I first noticed The 48 Laws of Power sitting on the desk of a person who works deep in the bowels of a large insurance company. In an idle moment, not having the faintest clue what the book was about, I picked it up and flipped it open to a random page where I began to read an interesting retelling of the story of Pancho Villa that paints the man as a brilliant tactician that defeated the United States military with a ragtag band.

Having a pretty strong familiarity with American history, I was simultaneously amused with the angle taken by this historical tale and baffled as to why this was found on a desk between a book on leadership and Getting Things Done, so I stepped back and took a broader look at the book – and I was rather appalled.

The 48 Laws of Power is a collection of “laws” based on historical and philosophical anecdotes. These laws are amoral, meaning that they themselves don’t take into account any sense of right or wrong. Instead, the laws focus on how one can increase their influence over any situation, regardless of the moral consequences of doing so. In other words, this book focuses on how to gain power in any situation, regardless of whether it’s morally right or wrong, and it uses specific anecdotes from history to illustrate these “rules of power.”

My initial reaction to the book was just to write it off – after all, I’ve found time and time again that following my moral compass has served me far better in life than following any set of amoral rules. Stepping on someone else’s throat to raise myself six inches higher holds no appeal to me at all – and the sight of someone else doing that raises disgust in me. I tend to believe that this is how the majority of the professional world works; people are fundamentally honest and realize that lifting others often lifts themselves.

Then I began to see the book pop up in several surprising places, from the bookshelves of various people I knew to a surprising feature-length article in The New Yorker detailing the book and its author, Robert Greene. At first, this annoyed me – why would anyone pay special attention to this nonsense? Were there really that many amoral people out there, operating cloak-and-dagger style?

I had to figure this whole thing out, so I picked up a copy of The 48 Laws of Power and gave it a read-through. I’ll leave my conclusions to the “Buy or Don’t Buy?” section below, but let’s first take a look at some of these 48 rules.

Wandering Through The 48 Laws of Power

Rather than going through all 48 laws and boring you to sleep, I selected ten of them worth commenting on. The other 38 rules are similar in nature; if you want to read them all, just pick up a paperback copy of the book and look at the back cover, as they’re all listed there.

2. Never put too much trust in friends, learn how to use enemies
Here, Greene advises that people should not trust their friends in any significant way, using the story of Michael III’s assassination by his former friend Basil I as an example. In general, you should never mix friendship and work – good advice. Instead, he advises that you place enemies in positions of power around you, as they have a lot to prove and can also provide great insight – I immediately thought of Abraham Lincoln’s inclusion of his political enemies in the Cabinet during the Civil War, a tactic outlined in the fascinating Team of Rivals.

My thoughts? I agree that it’s generally a good idea to not mix friendship and work – I have avoided making deep friendships with my coworkers. As for enemies, I tend to feel that working out conflicts with other people and actually working with them on projects can be beneficial to everyone involved – you can often come up with some great solutions and really set a good example of teamwork if you make an effort to work with your enemy. I essentially agree with this rule.

4. Always say less than necessary
Greene uses a myth about Coriolanus speaking too much (and thus ruining his reputation) and then holds up Louis XIV as a paragon of the virtue of speaking in brief. Both, actually, are completely mythological – very little is actually known about Coriolanus and the quote he uses from Louis XIV – L’État, c’est moi – was actually conceived by his opponents to make him seem egotistical.

This rule is a little strong for my taste – I generally believe in saying just what’s necessary because saying more than that is usually a detriment. Every time I’ve underplayed my knowledge, it’s actually ended up being a detriment to me as I’ve later been accused of hiding information. I think a philosophy of giving the relevant information but keeping it brief is the best route to follow.

7. Get others to do the work for you, but always take the credit
This is a pretty blunt one. Greene backs it up by retelling the classic tale of Nikola Tesla and Thomas Edison – Tesla may have been the better scientist, but Edison knew how to find others, employ them in his labs, and then take broader credit for the inventions.

At first glance, this is a deeply underhanded method of gaining power – it seems to warrant cheating, paying others to complete your papers, and so forth. Think of it this way, though – how often has your manager presented work you’ve done to demonstrate the work of the group – in other words, to make your manager look good? It’s generally accepted that a person receives more respect if he acknowledges the hard work of individual team members – I’ve seen this from the perspective of the team member, the person doing the reporting, and the person being reported to.

11. Learn to keep people dependent on you
Many people feel that the way to safety is to be a sycophant to a powerful boss. This isn’t true; as soon as you make a mis-step, they can easily get rid of you and replace you with another. Instead, Greene urges you to ally yourself with a weak boss and then focus on making yourself indispensable – create a situation where without you, their power would collapse. At that point, who has the power?

Greene uses the story of Otto von Bismarck and his relationship with the various Kaisers of Germany to illustrate the point. Bismarck was able to work tightly with some of the late Kaisers and push them into unifying Germany, making himself the first Chancellor in the process. A strong Kaiser could have tossed Bismarck aside for these moves, but the weak ones were so reliant on Bismarck that they let him lead.

12. Use selective honesty and generosity to disarm your victim
I believe the appropriate term for this is “sucking up,” though it takes the interesting twist of viewing the person you’re sucking up to as the victim. One could also view this as building a fake relationship with someone in order to exploit them. Either way, it’s a behavior that doesn’t win you much respect from others.

Greene uses several anecdotes in this chapter, most interestingly one actually involving a rather clever con man. Of course, that just illustrates the dishonesty of this approach – you’re basically being a confidence man when you cultivate relationships like this just to manipulate people.

14. Pose as a friend, work as a spy
This rule encourages the reader to use social situations to spy on the “enemy.” In other words, you should act friendly towards people you view as adversaries at social gatherings, hopefully disarming them, and then use this vague trust to probe them for information. I immediately thought of a person I know who will make small talk for a minute, then immediately start asking me questions about my computer consulting business.

To illustrate the point, Greene tells about the techniques Joseph Duveen, arguably the most successful art dealer of all time, and the techniques he used for finding clients. Basically, he used social situations to find out tons of details about prospective clients, then utilized these details to wow them.

16. Use absence to increase respect and honor
The discussion of this law involves the tale of Deioces, a highly respected judge who withdrew from public life; when the public realized how valuable he was as a judge to their society, they made him king.

Greene proposes that this same philosophy is often true. If you provide a valuable service for people, making yourself absent for a period will make them really appreciate the service that you provide. While this is true, it is extremely easy for this to backfire on you – people can discover that you’re not as valuable as you might hope, for instance. One way to do this effectively is to utilize your vacation time and go on a “no-contact” vacation.

20. Do not commit to anyone
The idea here is that by not strictly committing to anything, when you do produce it creates the impression of coming off as a grand favor. Greene uses Elizabeth I as one example here – she never married or bore children, but used hints of potential courtship to get exactly what she wanted.

While this can be a great tactic to use if you have value that others want – think of a skilled plumber in a city, for example – if you don’t, not committing and trying to play people off of each other will merely earn you enemies.

34. Be royal in your own fashion: Act like a king to be treated by one
This is one of the best pieces of advice in the entire book and one that I wholeheartedly agree with. There are few things you can do to improve yourself in the eyes of others than to appear mature and respectable and to value your personal appearance. If you act vulgar and crude, people will simply treat you with less respect.

Greene uses the example of Louis-Philippe to show the value of carrying yourself well, arguing that a big piece of his downfall was his attempts at appearing as a common man and not as a leader. An interesting take, though it was his increasingly ultraconservative governance that eventually brought him down.

41. Avoid stepping into a great man’s shoes
Generally, it is extremely difficult to follow a person who has done a tremendous job. People have come to expect excellence from the position, and as a replacement, you’re not only expected to uphold that excellence but also learn all of the trappings of the job very quickly. Greene basically says that one should not do this – the risks are too high. Instead, if you must fill that role, make it your own.

To illustrate, he uses the examples of Alexander the Great and Napoleon III. Alexander took what his father, Phillip of Macedonia, had built and used it as the foundation for much greater things. Napoleon III, on the other hand, stepped into his role as leader of France and took the nation in many unexpected directions, quickly stepping away from the shadow of his namesake.

Buy or Don’t Buy?

If you work in a large office environment, you’ve probably met people who do most of the things above. Consider what you think of these people. Do you like that person who seems to always skip out on meetings where they’re needed? What about the person that puts up a false front to everyone, acting generous and honest, but then behaves very coldly when push comes to shove? What about the guy who marches around like he’s God’s gift to the company, but rarely steps up to the plate when it’s really needed?

If you’re like me, you can’t stand these people and you’re much more likely to help out the straight shooter down the hall when he needs a hand than the person playing these games. The 48 Laws of Power is basically a litany of all of these various power games that people like to play. Playing them yourself is likely to have two effects: you’ll gain some power over some people and get a lot of resentment from the rest of them.

Obviously, a few of these rules do make sense for most – making your job your own, for example – but the nuggets of usefulness are surrounded by a deep mist of questionable behavior.

So why read this book? It does a brilliant job of explaining the logic and mindset of people who play such games to get power. If you want to understand why people play these games, this is a book well worth reading. It is interestingly written as well, with a lot of somewhat biased historical anecdotes (don’t take them as fact, as many are myths or are somewhat inaccurate) to support each of the points. The book itself is also laid out quite impressively, giving it a particular weightiness that’s also somehow inviting for browsing.

My belief is that real power comes from earning respect, and this is just a list of shortcuts that will easily fall apart under scrutiny. This book is useful for no other reason than it clues you in to how some people tend to think, particularly those that are overly power hungry. For that reason alone, if you work in a competitive office environment, this book is worth reading just to understand the logic behind some of these games. Of course, playing these games yourself is highly likely to get you labelled as the office scumbag, so tread lightly on this stuff – use it to understand the behavior of others, not to try to gain power yourself.

This post is part of The One Hour Project, in which you can spend just one hour to put your finances in a better place without a big lifestyle change, through frugality or other financial choices.

One final thing that you can do that can kick your finances into gear is opening up a high-yield savings account. Many banks now offer online-only savings accounts that offer very nice interest rates, often far exceeding the rates of return you can get from your local brick and mortar bank. HSBC Direct, the online version of HSBC, for example, is currently offering a 5.05% APY account, and ING Direct has a brilliantly simple and intuitive interface that holds a 4.3% APY savings account. Both of these likely decimate what you can find at your local bank – and you can manage the account straight from your computer.

If you maintain any savings at all – or are even thinking about starting – a high-yield online savings account is worth getting. It takes a bit of time to sign up – and you have to have a checking account to link the new savings account to – but once you’ve done that, it’s all about the savings.

Which bank should I use? I generally point people to ING Direct for starters – not only because it’s the bank I use, but because their interface is brilliantly simple to use. Other banks offer higher rates, but ING is probably the best choice for getting used to online-only banking.

Once you have the account set up, it’s worthwhile to set up an automatic savings plan. It pulls out a specified amount from your checking to your savings on a regular basis – usually weekly or monthly, but you can set up about anything you imagine. So, you could set it up to pull out $50 from your checking to your savings every week, or the day after you receive a paycheck. That money then hides away until you need it, earning a 4-5% interest rate.

What about after that? Once a person has their high-interest debts paid off and has some significant money in savings, I usually recommend that they begin investing in low-cost index funds. It’s a great way to start dipping your toes into stock investing without getting buried in fees, and it’s easy as pie – you deposit some money with a brokerage, tell them what fund you want to buy, and they do the rest for you. When you want to sell them, log in and sell them.

Again, I almost always point people who are just getting started towards either Vanguard (my favorite, and where I keep my investments) or Fidelity. Both offer a large array of low-cost index funds for investing, and signing up for an account at either one is quite easy. I consider them to be the cream of the crop for people wanting to buy low-cost index funds and just sit back and watch them grow, but be aware that many of the good funds at both businesses have a high minimum. Most of the Vanguard funds require $3,000 as an initial investment, but their fees are so low that it’s worth it – just save your money in that high-interest savings account.

In fact, that’s a good way to do things. Deposit a small amount each week into a high-yield savings account, then eventually use the money in there to invest. It’s actually exactly what I do – I deposit a sum into an online savings account each week, then use that money for investments. Right now, I’m actually buying into a diversity of Vanguard funds using this approach so that my investment is diversified – later, I’ll use that same plan to keep the portfolio balanced.

There’s no better time than right now to get started – so why not spend an hour and get the ball rolling?

The last two years have taught me many, many things about personal finances. Some of the lessons have been useful and others thought-provoking, but a few have really knocked my socks off and changed the way I view the world. Here are the five lessons I learned that really altered my perspectives.

Every time you buy anything, you sacrifice a bit of your dreams.
I have an old college friend who constantly moans about how he hates his job and how he dreams of not having to work any more. Yet every single weekend, he spends about $100 on two new video games and about $60 on beer and pizza – he then spends the whole weekend “zoning out on reality” by playing games and watching football.

He constantly tells me how he should be making more money and how it’s difficult to save money, but it’s pretty easy to see that he’s spending away his future here. Every time he buys a video game or goes on a beer and pizza binge, every single time, he extends his attachment to the misery of his job. If he took that $160 a week and invested it, then spent his weekend free time looking for other avenues to raise money (like building a side business), he’d be moving directly towards the kind of freedom that he wants.

While his case is an extreme example, it’s true to a degree for all of us: every frivolous purchase is an active choice to postpone our dreams. Consider what your dreams are the next time you pull out the plastic – and ask yourself if this item you’re buying is worth giving up a piece of that dream.

There is no such thing as a free lunch.
I used to often do things like sign up for in-store credit cards to get that “awesome” 10% discount. To me, it was like they were giving me money for free! I used to collect big time on the credit card offers on campus as well that offered “free” tee shirts just for getting a card.

Bad move. There is no such thing as a free lunch. If someone is giving you something for “free,” you will be giving them something in exchange. Often, it’s your time – other times, it’s personal information or access to you as a customer. Sometimes, it’s a freebie in exchange for signing up for something costly, as is the case with freecreditreport.com.

If someone offers you something for seemingly nothing, step back for a second and think about what they’re actually getting in return. Usually, it’s something more valuable than the freebie – your time, your information, or sometimes even your money.

My “income” wasn’t nearly as high as I believed it to be – and neither is anyone else’s.
Want to see how much you really make? Take your salary, then subtract your annual income taxes from it. Then subtract all of the extra expenses you incur because of work – professional clothing, transportation to and from work, extra food, work-related social gatherings, travel. Then add up how many hours you actually contribute to your job in an average week – time at work, time transporting to work, time spent traveling, time spent doing other work-related tasks like buying work clothes and attending work-related social functions. Multiply that average week by 50 or so (assuming two weeks off a year), then divide your real income by your real working hours and find out what you actually bring home per hour.

Ouch. There’s no other word for how you feel when you see that number. Lots of people working at high paying jobs discover their hourly rate compares well with McDonald’s. So why not do other tasks that pay you more per hour than your real job? I know of at least one woman who switched to a lower paying job (on the surface) that actually allowed her to bring home more cash per hour of work than before.

Thinking about things in this fashion really changes your perspective about what’s really important in life.

Investing isn’t just for rich people – it’s for everyone.
It wasn’t long ago that I had a perception that investing in the stock market and building a portfolio is something that rich people did, not people like me. In fact, I often used the fact that many investments return quite well as an excuse to believe that “the rich get richer and the poor get poorer.”

It’s not true. Anyone who is capable of spending less than they earn can invest and start collecting some great returns on the fruits of their labor. In fact, the internet era has made it easier than ever for people to invest – you can do everything from the convenience of your web browser. All you have to do is start spending less than you earn – that’s it.

Success is a choice.
This one is going to get some people upset, I’m sure, but it’s true. If you want something to happen in your life, you have a choice to make: do you really want it to happen? Are you willing to wake up for three hours in the middle of the night most nights to get posts written for your blog, so that you can spend the daytime with your family? Are you willing to spend weeks in a row without any simple relaxing activity – no television, no entertainment, just the stuff you need to do to get the job done? Are you willing to forego spending unnecessary money, period?

Success at anything requires some level of sacrifice, and often the big successes require a lot of sacrifice and focus. If you want to turn your financial life around quickly, you’re going to have to make some very tough choices. If you want to start a successful business, you’re going to have to make some sacrifices.

I used to look at people who started their own successful businesses with jealousy, and I felt like people who had their finances in order were given access to some secret that I didn’t know. It’s not true – success at anything is a result of a lot of hard work. You lay the groundwork for good things to come to you, but it’s a challenge. Are you up to the task?

This post is part of The One Hour Project, in which you can spend just one hour to put your finances in a better place without a big lifestyle change, through frugality or other financial choices.

If you’ve gone through even a few of the one hour projects in this series, you likely have some more money in your pocket. Don’t rush out and spend that jingle – instead, use that jingle to repay your debts, even if it’s just a few dollars a month.

Here’s how the debt snowball idea works. A debt snowball (or similar arrangement) is simply a debt repayment plan that specifies the order in which you should pay off your debts. Typically, there is some logic in the order – in Dave Ramsey’s original debt snowball, the debts were ordered from smallest to largest, for example. You then add up the minimum payments for this snowball, add an additional amount to that total, and then treat that dollar amount as your “debt bill” for the month.

From this “debt bill,” you make the minimum payments on all of your debts, then use the remainder to make extra payment on whichever debt is on top of the list. When that one is paid off, you don’t reduce the total of your “debt bill” – instead, you just have a larger remainder to tackle whatever debt is now on top of the list. Eventually, you’ll be using the whole “debt bill” amount to tackle that final debt – and it will melt away quite quickly.

If you’re spending less than you make but you still have a lot of debt to tackle, a debt snowball is a great thing to start. It commits you to actually getting rid of your debts – and debt freedom is a beautiful place to be.

How do you set this up? It’s pretty easy – all you need is either a piece of paper or a spreadsheet. Here’s the game plan.

First, find the interest rate, minimum payment, and outstanding balance of every outstanding debt you have. You should be able to get this information from the last statement of each of these bills.

Next, sort these bills. I recommend sorting them by interest rate, with the highest one on top. Another method is to sort them by the outstanding balance, with the smallest one on top. What you’re doing here is figuring out the order you’d like to see these debts gone.

Now, list the debts along with their minimum payment in the order you sorted them. You’re going to add up the minimum payments, so keep them in a nice column so you can easily add them up.

When you have them all listed, add up the minimum payments. This should give you a nice fat number – that’s how much of your income each month goes to paying off stuff you had to have before you could afford it. It’s a number that you want to knock down to zero.

At this point, you need to take a look at how much you spend overall each month. How much extra can you squeeze out? If you’ve been doing the one hour projects, you’ll probably be able to squeeze out at least a little. Commit yourself to spending a certain extra amount each month to getting yourself debt free.

Add this number to your minimum payments. This is how much you’re going to commit to your debt each month. I found it psychologically useful to find that number I was comfortable with, then rounding it up to a larger number, a nice even target for each month.

When you figure up your bills, use this total number instead of the individual minimum payments. Your “debt bill” is now this number.

When you sit down to pay the bills, make minimum payments on all but the top bill on your list. Then, for that one remaining bill, write a check for the remainder of the money you put aside for debt that month.

Repeat this exact bill paying procedure without changing the total amount you’re putting aside each month until your debts are gone. Obviously, you may want to refigure things if a major life change occurs, but unless something really big happens, stick to the snowball. It will get you out of debt.

A few weeks ago, I announced that a book club would be starting on The Simple Dollar and that the first book to be read would be Joe Dominguez and Vicki Robin’s Your Money or Your Life.

On Monday, October 1, this book club will begin. Here’s how it will work.

First of all, you don’t have to read Your Money or Your Life to participate. You’ll likely get more out of it if you do read along, but it’s far from a requirement. Feel free to offer up your opinions and thoughts on any piece, or just read the discussions and decide for yourself if you want to start reading.

Each day, I’ll read about 10 to 15 pages from Your Money or Your Life. I’ll announce what piece I’m reading the day before so you can read the same piece if you wish.

That afternoon, I’ll post an article outlining my thoughts on the piece that I read. I’ll outline the content of that section, write some of my thoughts, come up with a few rhetorical questions from the piece, and contribute my thoughts on those as well, finishing up with an indication of what the next piece I’m going to read will be.

These are intended for discussion. Think of it as a book club that I’m hosting, where I serve tea and crumpets and talk a bit about the last piece we read, then other people jump in with their thoughts. If you think my take is wrong, tell me so – if you had a completely different take on the piece, say so. Even if you didn’t read the section yourself, don’t hesitate to jump in with your thoughts.

Looking through Your Money or Your Life, I anticipate that this will take somewhere around a month. At the end, we’ll see how it went and decide whether it is of interest to tackle another book in a few months – or write it off as an interesting experiment that didn’t work real well.

Hopefully, you’re as excited about this as I am. I’ve often wanted to talk to others about a personal finance book as I’ve read it, and Your Money or Your Life is my favorite one. It should be fun.

Ready to get started? Before Monday, read the prologue. In my version (the common American paperback version that most of you will probably have), the prologue runs from page xxiii to xxxviii in the book. This will probably be the longest section that we read during the entire club, but it’s very easy reading.

This post is part of The One Hour Project, in which you can spend just one hour to put your finances in a better place without a big lifestyle change, through frugality or other financial choices.

So many times throughout the day, I come up with useful ideas: ideas for saving money, ideas for preparing food, ideas to improve The Simple Dollar, tasks that I need to take care of, and so on.

Forgetting these ideas is as good as money lost. They float out of your mind and most likely are permanently forgotten. Maybe you had a brilliant idea for work that wasn’t quite fully formed yet. Maybe you remembered someone from high school that you should really get in touch with. Maybe you came up with an amazing web application idea that could net you millions. Or maybe you just remembered to get milk on the way home. All of these are ideas worth real money – and they all slip away.

Whatever the thought is, it’s incredibly valuable to jot it down and then review your jottings regularly. That sounds really easy, but it requires a shift in thinking that takes practice. Here’s the game plan:

First, find a notebook small enough to comfortably fit in a pocket. It doesn’t matter really what kind of notebook you use. I personally use a small pocket Moleskine. You’ll also want a writing utensil that fits into a pocket; I use a Fisher Bullet space pen, but a Bic will do just fine.

At first, keep the notebook in a very obvious place. When I was first trying to get used to this concept, I left the pad out all the time so I would always see it. A friend of mine actually tied a piece of string around his wrist and attached it to his little notebook so he wouldn’t forget it when he got up.

Whenever you have a thought, jot it down. No matter what sort of thought it is, if you want to retrieve it later, write it down in your notebook. You can worry about dealing with it later – just make sure that you’ve written down enough so that you can pick up the train of thought at a later time. Most importantly, don’t hesitate to do it in front of others – tell them that what they said was important enough that you want to remember it later, and they’ll be flattered, not annoyed.

Once a day or so, review the new entries. I do this multiple times a day – just after leaving work, when I’m sitting at my desk and can take care of some things, and so on. This way, if I wrote down something like “get milk,” I won’t be already at home before I notice it.

Eventually you’ll get very used to this – and feel empty when you can’t take notes. You’ll also begin to realize how much impact such a simple thing can have on your life – in so many different ways. For instance, keeping a little idea notebook makes The Simple Dollar possible – I don’t know how I would keep up with the required ideas without it.

As I’ve mentioned frequently on here, my wife and I have defined a very specific long term goal for ourselves – we intend to buy a piece of land in the country and build a house on it before our oldest child’s sixteenth birthday. In order to have the financial resources in place to do this, we had to develop for ourselves a plan to make it happen. Here’s that exact plan, from scratch – I thought it might be worthwhile to paint a real picture of an investment plan, from scratch to plan in execution.

Step 1: Clearly Specify The Goal

We started off by getting a large number of samples of the cost of the land and house we desired. What do these cost today? We took an average of all of the values we found, then figured that they would increase in value 5% a year for the next fifteen years. This is our target number – a rough estimate of how much our dream will cost us.

Using that number as a starting point, we figured that we would like to be able to finance 50% of it out of pocket, move there, then sell our current home, paying off most of what we owe.

Our target dollar amount is $450,000. We have fifteen years to get there.

Step 2: Devise The Plan

Once we had our target number, we started doing some math. We assumed we can get an 8.5% annual return on our overall portfolio – maybe a slightly conservative number, but hopefully realistic.

With an 8% annual return, we wanted to see how much we would need to invest each week to get that amount. Our math showed that if we invest $300 a week into a portfolio that returns at 8% annually, we will have $440,783 at the end of fifteen years.

So, we defined our commitment: we will invest $300 a week into an investment portfolio.

Step 3: Coming Up With The Money

The next problem was finding this money. Over the last couple years, we’ve committed ourselves to a lot of financially responsible moves and we live a lifestyle that has a large separation between what we bring in and what we spend. We ran the numbers and found that we could commit ourselves to this once we had an emergency fund in place.

Why not just put that money into prepaying your home loan? There are two reasons. First, our home mortgage has a very low fixed interest rate – below 6%. Second, an investment gives us some flexibility – if we choose to go in a different direction, that investment will always be there for us, growing over time. Our assets aren’t tied up in our house.

Step 4: Defining The Portfolio

So how are we going to invest? I’m not a speculative investor by any means and our target return is well within a reasonable goal, so we made the decision to invest in an array of low-cost index funds through Vanguard. We want to diversify pretty widely, so here’s our tentative split:

20% large-cap domestic stocks
20% medium-cap domestic stocks
20% small-cap domestic stocks
30% international stocks
10% bonds

We will likely own ten distinct funds: 2 large cap funds, 2 medium cap funds, 2 small cap funds, 3 international funds, and 1 bond fund. We plan on investing directly with Vanguard, which was successful for us in the past as we invested a bit during the run-up to buying our current home.

Step 5: Our Specific Plan

Each week, we move $300 from the primary checking account into a savings account specifically set aside for investments. At first, we just let this amount build to $3,000 – the minimum amount required to buy most Vanguard funds – and when we reach that number in the account, we buy the minimum $3,000 worth of a fund. Here are the funds in the order we plan to buy them:

Vanguard 500 (VFINX; large-cap domestic)
Vanguard Emerging Markets Index Fund (VEIEX; international)
Vanguard Mid-Cap Growth Index Fund (VMGIX; mid-cap domestic)
Vanguard Small-Cap Growth Index Fund (VISGX; small-cap domestic)
Vanguard Total International Index Fund (VGTSX; international)
Vanguard Small-Cap Index Fund (NAESX; small-cap domestic)
Vanguard Mid-Cap Index Fund (VIMSX; mid-cap domestic)
Vanguard Large-Cap Index Fund (VLACX; large-cap domestic)
Vanguard European Stock Index Fund (VEURX; international)
Vanguard Total Bond Market Index (VBMFX; bond)

Currently, we’ve made our initial purchase in the Vanguard 500 and are now saving up for our second fund.

When this purchasing is done, which will take 100 weeks, I’ll then switch into rebalancing mode. I’ll continue to put away the $300 each week, then at the end of each month, I’ll deposit the monthly total into whichever of these funds has the lowest total balance. This is effectively an ongoing rebalancing, ensuring that I stay somewhat close to my original plan of having 10% of my investment in each fund. I do not plan to chase individual funds that are doing spectacularly well – my only tinkering will be with additional investments.

I plan on sticking with this arrangement until we approach our overall goal, then move the entire thing to something very solid – like a savings account – when we begin to make moves towards buying the land and the house. Since this investment is not a requirement to maintain my standard of living, I don’t feel a strong need to move into more conservative investments in the years approaching the goal – I’ll stick with this until we’re about to buy, then I’ll liquidate the entire thing.

That, in a nutshell, is our plan. Obviously, there are many life changes that could disrupt this, and when they occur we’ll re-evaluate where we are at. For now, though, this plan guides us directly towards our greater goals.

One of the most consistent worries I have is about how I will educate my children to not make the same financial mistakes I made. How can I imprint good financial decision making on their minds as they grow up in a rather material world? The First National Bank of Dad focuses on this very topic in a very engaging, well written fashion (David Owen, the author, is a staff writer for The New Yorker).

Owen speaks about his experience with his own children, where he observed that they tended to be very cavalier with money that wasn’t theirs, but much more careful with money that was their own. Purchasing decisions became much more serious if their own allowance money was involved, for example. So Owen took advantage of this basic human nature and set up a “Bank of Dad,” where they could safely put their allowance money and earn a very nice return on it. The First National Bank of Dad is all about this “Bank of Dad” plan: how it worked and how the children reacted to it.

Naturally, I was deeply intrigued by this concept, so I read this book in two sittings. Did the concepts inside make sense, or were they just high on concept and low on execution? Let’s take a look.

Visiting The First National Bank of Dad

1. Children and Money: An Introduction
In trying to instill financial wisdom in their children, parents often make a few key mistakes. First, they don’t entrust their children with large sums of money – they allow them to keep the small amounts (the $5 bill) but put away the larger amounts (the $100 check). This teaches kids that money should either be spent immediately or put away in a desk somewhere. Second, we think that getting them a savings account will teach them to save, but it’s pretty hard to impress a child with annual returns when a year seems like an eternity to a child.

These lessons, which seem sensible at first, actually teach children some pretty questionable values about money. If they have money, for example, they should just go blow it, and also that they shouldn’t be trusted with money. When you teach a child to ride a bike, you start off with a tricycle and then move on to training wheels, then eventually they go on their own – and we coach and help them every step of the way. Under this money philosophy, though, we hand them the tricycle, take the bike, and then never bother to show them how to ride it well.

2. The First National Bank of Dad
When I was a kid, the idea of putting money in the bank was incredibly boring. The biggest reason was that the rate of return was slower than molasses – a year seemed like forever to me then and thus waiting a year for $100 to earn $2 more was unbearable – why not just spend the money now? This made me not want to save – it made me annoyed by it because my parents would make me save anyway. I had a similar feeling about my piggy bank.

So how can you make it so that children want to save? You have to speed up the compounding to the point where they can see the benefit. Owen opened up “The First National Bank of Dad” for his children and invited them to deposit their money. He would pay them a rate of return of 5% a month – enough for them to grasp the idea. If they gave him $20 and let him hold it for a month, it would earn $1. They could also withdraw at any time. Owen managed all of this in Quicken.

If my parents had offered me that, I would have jumped all over it, and Owen’s kids certainly did. On allowance day, they’d usually hand it right back – depositing it in the Bank of Dad – and he’d give them monthly statements on their money.

3. Responsibility and Control
This “Bank of Dad” system creates a situation where children now feel a sense of responsibility for their money. It also enables parents to have a sense of control over situations where their children have a strong temporary desire for an object in a store, for example. It does require firmness, but the “Bank of Dad” account allows them to manage their own money and make their own choices about what to spend it on.

One interesting point is that Owen suggests that all gift money goes into this account. His argument is that the benefits of having the children learn responsibility over their money is more important than any potential bad moves they may make. I strongly agree with this – when my parents would “put away” money for me, I would just shrug my shoulders and forget about it and then it would magically reappear later. In other words, I didn’t learn much at all from the experience.

4. Allowances
This chapter on allowances was probably the most thought-provoking piece of the whole book. First of all, Owen argues that children should be heavily involved in the process of deciding how much allowance they should receive. For starters, you should ask them how much they think they should receive and then, after that, when they want an increase, they ask for it in writing and enumerate the reasons (encouraging them to write in an organized fashion).

He also argues that requiring children to save some portion of their allowance or to give away some portion to charity is meaningless – such saving and giving doesn’t mean anything unless they make the decision themselves, which makes a lot of sense. Owen also says after-school jobs is a poor idea (they should focus on studies) and that a child should get a debit card pretty early on – for his children, age twelve (it teaches responsibility with plastic in a safe environment). There’s really a lot of interesting discussing in this chapter, well worth reading if you’re a parent and thinking about allowances.

5. Beanie Baby Economics
At some point during childhood, almost everyone collects something. I collected baseball cards and later Magic: the Gathering. My wife collected Breyer horses. We would attribute a value to these collections, but it was a value that used to be hard to extract.

No more. With the advent of the internet, a child can liquidate their collection rather easily, so collecting can often transform into a way for children to experiment in how a free market works. They can actually utilize resources like eBay to easily buy, trade, and sell their collections, which means that the “foolishness” of collecting in our childhood isn’t nearly as foolish now – instead, it can actually be educational.

6. The Dad Stock Exchange
What about teaching children about investing in stocks? In order to teach that, Owen set up a brokerage at the “Bank of Dad.” This brokerage basically exists as a virtual version of a brokerage – the children could buy any individual stock or any common index at any time and then sell them at any time, too.

Doing this encourages kids to take an interest in the stock market. Owen discusses how his own children began poring over the business news and learning more about investments. It provided a relatively safe environment for mistakes, but provided great rewards for good choices, too.

7. True Net Worth
After all this talk about teaching financial values to your children, the book steps back here and focuses on the bigger picture. What’s really important in your life? What are the things that really have value? Money is just a tool to maximize the things that are important – and generally the important things aren’t materialistic at all.

I like the anecdote told here about his daughter as she started to approach college age. She watched her friends get involved in all sorts of resume-padding activities that they didn’t enjoy – they participated at the urging of adults who convinced them that if they didn’t act like some generic “super-student” model, they’d never succeed. She rejected all that and followed her own muse. What happened? Success. I found the same thing was true for me, but in a somewhat different way – my parents had no idea how I should apply for college, so I followed my own muse and it led me well. Don’t pressure kids to make the choices you’d make, but instead encourage them to work hard at what they’re naturally passionate about. Everything else will follow.

8. The Best Investment You Can Make For Your Children
What’s the best investment you can make for your children? Read to them. There’s nothing you can do that’s more effective than that for setting your child up for lifelong success. It’s even more important than the “Bank of Dad” stuff talked about earlier (though that’s vital as well).

9. The Ultimate Payoff
The ultimate payoff comes when we grow older, our children grow up, and they are there when we need a helping hand in the twilight of our lives. If we’ve raised our children well, with a sense of how to manage their money and the maturity and emotional intelligence to hold your hand as you take the final steps of your life. It’s an ongoing cycle of life, and the love and care you take in raising your children will pay you back for the rest of your life, in their love and in the love they share with their own children and the others in their lives.

Buy or Don’t Buy?

The First National Bank of Dad is filled with a whole pile of compelling concepts on techniques for educating children about how money works. While I am not sure I would be willing to commit entirely to the whole “Bank of Dad” concept with my children, the concepts in here are very much worth exploring.

If you have a child and are interested in raising them with sound ideas about money, this book is highly worth reading. Besides the big ideas, there are tons of little ideas, concepts, and pieces that you can apply directly to your own children.

Perhaps best of all, this book made me seriously reconsider some of my assumptions – and realize that maybe they weren’t good assumptions after all. Books that can do this and are backed by reason and logic are powerful ones, indeed.

The First National Bank of Dad is the forty-sixth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.