Monday, November 26, 2018

Smart Couples Finish Rich

We can all think of times when we wasted money on things that didn’t matter that much to us and were left without enough money to do things that truly bring us joy. The question then is how do we fix this problem? David Bach offers a step-by-step guide in his book Smart Couples Finish Rich. This book is getting dated, but it offers surprisingly concrete steps to the hard to pin down task of aligning your spending with your values and dreams.

This book is mainly aimed at people still in their working careers, so it’s tough for me to test out its ideas. However, I could imagine myself a decade or two ago being able to follow Bach’s nine steps. How much it would have helped me is hard to guess, but at least the steps are clear enough to go through the exercise.

Parts of this book won’t be too useful to Canadians with the talk of 401(k)s, IRAs, and health insurance. It wouldn’t be too hard for Canadian readers to skip these parts. Some of the examples are becoming quite dated with examples of much higher interest rates than we have now.

More troubling though is some bad advice. When it comes to choosing investments within a company plan, Bach suggests examining “a current list of investment options and a summary of how each of the investments has been performing recently.” Jumping to recent winners is a bad way to invest.

Here is some worse advice: “If you work for a terrific company and you know it’s well run, don’t be afraid to act on that knowledge. I currently have more than 50 percent of my 401(k) money invested in my company’s stock.” I wonder how many WorldCom employees thought their company was well run.

Less serious, but still somewhat troubling is the advice to put emergency funds in money market accounts because they are “incredibly safe.” There is some risk with money market accounts. The kinds of conditions that would put these accounts at risk are exactly the conditions where you’d be very glad to have cash at the ready. Higher returns always come with more risk.

One section does a good job of explaining the benefits of investing in low-cost index funds. But then Bach says index funds are just for the “getting started” phase before you have $50,000. He says to move to a portfolio of mutual funds. Why not stick with low cost investments instead of paying high costs?

Bach claims that with fee-based advice where you pay a percentage of your portfolio for financial advice has “no possible conflict of interest.” This just isn’t true. Commission-based advice may be worse, but fee-based advisors are incented to gather as many assets as possible and do as little as possible to retain clients’ money. Some advisors may do a great job despite this conflict of interest, but the conflict is there nonetheless.

One part I found curious was the claim that we won’t pay less in taxes when we’re retired. In my case, my income taxes dropped more than 90% when I retired. Perhaps this is a difference between being self-employed and being an employee. I paid very high taxes as an employee. Perhaps differences between Canadian and U.S. tax law are a factor as well.

People are too trusting of insurance company promises. Bach is very blunt: “Insurance companies will do just about anything they can to avoid having to pay out benefits—including hiring an investigator to check you out.” He’s not against getting sensible insurance; he is underscoring the importance of telling insurance companies the truth. Any lie you tell an insurance company gives them a potential way to avoid paying a claim.

People who have tried and failed to get control of their spending may be skeptical of yet another book on this subject. Bach begins with identifying your values, hopes, and dreams, and say “It’s my experience that people will do more, and act more quickly, with regard to their finances when they understand how their actions relate to their values.”

In conclusion, the best part of this book is the series of concrete steps designed to allow you to identify what matters to you in life and align your saving and spending with you values, hopes, and dreams. I suspect this approach is better than books that just urge us to spend less and save more. Delaying gratification sounds a lot less fun than making sure you get what you really want in life. But there are a few pieces of advice in this book readers are best to ignore.

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