December 30, 2009

SO AFTER MONEY TALK INVOLVING MEGAN MCARDLE AND DAVE RAMSEY, and advice from Toby Buckell, various readers have asked if I have any financial advice. Not really. Except, like Clint Eastwood says, that a man’s gotta know his limitations.

We don’t follow the Ramsey approach. It’s good for people who have debt problems, but we’ve never had those as we’ve avoided debt. My approach is tailored to my laziness, and lets savings be the control on spending. I decide how much money to save, and it goes into a money market account, automatically every month. The key is that this account is for money to go into, not to come out of, except for major purchases (like a house or car) or emergencies. I have a separate “slush fund” savings account that also gets an automatic deposit every month, and that gets hit up for routine unscheduled things like home and car repairs. Every once in a while I sweep money out of the “don’t touch” money market account into another account at a different bank that is inconvenient enough to access that I don’t take money out of it. (I guess that’s the “really don’t touch” account). At the end of the year, I look at the various account balances and know if I’ve saved as much as I planned; usually it turns out to be more, as I sometimes put unscheduled money — speaking fees, royalties, etc. — in there instead of the slush-fund savings account if I’m feeling flush.

This system turns my considerable sloth into an asset; savings is automatic, while spending takes effort. Taking money out of those “don’t touch” accounts is an event, meaning that I think about it before I do it, and thus don’t do it much. Likewise, almost the only credit card I use is American Express, which I pay off every month. You can stretch the payments, but, again, you have to make a conscious decision to do so, which means you have to think about it and realize how dumb it is, so I don’t. But the key is to prioritize saving first. Once I’m saving what I’ve planned to, I don’t have to worry about what I’m spending; it’s taken care of.

I was taught this “pay yourself first” approach in high school, and it seems to work. If you’re already deep in debt, then the Ramsey method is better. But if you’re like me — a fairly steady income punctuated with occasional unexpected “extra” money and, of course, occasional unscheduled expenses — it works pretty well, and requires fairly little thought. The Insta-Wife (with whom I am, happily, very compatible on this stuff) is a bit more OCD about things because she likes thinking about money and budgets, but her approach pretty much tracks this one too.

And that’s perhaps the best financial advice: Marry someone you’re financially compatible with. I seem to recall that The Millionaire Next Door had millionaires listing their spouses as one of the main reasons they wound up with money. I think that’s probably right.

UPDATE: Theodore Simon writes:

When it comes to saving, my wife and I are of like mind. During our marriage we have followed a strategy very similar to yours with one exception. Since money is fungible and can be removed from any bank, no matter how inconveniently located, we have always taken our “don’t touch money” and invested it in 20- and 30-year municipal bonds, which we have forced ourselves to hold to maturity. More recently we have invested in iBonds with the same idea in mind, which again serves to place our savings beyond the range of everyday temptations to spend. Some people might be surprised how much money you can save over four decades with that kind of discipline. Even with the meltdown of the economy in 2008, we are well off in our retirement, having enough savings to travel widely, cover our daily living expenses, pay for long-term health care insurance, and live comfortably in the way we had always intended.

Barring all but the worst personal catastrophes, the advice you gave really works. It certainly has worked for us.

Personally, I’m reluctant to tie up all my major savings in long-term fixed-income instruments, but then I’m younger. And the larger point holds. You can save a lot of money if you try, and on the other hand you can spend an amazing amount of money without really trying at all . . .

ANOTHER UPDATE: Reader Travis Blake writes: “Saw your post on Dave Ramsey – your approach sounds a lot like the method in the book linked below (The Wealthy Barber). I’m generally not fond of budgeting, but the ‘pay yourself first’ approach has served us reasonably well (although, for full disclosure, we have never done automatic savings).”

MORE: Reader William Manuel writes:

The pay yourself first strategy is great; the rest is awful. Let’s say you and your wife are mid 40′s. One of you is probably going to live to 90. Therefore, your investment time horizon is 50 years. Over any 10 year period, the probability of equity generating a greater real return than debt (bonds & money markets) is, I’m estimating, over 90%. Over a 50 year period, it is inevitable. Therefore, get your money out of the money market and into a broad market index. Even when you retire, your time horizon is still 20-30 years and suggests the majority of savings in equities.

Well, the post above is about saving, not investing, and in fact my retirement investments, etc., are mostly in equities. But in fact, stuff in money markets and CDs has done pretty well compared to stocks over the past decade — and, looking at my TIAA-CREF account, the small portion of my money in the fixed-income Traditional Fund did better over the past 20 years than the CREF Stock Fund, and I would have been better putting my money in CDs than in most of the mutual funds I’ve been in, which have all been highly-regarded blue-chip funds. Of course, this is a lousy market, and results would have looked different a couple of years ago (and if I were closer to retirement I would have gotten at least partly out of equities then). But honestly, though the long-term superiority of equities is something you hear about a lot, I’m not convinced that it’s so easy to realize in practice. Retrospectively you can always find stocks or funds that did really well, but spotting them prospectively is a lot harder.