Each Friday, The Simple Dollar reviews a personal finance book.
One particular aspect of personal finance that has always fascinated me (and this should be pretty obvious to long-time readers of The Simple Dollar) is the idea that most of our money decisions are fueled by a bunch of conflicting signals – the signals we get from others, the signals echoing forward from our childhood, the signals society gives us, and the signals from our own heart. Part of the challenge of modern money management is that we have an overflow of signals – the media is much more pervasive than before and we’re still learning as a society how to filter all of those signals.
When I first picked up The True Cost of Happiness, I was frankly attracted by the cover, which appeared to be newsprint and stood out from the other books on the library shelf. But when I opened the cover to read the dust jacket, it immediately began to talk about those signals – and thus I was intrigued.
Does the book itself hold up to that intrigue? Or does it dissolve into “ordinary” personal finance talk? Let’s dig in and find out.
A Walk Through The True Cost of Happiness
1 – Working Together
On the very first page, The True Cost of Happiness hits upon something interesting by listing what the authors describe as “The Big Three,” or the three major influences behind our choices aboutmaking and spending money: the lessons we learned about money growing up, the messages society tells us about money, and the messages we tell ourselves about money. In a very succinct fashion, it sums up a strong sense that I’ve had about money for a long time – and it’s that same sense that drives me to things like obsessing over the messages I’m teaching my kids and extolling the virtues of the grocery list. Your money choices are often the result of a lot of signals – but which ones should you focus on and which ones should you ignore?
2 – A Little Awareness Goes a Long Way
One idea I’ve often mentioned on The Simple Dollar is that at some point there is a “switch” that goes on in your head. That “switch,” which I talked about before and referred to as a “fundamental choice”. Choosing to be frugal and careful with your money versus spending everything you earn – that’s a fundamental choice, and it alters how you deal with your financial life and, by association, the world as a whole. That’s basically the same argument that this chapter provides, arguing that the little glimmer of awareness that surrounds that fundamental choice is the key to changing your financial life.
3 – The Big Picture: What You’re Planning For
Long term goal setting. That’s the story here. What are your goals over the next five years – and longer? Just saying “uh… retirement?” isn’t enough. Dream big, define that dream in detail, and then break it down into what you need to do today – and it probably involves not buying that $4 latte. That’s the real key.
4 – The Price of Pleasing Mom and Pop: Are Your Early Lessons Working for You or Against You?
I’ve written a lot about my early money lessons – especially the painful ones. Tisdale and Kennedy argue here that those lessons are often key in forming the financial mindset that we grow into – and unless one is mindful of this phenomenon, we’re often doomed to repeat the mistakes of our parents. While reading this chapter, I spent some time really thinking about the money lessons I learned from my folks – I learned how to be frugal, but I also didn’t really learn how to save or invest.
5 – Social Messages
From there, Tisdale and Kennedy move on to the messages society tells us about money: the media, our friends, our acquaintances, and so forth. We often get very false ideas planted in our head – ideas that our self-worth is represented by the possessions we have, that people that appear “rich” are living a lifestyle we should gravitate towards, and that we let issues of gender and race affect how we see money and our personal goals. For the most part, Tisdale and Kennedy encourage brushing all of that inside – they do this in something of a “workbook” format, in which they ask a lot of very good introspective questions.
6 – The Songs We Play in Our Heads
The third piece of the puzzle are the messages we tell ourselves. We can’t do it. We’re inadequate. We need this thing. The chatter of ideas between most people’s ears is enough to drown out most rational thought. Mostly, these messages are just excuses to let us make the easy choice, when it’s often the hard choice that leads us down the path to our dreams.
7 – Life Planning for Two
There’s really only one thing you need to do to be a part of a financially successful couple: communicate. That’s really what it’s all about. Tisdale and Kennedy even go so far as to recommend monthly financial meetings where you sit down and go through all of the statements and financial choices of the last month and agree on spending for the most month. The book even advocates spending “allowances” for partners, where each partner gets to spend a certain amount each month, no questions asked.
8 – Teach Your Children Well
Tisdale and Kennedy claim that there are three things you can do to get your children on the right financial page: be a good example, give them experience with money, and communicate with them about money. Most families fail at at least one leg of this puzzle. The book spends several pages describing how children should be involved in monthly family money meetings, something I wholeheartedly agree with. Why involve them in your financial decisions? The reasoning is simple: you get an opportunity to be a good example for them when it comes to money, communicate a bunch about how money really works, and even give them a bit of experience with regards to how the adult world of money management works.
9 – The Truth About Change
Making a significant change in your life is hard. I look at it as being like a well-worn trail – it’s much easier to stay on that trail than to get off the beaten path. The beaten path is our current habits – that hard route through the forest is the change we want to make. This chapter offers loads of suggestions – I find that the best way for me to bring about change in my life is to do it a tiny bit at a time. Want to start exercising? Park your car 1,000 feet farther from your workplace, or do some leg lifts in the evening when you’re watching television. Let the baby step become the new routine, then add another one. And another one. You get the idea.
10 – Your Bottom Line
This section discusses in detail the “bottom line” concept – in other words, exactly how much do you have to spend each month to maintain your minimum standard of living? What’s the real bottom line here, once you strip away all of the stuff that’s really unnecessary? This, to me, gets back to the “wants versus needs” dilemma I talked about in the past – what really are your actual needs? Tisdale and Kennedy believe that answering that question is vital to building a strong personal finance foundation.
11 – Saving Money
From the chapter 10 calculation of one’s bottom line, Tisdale and Kennedy recommend adding to it, starting with savings. Not retirement savings per se, but more along the lines of an emergency fund or a savings account for a future large purchase, like a car or a house down payment. These should be the first thing added onto your stripped-down bottom line.
12 – Debt: Wipe the Slate Clean
After that emergency fund is built and you have stable savings plans in place for your big future expenses, Tisdale and Kennedy recommend hammering the debts hard. They advocate a split into “good debt” and “bad debt” – for the most part, it’s really a split between interest rates and purpose. Anything with an interest rate above approximately 10% and anything incurred for something you don’t need is a bad debt – everything else (like a car loan or a home loan or a student loan) is a good debt to Tisdale and Kennedy. They advise paying off your bad debts as rapidly as you can and, more importantly, avoid incurring any more. Once you’re down to just good debts, you can keep moving forward.
13 – Living Longer and Stronger: The New Retirement
The next step is to set up a retirement plan, and the usual advice is offered here. The best bet for most people is to fund their 401(k) at work up to the employer’s match, then fully fund a Roth IRA, then dump anything extra you wish to save into the 401(k). There are a lot of formulas out there to use for calculating this – I’ve found that once you’re doing both the 401(k) up to the match and the Roth IRA and you’re under 30, you’re in great shape and you should focus hard on other goals.
14 – Covering Your Assets: How to Choose the Right Insurance
The chapter starts off with a long list of insurances you must have (health, dental, long-term care, long-term disability, homeowner’s/renter’s, and auto) and ones you might want to have depending on your situation (life, short-term disability, accidental death and dismemberment, umbrella liability, and possible riders on your homeowner’s insurance). These are all covered in a whirlwind in this chapter. Personally, I’ve got the health, dental, auto, homeowner’s, and life covered and I’m considering long-term care and long-term disability, just in case – they’re both really cheap at my age.
15 – Investing for Your Future
After this, start investing. Invest for big, long-term goals that maybe you can’t articulate yet (or maybe you can). The book recommends starting conservative so that you don’t overshoot your personal level of risk – and I completely agree. Put your money in something relatively low risk as an investment goes, with just enough of a real taste of risk that you’re not scared away. I usually recommend a very broad-based index fund from Vanguard, something like the Total Stock Market Index, so that you own bits of thousands of stocks and thus you’re largely unaffected by one of them tanking.
16 – The Real Cost of College
I was very happy to see that The True Cost of Happiness didn’t go down the easy road and just start talking about financial preparations for college. Instead, they looked at the many, many opportunities that exist in a child’s life to prepare them for college, open them up to other kinds of financial aid and scholarships, and grow as people. For instance, they suggest getting your children involved in working for volunteer programs – this makes them eligible for other kinds of financial aid that aren’t available to those who focus solely on their 529 balance and their FAFSA.
17 – Giving Back
Charity. That’s this chapter in one word. I’m a big advocate of just budgeting a piece of your annual spending for charity, whether it be church or secular charities, and sticking to that, and that’s largely what Tisdale and Kennedy advocate here as well. I find it much better to send out a few really big checks to charities that are most important to me each year and then saying “no” immediately to other charities that contact me – I can offer the rejection completely without guilt.
18 – Estate Planning
This chapter very briefly covers the absolute basics of estate planning, covering wills and other basic documents that everyone should have. Everyone should spend an afternoon taking care of this stuff – without it, your family could be out in the cold should you kick the bucket unexpectedly.
19 – A Final Thought on Your Finances
Update your plan once a month (yep, during that monthly personal finance meeting with your family) and look at your bottom line each day. For me, that “bottom line” is my children – a living reminder that I don’t really need a lot of the stuff that I try to talk myself into.
20 – Staying on Course
This is one aspect of personal finance that I find particularly challenging – once you start down the right path and start seeing some success, it’s easy to give it a break and lapse right back into your old habits. The book suggests a ton of fixes, most of which make sense – I find that constant reminders of the right thing to do (and my reasons for making those choices) work best for me.
21 – Change Happens
Our lives change over time, and change is often hard to deal with. Tisdale and Kennedy advocate the value of talking often to people you trust about your finances and about what you’re really thinking and feeling, just to get another set of eyes on your situation that can help guide you through changes. That’s brilliant advice – I firmly believe my wife is the best asset I have because of the wonderful advice and perspective she gives.
22 – Getting the Help You Need
This is important. If you have financial questions, the place to go is a fee-based financial advisor. Don’t go to one that earns commissions – choose one that will advise you with a fee. Your financial situation is unique and deserves to be treated as such – if you don’t know what to do, turn to a real expert.
Should You Read It?
This is a very good primer on basic personal finance, and it stands out a bit from the crowd because of the whole analogy of starting from the absolute bottom line and building up from there. I think that provides a very strong view of one’s own financial situation, because it forces you to discern clearly between want and need and, once you make that separation, allows you to build upon your needs in order of importance – a rational and carefully considered plan not trapped in the impulsiveness of buying.
That being said, there are a lot of what I like to call “primer” personal finance books out there – they offer the basics of what a person needs to know about managing their money but don’t offer anything exceptionally beyond that. This book falls into that category – it’s a good example with a good perspective, but it doesn’t take that extra step to jump out from the crowd.
If you’ve never read a book of this type before, this one’s definitely a good read with a lot of strong, sound advice, but if you’re familiar with the theme, it’s not one of those exceptional books that stands out from the pack or offers a completely new spin on things.