Every other Sunday, The Simple Dollar reviews a personal finance book.
Every once in a while, I stumble upon a personal finance book that makes me really wish someone had put it in my hands earlier in my life. Sure, it might not have made a difference in terms of the financial mistakes I made back then, but simply having such useful and direct knowledge available to me would have made a pretty big impact.
Which brings us to today’s review, The Wall Street Journal Guide to Starting Your Financial Life by Karen Blumenthal. The title alone sums up what you’re going to get from this book – straightforward facts and information about the best financial moves you can make early in your financial life, primarily in the handful of years right after leaving school and entering the workforce. In fact, it seems almost perfectly made to be a college graduation gift.
As with all of the Wall Street Journal personal finance guides, the writing’s just a bit on the dry side, but not too tedious. Blumenthal does a good job of connecting personal finance facts and information to the realities of day-to-day life for recent graduates.
The book is split up into five “parts,” each with quite a few short chapters on very specific topics. Let’s dig in and see what Blumenthal has to say.
Part I – The Basics
Blumenthal starts off talking about goals – where do you want to be in five years (or later)? For me, this is the big piece that really underlines all of personal finance, because personal finance is really just about utilizing tools to achieve your goals.
Many of the basic tools are discussed here – cash, savings accounts, checking accounts, budgeting, credit cards, credit scores, contracts, and so on. This is really the bread and butter of managing your money and Blumenthal writes about it briefly and matter-of-factly, getting the facts out there without bogging down in the details too much.
I particularly enjoyed the four page section on budgeting, which mostly encouraged people to just keep careful track of their spending. However, the real idea here was that when you stretch to spend money on some purchase, you give up a lot of flexibility in other areas. Sure, you can make a big purchase happen by using credit or taking out a big loan, but that big purchase will come back to bite you in the form of reduced flexibility in most other aspects of your life. Your money is now tied up in that car and in that house and you simply can’t afford to make other choices that might actually be more important to you and your long-term happiness (like a career change, for example).
She’s 100% right on – and I learned that lesson the hard way.
Part II – Earning It
Most people reading this book are aware of why we work – we sell our time and energy to others in exchange for money. However, when you get a job at Home Depot, you aren’t just selling an hour of your time for $9 – there are a lot of hidden costs to get there.
Sure, the big one is taxes, but that’s just the start. Often, you have to pay for your benefits. You also have to contribute to Social Security and Medicare. You might be making retirement contributions. This means you take home a smaller paycheck.
When you get that paycheck, even more comes out. You have to pay for transportation to and from work, as well as the clothes you wear. Some workplaces have all-but-required social engagements, too, which eat away at your take-home and your time.
Quite often, you’ll find that a great job really isn’t all that great after you take out all of the extra costs and figure all of the extra time you need to invest in it.
Part III – Spending It: The Big Stuff
The biggest bill that most graduates face straight out of college is the student loan bill. Blumenthal offers a lot of actionable advice – get on an automatic payment system, for one, because this often means a rate reduction on your loan. Also, if you can, pay off the loan(s) early, as freedom from loans means more flexibility to make other choices.
For housing, Blumenthal suggests renting for as long as possible, since renting (on the whole) is usually substantially cheaper than owning a home, thus giving you more flexibility in your choices (noticing a theme here?). Similarly, Blumenthal recommends driving a used car, keeping up the maintenance on it, and driving it for as long as possible – again, because this is the least expensive route and that gives you flexibility.
What do you do with this flexibility? Your best bet is to sock it away for whatever your big goals are (which Blumenthal encouraged people to identify right off the bat) and eliminate any debts you have as fast as possible. When you’re freshly out of college and single, you have a lot of potential opportunities that your later life (with a spouse and potential kids and a potential business and a home …) doesn’t afford you, so keep things as light as you can.
Part IV – Spending It: The Little Stuff
The fourth section of the book seems to focus on a somewhat random selection of little things, from cell phones to gym memberships. While the tips in each area are very solid, each one comes off almost like a blog post on a frugality blog, as the section is far from comprehensive in terms of the small expenses people face out of college.
Blumenthal’s best advice is to simply only pay for things that you actually need. What do you need a cell phone for? For most people, it’s just voice and text messages, so don’t throw tons of money on a complex phone and data plans if you’ll rarely use them and they’re mostly extraneous. What do you need a gym membership for? Why not exercise at home and/or go jogging?
Quite often, if you break down your expenses into terms of what you actually need, you might find that many of your seemingly-required expenses are actually pretty unnecessary.
Part V – Investing It
If you’ve adopted a lifestyle of spending less than you earn and you get rid of your debts, you’re going to start building up cash. And that’s a good thing. The only problem is that the cash you build up won’t earn much of a return for you just sitting in a checking or a savings account. What other options are there?
Blumenthal walks through many of the investment options available to people with relatively low bankrolls – people new to the working works. Stocks (great for aggressive investing). Bonds (great for more conservative investing). Mutual funds (great for diversification).
At the end of this section, Blumenthal touches on estate planning in a limited fashion, focusing mostly on what young people might want to have in place. For example, it’s often useful to get a 30 year term life insurance policy when you’re young because the rates will be way cheaper than if you wait even ten years.
Is The Wall Street Journal Guide to Starting Your Financial Life Worth Reading?
The Wall Street Journal Guide to Starting Your Financial Life is perhaps the best “default” college graduation book I’ve yet read. Sure, there are a few books written well for specific subsets of graduates, like Farnoosh Torabi’s You’re So Money (for female graduates about to enter “professional” careers) or Michael Masterson’s Automatic Wealth for Grads (great for entrepreneurial-minded graduates that intend to start their own businesses), but in terms of getting the basics of personal finance across in terms of the financial situation of a recent graduate, The Wall Street Journal Guide to Starting Your Financial Life is an excellent choice.
That being said, if you’re more than five years out of college or you’re 30 or over, this book probably won’t be a significant help to you. The advice is clearly written for people right out of the chute who have 40 years of professional life ahead of them before even considering retirement issues.
If you’re in your twenties and want a good guide to basic personal finance tuned to your age or you’re seeking a great college graduation gift for a thoughtful young person, The Wall Street Journal Guide to Starting Your Financial Life is a pretty solid choice.