The design by Lauren Ver Hage, who gets billing on the cover, also helps make the book appealing by making important ideas and intriguing thoughts jump out. For example, this sentence gets its own page: “The scariest thing about buying a home, in a lot of ways, is that it requires you do a not-insignificant amount of math.”
So many finance books are relentlessly masculine in tone and focus that it’s worth mentioning that this one skews female: Most of the experts quoted are women, and many references, to television shows like “Sex and the City,” appear to be oriented toward women, too. But her advice is universal.
For example, she suggests saving a combined 20 percent of your income for both short and long-term goals. And, she notes, “Saving, living below your means, and diversifying your income often make the difference between being stuck in a job you can’t stand and having the freedom to move on to something better.” These ideas apply to just about everyone.
So why does she not get a higher grade? For two interrelated reasons that boil down to this: She seems to advocate putting too much money into investments that are too conservative for younger investors.
The good news is Ms. Fagan is terrific about emphasizing the need to save. Early on, she creates “A Bank Account Pyramid,” explaining where to put the money and when, and she also makes saving money a significant part of a five-point plan that she describes as “The Total Idiot’s Guide to Investing.”
But if you look at both, it is easy to see the two problems.
A Few Flaws
The pyramid starts out with a strong base: Have a basic savings account to house your emergency fund.
But it gets shakier from there. In the next layer up, she calls for putting money in certificates of deposit, which are “good for things like saving to buy a house in the next few years and other medium-term savings.”
Certainly, you don’t want your down payment to disappear in a market crash the day before the money is due. But having all your money tied up in low-yielding C.D.s for more than three years before you buy a home will make it hard for your money to grow. As I write this, a three-year C.D. yields about just 2.2 percent and a five-year one isn’t much better, 2.6 percent. (Three to five years would seem to fit within Ms. Fagan’s definition of medium-term savings.)
So her argument about where to put money for medium-term objectives is debatable — my position would be to hold some stock, shifting the money to more conservative investments as your goal draws nigh. For example, have 100 percent of the money in equities when the goal is five years out; 60 percent in equities and 40 percent in short-term bond funds and C.D.s if you will need the money in 36 months, and only move all the money into short-term C.D.s a year before you have to write the check.
Ms. Fagan goes on to say that after putting cash into an emergency fund and buying C.D.s for short and intermediate goals, the rest of your savings should be in “longer term investments.” Like what? She doesn’t say. A 30-year bond would qualify, but it’s an awfully conservative place for a millennial investor saving for the long-term.
The same flaw exists in her investment guide. Her first two points are great. Again, it starts with the emergency fund, followed by working hard to pay off nondeductible debt. That is sound advice. But after that, things get squishy.
Her third point about opening a retirement account is fine as far as it goes, but where do you put that money? Ms. Fagan doesn’t tell us.
And her last point is confusing. After taking the first three steps, she writes, “Explore other low-risk options such as mutual funds and index funds.” Now on the surface that’s just wrong. Mutual funds and index funds that invest in equities, and bonds for that matter, have risk. As the prospectus of each always points out, you can lose money.
Giving Ms. Fagan the benefit of the doubt, I think she was trying to say that index funds and other mutual funds carry less risk to your portfolio than investing in individual stocks.
However, there are fixed- income mutual funds that offer low yields. Simply saying invest in mutual funds is not helpful.
But to be fair, Ms. Fagan did not set out to write the definitive investment book, and she emphasizes throughout that if you are confused, “It’s worth it to pay professionals” to help you with things “you don’t know how to do and will put off until it’s too late.” These quibbles aside, for the most part her advice and conclusions are solid.
“We live in a world that encourages us to spend wastefully, accumulate more than we need, and put off things like retirement saving until … we are basically retired,” she says. ”
Anything that can help improve matters is a good thing.