gives some insight into one element of why rents might be skyrocketing recently – loan rates are higher so developers/investors doing this re-assess/re-fi pattern have higher costs.

So what was portrayed in the YT video did not seem fabricated, he had an actual real estate developer talk through this process.

I strongly agree with YNAB. Investment advice and higher financial knowledge is all well and good, but they open with living paycheck to paycheck. Getting out of that lifestyle is all about employment and budgeting. YNAB is great, even if only as a tool to get you to use envelope budgeting.

To me it seems like a lot of people enjoy having things more than being free and not having to worry about getting paid. Also ‘spend less than you earn’. As simple as that – yet people struggle to follow this. It also boggled my mind to find that someone with masters degree believed they had money – despite it being cash withdrawn from a credit card. When challenged why do they not pay back their credit card – I heard it’s the feeling of empty account, and that money is for -just in case-. Yeah, you are paying % monthly on that just in case, that you could get from a credit card if it really happened. That $ on the account also was affecting that person’s spending habits – thanks to the avoidance the feeling of being out of money. Crazy – money illiteracy is real.

I don’t understand. Cashing out a CC, paying fees, avoiding being out of money and having $ on the account – these statements mixed together make no sense to me.

his “get out of debt” advice is fine, his investment advice is pretty terrible.

also he is just a terrible person all around. One of his antics bringing a loaded gun to an all hands.

he’s good for people who are in massive debt and can’t control themselves. people need to graduate themselves from him once they don’t fall into those categories as his advice will hold people back if you blindly follow his hard advice.

1. Spend less than you earn.
2. Learn about investing and develop an investing mindset. Investing can mean stock, but also a personal skill like cooking or a small business, a thing you can rent out, whatever.
3. Repeat.

My friends live paycheck-to-paycheck and I got $300k stashed in cash and a mix of investments. I’m not living for the money, but this world is full of costly stuff you definitely do not need – and it really surprises me what people are spending money on.

I got $300k stashed in cash and a mix of investments

Why?

I can understand if you’re saving to buy a house outright for cash, or to invest in a startup that needs a chunk of capex at the beginning, or something, but just sitting on a pile of depreciating cash assets is silly in an economic market where retail inflation is running at ~10%. If you’re literally just holding cash because you can’t think of anything fun to spend it on then that’s quite sad.

There’s something to be said for having some cash, despite inflation. Obviously you want enough to cover short-term emergency situations. But beyond that, the advantage of cash is that it’s liquid AF and having a stockpile can enable you to take advantage of opportunities that you might not be able to seize if you don’t have cash on hand.

No, you don’t want your entire “life savings” in cash stored in pillow-cases under the bed, but you do want enough cash where the value of “enough” varies depending your circumstances.

It’s an “investment” in the sense that you are getting some conceptual return on it, even if the return isn’t financial. For example, a $300 pair of boots is an investment, because you expect to get more than $300 worth of utility over the life of the pair of boots.

Dave Ramsey.

Listen to his podcast episodes. It’s a quick way to get a feel for his advice and to hear how real people who call in benefit from it. Go back to 2020 or so before his co-hosts started taking more airtime.

He catches a lot of flak because the debt snowball that he advocates is mathematically inefficient (folks prefer to pay debts with the highest interest rates off first). Also his political views. Look past those things – there is so much valuable advice.

There’s much valuable advice – sort of.

20+ years ago, he was one of a handful of well-known faces of personal finance, was nationally syndicated, books, etc. There were fewer outlets and fewer options than there are today.

His focus on debt and changing mindset around that will help some people, but if he’s a turnoff (for whatever reason), you’ll get 99% the same advice on most issues from dozens/hundreds of other personalities.

He’s a real estate millionaire that has moral issues with declaring bankruptcy. Real estate is like life’s cheat code: borrow money from the bank — buy rental property — pay the bank back with someone else’s money. All this “get a second job”/”deliver pizzas” advice is disingenuous in my opinion when the real secret is borrow money and become part of the landed class.

He personally likes real estate but his advice is mostly to get into mutual funds (swap with ETFs if you prefer).

He strongly advocates against taking debt to buy real estate. He only recommends purchasing real estate in cash.

The recommendation to get a second job only applies as people are getting out of debt (baby steps 1 and 2. After that he doesn’t really recommend it.

The best book bar none on investing is “The Intelligent Investor” by Benjamin Graham. So if you want to learn about investing in a way that is a sustainable way to build wealth for the long term, that is the one to read. The original is pretty old, but the advice remains sound. The modern edition with the original text + chapter updates from Jason Zweig is the one to go for.

That said, it sounds like you have some financial foundations to build before investing is a realistic option.

Ben Felix on YouTube is great at explaining things in an understandable way, while linking to the research that he bases his recommendations on.

Have an analogy.

Imagine you’re lanky or fat and you want to build muscle and get in shape.

Saving is like going to the gym and lifting. You’ll look and feel a ton better.

Putting together a budget is like going to the gym with a routine and maybe a rough diet plan. You’ll get there faster.

Investing is optimising your routine so that you hit every muscle group once you’re starting to plateau.

But it’s all built on the basic mindset that you need to go to the gym. It’s not optional, you just do it.

The main thing is to build the mindset of saving. You spend what you _need_ to, and perhaps a bit on top for fun. Money that comes in is saved by default.

If you’re living paycheck to paycheck I’d say learn to walk before you run. Keep it simple, open another account and transfer 20% or whatever you feel comfortable from every paycheck. After you save more than a year of living in that you can start to look into more advanced stuff.

If you are living paycheck to paycheck. You can not afford to lose your job, or not have one while you are looking for another one. This economy should make you immediately do anything and everything in your power to quickly amass at least 3 months of living expenses. This will give you that safety net necessary to be able to find a new gig if the need arises. You will be amazed at how much stress it can take off you and your attitude towards your job.

Agreed. I have probably a couple years of living expenses available now, and I still have some anxiety around work/income/etc. When I lived check to check, it was even worse. There’s not no stress now, but far less, knowing I can still eat/live/etc if some engagement is cut short or reduced. Beginning of covid, early lockdown stuff, the company I was working for cut some folks, and reduced me to … limbo for a few weeks. The project I was on had no clients willing to renew their contracts because… lockdown – they had no idea what was coming in the next few months (who did?). 15 years ago I’d have freaked out about having a project suspended like that. This time, it was… a blip. True, there were bigger things to be concerned about anyway (covid) but short term financial stability wasn’t an issue. Longer term – would still like enough to be even ‘lean fire’, but not quite there yet.

This – and more.

Having slack in your finances may not solve all your problems, but life is much better when you escape from the class of problems surrounding lack of money.

It takes a while, but when you get used to having enough money your time horizon can extend much further, and you can start to make decisions that will be likely to help you in the future.

I say this as someone with household income below the local median, but with thrifty habits and a financially compatible spouse, and who had the good fortune to buy a house before things got so crazy. If housing wasn’t a mostly-solved problem for us life would be very different.

For some people it happens automagically once there’s more than you can let yourself to spend in a moment. You see money, you think “good, better keep on keeping on”. For me it actually created motivation to seek and earn more.

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