Ask the grumpies: Getting started with money

Mel asks:

What books do you recommend for someone who is looking to understand the basics of investing for retirement and how much money a person should hold in their savings account for emergencies? Or to that end, also understanding which comes first: having savings you can reach for at a moment’s notice or putting money into a retirement plan? I’m looking for that sort of information in a book form.

I have a fairly (I think?) healthy relationship with money, carry no debt beyond the mortgage, and feel the word that best describes me is “careful.” So I don’t really need to understand budgeting or how to pay off debt, but I do want to make sure that we’ve saved enough for retirement, saved enough for college (and aren’t going to be locked out of applying for certain loans because we have too much in a savings account vs. moved over into a retirement account — is that even a thing?), and saved enough for emergencies.

I’m looking for big picture books to understand how the various plans work as well as books to avoid because they contain terrible advice.

A good primer on all things personal finance is JD Roth’s book, Your Money:  The Missing Manual.  The numbers will be out of date (you can now save $19K annually in a 401k and 6K annually in an IRA), and we now know that you can legally do a Backdoor Roth, but it is really good at explaining the basics.  Like the difference between an investment (ex. a specific stock fund) and the bucket you save an investment in (ex. a 401k).  It also summarizes many of the best ideas from the best personal finance books.

How much a person should hold in their savings account for emergencies isn’t something there’s 100% agreement on.  In general, most people agree that you should have at minimum around 1K (give or take, probably more given inflation) to cover small emergencies.  After that people tend to think in terms of months of expenses– you need 1 month of regular expenses in case your work has a billing mistake.  You need 3 months of expenses to cover things like car problems or a short-layoff.  You need 6 months of expenses to cover a lengthier spell of unemployment.  Some people will argue a year of expenses, but that’s a luxury.  Other factors are also important like how stable your industry is– if there’s more uncertainty, you need a larger emergency fund, if you are hard to fire then you need a smaller emergency fund.  If you have dual incomes and a spouse can increase hours or cover expenses you might need less.  If you own rental properties you might need more to cover tenant absences or large repairs.  Some people will keep part of their emergency fund in something safe like savings, but keep the bulk of it in an investment that could be tapped in an emergency without penalty, for example the contribution part of an IRA Roth or taxable accounts (or a 457 plan for government employees).  All Your Worth by Elizabeth Warren (yes, that Elizabeth Warren) and Amelia Warren Tyagi does an excellent job helping you think through what your monthly expenses are and how emergencies might affect them.

All Your Worth also does a great job in providing heuristics about how much you really can afford to spend given your income.  It provides great guidelines for what percent to put in required spending vs. optional spending vs. savings to provide stability in when there are emergencies.  It’s a really great read and a smart book.  As a note– one thing people often get wrong about her balanced money formula is that they think that they *must* spend what she says to spend and save only what she says to save, which isn’t true– if you read carefully, the spending amount is an upper bound and the savings amount is a lower bound.  She does note that if you are unhappy with your spending and you are saving the recommended amount then you can loosen up, but you don’t have to, especially if you’re considering early retirement.

Once you understand these big picture ideas, you can do one of two things.  You can read the Bogleheads Guide to Investing, or you can just figure out the cheapest target-date fund that your savings provider provides (ex. my work provides Fidelity so I use that for my 403b, outside of work the cheapest is usually Vanguard which I use for my backdoor Roth and taxable investments).  With the target date fund you can just pick a single date (when you plan to retire) and set and forget and it will take care of all the rebalancing and diversification and so on for you.  Easy peasy AND it matches the market, unlike the majority of active managers (who get out-performed by the market).

Here’s a couple of advanced posts on diversification of your overall personal portfolio (not just your retirement investments).  Here’s an ordering strategy of how you could choose to use your money.

In terms of college savings and financial aid, you definitely want to read this series of posts from Forbes Magazine.  Here’s one of our many posts discussing retirement vs college savings.  The short version is that depending on what schools your kids are considering and how much money you make (say, under 300K/year) then you are likely to want to shove as much money into retirement vehicles as possible.  (If I had to go back, I’d funnel some of our 529 money into 403b and 457 accounts, but I didn’t know we’d be as high income as we are now and I didn’t know that financial aid at fancy schools went so high up the income distribution.)

In email conversation you also mentioned that as a freelancer you wanted to know more about ways for self-employed people to save for retirement.  If anybody has book recommendations, that would be great.  I found a couple useful web articles on the topic.   You also mentioned you’d be interested in finding out more about how to tap into retirement money without penalty before age 59.5.  For that there’s something called substantially equal payments that you can use in some cases.  You can also always take money out with the 10% penalty.  Or take the principal out of a Roth (or 457 if you leave that employer).

In terms of what books to avoid:  Dave Ramsey is awesome for debt payment, but he is absolute garbage for investing.  Do not follow his advice for investing.

Grumpy Nation– What books do you and don’t you recommend for Mel?  Any web resources?  How should she get started?  Any advice specific to freelancers?

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