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  The numbers will be out of date (you can now save $19K annually in a 401k and 6K annually in an IRA), and we now know that you can legally do a Backdoor Roth, but it is really good at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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31 Responses to “Ask the grumpies: Getting started with money”

  1. bogart Says:

    Good recommendations, though I don’t know Roth’s book. Will investigate. I find PF something where reading re-enforcing advice is helpful to encouraging me to make good decisions.

    Someone (maybe here) recommended Suze Orman, not for the advice, but for the way in which she connects our emotions/life histories with the (actual) decisions we make and (potential) ways to change those. I sort of scoffed at that but then went and read her The Money Class book which is what whoever mentioned this (here or elsewhere) recommended and actually (actually …) did find at least the beginning of the book helpful (full disclosure:
    I didn’t finish reading the book b/c I had it out of the library and didn’t get through before it was done, probably because I prioritized others, not because I hated it. I’ve actually gone back just now and checked it back out as an e-book having been reminded of this, because who knows?).

    For online stuff I’m again reading JD Roth’s Get Rich Slowly blog, which is I’d say of somewhat mixed quality nowadays — but there is good stuff there. Just not entirely sure it’s obvious (to a newbie) what the good parts versus dumb parts are.

  2. SP Says:

    I think I used Personal Finance for Dummies back in the day, but there are probably much better books. I also read I Will Teach You To Be Rich by Ramit Sethi, but he has a specific take on how to do PF right, and I don’t agree with all of it. I don’t recall if his book has as much of that as the blog did. We have twicee used his new car buying strategy (basically pitting dealerships against each other), which is more common these days with the internet, but was relatively uncommon back when we first did it.

    But I think I relied mostly on blogs.

    Also, don’t forget to consider the Roth IRA ladder for accessing retirement early: https://www.madfientist.com/how-to-access-retirement-funds-early/

  3. Matthew Healy Says:

    One of our non-retirement buckets is invested in a mix of tax-free Municipals calibrated to return just a tad more than inflation. Much of it is in very safe stuff; smaller parts are in higher risk (and thus higher yield) stuff; for instance a little is currently in Chicago School Board. We pay an expert to keep track of the details but a do-it-yourself approach could just pick a few of the various tax-free mutual funds out there. This bucket represents most of our medium-term reserves (we can get cash out in about a week if/when needed).

    • nicoleandmaggie Says:

      Municipal bonds are only risky when municipalities declare bankruptcy!

      • Matthew Healy Says:

        One of the reasons Chicago School Board has to pay people like me a higher rate is precisely because there’s a small but nonzero chance that Chicago might go bankrupt.

      • nicoleandmaggie Says:

        Yes, in general higher risk = higher reward. Lower risk = lower reward. Bonds have lower risk.

        But also recall that nobody really expected Vallejo, CA to go bankrupt until it was close to doing so. Diversification is important.

      • Matthew Healy Says:

        Yes indeed diversification is important. With Municipals of course no single city should get a materially important fraction. Also diversity by regions: if one part of the country is hit particularly hard by some economic shock then it’s possible more than one city there could get in trouble.

  4. Cloud Says:

    When I was working as an independent contractor, I set up a SEP-IRA with Vanguard. I incorporated as an S-corp. I can’t remember if that had any impact on which types of retirement savings were available to me. I do remember that the Vanguard website was really helpful in figuring out what sort of retirement account I wanted to set up.

    • nicoleandmaggie Says:

      Vanguard is pretty awesome for the individual investor.

      • Cloud Says:

        They are! I should go look and see if they have something to help me figure out my retirement planning. I find the rules of thumbs and simple calculators to be not quite enough for my specific needs, but haven’t found anything better yet.

      • nicoleandmaggie Says:

        What areas do you think the online calculators and heuristics are missing?

      • bogart Says:

        To address the “what’s missing” question, a lot of the calculators (etc.) seem to have limited flexibility in terms of things like what age you will be when you retire and/or start drawing down (or from) retirement savings — like whether those 2 dates might be different — whether you’ll have dependents in retirement, and whether you and your spouse are different ages.

      • Cloud Says:

        The main things I’m struggling with is how to factor in expected longevity. One side of my family routinely lives to 99 or 100, and my grandparents were quite active into their early 90s. We have absolutely no pensions to count on for a defined payout no matter how long we live, and I am finding it hard to decide how to balance the various risks. I don’t want to limit our lifestyle too much now, because genetics aren’t everything. I could get hit by a bus tomorrow! But I also don’t want to feel like I have to work into my late 70s to make sure I don’t end up 95 and destitute. Everything I read implies annuities are a bad investment… but maybe having one would give me some peace of mind. It is hard to figure out.

      • nicoleandmaggie Says:

        Economists are always complaining that more people don’t buy annuities. It’s a formal “puzzle” even.

      • bogart Says:

        Annuities aren’t all-or-nothing (i.e., you could buy one while keeping some money invested — I know you know that, but … just thought I’d go ahead and state it.

        I believe there is a comparatively new product called longevity insurance? Basically a delayed annuity that kicks in at an advanced-ish age, say 85, and is relatively affordable. No idea how good these are, but the very little reading I’ve done on them suggests there exist good(ish) products, i.e., they’re not necessarily a scam/bad idea.

        Long-term care is another doozy to factor in/contemplate.

        I recently read this report — https://www.soa.org/globalassets/assets/files/resources/research-report/2019/viability-spend-safely.pdf — (never let it be said that I don’t know how to have a good time) and found it pretty informative/helpful. For my circumstances (and probably yours), the basic recommendation it contains would be a very conservative strategy to adopt (depending how the future unfolds, I suppose), but it makes good points about tradeoffs and includes a variety of different examples that I found informative.

      • bogart Says:

        … should have given credit to JD Roth for that link. I found it either on his blog or through his curated links.

      • nicoleandmaggie Says:

        hahaha, go JD Roth!

      • Cloud Says:

        Thanks for all the info! I guess I need to do *better* reading!

  5. Xin Says:

    For true beginners, I’m a fan of I Will Teach You to be Rich by Ramit Sethi, out of all the beginners’ personal finance books that I’m familiar with (which all teach very similar, very “personal finance 101” basic things that I mostly agree with), that’s probably the one I’d recommend first. Unlike SP, there isn’t much of Sethi’s advice that I disagree with. (I’d do some things a little differently, but nothing jumped out at me as something I’d definitely saw I disagree with.) Though it sounds like that book might be too basic to answer a lot of Mel’s questions. For the kind of questions she mentioned, I’ve been getting my information from blogs.

  6. sciliz Says:

    Here’s how I think of it:

    1st priority- a thousand dollar emergency fund and the habit not to carry credit card debt (it sounds like that bar is probably met for Mel)
    2nd priority, two essential things tied for next priority- get the max employer match and fill the emergency fund with 3-6 months of expenses in cash equivalents
    3rd priority, good great places to stick money next where your individual circumstances start to mater more- Roth IRAs (depending on current vs future tax rates), HSAs (depending on funds available and if the insurance makes sense given your options). These can function as either emergency cushions or as investments, and you can shift from the former to the later as you progress.
    4a priority- 457, if you’ve got it and the funds don’t suck, because it can be either retirement savings or job-loss-related-emergency-fund
    4b priority- 401k/403b up till you are either at 20% of your income or the max you are allowed to contribute.
    5th priority- 529s for college savings

    As an aside, for FAFSA retirement accounts (i.e. 401k/403b/457 and IRAs) are “off limits”. CSS is more complex, they want to know about them and some colleges will consider that. For most people most of the time, a dollar in a retirement account is “better” than a dollar in a 529, which in turn is “better” than a dollar in cash, in terms of financial aid.

    As a personal aside, while the market generally returns decent amounts over 18 year periods, it does so much more consistently over 40 year periods. I feel this is an additional reason to favor 401k vs. 529s, but your risk tolerance may vary.

    • Jenna Says:

      I like Darrow Kirkpatrick’s book Can I Retire Yet? For thinking about how much for retirement. He walks through a lot of nuance and recommends online calculators too.

  7. Carla Says:

    I’m a fan of JL Collins, both his online Stock Series and his book The Simple Path to Wealth. Definitely a Bogleheads vibe, but entertaining and clear explanations.

    https://jlcollinsnh.com/stock-series/

  8. Mel Says:

    You guys are awesome! I’m working my way through the links. Thank you so much.


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