Personal Finance 101

With the country flailing to emerge from subprime status, it’s time to restate real financial fundamentals. This seems too obvious, but I wonder. “Expert” talking heads in the last few days admonished consumers to spend, even though to do so condemns the consumer to bankruptcy should he or she subsequently become unemployed.

This simple system was not taught to me by schools or parents, but learned by trial and error, and too late to have the dramatic results it could have had if it had been applied over a lifetime. Further, this system does not require undue concentration, allowing the person to follow their career of choice rather than pursue an unloved, more rewarding path.

First, save at least ten percent toward retirement. This is over and above accumulating several months’ income equivalent for emergency funds. Also one should not finance items other than things that would otherwise cost the same or more if one used an alternative. An example would be buying a home vs. paying rent.

This accumulates an average of one year’s earnings each decade. This is needed for the second stage financial step.

Second, invest the funds saved. I would recommend the stock market, but do not use experts. They aren’t. They claim no one can do what they do not, which is to remove monies from the market when the market turns down. Instead, construct a system to determine the long-term and even intermediate direction of the market and at least remove funds from the market when that indicator turns adverse.

A simple system would be two moving averages of a market index. One average could be 10 weeks, the other 40 weeks, as an example. When the 10-week average is below the 40-week average, be out of the market. When the 10-week average is higher, be in the market. This would have gone into the market 9-15-2006, and absented the market on 12-21-2007, using the Large Cap Index, the Standard & Poor’s 500.

If the funds are in a self- directed IRA, adverse markets can be profitable by investing in a bear-market Exchange Traded Fund, rather than simply being out of the market. An example is SDS. Bull-market Exchange Traded Funds (ETFs) can be used when one’s indicator says to be in the market. An example is SSO. This use of broad-based ETFs simplifies the investment system to need only a few minutes each Sunday night to dramatically outperform the so-called experts. If this perform is placed in a Roth IRA, the eventual withdrawals are tax-free.

These fundamentals should produce at least a comfortable retirement if not a rich one. It is effective enough to use with even a modest income, and does not depend on an “expert.” The well being of a liberal democracy depends on the well being of its citizens; so being financially responsible and self-sufficient helps oneself, one’s family and one’s nation, even when that nation sometimes forgets.