Most people my age I talk to don’t have much of a clue about how to deal with personal finances. We come out of school with almost no money then suddenly have all this cash (on a relative basis) and don’t know what to do about it. All the while, the education system never thought it would be important to tell us how to manage this newly found wealth wisely. Well here is probably 80% of what you need to know courtesy of Scott Adams (of Dilbert fame), which I read on Matt Cutts blog. (I’ve annotated the list a bit with some important ideas.)
- Make a will.
- Pay off your credit card balance.
(bkeng: Compound interest is only good if it’s working for you.)
- Get term life insurance if you have a family to support.
- Fund your company 401K to the maximum.
(bkeng: RRSPs for us Canadians.)
- Fund your IRA to the maximum.
(bkeng: TSFAs for us Canadians.)
- Buy a house if you want to live in a house and can afford it.
(bkeng: Here’s a tip: Think of a house as a place to live and not as an investment – you’ll be much happier during the next real estate crash.)
- Put six months’ expenses in a money market account.
(bkeng: The future is uncertain; everyone needs a rainy day fund.)
- Take whatever is left over and invest it 70 percent in a stock index fund and 30 percent in a bond fund through any discount brokerage company and never touch it until retirement.
(bkeng: Great advice for 95% of people unless you are willing to dedicate a lot of time (and even then it’s still incredibly hard to do better).)
- If any of this confuses you, or you have something special going on (retirement, college planning, tax issue), hire a fee-based financial planner, not one who charges you a percentage of your portfolio.
(bkeng: Incentives, incentives, incentives. Money managers who make money based on a percentage of your portfolio have almost no incentive to give great results (which is really hard). They’d much rather just get you average results (which you can do in an index) and spend time bringing in more clients to increase their pay (much easier). All the while, you’re paying them 1-3% of your assets.)