Your Money Or Your Life, Step 9: Managing Your Finances

[This is the 9th and final episode of a series on the book Your Money or Your Life. See my original post about the book.]

First off, sorry for the delay between Step 8 and this post. If you made it this far, you’re going to have money saved up. No doubt about it. I was already a saver before I read the book, but my savings rate has significantly improved since. And not by denying myself. I feel happier about my spending (and not spending) then I ever have before.

This chapter changed a lot between the first and second editions of the book. The first edition simply told you to put all your money in bonds. This is pretty bad advice no matter what the current bond interest rate is, since you shouldn’t have all your eggs in one basket. But these days, with record-low bond rates, investing 100% in bonds is awesomely stupid. Makes sense why they changed Step 9 so drastically.

The new Step 9 is vague about what you should do with your money. One thing hasn’t changed, which is the authors’ advice to be your own investment advisor. This is excellent advice. Nobody can beat the market, so you shouldn’t pay someone to throw random darts at a dart board.

So what should you do with your investment money? It’s going to depend on your risk-tolarance and how long you plan to save before dipping into your capital.

Instead of giving specific advice, the book recommends you do your own research so as to become knowledgeable about long-term, income-producing investments. For me, that means a balance of 60/40 stock indexes and bond indexes*. I use Vanguard because they have the lowest fees. In addition, they have a single fund you can invest in that will give you the 60/40 blend without the need to pick indexes individually, or rebalance when things go askew.

It’s called Moderate Growth (VSMGX), and I highly recommend the fund for any beginning investor who wants a hands-off, “set it and forget it” approach.

To diversify, I also have a small amount of money in safer investments (cash) and a smaller amount in riskier investments (peer-to-peer lending).

Here’s what my entire portfolio looks like:

Investment Percentage
Stocks 67%
Bonds 25%
Cash (emergency fund) 7%
Peer-to-peer lending 1%

Stocks end up more than 60% due to some individual stocks I still own from the days when I thought I could beat the market. Silly me.

Conclusion

So that’s the whole book! You can go back to my first post about it, and get an overview about the entire program. I highly recommend doing all 9 Steps, it has really changed my life for the better.

I’ll do more book reviews now that I’m done with this one. Though they won’t be as long as this one was!

Update: I did a series of follow-up posts on my current investment allocation, starting here. The above info is still great for getting started with investing.


* An index is a list of investments picked by some standard definition, simple enough that they can be bought and sold automatically by a computer program, which is what makes them low-fee investments. For instance, Dow Jones and S&P are the most well-known indexes.

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