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Money’s 7 New Rules of Financial Security (Part 2)

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I'm reviewing Money Magazine's 7 New Rules of Financial Security. You can read Part 1 here.

Rule No. 4: Borrowing

Old thinking: Borrowing sensibly is a good way to build wealth.
New rule: Borrow cautiously. You have to worry about the other guy's debt too.

Money Summary: Credit was cheap and plentiful like food at Sizzler. Americans acted as expected and ate as much as they could. Now there's lots of vomiting going on. Next time don't eat so much. (Sorry, that might not have been Money's exact point, but I couldn't avoid the analogy.) Side point, you may be exposed to more leverage than you think. People paying you money may have been leveraged... their leverage becomes your problem when they can't pay you.

Lazy Man's Take: Sounds like money is saying that moderation is the key. Hmmm, I remain unconvinced that's a new rule. I do like the side point though. It's something that I hadn't thought about. I had done a lot of investing with Prosper and have found the returns not very good (though my Lending Club returns have been great). Perhaps everyone else's leverage became my leverage.

Rule No. 5: Housing

Old thinking: You can expect your house to appreciate handsomely over the long run.
New rule: Your home won't make you rich. But it is an important savings tool.

Money Summary: Except for two decades where real estate had skyrocketed real estate has been in line with inflation. Real estate also has other issues when it comes to investing in it: maintenance costs, insurance, taxes, remodeling costs that rarely pay for themselves, and steep buying and selling costs. Still owning a home is a great "'commitment device,' or a tool that forces you to save."

Lazy Man's Take: There's a great chart with the article. It's well worth clicking over to. I'll be here when you back. Done? Good. Back in May of 2007, I suggested the housing run up may be due to more people having dual incomes. Maybe I was wrong and it was government subsidies in the 1940s and easy credit and low interest in the 2000s. If that's true, there's going to be a lot of disappointed real estate investors.

As far a commitment device goes, it's pretty easy to set up an account and automatically funnel money into it. You can invest your money in things with returns that not just in line with inflation, but actually exceed inflation.

Rule No. 6: Diversification

Old thinking: A diversified portfolio lowers your risk.
New rule: Diversification won't always save you - and you need more of it than you think.

Money Summary: Diversify even more. Get an international bond fund. Use Morningstar's Internet X-Ray tool.

Lazy Man's Take: I feel like I already wrote this rule. I love diversification, but I don't think this is really new. The old thinking and new rule basically say the same thing to me. A lowered risk implies that it won't always save you. Otherwise the old thinking would have been "diversification eliminates all risk." I have been using Morningstar's X-Ray Tool for years now.

Rule No. 7: Retirement

Old thinking: Retiring early is a prize.
New rule: Retiring early is a problem.

Money Summary: With 401k accounts shrinking the odds of retiring early is much more unlikely than it was in the past... and it wasn't very likely then. Staying at your job for another year could make a big difference in if your money lasts. Lastly, you have to consider that you might not be able to work if you want to - your health and the job market could push you out as you get older.

Lazy Man's Take: Once again, all solid information, but I'm not sure it's a new rule. We've known for a long time that working an extra year makes a huge difference in retirement income. It's a year you aren't withdrawing and are adding to the next egg.

I'm going to stick to the old thinking... The new rule isn't very motivational.

Last updated on March 25, 2009.

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Investing, Psychology, Retirement

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5 Responses to “Money’s 7 New Rules of Financial Security (Part 2)”

  1. Hey I enjoyed this double post. I appreciate how you didn’t alter the original content and then added a short and sweet summary of your thoughts. Keep up the good work!

  2. kosmo @ The Casual Observer says:

    I think some people consolidated rule 4 and 5 into:

    Borrowing … is a good way to build wealth.

    You can expect your house to appreciate handsomely over the long run.

    With the result being:
    Banker: Let me see. My formula indicates that you can afford a $500,000 mortgage.

    Borrower: Sweet. Gotta call my realtor and look at some half million dollar houses. Stay in the house a few years, let it appreciate, sell it, and I’ll be on easy street.

    instead of

    Banker: Let me see. My formula indicates that you can afford a $500,000 mortgage.

    Borrower: Well, this $160,00 home actually has the number of bedrooms and features I need. I think I’ll just borrow that much and keep the payments reasonable.

  3. Miranda says:

    Great post! Although I think it is kind of interesting that, in my mind, these “new” rules are actually what is known as “common sense”. Great calls on the “new” rules that really should have been “the” rules all along.

  4. Dana says:

    Not exactly old rules out, new rules in. But more like, more uncertainties all around.

  5. Roger says:

    Meh, I was unimpressed with Money’s new rules. At best, they seem a return to the rules that existed before this last bubble (and should have existed through it); mostly, though, they seem to be the same rules I’ve reading about all along.

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