Expert Witness:
FMF on Personal Finances

[Note: The Expert Witness series is a regular Friday feature that allows guest bloggers to write about a topic in which they have a particular interest or expertise.]
If any of you have ever visited my site at Free Money Finance you’ll know how I dislike the term “expert.” But, since this is the name of the column and I’m a guest, I guess I’ll have to live with the Expert Witness name. But I don’t have to like it. :-)
Why I Dislike Financial Experts
Seriously, there is a reason for my dislike of the term. The current state of personal financial media/information/data (or whatever you want to call it) is dismal. The industry is full of sales people (who call themselves “experts”) who:

1) Overcomplicate the facts so the average person thinks he/she can ‘

Published by

Joe Carter

Joe Carter founded Evangelical Outpost in 2005. He is the web editor for First Things and an adjunct professor of journalism at Patrick Henry College. A fifteen-year Marine Corps veteran, he previously served as the managing editor for the online magazine Culture11 and The East Texas Tribune. Joe has also served as the Director of Research and Rapid Response for the Mike Huckabee for President campaign and as a director of communications for both the Center for Bioethics and Human Dignity and Family Research Council. He is the co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicaton.

  • John

    Interesting. I am afraid I do not have time for a full or extraordinarily thoughtful response at the moment, but I would venture to nit-pick a bit at the above.
    First, FMF (at least in this post) has very little to say about what to do with the money you are saving. This is where “financial experts” are useful. Sometimes they are not talking just to confuse you as those who would oversimplify the process of personal finance would have you believe. Sometimes asset management is hard. For instance, most people are unfamiliar with the fee structures of various mutual funds or with rules and regulations regarding early withdrawal for 401k accounts–but this information can save you thousands of dollars. For instance, as a future graduate school student I am putting large amounts of my current salary in a pre-tax 401K. Why? When I go to grad school or purchase my first home I get penalty free withdrawal on portions of the fund, and the money I withdraw, will be taxed at a lower level if it is withdrawn immediately after grad school because my income for the year will be significantly lower than in subsequent time periods. This is the easy stuff. If you have any significant amount of money, consultation on modes of savings and investment can be essential.
    Second, the “save, save, save” mentality ignores both your internal preferences and the regulatory incentive structures of the U.S. Perhaps a lot of elderly people have low levels of liquid assets because their living expenses are subsidized so much by social security and medicare that it makes no sense to have a savings glut. There is a famous and wonderful saying: “You can’t take it with you.” I would say a country where the elderly were supported to the extent the elderly in the U.S. are and still stockpile liquid assets is a country where people are living inefficiently.
    In addition, as young people, there is often no reason to forego current expenditures for the accumulation of assets–both because we may get more enjoyment from certain things now (i.e. vacations with co-eds in Panama City) and because investments that lower our “net worth” sometimes have larger returns that conventional savings. First, I like spending a large portion of my paycheck. I have fun. I travel while I am not married, etc. etc. Sure I save, but savings levels are a very individual function of utility, and being a spendthrift isn’t always the key to happiness. Second, some investments that lower net worth are worth making. Think of college. You do not receive a tangible asset in exchange for money you pay for a college education, hence, the simplified net worth calculation above would show a negative balance in net worth for almost every college student. However, in the long run, investment in a quality college education can have a higher and more consistent personal return than almost any other investment. Take risks!! You truly have to spend money to make money, and just as every major corporation that is anything like successful leverages debt and works hard to balance its capital structure, individuals can benefit from smart capital manipulation that may negatively impact a short term net worth, but pay huge dividends of pleasure or financial return in the long run.
    Wow, that rambled on and sounded more critical than I wanted it to. I think the above advice is mostly good, but finding a financial advisor you can trust can help you individualize a savings plan and open doors for you you never knew existed (the same reason I use a professional accountant which saves me both money and hassle).
    (In the interest of full disclosure, I am not a personal financial consultant, but I have a very pro-expert bias because I work on the finances and operations of companies–as the author above so thoughtfully noted, this comment may be worth what you paid: Nothing:))

  • Brian

    I am currently doing much of what you suggest, to the extent I am able. The only debt we have is our mortgage, I buy used cars, etc. Basically trying to apply the simple idea of delayed gratification.
    As you often said or implied in your post “The situation is very bad.” History always repeats itself. So, say the whole house of cards of our economy crashes down, banks fail, etc. What would my current frugality benefit me if in 20 years I lose everything along with everyone else in a repeat of the Great Depression? Why shouldn’t I join the party with everyone else now? Those are the temptations I struggle with. But, I guess I must still trust enough that it won’t actually get that bad. Maybe if I truly believed it will get that bad, I’d cash in all my savings – give a larger chunk to feed starving third world children and fund missions, borrow to the hilt and get some fun and goodies while the gettin’s good.
    Or, what to you recommend for truly rock-solid investment to guard against macro-economic catastrophe? Gold? If so, is it necessary to actually get your hands on some gold and put it in a safe-deposit box? Or can you safely trust a certificate where someone else holds on to it? How do you go about buying gold? Land is a decent investment, but even farmland is overpriced right now.
    Many who read this will think I’m being ridiculous, and may commencing riduculing me. That’s fine. But I’m not saying a doomsday economic event is likely, just possible. And more likely now than probably any time since the 30’s. One thing I think of is that right now, the boomers are at their peak earning potential and are pouring money into their 401K’s to get ready for retirement and make up for some losses from the stock market decline a few years ago. They begin to reach age 65 in 2010. Then, instead of pouring in, they begin to withdraw $ from the stock market. That will obviously cause whatever seniors spend their money on to be a growth market (like health care, travel) and maybe those things will prop up the stock market, I don’t know. But, combine that with the outside possibility that terrorists succeed in much bigger attacks on the U.S. What if they succeed in the year 2008 of exploding 2 or 3 nukes in U.S. cities? That would certainly be enough to knock over our teetering economic tower.
    I think the best thing to remember is to store up treasures in heaven and give money to the poor as one investment. But, what else can protect against doomsday scenarios? I’m also not talking about a huge investment, but just a small portion of savings. I’d appreciate your comments, FMF.

  • ap

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  • Michael

    I work in the collections industry and I assure you that the majority of people I talk to would be 100% better off if they follow the basic principles you explained. Most people are clueless when they are asked what their income and expenses are. A simple budget would revolutionized people’s lives.
    I heard someone once say if your output exceeds your input you upkeep will become your downfall.
    I’ll check out FMF.

  • Dave S.

    I agree that people should take care of their basic financial health, but that does not mean that, in addition, they may not benefit from professional advice.
    Think of it this way: I quit smoking, exercise regularly, and eat a reasonably healthy diet, but I still go to my doctor for a periodic check up, and if I have some illness that is beyond my own personal ability to treat.
    Generally speaking though people’s financial health is so bad that it’s a tremendous improvement if they just stop spending more than they make.

  • Joe Carter

    In case some people might be new to this feature, let me clarify that this post was written by a pseudonymous guest blogger from Free Money Finance.

  • FMF

    All —
    Wow! Thanks so much for the comments. I consider it a privilege that you would take time to comment on my post. Thanks.

  • Zuzu’s Petals

    This is good advice, but these principles are not applicable to my current situation.
    I am currently unemployed, though my wife is employed. I was put in this position by having to leave a very hostile work environment, and frankly, I’m disillusioned about finding another employee position with a company in my particular field. We live humbly in a $600.00/mo apartment and maintain as low expenses as possible. However, I am currently “in the red” and have no choice but to draw on credit. I am attempting to become an independent contractor in a field in which I have a great deal of contacts and experience. Such a move appears to be the only way in my field to make a good income while not working 70 hours a week for a company that hates you. Even if successful, my goodwill and accounts receivable may take months to build.
    Does FMF have any advice on how to mitigate my current problems?

  • John

    Thanks for the response. I figured there was a lot more you couldn’t say, and I appreciate the “experts clarification”. To be honest, from your writing you seem like such a nice person it is hard to disagree with you.
    Thanks for the post. Have a great weekend.

  • Evan

    Good advice, but I find that a lot of people would have trouble or no interest in even understanding those terms and logic, even though it seems simplistic to me and you.
    As a CPA, the simplest advice I give to people is:
    1) Buy and own a house
    2) Contribute the maximum to your IRA and 401(k) plans
    3) Never pay credit card interest
    4) Buy affordable vehicles and drive them for at least 6 years before trading
    Sure, there are many other financial factors that can help/harm people, but the large majority of Americans would be just fine financially if they just followed those 4 things.

  • Matthew Goggins

    Evan, great advice.
    Zuzu’s Petals,
    I don’t know what specific advice anyone should give you. It sounds like you have a very good plan. If you have to borrow some money for expenses temporarily, then that’s not the end of the world.
    If you need to use credit cards, keep in mind that there may be as many as four, five, or six different credit card corporations out there who really want to get a piece of your debt. You can try using the high level of competition among these companies to play one credit card against the other. You can negotiate better terms (interest rates) up front, and ask for special deals on balance transfers and the like.
    Sometimes, by being assertive, you can knock down an interest rate two, three, or four times in one phone call. Just make sure you make your payments on time, or they’ll kill you with high rates of penalty interest.
    Good luck!

  • Gray

    Yes, great advice, easy to understand and remember. I would modify #1 to “Buy and own less house than you can afford,” or maybe add #5, “Live within your means.” Not possible for everyone, but most people who can, don’t.

  • FMF

    More great comments! Thanks again, everyone for contributing!
    Zuzu —
    It’s hard for me to know your situation completely from just one post, so all I can tell you is what I’d do and what I’ve seen other entrepreneurs do in your situation. Here goes:
    1. Dramatically cut expenses. You say that you live modestly already, but there may be some things you can still do without (or cut down dramatically) for the short term — eating out, cable TV, entertainment expenses, and utilities (really watching what you spend on this — i.e. turn the AC up a bit). All this will add up. Sit down with your wife and brainstorm what’s possible and see what comes up.
    2. Don’t spend on longer term items you can put off — Expenses dealing with things like clothing and minor home repairs can usually be pushed back a few months if things get tough (which it sounds like they are).
    3. See if there are any other bills you can push back for a bit — For instance, my car insurance gives me the choice to pay once a year, twice a year, or four times a year. I get charged a bit more if I pick four times a year, but for people who need immediate cash flow, this can help out a bit. Doctors/dentists are often willing to work with you as well if you tell them your situation.
    4. Get help — There may either be government agencies, charitable organizations and/or churches that could help you out during this lean time. If you’re a member of a church and have been tithing to it, I would say it’s their responsibility to help care for you.
    5. Sell things — Is there anything you have that you really don’t need? If so, consider selling it. It could bring in some needed cash.
    6. Get a part-time job — I’ve known many people who held a part-time job for a few hours a week just to help out a bit while they’ve gotten their businesses up and running. Whether this is working at a restaurant or turning a hobby into income (teaching piano, for instance), the extra income will come in handy.
    7. Jump start your business — You may be thinking “I’m trying to get it started as fast as I can”, but there may be other ways you haven’t thought of to get as much as you can now. For instance, focus on your best connections with the potential customers that can pay the most. Offer them a GREAT deal (but one where you still make money) to buy now from you. Or if you’re in the kind of business where you can do this, sell services or products to be performed/delivered later. For instance, the company who checks our AC/Heater each season sells a package where you save $20 if you pay up front for BOTH the AC and heater checks. They get the money now and perform the services later.
    In the end, none of these may be workable for you and you may just need to gut it out during this time. If that’s the case, try to borrow as little as possible so when you do get up and running you won’t be buried under a mountain of debt. Good luck!
    John —
    Me? Nice? Aw, gee! ;-)
    Evan —
    Good advice! Can I use it at Free Money Finance? (I’ll give you credit for it). ;-)
    Thanks again to all of you for your comments!

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  • thc

    FMF: Nice post and I agree with much of what you say though, as a CFP with more than ten years experience advising clients, I wish you had been more clear about your definition of “experts”.

  • true republican

    You are so right. I can’t tell you enough. I really like your thought. Really balanced, you know. And only facts!
    It’s all about those rich liberals with their millions! Those rich bastards!
    I say: more tax cuts, because then us common folks get some of our hard earned cash back! You know, 50$ a month is a lot of money, you see my point?
    Maybe you can tell something about Social Security? You are good at this, you know what we want to hear! Never mind those liberals with their downplaying of our President! I really dig you!

  • Joel Thomas

    I would never hire a financial advisor who makes money off my investments. If I want to consult someone for advice, I want to pay them a set fee.
    Anyway, for people who have time to read and understand business magazines and are simply an average investor, they’re better off making their own decisons.
    My dad made a lot of money just using common sense about investing in lands likely to appreciate in value. One of his best investments of all time was his purchase in the early 1950’s of Louisiana timber land. He still owns it and has sold timber alone off it for many, many times its cost, even adjusted for inflation. He’s done well with stocks and bonds, too, being his own advisor. Not with every stock and bond, but he is so diversified that the failure of a stock here and there hasn’t been a big deal.
    His biggest investment strategy was to save now and buy later, avoiding credit — except for housing or transportation of course. My parents have always been very generous with the church — true tithers, but they had the same car from 1986 to 2003.

  • Phil Kraemer

    I think that until money and wealth are put into perspective with the real values of a Christian, then it becomes a great deal easier to live according to the principles that you outlined in your article. I have found in my life (and in the lives of most of my successful friends) that until they began to tithe, they were never truly successful in getting ahead.
    Once you come to realize that NONE of this stuff that has been accumulated in your life (to include the house, car and all savings and investment) actually belongs to you, then you can begin to understand your role as caretaker for the items that God has placed in your life.
    It is counterintuitive, but the worse off you are in terms of finances, the more important it is to give the first fruits to God. I remember this from when I began to tithe. I had recently lost a high paying job (from which I had accumulated no savings, investments etc) and was working as a temp for less than ten bucks an hour. The tithe forced me to look at my income in a very different way in that it was clear that I was working with an income that belonged totally to God as He had given me everything, including life, that was necessary for me to earn money in the first place. After that realization, it was a short step to seek the advice of the owner when I was making a decision about spending, etc.