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Is This Everything You Need To Know About Financial Planning?
Here’s an interesting article I discovered over at the Vanguard site about the basics of retirement planning. In it, the article quotes a section of Scott Adams’ 2002 book Dilbert and the Way of the Weasel:
Everything you need to know about financial planning
Make a will.
Pay off your credit cards.
Get term life insurance if you have a family to support.
Fund your 401(k) to the maximum.
Fund your IRA to the maximum.
Buy a house if you want to live in a house and you can afford it.
Put six months’ expenses in a money market fund.
Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
I largely agree with the ideas presented here and I think that, if your primary goal is to save for early retirement above all else, this is a great plan.
I have just a few small problems with this plan.
First of all, there’s no encouragement to cut out unnecessary expenses. The broad stroke of “take whatever money is left over and invest it” doesn’t point people toward one of the most powerful tools there is for improving their financial state – taking a serious look at their life and cutting back where it makes sense.
It is very easy for anyone to slip into a routine of spending money without any real benefit. We’ll start a Netflix subscription, for example, and keep paying for it even though we rarely use it. Taking a regular hard look at one’s expenses can provide quite a lot of money for investment.
Second, the money market fund idea isn’t a good idea for most people right now. At this point in time, having money in a money market fund is like having money in a savings account that returns only a tiny fraction of a percent and isn’t FDIC insured. There are times when a money market fund is a decent place to store your cash. Right now isn’t one of those times. Use a savings account.
Finally, it doesn’t look at non-retirement goals. Like I said earlier, this is a great plan if you’re saving for early retirement. If you’re not saving for early retirement, you’re going to want to take a different approach to the “money left over” investment and you might not necessarily want to be maxing both your 401(k) and your Roth IRA.
If you have non-retirement goals, I’d say it’s a good goal to be saving 10% of your income for retirement and throw everything else you can toward that non-retirement goal. If that goal is farther off than eight or ten years, then you might want to follow the investment advice above. Otherwise, you’ll probably want to be more conservative than that because stock market volatility makes stock investments much less of a sure thing over a term shorter than eight years. The stock market has leaped and fallen and leaped again like a hyperactive gymnast over the last eight years and over some shorter periods it has seen some devastating losses.
Aside from those quibbles, if you’re looking for a very straightforward plan for financial success, this is a pretty sensible one.