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Personal Finance for Dummies, 4th Edition

Personal Finance for Dummies, 4th Edition

by Eric Tyson, Rich Tennant (Illustrator)

Covers the financial impact of the recent tax cuts

"Detailed, action-oriented advice . . . A standout personal finance primer."
—Kristin Davis, Kiplinger’s Personal Finance

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


Covers the financial impact of the recent tax cuts

"Detailed, action-oriented advice . . . A standout personal finance primer."
—Kristin Davis, Kiplinger’s Personal Finance

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.

Praise for Personal Finance For Dummies

". . . provides tremendous insight and guidance into the world of investing and other money issues."
–PBS Nightly Business Report

"Tyson doesn’t tell you what to do or consider doing without explaining the hows and whys – and the booby traps to avoid – in plain English."
–Chicago Tribune

"Smart advice . . . . Rewards your candor with advice and comfort."

Product Details

Publication date:
For Dummies Series
Edition description:
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

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

    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

    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

    "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

    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

    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.


    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.

  • Meet the Author

    After toiling away for a number of years as a management consultant to Fortune 500 financial-service firms, Eric Tyson He took his inside knowledge of the banking, investment, and insurance industries and committed himself to making personal financial management accessible to us all. Today, Eric is an internationally acclaimed and best-selling personal finance book author, syndicated columnist, and speaker. He has worked with and taught people from all financial situations, so he knows the financial concerns and questions of real folks just like you. Despite being handicapped by an M.B.A. from the Stanford Graduate School of Business and a B.S. in Economics and Biology from Yale University, Eric remains a master at "keeping it simple."

    An accomplished personal finance writer, his "Investor's Guide" syndicated column, distributed by King Features, is read by millions nationally, and he was an award-winning columnist for the San Francisco Examiner. He is the author of five national best-selling financial books in the ...For Dummies series on personal finance, investing, mutual funds, home buying (co-author), and taxes (co-author). Personal Finance for Dummies was awarded the Benjamin Franklin Award for Best Business Book of the Year.

    He is also the author of Mind Over Money: Your Path to Wealth and Happiness which takes a holistic and thought provoking view of how we deal with money and can extinguish problematic financial habits and hone the best ones.

    Eric's work has been featured and quoted in hundreds of local and national publications including Newsweek, The Wall Street Journal, Los Angeles Times, Chicago Tribune, Forbes, Kiplinger's Personal Finance Magazine, Parenting, Money, Family Money, Bottom Line/Personal, and on NBC'S Today Show, ABC, CNBC, PBS Nightly Business Report, CNN, and FOX-TV, and on CBS national radio, NPR's MarketPlace Money, Bloomberg Business Radio, and Business Radio Network.

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