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Personal Finance

This guide gathers together useful resources relating to money management.

Financial success is a combination of doing the right things and NOT DOING the wrong things.  So let us look at some things you should be very cautious of and perhaps avoid altogether.

Avoidable Mistakes

Many people have an admirable trait of wanting to exhaust all possibilities before declaring bankruptcy, but if that includes cashing out their retirement accounts early to address emergencies or attack debt, then they have made a profound financial blunder which will damage them for the rest of their lives.

If you ever find yourself filing for bankruptcy, most types of retirement accounts are completely protected from creditors.  Even the ones that are not fully protected are partially protected - any combined accumulations in your partially-protected retirement accounts up to $1,283,025 is protected from your creditors.

I get approached by DIY investors fairly consistently who say, "Hey, I have a large allocation to XYZ individual equity.  What do you think about it?"  I'll respond by saying, "Well, the average stock dies.  The average stock has a catastrophic loss.  More than half of stocks suffer losses of 75% or greater.  So, on average, I think your precious holding is going to crash and burn."  It's knowing numbers like this.  It's knowing the odds.  Only about a quarter of stocks have accounted for nearly 100% of market's gains.  Fully 50% of stocks have fallen to nearly zero.  Another quarter have been flat.  It's understanding probabilities like this that leads you to acts of humility like diversification.  For me, diversification is the ultimate nod to low ego and is the way that we can say, "I have no idea what's going to happen.  I'm being appropriately circumspect about my ability to predict the future, and so I'm just going to spread my investment dollars around."

-- Daniel Crosby, Ph.D -- an expert in behavioral finance

Many financial advisors recommend you that you purchase only term life insurance and avoid whole life insurance entirely.

Quoting from Dave Ramsey's website:

Whole life insurance costs more because it’s designed to build cash value. But keep in mind that a life insurance policy shouldn’t be an investment or money-making scheme—it’s simply meant to provide security, protection and peace of mind for your family should the unthinkable happen.

... Life insurance has one job: It replaces your income when you die.

There are far more productive and profitable ways to invest your money than using your life insurance plan. What sounds like more fun to you—investing in stock with a cutting-edge company or "investing" money in a plan that’s all based on whether or not you kick the bucket? We think the answer is pretty easy.

An annuity is a contract with an insurance company that offers a lifetime income after maturity in exchange for contributions prior to the maturity date.  It can be a useful tool for retirement planning for people whose careers operate on a boom and bust cycle and who want stability in retirement because they will not have access to a pension or social security.

Many financial advisors disparage them for most situations because:

  • There are countless variations in structure including those with tax advantages and with interest rate, inflation, and investment risk protections. The magnitude of differing annuity products makes the decision to purchase an annuity cumbersome and confusing.
  • They are often over-sold or sold to people who don't need them by insurance agents.
  • They often have high fees associated with them.
  • annuity contracts depend on one's life expectancy, if the annuitant dies sooner than expected, he or she may forfeit thousands of nonrefundable dollars paid in advance to the insurance company

Before entering into and annuity contract, it is wise to consult a financial advisor who is completely independent of the insurance industry and who has a fiduciary obligation to provide advice on what is best in your situation.

Either a home equity loan (HEL) or a home equity line of credit (HELOC) is essentially a second mortgage.  You are using the equity that you have built up in paying off your mortgage to secure another loan or line of credit.  Many people use them to finance home improvements.  There is some logic to making an investment to increase the resale value of this major asset.

But it adds to the risk of losing your home if you are unable to make the payments.

It also defeats the logic of paying off the mortgage and getting out from under debt altogether.

This is infinitely more likely to be a financial blunder than a wise investment.