Personal Finance For The Average Joe

0

Personal Finance For The Average Joe

I sat down to talk with a young couple with three kids about personal finance.  This taxes me, because I’m not a financial planner.  I can remember most but not all of the rules on the taxation of various investments.

But this is the way that I handled it:

Joel Greenblatt Owned Hedge Fund On Why Value Investing Isn’t Working Now

Joel GreenblattAcacia Capital was up 12.27% for the second quarter, although it remains in the red for the year because of how difficult the first quarter was. The fund is down 14.25% for the first half of the year. Q2 2020 hedge fund letters, conferences and more Top five holdings Acacia's top five holdings accounted for Read More


Do you have your risks covered?

  • Life insurance on the husband, because the wife stays at home with the kids.  Bright lady, highly employable, but she wants to raise the kids.  Not enough insurance for this family.
  • Disability insurance — covered by his employer.
  • Health insurance — ditto.
  • P&C insurance for cars and house — difficult to avoid, but wise to check.

Do you have a buffer built of 3-6 months of expenses?

Remember my stoplight rule:

  • Less than 3 months expenses in the savings fund? Red light. Defer all discretionary expenditures.
  • 3-6 months expenses in the savings fund? Yellow light. Some discretionary expenditures allowed, so long as you don’t dip back into the red light zone.
  • More than 6 months expenses in the savings fund? Green light. Discretionary expenditures allowed, so long as you don’t dip back into the red light zone.

When my friends asked me how to define a month of expenses, I said take half of your discretionary expenses over a year, add it to your non-discretionary expenses, and divide by 12.  In this case, it revealed that they weren’t tracking their income and expenses, and so I suggested getting Quicken.

They need to build the buffer.

After the buffer comes expenditures that improve life, or reduce long-term costs.  Use cash payment to get discounts.

After that, invest the excess.  50-50 stocks and bonds in index funds is an excellent start, with annual rebalancing. Or 25-25-25-25 cash-gold-stocks-bonds works really well across a wide number of economic environments.

The most important thing is to spend less than you earn, build the buffer, and then invest, or reduce debt, whichever is more promising.  How you invest is secondary.  The first priority is to be wise with your spending money, and then, save.  Especially in a low interest rate environment, the biggest benefit of saving is saving, and not what you earn.

One more note: there are two ways to make sure you spend less than you earn.  The first way is to budget strictly.  The second is to make sure your cash balance grows over every six months.  The latter has been my way.  It is more flexible, but it requires that people have limited desires, viewing spending as a necessary evil at best.

By David Merkel, CFA of Aleph Blog

Previous articleHerbalife Conference Satisfies BAML Analysts
Next articleApple Inc. (AAPL) Still Impacting CES 2013, Even Though It Isn’t There
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.