You can make it more complicated, but successful financial planning has only two major parts.
First, you figure out your goals: “I want to make sure my kids can attend a good college,” or, “I want to retire in style in Tuscany,” or, “I just want to make ends meet when I can’t work any longer.” Then you determine the steps most likely to achieve them.
Two new books leave it up to you to determine your goals, presumably because what you want to achieve can be as unique as you are.
Instead, in “Money Hacks” (Adam Media, $15.99), Lisa Rowan, a personal finance writer, supplies useful tips on how you can obtain your objectives. And in “The Psychology of Money” (Harriman House, $18.99), Morgan Housel, a venture capitalist, takes a more defensive approach. He shows how you can avoid sabotaging yourself as you try to achieve your plan.
Mr. Housel’s book provides little specific financial advice beyond this: Think long-term and keep your investing expenses to a minimum. But that is by design.
“The premise of this book is that doing well with money has little to do with how smart you are, and a lot to do with how you behave, and behavior is hard to teach, even to really smart people,” Mr. Housel says.
The behavior he advocates amounts to common sense. Manage your money in a way that allows you to sleep at night, he says. Use that money to gain control over your time so that you can, ultimately, do whatever you want. And, he emphasizes, “Save, just save. It’s great to save for a car, or a down payment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save.”
Ordinary as these insights may be, Mr. Housel says, they are rarely put into practice, simply because we’re all human.
“People make financial decisions they regret, and they often do so with scarce information and without logic,” he says. “But the decisions made sense to them when they were made.”
You need to recognize that your desire to show people how smart you are, or to impress people with your wealth, or prove how quickly you can make money, which causes you to do insufficient research, can lead you to these bad decisions.
Accept that you are flawed, he says, and you will have a chance of doing the right thing. “Do not aim to be coldly rational when making financial decisions,” he says. “Aim to be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run.”
Mr. Housel offers two examples of reasonableness: Try to defer gratification, recognizing that wealth is created by not spending today so that you have more options in the future. And try to maintain a long horizon.
“Time is the most powerful force in investing,” he says. “It makes little things grow big and big mistakes fade away.”
As much as I like this book, it’s not perfect.
For example, Mr. Housel writes, “How you behave is more important than what you know.” While it’s certainly true that your behavior can undermine the best financial plans, it’s also true that if you know nothing about finance and make your own investment decisions anyway, you are leaving things up to chance.
I have the same problem with his claim that “an investor can be wrong half the time, and still make a fortune.” In one sense, that’s true. Here’s an interpretation that puts the comment in the best light. Say you buy 10 individual stocks that are all priced at $20 a share. If four rise 10 percent over the year, five fall 10 percent, and one increases by a factor of 20, you are a big winner.
But taking Mr. Housel’s comment literally could be dangerous. It could lead readers to believe they can beat the market by being right just half the time. That’s unlikely.
Hacking personal finance
There is something subversively appealing about the word “hack,” as in “life hack.” If you master a hack, you’ve figured out how to do something faster and with less effort than others. Who wouldn’t want that?
Lisa Rowan, a writer for the Lifehacker website, presents the basics of personal finance as a series of hacks to make learning about money easier and more intriguing.
It’s a clever conceit, and when it works well, it’s terrific. That doesn’t happen as much as I would like. But this book has many strengths.
Here’s how Ms. Rowan hacks the concept of budgeting. Instead of tracking every penny you spend, she says, just divide your money into three buckets. One is for essentials such as housing costs, food, prescriptions and the like. That should get 50 percent of your income. Twenty percent should go to savings of all types, and the rest is placed in the “everything else” bucket.
This is fundamental personal finance wisdom. She may not be breaking new ground in her discussion of budgeting, but she is making a topic most people find painful far less stressful.
Throughout the book, she offers useful tips. For example, if you are saving for a short-term goal, certificates of deposit are useful. Not only do they protect against a potential drop in value that could occur if you stash money in the stock market, but because you will pay a penalty if you liquidate C.D.s before their time, they eliminate the risk “that you’ll dip into your funds to pay for a spontaneous vacation.”
I also liked this one: While you receive your credit card bill each month, “that doesn’t mean you can only make a payment once per month. Credit card interest is calculated daily, which means the sooner you pay toward your revolving balance, the less interest you will pay.” She says you may want to consider making two payments a month “or even weekly payments.”
The problem is that Ms. Rowan seems to think the more hacks the better. She offers 280, but many could have been combined.
For example, one is that to avoid financial temptation, you should “unfollow” your favorite brands, so you won’t get online offers. The very next hack? Unsubscribe from email lists from companies where you have shopped, to avoid unnecessary spending. This sort of repetition occurs with annoying frequency.
Still, if you find three (or more) ideas that improve your financial life — that means only 1 percent of the hacks need to resonate — the book is worth your money and time.
And if those hacks help you to offset the very human traits that can upend your financial plan, so much the better.
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