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April 23, 2014

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I just sent you an email link to an article that was in the Sunday paper. It is about an eBook that William Bernstein has published for young adults. It is called
“If You Can: How Millennials Can Get Rich Slowly” and it is reported to be free on April 25th. I read his (short) book and learned some things and I am three decades older than his target audience. I think you and your readers would find the book worthwhile. He advocates paying off debt then saving for retirement, using three Vangaurd funds you advocated the other day.

Thanks, KD. I received the email and will look it over.

"The biggest mistake isn’t bad investment choices, it’s overspending." - Yes. Until you have many times your annual spending in investments, additional savings can more than make up for any investment shortcomings. Its pretty ridiculous to stress over trying to make an extra 4% on a $30k nest egg when you could just save another $100/month

Even in the later years, your overspending is still hurting you greatly, just from the other (spend down) end, i.e. the extra returns of great investing still might not be able to overcome the large amount of extra funds required to continue an inflated standard of living through retirement (e.g. an extra $1k of monthly spending requires an extra $300K in the nest egg).

"If you have a financial planner you trust, shouldn’t you leave the decisions to him or her?" Trust would mean both they're not rippping you off and they are good at what they do. I have no idea how you would develop and maintain that trust without actively following and questioning the planner's moves.

The "three fund" investment approach is no doubt good for busy people that aren't retired and don't have the time to manage their investments a little more actively, as I have done very successfully since retiring in 1992.

The one fund of the three that I would not use is the bond fund VBMFX. I like another bond fund much better even though it has a shorter record since its inception was 8/30/2002.

Here's the comparison since 8/30/2002.
VBMFX -- Total return 66.63% - Annual return = 4.53%
OSTIX --- Total return 143.65% - Annual return = 8.03%

I think the biggest mistake is buying too much house, followed by buying too much/too frequent car. Overspending on a day to day basic can be quickly and drastically reduced. However, saddling yourself with a high mortgage and/or car payment is what really torpedoes your finances.

I think people really underestimate the relative freedom choosing not to take out a mortgage offers. A mortgage represents a huge long-term commitment of income for most people. There's no flexibility if you lose your job or face increased expenses for some reason. And then you end up pouring free cash into an asset you're going to lose. With renting, the worst you're likely to be facing is a year's rent.

I could never have taken my current job if I had bought a condo of even a conservative value based on my income from my prior job. No mortgage, no car loan = above a certain threshold, my expenses are basically what I choose them to be.

Sarah:
When I was 29 with two kids & a third on the way, and had been with my company about 2 1/2 years when in 1963 we got carried away and bought a brand new 4br 2ba home in a new subdivision just 7 miles from work. The home was $26,950 and we put 20% down to get the best loan. Foolishly we also bought all new carpets, drapes and furniture and also had two patios installed. This knocked a huge hole in our savings as well as putting us into debt. They were still selling new homes in the tract so it would have been very difficult to get our money out of the home if we had been forced to sell it likely at a loss.

I was also working on my MS engineering degree part time at a local university. Looking back I realize what a gamble I had taken. Losing my job would have been disastrous because I would have likely had to move out of state to find another one.

As luck would have it everything worked out perfectly and we stayed in that home until 1977 when we sold it quickly for $90,000 and moved up to a gorgeous 2 year old far nicer custom home for $107,000, still in the same school district. We're still in the home and prices are now over $1.5M for it here in Silicon Valley. Our lives would no doubt have been totally changed for the worst if we had been forced to move out of state at that time.

I appreciate now that luck can play a huge role in anyone's life and that young people often make rash decisions that don't work out well for them, let alone making the decision to get a divorce which usually has a profound effect on their finances.

Sarah:
Here's my record for our housing since arriving in Silicon Valley in 1960.

!960 - Rented a brand new duplex for $125/month.

1963 - Bought a brand new 4br, 2ba tract home for $26,950 with 20% down.

1977 - Sold the above home for $90,000.

1977 - Bought a 2 year old 4br, 3ba custom home about a mile away for $107,000.

1992 - I retired, paid off our mortgage balance and became debt free.

2014 - Still in the same home, now valued at over $1.5M. Also since we live in California, and haven't moved since 1977, proposition 13 limits increases in property taxes for us which are currently $2,410/year which is hard to beat for living in a gorgeous home, on a 1/3 acre, at the bottom of a court in a great & very quiet neighborhood.


I think this makes the case for home ownership and limiting the amount of rent you pay during your life. This is especially true for a great many older retirees on limited incomes. As it turned out our income has grown by leaps and bounds since we retired as the reult of our investments.

@ Sarah/ Old limey

There are arguments both ways regarding renting or buying a home. I think if you have established roots in an area-- and will not be moving around-- a home is a wonderful thing. Old Limey is sitting proof of that. I have a similar story as well. Of course it has to be at an affordable price and with a loan that is not a ripoff.

Many lenders take advantage of the financially naïve -- focusing their attention only on the initial payment rather than the variable nature of the rate, the index it follows, the prepayment fees, etc..... We always need to remember- lenders are "for profit" businesses and they are looking out for their own bottom line--- not yours.

Generally, owning a home with a 30 year loan allows for an inflation hedge that is first rate, a tax deduction for taxes and mortgage and is generally a good financial move if your horizon is long term.

The flip side of that is if you move every few years--- you can get hurt owning a home. The costs to enter and exit are usually high with brokers and lawyers and title/ recordation and closing costs.

Its like anything else--- there is no rule of thumb-- you have to think it through under the specific circumstances involved.

On the other topics:

--- overspending is probably the #1 financial mistake-- I agree wholeheartedly.

---- Leave your financial decisions to a third party?

Financial planning is PERSONAL by nature. There is no way that a third party could make those decisions for you. It must be a process that you are involved with so that you can determine the appropriate risk levels and be comfortable with the required assumptions. I think planners are a fine resource but they are advisors and consultants---- NOT decision makers .

@M19
In hindsight my decision to buy our first home in 1963 looks like a "genius" move, however if I had been laid off and been forced to move a long way away to find a job in order to support my family it would have looked like a very dumb move for the following reasons.

The builder was still building new homes in the tract and with all of the improvements that I made such as brand new custom carpeting and draperies, brick planters, two patios, and several optional extras, if I had been forced to sell with a home the same as mine being available for thousands of dollars less because it didn't have all the extras, I would have taken a good sized loss, as well as having to get rid off my mortgage and spend a lot of money hopefully relocating somewhere else, possibly in another state, as well as uprooting the lives of our three young children.

However I had established a good rapport with my group leader and my manager and felt confident that if there was a layoff it would be unlikely to affect me. The project I was working on was also critical to the US Navy's submarine warfare program and was in good shape throughout the Cold War period which lasted into the early nineties.

Bottom line - my calculated risk turned out fine but sometimes the unexpected can happen out of the blue.

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