Every other Sunday, disclaimer-statement.info reviews a personal finance book.
One of the real root causes of money troubles is irrational behavior. When money is involved, people act in ways that undermine their best interest. They buy when the market is high, sell when the market is low, lie to the people they care about the most, equate their personal worth with the balance of their bank account, and take jobs that make themselves miserable. Put these behaviors in any other context and you’d believe that the person committing such behaviors was crazy.
by Spencer Sherman argues that the reason we engage in these poor behaviors is that many of us are indoctrinated with some very poor personal finance “rules” at an early age – and we stubbornly stick with these rules and ideas throughout our lives. What “rules”? Things like “it takes money to make money” and “paying rent is throwing money down the drain” and “don’t talk about money” and “the rich get richer while the poor get poorer.”
To put it bluntly, most of those “rules” are complete falsehoods and, if you abide blindly by those rules, you’ll often do quite a bit of damage to both your money and your life.
Sherman’s book moves through many of these rules and looks at the real story behind them, discovering what you should actually be doing instead of following those ideas. Most of the time, doing things in a more sensible manner saves time, reduces stress, adds to one’s personal sense of honor, and often puts more money in the bank as well.
Intriguing, indeed. Let’s dig in.
Spencer starts off the book listing “Seven Simple Rules for Achieving Money Wisdom,” which I thought were pretty spot on:
1. Pause, take a breath, discuss, and look hard at the numbers before making any financial decision.
2. Spend less than you earn now, not as much as you might earn in the future.
3. Spend mindfully, not mindlessly, and periodically leave the credit cards at home and pay cash instead.
4. Save something – regularly. Give something – regularly.
5. Diversify your investments into many different asset classes.
6. Buy low and sell high. Get aggressive when an asset class is down and act warily when an asset class is up.
7. Realize that your actual net worth far exceeds your bank balance. It includes your talents, your lifetime of future earnings, your family and friends, and your health.
Pretty spot on, I must say.
1 – Money Madness: What It Does and How It Works
Money causes us to act irrationally. Sherman opens the book with piles of little examples of this, some of which I can see in my own life even now (like a somewhat irrational desire to provide “the best” for my kids). What’s really interesting is that, almost always, we know that this behavior is irrational except for when we’re doing it. Think about impulse buying, for example – sitting there, as you read this, it’s pretty clear that impulse buys are irrational. Yet, almost everyone has made an impulsive purchase from time to time. Why do we do these irrational things? Sherman’s stance is that it’s an emotional response – we give into that irrational behavior because our emotions point strongly that way, strong enough to overwhelm our rationality.
2 – Contracting the Condition: How We Get Money Madness
But where do these emotional responses come from? Sherman points the finger decisively at one’s childhood, where most of our sense of right and wrong is developed. From our parents and others around us, we build up a sense of rights and wrongs about many things, money being just one of them. Most of these ideas aren’t given in the form of words, but in actions and physical responses – an angry glare when money is discussed, an impulse buy in the checkout aisle, anger and frustration over bills. These all create a false picture of how money works – and results in irrational behavior in adulthood.
3 – Money Madness in Action: How the Money Monster Operates in Your Life
For the most part, this chapter serves to illustrate Sherman’s points from the first two chapters. He offers a long list of specific situations where childhood messages can overrun rational behavior – and gives some specific things to look for (like big emotional swings in response to certain things). He also makes the point that one little choice can have a big snowball effect later in life – one $10,000 mistake drastically changed his life in various ways, and that $10,000 mistake occurred because of his “money madness.”
4 – Free Your Life from Money Madness: Tame the Monster
Take a ten second breath. Inhale … 1, 2, 3 … hold it … 4 … exhale … 5, 6, 7, 8, 9, 10. That’s what you should do each time you consider spending money for any reason. Just stop, breathe deeply, and think about what you’re doing. It’s a great tactic, one I use myself on a very regular basis. Sherman offers several other interesting tactics for digging into the psychological basis of your irrational money decisions as well, though I think the ol’ ten second rule works quite well.
5 – Financial Intimacy: Getting Naked Around Money
Sherman makes another good point here: if you’re in a committed relationship (marriage or otherwise), you should be completely open with your money. You should talk through every debt, every asset, every income stream – everything. Nothing should be hidden. Plans should be made together, after serious discussion. Sherman offers some great advice here for how to make these discussions happen, perfect for a starting point if you’re in a relationship. If you want more, Financial Infidelity is a great book on the topic, as is Smart Couples Finish Rich.
6 – The Rainbow Portfolio: Madness-Free Investing
The “Rainbow Portfolio” idea is simple. Just invest in a diversity of index funds, contribute regularly (automatically), and forget about them, except for a regular rebalancing (changing your contributions a bit so that you’re contributing more to the investments that are down and contributing less to the ones that are up). He offers a pretty complex portfolio that does seem to beat the market by a bit over a very long period (I’ve looked up the Vanguard index fund for each piece of the portfolio):
25% bonds ()
12% U.S. large cap stocks ()
12% U.S. large value stocks ()
6% U.S. small cap stocks ()
6% U.S. small value stocks ()
7% international large value stocks ()
3.5% international small cap stocks ()
3.5% international value stocks ()
2% emerging markets large cap stocks ()
2% emerging markets small cap stocks ()
2% emerging markets value stocks ()
11.5% U.S. real estate ()
3% international real estate ()
4.5% commodities ()
7 – Getting Money: Madness-Free Strategies
Sherman argues that the best thing you can possibly do, no matter what your career is, is learn how to be a salesman. Why? All throughout your career, you’re selling something – yourself, your good work, the reasons you deserve a raise, and so on. A resume is a sales job. An interview is a sales job. Learn what good salesmen do, and work on those techniques in your own life until they become natural. Doing this will make everything work better – more opportunities for you, more income, and better relationships.
8 – Madness-Free Spending
Here, Sherman digs into the basics of budgeting. It’s familiar stuff for anyone who reads much personal finance material, except that Sherman offers one big idea: ranges instead of actual numbers.
How does that work? For each item in your budget, set a spending range. The low end of your range should be a “perfect” month – the goal you’re shooting for. The high end of that range should be a poor month – in other words, if you hit all of the high ends, you’d spend everything you earned. Then, in each area, you have a goal to strive for, as well as a fallback “safe” number if you can’t make it. Interesting concept.
9 – Philanthropy and Money Madness
Look at charity as an investment of another kind. You invest your money, but the rewards of that investment aren’t paid in dollars. They’re paid in goodwill, in benefits to the community, and in a sense of doing the right thing.
10 – Enough: Finding Your Sufficiency
Sherman digs into the idea of “enough” here. What is enough for you? Some people dream only of being rich – owning a mansion and a Lamborghini. That’s not for me. My dreams are much simpler – I want a modest home in the country and a healthy and happy family. That’s enough for me. Sherman’s basic argument here is that figuring out what’s truly “enough” for you is vital in getting a good grip on your financial health.
11 – Make It Happen
So, how can you make it happen? Most of the actions people need to take to get their money straight can be done with a series of short-term goals. Sherman advocates making a list of these tasks – and devoting serious time in the short term to knocking those tasks down. Build a budget. Start a savings plan. Build a debt repayment plan. These can all be done in the very near future – so get started!
Is Worth Reading?
has a lot of good ideas (and a few outstanding ones) and is written in a friendly and open tone. It’s a great selection to read if you’ve never dug into a personal finance book before – it covers the basics in a very clear fashion and is actually fun to read while also teaching you things.
However, if you’ve already read a well-rounded personal finance book, is a good choice to browse. Chapters four through eight have a lot of good information stuffed into them, little gems surrounded by a lot of what I would call “typical” personal finance information.