Personal Finance For Dummies E-Book

Eric Tyson

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch

Seitenzahl: 821

Veröffentlichungsjahr: 2015

Beschreibung

Understand personal finance and put your money to work! Is your money working to increase your wealth? If not, it's time to take stock of your financial situation. Personal Finance For Dummies, 8th Edition offers time-tested financial tips and advice on how to continue to grow your financial assets in light of the changing market and economic conditions. A new breed of fiscal consciousness has arisen--and it's high time for you to join the movement by taking control over your financial life. This relevant text guides you through major financial subject areas, such as budgeting, saving, getting out of debt, making timely investment choices, and planning for the future. By looking at all aspects of your financial wellbeing, you can pinpoint the areas in which you need to change your strategy, and can identify how you can use the assets you have to continue to grow and protect your wealth. Personal finance is an important topic, as your financial wellbeing has an integral impact on so many aspects of your life. Taking the pulse of your finances every now and then is critical to ensuring that you're on the right track--and to identifying the areas in which you can improve your financial strategies. * Explore time-tested financial tips and advice that help improve your financial wellbeing * Consider how different aspects of your financial life work with and against one another, and how to bring them into alignment to enhance your overall financial situation * Discover updated recommendations and strategies that account for changing market and economic conditions * Look at your financial situation from a new perspective, and understand what you can do to improve it Personal Finance For Dummies, 8th Edition shows you how to take stock of your financial situation and put your money to work.

Leseprobe

Personal Finance For Dummies®

Visit www.dummies.com/cheatsheet/personalfinance to view this book's cheat sheet.

Table of Contents

Cover

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Beyond the Book

Where to Go from Here

Part I: Getting Started with Personal Finance

Chapter 1: Improving Your Financial Literacy

Talking Money at Home

Identifying Unreliable Sources of Information

Jumping over Real and Imaginary Hurdles to Financial Success

Chapter 2: Measuring Your Financial Health

Avoiding Common Money Mistakes

Determining Your Financial Net Worth

Examining Your Credit Score and Reports

Knowing the Difference between Bad Debt and Good Debt

Analyzing Your Savings

Evaluating Your Investment Knowledge

Assessing Your Insurance Savvy

Chapter 3: Managing Where Your Money Goes

Examining Overspending

Analyzing Your Spending

Chapter 4: Establishing and Achieving Goals

Creating Your Own Definition of Wealth

Prioritizing Your Savings Goals

Building Emergency Reserves

Saving to Buy a Home or Business

Funding Kids’ Educational Expenses

Saving for Big Purchases

Preparing for Retirement

Part II: Spending Less, Saving More

Chapter 5: Dealing with Debt

Using Savings to Reduce Your Consumer Debt

Decreasing Debt When You Lack Savings

Turning to Credit Counseling Agencies

Filing Bankruptcy

Stopping the Spending/Consumer Debt Cycle

Chapter 6: Reducing Your Spending

Unlocking the Keys to Successful Spending

Budgeting to Boost Your Savings

Reducing Your Spending

Chapter 7: Trimming Your Taxes

Understanding the Taxes You Pay

Trimming Employment Income Taxes

Increasing Your Deductions

Reducing Investment Income Taxes

Enlisting Education Tax Breaks

Getting Help from Tax Resources

Dealing with an Audit

Part III: Building Wealth through Investing

Chapter 8: Considering Important Investment Concepts

Establishing Your Goals

Understanding the Primary Investments

Shunning Gambling Instruments and Behaviors

Understanding Investment Returns

Sizing Investment Risks

Diversifying Your Investments

Acknowledging Differences among Investment Firms

Seeing through Experts Who Predict the Future

Leaving You with Some Final Advice

Chapter 9: Understanding Your Investment Choices

Slow and Steady Investments

Building Wealth with Ownership Vehicles

Off the Beaten Path: Investment Odds and Ends

Chapter 10: Investing in Funds

Understanding the Benefits of Mutual Funds and Exchange-Traded Funds

Exploring Various Fund Types

Selecting the Best Funds

Deciphering Your Fund’s Performance

Evaluating and Selling Your Funds

Chapter 11: Investing in Retirement Accounts

Looking at Types of Retirement Accounts

Allocating Your Money in Retirement Plans

Transferring Retirement Accounts

Chapter 12: Investing in Taxable Accounts

Getting Started

Understanding Taxes on Your Investments

Fortifying Your Emergency Reserves

Investing for the Longer Term (Several Years or Decades)

Chapter 13: Investing for Educational Expenses

Figuring Out How the Financial Aid System Works

Strategizing to Pay for Educational Expenses

Investing Educational Funds

Chapter 14: Investing in Real Estate: Your Home and Beyond

Deciding Whether to Buy or Rent

Financing Your Home

Finding the Right Property

Working with Real-Estate Agents

Putting Your Deal Together

After You Buy

Part IV: Insurance: Protecting What You Have

Chapter 15: Insurance: Getting What You Need at the Best Price

Discovering My Three Laws of Buying Insurance

Dealing with Insurance Problems

Chapter 16: Insurance on You: Life, Disability, and Health

Providing for Your Loved Ones: Life Insurance

Preparing for the Unpredictable: Disability Insurance

Getting the Care You Need: Health Insurance

Chapter 17: Covering Your Assets

Insuring Where You Live

Auto Insurance 101

Protecting against Mega-Liability: Umbrella Insurance

Planning Your Estate

Part V: Where to Go for More Help

Chapter 18: Working with Financial Planners

Surveying Your Financial Management Options

Deciding Whether to Hire a Financial Planner

Finding a Good Financial Planner

Interviewing Financial Advisors: Asking the Right Questions

Learning from Others’ Mistakes

Chapter 19: Using Technology to Manage Your Money

Surveying Software and Websites

Accomplishing Money Tasks on Your Computer, Tablet, or Smartphone

Chapter 20: On Air and in Print

Observing the Mass Media

Rating Radio and Television Financial Programs

Finding the Best Websites

Navigating Newspapers and Magazines

Betting on Books

Part VI: The Part of Tens

Chapter 21: Survival Guide for Ten Life Changes

Starting Out: Your First Job

Changing Jobs or Careers

Getting Married

Buying a Home

Having Children

Starting a Small Business

Caring for Aging Parents

Divorcing

Receiving a Windfall

Retiring

Chapter 22: Ten Tactics to Thwart Identity Theft and Fraud

Save Phone Discussions for Friends Only

Never Respond to Emails Soliciting Information

Review Your Monthly Financial Statements

Secure All Receipts

Close Unnecessary Credit Accounts

Regularly Review Your Credit Reports

Freeze Your Credit Reports

Keep Personal Info Off Your Checks

Protect Your Computer and Files

Protect Your Mail

Glossary

About the Author

Cheat Sheet

Connect with Dummies

End User License Agreement

Guide

Cover

Table of Contents

Begin Reading

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Introduction

You’re probably not a personal finance expert, for good reason. Historically, Personal Finance 101 hasn’t been offered in our schools — not in high school, college, or even graduate programs. Thankfully, a small but growing number of schools have begun offering personal-finance-type courses; some even use Personal Finance For Dummies as a textbook.

However, even if you got some financial education and acquired some financial knowledge over the years, you’re likely a busy person who doesn’t have enough hours in the day to get everything done. Thus, you want to know how to diagnose your financial situation efficiently (and painlessly) to determine what you should do next. Unfortunately, after figuring out which financial strategies make sense for you, choosing specific financial products in the marketplace is often overwhelming. You have literally thousands of investment, insurance, and loan options to choose from. Talk about information overload!

To further complicate matters, you probably hear about most products through advertising that can be misleading, if not downright false. Of course, some ethical and outstanding firms advertise, but so do those that are more interested in converting your hard-earned income and savings into their short-term profits. And they may not be here tomorrow when you need them.

Perhaps you’ve ventured online and been attracted to the promise of “free” advice. Unfortunately, discerning the expertise and background (and even identity) of those behind various blogs and websites is nearly impossible. And, as I discuss in this book, conflicts of interest (many of which aren’t disclosed) abound online.

Despite the development of new media and new financial products and services, folks keep making the same common financial mistakes — procrastinating and lack of planning, wasteful spending, falling prey to financial salespeople and pitches, failing to do sufficient research before making important financial decisions, and so on. This book can keep you from falling into the same traps and get you going on the best paths.

As unfair as it may seem, numerous pitfalls await you when you seek help for your financial problems. The world is filled with biased and bad financial advice. As a former practicing financial counselor and now as a writer, I constantly see and hear about the consequences of poor advice. All too often, financial advice ignores the big picture and focuses narrowly on investing. Because money is not an end in itself but a part of your whole life, this book helps connect your financial goals and challenges to the rest of your life. You need a broad understanding of personal finance that includes all areas of your financial life: spending, taxes, saving and investing, insurance, and planning for major goals like education, buying a home, and retirement.

Even if you understand the financial basics, thinking about your finances in a holistic way can be difficult. Sometimes you’re too close to the situation to be objective. Your finances may reflect the history of your life more than they reflect a comprehensive plan for your future.

You want to know the best places to go for your circumstances, so this book contains specific, tried-and-proven recommendations. I also suggest where to turn next if you need more information and help.

About This Book

You selected wisely in picking up a copy of Personal Finance For Dummies, 8th Edition! Over two million copies of prior editions of this book are in print, and as you can see from the quotes in the front of this edition, readers and reviewers alike have been pleased. This book also previously earned the prestigious Benjamin Franklin Award for best book of the year in business.

However, I never rest on my laurels. So the book you hold in your hands reflects more hard work and brings you the freshest material for addressing your personal financial quandaries. Here are some of the updates I’ve made to the book:

Updated coverage of the best ways to get the most for your spending

Expanded information regarding smart ways to minimize the cost of and eliminate consumer debt, use credit, and qualify for the best loan terms, as well as how to improve your credit scores

Coverage of new and revised tax laws, pending and likely future tax law changes, and how to best take advantage of them

The latest information on government assistance programs, Social Security, and Medicare and what it means in terms of how you should prepare for and live in retirement

Updated investment recommendations for exchange-traded funds, mutual funds, real estate, and more

Revised recommendations for where to get the best insurance deals and info on how government mandated health insurance has changed coverage options and costs

Expanded and updated coverage of how to use and make sense of the news and financial resources (especially online resources)

Aside from being packed with updated information, another great feature of this book is that you can read it from cover to cover if you want, or you can read each chapter and part without having to read what comes before. Handy cross-references direct you to other places in the book for more details on a particular subject. If you like, you can skip the sidebars (shaded boxes) and text marked with the Technical Stuff icon; that info is interesting but nonessential.

Foolish Assumptions

In writing this book, I made some assumptions about you, dear reader:

You want expert advice about important financial topics (such as paying off and reducing the cost of debt, planning for major goals, making wise investments), and you want answers quickly.

You want a crash course in personal finance and are looking for a book you can read cover-to-cover to help solidify major financial concepts and get you thinking about your finances in a more comprehensive way.

This book is basic enough to help novices get their arms around thorny financial issues. But it challenges advanced readers as well to think about their finances in a new way and identify areas for improvement.

Icons Used in This Book

The icons in this book help you find particular kinds of information that may be useful to you.

This target flags strategy recommendations for making the most of your money.

This icon highlights the best financial products in the areas of investments, insurance, and so on. These products can help you implement my strategy recommendations.

This icon points out information that you’ll definitely want to remember.

This icon marks things to avoid and points out common mistakes people make when managing their finances.

This icon alerts you to scams and scoundrels who prey on the unsuspecting.

This icon tells you when you should consider doing some additional research. I explain what to look for and what to look out for.

This nerdy-looking guy appears beside discussions that aren’t critical if you just want to understand basic concepts and get answers to your financial questions. You can safely ignore these paragraphs, but reading them can help deepen and enhance your personal financial knowledge.

Beyond the Book

In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out these features:

Cheat Sheet (

www.dummies.com/cheatsheet/personalfinance

):

Check out a list of pointers that can help you think about the role of money in your life and start achieving your financial goals.

Dummies.com articles (

www.dummies.com/extras/personalfinance

):

You can also find relevant online articles that supplement each part in this book with additional tips and techniques. Read helpful articles that explain how to keep your wits during uncertain investing times, how to make sure the insurance company you use is financially stable, and more.

Where to Go from Here

This book is organized so you can go wherever you want to find complete information. Want advice on investing strategies, for example? Go to Part III for that. You can check out the table of contents to find broad categories of information and a chapter-by-chapter rundown of what this book offers, or you can look up a specific topic in the index.

If you’re not sure where you want to go, you may want to start at the beginning with Part I. It gives you all the basic info you need to assess your financial situation and points to places where you can find more detailed information for improving it.

Part I

Getting Started with Personal Finance

Visit www.dummies.com for free access to great Dummies content online.

In this part …

Understand your financial literacy.

Assess your current personal financial health.

Determine where your money is going.

Set and accomplish personal and financial goals.

Chapter 1

Improving Your Financial Literacy

In This Chapter

Looking at what your parents and others taught you about money

Questioning reliability and objectivity

Overcoming real and imagined barriers to financial success

In recent years, a continuing stream of studies has indicated that Americans are by and large financially illiterate. The vast majority of survey respondents have “failing” scores — meaning that they answered less than 60 percent of the questions correctly.

I know from my many years of work previously as a personal financial counselor and teacher and now as a writer that many folks do indeed have significant gaps in their personal financial knowledge. Though more folks have greater access today to more information than in prior generations, the financial world has grown more complicated, and there are more choices, and pitfalls, than ever before.

Unfortunately, most Americans don’t know how to manage their personal finances because they were never taught how to do so. Their parents may have avoided discussing money in front of them, and most high schools and colleges lack courses that teach this vital, lifelong-needed skill.

Some people are fortunate enough to learn the financial keys to success at home, from knowledgeable friends, and from the best expert-written books like this one. Others either never discover important personal finance concepts, or they learn them the hard way — by making lots of costly mistakes. People who lack knowledge make more mistakes, and the more financial errors you commit, the more money passes through your hands and out of your life. In addition to the enormous financial costs, you experience the emotional toll of not feeling in control of your finances. Increased stress and anxiety go hand in hand with not mastering your money.

This chapter examines where people learn about finances and helps you decide whether your current knowledge is helping you or holding you back. You can find out how to improve your financial literacy and take responsibility for your finances, putting you in charge and reducing your anxiety about money. After all, you have more important things to worry about, like what’s for dinner.

Talking Money at Home

I was fortunate — my parents taught me a lot of things that have been invaluable throughout my life, and among those things were sound principles for earning, spending, and saving money. My parents had to know how to do these things, because they were raising a family of three children on (usually) one modest income. They knew the importance of making the most of what you have and of passing that vital skill on to your kids.

However, my parents’ financial knowledge did have some gaps. I observed firsthand the struggles my late father endured handling some retirement money after being laid off from a job when I was in middle school. In subsequent years, this situation propelled me to learn about investing to help myself, my family, and others.

In many families money is a taboo subject — parents don’t level with their kids about the limitations, realities, and details of their budgets. Some parents I talk with believe that dealing with money is an adult issue and that children should be insulated from it so they can enjoy being kids. In many families, kids hear about money only when disagreements and financial crises bubble to the surface. Thus begins the harmful cycle of children having negative associations with money and financial management.

In other cases, parents with the best of intentions pass on their bad money-management habits. You may have learned from a parent, for example, to buy things to cheer yourself up. Or you may have witnessed a family member maniacally chasing get-rich-quick business and investment ideas. Now I’m not saying that you shouldn’t listen to your parents. But in the area of personal finance, as in any other area, poor family advice and modeling can be problematic.

Think about where your parents learned about money management and then consider whether they had the time, energy, or inclination to research choices before making their decisions. For example, if they didn’t do enough research or had faulty information, your parents may mistakenly have thought that banks were the best places for investing money or that buying stocks was like going to Las Vegas. (You can find the best places to invest your money in Part III of this book.)

In still other cases, the parents have the right approach, but the kids do the opposite out of rebellion. For example, if your parents spent money carefully and thoughtfully and often made you feel denied, you may tend to do the opposite, buying yourself gifts the moment any extra money comes your way.

Although you can’t change what the educational system and your parents did or didn’t teach you about personal finances, you now have the ability to find out what you need to know to manage your finances.

If you have children of your own, don’t underestimate their potential or send them out into the world without the skills they need to be productive and happy adults. Buy them some good financial books when they head off to college or begin their first job.

Personal finance at school

In schools, the main problem with personal finance education is the lack of classes, not that kids already know the information or that the skills are too complex for children to understand.

Nancy Donovan teaches personal finance to her fifth-grade math class as a way to illustrate how math can be used in the real world. “Students choose a career, find jobs, and figure out what their taxes and take-home paychecks will be. They also have to rent apartments and figure out a monthly budget,” says Donovan. “Students like it, and parents have commented to me how surprised they are by how much financial knowledge their kids can handle.” Donovan also has her students invest $10,000 (play money) and then track their investments’ performance.

Urging schools to teach the basics of personal finance is just common sense. Children need to be taught how to manage a household budget, the importance of saving money for future goals, and the consequences of overspending. Unfortunately, few schools offer classes like Donovan’s. In most cases, the financial basics aren’t taught at all.

In the minority of schools that do offer a course remotely related to personal finance, the class is typically in economics (and an elective at that). “Archaic theory is being taught, and it doesn’t do anything for the students as far as preparing them for the real world,” says one high school principal I know. Having taken more than my fair share of economics courses in college, I understand the principal’s concerns.

Some people argue that teaching children financial basics is the parents’ job. However, this well-meant sentiment is what we’re relying on now, and for all too many, it isn’t working. In some families, financial illiteracy is passed on from generation to generation.

Education takes place in the home, on the streets, and in the schools. Therefore, schools must bear some responsibility for teaching this skill. However, if you’re raising children, remember that no one cares as much as you do or has as much ability to teach the important life skill of personal money management.

Identifying Unreliable Sources of Information

Most folks know that they’re not financial geniuses. So they set out to take control of their money matters by reading about personal finance or consulting a financial advisor.

But reading and seeking advice to find out how to manage your money can be dangerous if you’re a novice. Misinformation can come from popular and seemingly reliable information sources, as I explain in the following sections. (Because the pitfalls are numerous and the challenges significant when choosing an advisor, I devote Chapter 18 to the financial planning business and tell you what you need to know to avoid being duped and disappointed.)

Understanding the dangers of free financial content online

In addition to being able to quickly access what we want, the other major attraction of the Internet is the abundance of seemingly free websites providing piles of free content. Appearances, however, can be greatly deceiving.

While there are exceptions to any rule, the fact of the matter is that the vast majority of websites purporting to provide a seemingly never-ending array of “free” content are rife with conflicts of interest and quality problems due to the following:

Advertising:

Any publication that accepts advertising has a potential conflict of interest because it may not want to publish articles that would upset its advertisers. Such a mindset, however, can stand in the way of telling consumers the unvarnished truth about various products and services. For example, auto leasing companies aren’t very interested in advertising someplace that publishes articles highlighting the negatives of leasing. (Check out the section “

Publishers pandering to advertisers

” later in this chapter for more on the power of advertising to influence the financial information you encounter online, on TV, and elsewhere.)

Advertorials:

Too many website owners are unwilling or unable to pay real writers for quality content and instead publish articles that are written and provided by advertisers. These pieces of “content” are known as

advertorials

and, in the worst cases, aren’t even clearly labeled as advertisements, which is precisely what they are.

Affiliate relationships:

Many companies now pay “referral fees” to websites that bring in new customers. Here’s how that practice causes major conflicts of interest. On a financial website, you read a glowing review of a particular financial product or service. And the site provides a helpful link to the website of the provider of that product or service. Unbeknownst to you, when you click on that link and buy something, the seller kicks money back to the “affiliate” who reeled you in. At a minimum, such relationships should be clearly disclosed and detailed in any review.

Insufficient editorial oversight:

At most established, quality print publications, there are usually several layers of editors who oversee the publication and all of its articles. This structure helps ensure the accuracy of what gets into print (although bias, such as political bias, isn’t necessarily controlled). Unfortunately, the shoestring budget on which many websites operate precludes these quality control checks and balances. Thus, sites operated by non-experts proffering advice place you at great risk.

Lack of accountability:

In part because of a lack of editorial oversight, there’s also often a lack of accountability for advice given online. This situation is especially problematic on the numerous sites that are run without disclosure of who is actually in charge of the site and/or who is writing the articles. Although such anonymity may be helpful to the site and its content providers, it’s certainly not in your best interests because it prevents you from checking out the background, qualifications, and track record of the providers.

Recognizing fake financial gurus

Before you take financial advice from anyone, examine her background, including professional work experience and education credentials. This is true whether you’re getting advice from an advisor, writer, talk show host, or TV financial reporter.

If you can’t easily find such information, that’s usually a red flag. People with something to hide or a lack of something redeeming to say about themselves usually don’t promote their background.

Of course, just because someone seems to have a relatively impressive-sounding background doesn’t mean that she has your best interests in mind or has honestly presented her qualifications. Forbes magazine journalist William P. Barrett presented a sobering review of financial author Suze Orman’s stated credentials and qualifications:

“Besides books and other royalties, Orman’s earned income has come mainly from selling insurance — which gets much more attention in her book than do stocks or bonds… . The jacket of her video says she has ‘18 years of experience at major Wall Street institutions.’ In fact, she has 7.”

When the Forbes piece came out, Orman’s publicist tried to discredit it and made it sound as if the magazine had falsely criticized Orman. In response, the San Francisco Chronicle, which is the nearest major newspaper to Orman’s hometown, picked up on the Forbes piece and ran a story of its own — written by Mark Veverka in his “Street Smarts” column — which substantiated the Forbes story.

Veverka went through the Forbes piece point by point and gave Orman’s company and the public relations firm numerous opportunities to provide information contrary to the piece, but they did not. Here’s some of what Veverka recounts from his contact with them:

“If you want your side told, you have to return reporters’ telephone calls. But alas, no callback.

“… Orman’s publicist said a written response to the

Forbes

piece and the ‘Street Smarts’ column would be sent by facsimile to the

Chronicle

… . However, no fax was ever sent. They blew me off. Twice.

“In what was becoming an extraordinary effort to be fair, I placed more telephone calls over several days to Orman Financial and the publicist, asking for either an interview with Orman or an official response. If Orman didn’t fudge about her years on Wall Street or didn’t let her commodity-trading adviser license lapse, surely we could straighten all of this out, right?

“Still, no answer. Nada … I called yet again. Finally, literally on deadline, a woman who identified herself as Orman’s ‘consultant’ called me to talk ‘off the record’ about the column. What she ended up doing was bashing the

Forbes

piece and my column but not for publication. More importantly, she offered no official retort to allegations made by veteran

Forbes

writer William Barrett. I have to say, it was an incredibly unprofessional attempt at spinning. And I’ve been spun by the worst of them.”

You can’t always accept stated credentials and qualifications at face value, because some people lie (witness the billions lost to hedge fund Ponzi-scheme-man Bernie Madoff). You can’t sniff out liars by the way they look, their resume, their gender, or their age. You can, however, increase your chances of being tipped off by being skeptical (and by regularly reading the “Guru Watch” section of my website at www.erictyson.com).

You can see a number of hucksters for what they are by using common sense in reviewing some of their outrageous claims. Some sources of advice, such as Wade Cook’s investment seminars, lure you in by promising outrageous returns. The stock market has generated average annual returns of about 9 to 10 percent over the long term. However, Cook, a former taxi driver, promoted his seminars as an “alive, hands-on, do the deals, two-day intense course in making huge returns in the stock market. If you aren’t getting 20 percent per month, or 300-percent annualized returns on your investments, you need to be there.” (I guess I do, as does every investment manager and individual investor I know!)

Cook’s get-rich-quick seminars, which cost more than $6,000, were so successful at attracting people that his company went public in the late 1990s and generated annual revenues of more than $100 million. Cook’s “techniques” included trading in and out of stocks and options after short holding periods of weeks, days, or even hours. His trading strategies can best be described as techniques that are based upon technical analysis — that is, charting a stock’s price movements and volume history, and then making predictions based on those charts.

The perils of following an approach that advocates short-term trading with the allure of high profits are numerous:

You’ll rack up enormous brokerage commissions.

On occasions where your short-term trades produce a profit, you’ll pay high ordinary income tax rates rather than the far lower capital gains rate for investments held more than 12 months.

You won’t make big profits — quite the reverse. If you stick with this approach, you’ll underperform the market averages.

You’ll make yourself a nervous wreck. This type of trading is gambling, not investing. Get sucked up in it, and you’ll lose more than money — you may also lose the love and respect of your family and friends.

If Cook’s followers were able to indeed earn the 300 percent annual returns his seminars claimed to help you achieve, any investor starting with just $10,000 would vault to the top of the list of the world’s wealthiest people (ahead of Bill Gates and Warren Buffett) in just 11 years!

How some gurus become popular

You may be wondering how Wade Cook became so popular despite the obvious flaws in his advice (see the section “Recognizing fake financial gurus” for the goods on Cook). He promoted his seminars through infomercials and other advertising, including radio ads on respected news stations. The high stock market returns of the 1990s brought greed back into fashion. (My experience has been that you see more of this greed near market tops.)

The attorneys general of numerous states sued Cook’s company and sought millions of dollars in consumer refunds. The suits alleged that the company lied about its investment track record (not a big surprise — this company claimed that you’d make 300 percent per year in stocks!).

Cook’s company settled the blizzard of state and Federal Trade Commission (FTC) lawsuits against his firm by agreeing to accurately disclose its trading record in future promotions and give refunds to customers who were misled by past inflated return claims. (That didn’t stop Cook, however, from getting into more legal hot water — and serving a seven-year prison term for failing to pay millions in personal income taxes.)

According to a news report by Bloomberg News, Cook’s firm disclosed that it lost a whopping 89 percent of its own money trading during one year in which the stock market fared well. As Deb Bortner, director of the Washington State Securities Division and president of the North American Securities Administrators Association, observed, “Either Wade is unable to follow his own system, which he claims is simple to follow, or the system doesn’t work.”

Don’t assume that someone with something to sell, who is getting good press and running lots of ads, will take care of you. That “guru” may just be good at press relations and self-promotion. Certainly, talk shows and the media at large can and do provide useful information on a variety of topics, but bad eggs sometimes turn up. These bad eggs may not always smell bad up-front. In fact, they may hoodwink people for years before finally being exposed. Please review Part V for the details on resources you can trust and those that could cause you to go bust!

Publishers pandering to advertisers

Thousands of publications and media outlets — newspapers, magazines, websites, blogs, radio, TV, and so on — dole out personal financial advice and perspectives. Although some of these “service providers” collect revenue from subscribers, virtually all are dependent — in some cases, fully dependent (especially the Internet, radio, and TV) — on advertising dollars. Although advertising is a necessary part of capitalism, advertisers can taint and, in some cases, dictate the content of what you read, listen to, and view.

Be sure to consider how dependent a publication or media outlet is on advertising. I find that “free” publications, websites/blogs, radio, and TV are the ones that most often create conflicts of interest by pandering to advertisers. (All derive all their revenue from advertising.)

Much of what’s on the Internet is advertiser-driven as well. Many of the investing sites on the Internet offer advice about individual stocks. Interestingly, such sites derive much of their revenue from online brokerage firms seeking to recruit customers who are foolish enough to believe that selecting their own stocks is the best way to invest. (See Part III for more information about your investment options.)

As you read various publications, watch TV, or listen to the radio, note how consumer-oriented these media are. Do you get the feeling that they’re looking out for your interests? For example, if lots of auto manufacturers advertise, does the media outlet ever tell you how to save money when shopping for a car or the importance of buying a car within your means? Or are they primarily creating an advertiser-friendly broadcast or publication?

Jumping over Real and Imaginary Hurdles to Financial Success

Perhaps you know that you should live within your means, buy and hold sound investments for the long term, and secure proper insurance coverage; however, you can’t bring yourself to do these things. Everyone knows how difficult it is to break habits that have been practiced for many years. The temptation to spend money lurks everywhere you turn. Ads show attractive and popular people enjoying the fruits of their labors — a new car, an exotic vacation, and a lavish home.

Maybe you felt deprived by your tightwad parents as a youngster, or maybe you’re bored with life and you like the adventure of buying new things. If only you could hit it big on one or two investments, you think, you could get rich quick and do what you really want with your life. As for disasters and catastrophes, well, those things happen to other people, not to you. Besides, you’ll probably have advance warning of pending problems, so you can prepare accordingly, right?

Your emotions and temptations can get the better of you. Certainly, part of successfully managing your finances involves coming to terms with your shortcomings and the consequences of your behaviors. If you don’t, you may end up enslaved to a dead-end job so you can keep feeding your spending addiction. Or you may spend more time with your investments than you do with your family and friends. Or unexpected events may leave you reeling financially; disasters and catastrophes can happen to anyone at any time.

Discovering what (or who) is holding you back

A variety of personal and emotional hurdles can get in the way of making the best financial moves. As I discuss earlier in this chapter, a lack of financial knowledge (which stems from a lack of personal financial education) can stand in the way of making good decisions.

But I’ve seen some people caught in the psychological trap of blaming something else for their financial problems. For example, some people believe that adult problems can be traced back to childhood and how they were raised.

I don’t want to disregard the negative impact particular backgrounds can have on some people’s tendency to make the wrong choices during their lives. Exploring your personal history can certainly yield clues to what makes you tick. That said, adults make choices and engage in behaviors that affect themselves as well as others. They shouldn’t blame their parents for their own inability to plan for their financial futures, live within their means, and make sound investments.

Some people also tend to blame their financial shortcomings on not earning more income. Such people believe that if only they earned more, their financial (and personal) problems would melt away. My experience working and speaking with people from diverse economic backgrounds has taught me that achieving financial success — and more importantly, personal happiness — has virtually nothing to do with how much income a person makes but rather with what she makes of what she has. I know financially wealthy people who are emotionally poor even though they have all the material goods they want. Likewise, I know people who are quite happy, content, and emotionally wealthy even though they’re struggling financially.

Americans — even those who have not had an “easy” life — ought to be able to come up with numerous things to be happy about and grateful for: a family who loves them; friends who laugh at their stupid jokes; the freedom to catch a movie or play or to read a good book; or a great singing voice, a good sense of humor, or a full head of hair.

Developing good financial habits

After you understand the basic concepts and know where to buy the best financial products when you need them, you’ll soon see that managing personal finances well is not much more difficult than other things you do regularly, like tying your shoelaces and getting to work each day.

Regardless of your income, you can make your dollars stretch farther if you practice good financial habits and avoid mistakes. In fact, the lower your income, the more important it is that you make the most of your income and savings (because you don’t have the luxury of falling back on your next big paycheck to bail you out).

More and more industries are subject to global competition, so you need to be on your financial toes now more than ever. Job security is waning; layoffs and retraining for new jobs are increasing. Putting in 30 years for one company and retiring with the gold watch and lifetime pension are becoming as rare as never having problems with your computer.

Speaking of company pensions, odds are increasing that you work for an employer that has you save toward your own retirement instead of providing a pension for you. Not only do you need to save the money, you must also decide how to invest it. Chapter 11 can help you get a handle on investing in retirement accounts.

Personal finance involves much more than managing and investing money. It also includes making all the pieces of your financial life fit together; it means lifting yourself out of financial illiteracy. Like planning a vacation, managing your personal finances means forming a plan for making the best use of your limited time and dollars.

Intelligent personal financial strategies have little to do with your gender, ethnicity, or marital status. All people need to manage their finances wisely. Some aspects of financial management become more or less important at different points in your life, but for the most part, the principles remain the same for everyone.

Knowing the right answers isn’t enough. You have to practice good financial habits just as you practice other good habits, such as brushing your teeth or eating a healthy diet and getting some exercise. Don’t be overwhelmed. As you read this book, make a short list of your financial marching orders and then start working away. Throughout this book, I highlight ways you can overcome temptations and keep control of your money rather than let your emotions and money rule you. (I discuss common financial problems in Chapter 2.)

What you do with your money is a quite personal and confidential matter. In this book, I try to provide guidance that can keep you in sound financial health. You don’t have to take it all — pick what works best for you and understand the pros and cons of your options. But from this day forward, please don’t make the easily avoidable mistakes or overlook the sound strategies that I discuss throughout this book.

Throughout your journey, I hope to challenge and even change the way you think about money and about making important personal financial decisions — and sometimes even about the meaning of life. No, I’m not a philosopher, but I do know that money — for better but more often for worse — is connected to many other parts of our lives.

Chapter 2

Measuring Your Financial Health

In This Chapter

Tallying your assets, liabilities, and net worth

Requesting (and fixing) your credit reports

Making sense of your credit score

Understanding bad debt, good debt, and too much debt

Calculating your rate of savings

Assessing your investment and insurance know-how

How financially healthy are you? When was the last time you reviewed your overall financial situation, including analyzing your spending, savings, future goals, and insurance? If you’re like most people, either you’ve never done this exercise or you did so too long ago.

This chapter guides you through a financial physical to help you detect problems with your current financial health. But don’t dwell on your “problems.” View them for what they are — opportunities to improve your financial situation. In fact, the more areas you can identify that stand to benefit from improvement, the greater the potential you may have to build real wealth and accomplish your financial and personal goals.

Avoiding Common Money Mistakes

Financial problems, like many medical problems, are best detected early (clean living doesn’t hurt, either). Here are the common personal financial problems I’ve seen in my work as a financial counselor:

Not planning:

Most of us procrastinate. That’s why we have deadlines (like April 15) — and deadline extensions (need another six months to get that tax return done?). Unfortunately, you may have no explicit deadlines with your personal finances. You can allow your credit-card debt to accumulate, or you can leave your savings sitting in lousy investments for years. You can pay higher taxes, leave gaps in your retirement and insurance coverage, and overpay for financial products. Of course, planning your finances isn’t as much fun as planning a vacation, but doing the former can help you take more of the latter. See

Chapter 4

for details on setting financial goals.

Overspending:

Simple arithmetic helps you determine that savings is the difference between what you earn and what you spend (assuming that you’re not spending more than you’re earning!). To increase your savings, you either have to work more, increase your earning power through education or job advancement, get to know a wealthy family who wants to leave its fortune to you, or spend less. For most people, especially over the short-term, the thrifty approach is the key to building savings and wealth. (Check out

Chapter 3

for a primer on figuring out where your money goes;

Chapter 6

gives advice for reducing your spending.)

Buying with consumer credit:

Even with the benefit of today’s low interest rates, carrying a balance month-to-month on your credit card or buying a car on credit means that even more of your future earnings are going to be earmarked for debt repayment. Buying on credit encourages you to spend more than you can really afford.

Chapter 5

discusses debt and credit problems.

Delaying saving for retirement: