Catch a Gideon

Choose a Sound Financial Lifestyle - Ch 1 Bogleheads Series

October 30th, 2006 by digerati

This is Chapter 1 of the Bogleheads Series. The series goes through the book The Bogleheads Guide to Investing and gives the highlights of each chapter along with my comments and additions.

“Drive in banks were invented so cars could see their real owners.” — E. Joseph Grossman

Take 100 25 year old Americans, then fast forward 40 years. One is rich, 4 are financially independent, and 95 are, not. (Hmm, that’s a lucky bunch with none dead, but the point stands.) Those 95 will be unable to sustain a lifestyle they’d like to, and many will expect the government to pick up the slack; they won’t.

What is your financial lifestyle?

• The Borrowers - No they’re not small people, they are those who buy everything on credit and typically pay the minimum possible for their bill every month. They live their lives paying off the interest from past purchases. They live for today rob from today to pay for tomorrow.
• The Consumers - have a spend with a paycheck mentality. “Can we afford the payments?” they’ll ask rather than can they pay for something. They earn their money so that they can spend it and many do very well with this system. But when they retire or can no longer work they have problems supporting the lifestyle they have made for themselves. Ben Franklin says if you don’t add water but pour out a bucket, it will soon be dry. (Actually, he said something about grain bins, but no one has those anymore and I do have a bucket.)This mentality describes how I observed most of my parents friends in high school, and (coincidentally?) how I observe most of my friends now.
• The Keepers - pay themselves first. They avoid debt when possible, and choose affordable options when it is not (a home purchase for instance). They still spend, possibly too much, but they first set aside an amount to save be it in retirement plans, a savings account, or just a jar on the fridge.

Before You Start Investing

I love that this section is in this chapter. Most investing guides seem to think everyone can just take their next pay check or the next several, and put the money toward some sort of investment. Before you invest you should do a few things:

• Graduate from the consumer to the keeper method of thinking. This means thinking in terms of net worth rather than in terms of what your paycheck is. It’s how much you keep that counts, not how much you make.
• Payoff any high interest debt. This means credit cards (there are some exceptions). You do not need to pay off low interest debt such as school loans or mortgages. In fact, I’d highly recommend not trying to pay off your mortgage before you start any investing. I’ve written about the importance of paying off high interest.
• Establish an emergency fund. You need to be able to cover your immediate needs (not wants) if there is a sudden change in your financial situation. This is the money you’ll have for that. I’ve discussed emergency funds.

Ready to buy?

Bogleheads Guide to Investing is a great book that covers a variety of investment related topics in good depth and detail. The Bogleheads introduction has more detail about what is to come. This is the first chapter of my Bogleheads Series here at Successful Personal Finance (Catch a Gideon). Check back or join the feed or email lists (see the right column) to know when the next chapters are discussed.

Bookmark to: