Balance Junkie » Book Reviews

Millionaire Teacher Book Review

2 Cents — Tue, 07 Feb 2012 10:45:57 +0000

To stay out of harm’s way financially, we need to build assets, not debts. One of the surest ways to build wealth over a lifetime is to spend far less than you make and intelligently invest the difference. But too many people hurt their financial health by failing to differentiate between their “wants” and their “needs.”

~ Andrew Hallam, Millionaire Teacher

If you’re a novice investor wondering how to get started on the road to a worry-free retirement savings fund, I’ve got the perfect book for you. If you’re a seasoned personal finance aficionado, I think you’ll find this to be an excellent resource too. I’m talking about Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in Schoolby Andrew Hallam.

Andrew reached millionaire status before he turned 40 on a teacher’s salary. Did he win the lottery, pick some hot stocks or inherit a whack of money? None of the above. He just followed nine simple rules and has generously shared them with the rest of us in this book.

Rule #1

As with most potentially complicated endeavours in life, the means to growing your wealth can be boiled down to a few essential, timeless truths. While all of Andrew’s nine rules are wonderfully useful, if I had to boil them down further, I would choose Rule #1: Spend Like You Want to Grow Rich.

Many of us believe that we need to be really intelligent, or lucky, or both to accumulate wealth over our lifetime. The reality is that it’s not rocket science. If you can consistently spend less than you earn and wisely invest the difference, you’re well on your way to financial freedom.

Where most of us fall down (myself included) is getting caught up in the idea that we’ll save after we’ve paid for everything else. If we simply reverse that process, we can save a whole lot more. Instead of spending on things we “need” and saving what’s left, we can set aside our savings first and spend what’s left. And we can always look for ways to increase our savings and decrease our spending – within reason. (Don’t forget to budget in some fun!)

Favourite Themes

While there’s a lot of detailed, yet concise information in Millionaire Teacher, a few main threads seemed to run throughout the book:

Beware of mutual fund fees: these are often hidden in funds but can put a real crimp in your savings over time.
Car-buying tips: Andrew has some great ideas on how to keep your car from becoming a huge hole in your pocket.
Start saving early to unlock the magic of compound interest.
Don’t even think about investing until you’ve gotten rid of your consumer debt.
Buy a home you can afford even if interest rates double. (Hat tip to Andrew’s Mom on this one! )
Invest in low-cost index mutual funds or ETFs.
Rebalance your stock/bond allocation regularly.
Specific ideas on how to break up with your mutual fund salesman.
Where to find low-cost index mutual funds and ETFs whether you live in Canada, the U.S., Australia, or Singapore

Andrew advocates a passive investment approach where you simply invest a set percentage in stocks and bonds and rebalance when the asset allocation gets too far out of line. While I think this is a decent strategy for the average investor – and even for most sophisticated investors – longtime readers know that I have mixed feelings about devoting all of your savings to a purely passive strategy. I like to take into account secular market cycles as well as personal risk tolerance and valuations.

Believe it or not, Andrew even has an answer for those who still like to dabble in individual stock-picking. Rule #9 allows you to take 10% of your portfolio and invest it in a few individual stocks. If you’re right, you can kick your performance up a notch. If you’re not, you haven’t tanked your retirement plans. Not bad.

The Bottom Line

You can quibble with some of the fine details in Millionaire Teacher if you like, but the bottom line is that Andrew has produced a fantastic road map to wealth here. Whether you already know a little or a lot about personal finance and investing, this book is well worth your time – and it makes a great gift for those just starting out in life or investing.

As a bonus for those who aren’t avid readers – especially of financial texts – this book is tremendously readable. Andrew takes you by the hand through the investment industry maze, melding hard facts with amusing stories and he does it all in less than 200 pages. Before you know it, you’re finished.

You may or may not find your own pot of gold at the end of the maze. (Gold’s not such a great investment anyway, according to Andrew.) That will be entirely up to you. But you will be enlightened and hopefully, empowered to take your financial fate into your own hands and design a better future for yourself and your family.

Feel free to share your thoughts below!

Never Too Late: Book Review and Giveaway

2 Cents — Mon, 24 Oct 2011 09:45:01 +0000

It’s about taking control of your future so that when you finally get there you’re not surprised at what it looks like. And it’s about making sure you know the truth and deal from a place of fact, not fear.

~ Gail Vaz-Oxlade

Planning for retirement can be confusing – so much so that many of us avoid it altogether. If you’re Canadian, you might be further confused by the fact that much of the information out there is directed at Americans. While the basic principles of retirement saving know no borders, there are significant differences in the types of retirement saving vehicles out there and their corresponding tax laws.

It goes without saying that avoidance is not a good retirement strategy. No worries. Gail Vaz-Oxlade’s latest book called Never Too Late: Take Control of Your Retirement and Your Futurecan help you set a course for retirement that works for you.

Win a Signed Copy of Never Too Late

Thanks to InsureCan, I can offer a signed copy of Never Too Late to one lucky reader. All you need to do is leave a comment on this post and I’ll enter you in a draw for the book. I’ll announce the winner on Friday, November 4th, 2011. Good luck to all!

10 Questions Never Too Late Can Help You Answer

Gail’s no-nonsense style is familiar to many Canadians and her voice comes through loud and clear in this book. One thing she makes clear from the beginning and repeats throughout the book is that “only you can take the steps to get from where you are now to where you want to be.” She provides lots of practical information in an easy to read, clear cut format. Here are just a few of those nagging retirement questions Gail addresses:

1. How much money do I need to save for retirement?

2. How can I save enough for retirement?

3. Should I save for retirement or my child’s education?

4. Should I pay down my debt/mortgage before I save for retirement?

5. How should I invest my retirement savings?

6. What are the tax implications of RRSPs vs. TFSAs vs. unregistered investment vehicles?

7. Am I too young or too old to start saving for retirement? (Hint: No!)

8. Should I borrow money to invest? (Hint: No!)

9. What happens when I retire?

10. What happens to my retirement savings when I die?

If you know Gail, you know that she’s not prone to equivocation. She has strong views about some of these issues, but she’s also careful to lay out a variety of options when it’s warranted. One thing she’s particularly peeved about is the proliferation of bad information coming from some advisors, some sectors of the media and the financial industry in general. Her antidote for all of this is simple common sense and she delivers that in spades.

5 Things I Liked about This Book

1. Emphasis on Balance

Gail stresses throughout the book that saving for retirement is a balancing act. Contributing enough to all of our financial priorities without living a spartan existence is the key, but it can be easier said than done. “Having enough money is a wholly personal thing; there’s no magic number. You have to decide if what you have is enough.”

2. Find What’s Right for You

Not every investment vehicle fits for every saver. Your idea of enough and the best way to get there will be different than mine depending on a whole host of factors. Some of us have company pension plans to factor in and some of us don’t. Our income level will affect how much we can save, our choice of investments and the resulting tax implications. It can also affect how much we will receive from the government once we retire.

3. Easy to Read and Understand

Gail’s tone is very conversational and she brings an element of simplicity to even the more complicated aspects of retirement planning.

4. Clear Examples, Charts and Forms

Never Too Late doesn’t just tell us how to save for retirement, it shows us. There are forms to help you calculate your net worth and plan a budget, as well as helpful charts on investments and sample returns. Gail also breaks down a lot of the information according to age: a 50-year-old will have a different approach to retirement than a 20-year-old.

5. Emphasis on Saving, Action, and Specifics

It’s easy to get caught up in the acronym whirlpool at the heart of the retirement savings industry. Sometimes I get so preoccupied with trying to choose the best investment that I forget to prioritize the savings themselves. No savings, no investments. Gail offers lots of specific suggestions on how to cut spending and increase savings.

You can know heaps of information about retirement planning and investing, but it won’t do you any good if you don’t put it into action. Gail points out that “your life is yours to make of it what you will. And it’s never too late to get started making it what you want it to be.”

If you’ve read the book, would you share your thoughts? If not, do you think this book might be of some help to you?

Book Review: Jump Point

2 Cents — Fri, 11 Feb 2011 10:45:38 +0000

When they do arrive, Jump Points are necessarily startling and disruptive periods. They upset the status quo, threaten existing leaders, and rattle the complacent. . . . Most of our prevailing business assumptions will be challenged and a whole set of new ones will be born as businesses everywhere make the Jump.

~ Tom Hayes

I received a book called Jump Point: How Network Culture is Revolutionizing Business for Christmas in 2009. I didn’t get around to reading it until recently. That’s noteworthy because the topic of the book is quite time sensitive. You realize that when MySpace is referenced as the top dog in the social media world and Facebook is mentioned as an up-and-comer – and the book just came out in 2008!

It’s been interesting to read this book at the beginning of 2011 because that’s the year in which its author, Tom Hayes, estimated that the Jump Point would occur. Put simply, the Jump Point is when the number of internet users reaches 3 billion. That’s significant because it “will mark the first time in human history when all the world’s producers and consumers are unified in a single, integrated global system.” This will cause tectonic shifts in the way we think about and do just about everything.

10 Truths of the Jump Point

Mr. Hayes offers plenty of insights for businesses looking to become (or remain) successful in the post-Jump Point economy. Apparently, middlemen and intrusive marketers need not apply. In the new economy, businesses that are inflexible or try to control information rights will not survive. Instead, they will need to offer “mechanisms for customer influence and expression . . . or go home.”

In order to sell to the new generation of consumers, the “winning brands . . . don’t ask consumers to drink the Kool-Aid; they invite them to make it.” We are already seeing trends like this in music, publishing, and many other industries. Some of the new truths that the Jump Point will reveal are the following:

1. You Can’t Fight the Network

Businesses will need to understand how networks function and work with them rather than trying to change them to conform to antiquated standards. They need to understand the viral nature of networks and use that property to connect with potential customers in a way that authentically addresses their needs.

2. Social Communities Are the New Marketplace

If you want to grow your brand, you need a social media presence. But be forewarned: these communities “operate on a code of behavior centered on respect and reciprocity, participation, and affiliation.” The best marketers take the time to build a personal relationship with their fans, and attempt to provide real value to consumers.

3. Use the F-Word

Free. Many companies large and small have grown their brand and their revenues by offering consumers something for free. They can then sell premium or value-added upgrades to those who want to kick it up a notch. Hayes offers the example of Adobe and its PDF reader.

4. Reward Attention

With all of the options and information the network presents each of us every moment of the day, attention will come at a premium in the post-Jump Point society. Consumers don’t want to waste their precious attention on products or information that’s irrelevant to them personally. Businesses will need to provide real value to prospective customers in exchange for their attention.

5. Break the Time Barrier

Time zones become somewhat blurry in the Internet Age. The articles I write today can be viewed by anyone anywhere in the world at any time. And consumers have come to expect everything on demand. Servicing customers in a globally connected world means that businesses will need to have a 24/7 component or be replaced by competing enterprises that do.

6. Make Everything Mashable

Hayes believes that businesses that insist on pushing DRM (Digital Rights Management) will lose. Post Jump-Point consumers will be turned off by limits. Companies that give customers a sense of ownership will earn their trust, their loyalty, and their purchasing power.

7. Think Abundantly

The network is pretty much infinite. Unlike a bricks and mortar business, the shelf-space on the internet is limitless. There are no constraints due to finite warehouse space. The “new customer paradigm” allows people to edit and contribute to content. Businesses that find a way to tap this resource will thrive.

8. Compete on Trust

Mr. Hayes proposes that “trust is the real currency of the Jump Point economy.” The winning companies will be the most trusted brands.

9. Become Contagious

A recommendation from a trusted friend is so much more powerful than any type of advertising campaign you could possibly devise. The successful Jump Point enterprise will produce products that are infectious and take advantage of the momentum opportunities that the network culture provides.

10. Pandenomics: The Network Favours Blockbusters

The network provides entrée to smaller, niche players to be sure. But it’s really designed for “pandemic economics.” The viral mass dissemination of information that the network allows can create blockbusters very quickly. A faster return on investment for any business means that they can reinvest in innovation sooner. Blockbusters can create new markets and stimulate innovation and competition.

Not Just for Geeks

Let me preface this section by noting that I’m about as far from being a techie as you can get. Yes, I work online. But I’m a writer first and foremost. In fact, if I want to write something really good, I still require a paper and pen. My brain just doesn’t spit out the pretty words for the keyboard the way it does for my trusty dollar store notebook and pen.

One reviewer called this book “the Tipping Point for geeks.” I disagree. I think this is a fascinating read for anyone who will live through this Jump Point. I was very much intrigued by the insights into the social, marketing, and investing implications of this seismic shift.

The Jump Point will bring with it countless paradoxes. I found the prospect of an Orwellian kind of Big Brother presence a little frightening, and the sheer uncertainty of it all a little daunting. Still, I had to wonder whether this revolution might help us out of the tremendous economic pickle we’ve gotten ourselves into.

After all, if we’re going to have all kinds of new ways to conduct business, we’ll need lots of folks to help us navigate our brave new world. If cybercrime becomes a problem, we’ll need special law enforcement policies and personnel to combat that. And if this thing gets as big and pervasive as it sounds, it could spawn a lot of new jobs, many of which we can’t even conceive at the moment.

Three questions then come to mind:

Will the number of jobs created by this new economy be enough to offset those lost in the old economy?
Will the economic growth created by this new economy be enough to offset all of the intellectually-challenged financial decisions we’ve made over the past few decades?
Will the Internet Age be one in which the playing field is finally leveled a bit, or will we see even more social and economic bifurcation?

How do you feel about the changes that technology is bringing? Are you ready for the Jump Point?

Book Review: -Able

2 Cents — Fri, 28 Jan 2011 10:45:01 +0000

Play the song that is natural for you to play, in the way that is natural for you to play it, and in front of the fans that most need to hear it.

~ Scott Ginsberg

Update: This review was included in the Totally Money Blog Carnival #4 posted at Budgeting in the Fun Stuff. Thank you!

Scott Ginsberg has branded himself as “The Nametag Guy.” In fact, he’s all about branding, marketing and finding every way possible to make yourself more approachable. He writes a lot. His latest book, -Able offers “35 strategies for increasing the probability of success in business and in life.”

35 Ways to Be More Able

Each of the 35 chapters offers specific strategies to be more “able” in a certain area, and each offers a catch-phrase designed to crystallize the main idea and make it stick. The first five chapter titles (and subtitles) are as follows:

1. How to be More Advance-able than a Last Place NASCAR Driver High on PCP: Accelerate success – don’t create it.

2. How to be More Addict-able than Crack, But Without Killing Millions of People: I can’t quit you!

3. How to be More Book-able than George Bush as the Keynote Speaker for the Association for the Mentally Challenged: “And YOU can count. On me. Waiting for YOU in the parking lot.”

4. How to be More Brand-able than Dennis Rodman’s Left Butt Cheek: There are no cover bands in the Rock and Roll Hall of Fame.

5. How to be More Break-able than the Hideous Purple Vase Your Mom Used to Keep By the Front Door: So the big fish can jump right into your lap.

Depending on your personality type, and maybe your age, some of you are probably thinking, “Gee, that doesn’t sound all that professional.” Others are probably thinking, “Wow. This guy is funny. He really knows how to drive a point home and entertain all at the same time.” If you’re a typically understated Canadian, you may find some of the messages in the book a little too loud, a little too smooth, or a little too much.

The truth is, Scott is a young guy. He writes with a young voice. But what he has to say contains the type of wisdom that you would normally associate with someone who’s been around a lot longer than he has.

Style and Substance

If you were less than impressed by some of the chapter titles above, you might be thinking that the message of -Able is all style and no substance. On the contrary, Scott is adamant about the idea that style is useless without substance. Here are a few of the recurring themes that stood out to me:

Be Yourself: You can’t be successful if you’re not being authentic. If you offer your true self to people, you’re automatically offering a unique product.
Be Credible: Do what you say you’re going to do when you say you’re going to do it.
Be Visible: Put yourself out there. “Be public or be penniless.”
Be Honest: “Character trumps technique.”
Be Valuable: Offer people high quality at a reasonable price. Give them “meaningful, concrete, immediate” solutions to their problems.

If you’re getting the feeling that this book is full of one-liners and catch-phrases, you’re right. But there’s plenty of substance behind each and every one of them. The tips and suggestions are concise, practical and actionable.

Classic Wisdom 2.0

Scott Ginsberg has managed to combine time-tested business principles with the knowledge you’ll need to navigate the web-enabled landscape before us. The internet has transformed the way we do business as well as the way we do life. And yet some things remain the same.

We may be able to reach a lot more people a lot more quickly with the help of social networking and the myriad of other efficiencies that today’s technology has to offer, but we won’t be successful for long if we don’t stick to the core values that are common to all great businesses and all great people. If you want to be successful in business or in life, it still pays to act with integrity and help people solve problems.

Although the subtitle of -Able promises 35 strategies, I was surprised to find that many of those chapters actually contained dozens of useful ideas and lots of different ways to look at each topic. While the book is aimed primarily at entrepreneurs, salespeople and marketing professionals, there’s plenty of value here for just about anyone who’s willing to take action to improve their career and their life.

Does this sound like a book you might want to try out?

Book Review: Super Sectors

2 Cents — Fri, 14 Jan 2011 10:45:59 +0000

Stock market activity over the last ten years has proven that “buy and hold” is a dead concept and it’s very likely that going forward over the next ten years, “buy and hold” will continue to be an invalid and ineffective concept. Because over the last ten years, the S&P 500 has generated a negative rate of return and that doesn’t even factor in the ravaging effects that inflation has on your portfolio.

~ John Nyaradi

Update: This article was included in the Carnival of Wealth#21 at Personal Dividends as well as the Wealth Builder Carnival #24 at My Wealth Builder. Thanks!

John Nyaradi’s book Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFsis relatively new, having been released in September of 2010. Much of the information it contains, however, marries the analysis of contemporary market conditions with time-tested trading wisdom. It’s only about 250 pages long, but it contains quite a variety of investment insight.

The book is divided into six parts, each of which addresses a particular aspect of navigating today’s volatile markets. The goal is a realistic approach to investing. John acknowledges that we will not likely be able to catch market tops and bottoms with precision, but we can sidestep major declines, preserve capital, and participate on upside moves.

Part I: Five Wall Street Fairy Tales and Why the Conventional Wisdom is Flawed

As you’ve probably guessed from the opening quote, Mr. Nyaradi is not a fan of buy and hold investing. That doesn’t necessarily mean he’s advocating day trading either. He just believes that buying and closing your eyes until retirement probably isn’t the brightest move:

“Buying and holding is like wearing your swimsuit year-round and standing by your pool. You’ll be fine in summer, but when winter comes, you’ll get frostbite.“

In fact, the concept of “buy and hold” is his #1 Wall Street Fairy Tale:

“As a buy and hold investor, you’re saying that you’re willing to let your future be controlled by market forces rather than taking charge of your own destiny. You’re willing to let the law of averages determine what kind of retirement you’re going to have, and if you’re unlucky enough to match up your best earning and savings years with a bear market decline, the outcome will not be positive.“

The other fairy tales are as follows:

Asset Allocation: By this, Mr. Nyaradi means the standard methodology of diversifying your investments among stocks, bonds and other asset classes and getting more conservative as you age. This is no magic elixir. Bonds can suffer bear markets too, and in the current environment, they offer very low real returns. The other major issue is, of course, that this approach may not provide you with any diversification at all, since asset classes are highly correlated nowadays.
Dollar Cost Averaging: I must admit that this one raised my eyebrows. I’ve always seen this as a layman’s way of buying more shares at lower prices, but John cites research showing that lump sum investing beats dollar cost averaging two thirds of the time.
The Market Goes Up 8 Percent a Year: In light of the serial crashes of the past decade, it seems pretty obvious that this is not a good bet.
Sell the Leaders, Buy the Laggards: Sometimes leaders continue to lead for a very long time. Often, laggards just keep dropping.

Part II: Why Exchange Traded Funds

In this section, Mr. Nyaradi offers a brief history of Exchange Traded Funds (ETFs), as well as a description of the main ETFs on the market right now. You can buy ETFs for just about any geographical region, asset class, or index out there. You can also profit from bear markets using inverse ETFs and leverage your investments using 2x or 3x ETFs.

Part III: Sector Rotation: What It Is and Why It Works

Sector rotation involves buying and selling ETFs linked to various sectors as the economic cycle progresses. Certain sectors outperform at different points in the cycle. As someone who’s tried this before, however, I can tell you that it’s not always easy to figure out our precise position in the economic cycle – especially when you throw in events like those of 2008.

Part IV: Trading Systems Designed to Outperform the Indexes

In this section, John offers a brief description of three sample trading systems you can use to invest in the markets. He’s even got one that’s called “Almost Like Buy and Hold“. It’s basically a long term trend-following system using the 70-week moving average.

This system is very simple and easy to implement for people who are too busy to trade actively, but history shows that it will get you in for most of the long term upswings and out for a good portion of bear markets. As with any trend-following system, you can get some whipsaws, but back testing shows this system beats buy and hold by a nice margin.

Mr. Nyaradi also offers “The Simple Trading System“, which uses daily point and figure charts and “The Golden Crossover System“. You may be familiar with the latter system, whereby you enter trades when the 50-day moving average crosses above the 200-day moving average. You can experience whipsaws with this system too, but no approach is perfect and it will still generate good returns.

Part V: The Sector Scoring System: Trading Concepts, Challenges and Conundrums

This section describes signals for entering a trade and describes some of the basics of effective trading. There’s a great chapter on the psychology of trading. Although I’ve read about many of the ideas before, these fundamental principles can’t be repeated often enough. As with personal finance, there’s a big difference between knowing what you need to do and doing it.

Part VI: Super Sectors: 5 Super Sectors that Could Change Your Life

The final part of the book identifies 5 sectors that will be instrumental in determining how the economy and markets will progress over the coming decade. You’ve likely read about many of them elsewhere (including here on Balance Junkie), but John offers great perspective on each of them. Speaking of great perspective: The final chapter of the book offers a multitude of perspectives from over a dozen well-known market commentators. I loved the variety of factors each person raised, but two themes kept coming up over and over again: China and commodities.

Final Thoughts

If you think market timing is impossible or that trading is a bad word, this is probably not the book for you. But if you’re interested in learning about some alternatives to buy and hold investing, this book provides a nice overview of the current market environment and the basics of technical trading.

You can find out a lot more at John’s Super Sectors site and learn about several subscription programs he offers to help you trade ETFs. You can try them free for 30 days. Note that I have joined the Wall Street Sector Selector affiliate program, so that if you head there via any of the links on Balance Junkie and end up subscribing after the trial, I’ll receive a little compensation as well. Either way, the book is a great read if you’re at all interested in learning more about markets, trading, and sector rotation.

Update: My apologies for omitting this at first: John Nyaradi has generously offered at free copy of Super Sectors to a lucky Balance Junkie reader. Just leave a comment below and you will be entered into a draw for a copy of the book. The winner will be drawn January 21st and announced January 22nd. Good luck!

Does this book sound interesting to you?

Book Review: Generation Earn

2 Cents — Fri, 26 Nov 2010 10:45:42 +0000

Our generation might have grown up in an era of relative opulence, but as I make use of a closet full of second-hand baby clothes and a hand-me-down crib, I can’t help but feel lucky that we had the chance to learn some of that old-school frugality.

~ Kimberly Palmer

Today’s opening quote comes from a new book by Kimberly Palmer, the Alpha-Consumer blogger and columnist for US News & World Report. It’s called Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back. It hit the shelves shortly after Kimberly and her husband welcomed their first child, so she’s knee-deep in all of the opportunities and challenges she discusses in the book. You can win a free copy by leaving a comment below. (Sorry, but this particular draw is only available to U.S. readers.)

The “generation” referred to in the title and the quote above is basically Generation Y, or those who are very roughly 20 to 35 years old. These young people have been given a lot of different monikers, from Millennials, to Generation Next, to Echo Boomers. But the title aims to turn one particular nickname on its head: Generation Debt.

Generation Earn

Twenty and thirty-somethings are seen by some as a generation of slackers who are more than willing to rack up thousands of dollars in debt to secure an education, a prime career, a giant house, and all the gadgets their credit card can buy. No doubt, as with any generation, there are those who fit this description. But this book aims to show that many young professionals, having landed in the job market at one of the most economically challenging times in several generations, isn’t necessarily all about binge and bling.

According to Ms. Palmer, her “generation doesn’t need to define itself by debt and financial struggle, but we do face new challenges and trade-offs.” For many people, including the Millennials, the “financial crisis of 2008 dovetailed with a growing interest in sustainability, simplicity, and even frugality.” Like most of us, they just want to have a decent life, with a reasonably rewarding career, home, and maybe marriage and children. That’s not too much to ask, is it?

In the Book

The book is largely devoted to answering many of the key questions a young person embarking on a life of their own might have:

How much to save
How to increase, diversify and maximize your income
How to handle debt
How to handle finances as a couple
How to invest your savings
How to plan for retirement
How to manage the costs of having children
How to spend and invest in socially responsible ways
How to give some back

One of the things I loved about the book is that all of these questions are addressed in a way that allows for a ton of individual customization. This is no one-size-fits-all handbook. It’s chock full of case studies, anecdotes, and practical ideas. Each chapter is sprinkled with a few short “Quick Tip” sections and ends with a set of numbered “Exercises” that provide actionable ideas related to the content of the chapter. There are also some specific questions and answers throughout the book that provide additional information.

Saving and Investing Advice

As for the advice offered in the book, most of it will be relatively familiar to those who frequent personal finance blogs. But there were so many interesting stories about how different people are handling starting out in this challenging environment, it was still extremely informative – and, as I always say, you can’t hear this stuff often enough. Most of the ideas on saving and investing are fairly standard, but also take note of the unique economic climate in which we are all living.

As you might expect, I would take issue with some of these standards, including the idea that twenty-somethings should have 80% -100% of their retirement money in stocks, the diversification imperative, and the old “never time the market” admonition. I would simply say that you may have a high stock allocation, but that it should by no means be considered a must. BJ readers are likely more than familiar with my thoughts on the reduced benefits of diversification in markets that have become very highly correlated. You also know that I don’t have anything against timing the market, and that I think it can be essential to your investment success, provided you understand the risks. There are risks in not timing the market as well.

Having said all of that, Ms. Palmer is careful to point out that it’s unlikely that we’ll see the types of returns the market delivered from 1980-2000 again for a while. She also recognizes that advisors and retirement calculators that suggest you plan for 10% annual stock market returns are likely way too optimistic. The overall message is to curb your enthusiasm and plan on saving more due to reduced market and pension expectations. I certainly can’t argue with that.

Is It Just for Young Professionals?

At 40, I’m not a member of Generation Y. We handled the challenges of fitting twin babies into a one-bedroom apartment 15 years ago in a very different economic climate. And yet I found this book to be very helpful and informative. While it specifically addresses the concerns of younger people getting started in life, it also offers a lot of great tips and insights for anyone who is trying to navigate their way through these choppy financial waters.

While most of the advice in this book is relevant to just about anyone, it does refer to American financial products and standards. So even though you will see discussions on 401Ks rather than RRSPs, it’s still a very worthwhile read. It’s not too long (about 215 pages) and would make a great reference book for yourself, or maybe even a Christmas or wedding gift for anyone who’s ready to get their financial life on track.

If you are a U.S. resident and would like a chance to win a free copy of the book, just leave a comment below. My son will choose a winning comment number in a week’s time, and I’ll announce the winner on Saturday, December 4, 2010. Thanks to Kimberly Palmer for offering the free copy, for writing this book, and for inviting me to review it!

Book Review: The Fearful Rise of Markets

2 Cents — Fri, 19 Nov 2010 10:45:58 +0000

Synchronized markets warp perception and force politicians and investors alike into historic errors – but eventually collapse under their own contradictions.

~ John Authers

John Authers, investment columnist for the Financial Times, explains why so many market orthodoxies were smashed during the financial crisis in The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How to Prevent Them in the Future. Published by FT Press, the book offers a comprehensive treatment of the factors that led to the global synchronization of markets as well as some cautions for those who still cling to these orthodoxies. More than that, Mr. Authers has some concrete suggestions for how to prevent these synchronized bubbles in the future.

5 Trends from the Fearful Rise of Markets

Mr. Authers weaves five main themes throughout the book. Over and over we see these trends borne out in the economic events of the past few decades:

Principal/Agent Splits: When you as a principal hire an agent like a financial advisor to manage your money, you expect that they will act in your best interest. But the agent may in fact have numerous conflicts which prevent him/her from doing so. What’s best for you may not be what’s best for the agent’s firm or for him/her personally.
Herding: There are strong incentives for today’s investment professionals to follow the crowd or risk losing their job. When everyone is in the same investments at the same time, bubbles inflate.
Safety in Numbers: Mathematical models have contributed to the illusion of certainty in markets. These models promoted the idea that there was safety in diversification, but missed the fact that investors using this strategy all at once created mispriced asset values. When those asset prices inevitably revert to the mean, markets correct swiftly and violently.
Moral Hazard: As the memories of the 1930s faded, banks found ways to circumvent and eventually dismantle the rules put in place to prevent another Great Depression. Eventually bankers and investors came to believe that there would be no penalty for taking increased risks as a result of government bailouts and easy money.
The Rise of Markets and the Fall of Banks: Many of the roles banks have traditionally played have been usurped by the capital markets. Assets that were once available only to professionals are now accessible to almost anyone with the click of a mouse. Companies that wanted to raise capital had to go to the bank. Now they have the option of doing so via markets.

Many of these trends are still in place in spite of (as evidenced by?) the record rebound in the stock market.

Part I: The Rise

The book is divided into three parts. Part I looks at the rise of the investment banking industry, Modern Portfolio Theory and indexing and how all three have helped in the formation of asset bubbles and busts. Long Term Capital Management (LTCM) was run by at least a couple of Nobel Laureates in the 90s and it was based on mathematical models. When it failed spectacularly, the Federal Reserve intervened to rescue the markets from collateral damage. And so the Greenspan put was born. You might call it the prequel to the quantitative easing saga to which we are currently being subjected.

Once LTCM was rescued, moral hazard gave investors the confidence to put more money to work in the markets. They promptly migrated en masse into dot com companies. That bubble topped out on March 10, 2000 and the Nasdaq proceeded to fall 79% over the next 2 years. As we all know, it has yet to even come close to fully recovering 10 years later.

Part II: The Fall

The most recent bust began on February 27, 2007 with the “Shanghai Surprise” and was followed by 2 years of extreme volatility, bank runs, financial failures, and selective rescues for financial institutions and auto companies. Many companies that were deemed too big to fail received billions in taxpayer backstops. Those outside the Too Big to Fail bubble actually did fail.

Mr. Authers aptly points out a number of financial orthodoxies that were destroyed in the crash. Chief among them may have been what he calls the “paradox of diversification” and of course modern portfolio theory, from which this orthodoxy emanated. The paradox of diversification means that “the more investors bought in to assets on the assumption that they were not correlated, the more they tended to become correlated.”

Part III: The Fearful Rise

Part III details the stock market revival that was sparked by a recovery in emerging markets, especially China’s stimulus efforts. Next came one bailout and stimulus program after another as governments and central bankers worldwide pulled out all the stops to bring global markets back from the abyss. These efforts did spark a market rally, but they also increased moral hazard, and herding behaviour to ever higher levels.

According to Mr. Authers, the 2009 rally was the most impressive in a century, but there are still signs that the “perverse synchronization” of markets remains. He ends the book with some suggestions on how to combat each of the five main trends mentioned above. For one, he suggests that if we want to keep the idea of indexing around, we should be using fundamental parameters rather than capitalization weighting. He also thinks that investment managers need to be compensated differently and that investors should simply refuse to pay the types of fees charged by hedge funds.

There is so much more to this book than I have room to comment on here. If you have any interest in learning about some of the other suggestions Mr. Authers has for re-introducing fear into the markets, or if you just want to try to understand how markets have become so highly correlated, this book is well worth your time.

Your comments and questions are always appreciated.

Book Review and Giveaway: The RESP Book

2 Cents — Fri, 22 Oct 2010 09:45:06 +0000

Saving for your child’s education will likely improve the odds that she will participate in post-secondary education by diminishing financial barriers and building a financial nest egg.

~ Mike Holman

Whenever I was looking for detailed information about RESPs, I would always end up at Mike Holman’s blog. It used to be called Four Pillars, but the name has since changed to Money Smarts Blog. Mike’s always had a very comprehensive section on RESPs on his site and it was my go-to reference on the topic.

Still, I’m a huge fan of physical books rather than their cyberspace cousins and I wished I could have a concise book about RESPs on hand to use as a reference. It’s so easy to forget the details of relatively complex financial products like RESPs given that you likely don’t revisit them more than once or twice a year. I really like having Gordon Pape’s TFSA Guidearound for the same reason.

Mike Holman has done us all a favour by offering us The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians. He’s even taken it a step further by offering a free copy to one lucky Balance Junkie reader. All you have to do is leave a comment below and I’ll enter you in a draw for the book. I’ll announce the winner next Saturday, October 30, 2010 and Mike will send out the book. (Canadian residents only please.)

What’s In The RESP Book?

The RESP Book covers all the basics of opening and managing an RESP, including the following:

RESP account rules
How RESP contributions and grants work
RESP withdrawal rules once your child attends a post-secondary institution
What happens if your child doesn’t attend post-secondary school
Special grants for lower income households
Information about grants programs in Alberta and Quebec
RESP rules for part-time studies

The book also offers detailed information on how to go about setting up an RESP account, from choosing a financial institution to whether or not to use a professional investment advisor. He goes over what to watch out for in terms of fees, as well as basic investing tips like how to set an asset allocation.

The book begins with a basic explanation of what an RESP is and offers 6 reasons why you might want to open an RESP, and 6 reasons you might not want to do so. I’ll just give you a couple of my favourites here. The best reason to open an RESP for your kids is likely the Canadian Education Savings Grant (CESG). You just can’t beat free money. Another good reason is the idea that your children will not leave their post-secondary education saddled with tons of debt.

A couple of good reasons to delay opening an RESP might be that your personal finances are not in order, or that you do not have adequate retirement savings. The message is clear: Get your own financial house in order before you set about helping your kids.

Details, Details . . .

At 118 pages, this book won’t take you long to read, but it’s absolutely full of detailed information that’s pretty hard to remember from year to year. It’s greatest value may lie in its usefulness as a reference manual. You can turn to it a couple of times a year to quickly refresh your memory on the ins and outs of saving for your child’s education.

My two older boys turned 15 this year, and I thought I remembered reading that 15 was a significant age for RESPs, but I couldn’t remember why. Mike’s book reminded me that there are special grant rules for 16- and 17-year-olds, and the parameters for those are determined by the RESP status at the end of the calendar year your child turns 15.

I could have found this information on the government’s website, but frankly, it’s not always written in an easy-to-understand way. The RESP Book is. There are lots of different examples and specific case studies so that you can really get a grip on how the RESP rules work.

Mike recommends keeping an eye on your time horizon and shifting to more conservative investments like bonds as your children grow up. His kids sound like they’re pretty young, but I can tell you from experience that the years flip by like calendar pages, and they do so with increasing velocity as your children grow. Just when it seems like you’ve got a handle on putting money into the RESP, it’s time to figure out how to get it out again!

Have you set up an RESP for your children?

Book Review: The Weekend That Changed Wall Street

2 Cents — Fri, 08 Oct 2010 09:45:31 +0000

This is not just a symbolic black mark. The markets rely on investor confidence, and when that is shaken the results are recorded in tangible declines on balance sheets.

~ Maria Bartiromo

A couple of weeks ago a representative of the public relations firm handling CNBC anchor Maria Bartiromo’s new book sent me an email asking if I would care to review it. I quickly agreed, but my interest stemmed more from a curiosity about the tenor and approach the book would take rather than its actual contents. The book is called The Weekend That Changed Wall Street: An Eyewitness Account. It’s about that fateful September weekend a little over 2 years ago when the 158-year-old financial icon Lehman Brothers declared bankruptcy, sending global financial markets into a panic.

Before I read the book, I wondered whether it would offer substantive information about the financial crisis. Given my interest in markets and economics, I had followed the events of 2008 closely, and felt like I already had a pretty good handle on what happened. Would this book add to my understanding or would it amount to a name-dropping, tabloid-inspired effort to promote CNBC and stock market investing?

Wealth, Fame, and Conspicuous Consumption

The Prologue seemed to confirm my skepticism. It described a lavish 2006 holiday party held by Steve Schwarzman (chairman of the Blackstone Group) and his wife in their posh Park Avenue apartment. Ms. Bartiromo had been invited because the Schwarzmans had bought the apartment from her father-in-law back in 1999. There was indeed plenty of name-dropping. The guest list was a who’s who of finance and politics, and the opulence and excess of the era permeated the text.

I soon realized that the gratuitous glamour of the early pages was merely setting up a stark juxtaposition of the ensuing chapters. As I continued through book, my doubts about its legitimacy fell away one by one. Ms. Bartiromo’s descriptions of the events leading up to and following the Lehman bankruptcy provided an excellent review of everything that was occurring at the time. It’s so easy to forget just how many things changed forever in 2008.

I found the structure of the book to be a little choppy at first, as it seemed to jump from one scene to another. But I soon got used to the format, and ended up finding that it added to my enjoyment of the material. The events of the financial crisis are organized into a series of vignettes, punctuated by character sketches of many key players, and some historical background that was new, at least to me.

There is, for example, a brief history of mortgage-backed securities that I found interesting. As most of you are aware, it was the collapse of the MBS market that really got the crisis rolling. It started with tremors at Countrywide Financial, and whispers about the shady dealings of its founder, Angelo Mozilo.

Chaos, Panic, and Peering into the Abyss

You will recall that the problems snowballed from there. Before we knew it, Bear Stearns was sold to JP Morgan at a fire sale price, Fannie Mae and Freddie Mac were in serious trouble, and the U.S. taxpayer was on the hook for billions of dollars in losses. Next came Lehman Brothers. According to Ms. Bartiromo, a source close to the negotiations had told her as late as Saturday morning, September 13, 2008, that Bank of America was to buy Lehman. That, as we know, didn’t happen and Lehman filed for bankruptcy in the early hours of September 15, 2008.

Bank of America hastily bought Merrill Lynch at about the same time, and a few days later, the U.S. government was rescuing AIG, perhaps the most dangerous grenade out there. No one wanted to pull that pin. The cascade of financial failures continued, with Morgan Stanley and Goldman Sachs being forced to hastily convert to bank holding companies, and runs on Wachovia and Washington Mutual.

You’ll notice that I used the word “hastily” twice in the last paragraph. It’s clear from Ms. Bartiromo’s eyewitness account that the leadership at the time was really flying by the seat of their pants. Hank Paulson, Treasury Secretary at the time, told her off camera that it would be clear in 6 months why they spent “upwards of $1 trillion bailing out major banks without revealing which banks got the money.” She thought “it was a mysterious remark, but the government secrecy finally became clear: it was hiding Citigroup’s insolvency.”

Balanced, Insightful, and Substantial

Overall, the book does a great job of weaving some fairly complex financial concepts into a very interesting plot line. In that sense, I think this book might be of great interest to financial fanatics and the general public alike. In fact, I think anyone who has an interest in our future prosperity would benefit from reading this book.

The latter chapters deal with more recent events like the sovereign debt crisis, but also delve into the core reason these events are so important: Our very way of life is at stake. The final chapter, entitled “Capitalism in the Balance”, tackles many of the fundamental issues I write about on this website.

Over and over again, Ms. Bartiromo cites confidence as the lynch pin of our economic system, and pegs restoring it as priority one for financial reform. I had expected that she might temper her views somewhat, given that her job depends on a reasonably cordial relationship with the business community. On the contrary, she didn’t pull any punches, speaking as a concerned citizen first, and a balanced journalist second.

As for the assumptions I made before reading this book, they were all wrong. If you are harbouring some of the same doubts, I would humbly suggest you set them aside and give this book a chance. You won’t be disappointed.

Your comments are always appreciated.

Consumed: Rethinking Business in the Era of Mindful Spending

2 Cents — Fri, 10 Sep 2010 09:45:49 +0000

Whereas shopping and accumulation once promised a golden pathway to happiness, now consumers are getting unexpected pleasure hits from cutting back and making more considered consumption choices.

~ Andrew Benett & Ann O’Reilly

When you read this review of Consumed by Andrew Benett and Ann O’Reilly, you will recognize many of the major themes we address at Balance Junkie. I loved this book, and I’ll have a chance for you to win a free copy if you think you might feel the same – details at the end of the article. It’s been my contention that our society has become quite unbalanced on many levels. The financial turmoil of the past couple of years is a symptom rather than a cause of these imbalances.

Hyperconsumerism is arguably at the root of many of these problems. If you’re tired of running on the consumption rat wheel, you are not alone. According to the authors of Consumed, we are already starting to witness seismic changes in the way people evaluate, purchase, and consume all types of products and services. These changes will affect all of us, whether we’re running a business or a household.

Andrew Benett is Global CEO of marketing communications agency Arnold Worldwide and Global Chief Strategy Officer of Havas Worldwide. He has nearly 20 years of marketing experience. Ann O’Reilly is a strategic planner and content director of Euro RSCG Worldwide’s Knowledge Exchange. She has more than 20 years’ experience in marketing and publishing. The two have also teamed up to co-author a book called Good for Business: The Rise of the Conscious Corporationwhich addresses similar themes.

Unleashed: The Shopper Within

Part I of the book chronicles the birth of consumerism, its global proliferation, inevitable climax, and unfolding denouement. This is the story of how we got here. The authors describe the “strange alliance between government and retail” that began even before the Great Depression of the 1930s with Herbert Hoover advocating consumption as a means of increasing happiness and preventing social unrest. It culminated in New York Mayor Rudy Giuliani encouraging people to go out and buy things after 9-11, and U.S. President George W. Bush asking Americans to go shopping to support the economy in a 2006 press conference.

Far from spending to truly enhance our lives, consumption gradually became our patriotic duty. With a full two thirds of U.S. economic activity resting on consumer spending, belt-tightening by American families could have a huge impact on the global economy. We’re starting to see that already in Canada as our trade deficit recently hit the highest level since record-keeping began in 1971 due largely to a decline in U.S. exports.

The authors offer tons of really great quotes to punctuate their ideas, including this one from Mignon McLaughlin: “Be glad you’re greedy; the national economy would collapse if you weren’t.” Consumer support for the economy ballooned in the post war era due to 3 main factors:

Increasing Incomes
Easy Credit
T.V. Advertising

We have recently begun to see all three of these top out and show signs of unwinding. The growth in “purchasing power was increasingly based on credit and borrowing, not the growth of real disposable income.” As we moved from a “pain-now-pleasure-later” to a “pleasure-now-pain-later” model of consumption, we gradually came to realize that “infinite growth of material consumption in a finite world is an impossibility.” (The latter quote is from E.F. Schumacher.)

The 4 Paradigms of the Mindful Shopper

According to the authors, the new era that is just now emerging will be characterized by a more mindful shopper as opposed to the mindless consumer who was emblematic of the previous era. In Part II of the book, they describe 4 paradigms that will dominate:

1. Embracing Substance

Many of us have become victims of the “Paradox of Modern Times”: owning more, but having less. We have collected piles of stuff to match our piles of debt, yet we feel emptier than ever. The pursuit of stuff has crowded out more enlightening and fulfilling activities. Studies show that loneliness has reached an all-time high.

“We are witnessing a historic turning point” where marketers, manufacturers and governments are going to have to ask: “What can we offer people in terms of merchandise, services, and communications that will satisfy them and, ultimately, increase their happiness?” Increasingly, consumers are hungry for products that are manufactured in a sustainable, environmentally and ethically sensitive context and offer more authentic, fulfilling experiences. They will choose quality over quantity.

2. Rightsizing

This paradigm gets at the core of the balance theme. Many of us are finding that our lives are dominated by excess. We have too many things and not enough places to put them. We have too much to do and not enough time to do it. New consumers will rightsize their lives by eliminating clutter. They want fewer, but better choices. They want to eliminate waste from every aspect of their lives and they are looking to partner with brands that embrace a similar philosophy.

3. Growing Up

New consumers are ready to grow up. They are willing to accept responsibility for their choices and their future. It is finally becoming fashionable to act like an adult again. A new pragmatism has surfaced and is evident in trends toward frugal living, more formal dress codes at work, and environmentally responsible shopping.

4. Seeking Purposeful Pleasure

“Following the mindset of “see-buy-consume-discard – what’s next?” we rarely if ever paused to consider the more substantial, long-term, and purposeful pleasures that might be available if only we took the time to cultivate them.” Following the recession, we have had to think harder about how (and whether) we spend our money and our time. The new consumer will be looking to support brands that offer them pleasure with a purpose rather than hedonistic satisfaction.

The authors describe 3 main characteristics of new consumers:

They are smarter: New consumers use new resources like the internet to learn about products before they buy. They band together to learn from one another and they feel that “fellow shoppers are more truthful than corporations and even the media when it comes to evaluating products and companies.”
They are more mindful: New consumers care about where things come from, about quality and freshness, and are more skeptical in general. Mindfulness feels good to them.
They seek relationships: New consumers want companies “to stand for something other than profitability”. They prefer to buy from companies that share their values.

Marketing to the New Consumer

Part III describes how companies can successfully market to the new consumer, and gives some examples of those who are already doing so. The authors warn that the changes they describe are only beginning and will take some time to play out. They do, however, also contend that while “some observers dismiss current trends such as downsizing and sustainable shopping as no more than temporary aberrations brought on by the downturn, we strongly disagree: They are permanent.” Let’s hope so. Whether you run, work for, or invest in a business, these macroeconomic changes will affect you.

This book is extremely well-written and offers so much more information than I can describe in this short review. If you are interested in a copy of Consumed, just leave a comment below. I’ll randomly choose one commenter to receive a free book and announce the winner next Saturday, September 18th, 2010.

What are your thoughts on the themes discussed in this book?

Book Review: Your Life and Your Money

2 Cents — Fri, 03 Sep 2010 09:45:05 +0000

. . . too many people are unwilling to do what’s necessary to get their financial house in order. . . . Everyone wins when we have our financial affairs in order.

~ Scott Feher, Your Life & Your Money

If you’ve been reading this blog for any period of time at all, you know that I write a lot about imbalances in the global economy and in our society at large. Scott Feher, author of Your Life & Your Money, seems to have noticed some of the same trends. He writes:

“We live in an age of delusion. . . . Our biggest delusion is a sense of entitlement. . . . People delude themselves into believing everything is fine while engaging in behavior that’s definitely not fine. Then, when something goes wrong, they stand there blankly and do nothing about it, expecting somebody else to pick up after them!”

You may recognize some of these themes from a piece I wrote a while back that asked Have We Become a Society of Financial Adolescents? A lot of this type of sentiment can sound pretty negative, but the purpose is not to wave a finger at people. It is to incite them to take control of, and responsibility for their own destiny – financial and otherwise. But how? That’s the question that Mr. Feher aims to answer in this book.

Family CFO Basics

One of the key principles of the book is that, like any good corporation, every family needs a good Chief Financial Officer (CFO). The CFO needs to educate him/herself on financial matters and follow some basic rules in order to secure the family’s future prosperity. Here are just a few of the ideas discussed:

Write a financial mission statement: This is just a written outline of goals and priorities the family will work toward according to specific timelines. Of course, it should remain flexible as life progresses and inevitably throws us the odd curveball.
Don’t invest in any product or service that isn’t aligned with your mission statement: If a product doesn’t fit with your goal to limit spending, don’t buy it. If an investment doesn’t fit your risk profile, choose a different one.
Know where your money goes: “Buying what you can’t pay for is called living beyond your means. It’s delusional, so don’t do it.”
Master your expenses or you’re destined to fail: If you can’t say no to some expenses, you’re going to have a hard time living within your means.
Don’t let financial mistakes become your permanent life story: We all make mistakes. The key is to learn from them, fix them, and move on.
Keep apprised of economic issues that affect your finances: Taxes, risk, and inflation can have a big effect on how much of your money you get to keep. Understand the trends and how they could affect your money plans.
Understand asset classes and how to use them: Mr. Feher offers a comprehensive review of the different types of asset classes and how to use them to plan your financial future.

Who Should Read This Book?

This book offers a concise review of the basics of personal finance and investing. The simple writing style is suitable for a novice, but also offers advice and perspectives that more seasoned family CFOs might appreciate as well. Scott Feher is a financial adviser himself, and he explores some ideas on whether you need an adviser and how to go about choosing one that’s right for you.

The book is written from an American perspective, and some portions deal with investment products that are unique to the U.S. market. There is a full chapter on the best ways to hold your assets that looks at pensions, annuities, and government programs, some of which would not apply to Canadians. Still, the basic financial principles espoused here are universal and the message is clear: You are responsible for your financial life and ultimately, only you can improve it.

I liked the way Mr. Feher put as much emphasis on personal finance basics as investing principles. He stresses learning about covering the basics before you move on to more advanced investing and planning techniques. It’s difficult to hear about folks trying to figure out which fund or stock to invest in when they are swimming in debt. Walk before you run.

Like many books on personal finance, Mr. Feher’s work ends with the idea that it’s not really about the money. Money is only a tool that we can use or misuse. If we use it wisely, we can enhance our life balance sheet as well as our financial balance sheet. If we misuse our money, we can do some real damage to both types of balance sheet.

With headlines becoming increasingly populated with stories about economic difficulties and household financial challenges, it seems that this book has come at the right time. As noted in the opening quote, fiscal responsibility at home is not only good for your personal balance sheet, it can help society at large. The more people who have a good handle on their finances, the fewer our over-indebted governments will need to bail out. In the end, that’s good for all of us.

Your Life & Your Money is straightforward and relatively short, making it very easy to digest. It’s only about 140 pages long, not including a couple of useful appendices which include an inventory of expenses and an investing questionnaire. If you’re ready to improve your balance sheet and you’re looking for some ideas on how to get started, this just might be the book for you.

Does this book sound interesting to you? What types of questions would you like answered in a book like this?

Book Review: This Time Is Different

2 Cents — Fri, 27 Aug 2010 09:45:18 +0000

If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are.

~ Carmen Reinhart & Ken Rogoff, This Time Is Different

The subtitle of This Time Is Different indicates that the book covers “Eight Centuries of Financial Folly”, but its release date (September, 2009) makes it extremely relevant to our most recent and ongoing bout of financial folly. In fact, the authors devote the final four chapters of the book to what they call “The Second Great Contraction” (the first being The Great Depression) triggered by the U.S. subprime mortgage crisis. The authors do a great job of outlining the “huge regulatory mistakes” that lead to the current financial crisis, from the deregulation of the subprime mortgage market to the 2004 SEC decision to allow investment banks to triple their leverage ratios.

They describe 4 main types of financial crises (sovereign debt, currency, banking, and inflation) but concentrate quite a bit on the sovereign debt and banking varieties. They do note, however, that these crises tend to occur in clusters and one type can easily trigger another. In the run-up to the subprime crisis, they note that the U.S. exhibited “all the signs of a country on the edge of a financial crisis – indeed, a severe one.” Those signs were: “asset price inflation, rising leverage, large sustained current account deficits, and a slowing trajectory of economic growth”.

The This-Time-Is-Different Syndrome

Of course, the main tenet of the book is that the aforementioned financial follies are exacerbated by the “this-time-is-different syndrome”. It refers to ideas we often hear from financial professionals and government officials during boom times and is characterized by the following lines of thinking, which are eventually proven false:

Old valuation rules no longer apply.
We are smarter now. We’re doing things differently, and we have better systems in place.
We have learned from past mistakes.
The new boom is built on sound fundamentals, structural reforms, technological innovation, and good policy.

Does any of that ring a bell? It should. We heard all of the above right up to the point when the U.S. housing and mortgage markets imploded in 2007-2008. Too much debt eventually leads to problems and this incident was no different. The aftermath will likely follow the historical form Reinhart and Rogoff have noted as well:

Asset market collapses are deep and prolonged.
Profound declines in output and employment ensue.
The amount of government debt explodes.

This Time Is Not Different . . . But It Sort of Is

There is a bit of an inherent contradiction in the this-time-is-different thesis. I once heard Ken Rogoff discuss it in an interview and it goes something like this: This time is not different in the sense that history shows that financial crises happen quite often. But there is also a tendency for financial and government leaders to fail to recognize that the economic trajectory after a crisis-induced recession is very different from the one we might see following a normal business cycle-induced recession. Therefore, “standard macroeconomic models calibrated to statistically “normal” growth periods may be of little use.”

In that sense, this time is different. It differs from normal cyclical economic activity, but not from what usually happens following a financial crisis. If you think of it that way, it seems like we shoot ourselves in the foot twice when afflicted by the this-time-is-different syndrome: once, when we fail to see the crisis coming, and again when we try to get ourselves out of it by using solutions that are effective for a different set of problems.

In the wake of the recent financial crisis, we have repeatedly witnessed governments and central banks attempting to treat the symptoms without really attacking the source of the disease: debt. Instead, they have tried to cure a debt hangover with another round of debt. Hair of the dog anyone?

“This Time” Is Worth Your Time

When I received my copy of the book, my first impression was “Gee, this is a lot longer than it looked online.” It’s a little over 460 pages, but the main text of the book ends around page 290. The remainder is a treasure trove of historical economic data aggregated for your convenience. There’s also an extensive notes section, plenty of references and two different index choices – one for names and one by subject.

Before the core of the book even gets started, there is both a Preface and a Preamble, both of which are worth your time. They set the tone for the information in the book and offer some succinct overall impressions. The first twelve chapters deal with the description and causes of various types of financial crises throughout history, including The Big One (the Great Depression). The remainder deal with the current crisis and how the information in the preceding chapters might apply today.

The first sentence of the Preface announces that “this book provides a quantitative history of financial crises in their various guises”. If you are not an economist or a big fan of mathematical or statistical analysis, you may find that the quantitative part of this text goes over your head a bit. In between the charts, tables and statistics, however, you will also find that some very compelling ideas emerge. The plethora of valuable information means this book deserves a spot in your personal library, both as a reliable reference and a reminder that human folly can and does regularly wreak havoc on our finances.

If you’ve read the book, I’d love to hear your impressions. If not, does it seem like something that might interest you?

Book Review: Smart Tips for Estate Planning

2 Cents — Fri, 09 Jul 2010 09:45:01 +0000

Estate planning is not just for people who are old or have lots of money. Estate planning is for everyone.

~ Jim Yih & Marvin Toy

If you’re anything like me, estate planning ranks somewhere between going to the dentist and cleaning out the garage on the motivation scale. But it deserves to place much higher in light of its importance to the future well-being of your love ones. Like a lot of the other tasks that we consider boring, tedious, or just too hard to begin, estate planning isn’t so daunting once you take that first step and just get started.

If you’re looking for a great place to start, you might want to pick up a copy of Smart Tips for Estate Planning by Marvin Toy and Jim Yih. Mr. Toy is an experienced lawyer with expertise in the areas of tax law and estate planning. You will likely recognize Jim Yih’s name as he frequently leaves insightful comments on Balance Junkie. He also runs the Wealth Web Gurus website and is an established author, speaker, and entrepreneur. Both authors are well-versed in Canadian financial issues and it shows in this book.

Why Is Estate Planning So Important?

No one wants to think about the prospect of losing a loved one, or of dying and leaving loved ones behind. But the truth is that death is a fact of life and it can come at any time. Many of us feel like we’re too young to think about these matters. After all, we’re years away from where the actuarial tables say our number may be up. But anyone with loved ones needs to think about what would happen if they died tomorrow. How would your spouse or children cope? If you care for elderly parents, who would look after them?

If you are relatively young, chances are that your death would deal an even greater blow to those who depend on you. That’s all the more reason to put some plans into place now so that you can enjoy life without worrying that your untimely passing might place an added financial burden on your already grief-stricken loved ones. According to Toy and Yih, a good estate plan can provide the following benefits:

Outline an Enduring Power of Attorney and a Health Care Directive to designate someone to look after your health care and financial matters if you become incapacitated.
Make sure that your assets are passed on to your family in the way you want them to be.
Protect your estate from creditors.
Minimize income taxes after your death.
Minimize probate fees and taxes.
Minimize income taxes for your heirs.
Minimize estate settlement problems.
Meet legal obligations to your dependents.
Avoid government and judicial intervention.

If you’ve never considered estate planning before, you may be surprised at just how much there is to know. But don’t let that keep you from getting started. Marvin Toy and Jim Yih have lots of great tips on what you need to accomplish and what to look out for along the way.

Smart Tips for Everyone

One thing I really liked about this book is that it’s really easy to read. It provides a lot of information, but it’s broken up into easily digestible bites and spiced with some really good illustrative examples and case studies. You don’t realize how many unique scenarios might pop up until you really delve into the topic. It really makes you examine the specifics of your own situation a little more carefully.

Here are just a few of the tips and topics explored in Smart Tips for Estate Planning:

Have a Will: This is so important to ensuring that your children and your hard-earned savings end up where you want them to be that I included it in my 10 Steps to Fiscal Fitness. If you have children, or if your assets add up to $100 000 or more, a will is a must.
Choose an Executor: The authors point out that being an executor is a burden and not a privilege. It’s important that you choose the right person to settle your affairs.
Name Beneficiaries: If you have RRSPs, RRIFs, TFSAs, or jointly held banking or investment accounts, make sure that you’ve designated a beneficiary and that you keep that information up to date, especially in case of marital breakdown, birth, death, or other material life changes.
Trusts: There’s a lot of information here on the different types of trusts you can set up and the various situations in which you might want to use them.
Choosing Professionals: The authors provide some guidance on the types of professionals you may need to help you with your estate planning (lawyers, accountants, financial planners, etc.) as well as some ideas on what to look for with each.
Leaving Money to Charity: There are lots of good ideas on how best to donate all or a part of your estate to the charity of your choice.
Dealing with Specific Assets: Again, you may not realize how much there is to consider until you read this section of the book. There are all kinds of assets, from heirlooms to homes, farms, or life insurance that must be taken into account in your estate plan.
Probate: I found this chapter very interesting as I have never really felt like I had a good grasp on what probate is and how it works. This helped a lot.
Organ Donation, Funeral Arrangements and other possibly upsetting, but necessary decisions: These aren’t pleasant topics, but we need to address them in the present rather than at a time when we aren’t able to do so, or when our relatives are too upset to make the best choices.
What’s Your Legacy? In the end our lives comprise a unique story that will be of interest to our heirs for generations to come. Why not put together a narrative using photos, movies, and memoirs as your story unfolds so that your descendants can enjoy it for years to come?

Jim Yih and Marvin Toy point out that, like most aspects of financial planning, estate planning is not something you do once and forget about it. It’s an ongoing process that needs to be revisited and revised whenever a significant life event occurs. So it’s likely that you will be thinking about estate planning issues throughout your life, but not continuously. As such, it’s easy for us to forget the issues that are important to us in the intervening times. Luckily for us, we have Smart Tips for Estate Planning to remind us of those issues. This book is a great reference for Canadians on the topic. For me, it’s a keeper.

Have you started your estate planning process yet?

Book Review: The Millionaire Next Door

2 Cents — Fri, 11 Jun 2010 09:45:06 +0000

It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and most of all, self-discipline.

~ Thomas Stanley & William Danko, The Millionaire Next Door

The Millionaire Next Door is one of the true personal finance classics. It was originally published in 1996, and the ideas behind it were based on surveys conducted in 1995. Still, the lessons of this book are just as relevant today as they were more than a decade ago.

When Thomas J. Stanley and William D. Danko set out to discover how people become wealthy, they began by surveying people in upscale neighbourhoods across the U.S.. They were surprised to find that many people who lived in large homes and drove expensive cars were not wealthy at all. Further, many people who possessed a great deal of wealth did not have big homes or fancy cars. Many of them didn’t even live in upscale neighbourhoods.

What Does a Millionaire Look Like?

A millionaire is someone who lives in a mansion, drives a $100 000 car, and is painted with the latest fashions and the best bling that money can buy. He or she floats from one lucky mate to the next and regularly vacations in exotic locales. Right? Wrong. Stanley and Danko’s research found that your average millionaire looks something like this:

He’s a 57 year old male who earns most of the family’s income. (I’m going to use “he” from here on for simplicity and because research at the time showed that most millionaires were indeed male. Hopefully that’s changed a bit since 1995.)
One in five millionaires is retired. Two-thirds of those working are self-employed. (Self-employed people make up a minority of workers in America, but a majority of millionaires.)
Most are in businesses that would be considered dull to normal: contractors, farmers, pest controllers, etc..
80% are first generation affluent (ie. no trust fund babies here).
About half of their spouses do not work outside the home.
They live below their means, wear inexpensive suits, and drive American-made cars. A minority of them drive a current-year automobile and few of them lease a car.
Most of their wives are excellent planners and meticulous budgeters, and most would say that their wives are even more conservative than they are with their money.
They have a “go to hell fund” which comprises enough wealth for them to live on for 10 years or more without working. (Now that’s an emergency fund!)
80% are college graduates.
Most have married only once and remain married.
Most are what you might call cheap. I prefer to call them value conscious.

I could go on and on, but you get the idea. You can get much more information and detail by reading the book.

Are You a PAW or a UAW?

The authors continually contrast the habits of PAWs and UAWs. A PAW is a Prodigious Accumulator of Wealth, and a UAW is an Under Accumulator of Wealth. Here’s how you tell the difference:

“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”

I encourage you to give this calculation a try. If nothing else, it’s a great incentive to update (or calculate for the first time) your net worth. When I did the calculation for our current situation, we ended up in the AAW (Average Accumulator of Wealth) category. I was pleasantly surprised given our recent financial setbacks, but I’m still resolved to improve our standing!

The authors say that a well-positioned PAW should have twice the net worth indicated by the calculation above. If you have accumulated half or less of the indicated net worth for your age, you are in the UAW camp and you probably need to make some lifestyle changes.

Should You Read This Book?

I think this is a book that everyone could benefit from reading, even if you’re already well on your way to millionairedom. (I just made that word up.) You budding millionaires may find the information here to be quite a reinforcing pat on the back. You might even benefit from some of the ideas raised by your fellow PAWs.

Here are a few reasons why I would recommend that you give this book a try:

It can help reframe your thinking about money and how you handle it.
It provides concrete, proven, and practical information on how to build wealth over a lifetime.
There are some very interesting case studies and examples of what to do – and what not to do – in order to achieve enough wealth to retire comfortably.
There are detailed examples on how different PAWs approach buying a car, proving that there’s more than one way to become a millionaire.
This book can show you how to make financial planning a habit and really take control of your financial future.

Of course, the PAWs out there will likely choose to get the book at the library. The UAWs might look for an autographed hardcover copy. I’m an AAW, so I bought the paperback for about $14. I’m glad I did, as I plan to re-read it and use it as a reference for years to come. Incidentally, it looks like a new edition of the book is coming out in November of this year. If you would like more on millionaires, but you don’t even have the gusto to get to the library, click on over to Len Penzo’s informative and entertaining article on 19 Things Your Suburban Millionaire Neighbor Won’t Tell You.

Interestingly, Mr. Cents and I share many of the characteristics of the millionaires in this book. Um . . . except the one about being millionaires. But it does give a person reason to hope doesn’t it?

Did you find parts of yourself in the millionaire portrait? Are you interested in learning more on how to become a PAW?

Book Review: Your Money or Your Life

2 Cents — Fri, 14 May 2010 09:45:16 +0000

Throughout the years, feedback from individuals continued to underscore the idea that this course was not simply about retiring early but about thinking in new ways.

~ Prologue, Your Money or Your Life

Update: This review was included in the Forethought Edition of the Festival of Frugality #280 at Penniless Parenting. Thank You!

This book has become a personal finance classic with a bit of a cult following. It first came out in 1992, but a new edition was released in 2008. With Phase I of the financial crisis unfolding at the time, I guess it just looked as if we really needed it again.

The book was originally written by Joe Dominguez and Vicki Robin. It was based on principles that Joe used to retire at age 31. While Joe unfortunately died in 1997, Vicki worked with Monique Tilford on this updated version of the book . Here are some of the major themes:

9 Steps

The book offers “9 steps to transforming your relationship with money and achieving financial independence“. Most people like books that include steps. They hope to achieve some substantial goal by following a clearly defined sequence of actions. They hope it will make attaining the goal faster and easier.

These aren’t really those kinds of steps. Don’t get me wrong. The steps are clearly outlined in the book. It’s just that they’re not quite as concrete as some might like, and they certainly wouldn’t be easy for all of us to implement.

The point here is to get us to think about money and our relationship with it differently. That’s easier said than done, but the authors do a great job giving us a shove in the right direction with plenty of case studies and real life examples. Major changes in perspective don’t come quickly or easily, but can be well worth the effort.

Sustainability

The idea that we are, both individually and collectively, limited by a finite quantity of resources is a thread that’s woven throughout this book. We have only so many natural resources on our planet. Oil, metals, trees, and food are not unlimited. Nor are health, money, or life itself. We have only so many years in which to realize our goals and dreams and only so many hours a day in which we can earn income.

“Waste lies not in the number of possessions, but in the failure to enjoy them“. Frugality is about value, not quantity. It’s OK to have a lot of stuff if you truly enjoy every item to its fullest. The problem today, say the authors, is that we have become a society of consuming more faster. Consumption is a form of destruction rather than creation and we are not replacing our resources in order to make them last.

Do the Math

While a great deal of this book emphasizes ethereal (and unfortunately endangered) concepts like integrity, accountability, sustainability, and responsible stewardship of both our life energy and earth’s resources, there’s plenty of hard core but simple financial math here. The authors go into great detail on how to tabulate your net worth, track your spending, save money, and invest for the future.

Here’s another book that goes on and on about how budgeting doesn’t work and then turns around and spills a great deal of ink on how to track every penny you spend. If I had one bone to pick with this book, that might be the one. But it’s by no means a deal-breaker, and maybe I’m just not getting what they’re trying to say.

The Golden Mean

Here’s a concept that’s near and dear to the Balance Junkie manifesto. The Golden Mean has many definitions and implications, but for our purposes, it basically connotes the virtue of balance. How much is enough? This is a question that pops up throughout the book, and the authors take great pains to distinguish between frugality and self-denial.

Your Money or Your Life is about integrating the concept of money into your life as a whole so that you don’t necessarily need to view your years on this earth as a choice between the two. One of the persistent themes here at Balance Junkie is the idea that your financial balance sheet is only one part of Your Life Balance Sheet.

My 2 Cents

I guess the bottom line of a book review should tell you whether the book is worth your time or not. I wouldn’t be so presumptuous as to make that decision for you. But I can tell you that I’ve read and heard about people who have said that this book literally changed their lives. That’s no small claim and reason enough to pick it up and give it a chance. It’s not long, but very high on the valuable information : words ratio.

I didn’t really find this book life-altering myself. Maybe that’s because I had already considered and come to grips with a lot of the ideas presented. But if I had read it at a different time in my life, or if I had a different personality make-up, I could definitely see how this book might shake your tree a bit. Either way, it did make me think and I always love a book that can do that!

If I had to sum up Your Money or Your Life, I would say that it’s a nice, but kind of odd balance between a financial planning seminar and a speech by a New Age guru. It’s sort of like balancing your cheque book while listening to California Dreaming in the background. It’s not expensive, and who knows? Maybe it will change your life.

Have you read this book? How would you describe it? Does it sound like you might want to read it?