If you are going to get a mortgage, shop around first! Those simple words might be worth tens of thousands of dollars to you.

Whenever I advise clients who are planning to buy a home, I always encourage them to shop for a mortgage. Most people initially say things like “I have a great rate already!” Sometimes that is so but often the rates have fallen and they’d never know. Sometimes they didn’t have a great rate to begin with.

Among the last few people I’ve worked with on this, the advice to shop around and helping them do so has made a huge difference. In a pair of recent cases the rate they paid was so much lower that over the course of a mortgage, they will save *$90k* and *$100k* respectively.

Anyone getting a mortgage should shop around! This often saves more than all the comparison shopping at the supermarket anyone will ever do in their lifetime and takes just an hour or two. You can read more in the CFPB’s guide to buying a house. They have a great mortgage rate checking tool.

A major credit reporting company, Equifax, had a large-scale breach. It has effected lots of us. Even those whose data wasn’t compromised should still use this as an opportunity to think about data security and whether everything in our credit reports is correct.

Check out this great resource on what to do in response to the breach. It is from my former colleague Rohit Chopra  who is now doing terrific work at the Consumer Federation.

This piece will answer a lot of your questions. If you have more questions, be in touch!

Lot’s of people want to buy a first house and are trying to figure out ways to save up for down payments. I recently contributed to a piece by Meghan Nesmith, an exceptionally fun, approachable writer. She did a terrific job with it, as always!  I suggest heading over to Architectural Digest to read it (it’s below for posterity).

Certain pillars of adulthood feel more achievable than others: finally learning how to hang a gallery wall, say, or flossing. Homeownership, on the other hand, remains a pipe dream so bewildering that the mere idea is as unrealistic as joining the ranks of people who know where to find the “portico.” (In the bathroom, right? It sounds like a bathroom word.) But that first home might not be as far off as you think. While general wisdom has shifted slightly in the wake of the mortgage crisis, moving away from a lifestyle in which you play victim to the whims of landlords and the shrinking rental market can still make good financial sense. And getting started is easier than it appears. We all know an 18-year-old jerk who’s all, I saved my lemonade stand money and oops, guess I bought a detached 3-bedroom with pre-war details! You, too, could be one of those jerks.

1. Think (really, really) small

While the sheer size of down payments can seem terrifying, your first home is still a purchase like any other: with time and a strong savings strategy, it can be realized. “Consider setting up an automatic savings plan where some money goes directly from your paycheck to a down payment savings plan,” says Zach Teutsch, founder of Values Added Financial. “Alternatively,” says Teutsch, “you can set up a recurring transaction to transfer money from your checking account to a special savings account for this purpose.” Apps like Acorns or Digit make this simple, automatically deducting small amounts of money from your bank account to either save or invest. Proactive yet lazy: the perfect combination.

2. Think (really, really) big

Mysterious dead uncles, that scratch ticket a former tenant left under a floorboard, a hoard of pirate gold, your tax return. We tend to view these windfalls as magical money birds, and therefore not subject to the same rules as the rest of our finances. But rather than going wild, put unexpected jackpots in your savings account. Similarly, a raise doesn’t need to lead to lifestyle upgrade if you already have what is necessary to cover basic needs. Set up automatic transfers to move the additional income into that savings account, and let it work for you.

3. Here comes the. . . down payment

Getting married? Teutsch suggests including the option to help with a down payment on your registry. “In some cultures, giving money as a gift is encouraged,” he says, “but for many Americans, it feels awkward.” Using a registry website like Honeyfund, which offers specific options for down payments, makes it more likely that your guests will give freely. After all, Teutsch notes, “How many vases do you really need?”

4. Get real about debt

Feeling snowed under by student or credit card debt creates a psychic block that makes it near impossible to plan for the future. So before you start thinking about mortgages, put your energy towards clearing out your debt. Programs like Mint and LearnVest can consolidate loans, help you create a realistic payment plan, and create a clear roadmap towards that first converted loft with the obligatory exposed brick accent wall.

5. Educate yourself

So much of what makes a first home seem unattainable is that much of the conversation takes place in a foreign language. What exactly is a mortgage, anyway? Does anyone really know? Even if you don’t believe you’re ready to join the ranks of homeowners yet, taking the time now to understand what it takes to buy a home will allow you to consider the possibility more realistically. If you’re feeling especially productive, go one step further and investigate the First Time Homebuyers loans for which you might be eligible, such as a Federal Housing Administration loan or the Good Neighbor Next Door program. “Some of these will have higher monthly costs as a result of insurance, but less of a down payment,” Teutsch says. “There are also programs such as the FHA’s Section 203(k) loan that may be of special interest to architects, contractors, and others who may want fixer uppers.” A little research can go a long way towards building the self-esteem necessary to bring your dreams down to earth.

The Atlantic recently published a piece asking a very interesting question: do index funds have the (accidental) impact of limiting competition and driving up prices? Really smart people are taking both sides of the debate. That’s a good sign that it’s worth thinking about.

In April 2014, Azar, Schmalz, and Tecu posted an early draft of a paper titled “Anti-competitive Effects of Common Ownership.” The paper made several astonishing claims. Overall, it said, the high concentration of share ownership had caused serious harm to consumers in the airline industry: Ticket prices were as much as 12 percent higher than they otherwise would have been, because of common ownership of shares. The authors measured how competitive individual routes were, based not only on how often each airline flew a given route—which regulators already examine—but also on the degree to which each airline’s shares were held by common investors. They found that adding common ownership increased the level of concentration on the average route to more than 10 times higher than the levels that regulators presume to be a problem. The paper noted that three mutual-fund families—BlackRock, State Street, and Vanguard—collectively control about 15 percent of the shares of major U.S. airlines, although these funds are by no means the only common owners. At the end of 2016, for instance, Berkshire Hathaway, Warren Buffett’s company, owned 7.8 percent of American Airlines, 8.3 percent of Delta, 7 percent of Southwest, and 9.2 percent of United Continental.

A few initial thoughts with the caveat that I haven’t read the underlying papers yet:

1) The idea that firms will become non-competitive based on investor pressure is plausible but that pressure would push against the intensity and culture of most firms and industries. Further, financial incentives are only one area of influence on firm leaders (who are often competitive alpha types).
2) The air travel industry is sufficiently atypical that in almost all cases one shouldn’t extrapolate findings in that industry to the market as a whole.
3) There is still a lot of non-index money invested (most of the money!) and there are still activist investors so even if this was a potential problem, presumably it is muted in impact some by all the other investors.
4) The government ought to insure competition and it should examine this issue and consider whether it might be able to engage in a way that helped.
5) The rise of Vanguard and other indexers and their substantial and growing market power means they need to be much more careful about corporate governance and shareholder proxy issues.
6) Low-fee index funds have created a huge amount of value for middle-class investors (as well as wealthy investors).
7) If the problem hurts all consumers but benefits some investors, that would create additional inequality and would be very concerning. The bigger the impact, the more it should concern us.
8) Bonus thought on index funds: they tend to increase tax efficiency of investing which also contributes to income inequality.

There are lots of issues common to folks in their post-college, pre-middle aged years. Here are answers to many questions people in that age range often ask me. I am, of course, happy to provide more specific answers and update the post to reflect concerns left out–just make comments, I’ll be reading them actively.

1) Why Is Advice Different For People In Their 20s and 30s? I am primarily referring to those who are working and not anticipating retiring in the next 30-40 years–that obviously doesn’t apply to everyone in this age range but it is a common occurrence. The length of time that money will be invested impacts substantially how it should be invested. Someone who was 45 and anticipate working until age 72, would probably find this information useful, perhaps even if they planned to retire at age 62.

2) What If I Have Lots of Debt? If you have credit card debt, it multiplies at an astonishing rate. Do whatever you can to eliminate it as soon as possible! If you need to, move in with your parents and get it axed. Don’t eat out again until it’s gone. Do whatever you can to eliminate it immediately. Come up with a strategy to avoid carrying a credit card balance. Many credit cards companies are excellent at tricking you into making “minimum payments”. These payments allow your debt to grow and compound (sometimes at a rate of 30% or more). The bank is getting more than a 30% return and you are paying them for it. From the investors standpoint it’s a “maximum payment” as in maximized their profit. Square things with them immediately. If you have student loans, however, since they tend to charge less interest you don’t have to take as aggressive approaches as with credit card debt. You might be able to invest less as you pay them off but the money you invest will outperform the rate you have to pay for student loans. For many, income-based repayment approaches make the most sense, especially when combined with public student loan forgiveness eligibility or loan forgiveness from their university (especially common for fancy professional grad schools like law school). Student loans are complex and the best approach varies tremendously with characteristics of the loan and the borrower.

3) Do You Have Some Secrets Which Will Enable Me To Amass great Riches? Unfortunately, I don’t. If you eventually want to stop working (retire) then sometime before that point you must start spending less money than you earn (saving). Not saving likely leads to no comfortable retirement. When asked about the most important invention of the 19th century, Einstein is often said to have given it significant thought and then replied with “compound interest.” Insofar as there is a secret to retirement savings it is the power of compounding interest–or in the case of investment, compound return. Let’s say you invested $1 today and received a 10% per year return. That return is somewhat less than the 11.31% average annual return of the US stock market since 1928 (when good data began to become available). After one year that $1 will be worth $1.10. The next year you would have $1.21 (because you received interest on last years interest). After five years the dollar would have turned into $1.61, @10 years–$2.59, @20–$6.73, @30–$17.45, and after 40 years, that original dollar would be worth $45.26. From year 39 to 40 the $1 initial investment yielded $4.12 in annual interest. Now imagine that instead of investing $1 initially, you invested $1,000 and were 25. At age 65 that money would be worth $45,260. Combine that with social security and you can see how retirement could be pretty sweet.

4) But I’ll Be Making More Money When I’m 45. Shouldn’t I Just Put Money Away Then? In our example above you invested $1 at age 25 and ended up with about $45 at age 65. Now, assume you didn’t start investing until age 45. You would have needed to invest $6.43 to have the same $45 at the end. Do you really think you will be making 6.43 times as much money in twenty years? At that point you may have several children, mortgage payments, and many other things about which to worry about and you’ll probably not be making much more than double or triple what you are making now. If you invest 10% of your income every year for retirement starting at age 20 it will be worth a huge amount more than if you invest 30% starting at age 45. Over the course of your life, 10% will be doable. 20% would have you living a rich life in your later years.

5) Where Should I Invest This Money Between Now and When I Retire? Let me take a second and say something very important. Where exactly you invest isn’t nearly important as that you invest. You will make a solid decision of where to put your money and, if you are smart, you will pretty much leave it alone. Dr. Ilia Dichev, of the UMich B-School studied investors and found that the returns of most investors was less than the markets they invested in. The Wilson Quarterly has a great (brief) writeup of that study:

“Buy and hold” is the mantra of many investment gurus. Rather than try to time the market or pick win­ners and losers, they say, indi­vidual investors should put their money into a representative basket of stocks and forget about it. Good advice, says Ilia D. Dichev, an economist at the Uni­versity of Michi­gan’s Stephen M. Ross School of ­Business. What a pity it’s too simple for most people to follow. The NASDAQ market, the main crash site of the Internet boom of the 1990s, would have produced handsome returns (9.6 percent annually) for a person who invested in 1973 and did nothing until 2002. But even committed “passive” investors have a hard time sitting tight. People tend to put more money into stocks when the market soars and pull it out when it turns south. Most wind up buying high and selling low. In order to find out how investors actually fared, Dichev adjusted historical market returns to reflect the flows of money in and out of the market. That juicy 9.6 percent return on the NASDAQ? In fact, inves­tors reaped only 4.3 percent on average. Results were better in other markets. A capitalization-­weighted basket of stocks on the New York and American stock exchanges held from 1926 to 2002 returned an average of 9.9 percent annually. Investors who tried to outsmart the market saw an 8.6 percent annual ­increase.

6) So, Nu? Where should I Invest My Money? A lot of folks like to pay other people a lot of money to financial firms (often via mutual funds fees) to manage their money. This is usually a bad idea. Most financial “experts” aren’t better than the market and the mutual funds they work for often charge you a lot of money for their advice. The Motley Fool has an excellent piece on why Index Funds are better than anything else. Here are two excerpts:

There’s a reason that all these magazines don’t tell you how simple mutual fund investing really is. Scientific marketing surveys and focus group testing have determined that magazines with covers that read “Index Funds: Still The Best Choice!!!” every single month really wouldn’t sell as well as magazines that promise “Our BRAND NEW 10 Best Mutual Funds To Buy RIGHT NOW!” Sad, but true.

Basically, it will cost you anywhere from 1-2% to have an actively managed mutual fund. Sometimes even more when sneaky fees are introduced. Vanguard’s total US market index fund [Vanguard: VTSAX, ETF: VTI] is an example of a diverse, low-cost option. It has typically outperformed 90%+ of other investments over time and costs only 0.04%. If you want to live a very simple investment life, have a long time horizon, and don’t worry too much about short-term fluctuations, many passive investing enthusiasts suggest this as a good choice for your one mutual fund.

7) The Simple One Index Fund Approach Looks Good but What is the Next Step? Dave Swenson, the guy who used to manage money for Yale, is generally regarded as a financial super-genius. Here is a post on a great financial blog discussing his recommendation. It is very close to what a smart 20/30-something investor might do. A younger investor who is okay with more volatility might tweak it to this (certainly most people would be best off with something else, this is just an example!, anyone seeking support with asset allocation should contact a fee-only, fiduciary, perhaps a registered investment advisor):

• Domestic Equity (42.5 percent): Refers to stocks in U.S.-based companies listed on U.S. exchanges. [Vanguard: VTSMX, ETF: VTI]
• Emerging Market Equity (12.5 percent): Refers to stocks from emerging markets around the world, such as Brazil, Russia, India and China. [Vanguard: VEIEX, ETF: VWO]
• Foreign Developed Equity (20 percent): Refers to stocks listed on major foreign markets in developed countries, such as the United Kingdom, Germany, France and Japan. [Vanguard: VGTSX, ETF: VEU]
• Real Estate Investment Trusts (25 percent): Refers to stocks of companies that invest directly in real estate through ownership of property. [Vanguard: VGSIX, ETF: VNQ]

The above version removes Bonds and TIPS and concentrated on equities. Over several decades stocks have always outperformed bonds. If you are nearing retirement or about to buy a house then most want more stability and are willing to sacrifice some upside in order to achieve it. If you want to maximize money in the future then you need to accept more volatility. Retirement investments for young folks should be somewhat volatile in the short run to make them richer in the long run. The reason that the adapted Swenson approach has a few more funds than the one fund solution is to diversify more broadly to make it less volatile. This will cover you much better if foreign companies come to reign supreme in the next few decades. Also, this version of the portfolio uses Vanguard funds as an example. Many other firms have a wide range of low fee index funds. For instance, one could also construct a nearly identical portfolio using Fidelity funds. Or iShares. Or Schwab. Or many, many others. My point wasn’t to suggest a financial firm so much as give a sample portfolio to consider. I would never write a blog post suggesting how an individual person should invest–providing responsible investment advice requires knowing that person’s situation in depth.

8 ) But I want to buy a house? Generally speaking, real estate doesn’t do as well as the market. Here is an excerpt from a Forbes piece on the subject:

Where’s a better place to put your money: the stock market or real estate? These days the accepted wisdom (at least at cocktail parties) says to pick real estate. But is the accepted wisdom right? It is–in the short term. U.S. real estate sale prices increased more than 56% from the beginning of 1999 to the end of 2004, as tracked by the Office of Federal Housing Enterprise Oversight, part of the U.S. Department of Housing and Urban Development. The S&P 500 index dipped nearly 6% during that same period. But if you take a longer view–say 25 years–you’ll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sale prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%.

The other big problem with real estate is that it causes a large portion of your assets to be tied up in a single entity. It is very hard to diversify if 90% of your net worth is in a single property as is often the case with young investors. That said, if you are a brilliant real estate investor you may be able to realize short terms gains enough that your share of a nice home is less than renting used was costing you. In general though, if rent prices are attractive, the financial incentive to buy is not very substantial. However, and it’s a big however, there are many non-financial incentives to buy that are worth considering. Perhaps it will help you to feel invested in your community. You might live in a nicer place, you may like the idea of a 3-dimensional investment, you might have help from family members, or you might want to spend money to make your home more attractive and recoil at the idea of paying for your landlord’s investment to improve. Back to the financial side, one compelling feature related to buying real estate is that if you borrow money to do it (a mortgage) the interest payments on that borrowed money are tax deductible. Meaning that you don’t pay taxes on the portion of your income you use to payoff the interest on your loan. In the early years of a 30-year fixed rather mortgage, for instance, the vast majority of your payment is interest. If you are in a high tax bracket this break is very advantageous. Most young people, however, are not in a high tax bracket and those that are may want to see a tax planner or financial planner to get more personally tailored advice. Also, it’s important to realize that if you currently use the standard deduction, then you only save the difference between the new itemized deduction approach and the standard deduction. For instance, if you filed your taxes alone last year and had $3,000 in deductions, you’d have used the standard deduction which was worth $6,300 off of your taxes. If this year, you started paying a mortgage and had $8,000 in interest payments, your taxes wouldn’t be $8,000 less than last year.  The income on which you were taxes would actually be just $4,700 less than last year since you’d have $11,000 in deductions (the $3k in non-mortgage expenses plus the $8k in mortgage interest) but you’d no longer claim the $6,300 from the standard deduction. Though you’d pay a less taxes, it’s important to factor in losing the standard deduction so you don’t overestimate. As always, consult a professional or do careful research about your own tax situation!

9) Okay, back to investing…Should I use a 401k? 403B? IRA? Roth IRA? What are they? 401Ks, Roth IRAs, Traditional IRAs, and 403Bs are four different kinds of tax-advantaged retirement accounts. They have several features in common:

• All were setup by the IRS to help us save for retirement.
• All will lead to us paying less taxes, either now or later.

There are also some major differences.

401K and 403B plans are created by employers for the benefit of employees. 401Ks are generally in private (for-profit) companies and 403Bs are for public and non-profit firms though the lines can be fuzzy at time. These two plans work similarly. You tell your employer to deduct some of your salary and put it in the retirement account. You’ll also tell them how you want it invested. Often your boss will match your contributions up to a certain limit. For most people, most of the time, it’s wise to contribute up to that limit. Basically, you are getting an immediate 100% return on your investment. If your $1 is matched then 40 years later instead of being worth $45, your $1 invested will be worth $90. You don’t want to miss out on that. Both 401Ks and 403Bs must be funded through payroll deductions. You can’t move money from your checking account to that sort of retirement account. Money invested with a 401k/403b is tax deductible now (but not later). If you make $40,000 and you put $5,000 into your 403B you are taxes as though you only made$35,000. The 403B (or 401K) contribution is tax exempt. IRA’s are also tax except but aren’t managed by your employer. By contrast, Roth IRAs are not tax deductible now. In exchange for paying taxes now, you don’t need to pay taxes when your withdraw the money later. If you are in a low tax bracket now and expect to be in a high tax bracket upon retiring, this is often the better choice to prioritize. Of course, you can also do both! Basically, if your boss will match a contribution to a company plan, that is free money, consider taking it. If not you may be better off with an IRA, Roth IRA or both.

10) Okay, So I Want a Roth or Traditional IRA and Like Your Index Fund Idea, How Do I Do It? How Do The Mechanics Work? Just about any firm that manages money for individuals will manage your retirement accounts. You probably want a firm that has lots of good, cheap, index funds (and/or ETFs) and won’t charge you to buy or sell their own firms funds. Vanguard was the original firm to develop low-cost passive investment so many people gravitate towards them. They invented index funds and have a very good selection including the funds I used as an example earlier.* Conclusion:

• There are no tricks or secrets.
• Consider starting to save now and save more than you think.
• Consider investing in index funds.
• Money multiplies at an amazing rate the longer you put it away for. Consider starting right now! Then the money will be invested and reinvested as long as possible.
• If you push hard to invest enough now, you will have a much easier time later in life. It may well be worth the small sacrifice now.
• Would you rather put away $1,000 now out of your income or need to set aside $45,000 out of your income in 40 years?

*These funds are neither guaranteed to do as well as they have historically nor are they guaranteed to outperform most funds, as they have historically. I believe in this approach and use it myself and am reasonably confident in its simplicity but you should make sure you understand enough to think clearly about the question of which sorts of funds are best for you and why.

It often happens that someone wants to take first steps toward financial freedom at a slow pace, learns best from reading, or wants to have some great books to read while we are working together. If you check out any of the titles below, I’d be curious to hear what you think. Here are a few of my favorite books:

Helaine Olen (my favorite financial advice writer, you might remember her recurring column at Slate) wrote a book with Harold Pollock (of the University of Chicago) about the core tenets of financial behavior called The Index Card. The idea is that all the key information you need to know can fit on an index card. The principles are good and folks generally find this one very approachable, helpful, and easy to understand.

Your Money: The Missing Manual is a nice overview from J.D. Roth who developed my old favorite money blog, Get Rich Slowly. J.D. sold his site, wasn’t pleased with what the purchasers did to monetize it and bought it back. All this to say, I’ve appreciated his work for a long time and you may too. Though it may not be the prettiest I find J.D.’s combination of expertise, approachability, vulnerability, and honesty compelling.

Ramit Sethi has a very good book on money as well. It’s called I Will Teach You To Be Rich and focuses on building an automated system. The name is tool-ish but the content is really practical. It is less focused on avoiding lattes and more on automating (your investment/saving/etc), considering big expenses, and also increasing earnings. I think all those approaches can be very helpful in the right context. There is a second edition now with additional content but I haven’t read it though I presume it’s worth buying since it’s actually cheaper at this moment (link).

Bert Whitehead, who started the financial planning organization I am a part of (ACP) and has a really useful book that explains his approach to building a good financial life. Bert is especially helpful on matters of tax planning. His views are sometimes unconventional but always well-considered. That’s a useful combination.

The canonical book on investing is Burton Malkiel’s A Random Walk Down Wall Street. It is a bit less practical but very interesting/intellectually fulfilling and the most important and forceful single argument in the movement criticizing active mutual funds and the fees they charge.

Millionaire Next Door is a great book that looks at the lives of millionaires and shows that they usually aren’t opulent and part of why they are wealthy is that they tend to be practical and rather frugal. The main lesson is that people who look “rich” typically aren’t.

Perhaps the best-known, highest-impact guy in the personal finance world is a radio show host named Dave Ramsey. His show is a lot of fun and worth a shot, especially if you are comfortable with Christian-inflected approaches. His main focus is on avoiding debt (which can be an effective harm-reduction strategy but can miss major opportunities). Ramsey’s projections about stock returns aren’t well-grounded in evidence but lots of people find his work helpful even if it simplifies in ways that aren’t well supported. His main book is controversial (many professionals take issue with specifics) but has been effective for many people.

John Bogle was one of the most important financial innovators of the 20th century and his innovations created enormous value for investors, including middle-class people. His book on mutual fund investing is generally very well regarded. I am a big fan of his and curious to know what you think if you read it.

There isn’t a good basic intro book that also covers social issues in money management (noDAPL, socially responsible investment approaches and pitfalls, etc). Perhaps there will be someday.

[This piece was significantly revised on 1/30/2020 and now contains some updated links, corrects a couple of typos, and characterizes Ramsey’s book as often criticized.]