Posted by Canadian Dream on February 19, 2009
Ok, for long time readers you might recall I have already done a book review on Your Money or Your Life. So why do a second one? Well because the second edition did some significant changes.
Perhaps the first noticeable change to the book is the introduction of an environmental theme into the book. Which might seem strange until you realize how well the concept of being frugal ties in with being green. The reality is many frugal actions happen to be green as well so it’s a natural extension of the book to touch on. Besides after I did it on this blog I’m hardly going to give them trouble over it.
Then the other major overhauls are chapters 6 and 9. In chapter 6 they got rid of the 101 ways to save money list, which I liked, and replaced it with some general concepts and what works for some people who had previously read the book and put it into action. I agree with the change as so far to say the list limited people’s creativity. Instead now it’s a open concept where people can find out what works for them and do some Google searches for ideas.
In chapter 9 they finally updated the old ‘just buy bonds’ advice. It’s not an extensive discussion, but it does introduce a money system which I had previously come up with something similar myself. They divide your retirement funds into three parts: capital, cushion and cache. The capital section is still invested in bonds and is such it can cover all your day to day expenses and a little bit more. The cushion is six months living expense in cash to cover those odd expenses that come along like a ‘new to you’ car (In my case I was thinking about 3 years living expenses in cash as insurance on a market crash when you just retire). Then the cache is money you don’t need for day to day, but for other projects, trips or things you want to do (in my case I was thinking about 20 to 25% of the portfolio in stocks, but this concept works well). Here they suggest you take your extra risk and get into other investments like index funds or real estate. They also provide a few stories of what worked for other people.
All in all, I still think this is one of the best personal finance books out there for people to see and change their spending habits and views on money. It’s one of those rare books that address being happy and having enough all at once. The core principles and heart of the first edition is still there in the second, but now it is updated and expanded. Is it worth buying if you already own a first edition copy? Likely not, there isn’t that much change to the message of the book. Just borrow it from the library and read it and make a few notes in your first edition.
Any one else read the second edition? If so what did you think?
Posted by Canadian Dream on February 18, 2009
This last weekend I was in Edmonton on vacation. As part of my vacation budget I had $200 cash for spending money to buy ‘stuff’, so with shops of every kind in West Edmonton Mall you think I could spend all that? No, I still have $20 left. I’m a failure at being a consumer and doing my part to get the economy going again.
Actually what was fun about my list of things I brought home was I picked up a new winter coat for $63 (which I needed more than wanted, my old one might last one more year before it wasn’t usable). The new coat is one of those two layer types that come apart and when I tried it on in the store I started sweating all most at once. So I’m thinking I should be happy with it for the next decade.
Yet apart from that I spent another $30 on books (pure want there), $35 on three DVD’s (one had been on my to buy list for two years) and a small gift for my youngest. Then $30 on booze to take home, because I was running out of ideas for things to buy.
Yet what struck me the most about my trip was how disinterested I was in most stuff now. I can look at things and go “Oh that’s nice, but I’ll never use it” or “That’s cool, but I don’t have a place for it” or “That’s a good price, but it’s not exactly what I want.” I’ve managed to really decouple my mind from just buying completely mindlessly. I usually now buy things with a specific want/need I’m looking to fulfill. If the item doesn’t cut it I just walk away.
So my question to you all is this: is this a normal development for people after living frugally for a while? If so, are you there yet yourself or what changes in your spending have you noticed?
Posted by Canadian Dream on February 17, 2009
I’ve personal written on inflation before and how the Consumer Price Index (CPI) may be very far off from your own personal inflation rate. Yet people still worry about inflation eating up your buying power in retirement, so I decided to look into it a bit.
I have a 2007 Andex chart which is basically a PF geeks pride and glory. There is so much data in one chart it’s almost insane. What’s interesting on the chart is it shows the CPI and some sample portfolios and provides compound returns for the last 30 years. So from 1977 to 2007 the CPI averaged at 4.1% and that time period included part of the 70′s and all of the 80′s which were high inflation years. Now then there are three sample portfolios called Aggressive (80% equity, 20 % Bonds and Fixed Income), Moderate ( 60% equity, 40 % Bonds and Fixed Income) and Conservative (20% equity, 80 % Bonds and Fixed Income). It was assumed they were rebalanced at the start of each year.
The rates of return (ignoring taxes and fees) were:
- Aggressive: 12.9%
- Moderate: 12.1%
- Conservative: 10.8%
So even adjusting those for the 4.1% CPI and fees you would still be fine with 80% in bonds and fixed income. Actually it is interesting to note that despite the increased risks that Aggressive doesn’t do that much better than the Conservative.
In general I feel most people under estimate how important it is to protect your portfolio’s capital in retirement and over estimate the inflation threat. As such they end up with more risk in their portfolio than they really need. Now obviously you need some equity exposure as an all bond portfolio might very well not cut it (for example 90 day Treasury Bills only did 7.7% over that time frame). So that is why I’m thinking about having about 70 to 80% of my retirement funds in bonds and fixed income.
That’s not to say I’ve firmly made up my mind yet, but I have yet to see an good evidence that I should have more than 30% of my portfolio in equities when I’m retired.
