Financial Literacy

A Freakonomics Radio podcast I just listened to, Everything You Always Wanted to Know About Money (But Were Afraid to Ask), stated that studies have shown that in the USA and in nearly every other country studied, the percentage of people who are financially literate is under 30%. That’s the bad news.

The good news was Harold Pollack’s “all the financial advice you’ll ever need fits on an index card” conversation. I took notes:

  1. save 20% of your income
  2. pay off your credit card bill in full every month
  3. max out 401k & other tax advantaged accounts
    1. it reduces your tax burden today
    2. matching employer contributions are free money
  4. never buy or sell individual stocks
  5. buy inexpensive and well diversified index and ETF funds
  6. make your financial advisor adhere to the fiduciary standard
  7. buy a home when you’re financially ready
    1. homes are something we use and consume
    2. when are we ready?
      1. have 20% in hand
      2. fixed rate 15/30 year mortgage
      3. still have reserves for home maintenance
  8. insurance: be protected against losses > your reserves
    1. get the largest deductible
  9. do what you can to support the social safety net
    1. bad stuff happens
    2. lots of people need help

Money and Trust

My first employer had his landscaping business looted by his CPA, who then skipped the country. That incident planted a seed of mistrust in my mind for all financial service professionals (CPA, CFP, CFA, IFP, etc.).

Every time I hear people tell about “this guy” they know that does an outstanding job of managing their money, I can’t help but think of the very long and never ending parade of financial service professionals like this weeks example.

If I recall correctly, it was William Bernstein in The Four Pillars of Investing that, when outlining the perverse incentives that exist within the financial service industry, pointed out that the term service could aptly describe how a bull services a cow.