High-Level Thoughts

The best book on personal finance I’ve read. Particularly important is the “goal setting” so you know how much money you’re really shooting for.

Summary Notes

“You have to make the shift from being a consumer in the economy to becoming an owner— and you do it by becoming an investor.”

“Information without execution is poverty. Remember: we’re drowning in information, but we’re starving for wisdom.”

Step 1: Welcome to the Jungle

  • “What percentage works for you? Is it 10%? Or 15%? Maybe 20%? There’s no right answer here— only your answer. What does your gut tell you? What about your heart?”
  • “But here’s the key to success: you have to make your savings automatic.”

Step 2: Become an Insider, Learn the Rules

  • Mutual funds and institutional investing = bad.
  • Index funds = good.
  • Roth = good.

Step 3: What’s the price of your dreams?

  • “You can’t manage your health if you can’t measure it. And the same goes for your finances.”
  • Dream levels:
  • Dream 1: Financial Security
  • Mortgage, utilities, insurance, food, transportation, all covered for the rest of your life.Calculate the cost of those things per month, multiply it by 12 to get your annual “Secure” income. That’s your “financial security” income, and the first dream is to save enough money to cover that.
  • Dream 3: Financial Independence (skip 2)
  • What’s the cost of your complete lifestyle right now? That’s how much you need to be bringing in to be completely financially independent.To get an idea of how much an amount of income needs to be saved for, multiple it by 20. So if you spend $100,000 a year, you need to save 2,000,000.
  • Dream 4: Financial Freedom
  • The cost of the lifestyle you want and deserve, above and beyond what you’re at right now. Pick three things to start.Figure out whatever else you want and the annual cost of it, and add that amount to your current annual total.
  • Dream 5: Absolute Financial Freedom
  • Anything you want any time you want it, never worry about money again“You don’t have to own the jet to have the lifestyle. You don’t have to own the sports team to sit in the sky box. And you don’t have to pay for the whole team to be an owner— you can be a partial owner and get all the privileges.”Write down everything you would want on this list, and figure out the cost of it.
  • Speeding it up
  • Save more and invest the difference. Find big areas of spending you can cut back on to speed up your plan.
  • Earn more and invest the difference. Make a rule to invest more of your income as it increases.

Step 4: The Most Important Investment Decision

  • “Rule 1: don’t lose money. Rule 2: see Rule 1. —WARREN BUFFETT’S RULES OF INVESTING”
  • “Want to take the guesswork out of choosing the right bond mix for your portfolio? Vanguard founder Jack Bogle suggests buying into low-cost, low-fee bond index funds that spread out your risk because you’ll own every part of the bond market.”
  • “How often should you rebalance? Most investors rebalance once or twice a year. Mary Callahan Erdoes of J.P. Morgan told me she believes rebalancing is such a powerful tool that she does it “constantly.” What does that mean? “That’s as often as your portfolio gets out of whack with the plan that you originally put in place, or the adjusted plan based on what’s happened in the world. And that shouldn’t be set. It should be a constant evaluation, but not an obsessive evaluation.”
  • Just remember four things from this section of the book:
  • Asset allocation is everything! So you want to diversify between your Security Bucket and your Risk/ Growth Bucket. You want to diversify across asset classes, markets, and time.
  • You don’t want to hesitate to get in the market trying to have perfect timing; instead, use dollar-cost averaging and know that volatility can be your friend, providing opportunities to buy investments cheaply when the market is down. This technique will increase your portfolio’s value when the markets come back up.
  • Have a Dream Bucket that gives you emotional juice and excitement so you can experience the benefits of your investing prowess in the short term and midterm instead of just someday far in the future.
  • Use rebalancing and tax harvesting to maximize your returns and minimize losses.

Step 5: Upside without downside, a lifetime income plan

  • “Ray is showing us that if your money is divided equally, yet your investments are not equal in their risk, you are not balanced!”
  • He graciously proceeded to sketch out the following breakdown:
  • 30% in stocks (for instance, the S& P 500 or other indexes for further diversification in this basket).
  • Fifteen percent in intermediate term [seven- to ten-year Treasuries]
  • Forty percent in long-term bonds [20- to 25-year Treasuries].
  • 7.5% in gold and 7.5% in commodities.

Step 6: The Billionare’s Playbook

Four rules:

  • Don’t lose money
  • Risk a little to earn a lot, risk one dollar to earn 5
  • Anticipate and Diversify
  • You’re never done. Keep learning, saving.

Step 7: Taking action

How to spend money to make yourself happy:

  • Investing in new experiences
  • Buying time for yourself
  • Investing in others

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