People seek universal answers to personal finance questions, but the correct answer almost always starts with “it depends.”  What is good advice for one person may be terrible for another person.  This fact is often overstated, though.  For each question there tends to be a small number of important factors that determine the correct answer.  One such factor is your current wealth level.  In his book The Wealth Ladder , Nick Maggiulli explores how your current wealth level affects the financial choices you should make. Maggiulli refers to his book as “a grand unifying framework that will fundamentally change how you think about wealth and how to build it.”  On one level, this sounds a little grandiose.  However, it can be challenging to get through to people who seek universal answers that don’t exist.  These people need to be hit over the head with the idea that your best choices going forward depend on your current stage of wealth accumulation. ...

I get a lot of friends and family asking for help figuring out their retirement finances when they’re just a few years from retiring.  These discussions follow a common pattern: people say they want to spend more in their 60s while they’re still able to enjoy new experiences, but they make plans that involve spending less in their 60s than they will have available in their 70s and beyond.  They resist a simple idea even after I show them how much more they could be spending early on. I’ll illustrate what’s going on with an example that borrows from some of the real cases I’ve helped with. Meet Dan Dan is a single guy about to retire at 60.  Here are his relevant financial details: TFSA: $200,000 RRSP: $300,000 Pension: $4000/month indexed to inflation + $800/month bridge until he is 65 CPP: entitled to 90% of the maximum amount ($826 at 60, $1290 at 65, $1832 at 70) OAS: entitled to the full amount ($740 at 65, $1006 at 70, 10% increase at 75) Dan tried to work out what t...

A : I’ve got a guy who’s getting me into private equity.       A : This ad for a used car looks like a good deal. B : Are you sure that’s a good idea? Valuations in private equity are just made up.       B : The ad says it’s being sold as is, and you can’t go see the car. Do you know what you're getting into? A : That’s one down side, but the low volatility of private equity makes it less risky, and that’s what I’m looking for.       A : That’s a down side, but this is the brand I’ve been looking for. This model is highly rated. B : But the low volatility of returns is just a consequence of the made-up valuations. All the risk is hidden until a knowledgeable buyer evaluates the assets.       B : A good rating applies to the average car of this model. That won’t mea...

It’s a good idea to start saving when you’re young, but not for the reasons that personal finance experts give.  They offer tidy examples that have little connection to the real world.  Here’s a typical version: If you save $1000 per month from age 25 to 35 and then save no more, at a 7% annual return, your savings will grow to $1.3 million by the time you’re 65.  If instead you wait until you’re 35 to start saving $1000 per month, and you save for the full three decades until you’re 65, you’ll only have $1.17 million.  That first decade of saving is more valuable than the last three decades combined.  So get started early. This seems reasonable until we test it on someone who is 65 years old today.  Meet Jim.  Back in 1985, he was 25 years old working full time.  The minimum wage at the time was about $700 per month, but Jim was doing well making $1200 per month.  Now let’s ask young Jim to start saving $1000 per month.  Hmm.  That...

We often see debates about whether or not volatility of returns is a good measure of risk.  This debate is related to what I think is a bigger issue: the difference between perceived risk and actual risk.  Perceived risk is influenced by observations and “dollar bias,” but actual risk comes from the full range of what might happen and its influence on buying power. Dollar bias and buying power In some contexts we forget about inflation and view dollars as constant over time.  For example, we tend to focus on nominal returns and think that it’s okay to spend gains as long as we leave the principal intact.  But the principal will erode with inflation if we spend all the nominal gains. Another context where we see this bias is with mortgages.  We can calculate that with a 30-year $400,000 mortgage at 4%, the first year’s payments will only reduce the principal by about $7000.  But even with only 2% inflation, the buying power of the principal will erode by abo...

Before reading Barry Ritholtz’s book How Not to Invest , I wondered if the “Not” in the title was a sign it would be filled with gimmicky ways of giving investment advice.  It isn’t.  Investing well is simple enough, but the world tries to push us towards many types of poor choices that lose us money.  The best advice is a list of the many things to avoid when investing.  This book gives readers the benefit of Ritholtz’s extensive experience with staying on the simple path to investing success. The book is organized into four parts: Bad Ideas, Bad Numbers, Bad Behavior, and Good Advice. Bad Ideas Part of what makes it so easy to push investors toward bad ideas is that we believe secret ways to create wealth exist when, in fact, they don’t exist.  “We don’t like to admit it, but nobody knows anything about the future—not just you and me, but the so-called experts too.”   I’ve had the experience of getting people to agree that the future is unknown, and ...