A
active income, 62, 63, 67, 68-69, 220-21
appreciation rates
of homes, 181, 182, 183, 185, 209
Mortgageville case study, 188, 192, 195, 196-98
resale winners, 199-200, 211
total cost of owning at different rates, 197
asset allocation
automation, 284
defined, 256, 261
portfolio rebalancing, 288, 302
recommendations, 257-58, 259, 261, 280, 306
selection, 282, 283, 292, 293, 313
selling, 267
assets
balloon business case study, 65-66
defined, 28-29, 31
homes, 151, 159, 195
investment choices, 244, 245
as part of portfolio income, 62
B
balloon business case study (Holly and Molly), 64-66, 249
bankruptcy, 29, 90
basis, 181, 266
bathtub drain analogy
borrowing, 116
budgeting, 76, 82
net worth, 25-27, 29, 31-32, 34-35, 40
renting, 159, 170, 210
subscription effect, 311
bear market, 234
Big Picture graph discussions, 34-37, 37-38, 38-39, 39-40, 40-41, 41-43
Billy Bigshot budgeting case study
background, 85-86
committing to budgeting, 92-96, 98-99
expenses analysis, 88-91
financial makeover chart, 97
gross pay lesson, 87-88
spending lessons, 99-100
bond funds
as part of asset allocation, 256, 257, 259, 280, 282
defined, 245, 266
low risk and return, 260
portfolio rebalancing, 258, 313
borrowing
advice against, 115-16, 126, 146-47, 179, 210, 312
compounding, 16, 20, 23
fear and greed, 233-34, 313
first rule precluding, 31, 32, 83, 84
for home purchasing, 162, 174, 175, 184, 185
lending, 116-18, 126
in net worth graphs, 35, 36, 37-38
budgeting. See also Billy Bigshot budgeting case study
alternative to, 83
for a car, 146-47, 157, 158
contingency funds, 80, 84, 96, 98
credit cards, 119-20, 126
financial red alert, 107, 116
four-step diagram, 74
home owning, 166, 167-68, 169, 171, 182, 185
monthly budgeting cycle, 74-75, 83, 84, 311
paying yourself first, 76-77, 83, 84
spending skills, 77-82
tax software, 133
withholding strategy, 132
Buffet, Warren, 255-56
bull market, 234
business, starting your own, 307-8
C
capital gains, 181, 182, 183, 266, 267, 275
cars
affordability, 146-47, 150, 155-56
as assets, 62
basic terminology, 148
Billy Bigshot budget case study, 89, 92, 95, 96-98
car knowledge, types of, 149-50
do's and don'ts, 157-58
financing, 31, 125
insurance, 135, 138-39, 150, 155
new cars, 29
resell potential, 145-46, 151-52, 183, 312
used cars, 153-55
cash. See currency
cash bucket
borrowing, 116
car buying, filling before, 146-47, 157, 158
defined, 98, 103-4
exception to rule, 271-72, 276, 278
financial red alert, 106-7, 113, 298, 311
house buying, filling before, 104, 165, 171, 185
how to fill, 111-12
long-term investing, filling before, 220, 224, 278
low-risk financial choice, 245, 260
as part of risk management, 134, 141
ramifications of not filling, 108-11
risk categories, 105-6, 113
as a short-term investment, 216
topping off, 107, 113
Certificates of Deposit (CDs), 112, 113, 245
checking accounts
automatic transfers to savings account, 76-77, 83
best placement of, 73-74
as part of cash bucket, 111, 112, 113, 245
debit cards and, 119
investment money automation, 287, 294
checks, paying with, 119
closing and closing costs
bundling, 204
buyer's closing costs, 174, 182, 185
closing process, 208-9, 212
Mortgageville case study, 188, 190, 192, 195
points, 205
refinancing, 210
saving for, 278, 298
seller's closing costs, 180-81, 183
27% test, 165-66, 171
collateral, 175, 177, 179
college education, paying for, 217, 299-300
compounding
applying early in life, 23-24, 31, 44, 221, 278, 301, 303
college education savings, 300
compound interest, 16
Compound University Reunion case study, 20-23
defined, 16-17, 18-20, 23
offsetting entrepeneurship risks, 307
expense ratios, 252
inflation, 224, 253-55
interest rates on credit cards, 92, 109
interest rates on mortgages, 176, 178-79
investment horizon, 222-23, 226, 247
Ira Shield case study, 272, 274
as the key, 314
matching employer contributions, 271
Mortgageville case study, 190, 192, 195
in net worth graphs, 37, 39, 43
savings accounts, 74
student loan debt, 299
tax-deferred plans, 269
ultimate acceleration strategy, 61, 68, 69
unshielded investing, 267, 275
Consumer Price Index (CPI), 253
contingencies in house buying, 208, 212
contingency funds, 80, 84, 96, 98
cosigning, 116
credit bureaus, 121, 123-24, 125-26, 127, 166, 312
credit cards
as alternative to cash bucket, 109
bad household example, 38-39
Billy Bigshot budget case study, 89, 92, 98-99
budget process, facilitating, 80
compounded interest rates, 19-20
debt as liability, 28
for effective record-keeping, 130
responsible use of, 119-20, 124-26, 312
selecting, 120-22, 125, 126
subscription effect, 81
unpaid balances, 31, 278, 299
using without credit, 120, 126
credit reports, 123-24, 125-26, 127, 166, 312
credit scores
Billy Bigshot budgeting case study, 86-87, 92
borrowing affecting score, 116
credit card use improving, 120, 124-26
defined, 122
FICO scores, 123-27, 166-67
prime loan qualification, 171
switching cards hurting score, 121
credit unions, 112
currency
avoiding use of, 80, 81, 84, 119
as part of cash bucket, 111, 113, 245
D
debit cards, 80, 119-20, 126, 130
debt
Billy Bigshot budgeting case study, 86, 90, 92, 93-94, 98-99, 100
Buck and Penny case study, 217
clearing before investing, 224, 278, 292, 293
credit scores, 122, 124, 126-27
financial red alert, triggering, 298
lending to friends and family, 117
as liability, 28-29, 31
net worth graphs, 35, 38, 39, 42
right brain dangers, 116
student loans, 298-99
default, 179, 184
Disciplined Investor's Pledge, 240-41, 242, 291, 314
diversification, 246-47, 257, 260
dollar cost averaging (DCA), 225, 227, 283, 284-87, 313
Dow Jones Industrial Average (DJIA), 235, 249, 260
down payments
defined, 174-75
in financial time line, 182
forfeiting, 180
government programs, 169
before investing, 278
as lender protection, 180
Mortgageville case study, 190, 192, 193
PMI and, 177
pre qualification, 204
red alert, 298, 314
20% minimum, 167, 184, 185
27% test, 165-66, 171
E
electronically traded funds (ETFs), 252
emergency funds. See cash bucket
employer contribution matches. See matching contributions
entrepeneurship, 307-8
equity funds
asset allocation, 256-58, 261
defined, 245, 266
beating inflation, 255
investment returns, 253, 254
risk protection, 246-48, 260
subcategorizes, 248-49, 260
tax leakage, 267
equity index funds
active vs. passive, 250-51, 260, 267
asset allocation, 257, 280
fear and greed, 232-34
frictional costs, 251-52, 261, 283-84, 286, 293
as investment strategy, 227, 234, 238, 256, 259, 263, 303-6
Ira Shield case study, 272-74
affecting net worth, 29
as part of portfolio account, 225, 243, 245, 252-56, 313
Roth plan accounts, 268
tax leakage, 267, 274, 275
expense ratios, 251-52, 259, 261, 284
F
Fair Isaac Corporation (FICO), 123-27, 164, 166-67, 308
Federal Deposit Insurance Corporation (FDIC), 111-12, 113
Fidelity (Freedom Funds), 259
financial planners
as allies, 236-39
asset allocation, 256, 261, 282, 292-93, 313
college savings plans, 300
DCA plan, 285-87
frictional costs, 284, 293-94
as 911 rescuers, 287
ongoing advice, 225, 279, 283, 301-2
portfolio rebalancing, 258, 288-89, 293, 294, 313
tax strategies, 264, 268, 269, 270, 276, 280-81, 292-93
varying titles, 242
financial red alert
alternatives, 109
Billy Bigshot budgeting case study, 98
when forced into borrowing, 116
while filling cash bucket, 271, 278
defined, 107, 113, 297-98
five year timeline, 106
as a positive sacrifice, 302-3, 311-12
while repaying student loans, 299
first rule
based on primary income, 63
budgeting, 77
cash bucket, 104, 146, 279
long-term investment readiness, 224-25, 285, 292, 293
paying yourself first, 76, 83, 84, 94, 99
saving ten percent, 30-31, 32, 59-61, 68, 98, 278, 311
27% test, 165
fixed rates
defined, 175-76
Mortgageville case study, 188, 190
P&I payments, 182, 184
refinancing, 210
30-year mortgages, 164-65, 176, 178, 185, 204
foreclosure, 179-80
401(k)
Billy Bigshot budget case study, 88
Buck and Penny case study, 218-219
financial red alert, 298
investing, 285-86, 292-93
portfolio decisions, 281-82
Roth plan accounts, 268
tax shields and, 265, 269, 280-81
403(b) plans, 264, 265
frictional costs
asset allocation and vulnerability, 258
buying and holding investments, 225, 227, 229, 294
defined, 224
in employer-sponsored plans, 280-81, 282
of full-service investments firms, 289-91
fund sellers, 283-84, 293, 313
fund-specific, 251-52, 261
as obstacle to investment success, 227
portfolio rebalancing, 258, 261, 288, 293, 294
transaction fees, 286
Vanguard as low-cost choice, 259
G
gross income
Billy Bigshot budget case study, 87-88, 94, 98, 99
saving ten percent of, 30, 32, 285
H
habits
budgeting, 74, 75, 78
car servicing, 156
difficulty of changing, 196
immediate gratification, 44
long-term thinking, 33-34, 57, 79, 311
reevaluating choices when renewing, 137
conquering right brain dangers, 50
saving ten percent of income, 30-31, 32
small habit changes, 99, 100
transformational habits, 5-6, 28, 34
home equity
Buck and Penny case study, 217
building up, 86
defined, 177
financial red alert, 298
Mortgageville case study, 190, 192
affecting net worth, 314
selling rebate, 313
worst-case scenarios, 179-80
home ownership. See also appreciation rates; mortgage jargon; mortgages; renting
affordability table, 164
cash bucket, filling before buying, 104, 165, 171, 185
FICO review, 124, 126, 127, 166-67
financial red alert, 298
frictional costs, 224
homeowner's insurance, 138, 167, 176-77, 182-83, 184
homes as deductible expenses, 131
houses as assets, 28
before investing, 278-79, 292, 293
as milestone, 220
passive income from rental property, 62
pre qualification, 204-5
price limits, 205-6
readiness tests, 160, 161-69, 171, 312
real estate agents as allies, 200-201, 203, 206-9, 211-12, 313
rebates, 183, 185, 192, 195, 197, 313
resale winners, 197, 199-203, 210, 211, 313
selling, 180-81, 183, 185
tax advantages, 159, 170, 181-82, 185
I
index funds. See equity index funds
indices and index investment, 249-51, 252, 255, 257-58, 260, 305
individual retirement account (IRA)
DCA plan, 286-87
full-service investment firms, 291
multiple options, 281
portfolio investment decisions, 282-84, 293-94
Roth accounts, 268
self-employed option, 265, 280
inflation, 61, 224, 227, 253-55, 261, 272-74
installments, 175
insurance
cash bucket as self-insurance, 103
categories of, 138-40
homeowner's insurance, 138, 167, 176-77, 182-83, 184
common mistakes, 136-37, 141
as part of risk management, 134-36, 141
subscription effect, 81
interest rates
borrowing, 23, 116
CDs, 112
Compound University case study, 20-23
credit cards, 92, 109, 120, 121-22
credit scores, 122
as fixed-percentage increase, 19, 23
house affordability table, 164
mortgages and, 124, 164-65, 167, 175-79, 183, 184-85, 204-5
Mortgageville case study, 188-89, 192, 197
net worth graphs, 37
refinancing, 210, 212
savings accounts, 111-12
student loans, 299
K
Kelley Blue Book, 151, 152, 155, 158, 308
L
liabilities, 28-29, 31
living trusts, 140
loads, 251-52, 259, 261
loans. See borrowing
long-term investing
asset allocation, 256-58, 261, 280, 282, 292, 293
basic vocabulary terms, 244-45, 248-49
Buck and Penny case study, 217-19
business, starting your own, 307
cash bucket filling as prerequisite, 104
college education, 300
DCA plan, 284-87
disciplined investor's pledge, 241, 242, 291
through employer's plan, 281-82, 285-86, 292-93
equity index funds, 225, 227, 234, 250-51, 255, 303-6
fear and greed as dangers, 232-34, 239, 241
financial news avoidance, 235-36, 241, 288
financial planners, 236-39, 242, 279-80, 292, 293
full-service investment firms, 289-91
home ownership before investing, 166, 278, 292, 293
investment horizon, 222-23, 226
through IRAs, 282-84, 286-87, 293-94
life insurance, 139
matching contributions, 271, 276, 292
milestones, 220-22
mindset for success, 230-31, 241
911 financial rescuers, 239-40, 242, 287, 290, 293
obstacles to success, 223-24, 226-27
portfolio selection, 243-44, 245, 260, 275, 281-84, 288-89, 293
readiness checklist, 278-80, 292, 293
recommended book titles, 236
resistance, 219-20
risk protection, 246-48, 260
Roth plan accounts, 267-68, 275-76
S&P 500 analysis, 254-55, 304
strategy, 224-25, 227, 229, 255-56
target date funds, 258-59, 261
tax-deffered plans, 268-69, 275-76
tax shield selection, 280-81, 292, 293
tax strategy, 264, 275
timeline, 216, 226, 301
unshielded investing, 265-67, 275
long-term thinking, 33-34, 49-50, 57, 79, 216-17, 311
M
matching contributions
as exception to filling cash bucket rule, 271-72, 276, 278
financial red alert, 298
Ira Shield case study, 274
taking advantage of, 285, 292
tax shields and, 280-81
The Millionaire Next Door (Stanley), 27, 32, 43
mortgage jargon. See also closing and closing costs; down payments; fixed rates; home equity; interest rates; P&I; principal
basis, 181, 266
capital gains, 181, 182, 183, 266, 267, 275
collateral, 175, 177, 179
default, 179, 184
foreclosure, 179-80
homeowner's insurance, 138, 176-77, 184
installments, 175
PITI, 167-68, 177, 184, 190, 192
PMI, 139
property taxes, 167, 176-77, 182-83, 184
term, 174-75, 178
title, 174
underwater, 179-80, 184
upside down, 179
variable rates, 175-76
mortgages
affordability tests, 163-65, 165-66, 167-68, 171
credit scores affecting, 86, 122, 124-25, 127
as deductible expense, 131
interest rates, 183, 184
as liabilities, 28
monthly payments, 175-77, 182
Mortgageville case study, 187-88, 188-90, 190-93, 193-98
percent principal remaining, 178
points, 204-5
private mortgage insurance, 139, 177
refinancing, 210, 212
student loan debts and qualifying, 298-99
subprime, 124
tax advantages, 181-82, 185
worst-case scenarios, 179-80
mutual funds, 62, 251, 252, 267, 273
N
net worth
bathtub analogy, 25-27, 29, 31-32, 34-35, 40
budgeting, 76, 80
extraordinary outcome, 314
flat spending, 61
high net-worth issues, 302
home ownership boosting, 160, 166, 192
household graph discussions, 34-37, 37-38, 38-39, 39-40, 40-41, 41-43
living trusts, 140
long-term investing, 216, 277, 301, 313
long-term thinking, 33-34
measuring, 28
milestone achievement, 221
misconceptions, 26-28, 31-32
negative net worth, 29, 38, 40, 45, 90
passive income, 64
paying yourself first, 77, 83
right brain dangers, 52
savings, 43-45, 59, 84
spending control, 45, 49
term life insurance, 139, 312
ultimate acceleration strategy, 60-61, 68-69
wills, 140
911 financial rescuers, 239-40, 242, 287, 289, 290, 293, 294
no-load funds, 251-52, 259, 261
non recurring expenses, 79, 84
P
passive income, 62-64, 65-66, 67, 68-69, 105, 113
paying yourself first, 76-77, 83, 84, 94, 104, 311
pension plans, 43, 217-19, 226
points, buying, 204-205
portfolio account
asset allocation, 256-58, 261, 292, 293
defined, 225
doomsday scenario choices, 306
employer's investment plan, decisions based on, 281-82
equity index funds, 225, 252-56
full-service investment firms, 289
fund-specific frictional costs, 251-52
investment choice categories, 245
IRA, decisions based on, 282-84
in latter third of financial life, 301-2
portfolio income, 37, 62, 220, 221
rebalancing, 258, 288-89, 293, 294
risk protection, 246-48
Roth plan accounts, 268
selection, 243-44, 260
tax shields, 264, 275
unshielded investing, 267
principal
compounding effect, 178-79
defined, 175
equity and, 177, 179
forfeiting, 180
interest rates, 176, 184
paying off after house selling, 181, 183
percent principal remaining, 178
refinancing, 210
principal, interest, taxes, insurance (PITI), 167-68, 177, 184, 190, 192
principal and interest (P&I)
deductibility, 182, 183
defined, 175
fixed and variable rates affecting, 175-76
monthly payments, 177, 179, 184, 189
Mortgageville case study, 188-89, 194, 195
refinancing, 210
prioritization, 77-78, 81, 92
private mortgage insurance (PMI), 139, 177
R
real estate agents as allies, 200-201, 203, 206-209, 211-12, 313
rebates, 53-54, 58
red alert. See financial red alert
renting
advice against, 159-60
as cheaply as possible, 170, 171, 312
home owning as better choice, 170, 183
investing while renting, 292, 293
Mortgageville case study, 188, 190, 192, 193-98
passive income for owners, 62-63, 64
renter's insurance, 138, 141
total cost of renting vs. owning, 194
while waiting to buy, 161, 165, 166, 168, 171, 185
retirement
Buck and Penny case study, 217-19
college education, saving for, 299-300
IRAs, 265
Ira Shield case study, 272, 274
long-term investing, 216, 225, 226
matching employer contributions, 271
net worth, 43
portfolio income, 220
target retirement date funds, 258-59, 261, 284, 308
tax deferred vs. Roth accounts, 270, 276
tax incentives, 263, 275
typical US household, 38
right brain dangers
awkward financial discussions, avoiding, 54-55
borrowing, 116
budgeting, resistance to, 75
buying high, selling low, 223
cash bucket, not filling, 110
defined, 48-49
emotional decisions, 55-57, 145, 207-208, 277
fear leading astray, 232, 239
financial plans, derailing, 57-58, 229-30, 241
premature house buying, 169
immediate gratification, justifying, 51-53
insurance fears, 136, 138
long-term thinking, thwarting, 49-50
letting others take charge, 50-51
path of least resistance, 53-54
not paying balances in full, 120
risk management, 133-34, 134-36, 141, 244-245, 246-48
Roth plans, 265, 267-68, 274, 275-76, 280-81
S
sacrificing, 6, 31, 32, 44, 96, 302-3, 312
saving
for a car, 146-47
cash bucket, 104, 106, 107, 113, 271-72
college education, 299-300
compounding, 16, 20-24
vs. dissaving, 35
financial red alert, 98, 106-7, 113, 116, 278, 297-98
first rule of saving ten percent, 30-31, 32, 59-61, 68, 278
for a house, 165-66, 167-68, 169, 171, 185
investment accounts, 225, 285
net worth, 38, 43-45
non recurring expenses, 79
paying yourself first, 76-77, 83, 220
responsible example, 41
ultimate acceleration strategy, 60-61, 69
savings accounts, 73-74, 76-77, 83, 111-12, 113, 245
social security, 43, 217-19, 226
Standard and Poor's 500 (S&P 500)
beating performance of, 250
defined, 249
graphs to 1900s, 303-306
index fund tracking, 252, 260
inflation, 253-55, 261
inflation chart, 253
normal and logarithmic scales, 304
Stanley, Thomas J., 27
stocks. See equity index funds
student loans, 125, 278, 298-99
subprime loans, 166-67
subscription effect, 81-82, 84, 137, 311
supplemental income
cash bucket, 105, 106, 113
defined, 62
during financial red alert, 298
as income category, 68
Ira Shield case study, 272
in milestone process, 67
as part of income test, 165
tax rates, 131
ultimate acceleration strategy, 69
T
target date funds
defined, 258-59, 261
fund selection, 282, 283
IRAs, 281, 284
portfolio rebalancing, 289, 293, 294
Vanguard, 308
taxes. See also capital gains
eight rules, 129-33, 140-41
home ownership advantages, 159-60, 170, 181-83, 185, 210
incentives, 263-64, 275
income taxes, 26-27, 67, 77, 87-88, 161, 181-82, 183
investment strategies, 225
leakage, 267
paying only legal amounts, 312
Mortgageville case study, 188-89, 190, 192, 194-95
property taxes, 167, 176-77, 182-83, 184
VIP status, 224, 264
tax shields. See also financial planners
choices, 276, 279, 280-81
college savings, 300
defined, 264-65, 275
through employer's plan, 271, 276, 278, 292
investment account value after 40 years, 273
IRAs, 291, 293
Ira Shield case study, 272-75
lessons learned, 310, 313
Roth plans, 267-68, 270, 275-76
tax-deferred plans, 268-69, 275-76
unshielded investing, 265-67, 275
teaser rates, 81
term, 174-75, 178
thrift savings plans (TSPs), 265
title, 148, 174
T. Rowe Price, 259
U
ultimate acceleration strategy
college education savings, 300
compounding, 68, 69
defined, 60-61, 272
home owning, 169
lessons learned, 311
passive income, 63-64
underwater, 179-80, 184
upside down, 179
V
Vanguard, 259, 284, 308
variable rates, 175-76
W
wills, 140, 312
windfalls, 52-53, 57, 106, 113, 285
