Personal Finance for Dummies, 4th Edition

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Do you need help managing your financial priorities? Relax! This friendly guide, now updated to include changes to the tax code, gives you just the information you need to take control of your finances, buy the right insurance coverage, and weather economic downturns.
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Overview

Do you need help managing your financial priorities? Relax! This friendly guide, now updated to include changes to the tax code, gives you just the information you need to take control of your finances, buy the right insurance coverage, and weather economic downturns.
Read More Show Less

Product Details

  • ISBN-13: 9780764525902
  • Publisher: Wiley, John & Sons, Incorporated
  • Publication date: 7/21/2003
  • Series: For Dummies Series
  • Edition description: REV
  • Edition number: 4
  • Pages: 480
  • Sales rank: 651,634
  • Product dimensions: 7.72 (w) x 8.54 (h) x 1.06 (d)

Read an Excerpt


Personal Finance For Dummies



By Eric Tyson


John Wiley & Sons



Copyright © 2003

Eric Tyson
All right reserved.



ISBN: 0-7645-2590-5



Chapter One


Improving Your Financial Fitness

* * *

In This Chapter

* Understanding and conquering obstacles to personal financial success

* Overcoming real and imagined financial hurdles

* Comprehending common money problems

* Understanding bad debt, good debt, and too much debt

* Determining assets, liabilities, and your (financial) net worth

* Calculating your rate of savings

* Assessing your investments and insurance

* * *

We're barely acquainted, but I do know that you're not dumb. Real
dummies don't read and educate themselves. And real dummies don't
understand the value of investing in their education. Real dummies also can't
deflate their egos enough to admit that they need help and guidance.

Here's what dumb is: Dumb is the crook who walked into a convenience
store, put a $20 bill on the counter, and asked for change. When the cashier
opened the register, the man pulled a gun and demanded all the cash. The
thief took the loot - $15 - and fled, leaving his $20 bill on the counter. Or
how about the criminal who robbed a person who lacked cash? The victim
offered the assailant a check, which the assailantlater attempted to cash at
the bank, where - surprise, surprise - he was arrested. Both of these stories
are true!

So you're most definitely not dumb! But you may not be literate when it
comes to personal finances.


Targeting the Trouble Spots

Unfortunately, most Americans don't know how to manage their personal
finances because they were never taught how to do so. Nearly all our high
schools and colleges lack even one course that teaches this vital, lifelong-needed
skill.

In the handful of schools that do offer a course remotely related to a personal
finance class, the class is typically an economics course (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 are fortunate enough to learn the financial keys to success at
home, from knowledgeable friends and good books like this one. Others either
never learn the keys to financial success, or they learn them the hard way - by
making lots of costly mistakes. The lack of proficiency in personal financial
management causes not only tremendous anxiety but also serious problems.
Consider the following sobering statistics:

  •   About 1.5 million personal bankruptcies are now filed in the United
    States annually. That's about one in every 80 households. So in the next
    eight years, nearly one in every ten households in the United States - the
    most affluent country in the world - will file bankruptcy.
  •   Studies show that fewer than 20 percent of baby boomers are saving
    adequately for retirement, and that one-quarter of the adults between
    the ages of 35 and 54 have not even begun to save for retirement.
  •   One out of every two marriages in America ends in divorce. Studies show
    that financial disagreement is one of the leading causes of marital discord.
    In a survey conducted by Worth magazine and the market research firm
    of Roper/Starch, couples admitted to fighting about money more than
    anything else (more than three times more often than they fight about
    their sex lives). And a staggering 57 percent of those surveyed agreed
    with the statement, "In every marriage, money eventually becomes the
    most important concern."
  •   Fewer than 10 percent of American adults understand a 401(k) well
    enough to explain it to someone else. Fewer than one in four can
    explain what a municipal bond is.
  •   In a Princeton Survey Research Associates investing basics test, approximately
    one-third of the people who took the quiz answered fewer than
    50 percent of the questions correctly. These results are all the more
    stunning when you consider that the questions only offered two or
    three multiple choice answers as options!
  •   Nearly 80 percent of consumers do not know how the grace period on a
    credit card works. An even greater percentage doesn't understand that
    interest starts accumulating immediately for new purchases on credit
    cards with outstanding debts.
  •   Fifty-three percent of people who took a multiple choice investing quiz
    did not know that total return was the best measure of a mutual fund's
    performance.

The overall costs of personal financial illiteracy to our society are huge. The
high rate of spending and low rate of saving in the United States leads to lower
long-term economic growth and higher interest rates. Annually, billions of
dollars are wasted through the purchase of inferior and inefficient financial
products.


Talking money at home

I was fortunate that my parents taught and instilled in me the importance of
personal financial management. Mom and Dad taught me a lot of things that
have been invaluable throughout my life. Among the useful things my folks
taught me 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.

In many families, however, 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 kids should be insulated from it so that they can enjoy being kids.
In many families, kids may 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 money-management
habits. Unfortunately, some of those habits are bad habits. 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 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, your parents may mistakenly
think that banks are the best places for investing money. (You can
find the best places for investing your money in Part III of this book.)

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

Although you and I 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. And if you
have children of your own, I'm sure you'll agree that kids really are amazing.

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.


Teaching personal finance in schools

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, adding, "Students like it and parents have commented to me
how surprised they are with how much financial knowledge their kids can
handle." Donovan also has her students invest $10,000 (play money) and
then track the performance of their investments.

Urging our schools to teach the basics of personal finance is just common
sense. We should be teaching our children about how to manage a household
budget, about the importance of saving money for future goals, and about the
consequences and dangers of overspending. Unfortunately, few schools offer
classes like Nancy Donovan's. In most cases, the financial basics aren't taught
at all.

Some people argue that teaching children financial basics is the job of parents.
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.

We must recognize that education takes place in the home, on the streets,
and in the schools. Therefore, schools must bear some responsibility for
teaching this very important life skill. And with more and more teenage students
holding down after-school jobs, teaching money-management know-how
through the schools makes even more sense.

Lobby your schools! Make sure that financial basics are taught in schools at
all levels. If you think that you're powerless to change the situation, you're
mistaken. Many of the changes that were made to our education system
started at the grassroots level.


Identifying unreliable sources
of information

Some people are smart enough to realize that they're not financial geniuses.
So they set out to take control of their finances by reading or consulting a
financial advisor. Because the pitfalls are so numerous and the challenges
so mighty when choosing an advisor, I devote Chapter 17 to the financial
planning business and tell you what you need to know to avoid being fooled.

Reading is good. Reading is fundamental. But reading 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.


Won 't investment gurus make me rich?

One formerly best-selling personal finance book (Wealth Without Risk by
Charles Givens) advises you to "Buy disability insurance only if you are in
poor health or accident prone." Putting aside the minor detail that no insurance
company (that's interested in making a profit) is going to issue you a
disability policy after you fall into poor health, how do you know when you're
going to be accident-prone? Because health problems and auto accidents
cause many disabilities, you can't see disabilities coming unless your horoscope
happens to warn you!

Consider the investment seminars by Wade Cook. These seminars lure you in
by promising outrageous and unrealistic returns. The stock market has generated
average annual returns of about 10 percent over the long-term. Cook, a
former taxicab driver, promoted his seminars as follows: "A live, hands-on, do
the deals, two-day intense course in making huge returns in the stock market.
If you aren't getting 20% per month, or 300% 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 on
stocks 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're going to rack up enormous brokerage commissions.
  •   On those occasions where your short-term trades produce a profit, you
    pay high ordinary income tax rates rather than the far lower capital
    gains rate for investments held more than 12 months.
  •   You're not going to make big profits - quite the reverse. You're going to
    underperform the market averages if you stick with this approach.
  •   You're going to 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.

"The past history of stock prices cannot be used to predict the future in any
meaningful way. Technical strategies are usually amusing, often comforting,
but of no real value," says Burton Malkiel, a Princeton University business
professor and author of the investment classic, A Random Walk Down Wall
Street
.

If Cook's followers were indeed earning the 300 percent annual returns his
seminars claim 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!


Understanding how undeserving investment gurus get popular

You may be wondering how Charles Givens and Wade Cook became so popular
despite the obvious flaws in their advice. Givens made the most of his
talent for working the media and his great self-promotion through seminars.
One of the problems with the mass media is that hucksters like Givens can
get good coverage and publicity. Many members of the media are themselves
financially illiterate. And they love a good story. So Givens got all sorts of free
publicity, getting quoted in the press and invited to appear on a number of
national programs, such as The Today Show, Oprah, Donahue, and Larry King
Live
.

Thousands of people went to seminars conducted by Givens, partly because
of the credibility Givens built through media appearances. As has now been
well documented by some of those same members of the media, many unsuspecting
investors were sold commission-laden products, including risky limited
partnerships, through his organization.

Consider the case of Helen Giszczak, a 69-year-old retired secretary. She
invested nearly two-thirds of her modest life savings in limited partnerships,
which she said were described to her by Givens as "probably the most conservative
investments we know of." But some of her limited partnerships
ended up in bankruptcy, while the others lost much of their value.

Helen Giszczak appeared on the Donahue show with John Allen, an investment
broker turned securities lawyer who helped her sue Givens's organization
to get her money back.

Continues...




Excerpted from Personal Finance For Dummies
by Eric Tyson
Copyright © 2003 by Eric Tyson.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Introduction 1
Why This Book? 1
What's New in This Edition 2
Uses for This Book 3
How This Book Is Organized 3
Icons Used in This Book 5
Part I Assessing Your Fitness and Setting Goals 7
Chapter 1 Improving Your Financial Fitness 9
Targeting the Trouble Spots 9
Jumping over Real and Imaginary Hurdles 16
Common Financial Problems: You've Got Company 20
Defining Bad Debt and Good Debt 22
Knowing How Much Bad Debt Is Too Much 23
Determining Your Financial Net Worth 25
Savings Analysis 28
Measuring Your Investing Knowledge 30
Measuring Your Insurance Savvy 32
Chapter 2 Setting and Achieving Goals 33
Creating Your Own Definition of "Wealth" 33
Prioritizing Your Savings Goals 37
Building Emergency Reserves 40
Saving to Buy a Home or Business 41
Funding Kids' Educational Expenses 42
Saving for Big Purchases 42
Preparing for Retirement 43
Part II Saving More, Spending Less 59
Chapter 3 Determining Where Your Money Goes 61
Examining the Roots of Overspending 61
Analyzing Your Spending 66
Growing Rich on Your Income: The Secret 72
Chapter 4 Conquering Debt and Credit Problems 73
Using Savings to Reduce Your Debt 74
Decreasing Debt When You Lack Savings 76
Filing Bankruptcy 79
Ending the Spending-and-Debting Cycle 85
Dealing with Credit Mistakes 87
Chapter 5 Reducing Your Spending 91
Finding the Keys to Successful Spending 92
Reducing Your Spending: Eric's Strategies 98
Chapter 6 Taming Taxes 119
Understanding the Taxes You Pay 119
Trimming Employment Income Taxes 122
Increasing Your Deductions 124
Reducing Investment Income Taxes 132
Getting Help from Tax Resources 135
Dealing with an Audit 138
Part III Building Wealth through Investing 141
Chapter 7 Important Investment Concepts 143
Establishing Your Goals 143
Understanding the Major Investment Flavors 144
Understanding Investment Returns 148
Sizing Investment Risks 149
Diversifying Your Investments 152
Acknowledging Differences among Investment Firms 159
Experts Who Predict the Future 166
Leaving You with Some Final Advice 169
Chapter 8 Choosing Your Investment Vehicles 171
Slow and Steady Investments 171
Building Wealth with Ownership Vehicles 175
Off the Beaten Path: Investment Odds and Ends 188
Chapter 9 Investing in Mutual Funds 191
Understanding the Benefits of Mutual Funds 191
Exploring Various Fund Types 193
Selecting the Best Mutual Funds 200
Deciphering Your Fund's Performance 206
Following and Selling Your Funds 209
Chapter 10 Investing in Retirement Accounts 211
Looking at Types of Retirement Accounts 211
Allocating Your Money in Retirement Plans 221
Transferring Retirement Accounts 228
Chapter 11 Investing Outside Retirement Accounts 233
Getting Started 234
Understanding Taxes on Your Investments 235
Fortifying Your Emergency Reserves 236
Investing Money for the Longer Term 240
Chapter 12 Investing for Educational Expenses 247
Figuring Out How the Financial Aid System Works 247
Strategizing to Pay for Educational Expenses 251
Investing Educational Funds 256
Chapter 13 Investing in Real Estate 259
Deciding Whether to Buy or Continue Renting 259
Financing Your Home 267
Finding the Right Property and Location 283
Working with Real Estate Agents 285
Putting Your Deal Together 289
After You Buy 292
Part IV Insurance: Protecting What You've Got 299
Chapter 14 Insurance: Getting What You Need at the Best Price 301
Discovering My Three Laws of Buying Insurance 301
Dealing with Insurance Problems 311
Chapter 15 Insurance on You: Life, Disability, and Health 317
Providing for Your Loved Ones: Life Insurance 318
Preparing for the Unpredictable: Disability Insurance 326
Getting the Care You Need: Health Insurance 331
Discovering the Most Overlooked Form of Insurance 338
Chapter 16 Covering Your Assets 341
Protecting Where You Live 341
Auto Insurance 101 346
Protecting Against Mega-Liability: Umbrella Insurance 350
You Can't Take It with You: Planning Your Estate 351
Part V Where to Go for More Help 355
Chapter 17 Working with Financial Planners 357
Alice in Financial-Planner Land 357
Surveying Your Financial Management Options 362
Deciding Whether to Hire a Financial Planner 365
The Frustrations of Finding Good Financial Planners 368
Finding a Good Financial Planner 373
Interviewing Financial Advisors: Asking the Right Questions 375
Chapter 18 Computer Money Management 381
Surveying Software and Web Sites 381
Accomplishing Computer Money Tasks 385
Chapter 19 On Air and in Print 393
Observing the Mass Media 393
Rating Radio and Television Financial Programs 395
Learning to Surf the Internet 396
Navigating Newspapers and Magazines 397
Betting on Books 398
Part VI The Part of Tens 401
Chapter 20 Survival Guide for Ten Life Changes 403
Starting Out: Your First Job 404
Changing Jobs or Careers 405
Getting Married 406
Buying a Home 408
Having Children 408
Starting a Small Business 412
Caring for Aging Parents 412
Divorcing 414
Receiving a Windfall 415
Retiring 416
Chapter 21 Ten Things More Important than Money 419
Glossary 423
Index 439
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